nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒06‒02
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Durable goods and their effect on household saving rations in the euro area. By Samuel Reynard
  2. Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks By Benk, Szilárd; Gillman, Max; Kejak, Michal
  3. Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy By Fabrizio Mattesini; Lorenza Rossi
  4. Excess money growth and inflation dynamics By Barbara Roffia; Andrea Zaghini
  5. Reconsidering the role of monetary indicators for euro area inflation from a Bayesian perspective using group inclusion probabilities By Scharnagl, Michael; Schumacher, Christian
  6. Brazil: taming inflation expectations By Afonso S. Bevilaqua; Mário Mesquita; André Minella
  7. The cyclicality of consumption, wages and employment of the public sector in the euro area. By Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  8. New Keynesian Phillips curve for Estonia, Latvia and Lithuania By Aurelijus Dabušinskas; Dmitry Kulikov
  9. Can a Rule-Based Monetary Policy Framework Work in a Developing Country? The Case of Yemen By Selim Elekdag; Nabil Ben Ltaifa; Todd Schneider; Saade Chami
  10. The Inequality Channel of Monetary Transmission By Marta Areosa; Waldyr Areosa
  11. China: Strengthening Monetary Policy Implementation By Rodolfo Maino; Bernard Laurens
  12. Explaining Asset Prices with External Habits and Wage Rigidities in a DSGE Model. By Harald Uhlig
  13. Fiscal Policy in Real Time By Jacopo Cimadomo
  14. Long run macroeconomic relations in the global economy By Stephane Dees; Sean Holly; M. Hashem Pesaran; L. Vanessa Smith
  15. Nonlinear Mechanisms of the Exchange Rate Pass-Through: a Phillips curve model with threshold for Brazil By Arnildo da Silva Correa; André Minella
  16. Comparative Economic Cycles By Iolanda Lo Cascio; Stephen Pollock
  17. Forecasting Interest Rates: an application for Brazil By Eduardo J. A. Lima; Felipe Luduvice; Benjamin M. Tabak
  18. Monetary Policy Implementation: Results from a Survey By Rodolfo Maino; Inese Buzeneca
  19. Implications of Search Frictions: Matching Aggregate and Establishment-level Observations By Russell Cooper; John Haltiwanger; Jonathan L. Willis
  20. International Financial Remoteness and Macroeconomic Volatility By Rose, Andrew K; Spiegel, Mark
  21. Firm entry and liquidity By Lenno Uuskyla
  22. The Recent Brazilian Disinflation Process and Costs By Alexandre A. Tombini; Sergio A. Lago Alves
  23. Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism By Ceyhun Bora Durdu; Enrique G. Mendoza; Marco E. Terrones
  24. Monetary Policy Design under Competing Models of Inflation Persistence By Solange Gouvea; Abhijit Sen Gupta
  25. Has the Golden Rule of Public Finance Made a Difference in the UK ? By Jerome Creel; Paola Monperrus-Veroni; Francesco Saraceno
  26. Nominal versus Indexed Debt: A Quantitative Horse Race By Laura Alfaro; Fabio Kanczuk
  27. A look into the factor model black box - publication lags and the role of hard and soft data in forecasting GDP By Marta Ba?bura; Gerhard Rünstler
  28. The CFA Arrangements--More than Just an Aid Substitute? By Etienne B. Yehoue
  29. Are Workers' Remittances a Hedge Against Macroeconomic Shocks? The Case of Sri Lanka By Erik Lueth; Marta Ruiz-Arranz
  30. Debt Maturity: Is Long-Term Debt Optimal? By Laura Alfaro; Fabio Kanczuk
  31. Financial dollarization - the role of banks and interest rates By Henrique S. Basso; Oscar Calvo-Gonzalez; Marius Jurgilas
  32. Computing Optimal Policy in a Timeless-Perspective: An Application to a Small-Open Economy By Michel Juillard; Florian Pelgrin
  33. The Effects of Labor Market Conditions on Working Time: the US-EU Experience By Michelacci, Claudio; Pijoan-Mas, Josep
  34. Comparing smooth transition and Markov switching autoregressive models of US Unemployment By Philippe J. Deschamps
  35. Yemen: Exchange Rate Policy in the Face of Dwindling Oil Exports By Faisal Ahmed; Nabil Ben Ltaifa; Todd Schneider; Saade Chami
  36. Econometric analyses with backdated data - unified Germany and the euro area By Elena Angelini; Massimiliano Marcellino
  37. An assessment of the trends in international price competitiveness among EMU countries By Fischer, Christoph
  38. The Role of Consumer's Risk Aversion on Price Redigity By Sergio A. Lago Alves; Mirta N. S. Bugarin
  39. Public Expenditure in Latin America: Trends and Key Policy Issues By Christopher Faircloth; Benedict J. Clements; Marijn Verhoeven
  40. A Neoclassical Analysis of the Brazilian "Lost-Decades" By Flávia Mourão Graminho
  41. Institutional Enforcement, Labor-Market Rigidities, and Economic Performance By Alberto Chong; César Caldeón; Gianmarco León

  1. By: Samuel Reynard (Swiss National Bank, Research Unit, Boersenstrasse 15, 8022 Zurich, Switzerland.)
    Abstract: This paper presents a systematic empirical relationship between money and subsequent prices and output, using US, euro area and Swiss data since the 1960-70s. Monetary developments, unlike interest rate stance measures, are shown to provide qualitative and quantitative information on subsequent inflation. The usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short-term interest rates and real activity measures. The analysis sheds light on the recent change in inflation volatility and persistence as well as on the Phillips curve flattening, and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates. JEL Classification: E52, E58, E41, E3.
    Keywords: Monetary policy, monetary aggregates, inflation, output, Taylor rule, equilibrium interest rate.
    Date: 2007–05
  2. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The explanation of velocity in neoclassical monetary business cycle models relies on a goods productivity shocks to mimic the data's procyclic velocity feature; money shocks are not important; and the financial sector plays no role. This paper sets the model within endogenous growth, adds exchange credit shocks, and finds that money and credit shocks explain much of the velocity variation. The role of the shocks varies across sub-periods in an intuitive fashion. Endogenous growth is key to the construction of the money and credit shocks since these have similar effects on velocity, but opposite effects upon growth. The model matches the data's average velocity and simulates most of the velocity volatility that is found in the data. Its underlying money demand is Cagan-like in its interest elasticity, so that money and credit shocks cause greater velocity variation the higher is the nominal interest rate.
    Keywords: Velocity; business cycle; credit shocks; endogenous growth
    JEL: E13 E32 E44
    Date: 2007–05
  3. By: Fabrizio Mattesini (Università di Roma 2); Lorenza Rossi (DISCE, Università Cattolica)
    Abstract: In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the interest rate that supports the efficient equilibrium. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility.
    Keywords: Optimal Monetary Policy, Monopolist Union, Labor Indivisibility
    JEL: E24 E32 E50 J23 J51
    Date: 2007–03
  4. By: Barbara Roffia (European Central Bank, Directorate General Economics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrea Zaghini (Banca d’Italia, Economic Research Department, Via Nazionale 91, 00184 Rome, Italy.)
    Abstract: The paper analyses the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialised economies. We find that, over a 3-year horizon, the positive link between monetary aggregates and prices holds in approximately fifty percent of the cases. An econometric investigation suggests that a contemporaneous increase in the gap measures of the real stock price and real housing price and strong dynamics of loans to the private sector significantly increase the probability of turning an episode of excessive money growth into an inflationary outburst. JEL Classification: E31, E40.
    Keywords: Inflation, money growth, quantity theory of money.
    Date: 2007–05
  5. By: Scharnagl, Michael; Schumacher, Christian
    Abstract: This paper addresses the relative importance of monetary indicators for forecasting inflation in the euro area in a Bayesian framework. Bayesian Model Averaging (BMA)based on predictive likelihoods provides a framework that allows for the estimation of inclusion probabilities of a particular variable, that is the probability of that variable being in the forecast model. A novel aspect of the paper is the discussion of group-wise inclusion probabilities, which helps to address the empirical question whether the group of monetary variables is relevant for forecasting euro area inflation. In our application, we consider about thirty monetary and non-monetary indicators for inflation. Using this data, BMA provides inclusion probabilities and weights for Bayesian forecast combination. The empirical results for euro area data show that monetary aggregates and non-monetary indicators together play an important role for forecasting inflation, whereas the isolated information content of both groups is limited. Forecast combination can only partly outperform single-indicator benchmark models.
    Keywords: inflation forecasting, monetary indicators, Bayesian Model Averaging, inclusion probability
    JEL: C11 C52 E31 E37
    Date: 2007
  6. By: Afonso S. Bevilaqua; Mário Mesquita; André Minella
    Abstract: This paper analyzes monetary policy implementation and convergence of inflation and inflation expectations to the targets in Brazil after the crisis in 2002. It covers the initial disinflation and subsequent economic recovery, followed by the inflation rebound and corresponding policy response, and finally the consolidation of disinflation in 2005-06. Monetary policy implementation and the overall improvement in macroeconomic fundamentals have contributed substantially to create a more stable and predictable environment, evidenced by signs of reduction in inflation uncertainty. Furthermore, econometric exercises indicate the critical role played by the targets as attractors for inflation expectations.
    Date: 2007–01
  7. By: Ana Lamo (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Directorate General Economic, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ludger Schuknecht (Directorate General Economic, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study examines the business cycle behaviour of public consumption and its main components; the public wage bill (including compensation per employee and public employment)and intermediate consumption in the euro area aggregate, euro area countries and a group of selected non-euro area OECD countries (Denmark, Sweden, the UK, Japan and the US). It looks across a large number of variables and methods, using annual data from 1960 to 2005. It finds robust evidence supporting that public consumption, wages and employment co-move with the business cycle in a pro-cyclical manner with 1-2 year lags, notably for the euro area aggregate and euro area countries. The findings reflect mainly the correlation between cyclical developments (automatic stabilizers), but also point to the important role of pro-cyclical discretionary fiscal policies. JEL Classification: E62, E63, H50.
    Keywords: Public consumption, public wages, public employment, stylized facts, filtering, thick modelling.
    Date: 2007–05
  8. By: Aurelijus Dabušinskas; Dmitry Kulikov
    Abstract: This paper presents an empirical analysis of the inflation process in Estonia, Latvia and Lithuania within the framework of the New Keynesian Phillips Curve (NKPC) model of Galí and Gertler (1999) and Galí et al. (2001). An open economy extension by Leith and Malley (2003) and a NKPC model that explicitly incorporates energy into the average real marginal cost measure are also considered. The primary focus of the paper is to identify and compare the underlying structural parameters of the NKPC model across the three Baltic economies. Empirical NKPC model estimates point to a limited role of the cost measure in determining inflation dynamics in the three Baltic countries. It has been found that the inflation process in these countries primarily depends on inflation expectations and past inflation rates. Price setting flexibility, as measured by the price stickiness parameter, tends to be lower than in the euro area but higher than in the US, while the share of backward-looking price setters is found to be higher on average.
    Keywords: New Keynesian Phillips Curve, inflation dynamics, open economy,
    JEL: E31 C22
  9. By: Selim Elekdag; Nabil Ben Ltaifa; Todd Schneider; Saade Chami
    Abstract: Monetary policy in Yemen is largely rudimentary and ad hoc in nature. The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. This paper argues in favor of a new formal monetary policy framework for Yemen emphasizing a proactive and rule-based approach with a greater direct focus on price stability in the context of a flexible management of the exchange rate. Although, as in many developing countries, institutional capacity is a concern, adopting a more formal framework could impel the kind of changes that are required to strengthen the ability of the CBY in achieving low and stable rates of inflation over the medium term.
    Keywords: Monetary policy , Yemen, Republic of , Inflation targeting , Developing countries , Exchange rates , Prices ,
    Date: 2007–01–17
  10. By: Marta Areosa; Waldyr Areosa
    Abstract: We study optimal monetary policy when inequality is present by introducing agents with different productivities, wages, and financial market accesses into a general equilibrium model with sticky prices. Our main results are: (i) There is a channel from interest rate to inflation throughout inequality; (ii) The welfare-based objective of monetary policy includes inequality stabilization; (iii) Higher levels of financial exclusion are associated to bigger welfare losses and to smaller interest rate variability, providing an alternative explanation to why observed interest rate paths are much less volatile than optimal policies implied by most theoretical models of the monetary transmission mechanism.
    Date: 2006–08
  11. By: Rodolfo Maino; Bernard Laurens
    Abstract: The People's Bank of China (PBC) has made great strides in modernizing its monetary policy frameworks but their effectiveness will diminish as the sophistication of the economy increases. Empirical evidence supports maintaining a reference to money in China's monetary strategy and enhancing the role of interest rates in its conduct. We advocate adoption of an eclectic strategy involving the monitoring of several indicators, and of a short-term interest rate as the operational target. The PBC should be granted discretion to change its policy rate, and there are no technical obstacles for such a move to occur in the near future.
    Keywords: Monetary policy , China , Monetary policy instruments , Demand for money , Economic indicators , Interest rates ,
    Date: 2007–01–25
  12. By: Harald Uhlig
    Abstract: In this paper, I investigate the scope of a model with exogenous habit formation - or `catching up with the Joneses`, see Abel (1990) - to generate the observed equity premium as well as other key macroeconomic facts. Along the way, I derive restrictions for four out of eight parameters for a rather general preference specification of habit formation by imposing consistency with long-run growth, the leisure share, the aggregate Frisch elasticity of labor supply, the observed risk-free rate, and the observed Sharpe ratio. I show that a DSGE model with (exogenous and lagged) habits in both leisure and consumption, but not necessarily with additional persistence, is well capable of matching the observed asset market facts as well as macro facts, provided one allows for moderate real wage stickiness and provided one allows for sufficient curvature on preferences, as dictated by the asset market observations. Without wage stickiness, delivery on both the asset pricing implications as well as the macroeconomic implications seems to be much harder.
    Keywords: asset pricing, wage rigidity, habit formation, Frisch elasticity, Sharpe ratio, log-linear approximation
    JEL: E24 E30 G12
    Date: 2007–05
  13. By: Jacopo Cimadomo
    Abstract: Most of the empirical literature on fiscal policy has found that, over the post-World War II period, governments in developing and industrialized countries have reacted “pro-cyclically” to fluctuations in the economic activity (see e.g. Lane (2003) and Kaminsky, Reinhart and Vegh (2004)). Otherwise stated, budgetary decisions such as tax increases and cuts in public spending implemented in “bad times” would have tended to aggravate the length and the severity of economic recessions. On the other side, expansive policies put in place during “good times” would have led economic booms to be more prolonged and vigorous. This empirical evidence has been mainly drawn from the estimation of fiscal policy reaction functions, relating a policy indicator to the output gap and other explanatory variables, based on the use of revised data, i.e. data available in an “updated” form to the econometrician at the time the study is carried out. Since many economic variable are seriously contaminated by revision errors, however, revised data may be substantially different from the ones available in “real-time” to policymakers at the time of budgeting. In other words, as shown by Orphanides (2001) in the framework of monetary policy analysis, unrealistic assumptions about the timeliness of data availability may induce misleading assessments on the historical policy stance. Nevertheless, although informational problems clearly matter also for the evaluation of the fiscal policy stance, little has been done in this field.
    Keywords: Fiscal policy; real-time data; revision errors; endogenous threshold models
    JEL: C23 E30 E62 H30
    Date: 2007–05
  14. By: Stephane Dees (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sean Holly (Faculty of Economics and CIMF, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom.); M. Hashem Pesaran (Faculty of Economics and CIMF, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom.); L. Vanessa Smith (CEFAP, Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, United Kingdom.)
    Abstract: This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates suggested by arbitrage in financial and goods markets. It uses the global vector autoregressive (GVAR) model to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. We find strong evidence in favour of the UIP and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets. JEL Classification: C32, E17, F47, R11.
    Keywords: Global VAR, Fisher relationship, Uncovered Interest Rate Parity, Purchasing Power Parity, persistence profile.
    Date: 2007–05
  15. By: Arnildo da Silva Correa; André Minella
    Abstract: This paper investigates the presence of nonlinear mechanisms of pass-through from the exchange rate to inflation in Brazil. In particular, it estimates a Phillips curve with a threshold for the pass-through. The paper examines whether the short-run magnitude of the pass-through is affected by the business cycle, direction and magnitude of exchange rate changes, and exchange rate volatility. The results indicate that the short-run pass-through is higher when the economy is growing faster, when the exchange rate depreciates above some threshold and when exchange rate volatility is lower. These results have important implications for monetary policy and are possibly related to pricing-to-market behavior, menu costs of price adjustment and uncertainty about the degree of persistence in exchange rate movements.
    Date: 2006–11
  16. By: Iolanda Lo Cascio (Queen Mary, University of London); Stephen Pollock (Queen Mary, University of London)
    Abstract: The income cycles that have been experienced by six OECD countries over the past 24 years are analysed. The amplitude of the cycles relative to the level of aggregate income varies amongst the countries, as does the degree of the damping that affects the cycles. The study aims to reveal both of these characteristics. It also seeks to determine whether there exists a clear relationship between the degree of damping and the length of the cycles. In order to estimate the parameters of the cycles, the data have been subjected to the processes of detrending, anti-alias filtering and subsampling.
    Keywords: Business cycles, Autoregressive models
    JEL: E32 C22
    Date: 2007–05
  17. By: Eduardo J. A. Lima; Felipe Luduvice; Benjamin M. Tabak
    Abstract: Understanding the links between long and short-term interest rates is crucial for monetary policy makers, since Central Banks decide and set short-term interest rates in order to affect indirectly long-term interest rates, which affects aggregate spending. This paper studies whether VAR/VEC models are useful in predicting long-term interest rates for Brazil. The empirical results suggest that these models are useful in building qualitative scenarios for the Term structure of interest rates, but do not provide good forecasts in terms of accuracy. Furthermore, models that assume that the future path of short-term interest rates (target interest rates) is known by forecasters do not perform better in terms of both directional and forecasting accuracy.
    Date: 2006–10
  18. By: Rodolfo Maino; Inese Buzeneca
    Abstract: Since the early 1990s, the IMF has been advising countries to shift to the use of indirect instruments for executing monetary policy. This paper provides information about a monetary policy instruments database, maintained by the Monetary and Capital Markets Department of the IMF. We offer an overview of the information contained in the database in the form of comparative summary tables and graphs to illustrate the use of monetary policy instruments by groups of countries (developing, emerging market and developed countries). The main trend that can be identified from the database information is the increasing reliance on money market operations for monetary policy implementation. We emphasize the relevance and usefulness of the data collected through periodic surveys of central banks, for general descriptive and analytical purposes.
    Keywords: Monetary policy , Databases , Central banks ,
    Date: 2007–01–17
  19. By: Russell Cooper; John Haltiwanger; Jonathan L. Willis
    Abstract: This paper studies hours, employment, vacancies and unemployment at micro and macro levels. It is built around a set of facts concerning the variability of unemployment and vacancies in the aggregate and, at the establishment level, the distribution of net employment growth and the comovement of hours and employment growth. A search model with frictions in hiring and firing is used as a framework to understand these observations. Notable features of this search model include non-convex costs of posting vacancies, establishment level profitability shocks and a contracting framework that determines the response of hours and wages to shocks. The search friction creates an endogenous, cyclical adjustment cost. We specify and estimate the parameters of the search model using simulated method of moments to match establishment-level and aggregate observations. The estimated search model is able to capture both the aggregate and establishment-level facts.
    JEL: E24 J6
    Date: 2007–05
  20. By: Rose, Andrew K; Spiegel, Mark
    Abstract: This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.
    Keywords: business cycle; capital; cross-section; data; distance; empirical; proximity
    JEL: E32 F32
    Date: 2007–05
  21. By: Lenno Uuskyla
    Abstract: This paper shows that fewer firms enter after a contractionary liquidity shock and that firm entry reacts quicker to liquidity than the economic activity indicator. The results are obtained by using Estonian data for the period 1995M1–2006M7. Various structural VAR and VECM models are exploited to identify the liquidity shock.
    Keywords: monetary transmission, firm entry, VAR, VECM, Estonia
    JEL: E52 C32
  22. By: Alexandre A. Tombini; Sergio A. Lago Alves
    Abstract: This work revisits the recent disinflation process in Brazil and finds that solely the agents' perception that a policy rupture could occur is capable of triggering a change in the way firms and households used to behave in their pricing and consuming decisions. This change was captured by structural breaks in the parameters of a generalized hybrid Phillips curve, following the 2002 inflation shock. The paper also shows that such parameter changes led to an increase in the disinflation cost evidenced by a free market inflation gain that would have been observed should the coefficients on the Phillips curve have not changed. The paper finds that, maintaining the occurred paths for interest rates, output gap, nominal exchange rates, administered price inflation and exogenous shocks, the free market inflation would have been significantly lower in the absence of such structural break in the underlying inflation process, since mid 2002.
    Date: 2006–06
  23. By: Ceyhun Bora Durdu; Enrique G. Mendoza; Marco E. Terrones
    Abstract: Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops since the mid 1990s. Foreign reserves grew very rapidly during this period, and hence it is often argued that we live in the era of a New Merchantilism in which large stocks of reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a stochastic intertemporal equilibrium framework with incomplete asset markets in which precautionary saving affects foreign assets via three mechanisms: business cycle volatility, financial globalization, and Sudden Stop risk. In this framework, Sudden Stops are an equilibrium outcome produced by an endogenous credit constraint that triggers Irving Fisher's debt-deflation mechanism. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the observed surge in reserves but business cycle volatility is not. In fact, business cycle volatility has declined in the post-globalization period. These results hold whether we use the formulation of intertemporal preferences of the Bewley-Aiyagari-Hugget class of precautionary savings models or the Uzawa-Epstein setup with endogenous time preference.
    JEL: D52 E44 F32 F41
    Date: 2007–05
  24. By: Solange Gouvea; Abhijit Sen Gupta
    Abstract: Most of the recent research in monetary policy has focused on the use of a single exogenously specified standard ad hoc loss function to evaluate policy performance. This literature has come to the conclusion that backward looking models are more difficult to control i.e. monetary policy performance deteriorates with an increase in inflation persistence. In this paper we test the validity of this conclusion using both a standard ad hoc loss function and a model consistent loss function across competing models of inflation persistence. We find that conclusions vary markedly with different types of loss functions. We also look into the case where the policymaker is uncertain about the pricing behavior of firms and investigate the presence of robust policy rules. We find that the existence of robust rules depend crucially on the type of loss function used to evaluate outcomes.
    Date: 2007–05
  25. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Paola Monperrus-Veroni (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper uses the SVAR methodology to investigate the effects of public investment on growth, and more specifically, the effects of the introduction of a golden rule of public finance. We extend the existing literature by estimating a model of the British economy that takes into account long run factors such as public debt accumulation. We find that in such a long run framework, public investment has a significant and permanently positive effect on GDP growth; this result runs counter to the most recent literature on the topic that was limited to a short run specification. We further find, by comparing different subsamples, that the introduction of the golden rule in 1997 strengthened the positive effect of public investment.
    Keywords: fiscal policy, golden rule of public finance, Structural VAR, Public Investment, UK Economy
    JEL: C32 E60 E63 H60
    Date: 2007
  26. By: Laura Alfaro; Fabio Kanczuk
    Abstract: The main arguments in favor and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.
    JEL: E6 H63
    Date: 2007–05
  27. By: Marta Ba?bura (ECARES, Université Libre de Bruxelles, Avenue Franklin D. Roosevelt 50, B-1050 Brussels, Belgium.); Gerhard Rünstler (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We derive forecast weights and uncertainty measures for assessing the role of individual series in a dynamic factor model (DFM) to forecast euro area GDP from monthly indicators. The use of the Kalman filter allows us to deal with publication lags when calculating the above measures. We find that surveys and financial data contain important information beyond the monthly real activity measures for the GDP forecasts. However, this is discovered only, if their more timely publication is properly taken into account. Differences in publication lags play a very important role and should be considered in forecast evaluation. JEL Classification: E37, C53.
    Keywords: Dynamic factor models, forecasting, filter weights.
    Date: 2007–05
  28. By: Etienne B. Yehoue
    Abstract: The CFA franc zone has had one of the longest experiences with a fixed exchange rate for a convertible currency and regional integration of any group of developing countries. France, the anchor country, provides aid to support the zone. This paper asks whether the arrangements are more than just an aid substitute. The paper addresses this issue by evaluating the overall performance of the zone over the period 1960-2004. The analysis reveals that when the zone is hit by a negative shock, France increases its aid, thereby acting as a shock absorber. However, it also finds that the zone displays strong performance in two areas-price stability and fiscal policy. Thus the paper concludes that the arrangements are not an aid substitute; they have real macroeconomic value for the zone and complement aid.
    Keywords: Monetary unions , Africa , Risk management , Development assistance , Fiscal policy , Price stabilization , International cooperation ,
    Date: 2007–02–01
  29. By: Erik Lueth; Marta Ruiz-Arranz
    Abstract: We estimate a vector error correction (VEC) model for Sri Lanka to determine the response of remittance receipts to macroeconomic shocks. This is the first attempt of its kind in the literature. We find that remittance receipts are procyclical and decline when the island's currency weakens, undermining their usefulness as shock absorber. On the other hand, remittances increase in response to oil price shocks, reflecting the fact that most overseas. Sri Lankan are employed in the Gulf states. The procyclicality of remittances calls into question the notion that remittances are largely motivated by altruism.
    Keywords: Workers remittances , Sri Lanka , Business cycles , Economic conditions , Economic models ,
    Date: 2007–02–02
  30. By: Laura Alfaro; Fabio Kanczuk
    Abstract: We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.
    JEL: E62 F34 H63
    Date: 2007–05
  31. By: Henrique S. Basso (School of Economics, Mathematics and Statistics, Birkbeck College, University of London, Malet Street, London, WC1E 7HX, United Kingdom.); Oscar Calvo-Gonzalez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marius Jurgilas (Department of Economics, College of Liberal Arts, University of Connecticut, 341 Mansfield Road, Unit1063, CT 06269-1063 USA.)
    Abstract: This paper develops a model to explain the determinants of financial dollarization. Expanding on the existing literature, our framework allows interest rate differentials to play a role in explaining financial dollarization. It also accounts for the increasing presence of foreign banks in the local financial sector. Using a newly compiled data set on transition economies we find that increasing access to foreign funds leads to higher credit dollarization, while it decreases deposit dollarization. Interest rate differentials matter for the dollarization of both loans and deposits. Overall, the empirical results lend support to the predictions of our theoretical model. JEL Classification: E44, G21.
    Keywords: Financial Dollarization, Foreign Banks, Interest Rate Differentials, Transition Economies.
    Date: 2007–05
  32. By: Michel Juillard; Florian Pelgrin
    Abstract: Since the contribution of Kydland and Prescott (1977), it is well known that the optimal Ramsey policy is time inconsistent. In a series of recent contributions, Woodford (2003) proposes a new methodology to circumvent this problem, namely the timeless perspective solution. However, one main limitation is that it is not yet empirically implementable. In this paper, we develop a new methodology to compute initial values of the Lagrange multipliers in order to implement the timeless-perspective solution. In so doing, we also provide a generalization of the Ramsey and timeless-perspective problems. We apply our results to a small-open economy model in Canada.
    Keywords: Monetary policy framework
    JEL: C6 E5 E6
    Date: 2007
  33. By: Michelacci, Claudio; Pijoan-Mas, Josep
    Abstract: We consider a labor market search model where, by working longer hours, individuals acquire greater skills and thereby obtain better jobs. We show that job inequality, which leads to within-skill wage differences, gives incentives to work longer hours. By contrast, a higher probability of losing jobs, a longer duration of unemployment, and in general a less tight labor market discourage working time. We show that the different evolution of labor market conditions in the US and in Continental Europe over the last three decades can quantitatively explain the diverging evolution of the number of hours worked per employee across the two sides of the Atlantic. It can also explain why the fraction of prime age male workers working very long hours has increased substantially in the US, after reverting a trend of secular decline.
    Keywords: human capital; search; unemployment; wage inequality; working hours
    JEL: E24 G31 J31
    Date: 2007–05
  34. By: Philippe J. Deschamps (Department of Quantitative Economics)
    Abstract: Logistic smooth transition and Markov switching autoregressive models of a logistic transform of the monthly US unemployment rate are estimated by Markov chain Monte Carlo methods. The Markov switching model is identified by constraining the first autoregression coefficient to differ across regimes. The transition variable in the LSTAR model is the lagged seasonal difference of the unemployment rate. Out of sample forecasts are obtained from Bayesian predictive densities. Although both models provide very similar descriptions, Bayes factors and predictive efficiency tests (both Bayesian and classical) favor the smooth transition model.
    Keywords: Logistic smooth transition autoregressions; Hidden Markov models; Density forecasts; Markov chain Monte Carlo; Bridge sampling; Unemployment rate
    JEL: C11 C22 C53 E24 E27
    Date: 2007–05–24
  35. By: Faisal Ahmed; Nabil Ben Ltaifa; Todd Schneider; Saade Chami
    Abstract: This paper investigates the likely implications of declining oil production on Yemen's equilibrium exchange rate, and discusses policy options to ensure a smooth transition to a nonoil economy. The empirical results suggest that, as oil production and foreign exchange earnings fall, the Yemeni rial will have to adjust downward in real effective terms to keep pace with the equilibrium exchange rate. In light of strong pass-through from exchange rate depreciation to domestic inflation, this could entail a substantial depreciation in nominal terms. Given the nature of the adjustment, a floating exchange rate regime appears to be the best option, if supported by appropriate macroeconomic policies. However, given public fixation on a exchange rate stability, a softly managed float would be a better option for Yemen whereby the central bank may have to lead the market toward the equilibrium exchange rate.
    Keywords: Exchange rate policy , Yemen, Republic of , Oil exports ,
    Date: 2007–01–17
  36. By: Elena Angelini (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimiliano Marcellino (IGIER, CEPR and IEP - Bocconi University, Via Sarfatti 25, 20136 Milano, Italy.)
    Abstract: In this paper we compare alternative approaches for the construction of time series of macroeconomic variables for Unified Germany prior to 1991, and then use them for the construction of corresponding time series for the euro area. The resulting series for Germany and the euro area are compared with existing ones on the basis of both descriptive statistics and results of econometric analyses conducted with the alternative time series. We find that more sophisticated time series methods for backdating can yield sizeable gains. JEL Classification: C32, C43, C82.
    Keywords: Backdating, Factor Model, Unified Germany, Euro Area.
    Date: 2007–05
  37. By: Fischer, Christoph
    Abstract: Inflation differentials within European Monetary Union (EMU) are increasingly seen as exerting adverse effects on the price competitiveness of member countries’ firms and – given the common monetary policy within EMU – as being detrimental to euro-area economies, in particular to those with relatively high inflation rates. Using three simple measures of international price competitiveness for EMU countries, the paper analyses whether these indicators have displayed distinctive trends since the start of EMU and whether they converge with or diverge from their respective fundamental value. It is found that all three indicators suggest a gain in competitiveness for the German economy and a corresponding loss for Italy, Portugal and Spain. Two of the indicators, however, suggest that these trends reduce former disparities and, thus, contribute to a convergence of competitiveness within EMU while the third would imply the opposite.
    Keywords: Price competitiveness, EMU, purchasing power parity, productivity approach, panel unit root tests, panel cointegration
    JEL: E31 F31 F36
    Date: 2007
  38. By: Sergio A. Lago Alves; Mirta N. S. Bugarin
    Abstract: This paper aims to contribute to the research agenda on the sources of price rigidity. Based on broadly accepted assumptions on the behavior of economic agents, we show that firms’ competition can lead to the adoption of sticky prices as a sub-game perfect equilibrium strategy to optimally deal with consumers’ risk aversion, even if firms have no adjustment costs. To this end, we build a model economy based on consumption centers with several complete markets and relax some traditional assumptions used in standard monetary policy models by assuming that households have imperfect information about the inefficient time-varying cost shocks faced by the .rms. Furthermore, we assume that the timing of events is such that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center. Since such choices under uncertainty may decrease the expected utilities of risk-averse consumers, competitive firms adopt some degree of price stickiness in order to minimize the price uncertainty and "attract more customers".
    Date: 2006–11
  39. By: Christopher Faircloth; Benedict J. Clements; Marijn Verhoeven
    Abstract: This paper examines trends in government spending in Latin America from the mid-1990s to 2006. It also examines key policy issues, including the cyclicality of spending, public investment, public employment, and social expenditures. It finds that primary expenditures have trended upward for the past ten years as a share of GDP, driven by increases in current spending, in particular for social expenditures. Fluctuations in real spending have continued to follow a procyclical pattern. The paper finds that there is substantial scope to improve the efficiency of public investment, public employment, and social spending.
    Keywords: Government expenditures , Latin America , Fiscal policy ,
    Date: 2007–02–02
  40. By: Flávia Mourão Graminho
    Abstract: After the World War II, Brazil was one of the fastest growing economies in the world, growing at an average rate of more than 7% from 1950 to 1980. While Brazilian per capita GDP was roughly 15% of the U.S. per capita GDP in 1950, it achieved 30% in 1980. However, since then, Brazil has been growing at small or even negative rates, and in 1998 its per capita GDP was back to 20% of the U.S.. This paper investigates possible reasons for what is usually called the Brazilian "lost decades", based on an accounting procedure applied to a simple neoclassical model as in Chari, Kehoe and McGrattan (2006). After decomposing four types of shocks (productivity, labor, capital and income accounting), each of them is fed back into the model and the predicted and actual data are compared. It is shown that, for the case of the Brazilian "lost decades", productivity shocks seem to be the most important factor in explaining the behavior of output and consumption during the eighties, and labor shocks are the main responsible for the behavior of the variables of interest during the nineties. Increased barriers to competition and the changes imposed by the 1988 Constitution in labor markets are possible explanations for the results.
    Date: 2006–11
  41. By: Alberto Chong (Inter-American Development Bank); César Caldeón (The World Bank); Gianmarco León (Inter-American Development Bank)
    Abstract: This paper study the issue of institutional enforcement of regulations by focusing on labor-market policies and their potential link to economic performance. It test the different impacts of enforceable and non-enforceable labor regulations by proxying non-enforceable labor rigidity measures using data on conventions from the International Labor Organization (ILO). It has been argued that non-enforceable conventions -that is, those that exist on paper and are simply de jure regulations -appear to be more distortionary and tend to be the least enforced in practice (Squire and Suthiwart-Narueput, 1997). According to Freeman (1993), these conventions reflect the ideal regulatory framework from an institutionalist perspective and cover a variety of labor market issues, from child labor to placement agencies. Whereas in theory, a country's ratification of ILO conventions gives the country legal status and thus supersedes domestic regulations relating to those issues, in practice the degree of labor-market rigidity depends on how the conventions are enforced. It is the outcome of the regulations that matters, rather than their number.
    Keywords: Institutions; Enforcement; Labor Rigidities; Growth; GMM-IV
    JEL: O10 E60 J08 O40
    Date: 2006–10

This nep-mac issue is ©2007 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.