nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒06‒11
sixty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords By Alvaro Aguiar; Ines Drumond
  2. Inflation Dynamics By Frederic S. Mishkin
  3. On Keynesian effects of (apparent) non-Keynesian fiscal policies By Canale, Rosaria Rita; Foresti, Pasquale; Marani, Ugo; Napolitano, Oreste
  4. Effects of Monetary Policy on Corporations in Brazil. An Empirical Analysis of the Balance Sheet Channel By Fernando N. de Oliveira; Marco Antônio Costa
  5. Inflation persistence: alternative interpretations and policy implications By Argia M. Sbordone
  6. Transmission of business cycle shocks between unequal neighbours: Germany and Austria By Gerhard Fenz; Martin Schneider
  7. Macroeconomic Policy in a Heterogeneous Monetary Union By Oliver Grimm; Stefan Ried
  9. Why Investors Prefer Nominal Bonds: a Hypothesis By William Coleman
  10. Monetary Policy with Model Uncertainty: Distribution Forecast Targeting By Svensson, Lars E O; Williams, Noah
  11. Monetary policy, structural break, and the monetary transmission mechanism in Thailand By Hesse, Heiko
  12. In Search of the Transmission Mechanism of Fiscal Policy By Roberto Perotti
  13. Monetary Policy with Liquidity Frictions By Oscar Mauricio VALENCIA A.
  14. Fiscal deficits in the U.S. and Europe: Revisiting the link with interest rates By Andrea Terzi
  15. Investment Spikes: New Facts and a General Equilibrium Exploration By Francois Gourio; Anil K Kashyap
  16. The Relative Importance of Symmetric and Asymmetric Shocks: the Case of United Kingdom and Euro Area By Gert Peersman
  17. ‘This Arbitrary Rearrangement of Riches’: an Alternative Theory of the Costliness of Inflation By William Coleman
  18. Non-stabilizing Flexibility:From the Contributions By Keynes and Kalecki Towards a Post-Keynesian Approach By Sau, Lino
  19. Euro area inflation persistence in an estimated nonlinear DSGE model. By Gianni Amisano; Oreste Tristani
  20. A General Schema for Optimal Monetary Policymaking: Objectives and Rules By Huiping Yuan; Stephen M. Miller
  21. Estimating the Inflation-Output Variability Frontier with Inflation Targeting: A VAR Approach By W. Douglas McMillin; James S. Fackler
  22. The size and effectiveness of automatic fiscal stabilizers in Latin America By Suescun, Rodrigo
  23. The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001. By Travaglini, Guido
  24. Inflation-linked bonds from a Central Bank perspective By Juan Angel Garcia; Adrian van Rixtel
  25. Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets By George-Marios Angeletos; Vasia Panousi
  26. The expectations hypothesis of the term structure: some empirical evidence for Portugal By Silva Lopes, Artur C.; M. Monteiro, Olga Susana
  27. Globalization, aggregate productivity, and inflation By W. Michael Cox
  28. Fiscal Shocks, the Trade Balance, and the Exchange Rate By Faik Koray; W. Douglas McMillin
  29. Betas and the Business Cycle: An Analysis Based on Real-Time Data By Pierdzioch, Christian; Kizys, Renatas
  30. Estate Taxation, Entrepreneurship, and Wealth By Marco Cagetti; Mariacristina De Nardi
  31. Real business cycle dynamics under first-order risk aversion By Jim Dolmas
  32. Cross-Country Evidence on Output Growth Volatility: Nonstationary Variance and GARCH Models By WenShwo Fang; Stephen M. Miller; ChunShen Lee
  33. Exchange Rate Pass-Through and Domestic Inflation: A Comparison between East Asia and Latin American Countries By ITO Takatoshi; SATO Kiyotaka
  34. Considerations regarding the Romanian fiscal and budgetary reform in accordance with the E.U. requirements By Comaniciu, Carmen
  35. Methodische Fragen mittelfristiger gesamtwirtschaftlicher Projektionen am Beispiel des Produktionspotenzials By Gustav Horn; Camille Logeay; Silke Tober
  36. Further evidence on the impact of economic news on interest rates By Ielpo, Florian; Guégan, Dominique
  37. Openness and inflation By Mark A. Wynne; Erasmus K. Kersting
  38. Memory for prices and the euro cash changeover: An analysis for cinema prices in Italy By Vincenzo Cestari; Paolo Del Giovane; Clelia Rossi-Arnaud
  39. Cost-push impact of motor spirit price on price indices and inflation By Nooraddin Sharify; M. Alejandro Cardenete
  40. Cycles and Trends in U.S. Net Borrowing Flows: Pro-Cyclical Household Net Borrowing, Counter-Cyclical Government, Consumption and the Current Account, and Elusive Twin Deficits By Nelson H. Barbosa-Filho, Codrina Rada, Lance Taylor, and Luca Zamparelli
  41. The specificity of functions and principles of fiscal management By Comaniciu, Carmen
  42. A Synthetic, Stock-Flow Consistent Macroeconomic Model of Financialisation By Till van Treeck
  43. Institutions and Speculative Bubbles in International Stock Markets By Pierdzioch, Christian; Kizys, Renatas
  44. Oil Price Movements and the Global Economy: A Model-Based Assessment By Selim Elekdag; René Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti
  45. La transparence de la politique monétaire et la dynamique des marchés financiers. By Meixing DAI; Moïse SIDIROPOULOS; Eleftherios SPYROMITROS
  46. Stability and Growth Pact II? Let’s Move On to SGP III: “À la carte” By Thierry Warin
  47. A Proposed Synthesis of Classical and Keynesian Growth By Anwar Shaikh
  48. Does more money buy you more happiness? By Baucells, Manel; Sarin, Rakesh K.
  49. Intangible Investment in Japan: Measurement and Contribution to Economic Growth By FUKAO Kyoji; HAMAGATA Sumio; MIYAGAWA Tsutomu; TONOGI Konomi
  50. India rising - faster growth, lower indebtedness By Wes, Marina; Pinto, Brian; Pang, Gaobo
  51. Interventions in the Foreign Exchange Market: Effectiveness of Derivatives and Other Instruments By Walter Novaes; Fernando N. de Oliveira
  52. Finance and Efficiency: Do Bank Branching Regulations Matter? By Viral V. Acharya; Jean Imbs; Jason Sturgess
  53. How Does Liquidity Affect Government Bond Yields? By Carlo Favero, Marco Pagano and Ernst-Ludwig von Thadden
  54. Military Spending and the Growth-Maximizing Allocation of Public Capital: A Cross-Country Empirical Analysis By Pantelis Kalaitzidakis; Vangelis Tzouvelekas
  55. Una versión sencilla del modelo de búsqueda y el mercado laboral urbano de Colombia (2001:I - 2006: II) By Carlos Esteban Posada
  56. FDI and Credit Constraints: Firm Level Evidence in China By Jerome Hericourt; Sandra Poncet
  57. Intergenerational Mobility and the Informative Content of Surnames By Güell, Maia; Mora, José V Rodríguez; Telmer, Chris
  59. New Estimates of Regional GDP in Spain, 1860-1930 By Julio Martinez Galarraga
  60. High Heterogeneous Information and Investment under Uncertainty By Shawn Ni; Ronald Ratti
  61. Estimation of the Equilibrium Real Exchange Rate in Russia: Trade-Balance Approach By Nadezhda Ivanova
  62. Determinants of the development of corporate bond markets in Argentina: survey to firms and investors By María Alegre; Sergio Pernice; Jorge M. Streb

  1. By: Alvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ines Drumond (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: This paper improves the analysis of the role of financial frictions in the transmission of monetary policy and in business cycle fluctuations, by focusing on an additional channel working through bank capital. Detailing a dynamic general equilibrium model, in which households require a (countercyclical) liquidity premium to hold bank capital, we find that, together with the financial accelerator, the introduction of regulatory bank capital significantly amplifies monetary shocks through a liquidity premium effect on the external finance premium faced by firms. This amplification effect is larger under Basel II than under Basel I regulatory rules. Indeed, introducing bank capital enhances the role of financial frictions in the propagation of shocks, in line with arguments in related literature.
    Keywords: Bank capital channel; Bank capital requirements; Financial accelerator; Liquidity premium; Monetary transmission mechanism; Basel Accords
    JEL: E44 E32 E52 G28
    Date: 2007–06
  2. By: Frederic S. Mishkin
    Abstract: This paper first outlines the key stylized facts about changes in inflation dynamics in recent years: 1) inflation persistence has declined, 2) the Phillips curve has flattened, and 3) inflation has become less responsive to other shocks. These changes in inflation dynamics are interpreted as resulting from an anchoring of inflation expectations as a result of better monetary policy. The paper then goes on to draw implications for monetary policy from this interpretation, as well as implications for inflation forecasts.
    JEL: E31 E50
    Date: 2007–06
  3. By: Canale, Rosaria Rita; Foresti, Pasquale; Marani, Ugo; Napolitano, Oreste
    Abstract: The aim of the paper is to evaluate the robustness of the theory that claims for restrictive effects of expansionary fiscal policy. It shows that such so-called “non-Keynesian effects” may arise as a consequence of a synchronous and opposite monetary policy intervention. The paper demonstrate this conclusion through a stylized model – supported by an empirical investigation on ECB and FED reaction functions - in which Central Banks take into account deficit spending as an element that generate inflation expectations. The econometric analysis shows also that the ECB reacts asymmetrically to deficit spending variations while the FED has a linear reaction to this indicator.
    Keywords: Fiscal policy; Monetary policy; Central Banks Policy strategies
    JEL: E63 E52 E62 E58
    Date: 2007–05–30
  4. By: Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil); Marco Antônio Costa (IBMEC Business School - Rio de Janeiro)
    Abstract: This paper investigates the transmission mechanism of monetary policy in Brazil. It is an empirical analysis of the effects of monetary policy on the behavior of corporations in Brazil. We use the balance sheet theory to investigate how corporations respond to monetary contractions. Our results show that small corporations are more sensitive to monetary contractions than large corporations.
    Keywords: Monetary Transmission Mechanism, Balance Sheet Channel, Central Bank, Monetary Contractions
    JEL: E22 E52 E44
    Date: 2007–06–05
  5. By: Argia M. Sbordone
    Abstract: In this paper, I consider the policy implications of two alternative structural interpretations of observed inflation persistence, which correspond to two alternative specifications of the new Keynesian Phillips curve (NKPC). The first specification allows for some degree of intrinsic persistence by way of a lagged inflation term in the NKPC. The second is a purely forward-looking model, in which expectations farther into the future matter and coefficients are time-varying. In this specification, most of the observed inflation persistence is attributed to fluctuations in the underlying inflation trend, which are a consequence of monetary policy rather than a structural feature of the economy. With a simple quantitative exercise, I illustrate the consequences of implementing monetary policy, assuming a degree of intrinsic persistence that differs from the true one. The results suggest that the costs of implementing a stabilization policy when the policymaker overestimates the degree of intrinsic persistence are potentially higher than the costs of ignoring actual structural persistence; the result is more clear-cut when the policymaker minimizes a welfare-based loss function.>
    Keywords: Phillips curve ; Inflation (Finance) ; Monetary policy
    Date: 2007
  6. By: Gerhard Fenz (Oesterreichische Nationalbank, Economic Analysis Division); Martin Schneider (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: This paper analyses the comovement of the German and Austrian economies and the transmission of German shocks to Austria. Static and dynamic correlation measures show a strong comovement and a change of the relative position in time of these two economies. The transmission of German shocks to Austria is analysed with a two-country VAR model. Using sign restrictions on impulse response functions, we identify German supply, demand and monetary policy shocks. We find that the average reaction of the Austrian economy to German shocks amounts to 44% of the German reaction and remains broadly stable over time.
    Keywords: business cycle, synchronization, vector autoregression, shock transmission, Austria, Germany.
    JEL: C32 E32 F41
    Date: 2007–05–14
  7. By: Oliver Grimm (Center of Economic Research (CER-ETH) at ETH Zurich); Stefan Ried (at ETH Zurich, Institute of Economic Policy I, Humboldt-Universität zu Berlin)
    Abstract: We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union’s and the country-specific welfare.
    Keywords: monetary union, heterogeneities, policy game, simultaneous policy, sequential policy, coordination, discretionary policies
    JEL: E52 E61 F42
    Date: 2007–05
  8. By: Yuzo Honda (School of Economics, Osaka University); Yoshihiro Kuroki (Chuo University); Minoru Tachibana (Osaka Prefecture University)
    Abstract: Many macroeconomists and policymakers have debated the effectiveness of the quantitative monetary-easing policy (QMEP) that was introduced in Japan in 2001. This paper measures the effect of the QMEP on aggregate output and prices, and examines its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.
    Keywords: Quantitative easing; Money injection; Portfolio rebalancing; Stock price channel; Vector autoregression
    JEL: E44 E52
    Date: 2007–03
  9. By: William Coleman
    Abstract: The paper advances an answer to a puzzle: Why is any lending or borrowing done in terms of money, when such money debt exposes the lenders’ wealth to inflation risk? The ‘received’ answer to this question is that money bonds are just proxies for real bonds, proxies born of insufficient appreciation, or a benign neglect, of inflation risk. As mere ‘proxies’, this answer implies that money bonds are redundant: anything a money bond could do, a real bond could do. The thesis of the paper is that money bonds are not redundant. Money bonds have a social benefit. That benefit lies in the reduction that money bonds secure in the unpredictability of consumption that arises from the operation of real balance effects in an environment of unpredictable money shocks. It is the very vulnerability of money bonds to inflation makes them useful in immunising the economy against unpredictable redistributions of purchasing power caused by real balance effects.
    Keywords: Real balance effect, inflation risk, indexed bonds
    JEL: E44 E52
    Date: 2007–05
  10. By: Svensson, Lars E O; Williams, Noah
    Abstract: We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables and unobservable "modes." The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts - fan charts - of target variables and instruments. Our methods hence extend certainty equivalence and "mean forecast targeting" to more general certainty non-equivalence and "distribution forecast targeting."
    Keywords: multiplicative uncertainty; Optimal policy
    JEL: E42 E52 E58
    Date: 2007–06
  11. By: Hesse, Heiko
    Abstract: The paper studies monetary policy and the monetary transmission mechanism in Thailand in light of the Asian crisis in 1997. Existing studies that adopt structural vector auto-regression (VAR) approaches do not give a clear and agreed-upon view how monetary shocks are transmitted to the Thai economy that is subject to structural breaks. This study explicitly models a pre-crisis and post-crisis cointegrated VAR model. This analysis supports arguments that the trinity of open capital markets, pegged exchange rate regime, and monetary policy autonomy is inconsistent in the pre-crisis period. In contrast, the model points to an effective monetary policy in the post-crisis period. Further, the author analyzes the common driving trends of the model.
    Keywords: Economic Stabilization,Economic Theory & Research,Macroeconomic Management,Fiscal & Monetary Policy,Financial Economics
    Date: 2007–06–01
  12. By: Roberto Perotti
    Abstract: Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and inflation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic effects of a shock to government spending on goods and services: neoclassical models predict that private consumption and the real wage will fall, while some neo-keyenesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their effects. Applying these methodologies to data from the US and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the US input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the effects of government spending shocks.
    JEL: E2 E6 E62
    Date: 2007–06
  13. By: Oscar Mauricio VALENCIA A.
    Abstract: This paper explores the welfare efects of a reduction in the inflation rates in an environment of incomplete markets. We built a dynamic heterogeneous agent model that features idiosyncratic risks in the labor supply and liquidity frictions. The model shows that a disinflation policy results in an income reallocation among debtors and lenders. The changes in the capital returns conveys variations in the precautionary savings and hence, an intertemporal redistribution of wealth and income. The welfare implications are develop according to the incomplete market features and the money plays a role of smoothing consumption when the agents faces income variability without state contingent insurance. The model is calibrated for the Colombian economy in such a way that disinflation episodes are replicated. Early results show that the disinflation monetary policy leads to improvements of liquidity in the economy because the money holdings are used by the agents for wealth transfer over time. This paper shows quantitative evidence in which disin°ation facts are associated with increments in the average real money holdings and average consumption. In addition, the volatility of consumption is reduced as the inflation rate falls, while the volatility of money holdings increases (i.e precautionary demand for money balance).
    Date: 2007–02–15
  14. By: Andrea Terzi (Universita Cattolica, Milan, Italy)
    Keywords: deficits; fiscal deficit; interest rates; inflation
    Date: 2007–05–14
  15. By: Francois Gourio; Anil K Kashyap
    Abstract: Using plant-level data from Chile and the U.S. we show that investment spikes are highly pro-cyclical, so much so that changes in the number of establishments undergoing investment spikes (the "extensive margin") account for the bulk of variation in aggregate investment. The number of establishments undergoing investment spikes also has independent predictive power for aggregate investment, even controlling for past investment and sales. We re-calibrate the Thomas (2002) model (that includes fixed costs of investing) so that it assigns a prominent role to extensive adjustment. The recalibrated model has different properties than the standard RBC model for some shocks.
    JEL: E22 E32
    Date: 2007–06
  16. By: Gert Peersman (Ghent University)
    Abstract: In this paper, we show how a simple model with sign restrictions can be used to identify symmetric and asymmetric supply, demand and monetary policy shocks in a two-country structural VAR. The results can be used to deal with several issues that are important in the OCA-literature. Whilst the method can be applied to many countries, we provide evidence for the UK versus the Euro Area which are compared versus the US as a benchmark. An important role for symmetric shocks with the Euro Area in explaining UK output fluctuations is found. However, the relative importance of asymmetric shocks, being around 20 percent in the long-run, cannot be ignored. In contrast, the degree of business cycle synchronization seems to have been higher with the US. Moreover, the historical average reaction of the policy rate to symmetric aggregate demand shocks was stronger in the UK than the Euro Area. We also confirm existing evidence of the exchange rate being an important independent source of shocks in the economy.
    Keywords: optimal currency areas, symmetric and asymmetric shocks, vector autoregressions
    JEL: C32 E42 F31 F33
    Date: 2007–10–05
  17. By: William Coleman
    Abstract: This paper develops a model of the costliness of inflation that places the locus of costs in the bond market, rather than the money market. It argues that inflation is costly on account on the contraction of the bond market caused by the riskiness of inflation. The theory is premised upon the social function of bond markets as consisting of the transference of technological risk from those economic interests where risk is most concentrated (and so most painful) to interests where it is less concentrated (and so less painful). Using a Ramsey-Solow model with decision-makers maximising expected utility from consumption and real balances, the paper argues that unpredictable inflation impedes this useful transfer in risks secured by the bond market. Unpredictable inflation makes debt most costly when income is the most needed by debtors (since when the ex post real interest is highest, the debtor is in consequence the poorest), and credit the most remunerative when income is the least needed by creditors (since when the ex post real interest is the highest, the creditor is as a consequence richest). The upshot of these disincentives to borrow and lend is that less risk is transferred. Thus unpredictable inflation reduces the socially beneficial transfer of risks that a bond market secures.
    Keywords: inflation cost, inflation risk, debt
    JEL: E31 E43 E61
    Date: 2007–05
  18. By: Sau, Lino
    Abstract: New and old mainstream macroeconomics argues that price flexibility stabilizes the economy. After a decline in aggregate demand, the more rapid prices fall, the faster output returns to its full employment level. The theoretical basis for this result is the well known "Pigou effect". However both Keynes and Kalecki rejected the thesis that price flexibility, in a demand-induced recession, can be stabilizistabilizing. This paper seeks to contrast Keynes's and Kalecki's ideas with the mainstream and discuss and alternative approach in the spirit of the post-keynesian's debt-deflation school.
    Keywords: Non-stabilizing flexibily; Pigou effect: Fisher effect; Debt-deflation
    JEL: E32 E31
    Date: 2006
  19. By: Gianni Amisano (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Oreste Tristani (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We estimate the approximate nonlinear solution of a small DSGE model on euro area data, using the conditional particle filter to compute the model likelihood. Our results are consistent with previous findings, based on simulated data, suggesting that this approach delivers sharper inference compared to the estimation of the linearised model. We also show that the nonlinear model can account for richer economic dynamics - the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample. JEL Classification: C11, C15, E31, E32, E52.
    Keywords: DSGE models, inflation persistence, second order approximations, sequential Monte Carlo, Bayesian estimation.
    Date: 2007–05
  20. By: Huiping Yuan (Xiamen University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This paper examines four equivalent methods of optimal monetary policymaking, committing to the social loss function, using discretion with the central bank long-run and short-run loss functions, and following monetary policy rules. All lead to optimal economic performance. The same performance emerges from these different policymaking methods because the central bank actually follows the same (similar) policy rules. These objectives (the social loss function, the central bank long-run and short-run loss functions) and monetary policy rules imply a complete regime for optimal policy making. The central bank long-run and short-run loss functions that produce the optimal policy with discretion differ from the social loss function. Moreover, the optimal policy rule emerges from the optimization of these different central bank loss functions.
    Keywords: Optimal Policy, Central Bank Loss Functions, Policy Rules
    JEL: E42 E52 E58
    Date: 2007–03
  21. By: W. Douglas McMillin; James S. Fackler
    Abstract: This paper (i) illustrates how a VAR model can be used to evaluate inflation targeting, (ii) derives the policy frontier available to the central bank using counterfactual experiments with real time data, and (iii) estimates how this frontier has changed over time in terms of the position and slope of the available tradeoff between output gap variability and inflation variability under inflation targeting. Various inflation targets are considered as are tolerance bands of varying width around these targets. The results indicate that over time (i) a given reduction in inflation variability is associated with a smaller rise in output variability and that (ii) a given inflation variability is achieved with smaller interest rate volatility. Consistent with the data, our results require federal funds rate persistence, though no instrument instability was observed.
  22. By: Suescun, Rodrigo
    Abstract: This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb consumers (who consume their wages and do not save or borrow) and Ricardian households to study the stabilizing properties of different parameters of the tax code. The economy faces multiple sources of business cycle fluctuations: (1) world capital market shocks; (2) world business cycle shocks; (3) terms of trade shocks; (4) government spending shocks; and (5) nontradable and (6) tradable sector technology innovations. Calibrating the model economy to a typical Latin American economy allows the evaluation of its ability to mimic the region ' s observed business cycle frequency properties and the assessment of the quantitative relationship between tax code parameters, business cycle forcing variables, and business cycle behavior. The model captures many of the salient features of Latin America ' s business cycle facts and finds that the degree of smoothing provided by the automatic revenue stabilizers-described by various properties of the tax system-is negligible. Simulation results seem to suggest an invariance property for middle-income countries: the amplitude of the business cycle is independent of the tax structure. And government size-measured by the GDP ratio of government spending-plays the role of an automatic stabilizer, but its smoothing effect is very weak.
    Keywords: Economic Theory & Research,Fiscal Adjustment,Economic Stabilization,Intergovernmental Fiscal Relations and Local Finance Management,Inequality
    Date: 2007–06–01
  23. By: Travaglini, Guido
    Abstract: This paper combines two major strands of literature: structural breaks and Taylor rules. At first, I propose a nonstandard t-test statistic for detecting multiple level and trend breaks of I(0) series by supplying theoretical and limit-distribution critical values obtained from Montecarlo experimentation. Thereafter, I introduce a forward-looking Taylor rule expressed as a dynamic model which allows for multiple breaks and reaction-function coefficients of the leads of inflation, of the output gap and of an equity market index. Sequential GMM estimation of the model, applied to the Effective Federal Funds Rate for the period 1984:01-2001:06, produces three main interesting results: the existence of significant structural breaks, the substantial role played by inflation in the FOMC decisions and a marked equity targeting policy approach. Such results reveal departures from rationality, determined by structured and unstructured uncertainty, which the Fed systematically attempts at reducing by administering inflation scares and misinformation about the actual Phillips curve, in order to keep the output and equity markets under control.
    Keywords: Generalized Method of Moments; Monetary Policy Rules; Multiple Breaks.
    JEL: C61 C12 E58
    Date: 2007–06–06
  24. By: Juan Angel Garcia (Capital markets and Financial Structure Division, Directorate Monetary Policy, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Adrian van Rixtel (Capital markets and Financial Structure Division, Directorate Monetary Policy, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Inflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation expectations. In this context, the purpose of this paper is twofold. First, it provides a selective survey of the key arguments for and against the issuance of inflation-linked debt, and some of the factors that help to understand their recent growth. Second, it illustrates the use of these instruments to better monitor investors’ inflation expectations and growth prospects from a central bank perspective.
    Date: 2007–06
  25. By: George-Marios Angeletos; Vasia Panousi
    Abstract: This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now causes a reduction in risk taking and investment. This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.
    JEL: E13 E6 H3
    Date: 2007–05
  26. By: Silva Lopes, Artur C.; M. Monteiro, Olga Susana
    Abstract: The purpose of this paper is to test the (rational) expectations hypothesis of the term structure of interest rates using Portuguese data for the interbank money market. The results obtained support only a very weak, long-run or "asymptotic" version of the hypothesis, and broadly agree with previous evidence for other countries. The empirical evidence supports the cointegration of Portuguese rates and the "puzzle" well known in the literature: although its forecasts of future short-term rates are in the correct direction, the spread between longer and shorter rates fails to forecast future longer rates. In the single equation framework, the implications of the hypothesis in terms of the predictive ability of the spread are also clearly rejected.
    Keywords: term structure of interest rates; expectations hypothesis; hypothesis testing; cointegration; Portugal.
    JEL: C32 C22 E43
    Date: 2007–05–31
  27. By: W. Michael Cox
    Abstract: This paper investigates the effects of globalization on aggregate productivity, output growth, and inflation. I present a simple two-country, two-good, flexible exchange rate model using Fisher Ideal aggregators to examine changes in the mapping from microeconomic to macroeconomic productivity growth as nations globalize. Advances in industry-specific labor productivity are shown to have potentially a much greater passthrough to aggregate productivity, output, and prices the more open nations are to trade. Globalization raises both the level and growth rate of aggregate productivity by allowing more economywide reorganization in response to ongoing technological advances than would be optimal otherwise. ; I develop a globalized version of the quantity equation of money, where inflation in the home country depends on domestic money growth and a weighted average of home and foreign GDP growth. Relative country size, consumer preferences, production technologies, and the openness of trade are the chief determinants of these weights. Calibrating the model to match certain stylized facts about the U.S. and global economies, U.S. consumer price inflation falls from roughly 3.8 percent when economies are closed to under 2 percent in the transition period, eventually settling at around 2.3 percent in free trade. Producer and consumer prices trek a common path under autarky but diverge as the world globalizes. Both home and foreign aggregate productivity growth rates increase—by 0.4 and 0.7 percentage points, respectively. Roughly 30 percent of the output weight in the determination of home inflation shifts from the home to the foreign economy—greater than might be expected from strong home bias.
    Date: 2007
  28. By: Faik Koray; W. Douglas McMillin
    Abstract: This paper investigates empirically, using a VAR model, the response of the exchange rate and the trade balance to fiscal policy shocks for the U.S. economy during the period 1981:3-2006:3. The results indicate that positive shocks to real government purchases generate a persistent increase in the budget deficit, a transitory expansionary effect on output, and a long-lived positive effect on the price level, but reduce the real interest rate. Simultaneously, and consistent with interest parity, the real exchange rate depreciates, and the trade balance improves. Negative shocks to net taxes also generate a persistent increase in the budget deficit, and the effects on the model variables are generally in the same direction, but are almost never significant. Our results indicate it is inappropriate to attribute rising trade balance deficits to expansionary fiscal policy shocks, even though these shocks generate long-lived increases in the budget deficit.
  29. By: Pierdzioch, Christian; Kizys, Renatas
    Abstract: Our results shed light on the link between the betas of portfolios formed on market capitalization and book-to-market value and the U.S. business cycle. We derived our results by estimating a state-space model that captures the idea that both the portfolio betas and the business cycle are measured with error. We measured the business cycle using real-time and revised data. Our results indicate that the sensitivity of portfolio betas to the business cycle is significant and large when the book-to-market value is high and estimates are based on real-time data. Equity market investors should use real-time data when assessing the business-cycle sensitive risks of investments into portfolios with a high book-to-market value.
    Keywords: State-space model; Portfolio betas; Real-time data; Business Cycle; United States
    JEL: E32 C32 G12 E44
    Date: 2007–05–06
  30. By: Marco Cagetti; Mariacristina De Nardi
    Abstract: We study the effects of abolishing estate taxation in a quantitative and realistic framework that includes the key features that policy makers are worried about: business investment, borrowing constraints, estate transmission, and wealth inequality. We use our model to estimate effective estate taxation. We consider various tax instruments to reestablish fiscal balance when abolishing estate taxation. We find that abolishing estate taxation would not generate large increases in inequality, and would, in some cases, generate increases in aggregate output and capital accumulation. If, however, the resulting revenue shortfall were financed through increased income or consumption taxation, the immensely rich, and the old among those in particular, would experience a welfare gain, at the cost of welfare losses for the vast majority of the population.
    JEL: D31 E21 H2
    Date: 2007–06
  31. By: Jim Dolmas
    Abstract: This paper incorporates preferences that display first-order risk aversion (FORA) into a standard real business cycle model. Although FORA preferences represent a sharp departure from the expected utility/constant relative risk aversion (EU/CRRA) preferences common in the business cycle literature, the change has only a negligible e¤ect on the model s second moment implications. In fact, for what I argue is an empirically reasonable "ballpark" calibration of the FORA preferences, the moment implications are essentially identical to those under EU/CRRA, while the welfare cost of aggregate fluctuations in the model is substantially larger.
    Keywords: Business cycles
    Date: 2007
  32. By: WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); ChunShen Lee (Feng Chia University)
    Abstract: This paper revisits the issue of conditional volatility in real GDP growth rates for Canada, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the four countries became noticeably less volatile over the past few decades. In this paper, we employ the modified ICSS algorithm to detect structural change in the unconditional variance of output growth. One structural break exists in each of the four countries. We then use generalized autoregressive conditional heteroskedasticity (GARCH) specifications modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada, Japan, and the U.K. and disappears in the U.S., excess kurtosis vanishes in Canada, Japan, and the U.S. and drops substantially in the U.K., once we incorporate the break in the variance equation of output for the four countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary unconditional variance.
    Keywords: Nonstationary variance, the Great Moderation, real GDP growth and volatility, modified ICSS algorithm, IGARCH effect
    JEL: C32 E32 O40
    Date: 2007–04
  33. By: ITO Takatoshi; SATO Kiyotaka
    Abstract: Currency crises, accompanied by large devaluation, tend to have significant impacts on the domestic economy. If the exchange rate also depreciates in real terms, the economy can take advantage of the export price competitiveness to promote its exports. In contrast, if the currency devaluation induces an increase in domestic inflation, the currency value in real terms will return toward the pre-crisis level, which results in a loss of the export price competitiveness and, hence, a slow recovery from the severe economic downturn. This paper analyzes the degree of domestic price responses to the exchange rate changes in crisis-hit countries in East Asian and Latina American countries and Turkey in order to reveal why the post-crisis inflation performance was very different across countries. The structural vector autoregression (VAR) technique is applied to examining exchange rate pass-through. The degree of exchange rate pass-through is found to be higher in Latin American countries and Turkey than in East Asian countries with a notable exception of Indonesia. In particular, Indonesia, Mexico, Turkey and, to a lesser extent, Argentina show a strong response of CPI to the exchange rate shock. More noteworthy is that excessive supply of base money played an important role in increasing the domestic inflation rate in Indonesia, while such effect is not observed in other countries, which indicates the importance of credible monetary policy committed to price stability in order to prevent the post-crisis inflation. Shock transmission from import prices or PPI to CPI is quite large in Indonesia, Mexico and Turkey. This finding implies that the channel of shocks at different stage of pricing chain may be an additional factor in high domestic inflation.
    Date: 2007–06
  34. By: Comaniciu, Carmen
    Abstract: The paper starts with the role of the Romanian fiscal and budgetary reform in the development and economical growth and has as purpose to emphasize the essential problems: the harmonization and fiscal coordination from the E.U. perspective; the Romanian fiscal and budgetary perspectives for period 2007-2009.
    Keywords: fiscal; budgetary; reform; period transition; harmonization; coordination
    JEL: H2 H6 E6
    Date: 2006–11–23
  35. By: Gustav Horn (IMK at the Hans Boeckler Foundation); Camille Logeay (IMK at the Hans Boeckler Foundation); Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: Potential output measures a country's attainable aggregate living standard and is thus one of the most important categories of economics. It is also a key indicator for monetary and fiscal policy. Despite its prominence, however, potential output is a difficult concept to pinpoint theoretically and even more so empirically. The study discusses these difficulties and also the marked revision of potential output estimates by major international organizations. The authors furthermore present the results of their attempts to quantify Germany's potential output based on a production function approach coupled with the Kalman-filter technique to estimate the NAIRU. The authors find that potential output and potential output growth greatly depend on how the NAIRU and potential total factor productivity are modelled. Given the difficulties involved in robustly estimating potential output, especially in real time, economic policy makers need to learn to pursue their policy objectives without reference to this variable.
    Date: 2007
  36. By: Ielpo, Florian; Guégan, Dominique
    Abstract: US interest rates’ overnight reaction to macroeconomic announcements is of tremendous importance when trading fixed income securities. Most of the empirical studies achieved so far either assumed that the interest rates’ reaction to announcements is linear or independent to the state of the economy. We investigate the shape of the term structure reaction of the swap rates to announcements using several linear and non-linear time series models. The empirical results yield several not-so-well-known stylized facts about the bond market. First, and although we used a daily dataset, we find that the introduction of non linear models leads to the finding of a significant number of macroeconomic figures that actually produce an effect over the yield curve. Most of the studies using daily datasets did not corroborate so far this conclusion. Second, we find that the term structure response to announcements can be much more complicated that what is generally found: we noticed at least four types of patterns in the term structure reaction of interest rates across maturities, including the hump-shaped one that is generally considered. Third, by comparing the shapes of the rates’ term structure reaction to announcements with the first four factors obtained when performing a principal component analysis of the daily changes in the swap rates, we propose a first interpretation and classification of these different shapes. Fourth we find that the existence of some outliers in the one-day changes in interest rates usually leads to a strong underestimation of the reaction of interest rates to announcements, explaining the different results obtained between high-frequency and daily datasets: the first type of study seems to lead to the finding of fewer market mover announcements.
    Keywords: Macroeconomic Announcements; Interest Rates Dynamic; Outliers; Reaction Function; Principal Component Analysis.
    JEL: G12 E43
    Date: 2006–12
  37. By: Mark A. Wynne; Erasmus K. Kersting
    Abstract: This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country's openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship—that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper—seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation's inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.
    Keywords: Inflation (Finance) ; Trade ; Phillips curve
    Date: 2007
  38. By: Vincenzo Cestari (Università Lumsa and CNR); Paolo Del Giovane (Bank of Italy); Clelia Rossi-Arnaud (Università di Roma - La Sapienza)
    Abstract: The question addressed by this study is whether consumers remember past prices correctly. We test Italian citizens’ memory for cinema prices with questionnaires distributed to moviegoers. The analysis concentrates on the memory of pre-euro prices, but the recall for a more recent period is also investigated. The results show that only a small percentage of respondents recalled the correct price, and that the average prices recalled were much lower than the actual pre-euro prices and dated back to years before the changeover. Price recall is less accurate for the respondents who perceive higher and more persistent inflation; it is also worse for the older respondents and for the less frequent movie-goers.
    Keywords: prices, memory, perceptions, euro
    JEL: D12 D8 E31
    Date: 2007–02
  39. By: Nooraddin Sharify (Department of Economics, University of Mazandaran, Babolsar, Iran.); M. Alejandro Cardenete (Department of Economics, Universidad Pablo de Olavide)
    Abstract: Any increment in the prices of goods or services generally leads to an increase in different products prices indices and inflation. This paper examines the cost-push impact of a motor spirit price increment in Iran on different products prices indices and inflation. An Input-Output (I-O) table adjustment approach is applied. Iran input- output table for the year 2001-2002 is used as database. The empirical results of the model show how the cost-push impact of a 25% increment in the motor spirit price leads to an increment in different products prices indices, but the maximum effect of this increment, which is on transportation services prices, does not exceed 0.7492%. In addition, the cost-push effect of this increase on the Production Prices Index (PPI) is estimated at 0.2540%.
    Keywords: Input-Output, Motor Spirit Pricing, Price model, Iran.
    JEL: C67 D57 E37 E64
    Date: 2007–05
  40. By: Nelson H. Barbosa-Filho, Codrina Rada, Lance Taylor, and Luca Zamparelli (New School for Social Research, New York, NY)
    Keywords: net borrowing; twin deficits; current account
    Date: 2007–04–30
  41. By: Comaniciu, Carmen
    Abstract: The multiple changes which take place in the public sector due to the economical social and political processes and phenomenon impose the development and the perfecting of public management in order to assure efficiency and efficacy. Although in the specialty literature, the concept of fiscal management or management of fiscal activity is not very well defined, we will try to define this concept, to identify the fundamental and specific objectives, to specify the content of specific functions and principles.
    Keywords: fiscal management; functions; principles; taxes
    JEL: E62 M1 E6
    Date: 2007–03–28
  42. By: Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: This article is centred around the notions of shareholder value orientation and financialisation. Shareholder value orientation is reflected by a high dividend payout ratio applied by firms and the reluctance of firms to finance physical investment via new equity issues. Financialisation is the more general development towards an increased importance of the financial sector of the economy relative to the non-financial sector. In this article, a synthetic, stock-flow consistent model is developed that attempts to encompass and at times adjust some important recent works on the effects of financialisation. This includes contributions from the fields of mainstream information economics and Post Keynesian economics. We conduct simulations reflecting increased shareholder value orientation and show that the model produces a number of results that appear consistent with many stylised facts particularly of the US economy since the early 1980s.
    Keywords: Stocks and Flows, Corporate Governance, Investment Finance, Payout Policy, Income Distribution
    JEL: E10 E21 D14 G11 G32 G35 E25
    Date: 2007–05
  43. By: Pierdzioch, Christian; Kizys, Renatas
    Abstract: We combine tests for speculative bubbles in stock markets with a cross-country regression framework to analyze whether specific institutional characteristics of an economy can be identified that make speculative bubbles in stock markets more likely to occur. The list of institutional characteristics that have a significant effect on the probability that a speculative bubble arises includes the law and order tradition of a country, expropriation risk, the tax rates on dividend income and interest income, and the overall efficiency of the financial system. We also find that speculative bubbles are less likely to occur in an economy that experiences strong economic growth.
    Keywords: Speculative bubbles; cointegration; cross-country regression model; institutions
    JEL: E32 C32 G12 E44
    Date: 2007–06–06
  44. By: Selim Elekdag; René Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti
    Abstract: We develop a five-region version (Canada, an oil exporter, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labor income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.
    Keywords: Economic models; Inflation and prices; International topics
    JEL: E66 F32 F47
    Date: 2007
  45. By: Meixing DAI; Moïse SIDIROPOULOS; Eleftherios SPYROMITROS
    Abstract: Cet article étudie les implications, en termes de stabilité économique, de la relation entre le degré d’indépendance de la Banque centrale et le degré de transparence (ou d’opacité) de la politique monétaire dans un modèle qui tient explicitement compte des marchés financiers et ainsi de la dynamique jointe de l’inflation et des cours boursiers. Nous montrerons que l’opacité sur les préférences de la Banque centrale exerce une influence négative sur la stabilité. Cette influence négative pourrait être modérée ou compensée par les effets d’un écart positif entre le poids relatif perçu par le public et le vrai poids que la Banque centrale attribue à l’objectif d’output. Par ailleurs, un marché du travail peu flexible, une demande de biens peu sensible au taux d’intérêt réel, ou encore une vitesse de circulation de la monnaie et une élasticité - intérêt de la demande de monnaie élevées exigent une plus grande transparence pour assurer la stabilité de l’économie.
    Keywords: Transparence, règle de taux d’intérêt, prix des actifs, stabilité macroéconomique.
    JEL: E5
    Date: 2007
  46. By: Thierry Warin
    Abstract: After the fuzziness in Europe that surrounded the implementation of the excessive deficit procedure foreseen by the Stability and Growth Pact (SGP), the European Union had to restore the credibility of the weakened fiscal rule. On March 2005, the 25 members amended the SGP. The constraint was to keep alive the Treaty of Amsterdam, which instituted the SGP. Indeed, an attempt to make major changes to the SGP would have necessitated a new Treaty, and hence a ratification by the 25 countries. This could have meant no more Europe-wide fiscal rule. But are minor changes enough? This paper addresses this question by deciphering the amended version of the SGP, and finds that, in the case countries still breach the SGP, another minor change is possible: an “à la carte” version of the SGP.
    Keywords: Europe, Fiscal rule, Stability and Growth Pact
    Date: 2007–02
  47. By: Anwar Shaikh (New School for Social Research, New York, NY)
    Keywords: growth; keynesian; classical growth; keynesian growth
    Date: 2007–02–12
  48. By: Baucells, Manel (IESE Business School); Sarin, Rakesh K. (UCLA Anderson School of Management)
    Abstract: Why do we believe that more money will buy us more happiness (when in fact it does not)? In this paper, we propose a model to explain this puzzle. The model incorporates both adaptation and social comparison. A rational person who fully accounts for the dynamics of these factors would indeed buy more happiness with money. We argue that projection bias, that is, the tendency to project into the future our current reference levels, precludes subjects from correctly calculating the utility obtained from consumption. Projection bias has two effects. First, it makes people overrate the happiness that they will obtain from money. Second, it makes people misallocate the consumption budget by consuming too much at the beginning of the planning horizon, or consuming too much of adaptive goods.
    Keywords: Happiness; Life Satisfaction; Social Comparison; Consumer Life-Cycle Planning; Projection Bias;
    Date: 2007–02–14
  49. By: FUKAO Kyoji; HAMAGATA Sumio; MIYAGAWA Tsutomu; TONOGI Konomi
    Abstract: The purpose of this paper is to measure intangible assets, to construct the capital stock of intangible assets, and to examine the contribution of intangible capital to economic growth in Japan. We follow the approach of Corrado, Hulten, and Sichel (2005, 2006) to measure intangible investment using the 2006 version of the Japan Industry Productivity Database. We find that the ratio of intangible investment to GDP in Japan has risen during the past 20 years and now stands at 7.5%. However, the ratios of intangible investment to GDP and of intangible to tangible investment in Japan are smaller than the values estimated for the US by Corrado et al. (2006). In addition, we find that the growth rate for intangible capital in Japan declined from the 1980s to the 1990s, which is in stark contrast to the high growth rate for intangible capital in the US in the late 1990s. Therefore, the contribution of intangible capital to total labor productivity growth in Japan is substantially smaller than in the US.
    Date: 2007–05
  50. By: Wes, Marina; Pinto, Brian; Pang, Gaobo
    Abstract: Over the past 25 years, India ' s economy grew at an average real rate of close to 6 percent, with growth rates in recent years accelerating to 9 percent. Yet by 2005-06, the general government debt-to-GDP ratio was 34 percentage points higher than in the 1980s. The authors examine the links between public finances and growth in the post-1991 period. They argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was a reform-induced loss in trade, customs, and financial repression taxes. Over time, these very factors plus lower entry barriers have contributed to stronger microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. The authors suggest that the impressive growth acceleration of the past few years, which is now lowering government indebtedness, can be attributed to the lagged effects of these factors, which have taken time to attain a critical mass in view of India ' s gradual reforms. Similarly, the worsening of public finances during the late 1990s can be attributed to the cumulative effects of tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses, and a pullback in private investment (hence, growth and taxes), a situation which is now turning around. Insufficient capital expenditures have contributed to the infrastructure gap, which is seen as a constraint especially for rapid growth in manufacturing. The authors discuss ongoing reforms in revenue mobilization and fiscal adjustment at the state level, which if successfully implemented, will result in a better alignment of public finances with growth by generating further fiscal space for infrastructure and other development spending.
    Keywords: Economic Theory & Research,Banks & Banking Reform,Investment and Investment Climate,Public Sector Economics & Finance,External Debt
    Date: 2007–06–01
  51. By: Walter Novaes (PUC/RJ); Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil)
    Abstract: This paper discusses the effectiveness in Brazil of the traditional instruments of exchange rate interventions (spot interventions and interest rates) as well as instruments based on exchange rate derivatives (swaps and dollar indexed public bonds). We show that in periods of high volatility of the nominal exchange rate the instruments are not capable of significantly modifying the dynamics of the nominal exchange rate. In periods of low volatility of the nominal exchange rate, in contrast, both the traditional instruments and the derivative instruments are effective. These results are robust to the two techniques of estimation employed: GMM in continuous time and in discrete time.
    Keywords: Central Bank, intervention in the foreign exchange market, foreign exchange derivatives
    JEL: E58 F31 E52
    Date: 2007–06–05
  52. By: Viral V. Acharya (London Business School & CEPR); Jean Imbs (University of Lausanne - HEC, CEPR & Swiss Finance Institute); Jason Sturgess (London Business School)
    Abstract: We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value added output, we calculate for each state the efficient frontier for investments in the real economy, the efficient Sharpe ratio, and the corresponding weights on investments in different industries. We study how rapidly different states converge to an efficient allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries, greater distance from the efficient frontier before liberalization and larger geographical area. These effects are robust to industries integrating across states and the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for the efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variancecovariance properties of investment returns, rather than on their average only.
    Keywords: Financial development, Growth, Sharpe ratio, Volatility, Diversification
    JEL: E44 F02 F36 O16 G11 G21 G28
    Date: 2006–11
  53. By: Carlo Favero, Marco Pagano and Ernst-Ludwig von Thadden
    Abstract: The paper explores the determinants of yield differentials between sovereign bonds in the Euro area. There is a common trend in yield differentials, which is correlated with a measure of aggregate risk. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We propose a simple model with endogenous liquidity demand, where a bond’s liquidity premium depends both on its transaction cost and on investment opportunities. The model predicts that yield differentials should increase in both liquidity and risk, with an interaction term of the opposite sign. Testing these predictions on daily data, we find that the aggregate risk factor is consistently priced, liquidity differentials are priced for a subset of countries, and their interaction with the risk factor is in line with the model’s prediction and crucial to detect their effect.
  54. By: Pantelis Kalaitzidakis (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: In this paper drawing from the theoretical framework developed by Shieh et al., (2002), we present an endogenous growth model to empirical analyze the growth maximizing allocation of public capital among military spending and investment in infrastructure. Using this general model of public capital formation, we derive the growth-maximizing values of the shares of public capital allocated to it’s two different types, as well as the growth-maximizing tax rate (amount of total public capital as a share of GDP). Then we proceed with an empirical investigation of the theoretical implication of the model that both the effects of the shares of public capital and the tax rate on the long-run growth rate are non-linear, following an inverse U-shaped pattern. Using data of public investment in infrastructure and military capital formation, we investigate the long run relationship between economic growth and the allocation of public capital using panel cointegration analysis in a sample of 55 developed and developing countries. Our empirical results confirm the theoretical implications of the model for the majority of the countries in the sample. This finding is more consistent for the OECD countries although the same result can be drawn for a large part of the developing countries.
    Keywords: public capital, military spending, economic growth, panel unit root tests, panel cointegration
    JEL: E62 H56 O40 C23
    Date: 2007–05–29
  55. By: Carlos Esteban Posada
    Abstract: En este documento se expone una versión sencilla del modelo de búsqueda. Su aplicación al caso del mercado laboral urbano colombiano (2001:I – 2006:II) indica lo siguiente: a) el modelo parece pertinente si se juzga por sus predicciones; b) la relación inversa entre la tasa de ocupación asalariada y la tasa de desempleo predicha por el modelo es, según los datos, especialmente estrecha; c) la caída de la tasa de interés real a lo largo del período 2001:I – 2006:II parece haber sido el principal factor determinante de los aumentos de la tasa de ocupación (total y de asalariados) y del salario real medio y de la reducción de la tasa de desempleo; d) el proceso de reducciones de la tasa de interés parece ya temporalmente agotado así que, según el modelo, los aumentos del salario real durante los próximos años han de depender mucho más que en el quinquenio 2001-2006 de los incrementos de la eficiencia laboral.
    Date: 2007–05–25
  56. By: Jerome Hericourt; Sandra Poncet
    Abstract: In this paper, we assess the success of the ongoing financial system reforms in China through the investigation of the extent to which firms are financially constrained. We focus on the part played by Foreign Direct Investment (FDI) in funding Chinese corporate sector as we analyze whether incoming foreign investment in China plays an important role in alleviating domestic firms’ credit constraints. Using firm-level data on 2,200 domestic companies for the period 1999-2002 and splitting domestic firms into public and private firms, we find that public firms’ investment decisions are not sensitive to debt ratios or the cost of debt. Nor is there any evidence that public firms are affected by foreign firms presence. We interpret this as evidence in support of the notion of a soft budget constraint for public firms. In contrast, private domestic firms appear more credit constrained than state-owned firms but their financing constraints tend to ease in a context of abundant foreign investment. Our results confirm that the development of cross-border relationships with foreign firms helps private domestic firms to bypass both the financial and legal obstacles that they face at home(Huang, 2003).
    Keywords: Financial constraint; corporate finance; Foreign Direct Investment; China
    JEL: E22 E44 G31 O16
    Date: 2007–05
  57. By: Güell, Maia; Mora, José V Rodríguez; Telmer, Chris
    Abstract: We propose an alternative method for measuring intergenerational mobility. Traditional methods based on panel data provide measurements that are scarce, difficult to compare across countries and almost impossible to get across time. In particular this means that we do not know how intergenerational mobility is correlated with growth, income or the degree of inequality. Our proposal is to measure the informative content of surnames in one census. The more information does the surname have on the income of an individual, the more important is her background in determining her outcomes; and thus, the less mobility there is. The reason is that surnames inform on family relationships because the distribution of surnames is necessarily very skewed. A large percentage of the population is bound to have a very unfrequent surname. For them the partition generated by surnames is very informative on family linkages. First, we develop a model whose endogenous variable is the joint distribution of surnames and income. There we explore the relationship between mobility and the informative content of surnames. We allow for assortative mating to be a determinant of both. Then, we use our methodology to show that in large Spanish region the informative content of surnames is large and consistent with the model. We also show that it has increased over time, indicating a substantial drop in the degree of mobility. Finally, using the peculiarities of the Spanish surname convention we show that the degree of assortative mating has also increased over time, in such a manner that might explain the decrease in mobility observed. Our method allows us to provide measures of mobility comparable across time. It should also allow us to study other issues related to inheritance.
    Keywords: birth-death processes; cross-sectional data; inheritance; population genetics
    JEL: C31 E24 J1
    Date: 2007–06
  58. By: Juan Nicólas Hernández
    Abstract: El documento calcula la cuenta corriente óptima hacia el largo plazo, basándose en un enfoque de suavización intertemporal del consumo. La cuenta corriente actúa como una salvaguardia de manera que sí, hacia el largo plazo, se prevé una caída en el flujo del ingreso nacional, la mayor necesidad de ahorro en el presente implica un menor déficit en cuenta corriente. El trabajo coincide con trabajos anteriores en la identificación de los periodos en los cuales la cuenta corriente de Colombia ha estado alejada de la óptima. No obstante, al ampliar la muestra hasta 2004 y con proyecciones de la cuenta corriente hasta 2007, se identifica un agente representativo que tiende a consumir justamente su ingreso permanente en contraposición a aquel que tiende a consumir más allá de este. El progresivo relajamiento de las restricciones crediticias permite inferir en perspectiva, un comportamiento del consumo y por tanto de la cuenta corriente más cercanos al óptimo. Bajos los supuestos de déficit en cuenta corriente considerados se sugiere, a partir de 2006, la necesidad de un mayor ahorro.
    Date: 2007–05–20
  59. By: Julio Martinez Galarraga (Universitat de Barcelona)
    Abstract: This paper presents a new regional database on GDP in Spain for the years 1860, 1900, 1914 and 1930. Following Geary and Stark (2002), country level GDP estimates are allocated across Spanish provinces. The results are then compared with previous estimates. Further, this new evidence is used to analyze the evolution of regional inequality and convergence in the long run. According to the distribution dynamics approach suggested by Quah (1993, 1996) persistence appears as a main feature in the regional distribution of output. Therefore, in the long run no evidence of regional convergence in the Spanish economy is found.
    Keywords: convergence, economic growth, regional gdp, distribution dynamics, economic history
    JEL: N93 O47 E1 N94 O18
    Date: 2007
  60. By: Shawn Ni (Department of Economics, University of Missouri-Columbia); Ronald Ratti (Department of Economics, University of Missouri-Columbia)
    Abstract: A sudden change in investment environment shifts objective uncertainty (characterized by parameters that determine the distribution of returns) and at the same time heightens subjective uncertainty (about the data generating parameters) unevenly across investors. For a given state of economy, the uncertainty facing the investor is the sum of the uncertainty in the data and the uncertainty of the investors assessment of the expected return distribution. In this model the option value of waiting to invest depends not only on the objective uncertainty as in the traditional theory but varies systematically with investor information and Bayesian updating of outlook for the project. Simulation of the model suggests that during a state characterized by greater uncertainty and higher potential expected return investment will be by an abnormally high percentage of informed investors and may increase overall. For over 10,000 instances of firm-level FDI data for Korea from 1996 to 2001, regression results are consistent with the hypothesis that disproportionably more FDI is made by experienced (hence more informed) investors during heightened uncertainty.
    Keywords: uncertainty, investor information, option value, Bayesian updating, FDI
    JEL: D8 E22 F21
    Date: 2007–05–15
  61. By: Nadezhda Ivanova (CEFIR)
    Abstract: The paper estimates the equilibrium real exchange rate (ERER) in Russia for 1995-20065 using the partial-equilibrium version of the trade-balance approach. The three-good framework is applied, allowing distinction between the RER for imports and RER for exports. The terms of trade are viewed as exogenous. Russia’s export demand is regarded as infinitely price elastic, implying the estimation of export supply function. Russian imports are assumed to be demand determined. The estimation of the trade-volume equations is based on the search of cointegrating relationships. The import elasticities are in line with estimates obtained in other studies. The estimations for the export supply equation confirm “supply elasticity pessimism”. The ERER simulations reveal the degree of rouble overvaluation of 25%-40%, depending on the measure of the RER used, before the August 1998 crisis. In recent years, given the surge in oil prices and pro-active exchange rate policy of the Bank of Russia, the rouble appears to be substantially undervalued. In 2004-2006, given the surge in oil prices and pro-active exchange rate policy of the Bank of Russia, the rouble appears to be substantially undervalued: by 40-70% on average, depending on the measure of the RER used.
    Keywords: Equilibrium Real Exchange Rate, Trade Elasticities, Russia
    JEL: C22 E52 F4
    Date: 2007–05
  62. By: María Alegre; Sergio Pernice; Jorge M. Streb
    Abstract: Conventional theory leads to expect bonds to be a financing vehicle for large firms because of economies of scale and contracting costs. In this paper we present the results for Argentina of a survey of firms and of investors on the use of corporate bonds. The result of these surveys supports the idea that for Argentine firms, bonds are a financing vehicle of choice only for firms above a certain (large) size. This is independent of the criteria used for firm size. This result is similar to results in other countries such as the United Sates.
    Keywords: debt structure, leverage, short-term debt, corporate bonds, firm size, firm value
    JEL: G3 E6
    Date: 2007–04

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