nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒06‒18
35 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Fair Wages, Fair Prices, and Monetary Policy By Cenesiz, Alper
  2. Liquidity Traps, Learning and Stagnation By George W. Evans; Eran Guse; Seppo Honkapohja
  3. A Hybrid Sticky-Price and Sticky-Information Model By Bruchez, Pierre-Alain
  4. Terms and conditions for the implementation of Inflation targeting in Croatia By Tomislav Čorić
  5. Do tax distortions lead to more indeterminacy? A New Keynesian perspective By Di Bartolomeo, Giovanni; Manzo, Marco
  6. How Structural Are Structural Parameters? By Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez
  7. Monetary and prudential policies at a crossroads? New challenges in the new century By Claudio E. V. Borio
  8. "Fiscal Policy in a Stock-Flow Consistent (SFC) Model" By Wynne Godley; Marc Lavoie
  9. Growth dynamics: the myth of economic recovery By Valerie Cerra; Sweta Chaman Saxena
  10. Investment and the Cost of Capital: New Evidence from the Corporate Bond Market By Simon Gilchrist; Egon Zakrajsek
  11. James Meade By David Vines
  12. Central banks as agents of employment creation By Gerald Epstein
  13. Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation By Claudio E. V. Borio; Andrew Filardo
  14. What Happened to the Knowledge Economy? ICT, Intangible Investment and Britain’s Productivity Record Revisited By Mauro Giorgio Marrano; Jonathan Haskel; Gavin Wallis
  15. Interest Rate Rules, Inflation Stabilization, and Imperfect Credibility: The Small Open Economy Case By Guillermo A. Calvo
  16. "ELR-led Economic Development: A Plan for Tunisia" By Fadhel Kaboub
  17. Economic reforms and exchange rate pass-through to domestic prices in India By Jeevan K Khundrakpam
  18. On the aggregate effects of immigration in Spain By Mario Izquierdo; Juan F. Jimeno; Juan A. Rojas
  19. Single Equation Models, Co-Integration and the Expectations Hypothesis of the Term Structure of Interest Rates By Fabrizio Casalin
  20. Breaking the stability pact: was it predictable? By Luigi Bonatti; Annalisa Cristini
  21. What Determines the Saving Behavior of German Households? An Examination of Saving Motives and Saving Decisions By Daniel Schunk
  22. Why demand uncertainty curbs investment: Evidence froma a panel of Italian manufacturing firms By Elena Bontempi; Roberto Golinelli; Giuseppe Parigi
  23. Demographic Change, Relative Factor Prices, International Capital Flows, and Their Differential Effects on the Welfare of Generations By Alexander Ludwig; Dirk Krueger; Axel H. Boersch-Supan
  24. The euro as a reserve currency: a challenge to the pre-eminence of the US dollar? By Gabriele Galati; Philip D. Wooldridge
  25. Une évaluation du rôle des déterminants du partage de la valeur ajoutée By Stéphane Mussard; Bernard Philippe
  26. An assessment of Basel II procyclicality in mortgage portfolios By Jesús Saurina; Carlos Trucharte
  27. The random-lags approach: application to a microfounded model By Bruchez, Pierre-Alain
  28. The Usury Doctrine and Urban Public Finances in Late-Medieval Flanders: Annuities, Excise Taxes, and Income Transfers from the Poor to the Rich By John H. Munro
  29. A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application By Pinelopi K. Goldberg; Rebecca Hellerstein
  30. Home, Sweet Home or Is It - Always? Testing the Efficiency of the Norwegian Housing Market By Erling Røed Larsen and Steffen Weum
  31. Intergenerational Risksharing and Equilibrium Asset Prices By John Y. Campbell; Yves Nosbusch
  32. Why Doesn't Capitalism Flow to Poor Countries? By Rafael Di Tella; Robert MacCulloch
  33. Unanticipated Defaults and Losses in Canada's Large-Value Payments System, Revisited By Devin Ball; Walter Engert
  34. Including estimates of the future in today's financial statements By Mary Barth
  35. Institution-specific value By Ken Peasnell

  1. By: Cenesiz, Alper
    Abstract: Empirical research on inflation and output dynamics has revealed that inflation lags output following a shock to monetary policy. To account for this fact, researchers rely on price and wage setting assumptions that are not in line with the stylized facts of wage and price setting behavior. Fair wages and fair prices, however, can explain the observed wage and price setting behavior. Hence, I develop and analyze a general-equilibrium model with fair wages and fair prices. The model can explain the observed lag-lead relation between inflation and output. Furthermore, results with respect to other key macroeconomic aggregates are also in line with their empirical counterparts.
    Keywords: Inflation dynamics; Price adjustment; Efficiency wages; Monetary policy.
    JEL: E32 E52 E31
    Date: 2007–05
  2. By: George W. Evans (University of Oregon Economics Department); Eran Guse (University of Cambridge); Seppo Honkapohja (University of Cambridge)
    Abstract: We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals.
    Keywords: Adaptive Learning, Monetary Policy, Fiscal Policy, Zero Interest Rate Lower Bound, Indeterminacy
    JEL: E63 E52 E58
    Date: 2007–06–05
  3. By: Bruchez, Pierre-Alain
    Abstract: This paper shows that a hybrid of the sticky-price and sticky-information models of price adjustment is able to deliver a hump-shaped inflation response to monetary shocks without counterfactually implying, as in Mankiw and Reis (2002) or Altig et al. (2005), that individual firms' prices change each quarter (whether they respond or not to the shock). Under the assumption that firms' price-setting decisions are strategically neutral, the inflation response to a transitory shock to the money-supply growth rate is hump-shaped for the hybrid model, whereas it is monotonic for both the sticky-price and sticky information models. If the shock is permanent, then this response is hump-shaped for the sticky-information and the hybrid models, whereas it is flat for the sticky-price model.
    Keywords: hump-shaped impulse response; inflation persistence; Phillips curve; strategic complementarity
    JEL: E31
    Date: 2007–04–02
  4. By: Tomislav Čorić (Faculty of Economics and Business, University of Zagreb)
    Abstract: Since the introduction of the Stabilization program in 1993, the Croatian National Bank has been following the monetary strategy of exchange rate anchor. During the first several years (from 1993 to 1997) this monetary strategy achieved acceptable results, accompanied with a low inflation rate and high GDP growth rates. However, the macroeconomic situation has changed in the last decade. The indicators of Croatian economy, such as trade balance, the level of external debt and GDP growth rates, are not satisfying. The criticizers of exchange rate anchor monetary strategy argue that appreciated kuna lowers the competitiveness of the domestic economy. Due to that, the current monetary strategy is in the focus of various economists' discussions. One of the alternatives to the exchange rate anchor is inflation targeting. There are different theoretical and practical issues connected to the implementation of this, very popular, monetary strategy. Before the implementation of inflation targeting, the following conditions need to be fulfilled: (1) the independence of monetary authorities in choosing the monetary instruments should be achieved, (2) at least one monetary policy instrument should be efficient, and (3) the transparency of monetary policy should be accomplished. The process itself consists of several decisions, such as choosing the proper measure of inflation, the level of targeted inflation, targeted range or point etc., which is still a matter of theoretical debates. The purpose of this paper is to contribute to the above mentioned debate. After the theoretical discussion, the inflation targeting will be analyzed from the two perspectives. Firstly, in order to evaluate the capability of Croatia to implement the inflation targeting, the analysis of the Croatian monetary system will be given. Secondly, in order to asses the suitability of the inflation targeting as Croatian monetary strategy, both positive and negative characteristics of this strategy will be considered.
    Keywords: inflation targeting, monetary strategy, Croatia
    JEL: E42 E52 E58
    Date: 2007–06–13
  5. By: Di Bartolomeo, Giovanni; Manzo, Marco
    Abstract: Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule.
    Keywords: Rule-of-thumb consumers; equilibrium determinacy; fiscal and monetary policy inter-actions; and tax distortions.
    JEL: E61 E63
    Date: 2007–05
  6. By: Jesús Fernández-Villaverde; Juan F. Rubio-Ramírez
    Abstract: This paper studies how stable over time are the so-called "structural parameters" of dynamic stochastic general equilibrium (DSGE) models. To answer this question, we estimate a medium-scale DSGE model with real and nominal rigidities using U.S. data. In our model, we allow for parameter drifting and rational expectations of the agents with respect to this drift. We document that there is strong evidence that parameters change within our sample. We illustrate variations in the parameters describing the monetary policy reaction function and in the parameters characterizing the pricing behavior of firms and households. Moreover, we show how the movements in the pricing parameters are correlated with inflation. Thus, our results cast doubts on the empirical relevance of Calvo models.
    JEL: C11 C15 E10 E32
    Date: 2007–06
  7. By: Claudio E. V. Borio
    Abstract: It is hard to find a period in the post-war era in which inflation-adjusted interest rates have been so low for so long and monetary and credit aggregates have expanded so much without igniting inflation (the "Great Liquidity Expansion puzzle"). What lies behind these developments? How benign are they? This paper argues that financial liberalisation, the establishment of credible anti-inflation monetary policies and (real-side) globalisation have resulted in subtle but profound changes in the dynamics of the economy and in the challenges faced by policymakers. In the new environment which has gradually been taking shape, the main "structural" risk may not be so much run away inflation. Rather, it may be the damage caused by the unwinding of financial imbalances that occasionally build up over the longer expansion phases of the economy, typically spanning more than one higher-frequency business cycle. Depending on its intensity, the unwinding can lead to economic weakness, unwelcome disinflation and possibly financial strains. The analysis has implications for monetary and prudential policies. It calls for a firmer long-term focus, for greater symmetry in policy responses between upswings and downswings, with more attention being paid to actions during upswings, and for closer cooperation between monetary and prudential authorities. In recent years, the intellectual climate and policy frameworks have gradually evolved in a direction more consistent with this perspective. At the same time, obstacles to further progress remain. They are of an analytical, institutional and, above all, political economy nature. Removing them calls for further analytical and educational efforts.
    Keywords: business fluctuations, globalisation, prudential and monetary policy, financial imbalances, monetary and financial stability, liquidity
    Date: 2006–09
  8. By: Wynne Godley; Marc Lavoie
    Abstract: This paper deploys a simple stock-flow consistent (SFC) model in order to examine various contentions regarding fiscal and monetary policy. It follows from the model that if the fiscal stance is not set in the appropriate fashion—that is, at a well-defined level and growth rate—then full employment and low inflation will not be achieved in a sustainable way. We also show that fiscal policy on its own could achieve both full employment and a target rate of inflation. Finally, we arrive at two unconventional conclusions: first, that an economy (described within an SFC framework) with a real rate of interest net of taxes that exceeds the real growth rate will not generate explosive interest flows, even when the government is not targeting primary surpluses; and, second, that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode.
    Date: 2007–04
  9. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries. Trend output lost is not regained, on average. Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions. The output costs of political and financial crises are permanent on average, and long-term growth is negatively linked to volatility. These results also imply that panel data studies can help identify the sources of growth and that economic models should be capable of explaining growth and fluctuations within the same framework.
    Keywords: growth, output loss, recessions, crises, wars, business cycles, recovery
    JEL: C23 E32 F43 O40
    Date: 2007–03
  10. By: Simon Gilchrist; Egon Zakrajsek
    Abstract: We study the effect of variation in interest rates on investment spending, employing a large panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements. The bond price data -- based on trades in the secondary market -- enable us to construct a firm-specific measure of the user cost of capital based on the marginal cost of external finance as determined in the market for long-term corporate debt. Our results imply a robust and quantitatively important effect of the user cost of capital on the firm-level investment decisions. According to our estimates, a 1 percentage point increase in the user cost of capital implies a reduction in the investment rate of 50 to 75 basis points and, in the long run, a 1 percent reduction in the stock of capital.
    JEL: E22 E44 E62
    Date: 2007–06
  11. By: David Vines
    Abstract: This article explains the part that Meade played in the creation of Keynes`s General Theory, describes his work with Keynes during the Second World War in the creation of the IMF and the GATT, and summarizes the ideas in The Theory of International Economic Policy for which Meade was awarded the Nobel Prize in 1977. It also sets out the role that Meade played in the construction of the inflation-targeting regime which became the centrepiece of British macroeconomic policymaking in the 1990s.
    Keywords: Balance of Payments, Inflation Targeting, Heckscher-Ohlin Trade Theory, International Monetary Fund, World Trade Organisation
    JEL: E0 F0
    Date: 2007
  12. By: Gerald Epstein
    Abstract: Employment creation has dropped off the direct agenda of most central banks. The so-called “global best practice” approach to central banking has not focused on economic growth or employment generation but rather on keeping inflation in the low single digits. However, the policy record shows that employment generation and economic growth are often not by-products of inflation focused central bank policy. This chapter argues that there should be a return to the historical norm of central bank policy in which employment creation and more rapid economic growth join inflation and stabilization more generally as key goals of central bank policy. Supporting this argument, the chapter summarizes major lessons of a multi-country research project undertaken by an international team of economists which show that, within the constraints of contemporary economic conditions, there are viable alternatives to inflation targeting that can focus more on important social, real sector outcomes such as employment generation and poverty reduction.
    Keywords: inflation targeting; employment; central bank; poverty reduction.
    JEL: E5 E6 N1 N2 O2
    Date: 2007–07
  13. By: Claudio E. V. Borio; Andrew Filardo
    Abstract: There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation for this phenomenon is that monetary policy has been much more effective. There is no doubt in our mind that this explanation goes a long way towards explaining the better inflation performance we have observed. In this paper, however, we begin to explore a complementary, rather than alternative, explanation. We argue that prevailing models of inflation are too "country-centric", in the sense that they fail to take sufficient account of the role of global factors in influencing the inflation process. The relevance of a more "globe-centric" approach is likely to have increased as the process of integration of the world economy has gathered momentum, a process commonly referred to as "globalisation". In a large cross-section of countries, we find some rather striking prima facie evidence that this has indeed been the case. In particular, proxies for global economic slack add considerable explanatory power to traditional benchmark inflation rate equations, even allowing for the influence of traditional indicators of external influences on domestic inflation, such as import and oil prices. Moreover, the role of such global factors has been growing over time, especially since the 1990s. And in a number of cases, global factors appear to have supplanted the role of domestic measures of economic slack.
    Keywords: Globalisation, inflation, monetary policy, Phillips curve
    Date: 2007–05
  14. By: Mauro Giorgio Marrano (Queen Mary, University of London and CeRiBA); Jonathan Haskel (Queen Mary, University of London, AIM, CeRiBA, CEPR and IZA); Gavin Wallis (University College London)
    Abstract: A major puzzle is that despite the apparent importance of innovation around the “knowledge economy”, UK macro performance appears unaffected: investment rates are flat, and productivity has slowed down. We investigate whether measurement issues might account for the puzzle. The standard National Accounts treatment of most spending on “knowledge” or “intangible” assets is as intermediate consumption. Thus they do not count as either GDP or investment. We ask how treating such spending as investment affects some key macro variables, namely, market sector gross value added (MGVA), business investment, capital and labour shares, growth in labour and total factor productivity, and capital deepening. We find (a) MGVA was understated by about 6% in 1970 and 13% in 2004 (b) instead of the nominal business investment/MGVA ratio falling since 1970 it is has been rising (c) instead of the labour compensation/MGVA ratio being flat since 1970 it has been falling (d) growth in labour productivity and capital deepening has been understated and growth in total factor productivity overstated (e) total factor productivity growth has not slowed since 1990 but has been accelerating.
    Keywords: Intangible assets, Productivity, R&D, Training, Organisational capital, Investment
    JEL: O47 E22 E01
    Date: 2007–06
  15. By: Guillermo A. Calvo
    Abstract: The paper examines the robustness of Interest Rate Rules, IRRs, in the context of an imperfectly credible stabilization program, closely following the format of much of the literature in open-economy models, e.g., Calvo and Végh (1993 and 1999). A basic result is that IRRs, like Exchange Rate Based Stabilization, ERBS, programs, could give rise to macroeconomic distortion, e.g., underutilization of capacity and real exchange rate misalignment. However, while under imperfect credibility EBRS is associated with overheating and current account deficits, IRRs give rise to somewhat opposite results. Moreover, the paper shows that popular policies to counteract misalignment, like Strategic Foreign Exchange Market Intervention or Controls on International Capital Mobility may not be effective or could even become counterproductive. The bottom line is that the greater exchange rate flexibility granted by IRRs is by far not a sure shot against the macroeconomic costs infringed by imperfect credibility.
    JEL: E52 E58 F32 F41
    Date: 2007–06
  16. By: Fadhel Kaboub
    Abstract: This paper establishes the financial feasibility of an employer of last resort (ELR) program in a small developing country like Tunisia, and argues that an ELR-led economic development policy is vastly superior to the traditional import substitution industrialization (ISI), export-led, and FDI-led development models, all of which Tunisia has adopted without much success in reducing unemployment. Despite outperforming its peers in terms of macroeconomic stability, Tunisia's official unemployment rate still hovers around 15 percent, with two-thirds of first-time job seekers having university degrees. The paper demonstrates that a well-targeted ELR program can be gradually introduced over a six-year period to remedy this problem by reclaiming sovereignty over the country's domestic monetary and fiscal policies under a floating exchange rate regime. The estimated ELR net wage bill would be around 2.7 percent of GDP; however, spending by ELR workers would offset program costs, and the net effect on GDP would be an increase of about 3.6 percent. The paper concludes by proposing a set of complementary policy reforms that must accompany an ELR program to ensure long-term growth sustainability along with full employment and price stability.
    Date: 2007–05
  17. By: Jeevan K Khundrakpam
    Abstract: This paper examines the behaviour of exchange rate pass-through to domestic prices in India during the post-economic reforms initiated since the major devaluation of July 1991. It observes that there is no clear-cut evidence of a fall in exchange rate pass-through to domestic prices. Further, there is asymmetry in pass-through between appreciation and depreciation, and between sizes of the exchange rate change. Based on the empirical evidence provided in the literature, the paper conjectures that reductions in import tariffs, the removal of trade restrictions, the increased import penetration ratio and openness of the economy and the change in the composition of imports following the economic liberalisation could have transitorily negated the impact of lower inflation on pass-through. Part of the non-decline in long-run pass-through is due to a rise in inflation persistence. This could follow from the dismantling of price controls in an environment of periodic spurts in inflation around a non-declining inflationary trend, combined with a rise in the government deficit, which has a nexus with inflation in India.
    Keywords: pass-through, prices, exchange rate
    JEL: E31 E52 F41
    Date: 2007–02
  18. By: Mario Izquierdo (Banco de España); Juan F. Jimeno (Banco de España; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)); Juan A. Rojas (Banco de España)
    Abstract: This paper presents a dynamic general equilibrium model designed to compute the aggregate impact of immigration, accounting for relevant supply and demand effects. We calibrate the model to the Spanish economy, allowing for enough heterogeneity in the demographic characteristics of immigrant and native workers. We consider an initial steady state characterized by the age structure of the Spanish population in 1995 and study the effects of several immigration scenarios on several macroeconomic variables (GDP, employment, productivity, etc.).
    Keywords: immigration, general equilbrium models
    JEL: E10 F22
    Date: 2007–06
  19. By: Fabrizio Casalin
    Abstract: The purpose of this paper is twofold. First, by focusing on Single Equation and VECM techniques commonly employed to test for the Expectations Hypothesis of the Term Structure of interest rates (EHTS), it sheds light on the conditions - in terms of the different classes of stochastic processes of the spot and forward rates - that must hold for the EHTS to be valid. In doing so, the existing linkage between the two strands of literature is highlighted. Second, by using kalman filter and maximum likelihood, estimates of a permanent-transitory components model for spot and forward interest rates are carried out. The simple parametric model helps discern the relative contributions of both departures from rational expectation and time varying term premium to the invalidation of the EHTS. Departures from rational expectations turn out to have negligible impact on the rejection of the EHTS. Estimates of the time varying term premia for the short-end of the term structure spectrum are persistent and reasonable in magnitude, and exhibit sign fluctuations.
    Date: 2007–06
  20. By: Luigi Bonatti; Annalisa Cristini
    Abstract: We show analytically that the credibility problem which has affected the European Stability Pact originates from the insufficient distinction between two reasons for having binding fiscal constraints. The first reason deals with the governments’ tendency to neglect the effects of their fiscal policy on foreign governments (fiscal free-riding). The second reason follows from the governments’ tendency to raise debt by lowering taxes or increasing expenditures, and then to leave it to their successors (fiscal short-termism). An enforcement mechanism relying on governments’ collusion works if the fiscal constraints are not calibrated for curing fiscal short-termism but only for preventing fiscal free-riding.
    Keywords: Fiscal policy, Policy coordination, Capital formation, Free-riding, Short-termism.
    JEL: E6 H3 H7 O4
    Date: 2007
  21. By: Daniel Schunk (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: Many motives for saving a portion of one’s income co-exist and their relative importance changes over the life-cycle. However, most existing work focuses on only one of those motives and makes simplifying assumptions about the other motives so that they can be relegated to the background. All the more it is important to investigate heterogeneity in saving behavior in the presence of various co-existing saving motives. This paper is concerned with linking heterogeneity in German households’ savings decisions to four coexisting saving motives. First, I find that the importance that households attach to the saving motives is related to how much households save at different life stages. Second, I classify the saver type of the households based on whether they engage in regular savings plans, or rather save irregularly and without a savings plan and I find that saving motives are related to the saver type of the household. The results show that heterogeneity in saving behavior along two dimensions – with respect to the saving rate and the saver type – is systematically related to the importance that households attach to different saving motives. This suggests that policy reforms that change the importance of certain saving motives in the eyes of private households might alter household saving behavior in various ways.
    JEL: D12 D91 E21
    Date: 2007–06–07
  22. By: Elena Bontempi (University of Ferrara); Roberto Golinelli (University of Bologna); Giuseppe Parigi (Bank of Italy Research Dept.)
    Abstract: From a theoretical point of view, uncertainty over the demand for a firm’s product may not have clear effects on investments, because of the influence of a number of factors, such as the production technology and the amount of competition in the product market.Until now, a deeper investigation of the interplay of different factors in the temporal dimension has not been possible because the empirical research has been based on cross-section analysis. This omission makes biased estimates of the investment-uncertainty relationship likely.The aim of this paper is to extend the findings of the empirical literature by using a panel of Italian firms over the period 1996-2004, covering a complete business cycle. The availability of a panel of survey data on companies’ investment plans, expected future sales and demand uncertainty allows us to account for unobservable individual firm differences, macroeconomic shocks and the temporal evolution of the investment-uncertainty relationship. A key finding of our paper concerns the role of the competition faced by Italian firms in 1996-2004. The gradual loss of market power experienced by Italian manufacturing firms along with the increasing flexibility of labour input may have weakened the negative effect of uncertainty on investment decisions. We show that, in repeated cross-section estimates, the omission of firm-specific effects together with the dynamic interplay described above, would have lead to misleading conclusions about the relevance of demand uncertainty in explaining investment decisions.
    Keywords: planned investments, demand uncertainty, survey data, panel estimation.
    JEL: E22 C33
    Date: 2007–04
  23. By: Alexander Ludwig; Dirk Krueger; Axel H. Boersch-Supan
    Abstract: Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.
    JEL: C68 D33 E17 E25
    Date: 2007–06
  24. By: Gabriele Galati; Philip D. Wooldridge
    Abstract: Well developed financial markets are a necessary condition for a currency to play a role as a reserve currency. The introduction of the euro greatly improved the functioning of euro financial markets. This paper investigates whether euro financial markets have developed sufficiently to facilitate the emergence of the euro as a reserve currency on par with the US dollar. We find that the liquidity and breadth of euro financial markets are fast approaching those of dollar markets, and as a result the euro is eroding some of the advantages that have historically supported the pre-eminence of the US dollar as a reserve currency. This strengthens the incentive for monetary authorities to reconsider the currency composition of their reserves. Nevertheless, the introduction of the euro has not yet resulted in a significant change in the currency composition of official reserve holdings. The US dollar has maintained its place as the dominant reserve currency, supported perhaps by the edge that dollar financial markets still have over euro markets in terms of size, credit quality and liquidity, as well as inertia in the use of international currencies.
    Keywords: international currency, foreign exchange reserves, currency composition, dollar, euro, financial markets
    JEL: E58 F30 F31 G11 G15
    Date: 2006–10
  25. By: Stéphane Mussard (CEPS/INSTEAD, GREDI, Université de Sherbrooke and GEREM, Université de Perpignan); Bernard Philippe (GEREM, Université de Perpignan)
    Abstract: Au cours de la période 1961/2000, pourquoi la tendance à la hausse des taux de chômage s’est-elle inversée dans des économies « anglo-saxonnes » comme les États-Unis et le Royaume-Uni et pas dans des économies « continentales » telles que l’Allemagne, la France et l’Italie ? Nous soutenons que cette inversion ne peut pas être imputée au fait que ces dernières auraient maîtrisé leurs coûts salariaux unitaires moins bien que les premières. Pour défendre ce point de vue, nous commençons par expliquer comment et pourquoi nous sommes incités à nous intéresser aux déterminants d’un indicateur statistique : le taux de croissance du taux de marge. Afin d’évaluer l’influence exercée sur ce taux par chacun de ses déterminants au cours de la période 1961-2000, nous utilisons la fonction valeur de Shapley de manière particulière : en tant qu’outil permettant de décomposer un indicateur diachronique déterminé par une structure multiplicative.
    Keywords: Cout salarial unitaire, Decomposition, Shapley, Taux de chomage, Taux de marge
    JEL: E25 E24 C39
    Date: 2007
  26. By: Jesús Saurina (Banco de España); Carlos Trucharte (Banco de España)
    Abstract: In this paper we develop a probability of default (PD) model for mortgage loans, taking advantage of the Spanish Credit Register, a comprehensive database on loan characteristics and credit quality. From that model, we calculate different types of PDs: point in time, PIT, through the cycle, TTC, average across the cycle and acyclical. Then, we compare capital requirements coming from the different Basel II approaches. We show that minimum regulatory capital under Basel II can be very sensitive to the risk measurement methodology employed. Thus, the procyclicality of regulatory capital requirements under Basel II is an open question, depending on the way internal rating systems are implemented and their output is utilised. We focus on the mortgage portfolio since it is one of the most under researched areas regarding the impact of Basel II and because it is one of the most important banks’ portfolios.
    Keywords: procyclicality, basel ii, rating systems, mortgages
    JEL: E32 G18 G21
    Date: 2007–05
  27. By: Bruchez, Pierre-Alain
    Abstract: It is well known that a one-dimensional discrete-time model may yield endogenous fluctuations while this is impossible in a one-dimensional continuous-time model. Invernizzi and Medio (1991) recast this time-modeling issue into an aggregation issue. They have proposed a "random-lags approach" as a way of preserving fluctuations while relaxing the discrete-time assumption. The present paper applies this approach to the model of Aghion, Bacchetta and Banerjee (2000), and shows that their result that economies at an intermediate level of financial development may be prone to economic fluctuations continues to hold when the discrete-time assumption is relaxed.
    Keywords: continuous time; discrete time; fluctuations; aggregation
    JEL: E32
    Date: 2007–04–02
  28. By: John H. Munro
    Abstract: The objectives of this paper are three-fold. The first is to rebut Charles Kindleberger’s famous dictum that usury ‘belongs less to economic history than to the history of ideas’; and in particular to demonstrate that the resuscitation of the anti-usury campaign from the early 13th century led to a veritable financial revolution in late-medieval French and Flemish towns: one that became the ‘norm’ in modern European states from the 16th century (in England, from 1693): a shift in public borrowing from interest-bearing loans to the sale of annuities, usually called rentes or renten. That anti-usury campaign had two major features: (1) the decrees of the Fourth Lateran Council of 1215, which provided harsh punishments – excommunication -- for both unrepentant usurers and princes who failed to suppress them; and (2) the establishment of the two mendicant preaching orders: the Franciscans (1210) and the Dominicans (1216), whose monks preached hellfire and eternal damnation against all presumed usurers – including, of course, anyone who received any interest on government loans. There is much evidence that from the 1220s, many financiers in many French and Flemish towns, fearing for their immortal souls, preferred to accept far lower returns on buying rentes than the interest they would have earned on loans. These rentes, based on 8th-century Carolingian census contracts, had two basic forms: (1) life-annuities, by which a citizen purchased from the government, with a lump sum of capital, an annual income stream lasting a lifetime, or the lifetime of his wife as well; (2) perpetual annuities, by which the annual income stream was indeed perpetual, or until such time as the government chose to redeem the rentes, at par. Initially, some theologians opposed sales of rentes as subterfuges to cloak evasion of the usury doctrine. But in 1250-1, Pope Innocent IV declared them to be non-usurious contracts, essentially because they were not loans. Subsequent popes in the 15th century confirmed his views and the non-usurious character of rentes, on two conditions: (1) that the buyer of the rente could never demand redemption or repayment, and (2) that the annual annuity payments (and any ultimate redemptions) be in accordance with actual rent contracts: i.e., that the funds be derived from the products of the land. Ecclesiastical authorities soon agreed that taxes on the consumption of the products of the land (and sea) met this test: i.e., taxes on beer and wine (which always accounted for the largest share), bread, textiles, fish, meat, dairy products, etc. The second objective of this paper is to measure the importance of renten in the civic finances of Flemish towns, in terms of both revenues and expenditures: from the annual town accounts Ghent (14th century only), and Aalst (1395-1550), where they had far greater importance. The related third objective is to measure the burden of the excise taxes for master building craftsmen in Aalst, in tables that measure the values of the excise tax revenues expressed in real terms: first, in the equivalent number of ‘baskets of consumables’ (which form of the base of the Consumer Price Index), and second their value in terms of the annual money-wage incomes of master masons (for 210 days). This provides an entirely new look at the late-medieval ‘standard of living’ controversy – with indications that this consumption-tax burden sometimes rose from about 13,200 to almost 30,000 days’ wage income, for a town of perhaps 3600 inhabitants (but obviously less dramatic on a per capita basis). That tax burden rose the most strongly when, by other indications, real wages (RWI = NWI/CPI) were also finally rising; and thus possibly these real wage gains were largely eliminated. That per capita tax burden would have been all the greater if, in the course of the 15th century, Aalst had experienced the same decline as did small towns of Brabant, to the east, on the order of 25%, and some other Flemish towns, in which the population decline varied from 9% to 28 %. In earlier publications I had challenged the widespread view that the era following the Black Death, with a radical change in the land:labour ratio, came to be a ‘Golden Age’ of the artisan and labourer. I contended instead that frequent inflations eroded or eliminated wage gains, and thus that periodic rises in real wages were due essentially to steep deflations combined with pronounced wage-stickiness. As I also calculated, English artisans in the 1340s had earned real wages that were about 50% of the Flemish; but by the 1480s, they had narrowed that gap (with much less inflation) to about 80%. That gap was probably even smaller, until the 1640s, when England’s Parliament finally imposed similar excise taxes on consumption.
    Keywords: Flanders, warfare, urban public finances, building craftsmen, annuities (rentes), excise taxes, consumption, living standards, income transfers
    JEL: B11 D31 E25 E31 E42 E62 H2 H31 H71 J10 J31 J45 J81 N93
    Date: 2007–06–11
  29. By: Pinelopi K. Goldberg; Rebecca Hellerstein
    Abstract: The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a framework for identifying the sources of local-currency price stability. The empirical approach exploits manufacturers' and retailers' first-order conditions in conjunction with detailed information on the frequency of price adjustments in response to exchange-rate changes, in order to quantify the relative importance of fixed costs of repricing, local-cost non-traded components, and markup adjustment by manufacturers and retailers in the incomplete transmission of exchange-rate changes to prices. The approach is applied to micro data from the beer market. We find that: (a) wholesale prices appear more rigid than retail prices; (b) price adjustment costs account on average for up to 0.5% of revenue at the wholesale level, but only 0.1% of revenue at the retail level; (c) overall, 54.1% of the incomplete exchange rate pass-through is due to local non-traded costs; 33.7% to markup adjustment; and 12.2% to the existence of price adjustment costs.
    JEL: E30 F10 F30 L10
    Date: 2007–06
  30. By: Erling Røed Larsen and Steffen Weum (Statistics Norway)
    Abstract: The question of whether the housing market is efficient or not is posed by an increasing number of economists, policymakers, current homeowners and prospective homebuyers. This article tests the efficiency hypothesis on data from the Norwegian housing market in its capital, Oslo. We employ the Case-Shiller time-persistence-test on a repeated-sales model of a house price index and returns to housing. Our data cover the period 1991-2002 and comprise 20 752 transactions of same-object-repeated-sales. We explain why certain features, sometimes suppressed in earlier tests, of the data set are of importance in efficiency tests, and argue that ours is particularly well-suited for the purpose. We demonstrate that the repeated-sales house price index contains inertia and time-persistence. In addition, we investigate how the price history of returns; which consist of capital gains, dividends, and interest payments; can be exploited to predict future returns. Both the house price index and housing returns contain forecastable elements, so we reject the null hypothesis of martingale processes, a finding that is indicative of Case-Shiller inefficiency. This discovery is supplemented with an exploration of trading and timing rules by examinations of intra-market and inter-market returns. We show that the housing market consistently yield higher return at lower risk than does the stock market over the period, which is inconsistent with inter-market efficiency.
    Keywords: efficient market hypothesis; excess returns; house prices; housing market; martingale process; risk; time persistency; trading rules
    JEL: C22 C43 D12 E37 G14 R21
    Date: 2007–06
  31. By: John Y. Campbell; Yves Nosbusch
    Abstract: In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.
    Date: 2007–02
  32. By: Rafael Di Tella; Robert MacCulloch
    Abstract: We find anecdotal evidence suggesting that governments in poor countries have a more left wing rhetoric than those in OECD countries. Thus, it appears that capitalist rhetoric doesn't flow to poor countries. A possible explanation is that corruption, which is more widespread in poor countries, reduces more the electoral appeal of capitalism than that of socialism. The empirical pattern of beliefs within countries is consistent with this explanation: people who perceive corruption to be high in their country are also more likely to lean left ideologically (and to declare support for a more intrusive government in economic matters). Finally, we present a model explaining the corruption-left connection. It exploits the fact that an act of corruption is more revealing about the fairness type of a rich capitalist than of a poor bureaucrat. After observing corruption, voters who care about fairness react by increasing taxes and moving left. There is a negative ideological externality since the existence of corrupt entrepreneurs hurts good entrepreneurs by reducing the electoral appeal of capitalism.
    JEL: E62 K42 P16
    Date: 2007–06
  33. By: Devin Ball; Walter Engert
    Abstract: Recent work at the Bank of Canada studied the impact of default in Canada’s large-value payments system, and concluded that participants could readily manage their potential losses (McVanel 2005). In an extension of that work, the authors use a much larger set of daily payments data - with three times as many observations - to examine the simulated losses of private sector participants and the Bank from defaults in the payments system. They also gauge the upper bound of possible losses in the period April 2004 to April 2006. The authors conclude that losses from a participant failure in the large-value payments system are very likely to be small and readily manageable, as in McVanel (2005). For one or two small participants, under some (probably extreme) conditions, losses could be significant, but not solvency threatening. In sum, the risk controls of the large-value payments system allow and encourage participants to keep potential losses manageable.
    Keywords: Financial institutions; Payment, clearing, and settlement systems
    JEL: E44 E47 G21
    Date: 2007
  34. By: Mary Barth (Stanford Graduate School of Business)
    Abstract: This paper explains why the question is how, not if, today's financial statements should include estimates of the future. Including such estimates is not new, but their use is increasing. This increase results primarily because standard setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful information for making economic decisions, which is the objective of financial reporting. This is why standard setters seem focused on fair value accounting. How estimates of the future are incorporated in financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits are recognised. Note disclosures can help users understand recognised estimates, and can provide information about unrecognised estimates. Including more estimates of the future in today's financial statements would result in an income measure that differs from today's income, but arguably provides better information for making economic decisions.
    Keywords: financial statements, fair value, financial reporting
    JEL: E58 G15 M41
    Date: 2006–08
  35. By: Ken Peasnell (Lancaster University - Department of Accounting, Finance)
    Abstract: The introduction of a new accounting standard for financial instruments, has raised a number of issues related to the application of fair value principles. This paper discusses some of these issues which are generally related to the fact that "fair values" are not always easily defined or readily available. It concludes that the application of fair value for financial liabilities might present fewer complications if it is matched by similar valuation principles for financial assets. The issue of measurement error is more complicated as it can be related to whether valuations refer to exit value, as postulated by the IASB, or deprival value, which is more closely related to firm-specific valuation. Measurement error is magnified in the income statement and so will be any biases from the application of historical accounting for derivatives. Despite any measurement issues, the problem of institution-specific dimensions of value that looms so large in the case of non-financial enterprises and makes the systematic application of fair value accounting fraud with difficulty there, would seem to be much more manageable for financial institutions because of their familiarity with risk measurement and management techniques for financial instruments.
    Keywords: financial statements, institution-specific value, fair value, financial reporting
    JEL: E58 G15 M41
    Date: 2006–08

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