nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒06‒23
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. A two-pillar strategy to keep inflation expectations at bay: A basic theoretical framework. By Meixing DAI
  2. Liquidity Traps, Learning and Stagnation By Evans, G.W.; Guse, E.; Honkapohja, S
  3. Monetary hyperinflations and money essentiality. By Alexandre Sokic
  4. The rise and fall of U.S. inflation persistence By Meredith Beechey; Par Osterholm
  5. Did the FED Inflate a Housing Price Bubble? A Cointegration Analysis between the 1980s and the 1990s By Clemente De Lucia
  6. Optimal exchange rate policy in a low interest rate environment By Pavasuthipaisit, Robert
  7. Monetary policy and stock market booms and busts in the 20th century By Michael D. Bordo; Michael J. Dueker; David C. Wheelock
  8. Estimation of the Equilibrium Interest Rate: Case of CFA zone By DRAMANI, Latif; LAYE, Oumy
  9. Oil Price Shocks, Monetary Policy and Aggregate Demand in Ghana By Jumah, Adusei; Pastuszyn, Georg
  10. Is the Euro Sustainable? By Wickens, Michael R
  11. Supply shocks, demand shocks, and labor market fluctuations By Helge Braun; Reinout De Bock; Riccardo DiCecio
  12. Monetary Policy with Uncertain Central Bank Preferences for Robustness. By Li Qin; Eleftherios Spyromitros; Moïse Sidiropoulos
  13. The daily and policy-relevant liquidity effects By Daniel L. Thornton
  14. Technology Shocks, Statistical Models, and The Great Moderation By Fuentes-Albero, Cristina
  15. Central banks, inflation targeting and employment creation By Gerald Epstein
  16. Monetary Policy Transparency and Financial Market Forecasts in South Africa By Vivek B. Arora
  17. Money and Inflation in the Islamic Republic of Iran By Leo Bonato
  18. Optimal fiscal and monetary policy with costly wage bargaining By David M. Arseneau; Sanjay K. Chugh
  19. A state-level analysis of the great moderation By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
  20. Inventories and business cycle volatility: an analysis based on ISAE survey data By Marco Malgarini
  21. Whatever happened to the business cycle? a Bayesian analysis of jobless recoveries By Kristie M. Engemann; Michael T. Owyang
  22. Default risk: Poisson mixture and the business cycle By Chiara Pederzoli
  23. Macroeconomic and Financial Soundness Indicators: An Empirical Investigation By Rita Babihuga
  24. Milton Friedman and U.S. monetary history: 1961-2006 By Edward Nelson
  25. The Convergence Dynamics of a Transition Economy: The Case of the Czech Republic By Jan Bruha; Jiri Podpiera; Stanislav Polak
  26. The Cost of Social Pacts By Acocella, Nicola; Di Bartolomeo, Giovanni
  27. Modalities of Moving to Inflation Targeting in Armenia and Georgia By Andreas Billmeier; Daehaeng Kim; Era Dabla-Norris; V. Kramarenko; Mayra Rebecca Zermeno Livas
  28. Is there any scope for corporatism in stabilization policies? By Acocella, Nicola; Di Bartolomeo, Giovanni; Pauwels, Wilfried
  29. Why has Swedish Inflation been Persistently Low? By Felix Hüfner
  30. An Updated Assessment of the Lucas Supply Curve By Brant Abbott; Cristina Martinez
  31. Understanding the puzzling effects of technology shocks By Pengfei Wang; Yi Wen
  32. Time is not money By Ellingsen, Tore; Johannesson, Magnus
  33. Ranking State Fiscal Structures using Theory and Evidence By Niel Bania; Joe Stone
  34. Assessing French Inflation Persistence with Impulse Saturation Break Tests and Automatic General-to-Specific Modelling By Carlos Santos; Maria Alberta Oliveira
  35. An Oil and Gas Model By Noureddine Krichene
  36. The Ties that Bind: Measuring International Bond Spillovers Using the Inflation-Indexed Bond Yields By Andrew Swiston; Tamim Bayoumi
  37. Forecasting stock market volatility conditional on macroeconomic conditions. By Ralf Becker; Adam Clements
  38. Scaling-up HIV/AIDS Financing and the Role of Macroeconomic Policies in Kenya By Degol Hailu
  39. Global Imbalances and Financial Stability By Miranda Xafa
  40. Multivariate contemporaneous threshold autoregressive models By Michael J. Dueker; Zacharias Psaradakis; Martin Sola; Fabio Spagnolo
  41. Entry and the accumulation of capital: a two state-variable extension to the Ramsey model By Brito, Paulo; Dixon, Huw
  42. Investment and firm dynamics By D'Erasmo, Pablo
  43. Examining the Nelson-Siegel Class of Term Structure Models By Michiel De Pooter
  44. A goal programming approach for a joint design of macroeconomic and environmental policies: a methodological proposal and an application to the spanish economy By Francisco J. André; M. Alejandro Cardenete; Carlos Romero
  45. FDI Promotion policies and dynamic of growth in the South East Mediterranean countries (In French) By Marouane ALAYA (GREThA-GRES); Dalila NICET-CHENAF (GREThA-GRES); Eric ROUGIER (GREThA-GRES)
  46. Output Volatility and Large Output Drops in Emerging Market and Developing Countries By Dalia Hakura
  47. Small price change response to a large devaluation in a menu cost model By Bruchez, Pierre-Alain
  48. Budget Rigidity and Expenditure Efficiency in Slovenia By Todd D. Mattina; Victoria Gunnarsson
  49. On the Role and Effects of IMF Seniority By Diego Saravia
  50. Public Investment and Growth in the Eastern Caribbean By Shaun K. Roache
  51. The age of reason: financial decisions over the lifecycle By Sumit Agarwal; John C. Driscoll; Xavier Gabaix; David Laibson

  1. By: Meixing DAI
    Abstract: Using a simple macro-economic model, this study shows how a two-pillar monetary strategy as practiced by the European central bank (ECB) can be conceived to guarantee dynamic macro-economic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary base targeting. A commitment to a long-run monetary base growth rate (monetary targeting) corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, achieving price stability under inflationtargeting regime associated with Friedman’s money supply rule can generate dynamic instability in output, inflation and money demand. Alternative stabilizing monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability to warrant dynamic macroeconomic stability.
    Keywords: two-pillar monetary strategy, inflation targeting, monetary targeting, macroeconomic stability.
    JEL: E44 E52 E58
    Date: 2007
  2. By: Evans, G.W.; Guse, E.; Honkapohja, S
    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
  3. By: Alexandre Sokic
    Abstract: This paper aims at drawing new guidelines for investigation of monetary hyperinflation analysis. We propose a MIUF optimizing model and show that monetary hyperinflation can occur as a perfect foresight competitive equilibrium path only when money is essential in the sense of Scheinkman (1980). This result emerges without any ad-hoc assumption implying the inclusion of friction in the adjustment of some nominal variable. It suggests that monetary hyperinflation analysis under perfect foresight requires abandoning the Cagan money demand and adopting a demand for money respecting money essentiality.
    Keywords: monetary hyperinflation, seigniorage, inflation tax, money essentiality.
    JEL: E31 E41
    Date: 2007
  4. By: Meredith Beechey; Par Osterholm
    Abstract: This paper estimates the path of inflation persistence in the United States over the last 50 years and draws implications about the evolution of the Federal Reserve's monetary-policy preferences. Standard models of central-bank optimization predict persistent inflation outcomes. Time variation of the central bank's preference for output stability should be reflected in changes in inflation persistence. We estimate an ARMA(1,q) model with a time-varying autoregressive parameter for monthly U.S. inflation data from 1955 to 2006. The coefficients provide an estimate of the inflation target and the path of inflation persistence. The estimated inflation target over the sample is approximately 2.8 percent and we find that inflation persistence declined substantially during Volcker and Greenspan's tenures to a level significantly less than one and significantly below that of the 1970s and early 1980s.
    Date: 2007
  5. By: Clemente De Lucia (BNP Paribas, Paris, France)
    Abstract: The aim of this work is to verify if the recent episodes of expansionary policies followed by the FED contributed to the creation a housing price bubble. This study compares two different samples, both including periods of recession followed by accommodating monetary policies. The paper showed that even though the long-run relationship between inflation and the interest rate did not change along the whole sample, suggesting an unaltered behavior of the central bank with respect to changes in inflation, the reactivity of housing prices to monetary policy has considerably augmented during the 1990s compared to the 1980s. This is interpreted as evidence that prolonged accommodating monetary policies affected the US real estate market.
    Keywords: Housing Price Bubble, Monetary Policy, Cointegration
    JEL: E31 E41 E52
    Date: 2007–05
  6. By: Pavasuthipaisit, Robert
    Abstract: This paper examines optimal exchange policy when nominal interest rates are unusually low, as experienced by several Asian economies and Japan since July 2006. The paper finds that in such environments, it is optimal to create a nominal depreciation to offset contractionary disturbances. However, the limited scope of monetary policy easing may compromise the ability of the central bank to create a nominal depreciation especially if the central bank makes decisions on monetary policy making on a discretionary basis. In order to successfully create a nominal depreciation, the central bank needs to rely on the expectations channel, by making a credible promise to keep its currency weak going forward. Finally, trade liberalization, by enhancing the role of the exchange rate channel on the transmission mechanism, may allow the central bank to achieve lower average inflation.
    Keywords: Zero lower bound; liquidity trap; exchange rate policy; open-economy macroeconomics.
    JEL: E58 E52 F41
    Date: 2007–05
  7. By: Michael D. Bordo; Michael J. Dueker; David C. Wheelock
    Abstract: This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century. Booms tended to arise when output growth was rapid and inflation was low, and end within a few months of an increase in inflation and monetary policy tightening. Latent variable VAR analysis of post-war data finds that inflation has had a particularly strong impact on market conditions, with disinflation shocks moving the market toward a boom and positive inflation shocks moving the market toward a bust. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation.
    Keywords: Monetary policy ; Stock exchanges
    Date: 2007
  8. By: DRAMANI, Latif; LAYE, Oumy
    Abstract: • Problem Statement The framework of this study is consisted of the countries of zone CFA and in fact the two central banks (BCEAO and BEAC) in charge of the monetary policy implementation. There was a great resurgence of interest these last years on the question in the way of leading the monetary policy. One of the indicators of this phenomenon is the enormous volume of recent papers and the conferences prepared on this subject. In addition, much of macro economists proposed specific rules of policy or ruled on the way in which the monetary policy should be led. The principal objective of this study is the evaluation of the macroeconomic gold rule in the CFA countries which stipulates that in an economy with equilibrium growth and under simplifying macroeconomic assumptions: the neutral interest rate is equal to the potential growth rate of the economy. • Research Method To achieve this objective we try to determine the weight of the goals of monetary and fiscal policies attaches with a quadratic reaction function which takes into account a target of inflation, public expenditure and interest rate. And then the methodology of determination of the neutral interest rate is derived from a generalized Taylor rule. The estimation of the parameters is based on panel data econometrics, the generalized method of moments and the Kalman filter. These different methods are used to emphasize the robustness of the results of our analysis. • Results and conclusion The estimates carried out on the panel data emphasize a neutral interest rate in the interval of 1.4% to 1.6%. It is generally noticed that the estimates made on the panel data are compatible with those carried out by using the Kalman filter. In addition, it is observed that, overall the level of the natural interest rate in UEMOA zone (1.51) is lower than CEMAC zone (1.65). The most important neutral rate is observed in the Malian economy and the lowest in the Burkina economy. But we notice a larger homogeneity in CEMAC zone (standard deviation of 0.12) than UEMOA zone ( standard deviation of 0.29).
    Keywords: Taylor Rule; equilibrium interest rate; Kalman filter
    JEL: C1 C13 E4 E43 E0
    Date: 2007–06–18
  9. By: Jumah, Adusei (Department of Economics, University of Vienna, BWZ, Vienna, Austria); Pastuszyn, Georg (Department of Economics, University of Vienna, BWZ, Vienna, Austria)
    Abstract: The current study examines the relationship between the world oil price and aggregate demand in a developing country, Ghana, via the interest rate channel by means of cointegration analysis. Results of the study indicate that oil price—by impacting the price level positively—negatively impacts real output. The results also indicate that monetary policy is initially eased in response to a surge in the price of oil in order to lessen any growth consequences, but at the cost of higher inflation. The ensuing higher inflation, however, prompts a subsequent tightening of monetary policy leading to a further decline in output. In addition, output does not revert quickly to its initial level after an oil price shock, but declines over an extended period.
    Keywords: Aggregate demand, inflation, monetary policy, oil
    JEL: C32 E50 O13
    Date: 2007–06
  10. By: Wickens, Michael R
    Abstract: It is widely recognised that the "one-size-fits-all" monetary policy of the euro-zone is a potential problem. How much of a problem has not been much investigated. It is argued in this paper that it may result in the euro not being sustainable in the longer term without drastic changes to other aspects of the EU and, in particular, to fiscal policy. The problem is not the fault of the ECB, but is due to having a single nominal interest rate. As a result, the evidence reveals that national price levels are diverging over time which is leading to a permanent and unsustainable loss of competitiveness. A formal theory of inflation in the euro-zone based on an open-economy version of the New Keynesian model is used to analyse the problem. Although the euro system has automatic stabilising mechanisms arising from the changes in competitiveness and from absorbtion effects, these are shown to be not strong enough. The model is then modified to allow for fiscal transfers between countries and the size of the transfers required to produce a euro that may be sustainable are derived. It is shown that, in effect, this is an inflation tax, requiring high inflation countries to make transfers to low inflation countries as often happens within a single country in the form of unemployed benefits to low activity regions. Ultimately, the choice may lie between closer political union and a break-up of the euro-zone.
    Keywords: ECB; euro; inflation; monetary policy
    JEL: E5 E6
    Date: 2007–06
  11. By: Helge Braun; Reinout De Bock; Riccardo DiCecio
    Abstract: We use structural vector autoregressions to analyze the responses of worker flows, job flows, vacancies, and hours to shocks. We identify demand and supply shocks by restricting the short-run responses of output and the price level. On the demand side we disentangle a monetary and non-monetary shock by restricting the response of the interest rate. The responses of labor market variables are similar across shocks: expansionary shocks increase job creation, the hiring rate, vacancies, and hours. They decrease job destruction and the separation rate. Supply shocks have more persistent effects than demand shocks. Demand and supply shocks are equally important in driving business cycle fluctuations of labor market variables. Our findings for demand shocks are robust to alternative identification schemes involving the response of labor productivity at different horizons and an alternative specification of the VAR. However, supply shocks identified by restricting productivity generate a higher fraction of responses inconsistent with standard search and matching models.
    Keywords: Labor market ; Business cycles
    Date: 2007
  12. By: Li Qin; Eleftherios Spyromitros; Moïse Sidiropoulos
    Abstract: In this paper,we consider the transparency of monetary policy in a New Keynesian model with misspecification doubts. Model uncertainty allows us to identify a new source of central bank opacity, which refers to a lack of information about central bank’s preference for model robustness. Thus, taking into account this lack of transparency, we study its impacts on macroeconomic variables. We show that greater transparency can reduce the variability of output gap, inflation as well as that of their expected values.
    Date: 2007
  13. By: Daniel L. Thornton
    Abstract: In an environment of low inflation, the Federal Reserve faces the risk that it has not provided enough monetary stimulus even when it has pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate has been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base that may stimulate aggregate demand by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; or by stimulating bank lending through the credit channel. This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act, The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, perhaps in some circumstances, the use of options.
    Keywords: Liquidity (Economics) ; Monetary policy
    Date: 2007
  14. By: Fuentes-Albero, Cristina
    Abstract: In this paper we compare the cyclical features implied by an RBC model with two technology shocks under several statistical specifications for the stochastic processes governing technological change. We conclude that while a trend-stationary model accounts better for the observed volatilities, a difference-stationary model does a relatively better job of accounting for the correlation of the variables of interest with output. We also explore some counterfactuals to assess the ability of our model to replicate the volatility slowdown of the mid 1980s. First, we conclude that the stochastic growth model outperforms the deterministic growth model in accounting for the Great Moderation. Finally, we obtain that even though the neutral technology shock is the main driving force in the volatility slowdown, allowing for a larger financial flexibility in the form of a smaller volatility for the investment-specific innovation improves the ability of our model to account for the magnitude of the Great Moderation.
    Keywords: Business Cycle; Aggregate fluctuations; Technology Shocks; Unit Roots
    JEL: O30 E32 C32
    Date: 2007–06–01
  15. By: Gerald Epstein (Political Economy Research Institute, University of Massachusetts)
  16. By: Vivek B. Arora
    Abstract: The transparency of monetary policy in South Africa has increased substantially since the end of the 1990s; but little empirical work has been done to examine the economic benefits of the increased transparency. This paper shows that, in recent years, South African private sector forecasters have become better able to forecast interest rates, are less surprised by reserve bank policy announcements, and are less diverse in the cross-sectional variety of their interest rate forecasts. In addition, there is some evidence that the accuracy of inflation forecasts has increased. The improvements in interest rate and inflation forecasts have exceeded those in real output forecasts, suggesting that increases in reserve bank transparency are likely to have played a role.
    Date: 2007–05–29
  17. By: Leo Bonato
    Abstract: This paper looks at the determinants of inflation in Iran. Unlike the traditional estimates of the demand function for real money balances, the approach followed here focuses on the relationship between nominal variables and inflation. The model estimates are used to address the questions raised by the decline in inflation that occurred up to the first half of 2006, looking at the structural stability of the estimated relationships and the ability of the model to predict inflation at the end of the sample. The estimates confirm the strong relationship between money and inflation when M1 is used, with no evidence of a structural change.
    Date: 2007–05–15
  18. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: Costly nominal wage adjustment has received renewed attention in the design of optimal policy. In this paper, we embed costly nominal wage adjustment into the modern theory of frictional labor markets to study optimal fiscal and monetary policy. Our main result is that the optimal rate of price inflation is highly volatile over time despite the presence of sticky nominal wages. This finding contrasts with results obtained using standard sticky-wage models, which employ Walrasian labor markets at their core. The presence of shared rents associated with the formation of long-term employment relationships sets our model apart from previous work on this topic. The existence of rents implies that the optimal policy is willing to tolerate large fluctuations in real wages that would otherwise not be tolerated in a standard model with Walrasian labor markets; as a result, any concern for stabilizing nominal wages does not translate into a concern for stabilizing nominal prices. Our model also predicts that smoothing of labor tax rates over time is a much less quantitatively-important goal of policy than standard models predict. Our results demonstrate that the level at which nominal wage rigidity is modeled -- whether simply lain on top of a Walrasian market or articulated in the context of an explicit relationship between workers and firms -- can matter a great deal for policy recommendations.
    Date: 2007
  19. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data and find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-important reductions in volatility. We then exploit this cross sectional heterogeneity to evaluate hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively high concentrations in the durable-goods and extractive industries tended to experience later breaks. We interpret these results as contradictory to hypotheses that the Great Moderation could have been caused by improved inventory management or less-volatile shocks to energy and/or productivity. Instead, we find results that are more consistent with the view that the most significant contributor to the volatility reduction was improved monetary policy.
    Keywords: Macroeconomics ; Econometric models ; Monetary policy
    Date: 2007
  20. By: Marco Malgarini (ISAE - Institute for Studies and Economic Analyses)
    Abstract: The paper looks at an often debated issue - the decline observed in business cycle volatility - from a rather original point of view represented by careful consideration of qualitative data deriving from Business Tendency Surveys. It first concentrates on the manufacturing sector, providing evidence that volatility slowdown is attributable to a break in the Data Generating Process rather than to a long trend decline. Moreover, it shows that lower variance of the ISAE Confidence Indicator is mostly explained by the behaviour of firms’ assessments of demand and inventories. In particular, inventories volatility has decreased, while volatility of production has instead increased with respect to that of demand. Both of these results are consistent with the claim that better inventories management should have a specific role in shaping the production decisions of the firms.
    Keywords: Inventories, business cycle, business cycle volatility
    JEL: E22 E32 D24
    Date: 2007–05
  21. By: Kristie M. Engemann; Michael T. Owyang
    Abstract: During the typical recovery from U.S. post-War period economic downturns, employment recovers to its pre-recession level within months of the output trough. However, during the last two recoveries, employment has taken up to two years to achieve its pre-recession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the last two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and non-durable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.
    Keywords: Business cycles ; Labor market
    Date: 2007
  22. By: Chiara Pederzoli
    Abstract: As emphasized by the introduction of Basel II, the macroeconomic factors strongly affect credit risk variables. In order to account for the business cycle in a forward-looking way, a macroeconomic forecast can be introduced in the estimation of credit risk variables. This work proposes to model the distribution of the default rate as a mixture distribution which accounts for a binary representation of the business cycle: the distribution changes according to the estimated probability of recession over the credit horizon considered.
    Keywords: default risk; Poisson mixture; business cycle
    JEL: G21 C1 E3
    Date: 2007–06
  23. By: Rita Babihuga
    Abstract: This paper analyzes the relationship between selected macroeconomic and financial soundness indicators (FSIs) using a newly assembled panel dataset of FSIs for 96 countries covering the period 1998-2005. The analysis covers key macroeconomic indicators and FSIs of capital adequacy, asset quality and profitability. The paper finds that FSIs fluctuate strongly with both the business cycle and the inflation rate. Short term interest rates and the real exchange rate also emerge as important determinants. There is also a considerable degree of heterogeneity in the relationship between macroeconomic indicators and FSIs across the sample of countries. Several country and industry specific characteristics including country income levels, financial depth, market concentration, and the quality of regulatory supervision are found to be significant in explaining this cross country heterogeneity.
    Date: 2007–05–10
  24. By: Edward Nelson
    Abstract: This paper brings together, using extensive archival material from several countries, scattered information about Milton Friedman's views and predictions regarding U.S. monetary policy developments after 1960 (i.e., the period beyond that covered by his and Anna Schwartz's Monetary History of the United States). I evaluate these interpretations and predictions in light of subsequent events.
    Keywords: Federal Reserve System - History ; Friedman, Milton ; Economic history
    Date: 2007
  25. By: Jan Bruha; Jiri Podpiera; Stanislav Polak
    Abstract: In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. We borrow a paradigm from the New Open Economy Macroeconomics literature and amend it to address specific features such as initial asymmetry in development and size of economies as well as different speed of capital accumulation. Using a calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently replicate dynamics in key macroeconomic variables that are essential inputs for commonly used "gap models" in monetary policy routine. Based on the calibration we draw implications for future convergence of the Czech economy.
    Date: 2007–05–15
  26. By: Acocella, Nicola; Di Bartolomeo, Giovanni
    Abstract: Social pacts, while improving macroeconomic performance, usually impose costs on unions. To facilitate the formation of such pacts, various substitutes can operate, such as the payment of transfers or, to some extent, the conservativeness of the government, union’s inflation aversion or political partisanship.
    Keywords: Social pacts; side payments; conservativeness; partisanship; unions.
    JEL: E58 E61 J51
    Date: 2007–06
  27. By: Andreas Billmeier; Daehaeng Kim; Era Dabla-Norris; V. Kramarenko; Mayra Rebecca Zermeno Livas
    Abstract: This paper reviews the current monetary and exchange rate policy frameworks in Armenia and Georgia, and the challenges associated with the choice of a credible nominal anchor in the context of large nominal and real shocks. The paper makes a case for a gradual transition to full-fledged inflation targeting (FFIT) in both countries in the medium term. The implications of this option are examined from various angles. In particular, the monetary transmission mechanisms and compliance with major institutional prerequisites for successful FFIT adoption are analyzed. Based on this analysis, the paper identifies a series of short- and medium-term recommendations, drawing on the experience of emerging market countries that successfully moved to FFIT.
    Date: 2007–06–12
  28. By: Acocella, Nicola; Di Bartolomeo, Giovanni; Pauwels, Wilfried
    Abstract: This paper studies corporatism as the outcome of bargaining between the government and a representative labor union. We show that if negotiations between these two parties only relate to macroeconomic stabilization, corporatism can never be beneficial to both parties. As corporatist policies are nevertheless commonly observed in this context, we discuss possible explanations that reconcile the theory with actual observations. The policy implications of these explanations are also discussed.
    Keywords: Social pacts; axiomatic bargaining; unions; issue linkage.
    JEL: E58 E61 J51
    Date: 2007–06
  29. By: Felix Hüfner
    Abstract: Average inflation in Sweden has been one of the lowest among European countries since the mid- 1990s. Three supply-side factors help to explain this phenomenon, all related in some sense to increased global integration. First, a shift towards imports from low-cost producing countries has resulted in falling import prices. Second, deregulation and increased product market competition with foreign companies entering the market has led to price falls in some sectors, notably in retailing. Third, wage growth has lagged productivity and kept unit labour costs down. This paper reviews these factors and analyzes the policy options for the central bank. This paper relates to the OECD Economic Survey of Sweden 2007 ( <P>Pourquoi l'inflation suédoise est-elle restée obstinément faible ? <BR>Depuis le milieu des années 90, la Suède affiche un des taux moyens d'inflation les plus faibles d'Europe. Ce phénomène s'explique en partie par trois facteurs relevant de l'offre, tous liés d'une certaine manière à l'intégration croissante de l'économie mondiale. Premièrement, un glissement vers les importations des pays à bas coûts de production s'est traduit par une baisse des prix des importations. Deuxièmement, la déréglementation et le renforcement de la concurrence avec les entreprises étrangères sur les marchés de produits ont entraîné une diminution des prix dans certains secteurs, notamment dans le commerce de détail. Troisièmement, la croissance des salaires a été plus lente que celle de la productivité, ce qui a maintenu les coûts unitaires de main d'oeuvre à un bas niveau. Ce document passe en revue ces facteurs et analyse les options politiques pour la banque centrale. Ce document de travail se rapporte à l’Étude économique de l’OCDE de la Suède 2007 (
    Keywords: Sweden, Suède, monetary policy, politique monétaire, inflation target, cible d'inflation, inflation, inflation, core inflation, Riksbank, Riksbank, socle d'inflation
    Date: 2007–06–11
  30. By: Brant Abbott (Department of Economics, University of Victoria); Cristina Martinez (Department of Economics, University of Victoria)
    Abstract: Previous empirical work that assessed the theoretical results of Lucas (1972) is updated by incorporating recent data, utilizing advancements in time series methods and bootstrapping results. Specifically, the two-stage method of Ball et al. (1988) and others is used, but the functional form used in the first stage is such that the data are stationary. In comparison to using the traditional first stage functional form, coefficient estimates are smaller in absolute value, but still significant.
    Keywords: Inflation, Output inflation, Output, Phillips curves
    JEL: E12 E31
    Date: 2007–06–14
  31. By: Pengfei Wang; Yi Wen
    Abstract: Under aggregate technology shocks, both aggregate inputs and sectorial inputs decline initially and then rise permanently. However, under sector-specific technology shocks, sectorial inputs decline permanently. In addition, sectorial output is very responsive to aggregate technology shocks but not so to sector-specific technology shocks. We show that a flexible-price RBC model with firm entry and exit is consistent with these stylized facts.
    Keywords: Business cycles ; Equilibriuim (Economics)
    Date: 2007
  32. By: Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics)
    Abstract: Casual observation suggests that people are more generous with their time than with their money. In this paper we present experimental evidence supporting the hypothesis. A third of our subjects demand no compensation for non-monetary investments, whereas almost all subjects demand compensation for equally costly monetary investments. The finding supports the contention that generosity to some extent is symbolic and context dependent, and that social norms encourage generosity in the time domain.
    Keywords: Altruism; Bargaining; Non-monetary generosity
    JEL: C91 J20 L14 Z13
    Date: 2006–12–07
  33. By: Niel Bania (University of Oregon Department of Planning, Public Policy, and Management); Joe Stone (University of Oregon Economics Department)
    Abstract: This paper offers unique rankings of the extent to which fiscal structures of U.S. states contribute to economic growth. The rankings are novel in two key respects: they are well grounded in established growth theory, in which the effect of taxes depends both on the level of taxes and on the composition of expenditures; and they are derived from actual estimates of the link between fiscal structures and economic growth. Estimates for the latter yield a growth hill, in which the incremental effect of taxes spent on productive services and infrastructure initially rises, reaches a peak, and then declines. Rankings derived from these estimates differ sharply from typical rankings based on levels of taxation alone. Two hypothetical policy experiments highlight both the growth-hill effects of tax investments in productive services and infrastructure and the short- and long-term tradeoffs in attempting to fund strong social services.
    JEL: H2 H4 H7 E62
    Date: 2007–06–01
  34. By: Carlos Santos (Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto)); Maria Alberta Oliveira (ISMAI)
    Abstract: This paper has three different motivations. Firstly, we wish to contribute to the debate on whether French inflation has been persistent since the mid-eighties. Empirical evidence in this domain has been mixed. We use the standard method of testing for breaks in the mean of the inflation series to conclude whether possible unit root findings are the result of neglected breaks. Then, we build standard autoregressive representations of inflation, using an automatic general-to-specific approach. We conclude against inflation persistence in the sample period, and the point estimates of persistence we obtain are several percentage points below those achieved with other break tests and model selection methods. Moreover, our final model is congruent. Secondly, we provide the first empirical application of the new impulse saturation break test. The resulting estimates of the break dates are in line with other literature findings and have a sound economic meaning, confirming the good performance the test had revealed in theoretical and simulation studies. Finally, we also illustrate the shortcomings of the Bai-Perron test when applied to a small sample with high serial correlation. Indeed, we show the Bai- Perron break dates’ estimates would not allow us to build a congruent autoregressive representation of inflation.
    Keywords: Inflation Persistence, Break Tests, Model Selection, General-to-Specific
    JEL: E31 E65 C12 C22 C51
    Date: 2007–06
  35. By: Noureddine Krichene
    Abstract: This paper formulated a short-run model, with an explicit role for monetary policy, for analyzing world oil and gas markets. The model described carefully the parameters of these markets and their vulnerability to business cycles. Estimates showed that short-run demand for oil and gas was price- inelastic, relatively income-elastic, and was influenced by interest and exchange rates; short-run supply was price-inelastic. Short-run price inelasticity could be a source for high volatility in oil and gas prices, and could confer to producers a temporary market power. Being simultaneous and incorporating interest and exchange rates, the model could be useful in short-term forecasting of oil and gas outputs and prices under policy scenarios.
    Date: 2007–06–12
  36. By: Andrew Swiston; Tamim Bayoumi
    Abstract: This paper explores international bond spillovers using daily and intra-day data on yields on inflation-indexed bonds and associated inflation expectations for the United States, Australia, Canada, France, Sweden, Japan, and the United Kingdom. The analysis starts in 2002, by which point U.S. inflation-indexed markets were fully mature. Real bond yields are found to be closely linked across countries, with developments in U.S. markets determining around half of real foreign yields and no evidence of spillovers back to the United States. Spillovers in inflation expectations are smaller and the direction of causation is less clear.
    Date: 2007–06–13
  37. By: Ralf Becker; Adam Clements
    Abstract: This paper presents a GARCH type volatility model with a time-varying unconditional volatility which is a function of macroeconomic information. It is an extension of the SPLINE GARCH model proposed by Engle and Rangel (2005). The advantage of the model proposed in this paper is that the macroeconomic information available (and/or forecasts)is used in the parameter estimation process. Based on an application of this model to S&P500 share index returns, it is demonstrated that forecasts of macroeconomic variables can be easily incorporated into volatility forecasts for share index returns. It transpires that the model proposed here can lead to significantly improved volatility forecasts compared to traditional GARCH type volatility models.
    Keywords: Volatility, macroeconomic data, forecast, spline, GARCH.
    JEL: C12 C22 G00
    Date: 2007–06–14
  38. By: Degol Hailu (Policy Advisor, UNDP/BDP Caribbean SURF)
    Keywords: Poverty, HIV/AIDS, Kenya, Macroeconomic
    JEL: B41
    Date: 2007–06
  39. By: Miranda Xafa
    Abstract: This paper discusses two opposing views on global imbalances: The "traditional view", which regards the imbalances as a threat to global economic and financial stability, and the "new paradigm" view, which considers that they are the natural consequence of economic and financial globalization. In terms of their policy implications, the traditional view focuses on monetary and fiscal policy decisions in the United States that need to be urgently reversed to avoid an abrupt unwinding of the imbalances involving a sell-off of dollar assets, a sharp increase in U.S. interest rates, and a hard landing for the global economy. By contrast, the new paradigm view considers that the imbalances will be resolved smoothly through the normal functioning of markets. The paper argues that an abrupt unwinding of imbalances is highly unlikely and advances a number of arguments in support of the new paradigm view.
    Date: 2007–05–09
  40. By: Michael J. Dueker; Zacharias Psaradakis; Martin Sola; Fabio Spagnolo
    Abstract: In this paper we propose a contemporaneous threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex ante probabilities that latent regime-specific variables exceed certain threshold values. The model is a multivariate generalization of the contemporaneous threshold autoregressive model introduced by Dueker et al. (2007). A key feature of the model is that the transition function depends on all the parameters of the model as well as on the data. The stability and distributional properties of the proposed model are investigated. The C-MSTAR model is also used to examine the relationship between US stock prices and interest rates.
    Keywords: Time-series analysis ; Capital assets pricing model
    Date: 2007
  41. By: Brito, Paulo; Dixon, Huw (Cardiff Business School)
    Abstract: In this paper we consider the entry and exit of firms in a dynamic general equilibrium model with capital and a fixed labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. Entry is determined by a free entry condition such that the costs of entry are equal to the present value of incumbent firms. As short run profits are a decreasing function of the number of firms, we add a new stability mechanism in addition to the diminishing returns to capital. Then equilibrium is saddle-point stable and the stable manifold is two-dimensional. Transitional dynamics can, under certain circumstances, be non-monotonic. We study the effects of productivity and fixed cost shocks on the aggregate activity, the number and the size of firms.
    Keywords: Entry; dynamics; Ramsey
    JEL: D92 C62 E32 O41
    Date: 2007–06
  42. By: D'Erasmo, Pablo
    Abstract: In this paper I ask whether a model of ¯rm capital accumulation with entry and exit calibrated to match the investment regularities of U.S. establishments is capable of generating the dependence of ¯rm dynamics on size and age. Firms face uncertainty in the form of idiosyncratic productivity shocks and are subject to non-convex capital adjustment costs. I solve for the stationary equilibrium to show that the model can account for the simultaneous dependence of industry dynamics on size (once we condition on age) and on age (once we condition on size).
    Keywords: firm dynamics; investment; financial constraints
    JEL: D21 G11 E22
    Date: 2006–03
  43. By: Michiel De Pooter (Erasmus Universiteit Rotterdam)
    Abstract: In this paper I examine various extensions of the Nelson and Siegel (1987) model with the purpose of fitting and forecasting the term structure of interest rates. As expected, I find that using more flexible models leads to a better in-sample fit of the term structure. However, I show that the out-of-sample predictability improves as well. The four-factor model, which adds a second slope factor to the three-factor Nelson-Siegel model, forecasts particularly well. Especially with a one-step state-space estimation approach the four-factor model produces accurate forecasts and outperforms competitor models across maturities and forecast horizons. Subsample analysis shows that this outperformance is also consistent over time.
    Keywords: Term structure of interest rates; Nelson-Siegel; Svensson; Forecasting; State-space model
    JEL: E4 C5 C32
    Date: 2007–06–11
  44. By: Francisco J. André (Department of Economics, Universidad Pablo de Olavide); M. Alejandro Cardenete (Department of Economics, Universidad Pablo de Olavide); Carlos Romero (Departamento de Economía y Gestión Forestal, Escuela Tecnica Superior de Ingenieros de Montes, Universidad Politécnica de Madrid.)
    Abstract: Economic policy needs to pay more attention to environmental issues. This calls for the development of methodologies capable of incorporating environmental as well as macroeconomic goals in the design of public policies. In view of this, this paper proposes a methodology based upon Simonian satisficing logic implemented with the help of goal programming models to address the joint design of macroeconomic and environmental policies. The methodology is applied to the Spanish economy, where a joint policy is elicited, taking into account macroeconomic goals (economic growth, inflation, unemployment, public deficit) and environmental goals (CO2, NOx and SOx emissions) within the context of a computable general equilibrium model.
    Keywords: Environmental policies, goal programming, macroeconomic policies, computable general equilibrium model, multiple criteria decision making, satisficing logic.
    JEL: C61 C68 Q58
    Date: 2007–06
    Abstract: In this paper, we ask if the convergence in policies leads to a convergence in growth dynamics for MENA countries. We first show that FDI promotion policies have been very similar in the South East Mediterranean countries during the last decade. Then, we try to find clubs of convergence in this area through KPSS and ADF models, and show the difficulty of observing such clubs among Mediterranean countries.
    Keywords: Development Planning and Policy, Macroeconomic Analyses of Economic Development International; Investment; Long-Term Capital Movements
    JEL: O2 O11 F21
    Date: 2007
  46. By: Dalia Hakura
    Abstract: This paper establishes that output volatility and the size of output drops have declined across all countries over the past three decades, but remain considerably higher in developing countries than in industrial countries. The paper employs a Bayesian latent dynamic factor model to decompose output growth into global, regional, and country-specific components. The favorable trends in output volatility and large output drops in developing countries are found to result from lower country-specific volatility and more benign country-specific events. Evidence from cross-section regressions over the 1970-2003 period suggest that discretionary fiscal spending volatility, and terms of trade volatility together with exchange rate flexibility are key determinants of volatility and large output drops.
    Date: 2007–05–09
  47. By: Bruchez, Pierre-Alain
    Abstract: In an empirical paper based on five large devaluation episodes in Argentina, Brazil, Korea, Mexico and Thailand, Burstein and al. (2005a) find a very slow adjustment in the prices of non-tradable goods and services after large devaluations. Burnstein and al. (2005b) develop a quantitative general-equilibrium model that can account for this phenomenon. I consider an alternative, simpler model and explore under which conditions moderate menu costs can explain the muted response of the prices of non-tradables. The key new element in this alternative model is a nominal friction in wage-setting (generated by menu costs for changing wages). I find, for example, that although my model is based on menu costs, it is able to deliver not only constant prices of non-tradables, but also small price changes (in reality these prices do change, albeit by far less than the exchange rate). I also discuss the existence of multiple equilibria and the role of central-bank credibility.
    Keywords: large devaluation; exchange rate; pass-through; sticky prices; sticky wages
    JEL: F31
    Date: 2007–04–03
  48. By: Todd D. Mattina; Victoria Gunnarsson
    Abstract: This paper assesses the relative efficiency and flexibility of public spending in Slovenia compared to the advanced and new EU member states. Spending on health care, education, and social protection is relatively high in Slovenia without achieving correspondingly better outcomes. Inefficiencies appear to stem from the financing mechanisms for social services, institutional arrangements, and the weak targeting of social benefits. In addition, the composition of spending appears to be strongly tilted towards nondiscretionary items that reduce the fiscal room for maneuver. Greater flexibility is needed to facilitate the reallocation of relatively inefficient expenditure into higher priorities. In this manner, medium-term expenditure rationalization can focus on reducing inefficient outlays rather than restraining traditionally flexible components of the budget, such as public investment.
    Date: 2007–06–08
  49. By: Diego Saravia (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: We analyze the IMF as a lender to countries in financial distress highlighting the fact that it is a senior creditor. An advantage of delegating senior lending in a single institution rather than on competitive markets is that it would be able to reach the socially optimal solution. This would require the IMF not to intervene when the crisis is severe enough. However, a commitment device might be needed to achieve the socially optimal solution. If IMF lending were done for all shocks, the country would be always ex-post better off but lenders would be worse off when the country situation is either good or weak, which is consistent with empirical evidence. Anticipation of senior lending might make the country better off by preventing inefficient liquidation. However it might actually hurt the country ex-ante and too much rescuing in the future could lead to too little lending in the present which is contrary to the moral hazard critique.
    Keywords: Seniority, Sovereign Debt, IMF, ex-ante, ex-post, welfare effects.
    JEL: F30 F34 F40 E00
    Date: 2007
  50. By: Shaun K. Roache
    Abstract: This paper quantifies the effect of public investment on growth in the ECCU. The results, emerging from panel vector autoregressions, indicate that the return on public investment, as defined by Perreira (2000), is very likely negative. This means that the total change in real output induced by one EC dollar of public investment, due to its short-run impact on demand, or the longer-run impact on supply, is below one EC dollar. Public investment shocks also appear to appreciate the real exchange rate, suggesting that the short-run demand impact is larger than the long-run supply response.
    Date: 2007–05–30
  51. By: Sumit Agarwal; John C. Driscoll; Xavier Gabaix; David Laibson
    Abstract: The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.
    Date: 2007

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