nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒06‒30
63 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Cross-Country Estimates of the Degree of Fiscal Dominance and Central Bank Independence By Carlos de Resende
  2. Long-Run Inflation-Unemployment Dynamics: The Spanish Phillips Curve and Economic Policy By Marika Karanassou; Hector Sala; Dennis Snower
  3. Liquidity Traps, Learning and Stagnation By Evans, George W; Guse, Eran; Honkapohja, Seppo
  4. Optimal Monetary Policy Under Inflation Targeting: Is Zero the Optimal Perception of Inflation Inertia? By Páez-Farrell, Juan
  5. Monetary Policy and Swedish Unemployment Fluctuations By Alexius, Annika; Holmlund, Bertil
  6. Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy By Le, Vo Phuong Mai; Minford, Patrick
  7. Karl Brunner il monetarista By Michele FRATIANNI
  8. Time Series Approach to Test a Change in Inflation Persistence: The Mexican Experience. By Manuel Ramos Francia; Daniel Chiquiar; Antonio E. Noriega
  9. Gold Prices and Inflation By Greg Tkacz
  10. The Asymmetric Outcome of Sticky Price Models By Carles Ibanez
  11. Uncertainty about the Persistence of Cost-Push Shocks and the Optimal Reaction of the Monetary Authority. By Arnulfo Rodríguez; Fidel González; Jesús R. González García
  12. Recursive Thick Modeling and the Choice of Monetary Policy in Mexico. By Arnulfo Rodríguez; Pedro N. Rodríguez
  13. The yield spread and GDP growth - Time Varying Leading Properties and the Role of Monetary Policy By Hogrefe, Jens
  14. Implicit Contracts, Wages and Wage Inequality over the Business Cycle By Pourpourides, Panayiotis M.
  15. Assessing the Relation between Equity Risk Premium and Macroeconomic Volatilities in the UK By Renatas Kizys; Peter Spencer
  16. The Financial Accelerator from a Business Cycle Accounting Perspective. By Arturo Antón Sarabia
  17. Coordination des Politiques Budgétaires dans une Union Monétaire Hétérogène: Modélisation et Application à l'UEM By Christophe Schalck
  18. Inspecting the cyclical properties of the Italian Manufacturing Business survey data By Tatiana Cesaroni
  19. Inflation Dynamics in Latin America By Carlos Capistrán; Manuel Ramos Francia
  20. Is the Euro Sustainable? By Mike Wickens
  21. Inflation Dynamics in Mexico: A Characterization Using the New Phillips Curve By Manuel Ramos Francia; Alberto Torres García
  22. Disagreement and Biases in Inflation Expectations By Carlos Capistrán; Allan Timmermann
  23. Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious? By Carlos Capistrán
  24. Productivity Growth, Transparency, and Monetary Policy By Ichiro Muto
  25. Optimal Fiscal Policy in a Small Open Economy with Incomplete Markets and Interest Rate Shocks By Josué Fernando Cortés Espada
  26. Measuring the Fiscal Stance By Vito Polito; Mike Wickens
  27. Employment, Hours per Worker and the Business Cycle. By Emilio Fernandez-Corugedo
  28. Macroeconomic implications of financialization By Peter Skott; Soon Ryoo
  29. The monetary transmission mechanism in Turkey : New developments By Erdem Basci; Ozgur Ozel; Cagri Sarikaya
  30. 'Financialisation' in Kaleckian/Post-Kaleckian models of distribution and growth By Eckhard Hein; Till van Treeck
  31. Debt and the effects of fiscal policy By Carlo Favero; Francesco Giavazzi
  32. Sophistication in Risk Management, Bank Equity, and Stability By Gersbach, Hans; Wenzelburger, Jan
  33. Inflation Dynamics and Trade Openness By Aron, Janine; Muellbauer, John
  34. Optimal Fiscal Policy in a Small Open Economy and the Structure of International Financial Markets. By Josué Fernando Cortés Espada
  35. Optimal Taxation in a Two Sector Economy with Heterogeneous Agents By Selim, Sheikh
  36. Dynamic Aspects of Productivity Spillovers, Terms of Trade and The "Home Market Effects" By Ippei Fujiwara; nd Naohisa Hirakata
  37. Forecast Combination with Entry and Exit of Experts By Carlos Capistrán; Allan Timmermann
  38. The Dynamic Welfare Cost of Stagnation: An Alternative Measure to the Lucas-Obstfeld Model By Tatsuyoshi Miyakoshi; Masakatsu Okubo; Junji Shimada
  39. Tradable deficit permits: a way to ensure sub-national fiscal discipline? By Marie-Laure Breuillé
  40. Non-linearities and Unit Roots in G7 Macroeconomic Variables By Yunus Aksoy; Miguel A. León-Ledesma
  41. A Welfare Cost of the Lost Decade in Japan By Tatsuyoshi Miyakoshi; Masakatsu Okubo
  42. Funding source and soft budget constraint By Marie-Laure Breuillé; Thierry Madiès; Emmanuelle Taugourdeau
  43. A Thermodynamic Theory of Economics By John Bryant
  44. An Equilibrium Theory of Declining Reservation Wages and Learning By Francisco M. Gonzalez; Shouyong Shi
  45. A dynamic model to estimate the long-run trends in potential GDP By Albu, Lucian-Liviu
  46. What would Nelson and Plosser find had they used panel unit root tests? By Christophe Hurlin
  47. KIMOD 1.0 Documentation of NIER´s Dynamic Macroeconomic General Equilibrium Model of the Swedish Economy By Bergvall, Anders; Forsfält, Tomas; Hjelm, Göran; Nilsson, Jonny; Vartiainen, Juhana
  48. Are Consumers Forward-Looking? By Richard Startz
  49. Public finance, governance, and growth in transition economies : empirical evidence from 1992-2004 By Varoudakis, Aristomene; Tiongson, Erwin R.; Pushak, Taras
  50. The Macroeconomic Effects of Migration from the New European Union Member States to the United Kingdom By Dora M. Iakova
  51. Fiscal federalism and soft budget constraint: does the nature of public spending matter? By Marie-Laure Breuillé; Thierry Madiès; Emmanuelle Taugourdeau
  52. Compiling the national accounts demystified By Bos, Frits
  53. The Feldstein-Horioka Puzzle: a Panel Smooth<br />Transition Regression Approach By Julien Fouquau; Christophe Hurlin; Isabelle Rabaud
  54. Nature or Nurture? Learning and Female Labour Force Dynamics By Fogli, Alessandra; Veldkamp, Laura
  55. Corruption, uncertainty and growth By Djumashev, R
  57. Primitive Accumulation, Growth and the Genesis of Social Classes By Jean-François Jacques; Antoine Rebeyrol
  58. Self-Employment and Unemployment in Spanish Regions in the Period 1979-2001 By Antonio Golpe; Andre van Stel
  59. The Indian Economy: Current Performance and Short-Term Prospects By Raghbendra Jha
  60. The exact insensitivity of market budget shares and the "balancing effect". By Gaël Giraud; Isabelle Maret
  61. The theory of life-cycle saving and investing By Zvi Bodie; Jonathan Treussard; Paul Willen
  62. Estimating the Size of Underground Economy in Romania By Albu, Lucian Liviu
  63. Household Divisoin of Labor, Partnerships and Children: Evidence from Europe By Jose Ignacio Gimenez; Jose Alberto Molina; Almudena Sevilla Sanz

  1. By: Carlos de Resende
    Abstract: This paper studies the interdependence between fiscal and monetary policies, and their joint role in the determination of the price level ...
    Keywords: Central bank research; Fiscal policy; Inflation: costs and benefits
    JEL: E31 E42 E50 E63
    Date: 2007
  2. By: Marika Karanassou; Hector Sala; Dennis Snower
    Abstract: This paper takes a new look at the long-run dynamics of inflation and unemployment in response to permanent changes in the growth rate of the money supply. We examine the Phillips curve from the perspective of what we call “frictional growth,” i.e. the interaction between money growth and nominal frictions. After presenting a theoretical model of this phenomenon, we construct an empirical model of the Spanish economy and, in this context, we evaluate the long-run inflation-unemployment tradeoff for Spain and examine how recent policy changes have affected it.
    Keywords: Inflation-unemployment tradeoff, Phillips curve, staggered wage contracts, nominal inertia, forward-looking expectations, monetary policy
    JEL: E2 E3 E4 E5 J3
    Date: 2007–06
  3. By: Evans, George W; Guse, Eran; Honkapohja, Seppo
    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; fiscal policy; indeterminacy; monetary policy; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2007–06
  4. By: Páez-Farrell, Juan (Cardiff Business School)
    Abstract: Recent research has suggested that in deriving optimal policy under discretion, policymakers should react as if there were no structural inflation persistence in order to improve welfare. This paper considers whether such a strong result extends to an inflation targeting central bank with a more general Phillips curve formulation. The findings indicate that if anything, a central banker that assumes a high degree of inflation inertia is often preferable.
    Keywords: optimal monetary policy; discretion; uncertainty; inflation persistence
    JEL: E31 E52 E61 E63
    Date: 2007–06
  5. By: Alexius, Annika (Department of Economics); Holmlund, Bertil (Department of Economics)
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: Unemployment; Monetary policy; structural VARs
    JEL: E24 J60
    Date: 2007–06–18
  6. By: Le, Vo Phuong Mai; Minford, Patrick
    Abstract: This paper investigates optimal indexation in the New Keynesian model, when the indexation choice includes the possibility of partial indexation and of varying weights on rational and lagged indexation. It finds that the Calvo contract adjusted for rationally expected indexation under both inflation and price level targeting regimes delivers the highest expected welfare under both restricted and full current information. Rational indexation eliminates the effectiveness of monetary policy on welfare when there is only price-level targeting under the current micro information. If including both wage setting and full current information, monetary policy is effective; and a price-level targeting rule delivers the highest benefits because it minimises the size of shocks to prices and thus dispersion. However, even less than full rational indexation ensures that there is very little nominal rigidity in the adapted world of Calvo contracts.
    Keywords: Calvo contracts; inflation target; New Keynesian model; optimal indexation; price-level target; rational expectation
    JEL: E50 E52
    Date: 2007–06
  7. By: Michele FRATIANNI (Indiana University, Graduate School of Business Bloomington)
    Abstract: Karl Brunner (1916-1989) was, with Milton Friedman and Allan Meltzer, the leader of the monetarist revolution of the Sixties and the Seventies. His work on asset markets placed the credit market, along with the money market, at center stage and focused on monetary policy as a primary source of instability. With Allan Meltzer he challenged the validity of the Keynesian paradigm and proposed an alternative model of the economy where the transmission of monetary impulses to the economy did not depend exclusively on the interest sensitivity of the demand for money but on the relative interest elasticities of the asset markets as well on variations in wealth. An unexpected feature of the alternative model is that fiscal policy determines the price level. Brunner had a strong foundation in methodology and was an adherent of the empirical philosophy school. In addition to asset markets and macroeconomics, Krunner wrote extensively on the nature of man, the role of markets and institutions. Finally, Brunner launched and managed the Journal of Money, Credit and Banking , the Journal of Monetary Economics, the Konstanzer Seminar on Monetary Theory and Monetary Policy, the Interlaken Conference on Analysis and Ideology, the Carnegie-Rochester Conference Series on Public Policy, and the Shadow Open Market Committee (the last two with Allan Meltzer).
    Keywords: IS-LM model, credit market, monetarism, money supply
    JEL: B22 B31 E44 E51 E58
    Date: 2007–06
  8. By: Manuel Ramos Francia; Daniel Chiquiar; Antonio E. Noriega
    Abstract: When monetary policy has an explicit inflation target, observed inflation should be a stationary process. In countries where, for a variety of reasons, the determinants of inflation could lead it to follow a non-stationary process, the adoption of an inflation targeting framework should therefore induce a fundamental change in the stochastic process governing inflation. This paper studies the time series properties of Mexican inflation during 1995-2006, using recently developed techniques to detect a change in the persistence of economic time series. Consistent with the adoption of an inflation-targeting framework, the results suggest that inflation in Mexico seems to have switched from a nonstationary to a stationary process around the end of year 2000 or the beginning of 2001.
    Keywords: Inflation, Persistence change, Stationarity, Unit root tests, Unknown direction of change
    JEL: C12 C22 E31 E52 E58
    Date: 2007–01
  9. By: Greg Tkacz
    Abstract: Using data for 14 countries over the 1994 to 2005 period, we assess the leading indicator properties of gold at horizons ranging from 6 to 24 months. We find that gold contains significant information for future inflation for several countries, especially for those that have adopted formal inflation targets. This finding may arise from the manner in which inflation expectations are formed in these countries, which may result in more rapidly mean-reverting inflation rates. Compared to other inflation indicators for Canada, gold remains statistically significant when combined with variables such as the output gap or the growth rate of a broad monetary aggregate.
    Keywords: Inflation and prices; Exchange rates
    JEL: E31 E44
    Date: 2007
  10. By: Carles Ibanez
    Abstract: Empirical evidence shows demand shocks tend to have an asymmetric effect on output: it falls by a larger amount with a contraction than it rises with an expansion. We argue that introducing nominal rigidities in a framework where agents maximise their welfare can yield such an asymmetric outcome. We show that this is the case in the Sticky Prices framework, where each period an exogenously set fraction of firms fails to adjust prices. While the solution method commonly adopted by this literature, the log-linearization, delivers a perfectly symmetric response, methods that respect the original struc- ture of the model yield an asymmetric one. We show that when products are good substitutes to each other and labour supply is inelastic, the model implies that the response of output is larger with monetary contractions than with ex- pansions, even when the shock is small. We identify the origin of the asymmetry in that when not all firms adjust prices, some goods are cheaper than others and so more heavily consumed. With a positive shock, these goods are produced by the firms that fail to adjust, so that real income is not very much affected. But with a negative shock, they are produced by firms that adjust prices, causing a large swing in real income.
    Keywords: staggered price setting, asymmetric response to shocks, monetary business cycles
    JEL: E31 E32
    Date: 2007–06
  11. By: Arnulfo Rodríguez; Fidel González; Jesús R. González García
    Abstract: In this paper we formalize the uncertainty about the persistence of cost-push shocks using an open economy optimal control model with Markov regime-switching and robust control. The latter is used in only one of the regimes producing relatively more persistent cost-push shocks in that regime. Conditional on being in the regime with relatively less persistence, we obtain two main results: a) underestimating the probability of switching to the regime with relatively more persistent cost-push shocks causes higher welfare losses than its overestimation; and b) the welfare losses associated with either underestimation or overestimation of such probability increase with the size of the penalty on inflation deviations from its target. Keywords: Model uncertainty, Robustness, Markov regime-switching, Monetary policy, Inflation targeting.
    Keywords: Model uncertainty, Robustness, Markov regime-switching, Monetary policy, Inflation targeting
    JEL: C61 E61
    Date: 2007–03
  12. By: Arnulfo Rodríguez; Pedro N. Rodríguez
    Abstract: The choice of monetary policy is the most important concern of central banks. However, this choice is always confronted, inter alia, with two relevant aspects of economic policy: parameter instability and model uncertainty. This paper deals with both types of uncertainty using a very specific class of models in an optimal control framework. For optimal policy rates series featuring the first two moments similar to those of the actual nominal interest rates in Mexico, we show that recursive thick modeling gives a better approximation than recursive thin modeling. We complement previous work by evaluating the usefulness of both recursive thick modeling and recursive thin modeling in terms of direction-of-change forecastability.
    Keywords: Macroeconomic policy, Model uncertainty, Optimal control, Monetary policy, Inflation targeting
    JEL: C61 E61
    Date: 2007–03
  13. By: Hogrefe, Jens
    Abstract: The yield spread is a well documented leading indicator of GDP growth. Estrella (2005) proposes a model to explain this relationship. Within the model, the leading properties of the yield spread are determined by the monetary policy. Accordingly, changes of the leading properties that have been reported in many studies should correspond to changes of the monetary policy. This paper analyzes whether and what form of time variation of the leading properties can be found in four major industrialized countries (France, Germany, the UK and the US). The results are connected with time varying behavior of the monetary policy by modeling a joint state dependency of the leading properties and the reaction parameters of the monetary policy. Time variation of the leading properties seem to exist in all countries under consideration. For the US and Germany they are best modeled as a structural break while France and the UK exhibit recurring phases. Evidence for a link between the time variations of the monetary policy and the leading properties can be found. However, a clear determination of the leading properties by the monetary policy cannot be confirmed.
    Keywords: leading indicator, yield spread, GDP growth, monetary policy, Markov-Switching
    JEL: C32 E37 E43 E52
    Date: 2007
  14. By: Pourpourides, Panayiotis M.
    Abstract: Despite the success of Walrasian equilibrium models in explaining economic growth facts they fail to simultaneously account for the cyclical behavior of wages and the skill premium. In this paper I calibrate and solve a general equilibrium implicit contracts model where the workers are in fixed supply, homogeneous in preferences and the wage is the only insurance device available to them. I show that the Pareto optimal allocation is able to capture the weak contemporaneous correlation of wages and the skill premium with output while performing relatively well in matching other basic macroeconomic regularities. The key aspects of the model are the contracts and the capital utilization margin, and not the skill-complementarity of capital.
    Keywords: Implicit Contracts; Wages; Wage Inequality; Skill Premium; Business Cycles; Capital-Skill Complementarity
    JEL: E10 E20 E32 E37 J31 J41
    Date: 2007–06
  15. By: Renatas Kizys; Peter Spencer
    Abstract: This paper uses the exponential generalised heteroscedasticity model-in-mean (EGARCH- M) to analyse the relationship between the equity risk premium and macroeconomic volatility. This premium depends upon conditional volatility, which is significantly affected by the long bond yield, acting as a proxy for the underlying rate of inflation.
    Keywords: Asset pricing, Risk premium, Macroeconomic volatility, Stochastic discount factor model, Multivariate EGARCH-M model
    JEL: C32 E32 E44 G12
    Date: 2007–06
  16. By: Arturo Antón Sarabia
    Abstract: In a recent paper, Gertler, Gilchrist and Natalucci (2006) report that the financial accelerator mechanism may account for about half of the fall in output and investment observed during the Korean crisis of 1997-1998. Using the business cycle accounting method of Chari, Kehoe and McGrattan (2006a), this paper finds that such a result is very sensitive to the value of Tobin’s q elasticity. The implication is that the adjustment cost function may be crucial in terms of the relative importance of distortions for explaining business cycle fluctuations.
    Keywords: Business cycle accounting, Financial accelerator, Korean crisis
    JEL: E1 E32 F4
    Date: 2007–03
  17. By: Christophe Schalck
    Abstract: This paper studies coordination of fiscal policies in a monetary union in terms of stabilization performance. We use a static model of closed monetary union and numerical simulations in which macroeconomic heterogeneities are introduced. Results show that the coordination is an efficient tool to increase EMU stabilization, even though coordination gains greatly varies according to macroeconomic heterogeneities. We then identify coalitions and free riding behaviours.
    JEL: E61 E63 F42
    Date: 2007
  18. By: Tatiana Cesaroni (ISAE - Institute for Studies and Economic Analyses)
    Abstract: The aim of this paper is to empirically investigate the cyclical features of the main Italian Manufacturing Business Survey indicators using time and frequency domain techniques. In particular, it analyzes the dynamics of each survey variable over time and with respect to different benchmark business cycles. The findings show that important changes have occurred in the periodicity and volatility of Manufacturing Survey data over the years. As expected, the contemporary cross-correlation of each Survey indicator is higher with respect to the industrial production than it is to the GDP cyclical component. Evidence of significant differences in the co-movements between each indicator with respect to GDP and industrial production is found. The cross-spectral analysis seems to reveal the existence of a common periodicity of all cyclical indicators with both the manufacturing and the whole-economy business cycle. This last result confirms the strength of Business Survey data used as short-run policy indicators.
    Keywords: Business cycle, Cross-correlations, Spectral analysis, Manufacturing Business survey data
    JEL: C32 E32
    Date: 2007–05
  19. By: Carlos Capistrán; Manuel Ramos Francia
    Abstract: We analyze inflation's persistence in the 1980-2006 period for the ten largest Latin American economies using univariate time-series techniques. Although the estimated degree of inflation persistence appears to be different across countries, for the region as a whole the persistence seems to be very high. However, the estimated degree of persistence falls in all countries once we permit structural breaks in the mean of inflation. The timing of these breaks coincides with shifts in the monetary policy regimes and is similar across countries. Regardless of the changes in the mean, the degree of persistence appears to be decreasing in the region, even though for some countries persistence does not seem to be changing.
    Keywords: Inflation, Inflation Persistence, Latin America, Monetary Policy, Multiple Breaks, Time Series
    JEL: E31 E42 C22
    Date: 2006–11
  20. By: Mike Wickens
    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 in.ation 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: euro, ECB, monetary policy, inflation
    JEL: E5 E6
    Date: 2007–06
  21. By: Manuel Ramos Francia; Alberto Torres García
    Abstract: The paper describes the dynamics of inflation in the Mexican economy from 1992 to 2006 using the New Phillips curve framework. The purpose is to identify key structural characteristics of the economy (structural parameters) that define the short-run dynamics of inflation. Results show that despite a previous history of high inflation, a hybrid version of the New Phillips curve fits the data well for the period 1992-2006. The short-run dynamics of inflation in Mexico are best described when both backward and forward looking components are considered. In addition, estimates for the sub-sample 1997-2006 show that as inflation has fallen, on average, prices remain fixed for a longer horizon, the fraction of firms that use a backward looking rule of thumb to set their price decreases and the forward looking component of the inflation process gains importance.
    Keywords: Inflation dynamics, Phillips Curve
    JEL: E31
    Date: 2006–12
  22. By: Carlos Capistrán; Allan Timmermann
    Abstract: Recent empirical work documents substantial disagreement in inflation expectations obtained from survey data. Furthermore, the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecaster's costs of over- and under-predicting inflation. Our model implies biased forecasts with positive serial correlation in forecast errors and a cross-sectional dispersion that rises with the level and the variance of the inflation rate. It also implies that biases in forecaster's ranks should be preserved over time and that forecast errors at different horizons can be predicted through the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters.
    Keywords: Inflation, Expectations, Forecasting, Asymmetric loss, Inflation dynamics
    JEL: C53 E31 E37
    Date: 2006–06
  23. By: Carlos Capistrán
    Abstract: Inflation forecasts of the Federal Reserve seem to have systematically under-predicted inflation from the fourth quarter of 1968 until Volcker's appointment as Chairman, and to systematically over-predict it afterwards until the second quarter of 1998. Furthermore, under quadratic loss, commercial forecasts seem to have information not contained in those forecasts. To investigate the cause of this apparent irrationality, this paper recovers the loss function implied by Federal Reserve's inflation forecasts. The results suggest that the cost of having inflation above an implicit time-varying target was larger than the cost of having inflation below it for the period since Volcker, and that the opposite was true for the pre-Volcker era. Once these asymmetries are taken into account, the Federal Reserve's inflation forecasts are found to be rational.
    Keywords: Inflation forecasts, Forecast evaluation, Monetary policy
    JEL: C53 E52
    Date: 2006–12
  24. By: Ichiro Muto (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this study, we investigate how central bank transparency about views on future productivity growth influences social welfare. To this end, we use a New Keynesian framework in which both the central bank and private agents are engaged in filtering problems regarding the persistence of productivity growth. Since the central bank and private agents do not know the true value of the signal-to-noise ratio, the gain parameters used in the filtering problems can be heterogeneous. If the central bank is not transparent, private agents must conjecture the central bank's estimate of the efficient level of the real interest rate. Under this setup, we show that central bank transparency does not necessarily improve social welfare. It can potentially yield a welfare loss, depending on (i) the gain parameters used by the central bank and private agents and (ii) private agents' conjecture on the gain parameter used by the central bank. If the central bank is uncertain about the combination of these gain parameters, it is sensible for the central bank to respond strongly to the variations of the inflation rate, because the misperceptions about these parameters become the source of demand shock.
    Keywords: New Keynesian Model, Monetary Policy, Transparency, Productivity Growth, Learning
    JEL: E52
    Date: 2007–06
  25. By: Josué Fernando Cortés Espada
    Abstract: This paper studies optimal fiscal policy in a small open economy model under incomplete financial markets, where interest rates, government spending and productivity are stochastic and taxes are distortionary. The contributions of the paper are twofold. First, I solve the Ramsey problem and characterize the properties of the optimal fiscal policy. Second, I show that the optimal fiscal policy consists in smoothing tax distortions over time. The income tax rate, and the public debt are very persistent irrespective of the degree of autocorrelation of the shocks generating aggregate fluctuations. The government finances an increase in government spending or a decrease in the tax base partly by increasing debt and partly by increasing the tax rate.
    Keywords: optimal fiscal policy, taxation, incomplete markets, debt policy
    JEL: E60 F34 F41 H21
    Date: 2006–09
  26. By: Vito Polito; Mike Wickens
    Abstract: In this paper we propose an index of the fiscal stance suitable for practical use in short-term policy making. The index is based on a comparison of a target level of the debt-GDP ratio for a given finite horizon with a forecast of the debt-GDP ratio based on a VAR formed from the government budget constraint. This approach to measuring the fiscal stance is different from the literature on fiscal sustainability. We emphasise the importance of having a forward-looking measure of the fiscal stance for the immediate future rather than a test for fiscal sustainability that is backward-looking, or based just on past behaviour which may not be closely related to the current fiscal position. We use our methodology to construct a time series of the indices of the fiscal stances of the US, the UK and Germany over the last 25 or more years. We find that both the US and UK fiscal stances have deteriorated considerably since 2000 and Germany's has been steadily deteriorating since unification in 1989, and worsened again on joining EMU.
    Keywords: Budget deficits, government debt, fiscal sustainability, VAR analysis
    JEL: C22 C53 E62 E63
    Date: 2007–06
  27. By: Emilio Fernandez-Corugedo
    Abstract: We examine the impact that technology shocks have in a trivariate VAR that includes productivity, hours worked per person and the employment ratio. These last two variables have trends that make them non-stationary. There are three results of interest. First, a technology shock reduces both hours and employment if those two variables are specified in first differences, with the response of employment being stronger than the response of hours. Second, a technology shock increases both hours and employment, when those two variables are specified in levels, although in this case the response of hours worked per person is stronger. Third, considering the possibility of changes in the trend growth rate of productivity reverses the results for the VARs with data in levels only. We also present a real business cycle model capable of replicating some of the results for hours and employment.
    Keywords: Business cycles, Employment, Hours worked, Technology shocks
    JEL: E32
    Date: 2007–01
  28. By: Peter Skott (University of Massachusetts, Amherst); Soon Ryoo (University of Massachusetts, Amherst)
    Abstract: A growing literature suggests that 'financialization' may weaken the performance of non-financial corporations and constrain the growth of ag- gregate demand. This paper evaluates (some of) the claims that have been made using two alternative approaches (one derived from Skott (1981, 1988, 1989) and one from Lavoie and Godley (2001-2002)) and two differ- ent settings (a labor-constrained setting and a dual-economy setting). All models pay explicit attention to financial stock-flow relations. The results are insensitive to the precise specification of household saving behavior but depend critically on the labor market assumptions (labor-constrained vs dual) and the specification of the investment function (Harrodian vs stagnationist). JEL Categories: E12, E21, E44
    Keywords: financialization, stock-flow consistency, retention rate, ex- ternal finance, new issues.
    Date: 2007–06
  29. By: Erdem Basci; Ozgur Ozel; Cagri Sarikaya
    Date: 2007
  30. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: The macroeconomic effects of ‘financialisation’ are assessed applying two different variants of a Kaleckian model of distribution and growth. The focus is on the effects of changes in distribution between shareholders/rentiers, firms and workers, as well as on the effects of increasing ‘shareholder value orientation’ of management’s investment decisions. An isolated increase in the ‘shareholder value orientation’ of management’s investment decisions has a uniquely negative effect on capacity utilisation, the profit rate and capital accumulation in both models. An associated rise in the dividend rate, however, has contradicting effects. In both Kaleckian models the ‘normal’ case of a negative effect throughout the endogenous variables, the ‘puzzling’ case of a positive effect throughout, and an ‘intermediate’ case with a positive effect on capacity utilisation and the profit rate and with a negative effect on capital accumulation may arise, depending on the parameter values in the investment and the saving function of the models. ‘Profits without investment’, the ‘intermediate’ case in both models, is a possible medium- or long-run accumulation regime. However, if a rising dividend rate is associated with a particularly strong increase in the mark-up and hence with pronounced redistribution at the expense of labour, the possibility of such a regime will be undermined, provided that unit profits do not have a strong effect on firms’ real investment. The long-run sustainability of such a regime will also be questioned by the adverse effects of low investment on capital stock and productivity growth.
    Keywords: Financialisation, Distribution, Growth, Kaleckian models
    JEL: E12 E21 E22 E25 E44
    Date: 2007
  31. By: Carlo Favero; Francesco Giavazzi
    Abstract: A fiscal shock due to a shift in taxes or in government spending will, at some point in time, constrain the future path of taxes and spending, since the government’s intertemporal budget constraint will eventually have to be met. This simple fact is surprisingly overlooked in analyses of the effects of fiscal policy based on vector autoregressive models. We study the effects of fiscal shocks, keeping track of the debt dynamics that arise following a fiscal shock and allowing for the possibility that taxes, spending, and interest rates might respond to the level of the debt as it evolves over time. We show that the absence of a debt feedback effect can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular, omitting an effect of fiscal shocks on long-term interest rates—a frequent finding in studies that omit a debt feedback—can be explained by the misspecification of these fiscal shocks. Using data for the U.S. economy and two alternative identification assumptions, we reconsider the effects of fiscal policy shocks, correcting for these shortcomings. We close the paper by observing that the methodology described by taking into account the stock-flow relationship between debt and fiscal variables to analyze the impact of fiscal shocks could also be applied to other dynamic models that include similar identities. The inclusion of capital as a slow-moving variable in the study of the relationship between productivity shocks and hours worked is one example.
    Keywords: Debt ; Fiscal policy
    Date: 2007
  32. By: Gersbach, Hans; Wenzelburger, Jan
    Abstract: We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks by low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system.
    Keywords: banking regulation; Financial intermediation; macroeconomic risks; rating; risk management; risk premia
    JEL: D40 E44 G21
    Date: 2007–06
  33. By: Aron, Janine; Muellbauer, John
    Abstract: It is difficult to obtain reliable measures of evolving openness to trade, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other non-tariff barriers), and such factors as capital controls, sanctions and dual exchange rates (often used in composite trade measures). The share of manufactured imports in home demand for manufactured goods is estimated in STAMP (Koopman et al., 2000) using measured trade policy and controlling for fluctuations in domestic demand, relative prices of imports and the exchange rate. The unmeasured trade policy component is captured by a smooth non-linear stochastic trend. The two elements of openness, the stochastic trend and the rates of tariffs and surcharges, are included in a model of wholesale price inflation in South Africa. The evidence suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.
    Keywords: inflation dynamics; modelling inflation; trade openness
    JEL: C22 E31 F13 F41
    Date: 2007–06
  34. By: Josué Fernando Cortés Espada
    Abstract: This paper characterizes the behavior of debt and tax rates in a small open economy under both complete and incomplete markets. First, I show hat when the government follows an optimal fiscal policy and agents have access to complete markets, the value of the government’s debt portfolio is negatively correlated with government spending, and positively correlated with productivity and output, while output, labor, consumption and the tax rate are uncorrelated with government spending shocks. The stochastic processes followed by these variables inherit the serial-correlation properties of the stochastic process of the productivity shock. Second, I show that if agents can only buy and sell one-period risk-free bonds, public debt shows more persistence than other variables, and it is negatively correlated with productivity and output, and positively correlated with government spending. Moreover, the tax rate is positively correlated with government spending, while consumption is negatively correlated.
    Keywords: Complete markets, Incomplete markets, Optimal fiscal policy
    JEL: E60 F34 F41 G15 H21
    Date: 2007–03
  35. By: Selim, Sheikh (Cardiff Business School)
    Abstract: In this paper we show that in a two sector economy with heterogeneous agents and competitive markets, in a steady state the optimal capital income tax rate is in general different from zero. The optimal tax policy in this setting depends on the relative price difference. In a two sector economy capital and labour margins are interdependent, which is why a difference between investment good's price and consumption good's price allows the government to tax capital income in one sector and undo the tax distortion by differential labour income taxation. This policy serves efficiency purpose as it restores production efficiency. For instance, if investment goods are more expensive than consumption goods, it is optimal to tax capital income in consumption sector, and set zero capital income tax and lower labour income tax in investment sector. This policy discourages work and investment in consumption sector, and encourages agents to shift capital and working time to investment sector. This increases production in investment sector and restores production efficiency. In a model with two classes of agents, we show that this policy can also serve redistributive purpose.
    Keywords: Optimal taxation; Ramsey problem; Two Sector model
    JEL: C61 E13 E62 H21
    Date: 2007–06
  36. By: Ippei Fujiwara (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; nd Naohisa Hirakata (Financial Systems and Bank Examination Department, Bank of Japan (E-mail:
    Abstract: In this paper, we first set up a model that incorporates firm dynamics into the Global Economy Model (henceforth, GEM) developed by the IMF Research Department. Then, we show how the economic variables respond to the shocks that shift the production frontier outwards, namely productivity gains in manufacturing, efficiency gains in creating new firms, and an increase in the labor force. Contrary to the model used in previous research on the same topic by Corsetti, Martin and Pesenti (2007, henceforth, CMP), our model contains rich and realistic dynamics embedded in the GEM such as a time-to-build constraint for firm dynamics, and nominal price and wage stickiness. We show that (1) the analytical results of CMP are dependent on the elasticity of substitution between domestic and foreign goods, (2) short-run responses could be different from those in CMP because of the existence of price and wage stickiness, and (3) persistence of shocks also alters the direction of responses via the wealth effect. These results suggest that it is of great importance for policy institutions to acknowledge the dynamic aspects of productivity spillovers by simulating a model with richer dynamics like the GEM.
    Keywords: New Keynesian Model, Monetary Policy, Transparency, Productivity Growth, Learning
    JEL: E52
    Date: 2007–06
  37. By: Carlos Capistrán; Allan Timmermann
    Abstract: Combination of forecasts from survey data is complicated by the frequent entry and exit in real time of individual forecasters which renders conventional least squares regression approaches to estimation of the combination weights infeasible. We explore the consequences of this for a variety of forecast combination methods in common use and propose a new method that projects actual outcomes on the equal-weighted forecast as a means of adjusting for biases and noise in the underlying forecasts. Through simulations and an empirical application to inflation forecasts we show that the entry and exit of individual forecasters can have a large effect on the real time performance of conventional forecast combination methods. We also find that the proposed projection on the equal-weighted forecast works well in practice.
    Keywords: Forecasting, forecast combination, inflation, surveys
    JEL: C53 E37
    Date: 2006–09
  38. By: Tatsuyoshi Miyakoshi (Osaka School of International Public Policy (OSIPP), Osaka University); Masakatsu Okubo (Graduate School of Systems and Information Engineering,University of Tsukuba); Junji Shimada (School of Management, Aoyama Gakuin University)
    Abstract: This paper proposes an alternative measure to the Lucas-Obstfeld model to analyze the welfare costs of stagnation, and provides a practical illustration of both the Lucas-Obstfeld model and the alternative model. Compared with the Lucas-Obstfeld model, the alternative model can evaluate: (i) whether the policy was implemented in a timely fashion, (ii) whether the policy cost was expensive compared with the cost of stagnation, and (iii) whether the policy implemented was effective or whether an additional policy is required.
    Keywords: Lucas model; dynamic welfare cost; time-varying parameters
    JEL: C32 C50 E32 E20
    Date: 2007–06
  39. By: Marie-Laure Breuillé
    Abstract: This paper proposes a system of tradable deficit permits for implementing budgetary austerity at the local level. We evaluate the efficiency of the fiscal retrenchment allocation in a dynamic setting with a commitment problem. The way rights are allcated and traded on the market turns out to be decisive for the cost-effectiveness of the system. Indeed, the inability of the State to commit dynamically to a sharing rule of deficit rights generates perverse incentives which affect the local market. The market turns out to be ineffcient - with heterogeneous jurisdictions - unless the State allows local decision-makers to trade permits through time.
    Keywords: Policy Coordination, Tradable Permits Market, Soft budget constraint
    JEL: E61 E62 G14 H6 H7
    Date: 2007
  40. By: Yunus Aksoy (School of Economics, Mathematics & Statistics, Birkbeck); Miguel A. León-Ledesma
    Abstract: We carry out a meta-analysis on the frequency of unit-roots in macroeconomic time series with a dataset covering 249 variables for the G7 countries. We use linear tests and the three popular non-linear tests (TAR, ESTAR and Markov Switching). In general, the evidence in favour of the random walk hypothesis is weaker than in previous studies. This evidence against unit roots is stronger for real and nominal asset prices. Our results show that rejection of the null of a unit root in the macro dataset is substantially higher for non-linear than linear models. Finally, the results from a Monte Carlo experiment show that rejection frequencies are very close to the nominal size of the test when the DGP is a linear unit root process. This leads us to reject the hypothesis that overfitting deterministic components explains the higher rejection frequencies of nonlinear tests.
    Keywords: overfitting, nonlinear models, unit root
    JEL: E60 C22
    Date: 2007–01
  41. By: Tatsuyoshi Miyakoshi (Osaka School of International Public Policy (OSIPP), Osaka University); Masakatsu Okubo (Graduate School of Systems and Information Engineering,University of Tsukuba)
    Abstract: This paper measures the welfare cost of the Japanese economy in a elost decadef from 1990 to 2002, by using panels of different consumer groups. This paper finds that the costs for consumers in the lower and middle income quintiles and in urban districts are much higher, while it is a benefit for consumer in rural districts. This paper suggests that such cost disparities express the defects related to districts and income quintile group with high costs. Also, there exist consumers feeling this stagnation to be costless and the seriousness of stagnation are not recognized unanimously.
    Keywords: welfare cost; a lost decade of Japanese economy; Lucas model
    JEL: E32 E60 E20
    Date: 2007–06
  42. By: Marie-Laure Breuillé; Thierry Madiès; Emmanuelle Taugourdeau
    Abstract: This paper analyses the impact of funding source of the bailout on the softness of the regional budget constraint. We show that the funding source of the bailout has a considerable impact both on the credibility of the federal government's commitment and on the regional opportunistic behaviour. By choosing the adequate tax tool, the federal government turns out to be able to limit the soft budget constraint phenomenon.
    Keywords: Tax Competition, Soft Budget Constraint, Fiscal Federalism
    JEL: E62 H7
    Date: 2007
  43. By: John Bryant (Vocat International)
    Abstract: An analogy between thermodynamic and economic theories and processes is developed further, following a previous paper published by the author in 1982. Economic equivalents are set out concerning the ideal gas equation, the gas constant, pressure, temperature, entropy, work done, specific heat and the 1st and 2nd Laws of Thermodynamics. The law of diminishing marginal utility was derived from thermodynamic first principles. Conditions are set out concerning the relationship of economic processes to entropic gain. A link between the Le Chatelier principle and economic processes is developed, culminating in a derivation of an equation similar in format to that of Cobb Douglas production function, but with an equilibrium constant and a disequilibrium function added to it. A trade cycle is constructed, utilising thermodynamic processes, and equations are derived for cycle efficiency, growth and entropy gain. A thermodynamic model of a money system is set out, and an attempt is made to relate interest rates, the rate of return, money demand and the velocity of circulation to entropy gain. Aspects concerning the measurement of economic value in thermodynamic terms are discussed.
    Keywords: Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy
    JEL: A1 C02 C68 D5 E O1
    Date: 2007–04
  44. By: Francisco M. Gonzalez; Shouyong Shi
    Abstract: In this paper we consider learning from search as a mechanism to understand the relationship between unemployment duration and search outcomes as a labor market equilibrium. We rely on the assumption that workers do not have precise knowledge of their job finding probabilities and therefore, learn about them from their search histories. Embedding this assumption in a model of the labor market with directed search, we provide an equilibrium theory of declining reservation wages over unemployment spells. After each period of search, unemployed workers update their beliefs about the market matching efficiency. We characterize situations where reservation wages decline with unemployment duration. Consequently, the wage distribution is non-degenerate, despite the facts that matches are homogeneous and search is directed. Moreover, aggregate matching probability decreases with unemployment duration, in contrast to individual workers' matching probability, which increases over individual unemployment spells. The difficulty in establishing these results is that learning generates non-differentiable value functions and multiple solutions to a worker's optimization problem. We overcome this difficulty by exploiting a connection between convexity of a worker's value function and the property of supermodularity.
    Keywords: Reservation wages; Learning; Directed search; Supermodularity
    JEL: E24 D83 J64
    Date: 2007–06–25
  45. By: Albu, Lucian-Liviu
    Abstract: To estimate long-run growth based on the so-called potential GDP became a constant preoccupation among economists. However, one remaining problem in every long-run growth model is to estimate a persistent trend in labour productivity outside of it, in order to avoid the implicit circular relationship between actual productivity growth and potential level of production. Coming from recent literature on natural rate of unemployment estimation we used a specific methodology in order to estimate NAIRU in case of post-communist economies and based on it to evaluate the potential GDP. Taking into account that the “classic” Hodrick-Prescott method is in fact equivalent to an interpolation procedure, we used in our experiment other three filters demonstrating very similar output. Moreover, we conceived a simple autonomous model in order to estimate the growth of a so-called “pure” productivity independently from the actual level of employment and to compare its dynamics with that of natural rate of unemployment.
    Keywords: natural rate of unemployment; potential GDP; pure productivity
    JEL: P24 C13 E24 D58
    Date: 2006
  46. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: In this study, we systemically apply nine recent panel unit root tests to the same fourteen macroeconomic and financial series as those considered in the seminal paper by Nelson and Plosser (1982). The data cover OECD countries from 1950 to 2003. Our results clearly point out the difficulty that applied econometricians would face when they want to get a simple and clear-cut diagnosis with panel unit root tests. We confirm the fact that panel methods must be very carefully used for testing unit roots in macroeconomic or financial panels. More precisely, we find mitigated results under the cross-sectional independence assumption, since the unit root hypothesis is rejected for many macroeconomic variables. When international cross-correlations are taken into account, conclusions depend on the specification of these cross-sectional dependencies. Two groups of tests can be distinguished. The first group tests are based on a dynamic factor structure or an error component model. In this case, the non stationarity of common factors (international business cycles or growth trends) is not rejected, but the results are less clear with respect to idiosyncratic components. The second group tests are based on more general specifications. Their results are globally more favourable to the unit root assumption.
    Keywords: Panel Unit Root Tests
    Date: 2007–06–22
  47. By: Bergvall, Anders (National Institute of Economic Research); Forsfält, Tomas (National Institute of Economic Research); Hjelm, Göran (National Institute of Economic Research); Nilsson, Jonny (National Institute of Economic Research); Vartiainen, Juhana (National Institute of Economic Research)
    Abstract: KIMOD 1.0 is an annual large-scale macroeconomic model2 of the Swedish economy and is the result of a project that started in 2002 at the National Institute of Economic Research (NIER) in Sweden. In 2003, the model was used for the first time in policy analysis (see NIER, 2003) and from 2004 onwards it has also been applied for forecasting purposes. In November 2005, the time had come to document the first official version of the model, KIMOD 1.0. This document is a resulting part of the documentation project.
    Date: 2007–01–15
  48. By: Richard Startz
    Abstract: Are consumers forward-looking? According to the certainty-equivalence version of the life cycle/permanent income hypothesis, consumption is a function of the expected present value of income. Using longitudinal data from the PSID, I invert this function and compare the realized present value of income to consumption. Consumption proves to be a very poor predictor of future income, despite future income being predictable by past income. Under rational expectations, information known to the consumer should not enter the regression of present value on consumption. However, as an empirical matter lagged income does enter. The conclusion is that consumers act "as if" they are not forward-looking. Available data being imperfect much of the paper is devoted to robustness tests, none of which change the basic conclusion.
    Date: 2007–06
  49. By: Varoudakis, Aristomene; Tiongson, Erwin R.; Pushak, Taras
    Abstract: This paper revisits the early empirical literature on economic growth in transition economies, with particular focus on fiscal policy variables-fiscal balance and the size of government. The baseline model uses a parsimonious specification, drawn from Fischer and Sahay (2000), of economic growth as a function of initial conditions, stabilization, liberalization, and structural reform. The paper expands the data used in previous analyses by up to 10 years and finds unambiguous evidence that fiscal balance matters for growth, while confirming other previous findings on the correlates of economic growth in transition economies. In addition, the paper extends the baseline model and explores potential sources of nonlinearities in the relationship between growth and public finance. A key finding is that determinants of growth may vary in relative importance, depending on the underlying institutional quality. The evidence indicates that there could be higher growth payoffs from macroeconomic stability and public expenditure in countries characterized by relatively better public sector governance as measured by relevant indicators. In addition, the size of government matters for growth in a nonlinear manner: Beyond indicative thresholds of expenditure levels, public spending has a negative impact, while at levels below the threshold, there is no measurable impact on economic growth.
    Keywords: Public Sector Expenditure Analysis & Management,Governance Indicators,Pro-Poor Growth and Inequality,National Governance,Macroeconomic Management
    Date: 2007–06–01
  50. By: Dora M. Iakova
    Abstract: The United Kingdom allowed workers from the ten new European Union member countries immediate access to its labor market after the accession in 2004. This paper uses a general equilibrium framework to explore the dynamic adjustment of the UK economy to the postaccession surge in immigration. Simulations show that immigration is likely to have positive effects on economic growth, capital accumulation, consumption, and the public finances.
    Keywords: Immigration , new EU member states , globalization , free labor movement , Immigration , United Kingdom , European Union , Globalization , Labor mobility , Economic models ,
    Date: 2007–03–15
  51. By: Marie-Laure Breuillé; Thierry Madiès; Emmanuelle Taugourdeau
    Abstract: This paper analyses the impact of both the nature of regional public spending and the federal government’s fiscal tools on the softness of the regional budget constraint and the regional provision of public good. We show that i) whatever the nature of regional public spending, the regional budget constraint is harder when the federal government can no longer manipulate its lump sum tax and ii) under the assumption that the federal government can no longer manipulate its lump sum tax, the federal bailout is lower when the region provides a public input rather than a public good but the regional budget constraint can be either softer or harder.
    Keywords: Soft Budget Constraint, Fiscal Federalism, Tax Competition, Public Input
    JEL: E62 H7
    Date: 2007
  52. By: Bos, Frits
    Abstract: This paper unveils the mystery of national accounts statistics. National accounts statistics are not facts. They are estimates of a universal accounting model (SNA93) for describing, analyzing and managing national economies. The operational versions of the universal model decide what is actually estimated. They are estimated by expanding and transforming the available data with accounting identities, tested and untested assumptions and previous estimates. The estimates reflect skills, resources and compilation policy. The resulting differences in the reliability of the national accounts statistics are to a great extent the price to be paid for a miracle come true: all over the world, very incomplete, imperfect, heterogeneous and partly outdated data are to be transformed into complete, consistent, internationally standardized and up-to-date overviews of the national economies and their major components. Nevertheless, compiling the national accounts can be improved in various ways, but this requires an international long-term strategy.
    Keywords: National accounts; data compilation; reliability of national accounts statistics; measurement in economics
    JEL: E60 C82
    Date: 2007
  53. By: Julien Fouquau (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Isabelle Rabaud (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: This paper proposes an original framework to determine the relative influence of five<br />factors on the Feldstein and Horioka result of OECD countries with a strong saving-<br />investment association. Based on panel threshold regression models, we establish<br />country-specific and time-specific saving retention coefficients for 24 OECD coun-<br />tries over the period 1960-2000. These coefficients are assumed to change smoothly,<br />as a function of five threshold variables, considered as the most important in the<br />literature devoted to the Feldstein and Horioka puzzle. The results show that; de-<br />gree of openness, country size and current account to GDP ratios have the greatest<br />influence on the investment-saving relationship.
    Keywords: Feldstein Horioka puzzle, Panel Smooth Threshold Regression models,<br />saving-investment association, capital mobility .
    Date: 2007–06–22
  54. By: Fogli, Alessandra; Veldkamp, Laura
    Abstract: Much of the increase in female labour force participation in the post-war period has come from the entry of married women with young children. Accompanying this change has been a rise in cultural acceptance of maternal employment. We argue that the concurrent S shaped rise in maternal participation and its cultural acceptance comes from generations of women engaged in Bayesian learning about the effects of maternal employment on children. Each generation updates their parents' beliefs by observing the children of employed women. When few women participate in the labour force, most observations are uninformative and participation rises slowly. As information accumulates and the effects of labour force participation become less uncertain, more women participate, learning accelerates and labour force participation rises faster. As beliefs converge to the truth, participation flattens out. Survey data, wage data and participation data support our mechanism and distinguish it from alternative explanations.
    Keywords: female labour force participation; information diffusion; labor supply; preference transmission; S-shaped learning
    JEL: E2 J21 N32 Z1
    Date: 2007–06
  55. By: Djumashev, R
    Abstract: Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
    Keywords: Corruption; growth; public goods; tax evasion; uncertainty
    JEL: E20 O16 O41 D92 D72 E60 H26 G11 H41
    Date: 2007–06–26
  56. By: Dorothée Boccanfuso (GREDI, Faculte d'administration, Université de Sherbrooke); Rodolphe Missinhoun (GREDI et Institut d'Etudes Politiques de Paris); Luc Savard (GREDI, Faculte d'administration, Université de Sherbrooke)
    Abstract: Dans la perspective d’une réduction accélérée de la pauvreté et l’atteinte des objectifs du millénaire pour le développement, une riche littérature sur la croissance pro-pauvre s’est développée à partir du milieu des années 90 et propose des réformes pour générer une croissance soutenue tout en améliorant les revenus et les conditions de vie des pauvres. Mais les analyses pour l’impact pro-pauvre des réformes sont souvent développées en équilibre partiel et abordent très peu à la fois les questions d’efficacité et d’équité dans la lutte contre la pauvreté. Elles se ont très peu intéressées aux interactions entre les politiques envisagées. Nous abordons ces questions à travers un modèle d’équilibre général calculable (MEGC) statique dans lequel nous générons la croissance par l’endogénéisation du travail (variation du chômage ou de l’emploi) et les dépenses publiques (externalités), en plus des réallocations des dotations factorielles. Nous lui combinons un modèle ménage, suivant l’approche top-down/bottom up, pour prendre en compte les effets rétroactifs des comportements des ménages et leur hétérogénéité. Sur la base de cet outil (appliqué aux Philippines) qui permet de prendre en compte les effets imbriqués de réformes économiques, nous montrons que la piste de complémentarité des politiques (au sens de Edgeworth) peut constituer une alternative intéressante dans la perspective d’accélération de la réduction de la pauvreté et d’atteinte des objectifs du millénaires, à travers une croissance soutenue et équitable. Les résultats mitigés (voire néfastes) obtenus de la simulation de réformes libérales (suppression des subventions agricoles dans les pays développés, promotion des exportations agricoles, libéralisation agricole dans les pays du Sud) suggèrent également une prise en compte des spécificités et contexte particuliers de chaque pays dans la mise en œuvre des réformes.
    Keywords: modèle d’équilibre général calculable, microsimulation, pauvreté, croissance pro-pauvre
    JEL: D58 D31 I30 E6
    Date: 2007
  57. By: Jean-François Jacques; Antoine Rebeyrol
    Abstract: Unlike Stiglitz, we show that an inegalitarian long run equilibrium can emerge in a Solow growth model framework, assuming a linear consumption function. We then interpret this result in line with Marxian economics, showing that this dynamic framework is consistent with Roemer's idea of endogenous class stratification. We extend this calculation by incorporating some features of the Pasinetti-Samuelson-Modigliani model, and provide an example of possible microfoundations.
    JEL: B50 E25 O40
    Date: 2007
  58. By: Antonio Golpe (University of Huelva, Spain); Andre van Stel (EIM Business and Policy Research, Zoetermeer, Netherlands; Cranfield University School of Management, UK; Max Planck Institute of Economics, Jena, Germany)
    Abstract: This paper investigates the relation between changes in self-employment and changes in unemployment at the regional level in Spain in the period 1979-2001. We estimate a vector autoregression model as proposed by Audretsch, Carree, van Stel and Thurik (2005) using a data base for Spanish regions. By estimating the model we are able to empirically distinguish between two directions of causality. On the one hand increases in self-employment may contribute to lower unemployment rates (the "entrepreneurial" effect). On the other hand, higher unemployment rates may push individuals into self-employment, thereby contributing to higher self-employment rates (the "refugee" effect). In our analysis of these two effects we distinguish between higher and lower income regions within Spain. We find empirical support for the "entrepreneurial" effect to exist, both in higher income and in lower income regions. As regards the "refugee" effect, the evidence is mixed. We find empirical support for this effect for higher income regions. Remarkably, we do not find evidence for a "refugee" effect in lower income regions of Spain, even though unemployment rates are on average higher in these regions. We argue that this may be partly related to a lack of incentives for unemployed individuals in these regions to find paid employment.
    Keywords: entrepreneurship, self-employment, unemployment, economic growth, Spain
    JEL: E24 L11 M13 O10 O52
    Date: 2007–06–25
  59. By: Raghbendra Jha
    Abstract: This paper provides an update on the recent performance of the Indian economy. It reviews India’s growth performance, and the supporting performance of savings and investment, productivity and international trade. It highlights the performance of a dynamic sector (automobiles) and a laggard sector (agriculture) and comments on the structure of income growth in recent times. It also points out emerging constraints on rapid economic growth, e.g., increasing regional and personal inequality, rising unemployment, infrastructural constraints and the fiscal deficit. It assesses the prospects for economic growth in the near term.
    Keywords: Economic Growth, India, Leading Sectors
    Date: 2007
  60. By: Gaël Giraud (Centre d'Economie de la Sorbonne); Isabelle Maret (BETA, Université Louis Pasteur)
    Abstract: We reformulate Grandmont's and its successors' notion of behavioral heterogeneity such as to get the exact insensitivity of the aggregate budget share function with respect to changes in prices and income, instead of a mere approximate insensitivity. We propose a non parametric set-up such that, if the population is distributed according to some "uniform" probability measure, the aggregate budget share function is constant. The important contribution is that this exact insensitivity is not explained by any insensitivity at the microeconomic level but rather by an exact "balancing effect". We give illustrative examples of populations that fulfill our requirements.
    Keywords: Aggregation of demand, behavioral heterogeneity, balancing effect, large economy, law of demand.
    JEL: D11 D12 D30 D41 D50 E1
    Date: 2007–01
  61. By: Zvi Bodie; Jonathan Treussard; Paul Willen
    Abstract: How much should a family save for retirement and for the kids’ college education? How much insurance should they buy? How should they allocate their portfolio across different assets? What should a company choose as the default asset allocation for a mandatory retirement saving plan? We believe that the life-cycle model developed by economists over the last fifty years provides guidance for making such decisions. The theory teaches us to view financial assets as vehicles for transferring resources across different times and outcomes over the life cycle, and that perspective allows households and planners to think about their decisions in a logical and rigorous way. This paper lays out and illustrates the basic analytical framework from the theory in nonmathematical terms, with the aim of providing guidance to financial service providers, consumers, and policymakers.
    Date: 2007
  62. By: Albu, Lucian Liviu
    Abstract: Based on two Romanian household surveys, we analyse the structure of households' income by sources: main job, secondary job, and hidden activities. after conceptual clarification and explanation of the methodology we used, we estimate the size of informal economy, analyse the relationship between variables related to different types of income, and explore the dynamics of the informal economy. We find that the main participants in the informal economy are the poor people: the survival motive is dominant in the Romanian informal economy. We estimate that both in September 1996 and in July 2003 the income from the informal economy amounted to about 1/4 of the total household income (23.6% in 1996 and 22.7% in 2003, respectively). Also, we estimate the share of income from the informal economy in the cases of various categories of population (defined according to the dimension of the official declared income per person in the household). The extension of our analysis to the entire year using the household population structure by deciles suggests that the informal economy has increased, on average, by about 2-2.5% over the period 1995-2002.
    Keywords: informal economy, secondary income, informal income, decent income
    JEL: C61 D10 E62 H31 J22 O17 P36
    Date: 2007–06
  63. By: Jose Ignacio Gimenez; Jose Alberto Molina; Almudena Sevilla Sanz
    Abstract: This paper complements conventional economic analysis and presents a social norms interpretation to explain cross-country differences in partnership formation rates, and the dramatic decrease in partnership formation rates in Southern Europe in particular. We argue that increases in female human capital - by raising the opportunity cost of entering a partnership - had a differential impact on partnership formation rates in Northern and Southern Europe due to the different social norms regarding the household division of labor. Social norms are modeled as a constraint on the allocation of household labor that (if binding) diminishes the gains to enter a partnership. Furthermore, highly educated women are less likely to form a partnership, because the utility loss when a partnership is formed is lower the higher the female opportunity cost. We test the predictions of the model using 7 waves of the European Community Household panel (1995-2001). For each country and year we construct the average of the female to male ratio of childcare time as an indicator of social norms regarding the household division of labor. The empirical findings support the predictions of the model. After controlling for the time and country variation in the data, as well as for permanent individual heterogeneity and other aggregate variables at the country level, the results suggest that more traditional social norms regarding the household division of labor negatively affect a woman`s probability of forming a partnership. Thus, a woman living in a country with a more traditional division of household labor has, ceteris paribus, a lower probability of forming a partnership. Furthermore, as predicted by the theory, social norms have a stronger negative effect for highly educated women. To the extent that female education has increased over the years, and that Southern European countries have more traditional social norms, this latter finding may partly explain the dramatic decrease in partnership formation rates in Southern Europe.
    Keywords: Marriage Market, Gender Roles, Household Labor
    JEL: E21 I29
    Date: 2007

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