nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒07‒13
fifty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties By Marika Karanassou; Hector Sala; Dennis J. Snower
  2. Unemployment, Imperfect Risk Sharing, and the Monetary Business Cycle. By Gregory E. Givens
  3. Inflation persistence: Implications for a design of monetary policy in a small open economy subject to external shocks By Karlygash Kuralbayeva
  4. Global Monetary Policy Shocks in the G5: a SVAR Approach By Joao Miguel Sousa; Andrea Zaghini
  5. Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models By Michael F. Gallmeyer; Burton Hollifield; Francisco Palomino; Stanley E. Zin
  6. Monetary policy and natural disasters in a DSGE model: how should the Fed have responded to Hurricane Katrina? By Benjamin D. Keen; Michael R. Pakko
  7. The Welfare Costs of Inflation in a Micro-Founded Macroeconometric Model By Pablo A. Guerron
  8. Wealth Effects, the Taylor Rule and the Liquidity Trap By Barbara Annicchiarico; Giancarlo Marini; Alessandro Piergallini
  9. Inflation expectations, real interest rate and risk premiums -- evidence from bond market and consumer survey data By Dong Fu
  10. Microentrepreneurship and the business cycle: is self-employment a desired outcome? By Federico S. Mandelman; Gabriel V. Montes Rojas
  11. Volatile public spending in a model of money and sustainable growth By Dimitrios Varvarigos
  12. On the Sources of the Great Moderation By Jordi Galí; Luca Gambetti
  13. Pricing-to-market with state-dependent pricing By Anthony Landry
  14. Which Interest Rate Seems Most Related to Business Investment? A Few Preliminary Findings from an Ongoing Study By John J. Heim
  15. Taylor rules with headline inflation: a bad idea By Rajeev Dhawan; Karsten Jeske
  16. Testing similarities of short-run inflation dynamics among EU countries after the Euro By Giulio PALOMBA; Alberto ZAZZARO; Emma SARNO
  17. Financial Friction, Capital Reallocation and Expectation-Driven Business Cycles By Chen, Kaiji; Song, Zheng
  18. Comparative Advantage in Cyclical Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim
  19. Structural reforms in EMU and the role of monetary policy – a survey of the literature By Nadine Leiner-Killinger; Víctor López Pérez; Roger Stiegert; Giovanni Vitale
  20. What You Match Does Matter: The Effects of Data on DSGE Estimation By Pablo A. Guerron
  21. A functional coefficient model view of the Feldstein-Horioka puzzle By Herwartz, Helmut; Xu, Fang
  22. Monetary Policy and Potential Output Uncertainty: A Quantitative Assessment By Simona Delle Chiaie
  23. National Savings By Yiu, Kai Wing
  24. Whatever became of the Monetary Aggregates? By Charles Goodhart
  25. Learning and the Great Moderation By James B. Bullard; Aarti Singh
  26. The labor market effects of technology shocks By Fabio Canova; David López-Salido; Claudio Michelacci
  27. Tracking Down the Business Cycle: A Dynamic Factor Model For Germany 1820-1913 By Samad Sarferaz; Martin Uebele
  28. Was Keynes Right? Does Current Year Disposable Income Drive Consumption Spending? By John J. Heim
  29. Welfare Implications of Capital Account Liberalization By Ester Faia
  30. Net Worth, Exchange Rates, and Monetary Policy: The Effects of a Devaluation in a Financially Fragile Environment By Domenico Delli Gatti; Mauro Gallegati; Bruce C. Greenwald; Joseph E. Stiglitz
  31. Understanding the New Keynesian model when monetary policy switches regimes By Roger E.A. Farmer; Daniel F. Waggoner; Tao Zha
  32. The New Keynesian Business Cycle Achievements and Challenges By Gaurav Saroliya
  33. Counteracting counterfeiting? False money as a multidimensional justice issue in 16th and 17th century monetary analysis By Jérôme Blanc; Ludovic Desmedt
  34. Money and Bonds: An Equivalence Theorem By Narayana Kocherlakota
  35. New proposals for the quantification of qualitative survey data By Tommaso Proietti; Cecilia Frale
  36. Explaining Product Price Differences Across Countries By Robert E. Lipsey; Birgitta Swedenborg
  37. The unemployment impact of immigration in OECD countries By Sébastien Jean; Miguel Jimenez
  38. The Properties of Market-Based and Survey Forecasts for Different Data Releases By Lanne, Markku
  39. Higher order approximations of stochastic rational expectations models By Kowal, Pawel
  40. The Impact of Vintage on the Persistence of Gross Domestic Product Shocks By Christian Macaro
  41. Private Investment, Portfolio Choice and Financialization of Real Sectors in Emerging Markets By Demir, Firat
  42. Policy Volatility and Growth By Alberto Chong; Mark Gradstein
  43. Migration in OECD countries: Labour market impact and integration issues By Sébastien Jean; Orsetta Causa; Miguel Jimenez; Isabelle Wanner
  44. A Contribution to the Theory of International Trade By Yiu, Kai Wing
  45. Comparative analysis of the exchange market pressure in Central European countries with the Eurozone membership perspective By Stavarek, Daniel
  46. Band Spectral Estimation for Signal Extraction By Tommaso Proietti
  47. UNSAFE SEX, AIDS, and DEVELOPMENT By Bhattacharya, Joydeep; Bunzel, Helle; Qiao, Xue
  48. Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis By Brita Bye, Taran Fæhn and Tom-Reiel Heggedal
  49. Trade and Capital Flows: A Financial Frictions Perspective By Pol Antràs; Ricardo J. Caballero
  50. Do Falling Import Prices Increase Market Demand for Domestically Produced Consumer Goods? By John J. Heim

  1. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Kiel Institute for the World Economy, Christian-Albrechts-University of Kiel and CEPR)
    Abstract: This paper analyses the relation between US inflation and unemployment from the perspective of "frictional growth," a phenomenon arising from the interplay between growth and frictions. In particular, we examine the interaction between money growth (on the one hand) and various real and nominal frictions (on the other). In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long-run inflation-unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties.
    Keywords: Inflation dynamics, Unemployment dynamics, Phillips curve, Roaring nineties
    JEL: E24 E31 E51 E62
    Date: 2007–07
  2. By: Gregory E. Givens
    Abstract: This paper examines the impact of unemployment insurance on the propagation of monetary disturbances in a staggered price model of the business cycle. To motivate a role for risk sharing behavior, I construct a quantitative equilibrium model that gives prominence to an efficiency-wage theory of unemployment based on imperfectly observable labor effort. Dynamic simulations reveal that under a full insurance arrangement, staggered price-setting is incapable of generating persistent real effects of a monetary shock. Introducing partial insurance, however, bolsters the amount of endogenous wage rigidity present in the model, enriching the propagation mechanism. Positive real persistence appears in versions of the model that exclude capital accumulation as well as in versions that do not.
    Keywords: Unemployment, Partial Insurance, Staggered Prices, Endogenous Persistence
    JEL: E24 E31 E32 E52
    Date: 2007–07
  3. By: Karlygash Kuralbayeva (Lincoln College, University of Oxford)
    Abstract: We analyze implications of in.ation persistence for business cycle dynamics following terms of trade and risk-premium shocks in a small open economy, under fixed and flexible exchange rate regimes. We show that the country's adjustment paths are slow and cyclical if there is a signi.cant backward-looking element in the in.ation dynamics and the exchange rate is fixed. We also show that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters. In contrast, with an independent monetary policy, flexible exchange rate allows to escape severe cycles, supporting the conventional wisdom about the insulation role of flexible exchange rates.
    Keywords: inflation inertia, monetary policy, exchange rates, persistence, Phillips curve, small open economy
    JEL: E32 F40 F41
    Date: 2007–02–20
  4. By: Joao Miguel Sousa (Banco de Portugal); Andrea Zaghini (Banca d'Italia)
    Abstract: The paper constructs a global monetary aggregate, namely the sum of the key monetary aggregates of the G5 economies (US, Euro area, Japan, UK, and Canada), and analyses its indicator properties for global output and inflation. Using a structural VAR approach we find that after a monetary policy shock output declines temporarily, with the downward effect reaching a peak within the second year, and the global monetary aggregate drops significantly. In addition, the price level rises permanently in response to a positive shock to the global liquidity aggregate. The similarity of our results with those found in country studies might supports the use of a global monetary aggregate as a summary measure of worldwide monetary trends.
    Keywords: Monetary policy, Structural VAR, Global economy.
    JEL: E52 F01
    Date: 2007–02–20
  5. By: Michael F. Gallmeyer; Burton Hollifield; Francisco Palomino; Stanley E. Zin
    Abstract: We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of simple structural macroeconomic models. We explore whether richer models of risk premiums, specifically stochastic volatility models combined with Epstein-Zin recursive utility, can account for such patterns. We study the properties of the yield curve when inflation is an exogenous process and compare this to the yield curve when inflation is endogenous and determined through an interest-rate/Taylor rule. When inflation is exogenous, it is difficult to match the shape of the historical average yield curve. Capturing its upward slope is especially difficult as the nominal pricing kernel with exogenous inflation does not exhibit any negative autocorrelation - a necessary condition for an upward sloping yield curve as shown in Backus and Zin (1994). Endogenizing inflation provides a substantially better fit of the historical yield curve as the Taylor rule provides additional flexibility in introducing negative autocorrelation into the nominal pricing kernel. Additionally, endogenous inflation provides for a flatter term structure of yield volatilities which better fits historical bond data.
    JEL: E4 G0 G1
    Date: 2007–07
  6. By: Benjamin D. Keen; Michael R. Pakko
    Abstract: In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that the standard Taylor (1993) rule response in models with and without nominal rigidities is to increase the nominal interest rate. That finding is unchanged when we consider the optimal policy response to a disaster. A nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions that are attributable to nominal rigidities.
    Date: 2007
  7. By: Pablo A. Guerron (Department of Economics, North Carolina State University)
    Abstract: This paper computes the welfare costs of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. Both steady state and transitional welfare results are reported. I find that a 10 percent inflation entails a steady state welfare cost of 1.9 % of annual consumption. Taking into account trasitional effects, the cost drops to 1.2%. Under some circumstances, the transitional effects can erase most of the steady state welfare losses. The role of nominal frictions such as price/wage sluggishness as well as that of uncertainty are also addressed.
    Keywords: Bayesian Estimation, DSGE, Inflation, Welfare, Transtional Dynamics
    JEL: E31 E32 E37
    Date: 2007–07
  8. By: Barbara Annicchiarico (University of Rome “Tor Vergata”); Giancarlo Marini (University of Rome “Tor Vergata”); Alessandro Piergallini (CeFiMS, University of London)
    Abstract: This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, the operation of wealth effects does not avoid the occurrence of liquidity traps when the central bank implements a Taylor-type interest-rate feedback rule.
    Keywords: Wealth Effects, Taylor Rules, Liquidity Traps.
    JEL: E31 E52
    Date: 2007–05–21
  9. By: Dong Fu
    Abstract: This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation.
    Keywords: Inflation (Finance)
    Date: 2007
  10. By: Federico S. Mandelman; Gabriel V. Montes Rojas
    Abstract: Should a central bank accommodate energy price shocks? Should the central bank use core inflation or headline inflation with the volatile energy component in its Taylor rule? To answer these questions, we build a dynamic stochastic general equilibrium model with energy use, durable goods, and nominal rigidities to study the effects of an energy price shock and its impact on the macroeconomy when the central bank follows a Taylor rule. We then study how the economy performs under alternative parameterizations of the rule with different weights on headline and core inflation after an increase in the energy price. Our simulation results indicate that a central bank using core inflation in its Taylor rule does better than one using headline inflation because the output drop is less severe. In general, we show that the lower the weight on energy price inflation in the Taylor rule, the impact of an energy price increase on gross domestic product and inflation is also lower.
    Date: 2007
  11. By: Dimitrios Varvarigos (Dept of Economics, Loughborough University)
    Abstract: In a model where seignorage provides the financing instrument for the government’s budget, public spending volatility has an adverse effect on long-run growth. This negative relationship arises because the incidence of volatility in this type of public policy is responsible for higher average money growth, thus induces individuals to devote less time/effort towards capital accumulation. Another implication of the model is that policy variability provides a possible argument behind the positive correlation between inflation and inflation variability.
    Keywords: Growth, Inflation, Seignorage, Volatility
    JEL: E13 E31 O42
    Date: 2007–07
  12. By: Jordi Galí; Luca Gambetti
    Abstract: The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes.
    Keywords: Great Moderation, structural VAR, technology shocks, monetary policy rules, labor hoarding
    JEL: E32
    Date: 2006–09
  13. By: Anthony Landry
    Abstract: This paper extracts information on inflation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual inflation, University of Michigan consumer survey inflation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury Inflation Protected Securities (TIPS). Our findings suggest that a significant liquidity risk premium on TIPS exists, which leads to inflation expectations that are generally higher than the inflation compensation measure at the 10-year horizon. On the other hand, the estimated expected inflation is mostly lower than the consumer survey inflation forecast at the 12-month horizon. Survey participants slowly adjust their inflation forecasts in response to inflation changes. The nominal interest rate adjustment lags inflation movements, too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of inflation.
    Date: 2007
  14. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: This paper examines (econometrically) which interest rates seem most systematically related to investment and the GDP and how long the lag time is before changes in these interest rates affect the GDP. We conclude that the Prime interest rate has the most important and systematic influence on these variables and that it affects investment and the GDP after a two year lag due to the lengthy periods required to design, bid and build new factories, commercial facilities and some machinery. Other rates examined, but not found related to investment - triggered GDP growth, include the Aaa and Baa corporate bond rates, the Mortgage interest rate and the 10 year Treasury bond rate. Our results also suggest the magnitude of the effect of interest rate changes on the economy is relatively modest, and that therefore the Federal Reserve's ability to influence the economy by changing rates may also be somewhat constrained.
    JEL: E00 E12 E22 E44
    Date: 2007–07
  15. By: Rajeev Dhawan; Karsten Jeske
    Abstract: Should a central bank accommodate energy price shocks? Should the central bank use core inflation or headline inflation with the volatile energy component in its Taylor rule? To answer these questions, we build a dynamic stochastic general equilibrium model with energy use, durable goods, and nominal rigidities to study the effects of an energy price shock and its impact on the macroeconomy when the central bank follows a Taylor rule. We then study how the economy performs under alternative parameterizations of the rule with different weights on headline and core inflation after an increase in the energy price. Our simulation results indicate that a central bank using core inflation in its Taylor rule does better than one using headline inflation because the output drop is less severe. In general, we show that the lower the weight on energy price inflation in the Taylor rule, the impact of an energy price increase on gross domestic product and inflation is also lower.
    Date: 2007
  16. By: Giulio PALOMBA ([n.a.]); Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); Emma SARNO ([n.a.])
    Abstract: In this paper we introduce new definitions of pairwise and multivariate similarity between short-run dynamics of inflation rates in terms of equality of forecast functions and show that in the context of invertible ARIMA processes the Autoregressive distance introduced by Piccolo (1990) is a useful measure to evaluate such similarity. Then, we study the similarity of shortrun inflation dynamics across EU-15 area countries during the Euro period. Consistent with studies on inflation differentials and inflation persistence, our findings suggest that after seven years from the launch of the Euro the degree of similarity of short-run inflation dynamics across EU countries is still weak.
    Keywords: Euro, autoregressive metric, inflation dynamics
    JEL: C23 E31
    Date: 2007–06
  17. By: Chen, Kaiji; Song, Zheng
    Abstract: In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with financial friction on capital allocation. The arrivial of good news on future technology reduces such frictions and generates significant increase in current Total Factor Productivity via capital reallocation. This triggers an immediate boom in output, consumption, investment and hours worked. Our empirical evidence using firm-level data supports strongly the above mechanisms for news to affect current aggregate productivity.
    Keywords: Financial Friction; Capital Reallocation; Business Cycle
    JEL: G34 E32
    Date: 2007–07–05
  18. By: Mark Bils; Yongsung Chang; Sun-Bin Kim
    Abstract: We introduce worker differences in labor supply, reflecting differences in skills and assets, into a model of separations, matching, and unemployment over the business cycle. Separating from employment when unemployment duration is long is particularly costly for workers with high labor supply. This provides a rich set of testable predictions across workers: those with higher labor supply, say due to lower assets, should display more procyclical wages and less countercyclical separations. Consequently, the model predicts that the pool of unemployed will sort toward workers with lower labor supply in a downturn. Because these workers generate lower rents to employers, this discourages vacancy creation and exacerbates the cyclicality of unemployment and unemployment durations. We examine wage cyclicality and employment separations over the past twenty years for workers in the Survey of Income and Program Participation (SIPP). Wages are much more procyclical for workers who work more. This pattern is mirrored in separations; separations from employment are much less cyclical for those who work more. We do see for recessions a strong compositional shift among those unemployed toward workers who typically work less.
    JEL: E2 E24 E32 J6 J63
    Date: 2007–07
  19. By: Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Víctor López Pérez; Roger Stiegert (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Giovanni Vitale (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The need for structural reforms in the euro area has often been advocated. These reforms would improve the welfare of euro area citizens and also, as a welcome side-effect, facilitate the conduct of monetary policy. Against this background, a particularly relevant question that can be posed is whether monetary policy should help implement structural reforms. The objective of this paper is to provide a review of the existing literature on structural reforms in Economic and Monetary Union (EMU) and to discuss the possible ways in which monetary policy could support the structural reform process. In the context of EMU, the main conclusions that emerge are that the monetary policy for the euro area is not the appropriate tool for mitigating the potential and uncertain short-term costs of reforms or for providing incentives for structural reforms at the national level. However, credible monetary policy aimed at price stability can improve the functioning of the supply side of the economy and contribute to an environment which is conducive to welfare-enhancing structural changes. In addition, the ECB’s contribution to the implementation of structural reforms takes the form of analysis, assessment and communication.
    Date: 2007–07
  20. By: Pablo A. Guerron (Department of Economics, North Carolina State University)
    Abstract: This paper explores the effects of using alternative data sets for the estimation of DSGE models. I find that the estimated structural parameters and the model's outcomes are sensitive to the variables used for estimation. Depending on the set of variables the point estimate for habit formation ranges from 0.70 to 0.97. Similarly, the interest-smoothing coefficient in the Taylor rule fluctuates between 0.06 and 0.76. In terms of the model's predictions, if interest rates are excluded during estimation, the estimated structural coefficients are such that the model forecasts a strong deflation following an expansionary monetary expansion. More importanlty, three ways to assess different observable sets are proposed. Based on these measures, I find that that including the price of investment in the data set delivers the best results.
    Keywords: Bayesian Estimation, DSGE, Variable Selection, Impulse Response, Entropy
    JEL: C32 E32 E37
    Date: 2007–07
  21. By: Herwartz, Helmut; Xu, Fang
    Abstract: What does the saving-investment (SI) relation really measure and how should the (SI) relation be measured? These are two of the most discussed issues triggered by the so called Feldstein-Horioka puzzle. Based on panel data we introduce a new variant of functional coefficient models that allow to separate long and short to medium run parameter dependence. We apply the latter to uncover the determinants of the SI relation. Macroeconomic state variables such as openness, the age dependency ratio, government current and consumption expenditures are found to affect the SI relation significantly in the long run.
    Keywords: Saving-investment relation, Feldstein-Horioka puzzle, functional coefficient models
    JEL: C14 C23 E21 E22
    Date: 2007
  22. By: Simona Delle Chiaie (University of Rome, Tor Vergata)
    Abstract: This paper contributes to the recent literature that studies the quantitative implications of the imperfect information about potential output for the conduct of monetary policy. By means of Bayesian techniques, a small New Keynesian model is estimated taking explicitly account of the imperfect information problem. The estimation of the structural parameters and of the monetary authorities.objectives is key in assessing the quantitative relevance of the imperfect information problem and in evaluating the robustness of previous exercises based on calibration. Finally, the model allows us to analyse the usefulness of unit labor costs as monetary policy indicator.
    Date: 2007–02–20
  23. By: Yiu, Kai Wing
    Abstract: This paper examines how taxation and government expenditure structure affects national savings ratio. It might give some clues leading to an explanation of difference in savings ratio across nations.
    Keywords: saving; savings; save
    JEL: E2 E62
    Date: 2007–07–08
  24. By: Charles Goodhart
    Date: 2007–02
  25. By: James B. Bullard; Aarti Singh
    Abstract: We study a stylized theory of the volatility reduction in the U.S. after 1984—the Great Moderation—which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of Bayesian households attempting to learn the latent state of the economy. We use a standard equilibrium business cycle model with technology following an unobserved regime-switching process. After 1984, according to Kim and Nelson (1999a), the variance of U.S. macroeconomic aggregates declined because boom and recession regimes moved closer together, keeping conditional variance unchanged. In our model this makes the signal extraction problem more difficult for Bayesian households, and in response they moderate their behavior, reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy. We construct example economies in which this learning effect accounts for about 30 percent of a volatility reduction of the magnitude observed in the postwar U.S. data.
    Date: 2007
  26. By: Fabio Canova (Universitat Pompeu Fabra); David López-Salido (Banco de España; Centre for Economic Policy Research (CEPR)); Claudio Michelacci (Centro de Estudios Monetarios y Financieros (CEMFI))
    Abstract: We analyze the effects of neutral and investment-specific technology shocks on hours worked and unemployment. We characterize the response of unemployment in terms of job separation and job finding rates. We find that job separation rates mainly account for the impact response of unemployment while job finding rates for movements along its adjustment path. Neutral shocks increase unemployment and explain a substantial portion of unemployment and output volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. We show that this evidence is consistent with the view that neutral technological progress prompts Schumpeterian creative destruction, while investment specific technological progress has standard neoclassical features.
    Keywords: search frictions, technological progress, creative destruction
    JEL: E00 J60 O33
    Date: 2007–07
  27. By: Samad Sarferaz; Martin Uebele
    Abstract: We use a Bayesian dynamic factor model to measure Germany’s pre World War I economic activity. The procedure makes better use of existing time series data than historical national accounting. To investigate industrialization we propose to look at comovement between sectors. We find that Germany’s industrial sector developed earlier than stated in the literature, since after the 1860s agricultural time series do not comove with the business cycle anymore. Also, the bulk of comovement between 1820 and 1913 can be traced back to five out of 18 series representing industrial production, investment and demand for industrial inputs. Our factor is impressingly confirmed by a stock price index, leading the factor by 1-2 years. We also find evidence for early market integration in the 1820s and 1830s. Our business cycle dating aims to resolve the debate on German business cycle history. Given the often unsatisfactory quality of national accounting data for the 19th century we show the advantage of dynamic factor models in making efficient use of rare historical time series.
    Keywords: Business Cycle Chronology; Imperial Germany; Dynamic Factor Models; Industrialization.
    JEL: E32 C11 C32 N13
    Date: 2007–06
  28. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: In the Keynesian consumption function, current income is asserted to be the main determinant of consumption. This paper examines the extent to which the Keynesian consumption function explains 1960 - 2000 U.S. consumption patterns. The results are compared to the longer term average income variables suggested by Friedman's Permanent income Hypothesis and Ando and Modigliani's Life Cycle Hypothesis as the income variable affecting consumption. We find variance explained by the consumption function drops dramatically when multi-year average incomes are substituted for the Keynesian current income variable. However, when added to the Keynesian function as a second income variable, they increase explained variance from 88% to 90%, compared to the Keynesian income variable alone. This small amount suggests that their may be a small portion of the U.S. population whose consumption decisions follow the more complex formulations suggested by the Permanent Income and Life Cycle hypotheses, while the simpler current income formulation used by Keynes appears to characterize the consumption function of most of the population.
    JEL: E00 E12
    Date: 2007–07
  29. By: Ester Faia (Universitat Pompeu Fabra)
    Abstract: In recent decades, capital account liberalization in emerging economies has often been followed by a surge in capital inflows, despite the presence of severe informational asymmetries for foreign lenders. Empirical studies have shown that in emerging economies financial liberalization has led to an increase in consumption volatility (also relative to output). I use a small open economy model where foreign lending to households is constrained by an endogenous borrowing limit. Borrowing is secured by collateral in the form of durable investment whose accumulation is subject to adjustment costs. This economy is able to replicate the aforementioned stylized fact in response to various shocks (productivity, foreign demand and government expenditure). I find that financial liberalization reduces welfare since it increases the volatility of consumption and employment.
    Keywords: endogenous borrowing limit, financial liberalization, consumption volatility.
    JEL: E52 F1
    Date: 2007–02–20
  30. By: Domenico Delli Gatti; Mauro Gallegati; Bruce C. Greenwald; Joseph E. Stiglitz
    Abstract: In this paper we propose an Open Economy Financial Accelerator model along the lines of Greenwald-Stiglitz (1993) close in spirit but different in many respects from the one proposed by Greenwald (1998.) The first goal of the paper is to provide a taxonomy of the effects of a devaluation in this context. The direct (first round) effect on output, taking as given net worth and interest rate, is negative for domestic firms (due to the input cost effect) and positive for exporting firms (due to a positive foreign debt effect). The indirect (second round) wealth effect (on output through net worth, taking as given the interest rate) is uncertain, depending on the relative size of the domestic and exporting firms. There is also an indirect effect on output through the response of the domestic interest rate to a devaluation due to the risk premium effect. Due to the uncertainty on the sign of most of these effects, it is difficult to assess the overall impact of a devaluation. One cannot rule out, however, an economy-wide contractionary effect of a devaluation. If the devaluation affects negatively the net worth of domestic firms, the domestic interest rate may rise (due to the risk premium effect), exerting an additional contractionary impact on output. If, on top of that, the monetary authorities force a further increase of the interest rate in an effort to curb the exchange rate, the contractionary effect will be emphasized.
    JEL: E4 E5 F4
    Date: 2007–07
  31. By: Roger E.A. Farmer; Daniel F. Waggoner; Tao Zha
    Abstract: This paper studies a New Keynesian model in which monetary policy may switch between regimes. We derive sufficient conditions for indeterminacy that are easy to implement and we show that the necessary and sufficient condition for determinacy, provided by Davig and Leeper, is necessary but not sufficient. More importantly, we use a two-regime model to show that indeterminacy in a passive regime may spill over to an active regime no matter how active the latter regime is. As a result, a passive monetary policy is more damaging than has been previously thought. Our results imply that the propagation of shocks in an active regime, such as that of the Federal Reserve in the post-1982 period, may be substantially affected by the possibility of a return to a passive regime of the kind that was followed in the 1960s and 1970s.
    Date: 2007
  32. By: Gaurav Saroliya
    Abstract: The New-Keynesian (NK) business cycle model has presented itself as a potential "workhorse" model for business cycle analysis. This paper seeks to assess afresh the performance of the baseline NK model and its various extensions. The main theme of the paper is that although the dynamic NK literature has secured a robust defence to criticism arising, inter alia, on account of lack of microfoundations, it still has a long way to go in terms of providing a fully satisfactory model of the business cycle. In this regard, it is conjectured that explicitly accounting for the role of heterogeneity in business-cycle dynamics could lead towards a viable solution.
    Date: 2007–07
  33. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II]); Ludovic Desmedt (LEG - Laboratoire d'Economie et de Gestion - [CNRS : UMR5118] - [Université de Bourgogne])
    Abstract: False money appeared as the general common issue in monetary debates that occured in European countries in the 16th and 17th centuries. It first refered to sovereignty, in a time of state-building, as well as to a serious economic problem. Beyond sovereignty and economy, justice and, then, the public faith, were endangered by those who devoted themselves to produce false coins. The thesis of this communication is that one cannot understand clearly the general topic of false money by reading texts of the time with today's general definition of false money. We propose, then, to identify the multiple dimensions of false money : counterfeiting (by individuals), degradations of coins (by individuals and officers of the Mint) and debasement and enhancement (by princes). These dimensions appeared in monetary discourses like Bodin's, Mariana's and Locke's ones, with sometimes a lack of clarity. Then, a general claim to counteract counterfeiting may conceal a claim to suppress any possibility of debasing currency. Making clearer monetary discourses on that topic and establishing a hierarchy between the three dimensions of false money helps to understand why the false money issue was firstly a matter of monetary justice by the prince himself. In order to do so, we pay special attention to Bodin, Mariana and Locke.
    Keywords: History of monetary thought; monetary history; modern times; counterfeiting; debasement
    Date: 2007–07–09
  34. By: Narayana Kocherlakota
    Date: 2007
  35. By: Tommaso Proietti (Universita di Roma “Tor Vergata”); Cecilia Frale (Universita di Roma “Tor Vergata”)
    Abstract: In this paper we deal with several issues related to the quantification of business surveys. In particular, we propose and compare new ways of scoring the ordinal responses concerning the qualitative assessment of the state of the economy, such as the spectral envelope and cumulative logit unobserved components models, and investigate the nature of seasonality in the series. We conclude with an evaluation of the type of business cycle fluctuations that is captured by the qualitative surveys.
    Keywords: Spectral envelope; Seasonality; Deviation cycles; Cumulative Logit Model.
    Date: 2007–03–05
  36. By: Robert E. Lipsey; Birgitta Swedenborg
    Abstract: A substantial part of international differences in prices of individual products, both goods and services, can be explained by differences in per capita income, wage compression, or low wage dispersion among low-wage workers, and short-term exchange rate fluctuations. Higher per capita income is associated with higher prices and higher wage dispersion with lower prices. The effects of higher income and wage dispersion are moderated for the more tradable products. The effects of wage dispersion, on the other hand, are magnified for the more labor-intensive products, particularly low-skill services. The differences in prices across countries are reflected in differences in the composition of consumption. Countries in which prices of labor-intensive services are very high, such as the Nordic countries, consume much less of them. For some services, the shares of GDP consumed in high-price countries are less than 20 percent of the shares in low-price countries. Since these are services of very low tradability, the low consumption levels of these services imply low employment in them.
    JEL: E31 F10 J3
    Date: 2007–07
  37. By: Sébastien Jean; Miguel Jimenez
    Abstract: This paper assesses the consequences of immigration for natives' unemployment in OECD countries and investigates the role played by product and labour market policies in the economy's adjustment to immigration inflows. The estimations, combining a skill-level and an aggregate approach using data for males, cover eighteen OECD countries over the period 1984-2003. While no significant long-run impact is found, an increase in the share of immigrants in the labour force is estimated to raise temporarily natives' unemployment, over a period of approximately five to ten years. Anticompetitive product market regulations are found to increase both the magnitude and the persistence of this impact, while more stringent employment protection legislation magnifies its persistence, and a higher average replacement rate of unemployment benefits increases its magnitude. <P>L?impact de l?immigration sur le chômage dans les pays de l?OCDE <BR>Ce document de travail évalue les conséquences de l'immigration pour le chômage des autochtones dans les pays de l'OCDE, en s’intéressant particulièrement au rôle joué par les politiques sur les marchés des produits et du travail. Les estimations, combinant une approche par catégorie de qualification et une approche agrégée sur la base de données pour les hommes, couvrent dix-huit pays de l'OCDE sur la période 1984-2003. Aucun impact permanent significatif de la part des immigrés dans la population active sur le niveau de chômage parmi les autochtones n'est trouvé, mais une augmentation de cette part accroît temporairement le chômage des autochtones, pour une période de cinq à dix ans. Les régulations anticoncurrentielles sur le marché des produits augmentent l’ampleur et la persistance de cet impact, une législation plus stricte de protection de l’emploi accroît sa persistance, et un taux de remplacement moyen des allocations chômage plus élevé augmente son ampleur.
    JEL: E24 J61 L43
    Date: 2007–07–04
  38. By: Lanne, Markku
    Abstract: We compare the accuracy of the survey forecasts and forecasts implied by economic binary options on the U.S. nonfarm payroll change. These options are available for a number of ranges of the announced figure, and each pays $1 if the released nonfarm payroll change falls in the given range. For the first-release data both the market-based and survey forecasts are biased, while they are rational and approximately equally accurate for later releases. Both forecasts are more accurate for later releases. Because of predictability in the revision process, this indicates that the investors in the economic derivatives market are incapable of taking the measurement error in the preliminary estimates efficiently into account. This suggests that economic stability could be enhanced by more accurate first-release figures.
    Keywords: Expectations; economic derivatives; data vintage; real-time data
    JEL: C5 E44 D8 C82
    Date: 2007
  39. By: Kowal, Pawel
    Abstract: We describe algorithm to find higher order approximations of stochastic rational expectations models near the deterministic steady state. Using matrix representation of function derivatives instead of tensor representation we obtain simple expressions of matrix equations determining higher order terms.
    Keywords: perturbation method; DSGE models
    JEL: C63 C61 E17
    Date: 2007–07
  40. By: Christian Macaro (Faculty of Economics, Tor Vergata University.)
    Abstract: This paper aims to demonstrate that the data revision process affects the persistence of gross domestic product shocks. Results will contribute to the debate between unit root and linear models.
    Keywords: Revisions; GDP; Long memory
    JEL: C22 C82 E30
    Date: 2007–05–21
  41. By: Demir, Firat
    Abstract: Using micro level panel data, we analyze the impacts of rates of return gap between fixed and financial investments under uncertainty on real investment performance in three emerging markets, Argentina, Mexico and Turkey. Employing a portfolio choice model to explain the low fixed investment rates in developing countries during the 1990s, we suggest that rather than investing on risky and irreversible long term fixed investment projects, firms may choose to invest on reversible short term financial investments depending on respective rates of returns and uncertainty in the economy. The empirical results show that increasing rates of return gap and uncertainty have an economically and statistically significant fixed investment reducing effects in all three countries while the opposite is true with respect to financial investments.
    Keywords: Private Investment; Portfolio Choice; Uncertainty; Financialization
    JEL: C33 D21 O16 G11 E22
    Date: 2007
  42. By: Alberto Chong (Inter-American Development Bank); Mark Gradstein (Ben Gurion University/CEPR/CESifo/IZA)
    Abstract: A growing body of recent macroeconomic evidence suggests that volatility is detrimental to economic growth. The channels through which volatility affects growth, however, are less clear; substantive evidence based on disaggregate data is almost non-existent. This paper offers a framework in which policy volatility has an adverse effect on firms' entry into productive industries, thereby affecting economic growth. Empirical support for this relationship is based on a detailed dataset of thousands of firms from some 80 countries. Additional evidence is provided on the channels through which volatility affects firm growth, showing that institutional obstacles magnify the effect.
    Keywords: International Firm Growth; Policy Volatility; Institutions; Finance
    JEL: E60 H11 O11
    Date: 2006–08
  43. By: Sébastien Jean; Orsetta Causa; Miguel Jimenez; Isabelle Wanner
    Abstract: immigration for natives' labour market outcomes, as well as issues linked to immigrants' integration in the host country labour market. Changes in the share of immigrants in the labour force may have a distributive impact on natives' wages, and a temporary impact on unemployment. However, labour market integration of immigrants (as well as integration of second-generation immigrants - both in terms of educational attainments and of labour market outcomes) remains the main challenge facing host economies. In both cases, product and labour market policies have a significant role to play in easing the economy's adjustment to immigration. <P>Les migrations dans les pays de l'OCDE : Impact sur le marché du travail et intégration <BR>Les pays de l'OCDE connaissent une période de forte croissance des pressions migratoires. Cet article s'interroge sur les conséquences de ce phénomène d'une part sur le marché du travail domestique, d'autre part sur les trajectoires d'intégration propres aux immigrés dans les pays d'accueil. Des changements dans la proportion d'immigrés dans la force de travail peuvent avoir un impact distributif sur les salaires des natifs et un impact temporaire sur leur taux de chômage. Cependant, l'intégration des immigrés sur le marché du travail (de même que l'intégration des immigrés de seconde génération, aussi bien sur le plan de la réussite scolaire que sur celui de la performance sur le marché du travail) demeure l'enjeu principal auquel se doivent de faire face les économies d'accueil. Dans les deux cas, la régulation des marchés de produits et la politique du marché du travail ont un rôle important à jouer afin de favoriser les ajustements économiques associés à l'immigration.
    JEL: E24 J31 J61 J64 L43
    Date: 2007–07–04
  44. By: Yiu, Kai Wing
    Abstract: Existing trade theories almost exclusively rest on different kinds of products. They seldom consider consider difference in saving ratios across nations and cross-ownership of capital stock, which are two crucial components of the model presented in this paper. According to the model in this paper, imbalanced trade should persist in general when multiple trading economies reach their equilibrium. United States' prolonged trade deficit could possibly be explained under this framework. As a low saving nation, it is undergoing a necessary process to 'slim up' its wealth and run a persistent trade surplus at equilibrium provided that its savings ratio remains to be substantially lower than other nations.
    JEL: E2 F1
    Date: 2007–06–29
  45. By: Stavarek, Daniel
    Abstract: This paper estimates the exchange market pressure (EMP) in four Central European countries (Czech Republic, Hungary, Poland, Slovakia) during the period 1993-2006. Therefore, it is one of very few studies focused on this region and the very first paper applying concurrently model-dependent as well as model-independent approach to the EMP estimation on these countries. The results obtained suggest that the approaches are not compatible and lead to absolutely inconsistent findings. They often differ in both identification of principal development trends and estimated magnitude and direction of the pressure. Therefore, any general conclusion on those issues is hard to draw. The paper provides evidence that a shift in the exchange rate regime towards the quasi-fixed ERM II should not lead to increasing EMP. However, it is highly probable that some episodes of the excessive EMP will make the fulfillment of the exchange rate stability criterion more difficult in all countries analyzed unless the criterion will have eased.
    Keywords: exchange market pressure; model-dependent approach; model-independent approach; EU New Member States; exchange rate stability criterion
    JEL: F36 E42 F31 C32
    Date: 2007–06–28
  46. By: Tommaso Proietti (SEFEMEQ, Universita’ di Roma "Tor Vergata")
    Abstract: The paper evaluates the potential of band spectral estimation for extracting signals in economic time series. Two situations are considered. The first deals with trend extraction when the original data have been permanently altered by routine operations, such as prefiltering, temporal aggregation and disaggregation, and seasonal adjustment, which modify the high frequencies properties of economic time series. The second is when the measurement model is only partially specified, in that it aims at fitting the series in a particular frequency range, e.g. at interpreting the long run behaviour. These issues are illustrated with reference to a simple structural model, namely the random walk plus noise model.
    Keywords: Temporal Aggregation, Seasonal Adjustment, Trend Component, Frequency Domain.
    JEL: C22 E3
    Date: 2007–05–21
  47. By: Bhattacharya, Joydeep; Bunzel, Helle; Qiao, Xue
    Abstract: Much of Africa has been ravaged by the AIDS epidemic. There, heterosexual contact is the primary mode of transmission for the HIV virus. Even when access to condoms is good and their price low, a large fraction of young Africans continue to engage in unprotected sex. In this paper, we propose a simple two period rational model of sexual behavior that has the potential to explain why a large proportion of sexual activity in poor countries maybe unprotected. In the model economy, even when agents are perfectly cognizant of the risk involved in unsafe sexual activity, and fully internalize the effects of their own sexual behavior on their chance of catching the virus, they may rationally choose to engage in such risky behavior. Our results indicate that safe sexual practice is essentially a "normal good" and that development may be key to reducing HIV infectivity.
    Keywords: AIDS, rational choice, sexual behavior, safe sex
    JEL: E0 I1 O1
    Date: 2007–07–09
  48. By: Brita Bye, Taran Fæhn and Tom-Reiel Heggedal (Statistics Norway)
    Abstract: We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth, by means of a computable general equilibrium model with R&D-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare, than do the other alternatives, reflecting that the domestic market for capital varieties is limited. Directing support to R&D rather than to capital formation generates stronger economic growth, a higher number of patents and capital varieties, and a higher share of R&D in total production. However, it costs in terms of lower production within each firm, where presence of sunk patent costs and mark-ups result in efficiency losses. The welfare result is, thus, slightly lower.
    Keywords: Applied general equilibrium; Endogenous growth; Research and Development
    JEL: C68 E62 H32 O38 O41
    Date: 2007–07
  49. By: Pol Antràs; Ricardo J. Caballero
    Abstract: The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to flow to capital-scarce countries. In this paper we show that in a world with heterogeneous financial development, the classic conclusion does not hold. In particular, in less financially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (financial) capital flows. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows, when these are already heading from South to North. Our perspective also has implications for the effects of trade integration on factor prices. In contrast to the Heckscher-Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper-Samuelson result.
    JEL: E2 F1 F2 F3 F4
    Date: 2007–07
  50. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: Rising exchange rates can lower prices on imported consumer goods. The lower prices have two effects. A substitution effect shifts in demand from domestically produced goods to imports. An income effect also allows more import purchases. It also allows some income previously spent on imports to be shifted to domestic spending. This shift may or may not increase total demand for U.S. consumer goods. This paper finds it does, and that increases in demand for domestically produced consumer goods and services are about five times as large as the increase in demand for imported consumer goods and services. The paper also finds that the increase in demand for domestic goods is about three times as large as the increase in the trade deficit resulting from the higher exchange rate.
    JEL: E00 F40
    Date: 2007–07

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