|
on Macroeconomics |
|
Issue of 2007‒07‒20
twenty-two papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Assenza, Tiziana |
| Abstract: | The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In the original model, however, all the variables, credit included, are in real terms. In order to assess the impact of monetary policy the model must be reformulated to fit a monetary economy. In the present paper we model a monetary economy with financing constraints adopting the Money In the Utility function (MIU) approach.The occurrence of multiple equilibria is a likely outcome of the dynamics generated by the model. A change in the growth rate of money supply can affect real out- put through the impact of inflation on net worth. In a sense the monetary transmission mechanism we are focusing on consists of a combination of the inflation tax effect and the net worth channel. Contrary to the traditional view, at least for some parameter restrictions, an increase of the inflation tax can bring about an increase of aggregate output. |
| JEL: | E52 E31 E44 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4049&r=mac |
| By: | Stefano Eusepi; Bruce Preston |
| Abstract: | This paper analyzes the value of communication in the implementation of monetary policy. The central bank is uncertain about the current state of the economy. Households and firms are uncertain about the statistical properties of aggregate variables, including nominal interest rates, and must learn about their dynamics using historical data. Given these uncertainties, when the central bank implements optimal policy, the Taylor principle is not sufficient for macroeconomic stability: for reasonable parameterizations self-fulfilling expectations are possible. To mitigate this instability, three communication strategies are contemplated: i) communicating the precise details of the monetary policy -- that is, the variables and coefficients; ii) communicating only the variables on which monetary policy decisions are conditioned; and iii) communicating the inflation target. The first two strategies restore the Taylor principle as a sufficient condition for stabilizing expectations. In contrast, in economies with persistent shocks, communicating the inflation target fails to protect against expectations driven fluctuations. These results underscore the importance of communicating the systematic component of monetary policy strategy: announcing an inflation target is not enough to stabilize expectations -- one must also announce how this target will be achieved. |
| JEL: | D84 E52 E58 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13259&r=mac |
| By: | Schnabl, Gunther; Hoffmann, Andreas |
| Abstract: | We show how since the mid 1980s expansionary monetary policies in the large economies and âÃÂÃÂvagabonding liquidityâÃÂàhave contributed to bubbles in the new and emerging markets. Based on the monetary overinvestment theories of Hayek and Wicksell we describe a wave of bubbles and crises that was initiated in Japan by an expansionary monetary policy in the mid 1980s. After the burst of the Japanese bubble and sharply declining interest rates in Japan, carry trade transmitted the bubbles to East Asia (Asian crisis) and the new markets in the developed economies. After the end of the irrational exuberance in the new markets, new bubbles emerged in the US real estate market and possibly currently in China and Central and Eastern Europe. Because particularly Japan and the US have tended to lower interest rates in response to financial crisis, the low interest rate policies in the large countries and thereby speculative exaggerations may continue. According to Wicksell and Hayek a higher level of interest rates in the large countries would reveal the structural distortions that have come along with the ample liquidity supply. |
| Keywords: | Bubbles; Boom-bust cycles; Capital Flows; Emerging Markets; Hayek; Wicksell. |
| JEL: | E52 E44 B53 E32 |
| Date: | 2007–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4019&r=mac |
| By: | Bruce Preston; Mauro Roca |
| Abstract: | This paper solves a real business cycle model with heterogeneous agents and uninsurable income risk using perturbation methods. A second order accurate characterization of agent's optimal decision rules is given, which renders the implications of aggregation for macroeconomic dynamics transparent. The role of cross-sectional holdings of capital in determining equilibrium dynamics can be directly assessed. Analysis discloses that an individual's optimal saving decisions are almost linear in their own capital stock giving rise to permanent income consumption behavior. This provides an explanation for the approximate aggregation properties of this model documented by Krusell and Smith (1998): the distribution of capital does not affect aggregate dynamics. While the variance-covariance properties of endogenous variables are almost entirely determined by first order dynamics, the second order dynamics, which capture properties of the wealth distribution, are nonetheless important for an individual's mean consumption and saving decisions and therefore the mean equilibrium capital stock. Policy evaluation exercises therefore need to take account of these higher order terms. |
| JEL: | C6 D52 E21 E32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13260&r=mac |
| By: | Macri, Joseph; Sinha, Dipendra |
| Abstract: | Using two data series, namely GDP and the index of industrial production, we study the relationship between output variability and the growth rate of output. Ng-Perron unit root test shows that the growth rate of GDP is non-stationary but the growth rate of industrial output is stationary. Thus, we use the ARCH-M model for the monthly data of industrial output. A number of specifications (with and without a dummy variable) are used. In all cases, the results show that output variability has a negative but insignificant effect on the growth rate of output. |
| Keywords: | economic growth; volatility; variability; business cycle fluctuations; GARCH models |
| JEL: | C52 C51 C22 E32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4021&r=mac |
| By: | Christian Broda; David E. Weinstein |
| Abstract: | Japanese monetary and fiscal policy uses the consumer price index as a metric for price stability. Despite a major effort to improve the index, the Japanese methodology of calculating the CPI seems to have a large number of deficiencies. Little attention is paid in Japan to substitution biases and quality upgrading. This implies that important methodological differences have emerged between the U.S. and Japan since the U.S. started to correct for these biases in 1999. We estimate that using the new corrected U.S. methodology, Japan's deflation averaged 1.2 percent per year since 1999. This is more than twice the deflation suggested by Japanese national statistics. Ignoring these methodological differences misleading suggests that American real per capita consumption growth has been growing at a rate that is almost 2 percentage points higher than that of Japan between 1999 and 2006. When a common methodology is used Japan's growth has been much closer to that of the U.S. over this period. Moreover, we estimate that the bias of the Japanese CPI relative to a true cost-of-living index is around 2 percent per year. This overstatement in the Japanese CPI in combination with Japan's low inflation rate is likely to cost the government over 69 trillion yen -- or 14 percent of GDP -- over the next 10 years in increased social security expenses and debt service. For monetary policy, the overstatement of inflation suggests that if the BOJ adopts a formal inflation target without changing the current CPI methodology a lower band of less than 2 percent would not achieve its goal of price stability. |
| JEL: | E31 E5 H6 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13255&r=mac |
| By: | Christina D. Romer; David H. Romer |
| Abstract: | This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record -- presidential speeches, executive-branch documents, and Congressional reports -- to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases. |
| JEL: | E32 E62 H30 N12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13264&r=mac |
| By: | Gregor W. Smith (Department of Economics, Queen's University) |
| Abstract: | Estimating linear rational expectations models requires replacing the expectations of future, endogenous variables either with forecasts from a fully solved model, or with the instrumented actual values, or with forecast survey data. Extending the methods of McCallum (1976) and Gottfries and Persson (1988), I show how to pool these methods and also use actual, future values of these variables to improve statistical efficiency. The method is illustrated with an application using SPF survey data in the US Phillips curve, where the output gap plays a significant role but lagged inflation plays none. |
| Keywords: | rational expectations, recursive projection, Phillips curve |
| JEL: | E37 C53 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1129&r=mac |
| By: | Ferrara, Laurent |
| Abstract: | In this paper, we propose a new coincident monthly indicator to detect in real-time the start and the end of an economic recession phase for the Euro area. In this respect, we use the methodology proposed in Anas and Ferrara (2002, 2004) as regards the recession indicator for the US, based on Markov-Switching processes popularized in economics by Hamilton (1989). By using a set of four monthly time series, we show that this start-end recession indicator (SERI) is able to reproduce all the recession phases experienced by the Euro area since 1970. Concerning the last low phase of the growth cycle in the Euro area, started in 2001, empirical results show that the Euro area experienced a ÃÂë quasi-recession ÃÂû phase, located between the end of the 2001 year and the beginning of 2002, without a global recession. This is due to a lack of diffusion of this phenomena among the main Eurozone countries, though it was synchronized. |
| Keywords: | Recession; real-time; probabilistic indicator; Euro area. |
| JEL: | C51 E32 C32 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4042&r=mac |
| By: | Skriner, Edith (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) |
| Abstract: | The theory suggests that investment activities and monetary policy influence the development of the global business cycle. The oil price and other raw material prices also play a key role in the economic development and there is a co-movement among oil consumption and global output. Therefore, the aim of this study is to explain the development of this set of variables by ARs, small-scale VARs and ECMs. The lag length and the rank of the time series models have been determined using information criteria. Then one-step ahead forecasts have been generated. It was found, that the ARs generate the best forecasts at the beginning of the forecasting horizon. However, when the forecasting horizon increases the VARs outperform the ARs. Comparing the forecasting performance of the ECMs, it was found that the forecasting ability of the ECMs in first differences outperform the level based ECMs when the forecasting horizon increases. |
| Keywords: | International economics, time series models, forecasts, forecast evaluation |
| JEL: | F17 C22 C5 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:214&r=mac |
| By: | Harvie, Charles and Saleh, Ali Salman (University of Wollongong) |
| Abstract: | Since the onset of the Civil War in 1975 Lebanon has experienced burgeoning fiscal deficits and an unsustainable public debt overhang. Much of this arose from the loss of revenues during the period of the Civil War 1975-90 and attempts to maintain basic public expenditure, while from 1990-2006 it reflected post Taif rebuilding and reconstruction of key infrastructure with limited revenue capacity. Considerable progress from the 1990s has been achieved in rebuilding the shattered economy from both public and private international and domestic sources, but its legacy is a huge public debt and a servicing requirement that currently absorbs alone almost 30 per cent of total government revenue and is the highest in the world on a per capita basis. While the need to reduce this debt to a sustainable level would be daunting enough in itself, LebanonâÃÂÃÂs fiscal predicament was further compounded by the outbreak of war with Israel during July-August 2006. The consequence of this 34 day conflagration was the devastation of residential property, vital infrastructure, agricultural production, industrial production, exports, environmental damage, the collapse of tourism and a further erosion of the influence and power of the central government. Estimates of the direct and indirect costs for Lebanon of this relatively brief but devastating war conservatively vary from US$10-15 billion. The implications of such reconstruction and rebuilding costs for the budget and public debt are potentially calamitous for Lebanon. A key question is whether Lebanon can tackle this enormous task in insolation. This paper explores the background to the fiscal crisis, identifies from available literature the extent, nature and cost of the war damage, analyses the options available to the authorities in rebuilding the economy and highlights key policy issues and measures that will be required if a sustainable economic recovery is to be achieved. Despite its demonstrated and remarkable resilience to past trauma the paper concludes that the fiscal crisis makes it impossible for Lebanon to tackle the reconstruction and rebuilding task on its own and particularly in the wake of the events of summer 2006. The country will require substantial and ongoing financial support from international lenders and donors. The success of these efforts in the case of Lebanon is of particular interest as it could well be a microcosm of possible future outcomes for the region more generally. |
| JEL: | E60 E61 E62 E65 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp07-04&r=mac |
| By: | Rui Albuquerque; Neng Wang |
| Abstract: | The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premium, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22 percent, a gain for which outside shareholders are willing to pay 11 percent of their capital stock. |
| JEL: | E44 G1 G3 O4 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13251&r=mac |
| By: | KibritÃÂçioÃÂÃÂlu, Aykut |
| Abstract: | In this paper, a macroeconomic performance index (MEP10) which consists of selected ten indicators is proposed to evaluate the relative performance of Turkish governments by using monthly data for the period of December 1987 âÃÂàApril 2007. According to the multi-staged evaluation process applied in the study, the governments are grouped in three classes: (1) Relatively successful governments: 46. government (December 1987 âÃÂàNovember 1989), 48. government (June 1991 âÃÂàNovember 1991), 54. government (June 1996 âÃÂàJune 1997), and 59. government (March 2002 âÃÂàApril 2007), (2) Relatively unsuccessful governments: 47. government (November 1989 âÃÂàJune 1991), 49. government (November 1991 âÃÂàJune 1993), 55. government (June 1997 âÃÂàJanuary 1999) and 53. government (March 1996 âÃÂàJune 1996), and (3) Most unsuccessful governments: 50.-52. governments (June 1993 âÃÂàMarch 1996) and 56.-57. governments (January 1999 âÃÂàNovember 2002). The monthly performance index is also used to test some hypotheses regarding the relationship between the length of the governmentsâÃÂàterm of office and their macroeconomic performances. |
| Keywords: | Okun's misery index; macroeconomic performance; macroeconomic stability; governments; political stability; general elections; economic crises; Turkish economy |
| JEL: | O53 E65 C43 |
| Date: | 2007–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3962&r=mac |
| By: | Daley, Clayton |
| Abstract: | Assume a firm concerns itself exclusively with local shocks (copious citations including Lucas 1972 and Bomhoff 1983 validate that this type of assumption may be reasonable). Changes in a firm's production policy should occur when the actual demand in a period Dt suggests that the underlying demand function has shifted from expected demand E(Dt). Since firms face uncertainty, this is non-trivial and they must find a way to determining (given information from a single, current period) whether or not the underlying demand has changed or whether the firm has simply obtained a draw from its expected demand distribution. In a simplified model, a firm can use a concept similar to a Statistical Hypothesis Test on E(Dt) = Dt to come to this conclusion. Rather than select an arbitrary confidence threshold (alpha), a firm can reverse the process and use the "marginal" alpha (where the hypothesis is just rejected or accepted) as its confidence that the mean has changed, allowing it to update its expectations to E(Dt+1) = (1-a) * E(Dt) + a * (Dt) and price accordingly. By weighting new demand information using this "confidence factor," the model introduces significant and persistent rigidity around NAIRU/equilibrium. This model is also powerful because it explains the qualified success of threshold like behaivor in classical "menu cost" theories (as the threshold reflects the classic hypothesis test strategy), behavior similar to a learning model (via the weighted introduction of new data) and seeming information lags (via the low confidence in new information immediately after shifts), among others. |
| Keywords: | phillips curve |
| JEL: | E40 |
| Date: | 2007–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4012&r=mac |
| By: | Jianjun Miao; Neng Wang |
| Abstract: | Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze the joint decisions of business investments, consumption/savings, and portfolio selection. For a lump-sum investment payoff and an agent with a sufficiently strong precautionary savings motive, an increase in volatility can accelerate investment, contrary to the standard real options analysis. When the agent can trade the market portfolio to partially hedge against investment risk, the systematic volatility is compensated via the standard CAPM argument, and the idiosyncratic volatility generates a private equity premium. Finally, when the investment payoff is a series of flows, the agent's idiosyncratic risk exposure alters both the implied option value and the implied project value, causing a reversal of the results in the lump-sum payoff case. |
| JEL: | E2 G11 G31 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13250&r=mac |
| By: | Claudio H. Dos Santos; Gennaro Zezza |
| Abstract: | Despite being arguably one of the most active areas of research in heterodox macroeconomics, the study of the dynamic properties of stock-flow consistent (SFC) growth models of financially sophisticated economies is still in its early stages. This paper attempts to offer a contribution to this line of research by presenting a simplified Post-Keynesian SFC growth model with well-defined dynamic properties, and using it to shed light on the merits and limitations of the current heterodox SFC literature. |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_503&r=mac |
| By: | Greenwood, Jeremy; Guner, Nezih |
| Abstract: | Since World War II there has been: (i) a rise in the fraction of time that married households allocate to market work, (ii) an increase in the rate of divorce, and (iii) a decline in the rate of marriage. What can explain this? It is argued here that technological progress in the household sector has saved on the need for labour at home. This makes it more feasible for singles to maintain their own home, and for married women to work. To address this question, a search model of marriage and divorce is developed. Household production benefits from labour-saving technological progress. |
| Keywords: | Divorce; Hours Worked; Household Production; Marriage; Technological Progress |
| JEL: | E13 J12 J22 O11 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6391&r=mac |
| By: | Cervellati, Matteo; Sunde, Uwe |
| Abstract: | This paper provides a unified theory of the economic and demographic transition. Individuals make optimal decisions about fertility, education of their children and the type and intensity of the investments in their own education. These decisions are affected by different dimensions of mortality and technological progress which change endogenously during the process of development. The model generates an endogenous transition from a regime characterized by limited human capital formation, little longevity, high child mortality, large fertility and a sluggish income and productivity growth to a modern growth regime in which lower net fertility is associated with the acquisition of human capital and improved living standards. Unlike previous models, the framework emphasizes the education composition of the population in terms of the equilibrium share of educated individuals, and differential fertility related to education. The framework explores the roles of different dimensions of mortality, wages and schooling in triggering the transition. The dynamics of the model are consistent with empirical observations and stylized facts that have been difficult to reconcile so far. For illustration we simulate the model and discuss the novel predictions using historical and cross-country data. |
| Keywords: | child mortality; demographic transition; endogenous life expectancy; heterogeneous human capital; Long-term development |
| JEL: | E10 J10 O10 O40 O41 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6384&r=mac |
| By: | Francesco Audrino; Fabio Trojani |
| Abstract: | We propose a multivariate nonparametric technique for generating reliable shortterm historical yield curve scenarios and confidence intervals. The approach is based on a Functional Gradient Descent (FGD) estimation of the conditional mean vector and covariance matrix of a multivariate interest rate series. It is computationally feasible in large dimensions and it can account for non-linearities in the dependence of interest rates at all available maturities. Based on FGD we apply filtered historical simulation to compute reliable out-of-sample yield curve scenarios and confidence intervals. We back-test our methodology on daily USD bond data for forecasting horizons from 1 to 10 days. Based on several statistical performance measures we find significant evidence of a higher predictive power of our method when compared to scenarios generating techniques based on (i) factor analysis, (ii) a multivariate CCC-GARCH model, or (iii) an exponential smoothing covariances estimator as in the RiskMetricsTM approach. |
| Keywords: | Conditional mean and variance estimation, Filtered Historical Simulation, Functional Gradient Descent, Term structure; Multivariate CCC-GARCH models |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2007:2007-24&r=mac |
| By: | Pinaki Chakraborty |
| Abstract: | Since its enactment in 2005, the National Rural Employment Guarantee Act (NREGA) has been implemented in 200 districts in India. Based on state-by-state employment demand-supply data and the use of funds released under NREGA, it is found that, although it is a demand-driven scheme, there are significant interstate differences in the supply of employment. The supply falls far short of demand, particularly in low-income states, where the organizational capacity to implement the scheme is limited. It is also noted that the NREGA-induced fiscal expansion has not contributed to higher fiscal imbalances. The consolidation of other public employment programs into NREGA has actually kept the total allocation of funds by the central government at a level no higher than those reached in the fiscal years 2002-03 to 2005-06. The NREGA fund utilization ratio varies widely across states and is abysmally low in the poorer states. Since the flow of resources to individual states is based on approved plans outlining employment demand, it may turn out to be regressive for the poorer states with low organizational capacity in terms of planning and management of the schemes, especially labor demand forecasting. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_505&r=mac |
| By: | John Donaldson; Rajnish Mehra |
| Abstract: | This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well. |
| JEL: | D10 D11 D50 D52 D90 D91 E30 G00 G11 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13220&r=mac |
| By: | Tomer Shachmurove (Social Science Computing Center, University of Pennsylvania); Yochanan Shachmurove (Department of Economics, University of Pennsylvania and The City College of The City University of New York) |
| Abstract: | This paper utilizes Vector Auto Regression (VAR) models to analyze the interdependence among exchange rates of twelve Asian-Pacific nations, Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, South Korea, Singapore, Taiwan, Thailand, and Vietnam. The daily data span from 1995 to 2004. It finds strong regional foreign exchange dependency, varying from 32 to 73 percent. This network of markets is highly correlated, with shocks to one reverberating throughout the region. Despite the linkages of the Chinese exchange rate to the United States dollar, the Chinese foreign exchange is not as independent with respect to its South-Asian neighbors as previously thought. |
| Keywords: | : Exchange rates, Asian- Pacific region, Australia, China, Indonesia, Japan, Malaysia, New Zealand, Philippines, South Korea, Singapore, Taiwan, Thailand, Vietnam, Correlograms, Impulse Responses, Variance Decompositions, Interdependence |
| JEL: | F0 F3 G0 C3 C5 E4 P0 |
| Date: | 2007–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:07-019&r=mac |