nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒07‒27
twenty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime? By Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen
  2. Inflation-output gap trade-off with a dominant oil supplier By Anton Nakov; Andrea Pescatori
  3. Flattened Inflation-Output Tradeoff and Enhanced Anti-Inflation Policy: Outcome of Globalization? By Assaf Razin; Alon Binyamini
  4. An estimated New Keynesian policy model for Australia By Buncic, Daniel; Melecky, Martin
  5. Optimal Monetary Policy in a 'Sudden Stop' By Fabio Braggion; Lawrence J. Christiano; Jorge Roldos
  6. Money Demand Function By Yiu, Kai Wing
  7. Economic Liberalization and the Causal Relations among Money, Income, and Prices: The Case of Pakistan By Husain, Fazal; Rashid, Abdul
  8. The Canadian Business Cycle: A Comparison of Models By Frédérick Demers; Ryan Macdonald
  9. Aging, Saving, and Public Pensions in Japan By Charles Yuji Horioka; Wataru Suzuki; Tatsuo Hatta
  10. "Why Have Interest Rates Been So Low?" By Tatom, John
  11. Is the Bank of Canada any more or less independent than the Fed? By J. Stephen Ferris
  12. The Causes of Excessive Deficits in The European Union By Castro, Vítor
  13. Money and Taxes: The Relationship Between Financial Sector Development and Taxation By Tatom, John; Ott, Mack
  14. Stock Prices, Real Sector and the Causal Analysis: The Case of Pakistan By Husain, Fazal
  15. Régimes de change: Le chemin vers la flexibilité By Sfia, Mohamed Daly
  16. Asian Currency Crises: Do Fundamentals still Matter? A Markov-Switching Approach to Causes and Timing By J L Ford; Bagus Santoso; N J Horsewood
  17. An Evaluation of Foreign Exchange Intervention and Monetary Aggregates in Nigeria (1986- 2003) By Adebiyi, Michael Adebayo
  18. Is Inequality Growing as American Workers Fall Behind? By Tatom, John
  19. Understanding the Forward Premium Puzzle: A Microstructure Approach By Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo
  20. Selection of Optimal Lag Length in Cointegrated VAR Models with Weak Form of Common Cyclical Features By Carlos Enrique Carrasco Gutiérrez; Reinaldo Castro Souza; Osmani Teixeira de Carvalho Guillén

  1. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen
    Abstract: It has been widely argued that inflation persistence since WWII has been widespread and durable and that it can only be accounted for by models with a high degree of nominal rigidity. We examine UK post-war data and find that the varying persistence it reveals is largely due to changing monetary regimes and that models with moderate or even no nominal rigidity are best equipped to explain it.
    Keywords: Inflation Persistence; New Keynesian; New Classical; Nominal Rigidity; Monetary Regime Shifts
    JEL: E31 E37
    Date: 2007–07
  2. By: Anton Nakov (Banco de España; Universitat Pompeu Fabra); Andrea Pescatori (Universitat Pompeu Fabra)
    Abstract: An exogenous oil price shock raises inflation and contracts output, similar to a negative productivity shock. In the standard New Keynesian model, however, this does not generate a tradeoff between inflation and output gap volatility: under a strict inflation targeting policy, the output decline is exactly equal to the efficient output contraction in response to the shock. We propose an extension of the standard model in wich the presence of a dominant oil supplier (OPEC) leads to inefficient fluctuations in the oil price markup, reflecting a dynamic distortion of the economy´s production process. As a result, in the face of oil sector shocks, stabilizing inflation does not automatically stabilize the distance of output from first-best, and monetary policymarkers face a tradeoff between the two goals.
    Keywords: oil shocks, inflation-output gap tradeoff, dominant firm
    JEL: E31 E32 E52 Q43
    Date: 2007–07
  3. By: Assaf Razin; Alon Binyamini
    Abstract: The paper provides a unified analysis of globalization effects on the Phillips curve and monetary policy, in a New-Keynesian framework. The main proposition of the paper is twofold. Labor, goods, and capital mobility flatten the tradeoff between inflation and activity. If policy makers are guided by the welfare criterion of the representative household, globalization forces also lead monetary policy to be more aggressive with regard to inflation fluctuations but, at the same time, more benign with respect to the output-gap fluctuations.
    JEL: E31 F3 F4
    Date: 2007–07
  4. By: Buncic, Daniel; Melecky, Martin
    Abstract: An open economy New Keynesian policy model for Australia is estimated in this study. We investigate how important external shocks are as a source of macroeconomic fluctuations when compared to domestic ones. The results of our analysis suggest that the Australian business cycle and domestic inflation are most affected by domestic demand and supply shocks, respectively. However, domestic output also appears to be strongly affected by foreign demand shocks, and domestic inflation by exchange rate shocks. Domestic variables do not seem to be significantly affected by foreign supply and monetary policy shocks.
    Keywords: New Keynesian Policy Modelling; Small Open Economy Model; Australia; US; Bayesian Estimation.
    JEL: E40 E37 F41
    Date: 2007–07–18
  5. By: Fabio Braggion; Lawrence J. Christiano; Jorge Roldos
    Abstract: In the wake of the 1997-98 financial crises, interest rates in Asia were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. The optimality of the immediate rise in the interest rate is an example of the theory of the second best: although high interest rates introduce an inefficiency wedge into the labor market, they are nevertheless welfare improving because they mitigate distortions due to binding collateral constraints. Over time, as various real frictions wear off and the collateral constraint is less binding, the familiar Friedman forces dominate, and interest rates are optimally set as low as possible.
    JEL: E4 E44 E5
    Date: 2007–07
  6. By: Yiu, Kai Wing
    Abstract: Most, if not all, of available forms of money demand function take nominal interest rate of nonmonetary assets, which equals real interest rate of nonmonetary assets plus expected inflation, as one of its variables without taking expected inflation as a separate variable. This item shows that in fact we do need to introduce expected inflation as a separate variable in general.
    Keywords: money; demand; function
    JEL: E41 E4
    Date: 2007–07–17
  7. By: Husain, Fazal; Rashid, Abdul
    Abstract: This study re-examines the causal relations between money and the two variables, i.e., income and prices. Using annual data from 1959/60 to 2003/04, examining the stochastic properties of the variables used in the analysis, and taking care of the shifts in the series due to the start of the economic liberalization program in the early 1990s, we investigate the causal relations between real money and real income, between nominal money and nominal income, and between nominal money and prices. The analysis indicates, in general, the long run relationship among money, income, and prices. The analysis further suggests a one way causation from income to money in the long run implying that probably real factors rather than money supply has played a major role in increasing Pakistan’s national income. The study fails to find the active role of money in changing income even after taking care of possible shifts in these variables due to the economic reforms. As Regards the causal relationship between money and prices, the analysis suggests a unidirectional causality from money to prices implying monetary expansion increases inflation in Pakistan.
    Keywords: Money; Income; Prices; Economic Liberalization; Causal Relations; Pakistan
    JEL: E40
    Date: 2006
  8. By: Frédérick Demers; Ryan Macdonald
    Abstract: This paper examines the ability of linear and nonlinear models to replicate features of real Canadian GDP. We evaluate the models using various business-cycle metrics. From the 9 data generating processes designed, none can completely accommodate every business-cycle metric under consideration. Richness and complexity do not guarantee a close match with Canadian data. Our findings for Canada are consistent with Piger and Morley's (2005) study of the United States data and confirms the contradiction of their results with those reported by Engel, Haugh, and Pagan (2005): nonlinear models do provide an improvement in matching business-cycle features. Lastly, the empirical results suggest that investigating the merits of forecast combination would be worthwhile.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: C32 E37
    Date: 2007
  9. By: Charles Yuji Horioka; Wataru Suzuki; Tatsuo Hatta
    Abstract: We analyze the impact of population aging on Japan's household saving rate and on its public pension system and the impact of that system on Japan's household saving rate and obtain the following results: first, the age structure of Japan's population can explain the level of, and past and future trends in, its household saving rate; second, the rapid aging of Japan's population is causing Japan's household saving rate to decline and this decline can be expected to continue; third, the pay-as-you-go nature of the public pension system, combined with rapid population aging, created considerable intergenerational inequities and increased the saving rates of cohorts born after 1965, which in turn slowed the decline in Japan's household saving rate; and fourth, the 2004 public pension reform alleviated the intergenerational inequities of Japan's public pension system somewhat but will in the long run exacerbate the downward trend in Japan's household saving rate.
    JEL: D12 D91 E21 E24 H55 J11
    Date: 2007–07
  10. By: Tatom, John
    Abstract: This paper looks at interest rate developments in the US and argues that long-term real interest rates are at lows not seen in the past 50 years. It explores competing hypotheses that there is a global saving glut, there is conundrum or that global capital formation has slowed. The dominant view is a glut of saving, especially in China and Asia, that is depressing global real interest rates and boosting growth. While private sector capital formation remains at historic strong levels in the US, the same is not the case abroad. Unfortunately strong saving in China had not resulted in a boom in saving in Asia or globally. A decline in global capital formation is the proximate cause of depressed real interest rates. This is not a cyclical problem that is likely to go away with a rebound in economic activity in Asia or Europe. The implications for economic growth are dismal, despite notable exceptions in China and the US.
    Keywords: interest rates; capital formation; saving
    JEL: G15 F4 E21
    Date: 2007–04–18
  11. By: J. Stephen Ferris (Department of Economics, Carleton University)
    Abstract: In this paper I apply the work of Abrams and Iossifov (2006) to monetary policy in canada to see if same political party affiliation is needed to produce evidence of political opportunism. After modifying their anaylsis to maintain consistency in the time series dimensions of their variables for Canada, I find both an error correction model and a Taylor rule of reformulation of their test generate evidence consistent with same party political opportunism, but only weakly so. On the other hand, I find also that more traditional indicators of political influence present even more convincing evidence of political dependence. In particular, the data suggest that the election of a Liberal party government, a decrease in the degree of political competition, and to a lesser extent, the election of a minority government all positively influence the expansiveness of Canadian monetary policy. In combination, these findings are consistent with the hypothesis that the Bank of Canada is less rather than more independent that is the Fed.
    JEL: E52 E58
    Date: 2007–04–29
  12. By: Castro, Vítor (University of Warwick, University of Coimbra and NIPE)
    Abstract: Several studies have identified the factors that cause public deficits in industrial democracies. They consider that economic, political and institutional factors play an important role in the understanding of those deficits. However, the study of the determinants of excessive deficits remains practically unexplored. Since excessive deficits can have large negative spillover effects when countries are forming a monetary union without a centralised budget – as it is the case for a group of European countries – this paper tries to explore that gap in the literature by identifying the main causes of excessive deficits and the ways of avoiding them. Binary choice models are estimated over a panel of 15 European Union countries for the period 1970-2006, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results show that a weak fiscal stance, low economic growth, the timing of parliamentary elections and majority left-wing governments are the main causes of excessive deficits in the EU countries. Moreover, the institutional constraints imposed after Maastricht over the EU countries’ fiscal policy have succeeded in reducing the probability of excessive deficits in Europe, especially in small countries. Therefore, this study concludes that supranational fiscal constraints, national efforts to reduce public debts, growth promoting policies and mechanisms to avoid political opportunism and partisan effects are essential factors for an EU country to avoid excessive deficits. Finally, the results presented in this paper raise the idea that a good strategy for the EU countries to avoid excessive deficits caused by the opportunistic behaviour of their policymakers would be to schedule elections for the beginning or the end of the year.
    Keywords: Excessive public deficits ; European Union ; Political opportunism ; Binary choice models
    JEL: E62 H6 O52
    Date: 2007
  13. By: Tatom, John; Ott, Mack
    Abstract: Requiring taxes to be paid in domestic money provides a legal tender basis for money demand and hence to the development of a financial system. In emerging markets, the level of taxation is a positive factor boosting financial development. At higher tax rates, however, taxation provides an incentive to reduce money demand and reduces the size of the financial sector. There is also evidence of re-switching in high-tax developed countries, where financial deepening increases with the tax rate. Such financial deepening represents a form of capital market repression, not unlike the growth-depressing effects of financial repression in many poor countries.
    Keywords: Taxation; financial development; money demand; money multiplier; emerging markets
    JEL: H2 O16 E62
    Date: 2006–10–10
  14. By: Husain, Fazal
    Abstract: This paper re-examines the causal relationship between stock prices and the variables representing the real sector of the Pakistani economy.Using annual data from 1959/60 to 2004/05, examining the stochastic properties of the variables used in the analysis, and taking care of the shifts in the series due to the start of the economic liberalization program in the early 1990s, the paper investigates the causal relations between stock prices and variables like real Gross Domestic Product (GDP), real consumption expenditure, and real investment spending. The analysis indicates the presence of a long run relationship between stock prices and the real sector variables. Regarding the cause and effect relationship, the analysis indicates a one-way causation from the real sector to stock prices implying that the stock market in Pakistan is still not that developed to influence the real sector of the economy. Hence the market cannot be characterized as the leading indicator of the economic activity in Pakistan
    Keywords: Stock Prices; Causal Relations; Real Sector; Economic Activity; Pakistan
    JEL: G1 E44
    Date: 2006
  15. By: Sfia, Mohamed Daly
    Abstract: Nous cherchons dans le sillage de travaux tels que Agénor (2004) ou Duttagupta et al (2004) à identifier les principales conditions que doit remplir au préalable une économie avant l’adoption d’un régime de flottement pur du taux de change. Ces dernières englobent le développement du marché des changes, la mise en place d’une nouvelle stratégie de politique monétaire et d’une ancre nominale crédible et le développement du système financier.
    Keywords: régimes de change; marché des changes; stratégie de politique monétaire; système financier
    JEL: E58 E52 E51 F33 F3 F31
    Date: 2007–07
  16. By: J L Ford; Bagus Santoso; N J Horsewood
    Abstract: This paper examines the extent to which the Asian currency crises can be accounted for by the macroeconomic fundamentals suggested by first and second generation models, exclusive of the ideas of the third generation models. In doing so we extend the literature on the earlier models by using GARCH and Path Independent Markov-Switching GARCH models to explain the market pressure on the exchange rate, and the probability of the timing of a crisis. In addition, we account for appreciations of the exchange rate. Our empirical estimates for Indonesia, South Korea, Malaysia and Thailand confirm that macroeconomic variables can explain the crises and the probability of occurrence at any time, dominating the conventionally used logit model.
    Keywords: Currency crisis, macroeconomic fundamentals, Markov-switching, volatile sate, stable state, probability of a crisis, logit model
    JEL: F31 F40
    Date: 2007–07
  17. By: Adebiyi, Michael Adebayo
    Abstract: The paper investigates the impact of foreign exchange intervention in the Nigerian foreign exchange market using an Autoregressive Distributed Lag (ARDL) modeling approach. Quarterly time series data spanning 1986:1 to 2003:4 are used and a number of statistical tools are employed to verify this hypothesis. The study examines stochastic characteristics of each time series by testing their stationarity using Phillip Perron (PP) test. This is followed by performing cointegration test using Johansen technique. The existence of co-integration motivates us to estimate the error correction model for broad money, M2. The overall finding from all the techniques employed is that foreign exchange intervention in Nigeria is sterilized because the cumulative aid, which constitute part of foreign exchange inflows, and net foreign assets variables, which are proxies for intervention, are not significant. Thus, paper concludes by recommending, among others, that the use of stock of external reserves to support the exchange rate through increased funding of the foreign exchange market should be encouraged.
    Keywords: Nigeria; Foreign Exchange Intervention; Co-integration and Auto-regressive Distributed Lag
    JEL: E52 E5
    Date: 2007–07–04
  18. By: Tatom, John
    Abstract: A popular and highly politicized theme today is that US workers are falling behind as their real wages fall and income gets redistributed to the rich. This article looks at some reasons that income inequality could rise, and then explores whether, in fact, workers are losing out. It looks at the suggestion that workers are falling behind relative to the wealthy, and at evidence on whether workers real wages have been falling, or perhaps only manufacturing wages. It also examines whether there is a growing “wealth gap” and whether it is due to falling labor compensation relative to wealth. Finally it examines the hypothesis that relatively inexperienced or unskilled workers are falling behind by fixing a skill level and seeing how real wages are changing over the recent past. The evidence here provides a perspective on why some analysts might believe that there is rising inequality or an emerging wealth gap, or that workers are falling behind, but generally it is not favorable to these pessimistic views of how well workers are doing. While inequality may have risen in recent decades, and there are strong reasons to think that the evidence for this is weak, there is also a strong reason to think that it would be a normal function of an aging population and nothing more. Short of population control or unexplainable and unfair redistribution from the old to the young, there may be nothing that can or should be done to reverse the rise in inequality. Finally the paper argues that there is a wealth gap, but it is due to falling real interest rates and a decline and not due to declining compensation, either absolutely or relative to overall income.
    Keywords: inequality; wealth gap; wages
    JEL: E25 J3 J11
    Date: 2007–02–22
  19. By: Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo
    Abstract: High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this 'forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.
    JEL: E30 F31
    Date: 2007–07
  20. By: Carlos Enrique Carrasco Gutiérrez; Reinaldo Castro Souza; Osmani Teixeira de Carvalho Guillén
    Abstract: An important aspect of empirical research based on the vector autoregressive (VAR) model is the choice of the lag order, since all inference in the VAR model depends on the correct model specification. Literature has shown important studies of how to select the lag order of a nonstationary VAR model subject to cointegration restrictions. In this work, we consider an additional weak form (WF) restriction of common cyclical features in the model in order to analyze the appropriate way to select the correct lag order. Two methodologies have been used: the traditional information criteria (AIC, HQ and SC) and an alternative criterion (IC(p,s)) which select simultaneously the lag order p and the rank structure s due to the WF restriction. A Monte-Carlo simulation is used in the analysis. The results indicate that the cost of ignoring additional WF restrictions in vector autoregressive modeling can be high, especially when SC criterion is used.
    Date: 2007–06

This nep-mac issue is ©2007 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.