nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒08‒08
98 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. Monetary policy, output composition and the Great Moderation By Benoît Mojon
  3. The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example By Lars E.O. Svensson
  4. Monetary regime change and business cycles By Vasco Cúrdia; Daria Finocchiaro
  5. Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States By Morten O. Ravn; Saverio Simonelli
  6. Monetary policy and economic performance of West African Monetary Zone Countries By Balogun, Emmanuel Dele
  7. The interaction between the central bank and a monopoly union revisited: does greater uncertainty about monetary policy reduce average inflation? By Luigi Bonatti
  8. Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model By Costas Milas
  9. Investment and Monetary Policy: Learning and Determinacy of Equilibrium By John Duffy; Wei Xiao
  10. Dynamics and monetary policy in a fair wage model of the business cycle By David de la Croix; Gregory de Walque; Rafael Wouters
  11. Monetary Policy and Swedish Unemployment Fluctuations By Annika Alexius; Bertil Holmlund
  12. Shocks, structures or monetary policies? The euro area and US after 2001 By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  13. Monetary accommodation and unemployment: Why central bank transparency matters. By Eleftherios Spyromitros; Blandine Zimmer
  14. Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policy-making under Uncertainty By Ippei Fujiwara; Naoko Hara; Naohisa Hirakata; Takeshi Kimura; Shinichiro Watanabe
  15. A Monetary Union Model with Cash-in-Advance Constraints By Cengiz, Gulfer; Cicek, Deniz; Kuzubas, Tolga Umut; Olcay, Nadide Banu; Saglam, Ismail
  16. Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic By Ian Babetskii; Fabrizio Coricelli; Roman Horváth
  17. Sticky wages and rule of thumb consumers. By Andrea Colciago
  18. Optimal Policy Under Model Uncertainty: A Structural-Bayesian Estimation Approach By Alexander Kriwoluzky; Christian Stoltenberg
  19. On-the-job search and the cyclical dynamics of the labor market By Michael U. Krause; Thomas A. Lubik
  20. Rules versus discretion in fiscal policy By C. Bianchi; M. Menegatti
  21. An overhaul of doctrine: the underpinning of U.K. inflation targeting By Edward Nelson
  22. The dynamic behaviour of budget components and output By Antonio Afonso; Peter Claeys
  23. Understanding the dynamics of labor shares and inflation By Martina Lawless; Karl Whelan
  24. Aggregating Phillips curves By Jean Imbs; Eric Jondeau; Florian Pelgrin
  25. Resurrecting Equilibria Through Cycles By Barnett, Richard; Bhattacharya, Joydeep; Bunzel, Helle
  26. Asymmetric Expectation Effects of Regime Shifts and the Great Moderation By Zheng Liu; Daniel F. Waggoner; Tao Zha
  27. Monetary Policy and Japan’s Liquidity Trap By Lars E.O. Svensson
  28. Dynamic Modelling of the Demand for Money in Latvia By Boriss Siliverstovs
  29. Asymmetric expectation effects of regime shifts and the Great Moderation By Zheng Liu; Daniel F. Waggoner; Tao Zha
  30. Two-Country New Keynesian DSGE Model: A Small Open Economy as a Limit Case By Marcos Antonio C. da Silveira
  31. Monetary Policy By Alfredo Saad Filho
  32. Woodford and Wicksell: a Cashless Economy or a Moneyless Economy Framework ? By Nicolas Barbaroux
  33. Switzerland and Euroland: European Monetary Union, Monetary Stability and Financial Stability By Martin Hellwig
  34. Endogenous Retirement and Monetary Cycles By Hippolyte d'Albis; Emmanuelle AUGERAUD-VERON
  35. Japanese quantitative easing: The effects and constraints of anti-deflationary monetary expansions By Zammit, Robert
  36. Double Conditioned Potential Output By Dobrescu, Emilian
  37. Heterogeneity in Real Wage Cyclicality By Pedro S. Martins
  38. Phillips Curve instability and optimal monetary policy By Troy Davig
  39. Measuring Monetary Policy Stance in Brazil By Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça
  40. Fiscal sustainability across government tiers: an assessment of soft budget constraints. By Peter Claeys; Raúl Ramos; Jordi Suriñach
  41. Macro Factors and the Brazilian Yield Curve with no Arbitrage Models By Marcos S Matsumura; Ajax R. B. Moreira
  42. The Indian View of Economic Development: Resilience and the Quest for Growth By Raghbendra Jha
  43. Inflation, Investment Composition and Total Factor Productivity By Stefan Niemann; Michael Evers; Marc Schiffbauer
  44. Downward nominal wage rigidity in the OECD By Steinar Holden; Fredrik Wulfsberg
  45. Liquidity Shortages and Monetary Policy By Illing, Gerhard; Cao, Jin
  46. Globalisation and Technology Intensity as Determinants of Exports By James Mitchell
  47. Real Convergence, Price Level Convergence and Inflation Differentials in Europe By Balázs Égert
  48. Employment protection legislation and wages By Marco Leonardi; Giovanni Pica
  49. "Habit Formation and the Present-Value Model of the Current Account: Yet Another Suspect" By Takashi Kano
  50. Fiscal Responsibility Framework: International Experience and Implications for Hungary By George Kopits
  51. Saving and Demographic Change: The Global Dimension By Barry Bosworth; Gabriel Chodorow-Reich; ;
  52. SAFFIER A multi-purpose model of the Dutch economy for short-term and medium-term analyses By Henk Kranendonk; Johan Verbruggen
  53. The long-run determinants of U.S. external imbalances By Andrea Ferrero
  54. The Effect of Monetary Policy on Exchange Rates during Currency Crises; The Role of Debt, Institutions and Financial Openness By Eijffinger, S.C.W.; Goderis, B.
  55. Correcting US Imbalances By Ray Barrell; Dawn Holland; Ian Hurst
  56. Macroeconomics and Growth Policies By Jayati Ghosh
  57. Structural Policies and Economic Resilience to Shocks By Romain Duval; Jørgen Elmeskov; Lukas Vogel
  58. La incidencia económica de las cotizaciones sociales en España By Ángel Melguizo Esteso
  59. Insights gained from conversations with labor market decision makers By Truman F. Bewley
  60. Why Are Married Men Working So Much? The Macroeconomics of Bargaining Between Spouses By John Knowles
  61. Fiscal Federalism in the European Union: How Far Are We? By Rui Henrique Alves; Óscar Afonso
  62. Interpreting Life-Cycle Inequality Patterns asan Efficient Allocation: Mission Impossible? By Mark Huggett; Alejandro Badel
  63. Public expenditure and growth volatility: do "globalisation" and institutions matter? By Fabrizio Carmignani; Emilio Colombo; Patrizio Tirelli
  64. Coordination Cycles By Jakub Steiner
  65. Measuring the Impact of Price Changes on Poverty By Hyun H. Son; Nanak Kakwani
  66. Demographic Influences on Saving-Investment Balances in Developing and Developed Economies By Ralph C. Bryant; ; ;
  67. Domestic Saving and Investment Revised: Can the Feldstein-Horioka Equation be Used for Policy Analysis? By Adolfo Sachsida; Mário Jorge Cardoso de Mendonça
  68. The buffer stock model redux? An analysis of the dynamics of foreign reserve accumulation By Giulio Cifarelli; Giovanna Paladino
  69. On the cyclicality of R&D: disaggregated evidence By Min Ouyang
  70. Closer Trade and Financial Cooperation in ASEAN: Issues at the Regional and National Level with Focus on the Philippines By Balboa, Jenny D.; Yap, Josef T.; Medalla, Erlinda
  71. How strong is the case for downward real wage rigidity? By Steinar Holden; Fredrik Wulfsberg
  72. Macroeconomics and Growth Policies By Shari Spiegel
  73. Money and bonds: an equivalence theorem By Narayana R. Kocherlakota
  74. Modeling the impact of external factors on the euro area’s HICP and real economy - a focus on pass-through and the trade balance By Luigi Landolfo
  75. Exchange rate volatility and growth in small open economies at the EMU periphery By Gunther Schnabl
  76. Real GDP and the Purchasing Power of Provincial Output By Macdonald, Ryan
  77. Extracting business cycle fluctuations: what do time series filters really do? By Arturo Estrella
  78. Understanding the New Zealand current account: A structural approach By Anella Munro; Rishab Sethi
  79. Fiscal Policy By John Weeks; Shruti Patel
  80. Credit constraints and housing markets in New Zealand By Andrew Coleman
  81. Finance and growth - a macroeconomic assessment of the evidence from a European angle By Elias Papaioannou
  82. Measurement and Inference in International Reserve Diversification By Anna Wong
  83. The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations By François Coppens; Fernando González; Gerhard Winkler
  84. The use of portfolio credit risk models in Central Banks. By Ulrich Bindseil; Han van der Hoorn; Ken Nyholm; Henrik Schwartzlose; Pierre Ledoyen; Wolfgang Föttinger; Fernando Monar; Bérénice Boux; Gigliola Chiappa; Noëlle Honings; Ricardo Amado; Kai Sotamaa; Dan Rosen
  85. "Did the Credit Crunch in Japan Affect Household Welfare? An Augmented Euler Equation Approach Using Type 5 Tobit Model" By Yasuyuki Sawada; Kazumitsu Nawata; Masako Ii; Jeong-Joon Lee
  86. Federal Home Loan Bank advances and commercial bank portfolio composition By W. Scott Frame; Diana Hancock; Wayne Passmore
  87. Business services and the changing structure of European economic growth By Henk Kox; Luis Rubalcaba
  88. The CIS – does the regional hegemon facilitate monetary integration? By Mayes, David G; Korhonen, Vesa
  89. Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI asset quality By Gonzalez, Adrian
  90. Human Capital, Mortality and Fertility: A Unified Theory of the Economic and Demographic Transition By Matteo Cervellati; Uwe Sunde
  91. With Good Reputation Size Does not Matter: Issue Frequency and the Determinants of Debt Maturity By Rokkanen, Nikolas
  92. Analysis of Financial Stability By Charles Goodhart; Dimitrios Tsomocos
  93. Precautionary Savings by Natives and Immigrants in Germany By Matloob Piracha; Yu Zhu
  94. Complete Monotonicity of the Representative Consumer's Discount Factor By Chiaki Hara
  95. Housing Supply and Land Use Regulation in the Netherlands By Wouter Vermeulen; Jan Rouwendal
  96. Getting to know China By Tatom, John
  97. EU enlargement and migration: Assessing the macroeconomic impacts By Ray Barrell; Rebecca Riley; Fitzgerald, J.
  98. Funds of funds portfolio composition and its impact on the performance: evidence from the Italian market By Carretta, Alessandro; Mattarocci, Gianluca

  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, University of Kiel, CEPR and IZA)
    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: Benoît Mojon
    Abstract: This paper shows how US monetary policy contributed to the drop in the volatility of US output fluctuations and to the decoupling of household investment from the business cycle. I estimate a model of household investment, an aggregate of non durable consumption and corporate sector investment, inflation and a short-term interest rate. Subsets of the models' parameters can vary along independent Markov Switching processes. ; A specific form of switches in the monetary policy regimes, i.e. changes in the size of monetary policy shocks, affect both the correlation between output components and their volatility. A regime of high volatility in monetary policy shocks, that spanned from 1970 to 1975 and from 1979 to 1984 is characterized by large monetary policy shocks contributions to GDP components and by a high correlation of household investment to the business cycle. This contrasts with the 1960's, the 1976 to 1979 period and the post 1984 era where monetary policy shocks have little impact on the fluctuations of real output.
    Keywords: Monetary policy ; Business cycles
    Date: 2007
  3. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: The introduction of inflation targeting has led to major progress in practical monetary policy. Recent debate has focused on the interest-rate assumption underlying published projections of inflation and other target variables. This paper discusses the role of alternative interest-rate paths in the monetary-policy decision process and the recent publication by Norges Bank (the central bank of Norway) of optimal interest-rate projections with fan charts.
    Keywords: Forecasts, flexible inflation targeting, optimal monetary policy.
    JEL: E42 E52 E58
    Date: 2006–05
  4. By: Vasco Cúrdia; Daria Finocchiaro
    Abstract: This paper analyzes how changes in monetary policy regimes influence the business cycle in a small open economy. We estimate a dynamic stochastic general equilibrium (DSGE) model on Swedish data, explicitly taking into account the 1993 monetary regime change, from exchange rate targeting to inflation targeting. The results confirm that monetary policy reacted primarily to exchange rate movements in the target zone and to inflation in the inflation-targeting regime. Devaluation expectations were the principal source of volatility in the target zone period. In the inflation-targeting period, labor supply and preference shocks have become relatively more important.
    Keywords: Business cycles ; Monetary policy ; Foreign exchange rates ; Inflation (Finance) ; Equilibrium (Economics) ; Stochastic analysis ; Econometric models
    Date: 2007
  5. By: Morten O. Ravn (EUI and CEPR); Saverio Simonelli (Università di Napoli Federico II, EUI and CSEF)
    Abstract: We use a 12-dimensional VAR to examine the dynamic e®ects on the labor market of four structural technology and policy shocks. For each shock, we examine the dynamic effects on the labor market, the importance of the shock for labor market volatility, and the comovement between labor market variables and other key aggregate variables in response to the shock. We document that labor market indicators display ”hump-shaped” responses to the identified shocks. Technology shocks and monetary policy shocks are important for labor market volatility but the ranking of their importance is sensitive to the VAR specification. The conditional correlations at business cycle frequencies are similar in response to the four shocks apart from the correlations between hours worked, labor productivity and real wages. To account for the unconditional correlations between these variables, a mixture of shocks are required.
    Keywords: Structural VAR, labor market dynamics, the Beveridge curve
    JEL: C32 E24 E32 E52 E62
    Date: 2007–07–01
  6. By: Balogun, Emmanuel Dele
    Abstract: This study examined the monetary and macroeconomic stability perspective for entering into monetary union, using data available on WAMZ countries. It tests the hypothesis that independent monetary and exchange rate policies have been relatively ineffective in influencing domestic activities (especially GDP and inflation), and that when they do, they are counter productive. Usiing econometric methods, regression result show that, erstwhile domestic monetary policy, as captured by money supply and credit to government hurt real domestic output of these countries. Indeed, rather than promote growth, it was a source of stagnation. It also confirms that there appear to be a two quarters lag in monetary policy transmission effect with regard to real sector output. The results also show that although expansion in domestic output dampened aggregate consumer prices (inflation), it was however, not adequate enough to dampen the fuelling effects of past inflation. This was accentuated by money supply variable (MS2) and aggravated by exchange rate variable which are mostly positive, confirming the a priori expectations that rapid monetary expansion and devaluations fuels domestic inflation. A country by country comparison of the single and simultaneous equations model results show that expansionary monetary policy contributed more to fuelling prices than it did to growth. It also shows that interest rates policy had adverse effects on GDP by exhibiting a positive sign contrary to the theoretical expectation of an inverse relationship. The results also show that exchange rate devaluations manifest mainly in domestic inflation and have no effect at all on the growth variable, in the short term. The study concludes that these countries would be better-off to surrender its independence over these policy instruments to the planned regional body under appropriate monetary union arrangements.
    Keywords: International Monetary Economics; Econometric studies
    JEL: E5 F42
    Date: 2007–07–31
  7. By: Luigi Bonatti
    Abstract: Previous papers modeling the interaction between the central bank and a monopoly union demonstrated that greater monetary policy uncertainty induces the union to reduce nominal wages. This paper shows that this result does not hold in general, since it depends on peculiar specifications of the union’s objective function. In particular, I show that greater monetary policy uncertainty raises the nominal wage whenever union members tend to be more sensitive to the risk of getting low real wages than to the risk of remaining unemployed. This conclusion appears consistent with the evidence showing that greater monetary authority’s transparency reduces average inflation.
    Keywords: Monetary game, transparency in policymaking.
    JEL: E31 E58 J51
    Date: 2007
  8. By: Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: March 2007 saw an increase of 3.1 percent in the Consumer Price Index (CPI) annual inflation rate and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i)~the relationship between inflation and M4 growth is not stable over time, and (ii)~the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 10\%. Above this threshold, a 1 percentage point increase in the annual growth rate of M4 increases annual inflation by only 0.09 percentage points, whereas a 1 percentage point increase in the disequilibrium between money and its long-run determinants increases annual inflation by only 0.07 percentage points. Since the money effects are very small, the implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates.
    Keywords: M4, Money growth, Regime-switching models, UK inflation
    JEL: C51 C52 E52 E58
    Date: 2007–06
  9. By: John Duffy; Wei Xiao
    Abstract: We examine determinancy and expectational stability (learnability) of rational expectations equilibrium (REE) in sticky price `New Keynesian` (NK) models of the monetary transmission mechanism. We consider three different New Keynesian models: a labor-only model and two models that add capital -- one where capital is allocated in an economy-wide rental market and another that supposes that the demand for capital is firm-specific. We find that Bullard and Mitra`s (2002, 2006) findings on determinacy and learnability of REE under various interest rate rules in the labor-only NK model do not always extend to models with capital. In particular, the Taylor principle, that the response of interest rates should be more than proportionate to changes in inflation, will not generally suffice to guarantee determinate and/or learnable equilibria in NK models with capital.
    JEL: D83 E43 E52
    Date: 2007–07
  10. By: David de la Croix (Department of Economics, Université catholique de Louvain, 1, Place de l’Université, B-1348 Louvain-la-Neuve, Belgium.); Gregory de Walque (Department of Economics, University of Namur and National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.); Rafael Wouters (Department of Economics, Université catholique de Louvain and National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.)
    Abstract: We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm’s productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affect nominal interest rates and inflation outcomes. JEL Classification: E4, E5.
    Keywords: Efficiency wage, effort, inflation persistence, monetary policy.
    Date: 2007–07
  11. By: Annika Alexius (Uppsala University); Bertil Holmlund (Uppsala University and IZA)
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: unemployment, monetary policy, structural VAR
    JEL: J60 E24
    Date: 2007–07
  12. By: Lawrence Christiano (Northwestern University and National Bureau of Economic Research. Mailing address: Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
    Abstract: The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB’s policy rule - the ECB’s policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB’s quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility. JEL Classification: C51, E52, E58.
    Keywords: Policy activism, DSGEmodel, policy inertia, shocks.
    Date: 2007–07
  13. By: Eleftherios Spyromitros; Blandine Zimmer
    Abstract: Recent contributions have shown that in the presence of strategic interactions be- tween non atomistic unions and the central bank, an accommodating monetary policy rule may increase equilibrium unemployment. This note demonstrates that this result can be reversed considering the case where the central bank is not fully transparent concerning its reaction to wage decisions.
    Keywords: Monetary regime, Wage setting, Central bank transparency.
    JEL: E24 E5 J51
    Date: 2007
  14. By: Ippei Fujiwara; Naoko Hara; Naohisa Hirakata; Takeshi Kimura; Shinichiro Watanabe (Bank of Japan (Corresponding author, e-mail:
    Abstract: Focusing on policy-making under uncertainty, we analyze the Bank of Japanfs monetary policy in the early 1990s when the bubble economy collapsed. Conducting stochastic simulations with a large-scale macroeconomic model of the Japanese economy, we find that the BOJfs monetary policy at that time was essentially optimal under uncertainty about the policy multiplier. On the other hand, we also find that the BOJfs policy was not optimal under uncertainty about inflation dynamics, and that a more aggressive policy response than actually implemented would have been needed. Thus, optimal monetary policy differs greatly depending upon which type of uncertainty is emphasized. Taking into account the fact that overcoming deflation became an important issue from the latter 1990s, it is possible to argue that during the early 1990s the BOJ should have placed greater emphasis on uncertainty about inflation dynamics and implemented a more aggressive monetary policy. The result from a counter-factual simulation indicates that the inflation rate and the real growth rate would have been higher to some extent if the BOJ had implemented a more accommodative policy during the early 1990s. However, the simulation result also suggests that the effects would have been limited, and that an accommodative monetary policy itself would not have changed the overall image of the prolonged stagnation of the Japanese economy during the 1990s.
    Keywords: Collapse of the Bubble Economy, Monetary Policy, Uncertainty
    JEL: E17 E52
    Date: 2007–07
  15. By: Cengiz, Gulfer; Cicek, Deniz; Kuzubas, Tolga Umut; Olcay, Nadide Banu; Saglam, Ismail
    Abstract: We characterize the monetary competitive equilibrium in a two-country monetary union model involving cash-in-advance constraints both in the factor markets and in the good markets. Simulations show that common money inflation in the union have asymmetric effects on the welfare of workers in the two countries which are technologically differentiated. We also find that the distribution of the money stock within the union may affect labor flow across the countries.
    Keywords: Monetary union; cash-in-advance; monetary policy
    JEL: F22 E24
    Date: 2007–07
  16. By: Ian Babetskii (Czech National Bank; CERGE-EI); Fabrizio Coricelli (European Bank for Reconstruction and Development; CEPR); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Keywords: inflation dynamics, persistence, inflation targeting
    JEL: D40 E31
    Date: 2007–08
  17. By: Andrea Colciago (Department of Economics, University of Milan-Bicocca)
    Abstract: I introduce sticky wages in the model with credit constrained or “rule of thumb” consumers advanced by Galì, Valles and Lopez Salido (2005). I show that wage stickiness i) restores, in contrast with the results in Bilbiie (2005), the Taylor Principle as a necessary condition for equilibrium determinacy; ii) implies that a a rise in consumption in response to an unexpected rise in government spending is not a robust feature of the model. In particular, consumption increses just when the elasticity of marginal disutility of labor supply is low. Results are robust to most of Taylor-type monetary rules used in the literature, including one which responds to wage inflation.
    Keywords: Sticky Prices, Sticky Wages, Rule of Thumb Consumers
    JEL: E32 E62
    Date: 2006–09
  18. By: Alexander Kriwoluzky; Christian Stoltenberg
    Abstract: In this paper we propose a novel methodology to analyze optimal policies under model uncertainty in micro-founded macroeconomic models. As an application we assess the relevant sources of uncertainty for the optimal conduct of monetary policy within (parameter uncertainty) and across models (specification uncertainty) using EU 13 data. Parameter uncertainty matters only if the zero bound on interest rates is explicitly taken into account. In any case, optimal monetary policy is highly sensitive with respect to specification uncertainty implying substantial welfare gains of a robustly-optimal rule that incorporates this risk.
    Keywords: Optimal monetary policy, model uncertainty, Bayesian model estimation.
    JEL: E32 C51 E52
    Date: 2007–07
  19. By: Michael U. Krause (Economic Research Center, Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt, Germany.); Thomas A. Lubik (Federal Reserve Bank of Richmond, 701 East Byrd Street, Richmond, VA 23261, USA.)
    Abstract: We show how on-the-job search and the propagation of shocks to the economy are intricately linked. Rising search by employed workers in a boom amplifies the incentives of firms to post vacancies. In turn, more vacancies increases job search. By keeping job creation costs low for firms, on-the-job search greatly amplifies shocks. In our baseline calibration, this allows the model to generate fluctuations of unemployment, vacancies, and labor productivity whose magnitudes are close to the data, and leads output to be highly autocorrelated. JEL Classification: E24, E32, J64.
    Keywords: Search and matching, job-to-job mobility, worker flows Beveridge curve, business cycle, propagation.
    Date: 2007–07
  20. By: C. Bianchi; M. Menegatti
    Abstract: This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is not always superior to discretion, even in the absence of uncertainty, but only when the public debt-GDP ratio is sufficiently large. The introduction of uncertainty, as usual, implies a reduction in the net benefit generated by the adoption of a fixed rule.
    Keywords: rules, discretion, time inconsistency, fiscal policy
    JEL: E61 E62 H62 H63 H68
    Date: 2007
  21. By: Edward Nelson
    Abstract: This paper argues that the inflation targeting regime prevailing in the United Kingdom is not the result of a change in policymaker objectives. By conducting an analysis of U.K. policymakers that parallels Romer and Romer's (2004) study of Federal Reserve Chairmen, I demonstrate that policymaker objectives have been essentially unchanged over the past five decades. Instead, the crucial underpinning of U.K. inflation targeting has been an overhaul of doctrine-a changed view of the transmission mechanism. This overhaul can be understood in terms of changes in policymakers' views on the values of a few key parameters in their specifications of the economy's IS and Phillips curves. Specifically, the changed views pertain to the issues of whether interest rates enter the IS equation, and the extent of policymaker influence on those rates; whether the level of the output gap appears in the Phillips curve when the gap is negative; and whether a speed-limit term matters for inflation dynamics. Contrary to conventional wisdom, changing views on the expected-inflation term in the Phillips curve do not play a role.
    Keywords: Inflation (Finance) - Great Britain ; Monetary policy - Great Britain
    Date: 2007
  22. By: Antonio Afonso (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Peter Claeys (European University Institute, Via della Piazzuola, 43, I-50133 Firenze, Italy.)
    Abstract: The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability. JEL Classification: E62, E65, E66, H61, H62.
    Keywords: Fiscal indicator, structural balance, SGP, SVAR, short and long-term restrictions.
    Date: 2007–07
  23. By: Martina Lawless (Central Bank and Financial Services Authority of Ireland, PO Box 559/Dame Street, Dublin 2, Ireland.); Karl Whelan (Central Bank and Financial Services Authority of Ireland, PO Box 559/Dame Street, Dublin 2, Ireland.)
    Abstract: Calvo-style models of nominal rigidities currently provide the dominant paradigm for understanding the linkages between wage and price dynamics. Recent empirical implementations stress the idea that these models link inflation to the behavior of the labor share of income. Gali, Gertler, and Lopez-Salido (2001) argue that the model explains the combination of declining inflation and labor shares in Euro area. In this paper, we show that with realistic parameters, the canonical Calvo-style model cannot explain this outcome. In addition, we show that the model fails very badly in sectoral data. We examine the elements underlying the decline in the labor share in Europe, and conclude that the key factors are related to technological and labor market developments not accounted for in the standard New-Keynesian framework. JEL Classification: E31.
    Keywords: Labor Share, Phillips Curve, Sectoral Data.
    Date: 2007–07
  24. By: Jean Imbs (Corresponding author: Department of Economics, Institute of Banking and Finance - HEC Lausanne, CH-1015 Lausanne, Switzerland.); Eric Jondeau (Institute of Banking and Finance, Ecole des HEC - University of Lausanne, Extranef 232, CH-1015 Lausanne, Switzerland.); Florian Pelgrin (Enseignement et recherche – HEC, Quartier UNIL-Dorigny, Bâtiment Extranef 246, CH-1015 Lausanne, Switzerland.)
    Abstract: The New Keynesian Phillips Curve is at the center of two raging empirical debates. First, how can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behavior is relevant to both questions. We detail the conditions under which imposing homogeneity results in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias. JEL Classification: C10, C22, E31, E52.
    Keywords: New Keynesian Phillips Curve, Heterogeneity, Inflation Persistence, Marginal Costs.
    Date: 2007–07
  25. By: Barnett, Richard; Bhattacharya, Joydeep; Bunzel, Helle
    Abstract: In an overlapping generations model, momentary equilibria are defined as points that lie on the intergenerational offer curve, i.e., they satisfy agents' optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. The literature has always ruled out such paths. This paper studies a pure-exchange monetary overlapping generations economy in which real balances cycle forever between momentary equilibrium points. The novelty is to show that segments of the offer curve that have been previously ignored, can in fact be used to produce asymptotically valid cyclical paths. Indeed, a cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid.
    Keywords: overlapping generations models, monetary equilibria, cycles, minimum consumption requirements
    JEL: E4 D5 E3
    Date: 2007–07–26
  26. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a bad regime that accommodates inflation and a good regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the bad regime to the good regime.
    Date: 2007–07
  27. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level. Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates. Therefore, monetarypolicy alternatives in a liquidity trap should be assessed according to how effective they are likely to be in affecting private-sector expectations of the future price level. Expectations of a higher future price level would lead to current depreciation of the currency. Quantitative easing would induce expectations of a higher price level if it were expected to be permanent. The absence of a depreciation of the yen and other evidence indicates that the quantitative easing is not expected to be permanent. In an open economy, the Foolproof Way (consisting of a price-level target path, currency depreciation and commitment to a currency peg and a zero interest rate until the price-level target path has been reached) is likely to be the most effective policy to raise expectations of the future price level, stimulate the economy, and escape from a liquidity trap. It is the first-best policy to end stagnation and deflation in Japan. The Foolproof Way without the explicit exchange-rate policy, namely a price-level target path and a commitment to a zero interest rate until the price-level target path has been reached, would be a second-best policy. The current policy, a commitment to a zero interest rate until inflation has become nonnegative is at best a third-best policy, since it accommodates all deflation that has occurred before inflation turns nonnegative and therefore is not effective in inducing inflation expectations.
    Date: 2006–01
  28. By: Boriss Siliverstovs
    Abstract: This study develops a parsimonious stable coefficient money demand model for Latvia for the period from 1996 till 2005. A single cointegrating vector between the real money balances, the gross domestic product, the long-term interest rate, and the rate of inflation is found. Our study contributes to better understanding of the factors shaping the demand for money in the new Member States of the European Union that committed themselves to adopting of the Euro currency in the near future.
    Keywords: M2 money demand, stability, new EU member states, Latvia
    JEL: C32 E41
    Date: 2007
  29. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We assess the quantitative importance of the expectation effects of regime shifts in monetary policy in a DSGE model that allows the monetary policy rule to switch between a “bad” regime and a “good” regime. When agents take into account such regime shifts in forming expectations, the expectation effect is asymmetric across regimes. In the good regime, the expectation effect is small despite agents’ disbelief that the regime will last forever. In the bad regime, however, the expectation effect on equilibrium dynamics of inflation and output is quantitatively important, even if agents put a small probability that monetary policy will switch to the good regime. Although the expectation effect dampens aggregate fluctuations in the bad regime, a switch from the bad regime to the good regime can still substantially reduce the volatility of both inflation and output, provided that we allow some “reduced-form” parameters in the private sector to change with monetary policy regime. Much of the volatility reduction is attributed to a structural break in the persistence of equilibrium dynamics of macroeconomic variables.
    Date: 2007
  30. By: Marcos Antonio C. da Silveira
    Abstract: We build a two-country version of the model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain DSGE model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new Keynesian Phillips curve as a new pushing-cost variable feeding the inflation. Furthermore, home bias in households’ preferences allows for real exchange rate fluctuation, giving rise to alternative channels of monetary transmission. Unlike most part of the literature, the small domestic open economy is derived as a limit case of the two-coutry model, rather than assuming exogenous processes for the foreign variables. This procedure preserves the role played by foreign nominal frictions in the way as international monetary policy shocks are conveyed into the small domestic economy.
    Date: 2006–02
  31. By: Alfredo Saad Filho (Centre for Development Policy & Research School of Oriental & African Studies University of London)
    Abstract: .
    Keywords: Monetary Policy, Economic Policies, MDGs, Povery, Research, Programme
    Date: 2007–07
  32. By: Nicolas Barbaroux (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - [CNRS : FRE2938] - [Université Jean Monnet - Saint-Etienne])
    Abstract: Recently, one of the most fruitful debate in monetary macroececonomics that fascinates -and opposed- academics and policymakers has lied in the relevancy of money within the monetary policy analysis. Since the publication of King and Goodfriend 1997’s article that gave birth to a new current -the New Neoclassical Synthesis- money seems to be de-emphasized1. A new step has been reached in 2003 with Woodford’s monetary treatise that legitimates a Cashless framework. Woodford captures the "implied path of the money supply or the determinants of money demand" (Woodford, 2003, p.237) in the determination of the equilibrium of output and prices, without having to model the volume of money explicitly. Woodford gives his theory a Wicksellian flavour by comparing his cashless economy framework with Wicksell’s pure credit economy framework. Such a legacy gives the impression that Wicksell’s original writings downgraduated money for the conduct of monetary policy.
    Keywords: Monetary Policy ; De-emphasis of Money ;Monetarism.
    Date: 2007–07–13
  33. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This contribution to the Festschrift for the Centenary of the Swiss National Bank discusses the prospects for monetary stability and financial stability after the creation of the European Monetary Union. Topics covered include the robustness of institutional arrangements and their implications for monetary stability, the implications for a small, nonparticipating country, and the problem of financial stability in a setting in which banking supervision is national and the lender of the last resort is supranational.
    Keywords: European Monetary Union, European Central Bank, Monetary Stability, Banking Supervision, Financial Crisis Management
    JEL: E58 F41 G28
    Date: 2007–07
  34. By: Hippolyte d'Albis (LERNA, University of Toulouse); Emmanuelle AUGERAUD-VERON
    Date: 2007–07
  35. By: Zammit, Robert
    Abstract: An undergraduate dissertation in Monetary Economics. The aim of this dissertation is to empirically analyse the effects of the Bank of Japan’s anti-deflationary Quantitative Easing Policy carried out between March 2001 and April 2006. In doing so, this study also reviews the zero bound to interest rates, defined as the primary constraint to the effectiveness of conventional monetary policy at the interest rate floor. The results of the economic models contained in this study confirm the economic significance of a sustained increase in liquidity in fostering a return to inflationary pressures. Moreover, the findings of the study confirm that effective anti-deflationary policies may not necessarily entail extreme measures on the part of a central bank; on the other hand, credibility coupled with a resolved commitment may very well be enough to provide for positive macroeconomic repercussions.
    Keywords: Deflation; monetary policy at the zero-bound; quantitative easing
    JEL: E58
    Date: 2006–10
  36. By: Dobrescu, Emilian
    Abstract: The central argument of this paper is that both - internal and external - equilibria should be taken into account in the estimation of potential output. If only the data on inflation, unemployment rate, and wages are used for its evaluation, no certainty exists that such a level will correspond to a stable foreign trade balance. Our attempt is based on the following methodological assumption: - the potential output is concomitantly associated with a constant inflation and suistanable relative foreign trade balance (ratio of net export to gross domestic product); - all supply shocks affect this level, potential output being, therefore, a variable indicator; - consequently, the output gap reflects exclusively the demand pressure. The proposed computational algorithm is based on the use of orthogonal regression. It is exemplified on seasonally adjusted quarterly statistical series of variables charaterizing the Romanian transition economy; this application shows that the estimated output gap does contain significant regular and irregular cyclical components.
    Keywords: potential output, output gap, orthogonal regression, cycle
    JEL: C22 E23 E32
    Date: 2007–07
  37. By: Pedro S. Martins (Queen Mary, University of London, CEG-IST Lisbon and IZA)
    Abstract: This paper presents evidence that real wage cyclicality can be a particularly heterogeneous parameter, depending on different worker characteristics and also on the specific stage of the business cycle. Using matched employer-employee panel data for Portugal covering the period 1986-2004, real wages are shown to be considerably more procyclical during recessions than during expansions, resulting in relatively moderate overall levels of cyclicality (about -0.6). However, most of the procyclicality during downturns is shown to be driven by the younger employees, as older workers appear to be insulated from the business cycle. Moreover, movers between firms typically display higher cyclicality than workers that stay in the same firm, regardless of whether the latter move or not between job levels. Most results also hold when considering basic wages instead of total wages, except that the procyclicality of movers during downturns is substantially higher.
    Keywords: matched employer-employee data, worker mobility, wage rigidity
    JEL: J31 E24 E32
    Date: 2007–07
  38. By: Troy Davig
    Abstract: This paper assesses the implications for optimal discretionary monetary policy if the slope of the Phillips curve changes. The paper first derives a ‘switching’ Phillips curve from the optimal pricing decision of a monopolistic firm that faces a changing cost of price adjustment. Two states exists, a state with a high cost of price adjustment that generates a ‘flat’ Phillips curve and a low-cost state that generates a relatively ‘steep’ curve. The second aspect of the paper constructs a utility-based welfare criterion. A novel feature of this criterion is that it has a relative weight on output gap deviations that is state dependent, so it changes with the cost of price adjustment. Optimal monetary policy is computed subject to the switching-Phillips curve under both ad-hoc and utility-based welfare criteria. The utility-based criterion instructs monetary policy to disregard the slope of the Phillips curve and keep its systematic actions constant across different states. This stands in contrast to the prescription coming under the ad-hoc criterion, which advises monetary policy to change its systematic behavior according to the slope of the Phillips curve.
    Date: 2007
  39. By: Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça
    Abstract: In this article we use the theory of conditional forecasts to develop a new Monetary Conditions Index (MCI) for Brazil and compare it to the ones constructed using the methodologies suggested by Bernanke and Mihov (1998) and Batini and Turnbull (2002). We use Sims and Zha (1999) and Waggoner and Zha (1999) approaches to develop and compute Bayesian error bands for the MCIs. The new indicator we develop is called the Conditional Monetary Conditions Index (CMCI) and is constructed using, alternatively, Structural Vector Autoregressions (SVARs) and Forward-Looking (FL) models. The CMCI is the forecasted output gap, conditioned on observed values of the nominal interest rate (the Selic rate) and of the real exchange rate. We show that the CMCI, when compared to the MCI developed by Batini and Turnbull (2002), is a better measure of monetary policy stance because it takes into account the endogeneity of variables involved in the analysis. The CMCI and the Bernanke and Mihov MCI (BMCI), despite conceptual differences, show similarities in their chronology of the stance of monetary policy in Brazil. The CMCI is a smoother version of the BMCI, possibly because the impact of changes in the observed values of the Selic rate is partially compensated by changes in the value of the real exchange rate. The Brazilian monetary policy, in the 2000:9- 2005:4 period and according to the last two indicators, has been expansionary near election months.
    Date: 2005–10
  40. By: Peter Claeys (Faculty of Economics, University of Barcelona.); Raúl Ramos (Faculty of Economics, University of Barcelona.); Jordi Suriñach (Faculty of Economics, University of Barcelona.)
    Abstract: This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of adjustment, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances.
    Keywords: fiscal policy, fiscal rules, EMU, SGP, fiscal federalism
    JEL: E61 E62 H11 H72 H77
    Date: 2007–07
  41. By: Marcos S Matsumura; Ajax R. B. Moreira
    Abstract: We use no arbitrage models with macro variables to study the interaction between the macroeconomy and the yield curve. This interaction is a key element for monetary policy and for forecasting. The model was used to analyze the Brazilian domestic financial market using a daily dataset and two versions of the model, one in continuous-time and estimated by maximum likelihood, and the other in discretetime and estimated by Monte Carlo Markov Chain (MCMC). Our objective is threefold: 1) To analyze the determinants of the Brazilian domestic term structure considering nominal shocks; 2) To compare the results of the discrete and the continuous time versions considering adherence, forecasting performance and monetary policy analysis; and 3) To evaluate the effect of restrictions on the transition and pricing equations over the model properties. Our main results are: 1) results from continuous and discrete versions are qualitatively and in most cases quantitatively equivalent; 2) Monetary Authorities are conservative in Brazil, smoothing short rate fluctuations; 3) inflation shock, or slope shock, depending on the model selected, are the main sources of long run fluctuations of nominal variables; and finally, 4) no arbitrage models showed lower forecasting performance than an unrestricted factor model.
    Date: 2006–08
  42. By: Raghbendra Jha
    Keywords: India, Economic Growth, Resilience to Shocks
    JEL: B22 E21 E66 N15
    Date: 2007
  43. By: Stefan Niemann; Michael Evers; Marc Schiffbauer
    Abstract: This paper employs a dynamic stochastic general equilibrium model with a financial market friction to rationalize the empirically observed negative relationship between inflation and total factor productivity (TFP). Specifically, an empirical analysis of US macroeconomic time series establishes that there is a negative causal effect of inflation on aggregate productivity. Rather than taking the productivity process as exogenous, the model is therefore set up to feature an endogenous component of TFP. This is achieved by allowing physical investment to be channelled into two distinct technologies: a safe, but return-dominated technology and a superior technology which is subject to idiosyncratic liquidity risk. An agency problem prevents complete insurance against liquidity risk, and the scope for insurance is endogenously determined via the relevant liquidity premium. Since the liquidity premium is positively related to the rate of inflation, the model demonstrates how nominal fluctuations have an influence not only on the overall amount, but also on the qualitative composition of aggregate investment and hence on TFP. The quantitative relevance of the underlying transmission mechanism which links nominal fluctuations to TFP via corporate liquidity holdings and the composition of aggregate investment is corroborated by means of the quantitative analysis of the calibrated model economy as well as a detailed analysis of industry-level and firm-level panel data. Notably, the empirical findings are consistent with both the properties of the agency problem postulated in the theoretical model and its implications for corporate liquidity holdings and physical investment portfolios.
    Date: 2007–07–13
  44. By: Steinar Holden (University of Oslo, Norges Bank and CESifo, Department of Economics, University of Oslo, Box 1095 Blindern, 0317 Oslo, Norway.); Fredrik Wulfsberg (Norges Bank and Federal Reserve Bank of Boston, Box 1179 Sentrum, 0107 Oslo, Norway.)
    Abstract: Recent micro studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but the effect on aggregate variables remains disputed. Using data for hourly nominal wages, we explore the existence of DNWR on wages at the industry level in 19 OECD countries, over the period 1973–1999. Based on a novel method, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low, union density is high, and employment protection legislation is strict. JEL Classification: E3, J3, J5.
    Keywords: Downward nominal wage rigidity, oecd, employment protection legislation, wage setting.
    Date: 2007–07
  45. By: Illing, Gerhard; Cao, Jin
    Abstract: The paper models the interaction between risk taking in the financial sector and central bank policy. It shows that in the absence of central bank intervention, the incentive of financial intermediaries to free ride on liquidity in good states may result in excessively low liquidity in bad states. In the prevailing mixed-strategy equilibrium, depositors are worse off than if banks would coordinate on more liquid investment. It is shown that public provision of liquidity improves the allocation, even though it encourages more risk taking (less liquid investment) by private banks.
    Keywords: Liquidity Provision; Monetary Policy; Bank Runs
    JEL: E5 G21 G28
    Date: 2007–07
  46. By: James Mitchell
    Abstract: We seek to understand what can be inferred from the movement of and revisions to fixed-event density forecasts. This involves extending efficiency tests used to examine fixed-event forecasts from the point to density case. The extension requires the revision to a density forecast to be reduced to a revision to an event forecast; this is because revisions to the density forecasts themselves, as measured by the KLIC, need not be unpredictable even when the forecast is rational. We consider an application to inflation and output growth density forecasts from the Survey of Professional Forecasters. We find that while fixed-event density forecasts for inflation appear inefficient, there is greater evidence that those for GDP growth are efficient. We also extract information from the fixed-event density forecasts about the SPF's perceptions of the persistence of inflation and output growth. These perceptions are related to the decline in macroeconomic volatility observed in the United States.
    Date: 2007–05
  47. By: Balázs Égert (Oesterreichische Nationalbank, Foreign Research Division)
    Abstract: This paper provides a comprehensive review of the factors that can cause price levels to diverge and which are at the root of different inflation rates in Europe including the EU-27. Among others, we study the structural and cyclical factors influencing market and non-market-based service, house and goods prices, and we summarise some stylised facts emerging from descriptive statistics. Subsequently, we set out the possible mismatches between price level convergence and inflation rates. Having described in detail the underlying economic factors, we proceed to demonstrate the relative importance of these factors on observed inflation rates first in an accounting framework and then by relying on panel estimations. Our estimation results provide the obituary notice for the Balassa-Samuelson effect. Nevertheless, we show that other factors related to economic convergence may push up inflation rates in transition economies. Cyclical effects and regulated prices are found to be important drivers of inflation rates in an enlarged Europe. House prices matter to some extent in the euro area, whereas the exchange rate plays a prominent (but declining) role in transition economies.
    Keywords: price level, inflation, Balassa-Samuelson, tradables, house prices, regulated prices, Europe, transition
    JEL: E43 E50 E52 C22 G21 O52
    Date: 2007–05–07
  48. By: Marco Leonardi (University of Milan and IZA, via Festa del Perdono 7, 20122 Milan, Italy.); Giovanni Pica (University of Salerno and CSEF, via Ponte don Melillo, 84084 Fisciano, Italy.)
    Abstract: In a perfect labor market severance payments can have no real effects as they can be undone by a properly designed labor contract (Lazear 1990). We give empirical content to this proposition by estimating the effects of EPL on entry wages and on the tenure-wage profile in a quasi-experimental setting. We consider a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. Estimates which account for the endogeneity of the treatment status due to workers and firms sorting around the 15 employees threshold show no effect of the reform on entry wages and a decrease of the returns to tenure by around 20% in the first year and by 8% over the first two years. We interpret these findings as broadly consistent with Lazear’s (1990) prediction that firms make workers prepay the severance cost. JEL Classification: E24, J63, J65.
    Keywords: Costs of Unjust Dismissals, Severance Payments, Regression Discontinuity Design.
    Date: 2007–07
  49. By: Takashi Kano (Faculty of Economics, University of Tokyo)
    Abstract: A recent paper claims that habit formation in consumption plays an important role in current ac- count fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real busi- ness cycle (SOE-RBC) model endowed with consumption habits as well as world real interest rate shocks, this paper seeks effects of habit formation on current account fluctuations in a typical small open economy, Canada, by a Bayesian calibration approach. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations.
    Date: 2007–08
  50. By: George Kopits (Magyar Nemzeti Bank)
    Abstract: In an effort to correct worrisome trends in discretionary fiscal policy (deficit bias, procyclicality, and structural distortions), an increasing number of countries introduced a rules-based fiscal responsibility framework (FRF), characterized by fiscal policy rules, procedural rules, transparency standards, and a surveillance and enforcement mechanism. Preliminary evidence suggests that compliance with a well-designed FRF contributes to building policy credibility, to reducing risk premia, to boosting economic growth, and to lowering output volatility. Faced with large and persistent fiscal imbalances and a sharp buildup of public indebtedness, Hungary would benefit from exploring the adoption a FRF along the following lines. The FRF should encompass the entire public sector, fully accounting for contingent liabilities, and including prudent fiscal projections. Second, it is necessary to strengthen procedural rules, including implementation of the pay-go approach to budget legislation and preparat on of a rolling three-year budget program, setting annual limits on the nominal level of primary expenditures. Third, phasing in of a primary surplus rule, calibrated to the path of desired debt reduction, should be seriously considered. Fourth, a current balance rule should be adopted for local self-governments. Finally, compliance with the FRF would need to be monitored by an independent authority.
    Keywords: public finances, macroeconomics.
    JEL: E61 E62 H6
    Date: 2007
  51. By: Barry Bosworth; Gabriel Chodorow-Reich (Brookings Institution); ;
    Abstract: This paper uses a panel data set of 85 countries covering 1960-2005 to investigate the macroeconomic linkages between national rates of saving and investment and population aging. The issue takes on added significance because of the recent suggestion that the decline in global interest rates has been driven by demographic changes in the industrial economies. We do find a significant correlation between the age composition of the population and nations’ rates of saving and investment, but the effects vary substantially by region. They are very strong for the non-industrial economies of Asia, but weak in the high-income countries. We also find evidence of demographic effects on both the public and private components of national saving. Furthermore, we conclude that the demographic effects on saving will be less disruptive than sometimes believed because of offsetting declines in investment. However, the effects on saving are stronger than those for investment, implying that most aging economies will ultimately be pushed in the direction of current account deficits. In contrast to some of the recent discussion, we find that demographic change is already exerting a downward pressure on saving in the high-income economies and that the current evidence of a global saving glut is related more to the weakness of investment – particularly in Asia – and the high short-run saving of the oil-producing countries. We conclude with a discussion of why the effects appear to be so strong in Asia.
    Keywords: national saving rates, populating aging, global interest rates, investment, demographic change
    Date: 2007–02
  52. By: Henk Kranendonk; Johan Verbruggen
    Abstract: Since late 2004, CPB Netherlands Bureau for Economic Policy Analysis has been using the macro-econometric model SAFFIER for its short-term and medium-term analyses. This model resulted from the integration of the quarterly model SAFE and the yearly model JADE. SAFFIER is a multi-purpose model. The quarterly version of the model, used for short-term analyses, only differs from its yearly version, used for medium-term analyses, in the specification of the lag structures. All other (non-technical) specifications are identical in both versions of the model. Simultaneously with the integration of SAFE and JADE, some innovations with respect to the modelling of the wage rate, private consumption, exports, the public sector and the house-price development have been incorporated. In the wage equation, the elasticity of the replacement rate is no longer constant, but is depending on the actual labour-market situation.<br> This publication sketches the outlines of the SAFFIER model, focusing on the main innovations. In order to explain the working of the model, the results from a number of standard shocks are presented.
    Keywords: macro-econometric model; wage equation; simulations
    JEL: C30 C53 E17 E27
    Date: 2007–04
  53. By: Andrea Ferrero
    Abstract: This paper develops a tractable two-country model with life-cycle structure to investigate analytically and quantitatively three potential determinants of the U.S. external imbalances in the last three decades: productivity growth, demographic factors, and fiscal policy. The results suggest that (1) productivity growth differentials are the main driving force at high frequencies, (2) the different evolution of demographic factors across countries accounts for a large portion of the long-run trend, and (3) fiscal policy plays, at best, a minor role. The main prediction of the analysis is that among industrialized countries, capital should generally be expected to flow toward relatively young and rapidly growing economies. In addition, the paper shows that international demographic trends might be partly responsible for the recent declining pattern of the world real interest rate and therefore shed new light on the real side of the interest rate conundrum.
    Keywords: Capital movements ; Productivity ; Demography ; Fiscal policy ; Interest rates
    Date: 2007
  54. By: Eijffinger, S.C.W.; Goderis, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature.
    Keywords: Currency Crises;Institutions;Monetary Policy;Short-Term Debt;External Debt;Capital Account Openness;
    Date: 2007–03–22
  55. By: Ray Barrell; Dawn Holland; Ian Hurst
    Abstract: The US current account deficit is in excess of 6 per cent of GDP, and is leading to an accumulation of debts. We use NiGEM to evaluate the causes of the decline, and suggest that domestic absorption in the US has increased markedly. Nominal realignments and monetary expansions elsewhere are shown to be only short term palliatives. A sustained change in the current account must come either from a real realignment associated with a rise in risk premia on US assets or from a change in domestic absorption in the US and elsewhere. Any adjustment must be associated with a significant change in eth US real exchange rate to induce expenditure switching as well.
    Date: 2007–03
  56. By: Jayati Ghosh
    Abstract: This United Nations Background Note on Macroeconomics and Growth provides practical guidance on how to operationalize alternative equitable and employment-generating macroeconomic and growth policies in National Development Strategies. This Policy Note has been developed in cooperation with UN agencies, and has been officially reviewed by distinguished academics/ development specialists such as Jose Antonio Ocampo, Jomo K.S. and Nobel Laureate Joseph Stiglitz.
    Keywords: macroeconomics, growth, development planning
    JEL: O1 O2 E0 H0
    Date: 2007–07
  57. By: Romain Duval; Jørgen Elmeskov; Lukas Vogel
    Abstract: Cyclical fluctuations in economic activity have moderated over time but the extent and dynamics of volatility remain different across OECD countries. A reason behind this heterogeneity is that countries exhibit different degrees of resilience in the face of common shocks. This paper traces divergences in resilience back to different policy settings and institutions in labour, product and financial markets. Using pooled regression analysis across 20 OECD countries over the period 1982-2003, the paper identifies the impact of policy settings on two dimensions of resilience: the impact effect of a shock and its subsequent persistence. Policies and institutions associated with rigidities in labour and product markets are found to dampen the initial impact of shocks but to make their effects more persistent, while policies allowing for deep mortgage markets lower persistence and thereby improve resilience. Combining these two dimensions of resilience, the paper then uses the estimated equations to derive indicators of resilience for the OECD countries concerned, based on their current or recent policy settings. Three groups of countries emerge. In English-speaking countries, simulations suggest shocks have a significant initial effect on activity but this impact then dies out relatively quickly. By contrast, in many continental European countries the initial impact of shocks is cushioned but their effect linger for longer, with the cumulated output loss tending to be larger than in English-speaking countries. Finally a few, mostly small, European countries combine cushioning of the initial shock with a fairly quick return to baseline. <P>Politiques structurelles et résilience économique aux chocs <BR>Bien que les fluctuations cycliques de l'activité se soient atténuées au cours des années récentes, leur ampleur et leur évolution continuent de différer sensiblement entre pays de l'OCDE. L'une des explications à cette hétérogénéité est que les pays affichent différents degrés de résilience à des chocs communs. Cet article explore la contribution des politiques et des institutions sur les marchés financiers, du travail et des biens et services à ces écarts de résilience. À partir de régressions sur un panel de 20 pays de l'OCDE portant sur la période 1982-2003, l'article identifie l' impact des politiques sur deux dimensions de la résilience : l'effet d'un choc à l'impact et sa persistance ultérieure. Il ressort que les politiques et les institutions entraînant des rigidités sur les marchés du travail et des biens et services atténuent l'impact initial d'un choc mais rendent cet effet plus persistant, tandis que des politiques favorisant le développement des marchés hypothécaires réduisent la persistance et ainsi améliorent la résilience. Combinant ces deux dimensions de la résilience, l'article utilise ensuite les équations estimées pour construire des indicateurs de résilience pour chacun des pays de l'OCDE concernés, sur la base de leurs politiques et de leurs institutions actuelles ou récentes. Cette analyse fait ressortir trois groupes de pays. Dans les pays anglophones, les simulations suggèrent que les chocs ont un impact initial significatif, mais que celui-ci se dissipe assez rapidement. A contrario, dans de nombreux pays d'Europe Continentale, l'impact initial des chocs est atténué, mais leurs effets se font ressentir plus longtemps et la perte de production cumulée tend à être plus élevée que dans les pays anglophones. Enfin, quelques petits pays Européens combinent à la fois un impact modéré des chocs et un retour relativement rapide à l'équilibre.
    Keywords: institutions, institutions, resilience, résilience, cycles, écart d'activité, cycles, output gap
    JEL: E32
    Date: 2007–07–16
  58. By: Ángel Melguizo Esteso (Oficina Económica del Presidente del Gobierno)
    Abstract: ¿Quién soporta la carga fiscal asociada a las cotizaciones sociales, los trabajadores, los consumidores o las empresas? La elevada recaudación por cotizaciones sociales, su impacto en el mercado de trabajo y su papel central en la financiación del Estado del Bienestar justifican su relevancia. Para ello, se estima una ley de Okun de la economía española, en el período 1964- 2001, contrastándose la aportación de las principales instituciones del mercado de trabajo, en especial, de los diferentes componentes de la cuña fiscal. En segundo lugar, se estima un sistema de dos ecuaciones, precios y costes laborales unitarios nominales de los asalariados privados, donde se contrasta la significatividad de las cotizaciones sociales. En el largo plazo, se rechaza que los trabajadores o los consumidores hayan soportado la fiscalidad directa por medio de menores salarios o de mayores precios. Por tanto, habrían sido las empresas quienes soportaron íntegramente la fiscalidad laboral, y, dentro de ella, las cotizaciones sociales empresariales.
    Keywords: Cotizaciones sociales, incidencia económica, mercado de trabajo, España.
    JEL: E24 H22 H55 J32
    Date: 2007–07
  59. By: Truman F. Bewley (Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281, USA.)
    Abstract: I describe insights into wage dynamics and downward wage rigidity obtained from more than two hundred interviews with businesspeople, labor leaders, and various labor market intermediaries and made in the early 1990s in the Northeast of the United States. I explain the morale explanation for downward rigidity of the pay of existing employees and discuss what morale is, why businesspeople care about it, and why pay cuts damage it. I discuss the origin and nature of pay structures internal to an establishment, the relation between pay at different establishments, and why firms tend to lay off workers rather than cut pay. The findings of the study to be discussed are reported in detail in Truman Bewley, Why Wages Don’t Fall during a Recession. Cambridge, MA - Harvard University Press (1999). JEL Classification: E24, J31, J41.
    Keywords: Wage rigidity, wage determination.
    Date: 2007–07
  60. By: John Knowles (University of Pennsylvania and IZA)
    Abstract: The rise in per-capita labor over the last 30 years is difficult to explain in a standard macroeconomic model because rising wages of women should have lead to a large rise in husband’s leisure. This paper argues that home production and bargaining are both essential for understanding these trends, and develops an equilibrium model of marriage and bargaining. Calibration to US data suggests that the bargaining position of husbands has deteriorated with the closing of the gender gap in wages, that the decline of home-equipment prices plays a role in the rise in per-capita hours, and that the labor trends are consistent with stationarity along a balanced-growth path.
    Keywords: general aggregative models: neoclassical, time allocation and labor supply, economics of gender, marriage, marital dissolution
    JEL: E13 J12 J16 J20 J22
    Date: 2007–07
  61. By: Rui Henrique Alves (CEMPRE and Faculdade de Economia da Universidade do Porto, Portugal); Óscar Afonso (CEMPRE and Faculdade de Economia da Universidade do Porto, Portugal)
    Abstract: In this paper, we compare the present process of definition and implementation of fiscal policies in the European Union with the main conclusions of the “fiscal federalism” theory. This is done in order to draw possible lessons for future evolution, particularly taking into account the possibility of creating a European “Federation of Nation-States”, which we supported in a previous work. We argue that these main conclusions are easily compatible with the emergence of a largely decentralised “Federation”, but are still far distant from the present situation. In this context, we argue for several important lines of change in the short-run, namely an effective change in the process of coordinating fiscal policies and a credible reform of the Stability and Growth Pact, and in the medium-long-run, namely an important increase in the size of the European budget.
    Keywords: Fiscal federalism, fiscal policy, European budget, fiscal discipline
    JEL: E62 H77 H61
    Date: 2007–07
  62. By: Mark Huggett; Alejandro Badel (Department of Economics, Georgetown University)
    Abstract: Data on consumption, earnings, wages and hours dispersion over the life cycle has been viewed as being at odds with an efficient allocation. We challenge this view. We show that a model with preference and wage shocks and full insurance produces the type of inequality patterns across age groups found in U.S. data. The efficient allocation model requires an increasing preference shifter dispersion profile to account for an increasing consumption dispersion profile. We examine U.S. data and find support for the view that the dispersion in preference shifters increases with age. Classification-JEL Codes: E21, D91, D52
    Keywords: Life Cycle Inequality, Efficient Allocation, Preference Shocks
    Date: 2007–07–03
  63. By: Fabrizio Carmignani (United Nations Economic Commission for Africa¤); Emilio Colombo (Department of Economics, University of Milan-Bicocca); Patrizio Tirelli (Department of Economics, University of Milan-Bicocca)
    Abstract: We revisit the empirical relationship between output volatility and government expenditure in a model where the two are jointly deter- mined. The key regressors in our model are trade and ¯nancial integra- tion indicators, institutional variables, including central bank indepen- dence, and a measure of de facto exchange rate °exibility. Our ¯ndings consistently signal that government discretion has destabilising e®ects on growth volatility. We con¯rm that government size increases with trade integration, but this has adverse e®ects because public spending is positively related to growth volatility. Institutions that increase policy- makers accountability limit the level of public expenditure and volatility. In this regard, our results support the view that stronger institutions increase policy efficiency.
    Keywords: Output volatility, government expenditure, trade openness, financial openness, central bank independence, political institutions
    JEL: F10 F30 E58 E60 F43 E30
    Date: 2007
  64. By: Jakub Steiner
    Abstract: Players repeatedly face a coordination problem in a dynamic global game. By choosing a risky action (invest) instead of waiting, players risk instantaneous losses as well as a loss of payoffs from future stages, in which they cannot participate if they go bankrupt. Thus, the total strategic risk associated with investment in a particular stage depends on the expected continuation payoff. High continuation payoff makes investment today more risky and therefore harder to coordinate on, which decreases today’s payoff. Thus, expectation of successful coordination tomorrow undermines successful coordination today, which leads to fluctuations of equilibrium behavior even if the underlying economic fundamentals happen to be the same across the rounds. The dynamic game inherits the equilibrium uniqueness of the underlying static global game.
    Keywords: Coordination, Crises, Cycles and Fluctuations, Equilibrium Uniqueness, Global Games.
    JEL: C72 C73 D8 E32
  65. By: Hyun H. Son (International Poverty Centre); Nanak Kakwani (International Poverty Centre)
    Abstract: This paper develops a methodology to measure the impact of price changes on poverty measured by an entire class of additive separable poverty measures. This impact is captured by means of price elasticity of poverty. The total effect of changes in price on poverty is explained in terms of two components. The first component is the income effect of the change in price and the second is the distribution effect captured by the price changes. It is the distribution effect which determines whether the price changes benefit the poor proportionally more (or less) than the non-poor. This paper also derives a new price index for the poor (PIP). While this index can be computed for any poverty measures, our empirical analysis applied to Brazil is based on three poverty measures, the head-count ratio, the poverty gap ratio and the severity of poverty. The empirical results show that price changes in Brazil during the 1999-2006 period have occurred in a way that favors the non-poor proportionally more than the poor. Nevertheless, during the last 2-3 years the price changes have favored the poor relative to the non-poor.
    Keywords: Inflation, Price elasticity, Money metric utility, Price index for the poor
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–11
  66. By: Ralph C. Bryant; (Brookings Institution); ;
    Abstract: This paper studies demographic differences between lower-income, less developed countries (the “South”) and higher-income developed countries (the “North”). It analyzes the implications of heterogeneous demographic evolutions for aggregate saving-investment imbalances, exchange rates, and the resulting net capital flows between North and South. An optimistic perspective suggests that the North can run a current-account surplus sizable in relation to the Northern economy, thereby transferring large net amounts of financial capital to the South. This paper argues that an optimistic perspective is a plausible characterization of demographic influences on North-South capital flows in the historical period between 1950 and the mid-1970s. For historical decades after the 1970s and for the initial decades of the 21st century, however, a less optimistic perspective is appropriate. Demographic forces considered by themselves are likely to diminish rather than augment the flow of Northern saving to the South as a fraction of the Southern economy. The fundamental causes of these effects are shifts in relative demographics between the South and the North. The qualitative conclusion holds regardless of whether the demographic transition in Southern economies is somewhat faster and sooner or somewhat slower and delayed, regardless of whether growth in Southern total factor productivity is vigorous or weak, and regardless of whether cross-border goods substitutability is modest or strong. Public policy concerned with demographic trends in higher-income Northern nations should recognize that demographic asymmetries with lower-income Southern economies are unlikely, by themselves, to ease resolution of Northern macroeconomic difficulties caused by population aging.
    Keywords: demographic evolutions, trends, changes, capital flows, exchange rates, North, South, cross-border goods, asymmetries
    Date: 2007–04
  67. By: Adolfo Sachsida; Mário Jorge Cardoso de Mendonça
    Abstract: Based on the relation between investment and domestic saving proposed by Feldstein and Horioka (1980) to verify capital mobility, this study performs some exogeneity tests in order to determine the capacity of the FH equation of supporting and implementing economic policies in Brazil. We then use the result of weak exogeneity test to identify a structural vector autoregressive (SVAR) involving investment and saving in order to evaluate the effect of exogenous shocks through impulse response functions (IRFs) on both variables. The main findings of this paper are: a) the elasticity of domestic saving estimated using appropriate methods points out to high capital mobility for Brazil; b) domestic saving is weakly exogenous in the FH equation; c) domestic saving is not strongly exogenous, therefore this equation should not be used to make forecasts for the Brazilian economy; d) superexogeneity is accepted for domestic saving, meaning that Lucas’ criticism does not apply; and e) the IRFs showed that investment is sensitive to contemporaneous innovation on saving and this effect lasts for a long time. Regarding to domestic saving, the response of this variable to a non-expected shock on investment has a more is more complicate description. Initially domestic saving goes down. After some lags this movement changes and domestic saving begins to react positively to the shock.
    Date: 2006–02
  68. By: Giulio Cifarelli (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Giovanna Paladino (Intesa-Sanpaolo Economic Research Dept. and LUISS University, Economics Dept)
    Abstract: Emerging market economies have recently accumulated large stocks of foreign reserves. In this paper we address the question of what are the main factors accounting for reserve holdings in nine developing countries located in Asia and Latin America. Monthly data from January 1985 to May 2006 are used to estimate for each country the long run equilibrium reserve demand, based on the buffer stock model, the short run dynamics governing the process of reserve accumulation (decumulation) and the factors which may influence the speed of adjustment of actual to desired reserves. Cointegration analysis suggests that the buffer stock precautionary model accounts for the optimal reserve demand. The corresponding VECMs are further interpolated, using the permanent and transitory innovations decomposition procedure of Gonzalo and Ng (2001), in order to assess the relative impact of the time series on the convergence to equilibrium after a shock. Finally the (asymmetric) effect on the speed of convergence of positive/negative changes in signal variables - such as the excess reserves of the previous period, relative competitiveness and US monetary stance - is found to be significant, in line with mercantilistic and fear of floating motives for hoarding international reserves.
    Keywords: Emerging markets reserves, cointegration, P-T components decomposition, asymmetric adjustment
    JEL: F32 F34 F36
    Date: 2007
  69. By: Min Ouyang
    Abstract: This paper explores the link between short-run cycles and long-run growth by examining the cyclical properties of R&D at the disaggregated industry level. The relationship between R&D and output is estimated using an annual panel of 20 U.S. manufacturing industries from 1958 to 1998. The results indicate that R&D is in fact procyclical; but interestingly, estimates using demand-shift instruments suggest that it responds asymmetrically to demand shocks. We discuss the possibilities that liquidity constraints and technology improvement cause the observed procyclicality of R&D.
    Keywords: Business cycles ; Research and development
    Date: 2007
  70. By: Balboa, Jenny D.; Yap, Josef T.; Medalla, Erlinda
    Abstract: Trade and financial policies in ASEAN-member countries have contributed to the goal of economic integration. One important feature of this process is the need to narrow the development gap in the region in order to make economic integration more effective and meaningful. This paper examines the Philippine experience with economic reform, particularly in its attempt to integrate with ASEAN. The Philippines simplified its tariff structure and reduced tariffs in accordance with the CEPT Scheme. Monetary and financial reform—particularly adopting the inflation targeting framework—and fiscal consolidation were undertaken to strengthen the financial system and address the fiscal deficit. These efforts also facilitate regional monetary cooperation and integration. However, the Philippines continues to lag behind the larger ASEAN economies particularly with respect to reducing poverty incidence. The Philippine experience has shown the importance of having economic reform supported by strategies to enhance good governance and strengthen institutions.
    Keywords: regional economic integration, development gap, trade and investment reforms, financial cooperation, governance and institutions
    Date: 2007
  71. By: Steinar Holden; Fredrik Wulfsberg
    Abstract: This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, over the period 1973-1999, using data for hourly nominal earnings at the industry level. Based on a nonparametric statistical method, which allows for country- and year-specific variation in both the median and the dispersion of industry wage changes, we find evidence of some DRWR in OECD countries overall, as well as for specific geographical regions and time periods. There is some evidence that real wage cuts are less prevalent in countries with strict employment protection legislation and high union density. Generally, we find stronger evidence for downward nominal wage rigidity than for downward real wage rigidity.
    Keywords: Wages
    Date: 2007
  72. By: Shari Spiegel
    Abstract: This United Nations Policy Note on Macroeconomics and Growth provides practical guidance on how to operationalize alternative equitable and employment-generating macroeconomics and growth policies in National Development Strategies. This Policy Note has been developed in cooperation with UN agencies, and has been officially reviewed by distinguished academics/ development specialists such as Jose Antonio Ocampo, Jomo K.S. and Nobel Laureate Joseph Stiglitz.
    Keywords: macroeconomics, growth, development planning
    JEL: O1 O2 E0 H0
    Date: 2007–07
  73. By: Narayana R. Kocherlakota
    Abstract: This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term “exogenous variables” refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or money.)
    Date: 2007
  74. By: Luigi Landolfo (Department of Economics, University of Warwick, Coventry, CV4 7AL, United Kingdom.)
    Abstract: This paper aims to analyze the impact of external factors, such as the nominal effective exchange rate, foreign demand and the terms of trade, on the euro area real economy. In particular, the paper estimates the quantitative impact that changes in these factors have on net trade, real GDP and the Harmonized Consumer Price Index (HICP). To this end, we estimate a Dynamic Simultaneous Equation Model (DSEM) accounting for the presence of key exogenous variables. The tool utilized here to measure the impact of various shocks on the real economy is the impulse response function. The study is also conducted at sub-components level. First, we estimate the model replacing net trade with its sub-components, namely, the volume of exports and the volume of imports. Then, we re-estimate the model by dividing the terms of trade index into import and export prices. Overall, we estimate three models. Two of these models show consistent results. We found that the nominal effective exchange rate and foreign demand are the main determinants of the trade balance. Nevertheless, while foreign demand strongly affects real GDP, the nominal effective exchange rate affects it only slightly. Among the external factors, foreign demand has the strongest impact on real GDP. Regarding the impact of the nominal effective exchange rate on import prices and HICP, we found that the exchange rate pass-through for the euro area is not very high. This result is broadly in line with the findings presented in Hahn (2003). JEL Classification: C32, E52.
    Keywords: Net trade, Real economy, ECB.
    Date: 2007–07
  75. By: Gunther Schnabl (Leipzig University, Marschnerstr. 31, 04109 Leipzig, Germany)
    Abstract: Since the introduction of the euro in January 1999, exchange rate stability at the periphery of the euro area is growing. The paper investigates the impact of exchange rate stability on growth for a sample of 41 mostly small open economies at the EMU periphery. It identifies international trade, international capital flows and macroeconomic stability as important transmission channels from exchange rate stability to more growth. It is argued that fixed exchange rates provide a more stable framework for the adjustment of asset and labour markets of countries in the economic catchup process thereby accelerating growth. Panel estimations reveal a robust negative relationship between exchange rate volatility and growth for countries in the economic catch-up process with open capital accounts. JEL Classification: F43, F31, E42.
    Keywords: Exchange Rate Regimes, Exchange Rate Volatility, Growth, EMU Periphery, International Role of the Euro.
    Date: 2007–07
  76. By: Macdonald, Ryan
    Abstract: This paper examines the impact of import and export price changes on economic welfare in Canada, and in each of the provinces. It examines how terms of trade shifts and fluctuations in the ratio of traded to non-traded goods prices affect the purchasing power of domestic production. Terms of trade shifts are shown to have a larger impact in the short-run. Moreover, the paper shows that failing to account for terms of trade shifts, when analysing macroeconomic data, can lead to misinterpretations about the sources of growth or decline in consumption, investment and imports. The magnitude and direction of terms of trade fluctuations, and their impacts, vary by province and over time. Changes in commodity prices are shown to have important effects. The effect of terms of trade shifts is largest in Alberta and Newfoundland and Labrador, while Manitoba is relatively unaffected.
    Keywords: International trade, Economic accounts, Gross domestic product, Income and expenditure accounts
    Date: 2007–07–24
  77. By: Arturo Estrella
    Abstract: Various methods are available to extract the "business cycle component" of a given time series variable. These methods may be derived as solutions to frequency extraction or signal extraction problems and differ in both their handling of trends and noise and their assumptions about the ideal time-series properties of a business cycle component. The filters are frequently illustrated by application to white noise, but applications to other processes may have very different and possibly unintended effects. This paper examines several frequently used filters as they apply to a range of dynamic process specifications and derives some guidelines for the use of such techniques.
    Keywords: Business cycles ; Time-series analysis
    Date: 2007
  78. By: Anella Munro; Rishab Sethi (Reserve Bank of New Zealand)
    Abstract: In this paper we use a small open economy model to identify the causal factors that drive New Zealand's current account. The model features nonseparable preferences, habit in consumption, imperfect capital mobility, permanent productivity shocks, fiscal shocks and two foreign shocks to explore features that are important in understanding the dynamics of the current account. The results suggest that permanent technology shocks and world cost of capital shocks account for the bulk of variation in the current account at short horizons; at longer horizons, external valuation shocks (reflecting terms of trade and exchange rate developments) account for most of the variance. Habit in consumption and a debt-sensitive risk premium are features that improve overall model it as measured by posterior odds ratios. These features, and the contribution of foreign and permanent technology shocks, help to explain why the one shock present value model of the current account fails to appropriately characterise the dynamics of the New Zealand current account, as discussed in Munro and Sethi (2006).
    JEL: C51 E52 F41
    Date: 2007–07
  79. By: John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London); Shruti Patel (Centre for Development Policy & Research School of Oriental & African Studies, University of London)
    Abstract: .
    Keywords: Training, Modules, Research Programme, Economic Policies, MDGs, Poverty
    Date: 2007–07
  80. By: Andrew Coleman (Reserve Bank of New Zealand)
    Abstract: The paper develops an overlapping generations model incorporating a realistic depiction of the credit constraints facing home buyers to explain why home ownerships rates have declined in New Zealand since 1990 despite a significant relaxation of credit constraints. The model focuses attention on the role of property investors in the property market, and suggests changes in credit constraints mainly affect the tenure decisions of individual households, but not the aggregate level of house prices. The model suggests the decline in real interest rates is likely to be the cause of the rise in house prices and the decline in home ownership rates since 1990.
    JEL: E40
    Date: 2007–07
  81. By: Elias Papaioannou (Dartmouth College, Economics Department, Hanover, NH 03755, USA.)
    Abstract: This paper reviews the literature on the finance-growth nexus within a neoclassical growth framework, placing an emphasis on the policy implications in the current European environment, that has placed financial reforms high on the policy Agenda. While more research is needed to establish causality and verify the theoretical channels linking access to finance and growth, firm-level, industry-level, macro, and country-specific studies all tend to show a significant correlation between financial efficiency and economic performance. The empirical evidence hint that in underdeveloped and emerging countries financial development fosters aggregate growth mainly by lowering the cost of capital, while in advanced economies by raising total-factor-productivity. JEL Classification: G00, O00.
    Keywords: Finance, Financial Institutions, Development, Growth Decomposition, Financial Intermediation, Europe, Productivity.
    Date: 2007–07
  82. By: Anna Wong (University of Chicago)
    Abstract: This paper analyzes international reserve diversification by examining changes in quantity shares of currencies held in foreign exchange reserves. It discusses alternative methodologies for constructing quantity shares and applies the preferred methodology to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund’s Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings. What can one infer from available data about the diversification of foreign exchange reserves since 1999? The analysis suggests four conclusions: (1) The behavior of the quantity shares of the US dollar and the euro in total reserves is consistent with net stabilizing intervention; their quantity shares tend to rise when these currencies are declining and vice versa. (2) The principal driver of this stabilizing diversification over the period 1999Q1–2005Q4 is Japan. (3) The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. (4) The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. In summary, the aggregate data conceal much diversity in the practices of individual countries.
    Keywords: Foreign Exchange Reserves, Central Banks, Methodology, Index Numbers, Aggregation
    JEL: F31 E58 B41 C43
    Date: 2007–07
  83. By: François Coppens (National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium.); Fernando González (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gerhard Winkler (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1090 Vienna, Austria.)
    Abstract: The aims of this paper are twofold: first, we attempt to express the threshold of a single “A” rating as issued by major international rating agencies in terms of annualised probabilities of default. We use data from Standard & Poor’s and Moody’s publicly available rating histories to construct confidence intervals for the level of probability of default to be associated with the single “A” rating. The focus on the single “A” rating level is not accidental, as this is the credit quality level at which the Eurosystem considers financial assets to be eligible collateral for its monetary policy operations. The second aim is to review various existing validation models for the probability of default which enable the analyst to check the ability of credit assessment systems to forecast future default events. Within this context the paper proposes a simple mechanism for the comparison of the performance of major rating agencies and that of other credit assessment systems, such as the internal ratings-based systems of commercial banks under the Basel II regime. This is done to provide a simple validation yardstick to help in the monitoring of the performance of the different credit assessment systems participating in the assessment of eligible collateral underlying Eurosystem monetary policy operations. Contrary to the widely used confidence interval approach, our proposal, based on an interpretation of p-values as frequencies, guarantees a convergence to an ex ante fixed probability of default (PD) value. Given the general characteristics of the problem considered, we consider this simple mechanism to also be applicable in other contexts.
    Date: 2007–07
  84. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Han van der Hoorn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Henrik Schwartzlose (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pierre Ledoyen (National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium.); Wolfgang Föttinger (Deutsche Bundesbank, Hauptverwaltung Frankfurt am Main, Postfach 11 12 32, 60047 Frankfurt / Main.); Fernando Monar (Banco de Espana, Alcala 50, E-28014 Madrid, Spain.); Bérénice Boux (Banque de France,39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Gigliola Chiappa (Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy.); Noëlle Honings (De Nederlandsche Bank, Westeinde 1, NL - 1017 ZN Amsterdam, The Nederlands.); Ricardo Amado (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon Condex, Portugal.); Kai Sotamaa (Suomen Pankki, P.O. Box 160, FIN-00101 Helsinki, Finland.); Dan Rosen (University of Toronto, McMurrich Building, Administration, 12 Queen's Park Crescent West, Toronto, Ontario M5S 1A8, Canada.)
    Abstract: This report summarises the findings of the task force. It is organised as follows. Section 2 starts with a discussion of the relevance of credit risk for central banks. It is followed by a short introduction to credit risk models, parameters and systems in Section 3, focusing on models used by members of the task force. Section 4 presents the results of the simulation exercise undertaken by the task force. The lessons from these simulations as well as other conclusions are discussed in Section 5.
    Date: 2007–07
  85. By: Yasuyuki Sawada (Faculty of Economics, University of Tokyo); Kazumitsu Nawata (Graduate School of Economics, University of Tokyo); Masako Ii (Graduate School of International Corporate Strategy, Hitotsubashi University); Jeong-Joon Lee (Department of Economics Towson University)
    Abstract: We investigate whether the credit crunch in Japan affected household welfare and the manner in which it did. We augment the theoretical framework of a consumption Euler equation with endogenous credit constraints and estimate it with household panel data for 1993-1999, generating several empirical findings. First, a small portion of the people faced credit constraints in Japan before and after the financial crisis in 1997. Accordingly, our results reject the standard consumption Euler equation. Second, the credit crunch affected household welfare negatively, albeit not seriously, after 1997. Our results corroborate that the credit crunch in Japan was supply-driven.
    Date: 2007–05
  86. By: W. Scott Frame; Diana Hancock; Wayne Passmore
    Abstract: This paper considers the role of Federal Home Loan Bank (FHLB) advances in stabilizing their commercial bank members' residential mortgage lending activities. Our theoretical model shows that using mortgage-related membership criteria or requiring mortgage-related collateral does not ensure that FHLB advances will be put to use for stabilizing members' financing of housing. Using panel vector autoregression (VAR) techniques, we estimate recent dynamic responses of U.S. bank portfolios to FHLB advance shocks, bank lending shocks, and macroeconomic shocks. Our empirical findings suggest that FHLB advances are just as likely to fund other types of bank credit as to fund single-family mortgages.
    Date: 2007
  87. By: Henk Kox; Luis Rubalcaba
    Abstract: A pervasive trend that characterised the past two decades of European economic growth is that the share in the economy of commercial services, and particularly business services, grows monotonically, and this mainly to the expensive of the manufacturing sector. The structural shift reflects a changing and increasingly complex social division of labour between economic sectors. The fabric of inter-industry relations is being woven in a new way due to the growing specialisation in knowledge services, the exploitation of scale economies for human capital, lowered costs of outsourcing in-house services, and the growing encapsulation of manufacturing products in a ‘service jacket’. Business services, which inter alia includes the software industry and other knowledge-intensive business services (KIBS), play a key role in many of these processes.<BR> We argue that in recent decades business services contributed heavily to European economic growth, in terms of employment, productivity and innovation. A direct growth contribution stems from the businessservices sector’s own remarkably fast growth, while an indirect growth contribution was caused by the positive knowledge and productivity spill-overs from business services to other industries. The spill-overs come in three forms: from original innovations, from speeding up knowledge diffusion, and from the reduction of human capital indivisibilities at firm level. The external supply of knowledge and skill inputs exploits positive external scale economies and reduces reduces the role of internal (firm-level) scale (dis)economies associated with these inputs. The relatively low productivity growth that characterises some business-services sectors may be a drag on the sector's direct contribution to overall economic growth. The paper argues that there is no reason to expect a "Baumol disease" effect as long as the productivity and growth spill-overs from KIBS to other economic sectors are large enough.<BR> Finally, the paper concludes by pinpointing some policy 'handles' that could be instrumental in boosting the future contibution of business services to overall European economic growth.
    JEL: E32 L2 L8 L16 O3 O4 O52
    Date: 2007–06
  88. By: Mayes, David G (BOFIT); Korhonen, Vesa (BOFIT)
    Abstract: We consider the likely economic impact and prospects for monetary integration among Belarus, Kazakhstan, the Russian Federation and Ukraine as part of the Single Economic Space they have agreed to set up. A monetary union among these countries poses three interesting issues for the structure and process of integration: they have already been members of a wider currency union that collapsed, so it is necessary to handle the problems of history; secondly the union would be of very unequal size with the Russian Federation outweighing the others taken together, so we must consider how the national interests would be balanced; lastly natural resources, particularly oil and gas pose problems for dependence and for the determination of the external exchange rate.
    Keywords: monetary union; CIS; economic integration
    JEL: E42 E63 F16
    Date: 2007–07–24
  89. By: Gonzalez, Adrian
    Abstract: After controlling for MFI and country characteristics, we find no evidence suggesting a strong (in magnitude) and statistically significant relationship between changes in GNI per capita (GROWTH) and four indicators of MFI portfolio risk: quality at Risk over 30 Days (PAR-30), Portfolio at Risk over 90 Days (PAR-90), Loan loss Rate (LLR), and Write-off Ratio (WOR). We test the robustness of the models with different specifications that confirm the general result and test for different impact from growth rates according to average loan sizes disbursed by MFIs. These tests suggest that microfinance portfolios have high resilience to economic shocks. Specifically, we found only a significant relationship between growth and PAR-30. We also control for other explanatory variables like size, age, average loan size, and productivity.
    Keywords: Microfinace; Assets Quality; Systemic Shocks; Repayment; Resilience
    JEL: E5 G15 O1
    Date: 2007–07
  90. By: Matteo Cervellati (University of Bologna, IAE Barcelona and IZA); Uwe Sunde (IZA, University of Bonn and CEPR)
    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: long-term development, demographic transition, endogenous life expectancy, child mortality, heterogeneous human capital, technological change, industrial revolution
    JEL: E10 J10 O10 O40 O41
    Date: 2007–07
  91. By: Rokkanen, Nikolas (Swedish School of Economics and Business Administration)
    Abstract: This paper examines empirically the effect firm reputation has on the determinants of debt maturity. Utilising data from European primary bond market between 1999 and 2005, I find that the maturity choice of issuers with a higher reputation is less sensitive to macroeconomic conditions, market credit risk-premiums, prevailing firm credit quality and size of the debt issue. The annualised coupon payments are shown to be a significant factor in determining the debt maturity and reveal a monotonously increasing relationship between credit quality and debt maturity once controlled for. Finally, I show that issuers lacking a credit rating have an implied credit quality positioned between investment-grade and speculative-grade debt.
    Keywords: corporate debt maturity; credit risk; debt seniority; subordination; macroeconomic; reputation
    Date: 2007–02–07
  92. By: Charles Goodhart; Dimitrios Tsomocos
    Date: 2007–05
  93. By: Matloob Piracha (University of Kent and IZA); Yu Zhu (University of Kent)
    Abstract: This paper analyses the savings behaviour of natives and immigrants in Germany. It is argued that uncertainty about future income and legal status (in case of immigrants) is a key component in the determination of the level of precautionary savings. Using the German Socio-economic Panel data it is shown that, although immigrants have lower levels of savings and are less likely to have regular savings than natives, the gap is significantly narrowed once we take loan repayments and remittances into account. Moreover, we find that marginal propensity to save for immigrants is about 40% higher than that for natives. We then exploit a natural experiment arising from a change in nationality law in Germany in 2000 to estimate the importance of precautionary savings. Using a difference-in-differences approach, we find that the easing of the requirements for naturalization has caused significant reductions of savings and remittances for immigrants as a whole, in the magnitude of 13% and 29% respectively, comparing to the pre-reform period. Our parametric specification shows that the introduction of the new nationality law reduces the gap between natives and immigrants in marginal propensity to save by 40% to 65%, depending on the measure of savings used. These findings suggest that much of the differences in terms of the savings behaviour between natives and immigrants are driven by the precautionary savings arising from the uncertainties about future income and legal status rather than cultural differences.
    Keywords: migration, remittances, savings, uncertainty
    JEL: D80 E21 F22
    Date: 2007–07
  94. By: Chiaki Hara (Institute of Economic Research, Kyoto University)
    Abstract: A univariate real-valued function is said to be completely monotone if it takes positive values and alternate the signs of its higher order derivatives, starting from everywhere negative first derivatives. We prove that the representative consumerfs discount factor of a continuous-time economy under uncertainty is a power function of some completely monotone function of time satisfying certain boundary conditions if and only if it may be derived from a group of consumers having constant and equal relative risk aversion, and constant and yet possibly unequal discount rates.
    Keywords: Complete monotonicity, discount factor, discount rate, representative consumer, expected utility, time additivity, relative risk aversion, Bernsteinfs theorem.
    JEL: D51 D53 D61 D81 D91 E43 G12
    Date: 2007–07
  95. By: Wouter Vermeulen (CPB, The Hague, and VU University Amsterdam); Jan Rouwendal (VU University Amsterdam)
    Abstract: In spite of a growing recognition of the importance of supply conditions for the level and volatility of house prices, empirical work on housing supply outside the US is scarce. This paper considers various measures of housing supply in the Netherlands, where real house prices have roughly tripled since 1970. Besides the volume of investment in residential structures, and new housing construction in units, we derive time series of structure and location quality in a hedonic analysis. Each of these variables appears to be almost fully inelastic with respect to house prices in at least the short to medium long run. Further analysis of the quality of location index shows that conventional models of competitive land and housing markets cannot account for these findings. However, they may be well explained in terms of the rather extensive body of interventions by the Dutch government.
    Keywords: housing supply; residential investment; housing markets; land use regulation
    JEL: E22 R31 R52
    Date: 2007–07–31
  96. By: Tatom, John
    Abstract: China, a low income country about the same geographic size as the US and with over four times the population, has had persistent rapid growth that averaged 9.6 percent per year since reform began in 1979. On a per capita basis, real GDP is eight times larger than it was 26 years earlier! China’s population is expected to continue to slow, reaching near zero in 30 years. It has already slowed markedly due to the one-child policy from about 1.5 percent per year in the late 1970s, to about 0.6 percent in recent years. China is likely to become the US’ third largest trading partner, supplying relatively cheap and high quality machinery, apparel and other goods, and a large market where US producers can produce and/or sell their products. At the same time, private Chinese investment is likely to become an important source of saving and financing for US economic activity. Doing business with China has always been a two-way street and that street is beginning to widen to include significant flows of entrepreneurial and financial resources in both directions.
    Keywords: China; growth; financial regulation; demographics
    JEL: O5 E6
    Date: 2007–01–26
  97. By: Ray Barrell; Rebecca Riley; Fitzgerald, J.
    Abstract: This paper considers the macroeconomic effects of the migration that followed the enlargement of the EU in May 2004. At that time the EU was expanded to include 10 New Member States (NMS) predominantly from Central and Eastern Europe. In the wake of accession the number of workers migrating to the EU-15 from the poorest of the NMS increased significantly. In part the result of the liberal immigration policies adopted, and restrictive policies adopted elsewhere, Ireland and the UK have become popular destination countries for NMS workers. Here we illustrate the potential macroeconomic consequences of these migration flows across Europe, highlighting the impacts in both the receiving and sending countries.
    Date: 2007–03
  98. By: Carretta, Alessandro; Mattarocci, Gianluca
    Abstract: Funds of Funds (FoF) are particular investment funds that invest resources in some mutual funds. This type of funds offers the possibility to achieve an higher diversification that an investor can’t realize using other instruments. One of the main differences among FoFs available is the strategy adopted by the manager to select the investment funds to include in the portfolio and the number of funds included in the portfolio. The funds’selection could be naïf or based on some aspect related to the funds‘ history as the past performance achieved, the fund’s investment style or the manager’s reputation. This paper analyses FoF’s Italian market and verifies whether the performance is influenced by either the diversification strategy or the number of funds included in the portfolio. The analysis demonstrates that FoFs’ best performers are those which are less geographically or sectorially concentrated; there are significant differences following different criteria/constraints applied in the funds’ selection.
    Keywords: Fund of Funds; Diversification and Portfolio strategy
    JEL: E44 G11
    Date: 2005–06

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