nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒08‒14
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Exchange Rate Targeting of Central Banks Revised: The Role of Long-term Interest Rates By Lahtinen, Markus; Mäki-Fränt, Petri
  2. Inflation without a quantity of money: a simple Wicksellian model outlined By William Coleman
  3. Optimal Monetary Policy in an Interdependent World By Michael Evers
  4. The Rise and Fall of U.S. Inflation Persistence By Beechey, Meredith; Österholm, Pär
  5. Inflation risk premia in the term structure of interest rates By Peter Hoerdahl; Oreste Tristani
  6. Search Frictions on Product and Labor markets : Money in the Matching Function By Etienne, LEHMANN; Bruno, VAN DER LINDEN
  7. Is Old Money Better than New? Duration and Monetary Regimes By Mihov, Ilian; Rose, Andrew K.
  8. Optimum Policy Domains in an Interdependent World By Michael P. Evers
  9. Asset-Price Misalignments and Monetary Policy: How Flexible Should Inflation-Targeting Regimes Be? By Jack Selody; Carolyn Wilkins
  10. Japan's monetary policy transition, 1955-2004 By Rhodes, James; Yoshino, Naoyuki
  11. Liquidity, Redistribution, and the Welfare Cost of Inflation By Jonathan Chiu; Miguel Molico
  12. Investment Options and the Business Cycle By Boyan Jovanovic
  13. New Evidence on News-Driven Business Cycles By Haertel, Thomas; Lucke, Bernd
  14. Determinantes de la morosidad bancaria en una economía dolarizada. El caso uruguayo. By Martín Vallcorba; Javier Delgado
  16. Heterogenous Saving-Investment Causality in Monetary Union and Fiscal Coordination Issues: The Case of CEMAC Zone By Ebeke, Christian Hubert
  17. The Great Depression in Belgium from a Neo-Classical Perspective By Luca, PENSIEROSO
  18. Determinants of the time varying risk premia By Pornpinun Chantapacdepong
  19. Investment and the Cost of Capital: New Evidence from the Corporate Bond Market By Simon Gilchrist; Fabio M. Natalucci; Egon Zakrajsek
  20. Island Matching By Dale T. Mortensen
  21. EU Enlargement and Migration: Assessing the Macroeconomic Impacts By Ray Barrell; John FitzGerald; Rebecca Riley
  23. Ambiguity Aversion, the Equity Premium and the Welfare Costs of Business Cycles By Alonso, Irasema; Prado, Jr., Jose Mauricio
  24. Private and Public Consumption and Counter-Ciclical Fiscal Policy By L. Marattin
  25. Real Interest Parity in the EU and the Consequences for Euro Area Membership: Panel Data Evidence, 1979-2005 By Martin O'Brien
  26. Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax1 By Sabine Jokisch; Laurence J. Kotlikoff
  27. Ambiguity Aversion and the Term Structure of Interest Rates By Patrick Gagliardini; Paolo Porchia; Fabio Trojani
  28. La Comisión Independiente del Gasto: recomendaciones para una Política Fiscal Contracíclica By FEDESARROLLO
  29. On Policy Relevance of Ramsey Tax Rules By Selim, Sheikh
  30. Sources of Productivity Slowdown in European Countries During 1990s By Enrico Saltari; Giuseppe Travaglini
  31. Pairwise-core Monetary Trade in the Lagos-Wright Model By Tai-wei Hu; John Kennan; Neil Wallace
  32. Predicting Indian Business Cycles-- Leading Indices for External and Domestic Sectors By Pami Dua; Anirvan Banerji
  33. Convergence of Consumption Patterns During Macroeconomic Transition: A Model of Demand in Ireland and the OECD By Seán Lyons; Karen Mayor; Richard S.J Tol
  36. Government Policy in the Formal and Informal Sectors By Prado, Jr., Jose Mauricio
  37. China’s Real Exchange Rate By Rod Tyers; Jane Golley
  38. Radiografía de una política de derechos humanos:los Estados Unidos frente a la Argentina By Carlos Escudé; ;
  39. Intergenerational Mobility and the Informative Content of Surnames By Maia Güell; José V. Rodriguez Mora; Chris Telmer
  40. CHINA'S REAL EXCHANGE RATE PUZZLE By Rod Tyers; Jane Golley; Iain Bain
  41. A Note on Human Capital and the Feldstein-Horioka Puzzle By Katsimi, Margarita; Moutos, Thomas
  42. The Effects of Human Capital on Output Growth in ICT Industries: Evidence from OECD Countries By Gavin Murphy; Iula Traistaru-Siedshlag
  43. Leasing, Ability to Repossess, and Debt Capacity By Andrea Eisfeldt; Adriano Rampini
  44. A Note on Contestability in the Canadian Banking Industry By Jason Allen; Ying Liu
  45. Towards a new theory of economic policy: Continuity and innovation By Acocella, Nicola; Di Bartolomeo, Giovanni
  47. Los administradores tienen expectativas de disminución en la inflación By FEDESARROLLO
  48. Global dynamics and imbalance effects in the Lucas Uzawa model : further results By Rauf, BOUCEKKINE; Blanca, MARTINEZ; Jose R., RUIZ-TAMARIT
  49. A Dual Elasticity of Substitution Production Function with an Application to Cross Country Inequality By Juergen Antony
  50. Gerechtigkeit und Marktwirtschaft - das Problem der Arbeitslosigkeit By Malte Faber; Thomas Petersen
  51. ChinAfrica : How can the Sino-African cooperation be beneficial for Africa ? By Luca, MARCHIORI

  1. By: Lahtinen, Markus; Mäki-Fränt, Petri
    Abstract: Using a New Keynesian macro model, the paper reconsiders the question, whether the central banks should directly respond to exchange rate movements. It is assumed that the transmission of monetary policy to output is carried out by the long-term interest rate, which is determined as a sum of expectations of short-term interest rates and a non-negligible term premium. According to the results, the central banks could gain from stabilizing the exchange rate movements more than suggested in the previous literature. The welfare gains are more clearly seen in the reduced volatility of inflation than stabilization of output, however.
    Keywords: Open economy, Exchange rate determination, Monetary policy
    JEL: E32 E52 E58
    Date: 2007
  2. By: William Coleman
    Abstract: The paper advances a simple and tractable Wicksellian model of inflation, in which the price level is determined by the interaction of the nominal rate of return on capital with a rule that governs the interest rate at which the Central Bank supplies money, and in which the equality of the supply of money with its demand has no explanatory role to play.
    Keywords: Wicksell, inflation, monetary policy, central banks
    JEL: E31 E52 E58
    Date: 2007–07
  3. By: Michael Evers
    Abstract: In the literature on international monetary policy, the paradigm is that gains from coordination are fairly small. Monetary policy is conducted to stabilize macroeconomic fluctuations and gains from policy coordination arise from preventing national monetary authorities from strategically manipulating the terms of trade by means of these stabilization policy instruments. However, as it has been emphasized by \cite{lucas:2003a}, welfare gains from stabilizing fluctuations are generically small since they are of second order. In this paper, I develop a dynamic stochastic two-country model with sticky wages and a cash-in-advance restriction which is in the spirit of the New Open Economy Macroeconomics framework. In this environment, monetary authorities can manipulate the terms of trade by conducting a general short-run monetary policy using both the nominal interest rate and the money supply. The money supply affects the terms of trade by altering the nominal exchange rate ex post and it is used in the traditional way so as to stabilize macroeconomic fluctuations. The nominal interest rate affects the terms of trade by changing expected inflation ex ante. Self-oriented national policymakers use the nominal interest rates to raise the terms of trade ex ante. This leads to an inefficient inflation tax whose welfare effects are of first order. Consequently, gains from monetary policy coordination are of first order.
    Keywords: International Policy Coordination, General Short-Run Monetary Policy, New Open Economy Macroeconomics
    JEL: F41 F42
  4. By: Beechey, Meredith (Monetary Affairs Division); Österholm, Pär (Department of Economics)
    Abstract: This paper estimates the path of inflation persistence in the United States over the last 50 years and draws implications about the evolution of the Federal Reserve's monetary-policy preferences. Standard models of central bank optimization predict that the central bank's preference for output stability is a determinant of inflation persistence. Hence, time variation of that preference should be reflected in changes in inflation persistence. We estimate an ARMA(1,q) model with a time-varying autore- gressive parameter for monthly U.S. inflation data from 1955 to 2006.The coefficients provide an estimate of the inflation target and the path of inflation persistence. The estimated inflation target over the sample is approximately 2.8 percent and we find that inflation persistence declined substantially during Volcker and Greenspan's tenures to a level significantly less than one and significantly below that of the 1970s and early 1980s.
    Keywords: Monetary policy; Central bank preferences; Inflation persistence; Time-varying parameters; Kalman filter
    JEL: E52 E58
    Date: 2007–07–12
  5. By: Peter Hoerdahl; Oreste Tristani
    Abstract: This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index-linked yields is used in the empirical analysis. Our results indicate that term premia in the euro area yield curve reflect predominantly real risks, i.e. risks which affect the returns on both nominal and index-linked bonds. On average, inflation risk premia were negligible during the EMU period but occasionally subject to statistically signifcant fluctuations in 2004-2006. Movements in the raw break-even rate appear to have mostly reflected such variations in inflation risk premia, while long-term inflation expectations have remained remarkably anchored from 1999 to date.
    Keywords: Term structure of interest rates, inflation risk premia, central bank credibility
    Date: 2007–05
  6. By: Etienne, LEHMANN; Bruno, VAN DER LINDEN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: This paper builds a macroeconomic model of equilibrium unemployment in which firms persistently face difficulties in selling their production and this affects their decisions to create jobs. Due to search-frictins on the product market, equilibrium unemployment is a U-shaped function of the ratio of total demand to total supply on this market. When prices are at their Competitive Search Equilibrium values, the unemployment rate is minimized. Yet, the Competitive Search Equilibrium is not efficient. Inflation is detrimental to unemployment.
    Keywords: Equilibrium unemployment, Matching, Inflation, Demand Constraints
    JEL: E12 E24 E31 J63
    Date: 2007–03–28
  7. By: Mihov, Ilian; Rose, Andrew K.
    Abstract: We compare the duration and performance of different monetary regimes, especially the contrast between countries those that fix exchange rates and those that target inflation. Inflation targeting is a more durable policy; no country has yet been forced to abandon an inflation target, while many have abandoned fixed exchange rates. Indeed, even though inflation targeting began only in 1990, the duration of inflation targeting regimes is at least as long as, or longer than all alternative monetary regimes for comparable countries. Regime duration also matters in monetary policy; older regimes are typically more successful than younger ones in achieving low inflation.
    Keywords: empirical, panel, exchange, rate, inflation, policy, data, success, target, filter, time
    JEL: E52 E58
    Date: 2007
  8. By: Michael P. Evers
    Abstract: In this paper, I argue that international policy coordination requires to include both monetary as well as fiscal policy because both sides include policy instruments that allow the strategic manipulation of the country's terms of trade. Hence, the coordination of one part of national macroeconomic policies through an international agreement still leaves room for national authorities to still unilaterally manipulate the terms of trade by means of different policy instruments. In a simple and tractable dynamic stochastic two-country sticky-wage model in line with the recent New Open Economy Macroeconomics it is demonstrated that potential gains from international policy coordination are squandered if policymakers only cooperate on monetary policy. Moreover, by letting the fiscal policy instruments be chosen non-cooperatively, monetary policy coordination might even create welfare losses as compared to no macroeconomic policy coordination at all.
    Keywords: International Policy Coordination; Monetary and Fiscal Policy Interaction; Beggar-Thy-Neighbor; New Open Economy Macroeconomics
    JEL: F41 F42 E62 E63
  9. By: Jack Selody; Carolyn Wilkins
    Abstract: The authors analyze the extent to which inflation-targeting frameworks should incorporate flexibility in order to respond to asset-price misalignments and other atypical events. They examine the costs and benefits of adding flexibility to the Bank's current inflation-targeting framework, and conclude that maintaining low and stable consumer price inflation is the best contribution that monetary policy can make to promoting economic and financial stability, although some flexibility in the target horizon may allow monetary policy to deal appropriately with asset-price bubbles and other atypical events. The authors suggest that monetary policy may, in principle, be better able to maintain low and stable consumer price inflation by leaning against an asset-price bubble (even though it may mean that inflation deviates longer than usual from its target), when such an event is well identified and likely to have significant real economic effects. This circumstance is likely to be rare in practice, however, because economists are far from being able to determine consistently and reliably when leaning against a particular bubble is likely to be successful. The authors also describe ongoing Bank research to better understand the transmission of asset prices to the real economy and the interaction between asset prices and optimal monetary policy.
    Keywords: Monetary policy framework; Inflation targets
    JEL: E5 E6
    Date: 2007
  10. By: Rhodes, James; Yoshino, Naoyuki
    Abstract: This paper surveys the postwar evolution of Bank of Japan (BOJ) monetary policy. Using both qualitative and quantitative data, we describe the changes in the money supply process in response to changing institutional constraints. We focus on the transition from quantitative to qualitative control mechanisms, illuminating, in particular, the important role of the BOJ’s lending guidance (window guidance) in the early periods and financial liberalization in subsequent periods. Monetary policy reaction functions are estimated and used to verify major changes in policy instruments, targets, and indicators.
    Keywords: Japanese Monetary Policy
    JEL: E52 E51
    Date: 2005
  11. By: Jonathan Chiu; Miguel Molico
    Abstract: This paper studies the long run welfare costs of inflation in a micro-founded model with trading frictions and costly liquidity management. Agents face uninsurable idiosyncratic uncertainty regarding trading opportunities in a decentralized goods market and must pay a fixed cost to rebalance their liquidity holdings in a centralized liquidity market. By endogenizing the participation decision in the liquidity market, this model endogenizes the responses of velocity, output, the degree of market segmentation, as well as the distribution of money. We find that, compared to the traditional estimates based on a representative agent model, the welfare costs of inflation are significantly smaller due to distributional effects of inflation. The welfare cost of increasing inflation from 0% to 10% is 0.62% of income for the U.S. economy and 0.20% of income for the Canadian economy. Furthermore, the welfare cost is generally non-linear in the rate of inflation, depending on the endogenous responses of the liquidity market participation to inflation and liquidity management costs.
    Keywords: Inflation: costs and benefits
    JEL: E40 E50
    Date: 2007
  12. By: Boyan Jovanovic
    Abstract: This paper extends Lucas (1978) to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an "option". When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin's Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff that is absent in the adjustment-cost model. Equilibrium may be efficient even without markets for knowledge; the stock market may suffice.
    JEL: E3 E44
    Date: 2007–08
  13. By: Haertel, Thomas; Lucke, Bernd
    Abstract: We study the Beaudry and Portier (2006)-hypothesis of delayed-technology diffusion and newsdriven business cycles. For German data on TFP and stock prices we find qualitatively similar empirical evidence. Quantitatively, however, an impulse response analysis suggests that a substantial part of the total TFP response is immediate rather than delayed. We relate this to disembodied technological change and noisy data on TFP. Nevertheless, we confirm the technology interpretation of structural shocks by showing that they are Granger-causal for data on patents granted by the German patent agency.
    Keywords: news, business cycles, TFP, structural VAR
    JEL: E32
    Date: 2007
  14. By: Martín Vallcorba (Banco Central del Uruguay); Javier Delgado (Banco de España)
    Abstract: This paper examines the determinants of the non-performing loans ratio of Uruguayan banks and studies the existence of cointegration relationships between this ratio and a set of macroeconomic variables. Authors find evidence of the existence of a relationship between non-performing loans ratio, variation of wages measured in dollars and interest rates. The paper concludes that lower wages and higher rates lead to a higher default ratio in the long term. This conclusion emphasizes the importance of the exchange-rate risk over the credit risk in such economies with dollarized banking systems. The estimated model is then used to simulate the effects of several hypothetical stress scenarios on defaulted loans ratio. As a result of this exercise, the paper concludes that the Uruguayan banking system presents nowadays a more solid position than during the period before the 2002 crisis.
    Keywords: morosidad, dolarización, cointegración, Uruguay
    JEL: E32 E44 G21
    Date: 2007–07
  15. By: Francois Gourio (Boston University, Department of Economics); Anil K Kashyap
    Abstract: Using plant-level data from Chile and the U.S., we show that investment spikes are highly pro-cyclical, so much so that changes in the number of establishments undergoing investment spikes (the “extensive margin”) account for the bulk of variation in aggregate investment. The number of establishments undergoing investment spikes also has independent predictive power for aggregate investment, even controlling for past investment and sales. We re-calibrate the Thomas (2002) model (that includes fixed costs of investing) so that it assigns a prominent role to extensive adjustment. The recalibrated model has different properties than the standard RBC model for some shocks.
    Keywords: adjustment costs, investment, investment tax credit, fixed costs, extensive margin.
    JEL: E22 E23
    Date: 2007–05
  16. By: Ebeke, Christian Hubert
    Abstract: Les unions monétaires contemporaines sont caractérisées par des arrangements institutionnels qui confient la politique monétaire à une entité supranationale tandis que les politiques budgétaires sont encadrées par des normes imposées sur le déficit budgétaire. Les limites imposées aux déficits publics sont généralement justifiées par l’idée que les déficits publics réduisent l’épargne nationale, ce qui finalement réduit l’investissement intérieur et la croissance économique. Cependant, cette idée que l’épargne domestique doit nécessairement s’accroître pour que l’investissement augmente ne saurait être prise pour argent comptant. Par ailleurs, il est possible qu’au sein de l’union, les pays révèlent des causalités épargne-investissement différentes, ce qui est susceptible d’entacher considérablement la crédibilité et l’efficacité des règles budgétaires de prohibition systématique des déficits publics comme moyen de revitaliser l’investissement. Cette étude pose le problème de la causalité épargne-investissement domestiques dans la zone CEMAC. Elle a été déterminée dans chaque pays à partir d’une méthodologie axée sur les analyses de cointégration débouchant sur des représentations vectorielles à correction d’erreur. L’existence d’une hétérogénéité dans la causalité épargne-investissement en zone CEMAC conduit alors à réfléchir sur un nouveau modèle de coordination budgétaire intégrant cette hétérogénéité, notamment, l’adoption d’une nouvelle norme budgétaire plus souple basée sur un solde structurel hors investissements publics.
    Keywords: union monétaire; causalité épargne-investissement; hétérogénéité; coordination budgétaire.
    JEL: E61 E62 E21
    Date: 2007–04
  17. By: Luca, PENSIEROSO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: This paper casts the Belgian Great Depression of the 1930s within a dynamic stochastic general equilibrium (DSGE) framework. Results show that a total factor productivity shock within a standard real business cycle model is unsatisfactory. Introducing war expectations in the baseline model produces little improvement. Given the evidence on sticky wages put forward by historians, it shows that a simple DGSE model with sticky wages ˆ la Taylor improves on the result.
    Keywords: Great Depression; Belgium; sticky wages; dynamic stochastic general equilibrium
    JEL: E13 N14
    Date: 2007–08–02
  18. By: Pornpinun Chantapacdepong
    Abstract: This paper generates monthly risk premia data using zero coupon government treasury bills for 43 countries over the period of 1994-2006. The measure of risk premia is based on the ARCH-in-Mean (ARCH-M) model introduced by Engle, Lilien and Robins (1987). We show that the risk premia are time varying and also vary considerably across sample countries. Countries with better financial development and higher income generally have lower risk premia of government assets. This study also examines the macroeconomic and political determinants of the risk premia by using cross-section and dynamic panel regression analyses. The results show that the risk premia are significantly affected by macroeconomic circumstances, especially economic growth and the real e¤ective exchange rate. The results are robust across the majority of countries in our study.
    Keywords: ARCH-in-Mean, term structure of interest rates, risk premium, dynamic panel regression analysis.
    JEL: E43 E44 G12 G15
  19. By: Simon Gilchrist (Department of Economics, Boston University and NBER); Fabio M. Natalucci (Federal Reserve Board); Egon Zakrajsek (Federal Reserve Board)
    Abstract: We study the effect of variation in interest rates on investment spending, employing a large panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements. The bond price data—based on trades in the secondary market—enable us to construct a firm-specific measure of the user cost of capital based on the marginal cost of external finance as determined in the market for long-term corporate debt. Our results imply a robust and quantitatively important effect of the user cost of capital on the firm-level investment decisions. According to our estimates, a 1 percentage point increase in the user cost of capital implies a reduction in the rate of investment of 50 basis points and, in the long-run, a 1 percent reduction in the stock of capital.
    Keywords: Investment, user cost of capital, corporate bond yields
    JEL: E22 E44 E62
    Date: 2007–04
  20. By: Dale T. Mortensen
    Abstract: A synthesis of the Lucas-Prescott island model and the Mortensen- Pissarides matching model of unemployment is studied. By assumption, all unmatched workers and jobs are randomly assigned to islands at the beginning of each period and the number of matches that form on a particular island is the minimum of the two realizations. When calibrated to the recently observed averages of U.S. unemployment and vacancy rates, the model fits the observed vacancy-unemployment Beveridge relationship very well and implies an implicit log linear relationship between the job finding rate and the vacancy-unemployment relationship with an elasticity near 0.5. The constrained efficient solution to the model is decentralized by a equilibrium outcome in which wages on each island are determined by a modified auction. Although the efficient solution explains only about 25% of the observed volatility in the U.S. vacancy-unemployment ratio, an equilibrium outcome in which wages are determined as the solution to a strategic bargaining game explains almost all of it.
    JEL: E24 E32 J64
    Date: 2007–08
  21. By: Ray Barrell (National Institute of Economic and Social Research (NIESR)); John FitzGerald (Economic and Social Research Institute (ESRI)); Rebecca Riley (National Institute of Economic and Social Research (NIESR))
    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.
    Keywords: EU enlargement, New Member States, migration
    JEL: E22 E24 E27 F22 J61
    Date: 2007–06
  22. By: Jaime Alonso-Carrera; Jordi caballe; Xavier Raurich
    Abstract: In this paper, we show that consumption externalities are a source of equilibrium indeterminacy in a growth model with endogenous labor supply. In particular, when the marginal rate of substitution between own consumption and the others’ consumption is constant along the equilibrium path, the equilibrium does not exhibit indeterminacy. In contrast, when that marginal rate of substitution is not constant, the equilibrium may exhibit indeterminacy even if the elasticity of the labor demand is smaller than the elasticity of the Frisch labor supply.
    JEL: D91 E62 O40
    Date: 2007–07
  23. By: Alonso, Irasema (Yale University); Prado, Jr., Jose Mauricio (Institute for International Economic Studies, Stockholm University)
    Abstract: We examine the potential importance of consumer ambiguity aversion for asset prices and how consumption ‡fluctuations influence consumer welfare. First, considering a simple Mehra-Prescott-style endowment economy with a representative agent facing consumption fluctuations calibrated to match U.S. data, we study to what extent ambiguity aversion can deliver asset prices that are consistent with data: a high return on equity and a low return on riskfree bonds. For some configurations of preference parameters— a discount factor, a degree of relative risk aversion, and a measure of ambiguity aversion— we find that it can. Then, we use these parameter configurations to investigate how much consumers would be willing to pay to reduce endowment fluctuations to zero, thus delivering a Lucas-style welfare cost of fluctuations. These costs turn out to be very large: consumers are willing to pay over 10% of consumption in permanent terms.
    Keywords: Ambiguity aversion; asset prices; business cycle
    JEL: D14 E32 G12
    Date: 2007–08–06
  24. By: L. Marattin
    Date: 2007–04
  25. By: Martin O'Brien (Economic and Social Research Institute (ESRI))
    Abstract: This paper examines whether macroeconomic convergence is an automatic outcome of forming a currency union by combining an analysis of real interest parity (RIP) in the EU with the argument for the endogeneity of the Optimum Currency Area (OCA) criteria. Using the DF-GLS and the CIPS* panel unit root test, RIP is tested for a sample of Euro area and non-Euro area EU member states with respect to Germany for key sub-periods covering 1979 M3 – 2005 M12. RIP is not found to hold for most of the sample between 1979 M3 and 1998 M12. There is evidence in favour of RIP for most of the Euro area sample during the 1999 M1 – 2005 M12 sub-period, exceptions being Ireland, Italy and Spain. RIP does not hold for any of the non-Euro area countries during the same period. This indicates some support for the endogeneity hypothesis, with the caveat that certain country-specific issues can seriously hinder the “automatic” integration process.
    Date: 2007–03
  26. By: Sabine Jokisch (Centre for European Economic Research); Laurence J. Kotlikoff (Department of Economics, Boston University and NBER)
    Abstract: America's aging coupled with high and growing old age health and pension benefits augers for much higher payroll taxes, with damaging effects on the U.S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model. The FairTax, which proposes to replace the federal payroll, personal income, corporate income, and estate tax with a progressive consumption tax, offers a potential alternative to this dismal economic future. According to our simulation model, these policy changes would lead to major improvements in the U.S. capital stock, long-run real wages and the wellbeing of the majority of Americans.
    Date: 2007–04
  27. By: Patrick Gagliardini; Paolo Porchia; Fabio Trojani
    Abstract: This paper studies the term structure implications of a simple structural economy in which the representative agent displays ambiguity aversion, modeled by Multiple Priors Recursive Utility. Bond excess returns reflect a premium for ambiguity, which is observationally distinct from the risk premium of affine yield curve models. The ambiguity premium can be large even in the simplest logutility model and is non zero also for stochastic factors that have a zero risk premium. A calibrated low-dimensional two-factor economy with ambiguity is able to reproduce the deviations from the expectations hypothesis documented in the literature, without modifying in a substantial way the nonlinear mean reversion dynamics of the short interest rate. In this economy, we do not find any apparent tradeoffs between fitting the first and second moments of the yield curve and the large equity premium.
    Keywords: General Equilibrium, Term Structure of Interest Rates, Ambiguity Aversion, Expectations Hypothesis, Campbell-Shiller Regression
    JEL: C68 G12 G13
    Date: 2007–07
    Abstract: · Editorial: La Comisión Independiente del Gasto: recomendaciones para una Política Fiscal Contracíclica. · Actualidad: Un balance de la situación fiscal en Colombia. · Encuesta de Opinión Financiera (reporte a mayo de 2007). · Encuesta de Opinión del Consumidor (reporte a mayo de 2007). · Encuesta de Opinión Empresarial (reporte a abril de 2007). · Indicadores Económicos.
    Date: 2007–07–02
  29. By: Selim, Sheikh
    Abstract: The Ramsey approach to optimal taxation and Ramsey tax rules have amassed substance in economic theory. However, they are often criticized on grounds of practicality, fairness, feasibility and some other aspects of designing actual tax policy. This paper presents a collection of these views; it discusses how closely or remotely Ramsey rules are followed in designing tax policy. It presents some recent tax reforms in the US and in the UK that have closely, if not completely, followed the principle of distortion minimization. Despite the widely speculated difficulty associated with mapping normative tax rules into positive policy design, it is possible to implement taxes that have strong correspondence to Ramsey tax formulas. This paper also discusses why some implemented tax rules lack consistency with Ramsey principles, or why it is often difficult to establish correspondence between some implemented taxes and Ramsey tax rules.
    Keywords: Optimal Taxation, Policy Relevance, Ramsey Tax Rules
    JEL: E61 E62 H21 H30
    Date: 2007
  30. By: Enrico Saltari; Giuseppe Travaglini
    Abstract: In this paper we address the question whether the shift in labour supply curve is the only fundamental change capturing the negative correlation between the growth rates of productivity and employment in European countries in the last fifteen years. If this explanation is correct then the labour demand curve did not shift in recent times, keeping other features of the production function unchanged. This is obviously a problem of identification. Thus, in this study we provide some empirical evidence explaining the shifts in labour demand curve over the same period. Our main conclusion is that the sluggish performance of the European economy in the last fifteen years has a common root in the large changes occurred in the labour market. We refer to these changes as technological and non technological shocks. In our model, adverse technological shocks shift the labour demand curve, while positive non technological shocks shift the labour supply curve. These two shifts contribute simultaneously to rise employment and to decrease the growth rate of productivity. Our evidence shows that labour productivity does respond positively to labour demand (technological) shocks and negatively to labour supply (non technological) shocks. Hence, the main result of our study is that both shocks are necessary to provide a complete picture of the employment-productivity trade-off in European countries during the last fifteen years.
    Keywords: Productivity slowdown, labour market, SVAR
    JEL: E32 J60 E29
    Date: 2007–08
  31. By: Tai-wei Hu; John Kennan; Neil Wallace
    Abstract: The Lagos-Wright model has been analyzed using particular trading protocols. Here, weakly and strongly implementable allocations are studied, where weak and strong are used in the sense of (weak) Nash (immune to individual defection) and strong Nash (immune to individual and cooperative pairwise defection). It is shown that the first-best allocation is strongly implementable without intervention for all sufficiently high discount factors. And, if people are free to skip the centralized meeting, then Friedman-rule intervention that uses lump-sum taxation in the centralized meeting to raise the return on money does not enlarge even the set of weakly implementable allocations.
    JEL: E40
    Date: 2007–08
  32. By: Pami Dua (Department of Economics, Delhi School of Economics, Delhi, India and Economic Cycle Research Institute, New York); Anirvan Banerji (Economic Cycle Research Institute, New York)
    Abstract: This paper evaluates the real-time performance of the growth rate of the DSE-ECRI Indian leading index for exports for predicting cyclical downturns and upturns in the growth rate of Indian exports. The index comprises the 36-country real effective exchange rate and leading indices of India’s 17 major trading partners. Leading indices of India’s major trading partners were developed at the Economic Cycle Research Institute and forecast the onset and end of recessions in overall economic activity in these economies. The results show that the real-time performance of the growth rate of the leading index of Indian exports has been creditable in the last seven years since its construction in 2001. In conjunction with the DSE-ECRI Indian Leading Index, designed to monitor the domestic economy, the exports leading index forms a sound foundation for a pioneering effort to monitor Indian economic cycles.
    Date: 2007–07
  33. By: Seán Lyons (Economic and Social Research Institute (ESRI)); Karen Mayor (Economic and Social Research Institute (ESRI)); Richard S.J Tol (Economic and Social Research Institute (ESRI))
    Abstract: This study uses country-level panel data on consumption in Ireland and seven other OECD countries to examine the evolution of Irish consumption patterns as Ireland underwent rapid macroeconomic growth. Consumption levels obviously increased due to substantially higher incomes, but it is less clear how the shares of different types of goods purchased have changed or whether Ireland's consumption mix has converged with that of other high-income countries. Rankings based on a simple distance measure of consumption similarity suggest that Ireland moved from a "low-income" pattern similar to Portugal or Greece to a "high-income" pattern like that of Canada between 1995 and 2003. Using static and dynamic Almost Ideal Demand System models, we first estimate long- and short-run Irish price and income elasticities for nine categories of commodities between 1976 and 2003. These results provide evidence of substantial habit formation in aggregate consumption. We then estimate a long-run cross-country model covering six aggregate commodity groups between 1975 and 2003. The analysis shows that Ireland’s demand parameters remain more similar to those of Greece than to higher-income OECD countries in the sample. Although Ireland has overtaken most other OECD countries in per capita income, it is still converging to a higher-income consumption pattern. We foresee further convergence of Irish expenditure patterns towards a pattern typical of high-income countries.
    Keywords: Macroeconomic transition, Almost Ideal Demand System, Consumption Patterns, Ireland, OECD
    JEL: D12 E2 F15
    Date: 2007–08
  34. By: Sean Lyons; Karen Mayor; Richard S.J. Tol (Economic and Social Research Institute, Dublin, Ireland)
    Abstract: This study uses country-level panel data on consumption in Ireland and seven other OECD countries to examine the evolution of Irish consumption patterns as Ireland underwent rapid macroeconomic growth. Consumption levels obviously increased due to substantially higher incomes, but it is less clear how the shares of different types of goods purchased have changed or whether Ireland's consumption mix has converged with that of other high-income countries. Rankings based on a simple distance measure of consumption similarity suggest that Ireland moved from a "low-income" pattern similar to Portugal or Greece to a "high-income" pattern like that of Canada between 1995 and 2003. Using static and dynamic Almost Ideal Demand System models, we first estimate long- and short-run Irish price and income elasticities for nine categories of commodities between 1976 and 2003. These results provide evidence of substantial habit formation in aggregate consumption. We then estimate a long-run cross-country model covering six aggregate commodity groups between 1975 and 2003. The analysis shows that Ireland’s demand parameters remain more similar to those of Greece than to higher-income OECD countries in the sample. Although Ireland has overtaken most other OECD countries in per capita income, it is still converging to a higher-income consumption pattern. We foresee further convergence of Irish expenditure patterns towards a pattern typical of high-income countries.
    Keywords: Macroeconomic transition; Almost Ideal Demand System; Consumption Patterns; Ireland; OECD
    JEL: D12 E2 F15
    Date: 2007–08
  35. By: Francois Gourio (Boston University, Department of Economics)
    Abstract: I derive a production-based asset pricing formula to infer aggregate stock market returns from macroeconomic time series when the technology is putty-clay. Capital heterogeneity leads to variation in the aggregate stock market value through a new compositional effect. The asset pricing formula, which holds regardless of the stochastic discount factor, predicts that stock returns are high when the ratio of investment to gross job creation is low. This contrasts with the adjustment cost model which predicts that stock returns are high when the investment-capital ratio is high. Incorporating the putty-clay technology increases substantially the ability of the adjustment cost model to match the data on U.S. stock returns.
    Date: 2007–01
  36. By: Prado, Jr., Jose Mauricio (Institute for International Economic Studies, Stockholm University)
    Abstract: The paper quantitatively investigates, in general equilibrium, the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement, given a level of regulation. A static version of Ghironi and Melitz’s (2005) industry model is used to show that firms with lower productivity endogenously choose to operate in the informal sector. I use cross-country data on taxes, measures of informality, and measures of regulation (entry and compliance costs, red tape, etc) to back out how high the enforcement levels must be country by country to make the theory match the data. Welfare gains from policy reforms can be fairly large. I find also that welfare gains from reducing regulation are almost twice those computed for the policy reform. Finally, distortions associated with informality account for a factor of 1.5 of the output per capita difference between the richest and the poorest countries.
    Keywords: Informal economy; General equilibrium; Regulation
    JEL: E61 H30
    Date: 2007–08–06
  37. By: Rod Tyers; Jane Golley
    Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which economic growth, stemming from improvements in traded sector productivity, causes non-traded prices to rise. More generally, real depreciations can stem from non-traded productivity improvements or, in association with failures of the law of one price for traded goods, labour supply growth and growth-related demand switches due to changes in the saving rate, trade distortions or investment risk premia. This chapter examines the sensitivity of China’s real exchange rate to these determinants. The results confirm that financial capital inflows are a dominant appreciating force in the short run, helping to explain why it is the surplus of Chinese domestic saving over its investment that has restrained the real exchange rate from appreciating during the past decade. In the long term, the appreciating effect of the inevitable fall in the saving rate is likely to be at least partially offset by the depreciating effects of skill acquisition and services productivity growth. Indeed, if future Chinese growth is propelled by these factors, a long term real depreciating trend could be in store.
    JEL: C68 C53 E27 F21 F43 F47 J11 J13 J26 O11
    Date: 2007–05
  38. By: Carlos Escudé; ;
    Abstract: The declassification of secret papers from the governmental archives of the United States and the United Kingdom makes it possible to document the instrumental use of the cause of human and civil rights for the attainment of pragmatic objectives of the United States government. At times, the rights policy was an instrument to pressure for a goal such as the ratification of the Inter-American Treaty of Reciprocal Assistance (the Rio Pact) – once reached, the rights policy was deactivated as friendly retribution. In other occasions, the rights policy was activated due to domestic pressure from U.S. lobbies such as the press and labor. When the United States were finally able to seduce Perón, the policy was deactivated and a discreet domestic campaign was launched to attempt to convince U.S. special interest groups of the convenience of cooperating with Argentina, as was widely accepted in regard to other dictatorships.
    Date: 2007–07
  39. By: Maia Güell; José V. Rodriguez Mora; Chris Telmer
    Abstract: We propose an alternative method for measuring intergenerational mobility. Measurements obtained from traditional methods (based on panel data) are scarce, difficult to compare across countries and almost impossible to get across time. In particular, this means that we do not know how intergenerational mobility is correlated with growth, income or the degree of inequality. Our proposal is to measure the informative content of surnames in one census. The more information the surname has on the income of an individual, the more important is her background in determining her outcomes; and thus, the less mobility there is. The reason is that surnames provide information about family relationships because the distribution of surnames is necessarily very skewed. A large percentage of the population is bound to have a very unfrequent surname. For them the partition generated by surnames is very informative on family linkages. First, we develop a model whose endogenous variable is the joint distribution of surnames and income. There, we explore the relationship between mobility and the informative content of surnames. We allow for assortative mating to be a determinant of both. Second, we use our methodology to show that in large Spanish region the informative content of surnames is large and consistent with the model. We also show that it has increased over time, indicating a substantial drop in the degree of mobility. Finally, using the peculiarities of the Spanish surname convention we show that the degree of assortative mating has also increased over time, in such a manner that might explain the decrease in mobility observed. Our method allows us to provide measures of mobility comparable across time. It should also allow us to study other issues related to inheritance.
    Keywords: Inheritance, birth-death processes, cross-sectional data, population genetics
    JEL: C31 E24 J1
    Date: 2007–05
  40. By: Rod Tyers; Jane Golley; Iain Bain
    Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which economic growth, stemming from improvements in traded sector productivity, causes non-traded prices to rise. The puzzle is that, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has shown no long run tendency to appreciate. Resolution requires extension of the hypothesis to allow for effects on the real exchange rate due to non-traded productivity improvements or, in association with failures of the law of one price for traded goods, labour supply growth and growth-related demand switches due to changes in financial capital flows and trade distortions. The sensitivity of China’s real exchange rate to these determinants is reviewed with the results confirming that financial and capital outflows are dominant depreciating forces in the short run. Along with WTO accession trade reforms, it is shown that the heretofore rising surplus of Chinese domestic saving over its investment has restrained the real exchange rate from appreciating since the late 1990s.
    JEL: C68 C53 E27 F21 F43 F47 O11
    Date: 2007–06
  41. By: Katsimi, Margarita; Moutos, Thomas
    Abstract: In this paper we reexamine the Feldstein-Horioka finding of limited international capital mobility by using a broader view (i.e., including human capital) of investment and saving. We find that the Feldstein-Horioka result is impervious to this change.
    Keywords: human capital, current account, investment-saving correlation, capital mobility
    JEL: E2 F2 I2 Q4
    Date: 2007
  42. By: Gavin Murphy (Economic and Social Research Institute (ESRI)); Iula Traistaru-Siedshlag (Economic and Social Research Institute (ESRI))
    Abstract: Information and communication technologies (ICT) play a central role in the transition to knowledge - based economies. In this paper we analyse the effects of human capital in fostering output growth in ICT manufacturing and services using data from a sample of twenty OECD countries over the period 1980-2002. We focus on within country between industry differences and estimate a system of simultaneous equations to account for simultaneous effects of human capital on physical investment and output growth. The results of our econometric analysis suggest that countries with a high human capital stock experienced faster output growth in ICT producing manufacturing and ICT using services. Also, in countries with high human capital improvement over the analysed period output grew relatively faster in ICT producing manufacturing industries. Furthermore, we find that past country level educational attainment reflected in the human capital stock and human capital accumulation over the analysed period had a direct positive and significant effect on physical capital investment. Our findings indicate that in developed countries human capital is an important factor driving the ICT industries growth.
    Keywords: Human capital, ICT industries, Economic growth
    JEL: E62 F43 O33
    Date: 2007–03
  43. By: Andrea Eisfeldt; Adriano Rampini
    Abstract: This paper studies the financing role of leasing and secured lending. We argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. We provide empirical evidence consistent with this prediction. Our theory is consistent with the explanation of leasing by practitioners, namely that leasing "preserves capital," which the academic literature considers a fallacy. Review of Financial Studies, forthcoming.
    Keywords: Leasing, secured debt, collateral, repossession, debt capacity, capital structure
    JEL: D23 D92 E22 G31 G32 G33
    Date: 2007–06
  44. By: Jason Allen; Ying Liu
    Abstract: The authors examine the degree of contestability in the Canadian banking system using the <em>H</em>-statistic proposed by Panzar and Rosse (1987) and modified by Bikker, Spierdijk, and Finnie (2006). A modification is necessary because the standard approach of controlling for size using total assets leads to an upward bias in the <em>H</em>-statistic. The authors propose a variety of model specifications and test for contestability using detailed quarterly balance-sheet data from 2000 to 2006. Contrary to Bikker, Spierdijk, and Finnie (2006), the authors find that the Canadian banking sector is in equilibrium and characterized by monopolistic competition. This result is in line with earlier studies of the Canadian banking sector (Nathan and Neave 1989) as well as cross-country studies that use cruder measures of Canadian banking inputs (Claessens and Laeven 2005). As in Bikker, Spierdijk, and Finnie (2006), the authors show that projecting revenue on total assets leads to an upward bias regarding the level of competition.
    Keywords: Financial institutions
    JEL: E5 E6
    Date: 2007
  45. By: Acocella, Nicola; Di Bartolomeo, Giovanni
    Abstract: This paper outlines the evolution of the theory of economic policy from the classical contributions of Frisch, Hansen, Tinbergen and Theil to situations of strategic interaction. Andrew Hughes Hallett has taken an active and relevant part in this evolution, having contributed to both the development and recent rediscovery of the classical theory, with possible relevant applications for model building.
    Keywords: policy games; policy effectiveness; controllability; equilibrium existence.
    JEL: A10 E00
    Date: 2007–06
  46. By: Simon Gilchrist (Boston University and NBER); Jae W. Sim (Boston University)
    Abstract: Without capital market imperfections, the capital structure of a firm, including the size, the maturity and the currency composition of debts, should not matter for investment decisions. The Asian financial crises provide a good opportunity to test this hypothesis. We approach the problem in two ways: First, we apply a conventional reduced-form analysis to a panel data of Korean manufacturing firms, arguing that the devaluation that occurred during the crisis provides a natural experiment in which to assess the effect of balance sheet shocks to investment. Second, we use indirect inference to estimate a structural dynamic programming problem of a firm with foreign debts and financial constraints. Both reduced-form evidence and structural parameter estimates imply an important role for finance in investment at the firm level. Counterfactual simulations imply that balance sheet effects may account for 50% to 80% of the drop in investment during the crisis period. Although our estimates suggest that foreign denominated debt had relatively little effect on aggregate investment spending for the Korean economy during this crisis episode, counterfactual experiments imply sizeable contractions in investment through this mechanism for economies that are more heavily dependent on foreign-denominated debt.
    Date: 2007–01
    Abstract: Los administradores tienen expectativas de disminución en la inflación Una mayor proporción de administradores espera que el spread aumente Disminuyen las expectativas de incrementos en las tasas de interés del Emisor. Las menores expectativas de inflación promueven a una mejora en el Índice de Confianza del Mercado. Por tercer mes consecutivo, los títulos atados a la DTF se mantienen como los más atractivos.
    Date: 2007–07–10
    Abstract: In this paper we use a new analytical approach to the Lucas-Uzawa model (Boucekkine and Ruiz-Tamarit, 2007) to extend the existinc results on the dynamics and notably on the imbalance effects arising in the model. The approach does not only allow to extend the traditional analysis to any initial conditions for all variables in level, but it also permits a more general investigation of imbalance effects
    Keywords: Lucas-Uzawa; hypergeometric functions; imbalance effects; global dynamics
    JEL: E20 O40 C60
    Date: 2007–07–30
  49. By: Juergen Antony (University of Augsburg, Department of Economics)
    Abstract: This paper develops a production function which two separate elasticities of substitution between two input factors. One of these elasticities is obtained if the factor intensity equals a particular baseline value. The second part of the paper gives an economic application and shows the theoretical properties of this production function regarding the development of relative capital intensities and relative production per efficiency unit of labor. Inequality across countries widens in transition to the steady state. Panel data on the development of these relative figures seem to support the implications of the above production function.
    Keywords: capital and labor substitution, cross country inequality
    JEL: O11 O33 E23
    Date: 2007–08
  50. By: Malte Faber (University of Heidelberg, Department of Economics); Thomas Petersen (University of Heidelberg, Department of Philosophy)
    Abstract: Zwei wesentliche Perspektiven, Arbeitslosigkeit zu untersuchen, sind die der Gerechtigkeit und die der Effizienz. Unverschuldete Arbeitslosigkeit wird als ungerecht empfunden. Zugleich wird häufig argumentiert, dass Arbeitslosigkeit zu gesellschaftlichen Wohlfahrtseinbußen führt, da Arbeit als Produktionsfaktor in erheblichen Umfang nicht genutzt wird. Dieses zweite Argument ist unmittelbar ein Effizienzargument. Beide Argumente führen möglicherweise zu ganz unterschiedlichen Einschätzungen davon, (i) warum Arbeitslosigkeit überhaupt ein Problem ist und (ii) von welchen Grundlagen man ausgehen sollte, um diesem Problem zu begegnen. Wir werden diese Fragen zu beantworten suchen, indem wir sie aus den beiden genannten Perspektiven betrachten. (Abschnitt 1). Die Perspektive der Effizienz ist die der Neuen Politischen Ökonomie (Public Choice), die auf dem Menschenbild oder Modell des Homo oeconomicus beruht (Abschnitt 2). Dieser werden wir in Abschnitt 3 eine andere gegenüberstellen, deren Basis das Menschenbild des Homo politicus ist. Den Homo politicus verstehen wir als einen Menschen, der in seinem Handeln vom Interesse an der Errichtung und Erhaltung eines gerechten politischen Gemeinwesens geleitet ist. Im Abschnitt 4 wenden wir uns dem Thema der Gerechtigkeit zu, indem wir die Konzepte der Ordnungsgerechtigkeit und der Verteilungsgerechtigkeit darstellen und diskutieren. Die Beziehung zwischen Gerechtigkeit und Marktwirtschaft wird in Abschnitt 5 untersucht. Damit sind die Voraussetzungen geschaffen, um in Abschnitt 6 das Thema Marktwirtschaft und Arbeit und in Abschnitt 7 die Beziehung zwischen politischer Verantwortung und Arbeit.zu behandeln. Schließlich untersuchen wir in Abschnitt 8 wirtschaftspolitische Perspektiven für den Arbeitsmarkt am Beispiel von Hartz IV. In Abschnitt 9 erläutern wir, dass die Idee der Ordunungsgerechtigkeit als Orientierung in der arbeitsmarktpolitischen Debatte verwendet werden kann.
    Keywords: Marktwirtschaft, Gerechtigkeit, Einkommensverteilung, Homo politicus, Homo oeconomicus, Arbeitslosigkeit, Hartz IV
    JEL: A13 D3 D63 E24 J00
    Date: 2007–08
  51. By: Luca, MARCHIORI
    Abstract: In this paper, different scenarios of increased cooperation between China and African countries are simulated. Recent intensification of political and economic ties between China and Sub-Saharan Afreican countries may give hope that an economic improvement in Sub-Saharan Africa (SSA) is possible. Three channels may lead to a catching-up for Africa with China : a reduction in AfricaÕs investment risk, an increase in its total factor productivity (TFP) and an improvement of its worker skills. A computable general equilibrium model of the world economy is used, that shares the world in 10 regions, among which Sub-Saharan Africa and China. Three scenarios are considered in which, by 2100, Africa will have reduced simultaneously its gaps in investment risk, TFP and eduction to China by either 20% (scenario 1), 40% (scenario2) or 60% (scenario3). The effects on the Sub-Saharan African economy are very promising. The results show that, already in 2050, Africa will have increased its per capita Gross Domestic Product (GDP) by 50% with scenario1, 80% with scenario 2 and by 125% with scenario 3.
    Keywords: OLG-CGE Model, Catching-up, sSmulations, Africa, China
    JEL: E27 J11 O47 O55 O57
    Date: 2007–04–24

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