nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒08‒18
thirty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks By Szilárd Benk; Max Gillman; Michal Kejak
  2. More Potent Monetary Policy? Insights from a Threshold Model By Jarkko Jääskelä
  3. Monetary policy responses amid credit and asset booms and busts By Pavasuthipaisit, Robert
  4. A fiscal rule to produce counter-cyclical fiscal policy in South Africa By Stan du Plessis; Willem H. Boshoff
  5. The Macroeconomic Debate on Scaling up HIV/AIDS Financing By Terry McKinley; Degol Hailu
  6. Can Excess Liquidity Signal an Asset Price Boom? By Annick Bruggeman
  7. "A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate" By L. Randall Wray
  8. Simple Monetary Rules under Fiscal Dominance By Michael, Kumhof; Ricardo, Nunes; Irina, Yakadina
  9. "The Fed's Real Reaction Function Monetary Policy, Inflation, Unemployment, Inequality-and Presidential Politics" By James K. Galbraith; Olivier Giovannoni; Ann J. Russo
  10. Distortionary Taxation, Rule of Thumb Consumers and the Effect of Fiscal Reforms By Andrea Colciago
  11. What Explains Persistent Inflation Differentials Across Transition Economies? By Felix Hammermann; Mark Flanagan
  12. An Open Economy Model of the Credit Channel Applied to Four Asian Economies By Spiros Bougheas; Paul Mizen; Cihan Yalcin
  13. La Experiencia de los Primeros Años del Euro By Fernando Ossa
  14. Co-movements in international dollar price levels By Shelley, Gary; Wallace, Frederick
  15. Une évaluation du rôle des déterminants du partage de la valeur ajoutée By Mussard, Stéphane; Philippe, Bernard
  16. Price-Level Computation: Illustrations By Sydney N. Afriat; Carlo Milana
  17. Business Expectations for a Common Currency in the Arabian Gulf By Rutledge, Emilie
  18. Estimating Discount Functions with Consumption Choices over the Lifecycle By David Laibson; Andrea Repetto; Jeremy Tobacman
  19. Banking, Inside Money and Outside Money By Sun, Hongfei
  20. The Feldstein-Horioka Puzzle: a Panel Smooth<br />Transition Regression Approach By Julien Fouquau; Christophe Hurlin; Isabelle Rabaud
  21. Predicting GDP Components. Do Leading Indicators Increase Predictability? By Jonas Dovern
  22. Is Foreign-Owned Capital a Bad Thing to Tax? By William Scarth
  23. Rules versus discretion in managing the Hong Kong dollar, 1983-2006 By Tony Latter
  24. Rediscounting under aggregate risk with moral hazard By James T. E. Chapman; Antoine Martin
  25. Expectations and Exchange Rate Policy By Michael B. Devereux; Charles Engel
  26. Public-private Partnerships in Micro-finance: Should NGO Involvement be Restricted? By Roy Chowdhury, Prabal; Roy, Jaideep
  27. China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients By Alice Y. Ouyang; Ramkishen S. Rajan; Thomas D. Willett
  28. Tests of equal predictive ability with real-time data By Todd E. Clark; Michael W. McCracken
  29. Malaria: Disease Impacts and Long-Run Income Differences By Douglas Gollin; Christian Zimmermann
  30. A Note on Income Distribution and Growth By William Scarth
  31. Corporate Governance and Investment in East Asian Firms -Empirical Analysis of Family-Controlled Firms- By Masaharu Hanazaki; Qun Liu

  1. By: Szilárd Benk (Magyar Nemzeti Bank); Max Gillman (Cardiff Business School); Michal Kejak (CERGE-EI)
    Abstract: The paper sets the neoclassical monetary business cycle model within endogenous growth, adds exchange credit shocks, and finds that money and credit shocks explain much of the velocity variation. The role of the shocks varies across sub-periods in an intuitive fashion. Endogenous growth is key to the construction of the money and credit shocks since these have similar effects on velocity, but opposite effects upon growth. The model matches the data's average velocity and simulates well velocity volatility. Its Cagan-like money demand means that money and credit shocks cause greater velocity variation the higher is the nominal interest rate.
    Keywords: Velocity, business cycle, credit shocks, endogenous growth.
    JEL: E13 E32 E44
    Date: 2007
  2. By: Jarkko Jääskelä (Reserve Bank of Australia)
    Abstract: It has been argued that the effect of a change in the monetary policy interest rate on aggregate demand may be larger at higher levels of indebtedness through its impact on cash flows. However, the extent of credit constraints may be at least as important, if not more so. In particular, monetary policy could have a larger impact on aggregate demand when credit constraints are pervasive (which could be the case at low or high levels of indebtedness, or both). This paper examines the extent to which the strength of credit growth, which can be seen as a proxy for credit constraints, may affect the transmission of monetary policy in a way that cannot be captured in linear models. The results reveal that GDP growth is more responsive to interest rate shocks when credit growth is low. Separate models for household and business credit growth confirm this finding: consumption and business investment are more responsive to interest rate shocks when credit is growing slowly for the household and business sectors, respectively.
    Keywords: monetary policy; business-cycle asymmetries; threshold models
    JEL: C51 C52 E37 E52
    Date: 2007–07
  3. By: Pavasuthipaisit, Robert
    Abstract: This paper examines the conduct of monetary policy in the presence of credit and asset booms and busts. Conventional wisdom is for the central bank to respond to asset prices and other financial indicators insofar as these factors affect the forecasts of inflation. This paper finds that such strategy is far from being optimal. This paper derives optimal policy under commitment in a standard financial accelerator model and finds that in the optimal equilibrium, the central bank responds to a rise in productivity growth by making a credible commitment to keep the rate of return on capital below the trend. This causes net worth to be countercyclical, which is the key mechanism that allows the central bank to successfully stabilize the economy. The countercyclicality of net worth is consistent with what can be found in the data on the periods following the Volcker chairmanship of the FOMC.
    Keywords: Financial accelerator; optimal policy under commitment; asset prices; credit market frictions; countercyclicality of net worth
    JEL: E58 E50 E44
    Date: 2007–06
  4. By: Stan du Plessis (Department of Economics, Stellenbosch University); Willem H. Boshoff (Department of Economics, Stellenbosch University)
    Abstract: This paper considers the role of fiscal policy as a component of stabilisation policy in South Africa. The South African economy – like many others, most notably the United States – has experienced considerable economic stability over the last decade. At stake in this paper is whether fiscal policy had intentionally or unintentionally contributed to this favourable outcome. A number of techniques are used to investigate the cyclicality of fiscal outcomes since the early 1990s in South Africa and the evidence does not support claims that South African fiscal policy had been pro-cyclical (and hence destabilising) overt this period. But to prevent potential fiscal pro-cyclicality from becoming a reality in South Africa a package of reforms is derived that is consistent with the empirical evidence presented. The recommended reform includes: firstly, a fiscal rule that includes the following features: a numerical limit on the ratio of government expenditure to GDP and a commitment to a balanced budget (adjusted for the economic cycle), which would allow automatic revenue stabilisers to ensure a counter-cyclical policy. Secondly, a procedural rule that requires an independent business cycle commission to calculate potential GDP, the output gap and the adjustments required to calculate the structural budget balance. This depoliticised commission will enhance fiscal transparency and prevent the temptation by fiscal authorities to adjust these estimates, which have undermined some fiscal rules in practice.
    Keywords: Fiscal policy, Stabilisation policy, Structural budget balance, Fiscal stance, Fiscal rules
    JEL: E32 E61 E62 E63
    Date: 2007
  5. By: Terry McKinley (International Poverty Centre); Degol Hailu (UNDP SURF)
    Keywords: Poverty, ECONOMIC, Macroeconomic, HIV, AIDS
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–09
  6. By: Annick Bruggeman (National Bank of Belgium, Research Department)
    Abstract: This paper analyses the relationship between the prevailing liquidity conditions (such as measures of money, credit and interest rates) and developments in asset prices from a monetary analysis perspective. After having identified periods of sustained excess liquidity, we analyse under which conditions they are more likely to be followed by an asset price boom. The results from a descriptive analysis of the developments in a number of macroeconomic and financial variables suggest that periods of sustained excess liquidity that are accompanied by strong economic activity, low interest rates, high real credit growth and low inflation have a higher likelihood of being followed by an asset price boom. This conclusion is also confirmed by a logit analysis.
    Keywords: excess liquidity, asset prices, logit model
    JEL: E41 E51 E52
    Date: 2007–08
  7. By: L. Randall Wray
    Abstract: This paper addresses three issues surrounding monetary policy formation: policy independence, choice of operating targets, and rules versus discretion. According to the New Monetary Consensus, the central bank needs policy independence to build credibility; the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. This paper provides an alternative view, arguing that an effective central bank cannot be independent as conventionally defined, where effectiveness is indicated by ability to hit an overnight nominal interest rate target. Discretionary policy is rejected, as are conventional views of the central bank's ability to achieve traditional goals such as robust growth, low inflation, and high employment. Thus, the paper returns to Keynes's call for low interest rates and euthanasia of the rentier.
    Date: 2007–08
  8. By: Michael, Kumhof; Ricardo, Nunes; Irina, Yakadina
    Abstract: This paper asks whether an aggressive monetary policy response to inflation is feasible in countries that suffer from fiscal dominance, as long as monetary policy also responds to fiscal variables. We find that if nominal interest rates are allowed to respond to government debt, even aggressive rules that satisfy the Taylor principle can produce unique equilibria. But following such rules results in extremely volatile inflation. This leads to very frequent violations of the zero lower bound on nominal interest rates that make such rules infeasible. Even within the set of feasible rules the optimal response to inflation is highly negative, and more aggressive inflation fighting is inferior from a welfare point of view. The welfare gain from responding to fiscal variables is minimal compared to the gain from eliminating fiscal dominance.
    Keywords: Optimal simple policy rules; fiscal dominance
    JEL: E40
    Date: 2007–08
  9. By: James K. Galbraith; Olivier Giovannoni; Ann J. Russo
    Abstract: Using a VAR model of the American economy from 1984 to 2003, we find that, contrary to official claims, the Federal Reserve does not target inflation or react to "inflation signals." Rather, the Fed reacts to the very "real" signal sent by unemployment, in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. Tests of variations in the workings of a Taylor Rule, using dummy variable regressions, on data going back to 1969 suggest that after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell "too low." Further, we find that monetary policy (measured by the yield curve) has significant causal impact on pay inequality-a domain where the Fed refuses responsibility. Finally, we test whether Federal Reserve policy has exhibited a pattern of partisan bias in presidential election years, with results that suggest the presence of such bias, after controlling for the effects of inflation and unemployment.
    Date: 2007–08
  10. By: Andrea Colciago (Department of Economics, University of Milan-Bicocca)
    Abstract: We consider a standard growth model augmented with a share of rule of thumb con- sumers. A Government ?nances a preset level of public expenditure through ?at tax rates on labor and capital income and also makes lump sum transfers to non ricardian consumers. It has been shown in representative agents models with perfect competition that balanced budget rules with endogenous tax rates are likely to generate indetermi- nacy of the perfect foresight equilibrium. We show that the presence of rule of thumb consumers reduces this possibility. Further, we show that a ?scal reform which features a reduction in the capital income tax rate and leads to the steady state where the welfare of non ricardian agents is maximized could be Pareto improving. This is obtained via a direct redistribution of resources to rule of thumb consumers along the transition path.
    Keywords: Non Ricardian Agents, Fiscal Policy, Capital Income Tax Rate
    JEL: E62
    Date: 2007
  11. By: Felix Hammermann; Mark Flanagan
    Abstract: Panel estimates based on 19 transition economies suggests that some central banks may aim at comparatively high inflation rates mainly to make up for, and to perhaps exploit, lagging internal and external liberalization in their economies. Out-of-sample forecasts, based on expected developments in the underlying structure of these economies, and assuming no changes in institutions, suggest that incentives may be diminishing, but not to the point where inflation levels below 5 percent could credibly be announced as targets. Greater economic liberalization would help reduce incentives for higher inflation, and enhancements to central bank independence could help shield these central banks from pressures.
    Keywords: inflation, transition economies, panel data
    JEL: E58 P24
    Date: 2007–08
  12. By: Spiros Bougheas (University of Nottingham); Paul Mizen (University of Nottingham); Cihan Yalcin (University of Nottingham)
    Abstract: This paper provides a theoretical model of an open economy credit channel including currency mismatch and financial fragility where exporting firms have access to international credit but non-exporting firms do not. It considers the post-crisis outcome which is predicted to be dramatically different for exporters/ non-exporters. We examine firms¡¦ access to external finance in four Asian economies after 1997 using a large panel of balance sheet data. Our paper demonstrates that firm heterogeneity is critical to understanding the open economy credit channel effects post-crisis since smaller and less profitable firms are indeed less likely to obtain credit than larger, export-oriented firms.
    Keywords: Credit Channel, External Finance, Asian Crisis
    JEL: E32 E44 E51
    Date: 2007–04
  13. By: Fernando Ossa (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: La unificación monetaria en la Unión Europea (UE) comenzó en enero de 1999. A partir de esa fecha once países fijaron irrevocablemente el tipo de cambio de sus monedas con respecto a una unidad de cuenta denominada euro, y el Banco Central Europeo asumió el control de las ofertas monetarias nacionales. A comienzos del año 2002 se emitieron billetes y monedas de euros, con lo cual el euro reemplazó a las monedas nacionales de los once países participantes. En la actualidad pertenecen al área euro trece países. Este trabajo estudia la experiencia de los primeros años del euro, es decir, desde el comienzo de la unificación monetaria en 1999 hasta el presente. En la sección dos se presenta el desarrollo del proceso de integración monetaria en la Unión Europea, desde el Sistema Monetario Europeo hasta la adopción del euro. La tercera parte analiza el impacto del euro en el comercio de bienes y servicios entre los países miembros, y en la integración de los mercados financieros. La cuarta sección estudia la política monetaria y fiscal en el área euro. En la quinta parte se analiza la función del euro como dinero internacional, tanto en los usos privados como oficiales. La sección sexta y final corresponde al resumen y conclusiones.
    Keywords: euro, unificación monetaria, bancos centrales, integración
    JEL: E42 E58 F33 F36
    Date: 2007
  14. By: Shelley, Gary; Wallace, Frederick
    Abstract: This paper studies the relation between movements in the U.S. price level and the dollar price levels of nineteen other countries. Using the band pass filter developed by Christiano and Fitzgerald (2003), we examine correlations between dollar prices when decomposed into their high, medium, and low frequency cycles. The low frequency cycle in the U.S. price series is highly correlated with low frequency cycles in dollar price levels of the majority of countries in our sample. The high correlation between low frequency cycles persists over a variety of historical sub-periods, including the eras of fixed and flexible nominal exchange rates. This result, suggesting the existence of a common long-run price cycle, is consistent with long-run purchasing power parity. In contrast, both high and medium frequency cycles are more highly correlated prior to the Great Depression. This result is consistent with studies finding greater stability of real exchange rates during the era of the gold standard. Also, it appears that the increased volatility of U.S. real exchange rates after the 1973 move to flexible exchange rates was largely due to declines in the co-movement of short-run dollar price cycles.
    Keywords: Purchasing power parity; real exchange rate volatility; band-pass filter
    JEL: F41 E31
    Date: 2007–07
  15. By: Mussard, Stéphane (CEPS/INSTEAD, GREDI, GEREM); Philippe, Bernard (GEREM, Université de Perpignan)
    Abstract: Au cours de la période 1961/2000, pourquoi la tendance à la hausse des taux de chômage s’est-elle inversée dans des économies « anglo-saxonnes » comme les États-Unis et le Royaume-Uni et pas dans des économies « continentales » telles que l’Allemagne, la France et l’Italie ? Nous soutenons que cette inversion ne peut pas être imputée au fait que ces dernières auraient maîtrisé leurs coûts salariaux unitaires moins bien que les premières. Pour défendre ce point de vue, nous commençons par expliquer comment et pourquoi nous sommes incités à nous intéresser aux déterminants d’un indicateur statistique : le taux de croissance du taux de marge. Afin d’évaluer l’influence exercée sur ce taux par chacun de ses déterminants au cours de la période 1961-2000, nous utilisons la fonction valeur de Shapley de manière particulière : en tant qu’outil permettant de décomposer un indicateur diachronique déterminé par une structure multiplicative.
    Keywords: Coût salarial unitaire; Décomposition ; Shapley ; Taux de chômage ; Taux de marge
    JEL: E25 E24 C39
    Date: 2007–06
  16. By: Sydney N. Afriat; Carlo Milana
    Abstract: It has been submitted that, for the very large number of different traditional type formulae to determine price indices associated with a pair of periods, which are joined with the longstanding question of which one to choose, they should all be abandoned. For the method proposed instead, price levels associated with periods are first all computed together, subject to a consistency of the data, and then price indices that are true taken together are determined from their ratios. An approximation method can apply in the case of inconsistency. Here are illustrations of the method.
    Keywords: index-number problem, inflation, non-parametric, price index, price level, revealed preference.
    JEL: C43 E31
    Date: 2007–07
  17. By: Rutledge, Emilie
    Abstract: Purpose – As the 2010 launch date for a common currency in the Arabian Gulf approaches, one important aspect policymakers should consider is the impact of the change of monetary system on private sector businesses. The purpose of this paper is to provide primary evidence on business attitudes towards, and preparedness for, the proposed Gulf single currency. Design/Methodology/approach – Prior to the launch of the EMU surveys assessed European business expectations and preparedness for the euro. This is the first GCC wide business survey designed to ascertain the opinions of businesses regarding the proposed Gulf currency union. Findings - Overall, businesses are in favour of the currency union and expect it to have a positive impact, but they consider non-monetary factors to be more significant to their future growth. Nevertheless, not one respondent was actively preparing for the single currency. This may very well be because regional institutions have yet to provide any business-centric information regarding the planned currency union. The paper contends that if participating governments do not soon start making policy orientated preparations – not least assisting businesses to prepare – then the existing positive sentiment may erode. Research Implications/Limitations – This study provides evidence on the microeconomic implications of a Gulf currency union and its potential impact on the business community. Practical Implications – In order to ensure a smooth transition to the single currency regional policymakers must move towards meeting a credible timetable for currency union and take immediate steps to inform and assist businesses in preparing for it.
    Keywords: Business survey; economic and monetary integration; single currency; monetary union; Gulf Cooperation Council states
    JEL: F15 E52 M20 O53
    Date: 2007–04
  18. By: David Laibson; Andrea Repetto; Jeremy Tobacman
    Abstract: Intertemporal preferences are difficult to measure. We estimate time preferences using a structural buffer stock consumption model and the Method of Simulated Moments. The model includes stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and discount functions that allow short-run and long-run discount rates to differ. Data on retirement wealth accumulation, credit card borrowing, and consumption-income comovement identify the model. Our benchmark estimates imply a 40% short-term annualized discount rate and a 4.3% long-term annualized discount rate. Almost all specifications reject the restriction to a constant discount rate. Our quantitative results are sensitive to assumptions about the return on illiquid assets and the coefficient of relative risk aversion. When we jointly estimate the coefficient of relative risk aversion and the discount function, the short-term discount rate is 15% and the long-term discount rate is 3.8%.
    Keywords: Intertemporal Consumer Choice, Lifecycle Models and Saving, Consumption, Saving
    JEL: D91 E21
    Date: 2007
  19. By: Sun, Hongfei
    Abstract: This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e. bank money that expires immediately after the settlement of debts. Short-term inside money dominates outside money because the former makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
    Keywords: banking; inside money; outside money
    JEL: G2 E4
    Date: 2007–08
  20. By: Julien Fouquau (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Isabelle Rabaud (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: This paper proposes an original framework to determine the relative influence of five<br />factors on the Feldstein and Horioka result of OECD countries with a strong saving-<br />investment association. Based on panel threshold regression models, we establish<br />country-specific and time-specific saving retention coefficients for 24 OECD coun-<br />tries over the period 1960-2000. These coefficients are assumed to change smoothly,<br />as a function of five threshold variables, considered as the most important in the<br />literature devoted to the Feldstein and Horioka puzzle. The results show that; de-<br />gree of openness, country size and current account to GDP ratios have the greatest<br />influence on the investment-saving relationship.
    Keywords: Feldstein Horioka puzzle, Panel Smooth Threshold Regression models,<br />saving-investment association, capital mobility .
    Date: 2007–08–03
  21. By: Jonas Dovern
    Abstract: We use the concept of predictability as presented in Diebold and Kilian (2001) to assess how well the growth rates of various components of German GDP can be forecasted. In particular, it is analyzed how well different commonly used leading indicators can increase predictability of these time series. To this end, we propose an algorithm to select an optimal information set from a full set of possible leading indicators. In the univariate set up, we find very small degrees of predictability for all quarterly growth rates whereas yearly growth rates seem to be more predictable at short forecast horizons. According to the algorithm proposed, from a set of financial leading indicators the short term interest rate is included in the highest number of information sets and from a set of survey indicators the ifo-business expectation index is included in most cases. Conditioning on the optimal sets of leading indicators improves the predictability of most of the quarterly growth rates substantially while the predictabilities of the yearly growth rates cannot be increased significantly further. The results indicate that there is clearly evidence that complicated forecasting models are usually superior to simple AR univariate models.
    Keywords: Predictability, Leading Indicators, GDP component
    JEL: C53 E37
    Date: 2006–07
  22. By: William Scarth
    Abstract: The aging population has raised at least two concerns about tax policy. First, taxes will need to be increased to cover higher public-pension and medical-care expenses when baby boomers have retired. Second, taxes can be cut in the meantime, as the government realizes the "fiscal dividend" that accompanies its debt reduction program (that has been motivated by the aging population development). This paper uses a simple endogenous growth analysis to examine these issues. It is assumed that sales tax increases are infeasible on political grounds. Two conclusions emerge: the income tax rate levied on domestic residents should be cut during the debt-reduction period, and the tax rate on foreigners whose capital is operating in Canada should be increased later on when the bulk of the baby boomers have retired.
    Keywords: fiscal policy, endogenous growth, open economy
    JEL: E10 E60 F43 H30 O40
    Date: 2007–06
  23. By: Tony Latter (Hong Kong Institute for Monetary Research)
    Abstract: This paper examines the way in which Hong Kong¡¦s currency board has operated since its re-introduction in 1983. It discusses currency board design and the extent to which Hong Kong has conformed to particular principles. The core of the paper is an assessment of the rules-versus-discretion question. From 1983 to 1988 the currency board convertibility obligation applied, in effect, to physical cash only. Arbitrage could not be relied upon to ensure that the market rate converged to 7.80, so intervention ¡V mostly in the foreign exchange market ¡V played a significant role. In 1988 the authorities acquired the means to apply currency board principles also to the reserve balance of the banking system, but over the next ten years they did not exploit that to full advantage in the currency board context. They gave no convertibility promise for the reserve balance and seldom allowed foreign exchange transactions to trigger currency-board-type adjustment. They concentrated instead on managing bank liquidity or interest rates, very often via money market intervention, albeit subject to the overriding goal of a stable exchange rate. But the range which defined that stability was never revealed. Although this exercise of discretion and the departures from strict currency board principles were not obviously damaging, they may have complicated official procedures unnecessarily, and may have raised doubts as to the authorities¡¦ longterm commitment to 7.80. In other words, rather than helping to settle markets, the tactics may at times have disturbed them. Reforms in 1998 included a weak-side convertibility undertaking for banks¡¦ reserve money at 7.80 (after transition), but left strong-side intervention to the discretion of the Monetary Authority. It was only in 2005 that a firm strong-side undertaking was introduced at 7.75, with the weak side bound being moved to 7.85 in order to provide symmetry. Now, only one minor element of discretion ¡V for intrazone intervention ¡V remains. Whereas discretionary interventions were probably very necessary in the early years after 1983, the authorities could have moved more quickly after 1988 to reach the almost completely rule-based status of today. But the stability of the exchange rate over the entire period speaks for itself, and it is not obvious that stricter adherence to currency board principles would have delivered a materially different outcome.
    Date: 2007–01
  24. By: James T. E. Chapman; Antoine Martin
    Abstract: In a 1999 paper, Freeman proposes a model in which discount window lending and open market operations have different outcomes - an important development because in most of the literature the results of these policy tools are indistinguishable. Freeman's conclusion that the central bank should absorb losses related to default to provide risk-sharing goes against the concern that central banks should limit their exposure to credit risk. We extend Freeman's model by introducing moral hazard. With moral hazard, the central bank should avoid absorbing losses, contrary to Freeman's argument. However, we show that the outcomes of discount window lending and open market operations can still be distinguished in this new framework. The optimal policy would be for the central bank to make a restricted number of creditors compete for funds. By restricting the number of agents, the central bank can limit the moral hazard problem. And by making agents compete with each other, the central bank can exploit market information that reveals the state of the economy.
    Keywords: Discount window ; Open market operations ; Banks and banking, Central ; Credit
    Date: 2007
  25. By: Michael B. Devereux (University of British Columbia); Charles Engel (University of Wisconsin)
    Abstract: Both empirical evidence and theoretical discussion has long emphasized the impact of ¡¥news¡¦ on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in determining the relative price of non-durable goods. In this paper we argue that these two roles may conflict with one another when nominal goods prices are sticky. If news about future asset returns causes movements in current exchange rates, then when nominal prices are slow to adjust, this may cause changes in current relative goods prices that have no efficiency rationale. In this sense, anticipations of future shocks to fundamentals can cause current exchange rate misalignments. We outline a series of models in which an optimal policy eliminates news shocks on exchange rates.
    Date: 2007–03
  26. By: Roy Chowdhury, Prabal; Roy, Jaideep
    Abstract: This paper examines public-private partnerships in micro-finance, whereby NGOs can help in channelizing credit to the poor, both in borrower selection, as well as in project implementation. We argue that a distortion may arise out of the fact that the private partner, i.e. the NGO, is a motivated agent. We find that whenever the project is neither too productive, nor too unproductive, reducing such distortion requires unbundling borrower selection and project implementation, with the NGO being involved in borrower selection only.
    Keywords: Public-private partnerships; micro-finance; motivated agent; NGO.
    JEL: O17 H5 G28 G21 E62
    Date: 2007–08–14
  27. By: Alice Y. Ouyang (Claremont Graduate University); Ramkishen S. Rajan (George Mason University); Thomas D. Willett (Claremont Graduate University)
    Abstract: China has been stockpiling international reserves at an extremely rapid pace since the late 1990s and has surpassed Japan to become the largest reserve holder in the world. This paper undertakes an empirical investigation to assess the extent of de facto sterilization and capital mobility using monthly data between mid 1999 and late 2005. We find that China has been able to successfully sterilize most of these reserve increases, thus making it a reserve sink such as Germany was under the Bretton Woods system. Recursive estimation of offset coefficients, however, finds evidence of increasing mobile capital flows that may undercut China¡¦s ability to continue high levels of sterilization.
    Keywords: Balance of payments, China, Capital Mobility, Reserves, Sterilization
    JEL: E51 E52 E58
    Date: 2007–05
  28. By: Todd E. Clark; Michael W. McCracken
    Abstract: This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy applied to direct, multi-step predictions from both non-nested and nested linear regression models. In contrast to earlier work -- including West (1996), Clark and McCracken (2001, 2005),and McCracken (2006) -- our asymptotics take account of the real-time, revised nature of the data. Monte Carlo simulations indicate that our asymptotic approximations yield reasonable size and power properties in most circumstances. The paper concludes with an examination of the real-time predictive content of various measures of economic activity for inflation.
    Keywords: Forecasting
    Date: 2007
  29. By: Douglas Gollin (Williams College); Christian Zimmermann (University of Connecticut)
    Abstract: The World Health Organization (WHO) reports that malaria, a parasitic disease transmitted by mosquitoes, causes over 300 million episodes of "acute illness" and more than one million deaths annually. Most of the deaths occur in poor countries of the tropics, and especially sub-Saharan Africa. Some researchers have suggested that ecological differences associated with malaria prevalence are perhaps the most important reason why some countries today are rich and others poor. This paper explores the question in an explicit dynamic general equilibrium framework, using a calibrated model that incorporates epidemiological features into a standard general equilibrium framework.
    Keywords: Malaria, Epidemiology, GDP, Disease prevention, Sub-Saharan Africa.
    JEL: I1 O11 E13 E21
    Date: 2007–08
  30. By: William Scarth
    Abstract: Many analysts expect the aging population to lead to a reduction in the growth of living standards. Income inequality – a problem that has been accentuated by the payroll tax hikes that were necessary to fund the public pension as the population ages – is becoming an increasing challenge at the same time. As a result, policy-makers need to pursue initiatives that can simultaneously address both our efficiency and our equity objectives. With the challenge of the aging population, it is all the more important that we not rely on fiscal policies that involve a trade-off between growth and equality. This paper identifies a strategy for tax policy that meets these objectives.
    Keywords: fiscal policy, endogenous growth, efficiency and equity
    JEL: E10 E60 H30 O40
    Date: 2007–06
  31. By: Masaharu Hanazaki; Qun Liu
    Abstract: This paper investigates the mechanisms that ?firms use to get state favors. We focus on a less well studied but common mechanism: business owners seeking election to top office. Using Thailand as a research setting, we fi?nd that business owners who rely on government concessions or are wealthier are more likely to run for top office. Once in power the market valuation of their ?firms increases dramatically. Surprisingly, the owners' political power does not change their fi?rms' fi?nancing strategies. Instead, we show that business owners in top office use their policy decision powers to implement regulations and public policies favorable to their fi?rms. Such policies hinder not only domestic competitors but also foreign investors. As a result, connected fi?rms are able to seize more market share.
    Keywords: Trade credit, Bank-firm relationship, Unlisted firms
    JEL: G32 E22 O53
    Date: 2006–10

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