nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒09‒02
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. An affine macro-finance term structure model for the euro area By Lemke, Wolfgang
  2. Inflation-linked bonds from a central bank perspective By Juan Angel Garcia; Adrian van Rixtel
  3. Independence and Accountability of Monetary and Fiscal Policy Committees By Mihailov, Alexander; Ullrich, Katrin
  4. Fiscal Policy in a Stock-Flow consistent (SFC) Model: A Comment By Bill Martin
  5. Monetary Policy in East Asia: the Case of Singapore By Bennett T. McCallum
  6. Identifying aggregate supply and demand shocks in South Africa By Stan du Plessis; Ben Smit; Federico Sturzenegger
  7. Modelling inflation in China – a regional perspective By Mehrotra, Aaron; Peltonen, Tuomas; Santos Rivera, Alvaro
  8. How Important is Money in the Conduct of Monetary Policy? By Michael Woodford
  9. Delivering Endogenous Inertia in Prices and Output By Alok Johri
  10. Monetary Policy and Exchange Rate Regime: Proposal for a Small and Less Developed Economy By Jian Gao; Gang Gong; Xue-Zhong He
  11. Does anticipation of government spending matter? Evidence from an expectation augmented VAR By Tenhofen, Jörn; Wolff, Guntram B.
  12. The transmission of US cyclical developments to the rest of the world. By Stéphane Dées; Isabel Vansteenkiste
  13. A Neoclassical Analysis of the Asian Crisis: Business Cycle Accounting of a Small Open Economy By Keisuke Otsu
  14. A Microfounded Sectoral Model for Open Economies By Plasmans, J.E.J.; Fornero, J.; Michalak, T.
  15. Long run effects of money on real consumption and investment in the U.S. By Shelley, Gary; Wallace, Frederick
  16. Price-Level Targeting By Agathe Côté
  17. Listening Without Understanding By Menno Middeldorp; Clemens Kool; Stephanie Rosenkranz
  18. Optimal Monetary Policy Committee Size: Theory and Cross Country Evidence By Szilárd Erhart; Jose Luis Vasquez-Paz
  19. Central Bank Independence and inflation: the case of Greece By PANAGIOTIDIS, Theodore; TRIAMPELLA, Afroditi
  20. The HIV Anticaptory Saving Motive: An Empirical Analysis in South Africa By Kuilen, G. van de; Lammers, J.
  21. Financial Intermediaries, Markets, and Growth By Falko Fecht; Kevin X.D. Huang; Antoine Martin
  22. Recent macroeconomic performance in colombia: what went wrong? By ARANGO, Luis Eduardo; IREGUI, Ana María; MELO, Luis F.
  23. Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation By Raquel Fonseca; Lise Patureau; Thepthida Sopraseuth
  24. Do China's capital controls still bind? Implications for monetary autonomy and capital liberalisation By Guonan Ma; Robert N. McCauley
  25. The Robustness and Real Consequences of Nominal Wage Rigidity By Ernst Fehr; Lorenz Goette
  26. Output Gaps and Inflation in Mainland China By Stefan Gerlach; Wensheng Peng
  27. Excess Sensitivity in Consumption without Liquidity Constraint: Evidence from Monthly Household Panel Data By Shawn Ni
  28. Is the Chinese Growth Miracle Built to Last? By Eswar S. Prasad
  29. Sostenibilidad de la cuenta corriente: una aproximación desde la suavización intertemporal del consumo By Juan Nicolás Hernández
  30. Macroeconomic Volatility, Debt Dynamics, and Sovereign Interest Rate Spreads By Hans Genberg; Astrit Sulstarova
  31. Structural Breaks in Public Infrastructure Investment in the U.S. By Alfredo M. Pereira; Martin B. Schmidt
  32. Capital regulation and banks' financial decisions By Haibin Zhu
  33. Rational bubbles in emerging stockmarkets By Nunes, Mauricio; Da Silva, Sergio
  34. The Property Market and the Macroeconomy of the Mainland: A Cross Region Study By Wensheng Peng; Dickson C. Tam; Matthew S. Yiu
  35. Optimal Capital Income Taxation By Andrew B. Abel
  36. Malaria: Disease Impacts and Long-Run Income Differences By Douglas Gollin; Christian Zimmermann
  37. Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis By Sonja Fagernäs; Prabirjit Sarkar; Ajit Singh
  38. A Micro-Decomposition Analysis of the Macroeconomic Determinants of Human Development By LAMBERT Sylvie; RAVALLION Martin; VAN DE WALLE Dominique
  40. Herding and Bank Runs By Chao Gu
  41. Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy By Blanchard, Emily; Willmann, Gerald
  42. Financial Globalization and Emerging Market Portfolios By Michael B Devereux

  1. By: Lemke, Wolfgang
    Abstract: A joint model of macroeconomic and term structure dynamics is specified and estimated for the euro area. The model comprises a backward-looking Phillips curve, a dynamic IS equation, a monetary policy rule as well as a specification of the dynamics of trend growth and the natural real interest rate. Under the condition of no arbitrage, yields of all maturities are affine functions of the macroeconomic driving forces. With the exception of a shock to potential output growth, the response of short-term yields to macroeconomic shocks is generally stronger than that of long-term yields. Impulse responses of all bond yields are fairly persistent, which reflects the persistence of their macroeconomic driving forces. Across the whole maturity spectrum, about ninety percent of the variation in yields is explained jointly by monetary policy shocks and shocks to the natural real rate of interest; the relative contribution of the latter shock increases with time to maturity. Cost-push shocks explain at most eight percent, while shocks to the output gap play an even less important role.
    Keywords: affine term structure models, monetary policy, euro area
    JEL: E32 E43 G12
    Date: 2007
  2. By: Juan Angel Garcia (Europena Central Bank); Adrian van Rixtel (Banco de España)
    Abstract: Inflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation expectations. In this context, the purpose of this paper is twofold. First, it provides a selective survey of the key arguments for and against the issuance of inflation-linked debt, and some of the factors that help to understand their recent growth. Second, it illustrates the use of these instruments to better monitor investors’ inflation expectations and growth prospects from a central bank perspective.
    Keywords: central banks, monetary policy, inflation-linked bonds, break-even inflation rates
    JEL: E44 E52 E58 G10
    Date: 2007–08
  3. By: Mihailov, Alexander; Ullrich, Katrin
    Abstract: The democratic accountability of policymaking institutions which are autonomous within delegated mandates has not received as much attention as their independence. We analyze in a theoretical model the effects of accountability in the form of possible overriding of economic policy decisions by the government under different degrees of independence of expert committees conducting monetary and fiscal policy. The equilibrium outcomes of such alternative institution-design frameworks are compared according to key macroeconomic performance criteria. Our results stress the trade-off between anchoring inflation expectations on target and output stabilization that is not solved with accountability.
    Keywords: Independence, accountability, monetary policy, fiscal policy, expert committees, institution design
    JEL: E52 E58 E61 E63
    Date: 2007
  4. By: Bill Martin
    Abstract: This comment provides a simple analytical exposition of the stock-flow consistent closed economy model used by Godley and Lavoie (2007b) to argue a case for fiscal stabilization policy. We show that the government spending stabilisation rule proposed by Godley and Lavoie (GL) is equivalent to an optimal-output budget deficit rule that automatically ensures budget solvency as long as private sector saving behaviour is itself stable. Assuming a non-inflationary full-employment objective, we derive an optimal government-spending rule. We endorse GL's view that fiscal policy needs to be "appropriate" if monetary policy is to be actively pursued. The main requirement of fiscal policy is a government debt rule to avoid instabilities arising from the accumulation of debt interest payments. Godley and Lavoie (2007a) simulate such instabilities but do not propose a solution. We do so and derive an optimal monetary rule. The theoretical substitutability of policy rules raises important questions about the wisdom of macroeconomic stabilization strategies that relegate fiscal policy to a purely supporting role.
    Keywords: Stock-flow consistency, fiscal policy, monetary policy, fiscal solvency, optional policy rules.
    JEL: E12 E62 F41
    Date: 2007–06
  5. By: Bennett T. McCallum (Carnegie Mellon University and National Bureau of Economic Research (E-mail:
    Abstract: The Monetary Authority of Singapore (MAS) conducts policy by adjusting the Singapore dollarfs effective exchange rate so as to achieve macroeconomic goals for the economyfs inflation rate and output gap. Estimates of a policy rule of the Taylor type, except with exchange rate appreciation serving as the instrument/indicator variable, substantiate this interpretation. That this rule reflects policy that is much like inflation targeting is evidenced by the absence of any significant role for the real exchange rate as a distinct target variable in addition to inflation and the output gap. Simulations with a dynamic model of a small open economy illustrate that this type of rule can be relatively more advantageous in economies that (like Singapore) are extremely open to international trade. The analysis illustrates that monetary policy and exchange-rate policy are two sides of the same coin, which suggests that assignment of exchange-rate management to a nationfs fiscal authority is an anachronism.
    Keywords: exchange rate, inflation targeting, instrument variable, target variable, open economy, monetary policy
    JEL: E42 E58 F31 F41
    Date: 2007–08
  6. By: Stan du Plessis (Department of Economics, Stellenbosch University); Ben Smit (Bureau of Economic Research, Stellenbosch University); Federico Sturzenegger (Kennedy School of Government, Harvard University)
    Abstract: This paper uses a structural VAR methodology to identify aggregate demand and supply shocks to real output for the South African economy. Demand shocks, in turn, are separated into fiscal and monetary shocks. The model is estimated with quarterly data over two overlapping samples: 1960Q2-2006Q4 and 1983Q4-2006Q4. The identified (structural) shocks were used in a historical decomposition to split output into a measure of potential output (resulting from the evolution of supply shocks) and a measure of the business cycle (the gap between actual and potential output). This measure of potential output suggests a significant decline relative to trend in the years prior to the political transition of 1994 and a swift reversal thereafter. The paper presents evidence from three sources to support its identification of aggregate supply and demand shocks. These sources are the following: theory consistent impulse response functions; a close match between the implied measure of the business cycle and independent information about the South African business cycle; and a demonstration of the close match between the identified series of aggregate supply shocks and important historical events in the decades prior to and following 1994 that have been identified by economic historians as important shocks to the South African economy.
    Keywords: South Africa, aggregate supply, aggregate demand, monetary policy, fiscal policy, potential output, long-run restrictions
    JEL: C25 C41 E32
    Date: 2007
  7. By: Mehrotra, Aaron (BOFIT); Peltonen, Tuomas (BOFIT); Santos Rivera, Alvaro (BOFIT)
    Abstract: We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forward-looking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces.
    Keywords: China; inflation; regional; New Keynesian Philips Curve; GMM
    JEL: C22 E31
    Date: 2007–08–29
  8. By: Michael Woodford
    Date: 2007–08–24
  9. By: Alok Johri
    Abstract: This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price setting ?rms. All the usual sources of inertia are absent here ie., all fi?rms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and in?ation in response to a nominal shock. Two modi?cations of a standard one-quarter pre-set price model deliver these results: learning-by-doing and habit formation in leisure.
    Keywords: Endogenous price stickiness, Business Cycles, Inflation, Nominal rigidities, Learning-by-doing, Habit formation, Propagation mechanisms, Persistence.
    JEL: E3
    Date: 2007–08
  10. By: Jian Gao (China Development Bank); Gang Gong (School of Economics and Management, Tsinghua University); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We investigate monetary policy under the assumption that a country?s capital market is ?open? under the WTO framework while the exchange rate is fixed. Our purpose is to determine if it is possible in this case for the economy to maintain an effective monetary policy for stabilizing the domestic economy. For this, we suggest two institutional restrictions. Given the restrictions, we demonstrate within a macro-dynamic model that monetary policy can still be effective. The implication of such an institutional design for an exchange rate regime is also discussed with special reference to small and less development economies.
    Keywords: open economy trilemma; macroeconomic stability; exchange rate regime
    JEL: E12 E32 C62
    Date: 2007–07–01
  11. By: Tenhofen, Jörn; Wolff, Guntram B.
    Abstract: How does private consumption react to an exogenous increase in government expenditure? Standard structural vector autoregressions (SVARs) usually report a positive GDP as well as consumption response, while event studies report a negative consumption response. We investigate in a SVAR whether anticipation of the fiscal shock reverses the sign of this dynamic response to a negative one. As a methodological contribution, we model expectation formation within a SVAR framework. We show for the US that consumption falls in reaction to an expenditure shock once the model allows for one-period-ahead anticipation of this shock. Modelling anticipation of fiscal shocks is thus crucial to correctly capture their macroeconomic effects. Differences in results between event studies and VARs can be explained by missing anticipation in VARs. When re-estimating the two models (with and without anticipation) for non-defense related expenditures, we find a positive consumption response for both models. The implications of our results for macroeconomic theory are briefly discussed.
    Keywords: Fiscal policy, government spending, net revenue, policy anticipation, structural vector autoregression
    JEL: E62 H30
    Date: 2007
  12. By: Stéphane Dées (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Isabel Vansteenkiste (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
    Abstract: The US economy is often considered to play a pivotal role in global growth. Such a view has persisted despite the falling contribution of the US economy to global growth (from almost 30% in 1950 to around 20% at present). In this paper, we analyse the veracity of this conjecture and consider the implications of cyclical developments in the US economy on the rest of the world. Overall we find that while US economic developments would indeed affect the rest of the world, developments in most countries and regions remain primarily affected by idiosyncratic shocks as well as by global factors, which do not originate from a single country. JEL Classification: E32, E37, F41.
    Keywords: Business Cycle, Global VAR model, Markov-switching model, Factor models.
    Date: 2007–08
  13. By: Keisuke Otsu (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper applies the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) to a standard neoclassical small open economy model and assesses the recent crises in Hong Kong, Korea, Singapore and Thailand. The key common features of these crises are the sudden output collapses and consumption drops as large as the output drops. Quantitative results show that the sudden drops in total factor productivity are important in explaining the output drops. Distortions in the foreign debt market are important in Korea and Thailand whereas distortions in the domestic capital market are important in Hong Kong and Singapore in explaining the large consumption drops.
    Keywords: Business Cycle Accounting, Small Open Economy, Asian Crisis
    JEL: E13 E32
    Date: 2007–08
  14. By: Plasmans, J.E.J.; Fornero, J.; Michalak, T. (Tilburg University, Center for Economic Research)
    Abstract: Numerical simulations of the two-country sectoral model are provided for a relatively large number of structural shocks as domestic and foreign productivity shocks in final tradables and non-tradables, money demand shocks and a shock in the exchange rate. Such a model is well suited for monetary policy analysis at the international level and risk analysis.
    Keywords: New Keynesian open economy model;tradable and non-tradable sectors;final and intermediate goods;log-linearization.
    JEL: E31 D21 F41 P24
    Date: 2007
  15. By: Shelley, Gary; Wallace, Frederick
    Abstract: This paper tests for long run neutrality (LRN) of money with respect to real expenditures in the U.S. over the 1947-2004 period. Real consumption and investment expenditures, as well as their broadly defined components, are examined. We also test for the effects of money on long run reallocations of GDP among durables, nondurables, and services. The time series characteristics of each variable are rigorously investigated. This is followed by application of the LRN test, introduced by Fisher and Seater (1993), to each real expenditures series. Although rejections of LRN occur in a number of studies, our results support long run neutrality of money with respect to real expenditures regardless of the level of data aggregation.
    Keywords: Money neutrality; consumption; investment
    JEL: E52 E20
    Date: 2006–03
  16. By: Agathe Côté
    Abstract: In November 2006, the Bank of Canada announced its intention to lead a concerted research program over the next few years on the type of monetary policy framework that would best contribute to the economic well-being of Canadians in the decades ahead. The research will focus on two broad questions: whether economic welfare might be improved by targeting a rate of inflation lower than 2 per cent, and whether economic welfare might be improved by moving from an inflation-targeting (IT) framework to some form of price-level targeting (PLT). This paper focuses on the second question. The author provides an overview of the main conclusions in the literature on the relative merits of replacing IT with PLT, identifies some key outstanding questions, and outlines the Bank's research program. The author concludes that, compared with the conventional wisdom that prevailed a decade ago, recent analysis is more promising for PLT. Nevertheless, the models that have been used so far often ignore some of the key potential benefits, or some of the key potential costs, associated with PLT. More research is needed before one can draw strong conclusions.
    Keywords: Monetary policy framework
    JEL: E52 E58
    Date: 2007
  17. By: Menno Middeldorp; Clemens Kool; Stephanie Rosenkranz
    Abstract: The trend of monetary policy transparency has recently extended itself to the practice of providing guidance on the likely direction of policy rates. There is a risk that communicating the central bank’s own outlook for interest rates actually undermines the financial markets’ ability to predict monetary policy. This paper analyzes this risk using the Diamond (1985) model of a financial market, which includes both costly private information acquisition and a costless public signal. We demonstrate that a sufficiently precise signal from the central bank can result in a deterioration of the financial market’s ability to predict monetary policy through the crowding out of private information acquisition. Central banks could alleviate this risk with a policy of limiting the guidance offered to the financial market in order to leave sufficient scope for private information acquisition.
    Keywords: Interest Rates, Monetary Policy, Information and Financial Market Efficiency, Communication, Transparency, Information Acquisition
    JEL: E43 E52 G14
    Date: 2007–08
  18. By: Szilárd Erhart; Jose Luis Vasquez-Paz
    Abstract: Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The optimal monetary policy committee (MPC) size varies according to the uncertainty of MPC members’ information influenced by the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a survey of 85 countries. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.
    JEL: E50 E58
    Date: 2007–03
  19. By: PANAGIOTIDIS, Theodore; TRIAMPELLA, Afroditi
    Abstract: This paper discusses the argument for Central Bank Independence (CBI) in the case of Greece. Using a time series approach and the last data available before Greece joined the EMU , the hypothesis that Central Bank Independence is important for controlling inflation is examined. Employing two indices, which serve as proxies for CBI, LegalCBI and TOR, the inverse relationship between CBI and inflation was confirmed. The interactions between the variability of inflation and CBI were also investigated. Furthermore, evidence was found to suggest that the rate of turnover Granger causes inflation.
    Date: 2006–01–01
  20. By: Kuilen, G. van de; Lammers, J. (Tilburg University, Center for Economic Research)
    Abstract: This paper studies the effect of the HIV/AIDS epidemic on saving behaviour. Two important characteristics of HIV result in opposing forces on savings: mortality increases, which reduces savings, and long-term illness risk increases, which enhances savings. We use a two period life-cycle model with uncertain lifetime including perceived HIV contamination risk to illustrate both the opposing effects of the HIV epidemic on individual savings and test the predictions of our model with data obtained from an economic experiment with real monetary incentives performed in South Africa. The empirical results show that increased mortality decreases the amount of savings and that having a high perception of HIV contamination risk increases savings. The latter effect confirms the HIV anticipatory saving hypothesis.
    Keywords: HIV/AIDS;saving behavior;illness risk;mortality;life-cycle model;time preferences.
    JEL: D12 D91 E21 I12
    Date: 2007
  21. By: Falko Fecht (Deutsche Bundesbank); Kevin X.D. Huang (Department of Economics, Vanderbilt University); Antoine Martin (Federal Reserve Bank of New York)
    Abstract: We build a model in which financial intermediaries provide insurance to households against idiosyncratic liquidity shocks. Households can invest in financial markets directly if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. From a growth perspective, this can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies can grow more slowly than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and markets that maximizes welfare under a given level of financial development depends on economic fundamentals.
    Keywords: Financial intermediaries, financial markets, risk-sharing, Growth <br><br>
    JEL: E44 G10 G20
    Date: 2007–08
  22. By: ARANGO, Luis Eduardo; IREGUI, Ana María; MELO, Luis F.
    Abstract: Al finalizar la década anterior la actividad real en Colombia experimentó la más aguda recesión de los últimos 50 años. Para explicar este fenómeno, postulamos un modelo VAR estructural no-triangular que describe la dinámica de la producción, los precios, el desempleo y los salarios durante las últimas dos décadas. La evidencia sugiere que, en el largo plazo, la política monetaria ha sido neutral con respecto al producto y la desempleo, mientras que la principal razón para el incremento de éste último se explica por la forma en que se han determinado los salarios (formación de expectativas hacia atrás) y el incremento de los costos no salariales.
    Date: 2006–01–01
  23. By: Raquel Fonseca; Lise Patureau; Thepthida Sopraseuth
    Abstract: This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. The authors first develop a two-country right-to-manage model of wage bargaining. They find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. They then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Their estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront their results with those found in previous studies. Consistently with their theoretical results, they find that similar labor markets tend to favor more synchronized cycles. In particular, disparity in tax wedges yields lower GDP comovement. Besides, interactions between labor market institutions do matter, as they are found to affect the effect of tax wedge divergence on BC synchronization. Their overall results suggest that the impact of distortions in demand-supply labor mechanism should be investigated in international business cycle models.
    Keywords: International business cycle, business cycle synchronization, labor market institutions, panel data estimation
    JEL: F42 C23 J32 J52
    Date: 2007–05
  24. By: Guonan Ma; Robert N. McCauley
    Abstract: The paper argues that China's capital controls remain substantially binding. This has allowed the Chinese authorities to retain some degree of short-term monetary autonomy, despite the fixed exchange rate up to July 2005. Although the Chinese capital controls have not been watertight, we find sustained and significant gaps between onshore and offshore renminbi interest rates and persistent dollar/renminbi interest rate differentials during the period of a de facto dollar peg. While some cross-border flows do respond to market expectations and relative yields, they have not been large enough to equalise onshore and offshore renminbi yields.
    Keywords: Foreign exchange market, capital flows, capital controls, monetary policy, financial stability and the Chinese economy
    Date: 2007–08
  25. By: Ernst Fehr; Lorenz Goette
    Abstract: Recent studies found evidence for nominal wage rigidity during periods of relatively high nominal GDP growth. It has been argued, however, that in an environment with low nominal GDP growth, when nominal wage cuts become customary, workers’ opposition to nominal cuts would erode and, hence, firms would no longer hesitate to reduce nominal pay. If this argument is valid nominal wage rigidity is largely irrelevant because in a high-growth environment there is little need to cut nominal pay while in a low-growth environment the necessary cuts would occur. To examine this argument we use data from Switzerland where nominal GDP growth has been very low for many years in the 1990s. We find that the rigidity of nominal wages is a robust phenomenon that does not vanish in a low growth environment. In addition, it constitutes a considerable obstacle to real wage adjustments. In the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment. Moreover, the wage sweep-ups caused by nominal rigidity are strongly correlated with unemployment suggesting that downward rigidity of nominal wages indeed contributes to unemployment.
    Date: 2007–06
  26. By: Stefan Gerlach (Bank for International Settlements); Wensheng Peng (Hong Kong Monetary Authority)
    Abstract: We estimate output gaps using three methods for Mainland China on annual data spanning 1982-2003. The estimates are similar and appear to co-move with inflation. Standard Phillips curves, however, do not fit the data well. This may reflect the omission of some important variable(s) such as the effect of price deregulation, trade liberalisation and/or changes in the exchange rate regime. We reestimate the Phillips curves assuming that there is an unobserved variable that follows an AR(2) process. The modified model fits the data much better and accounts for some of the surprising features of the simple Phillips curve estimates.
    Keywords: output gap, Phillips curve, China, omitted variab les
    JEL: C22 E30 E40 E53
    Date: 2005–11
  27. By: Shawn Ni (Department of Economics, University of Missouri-Columbia)
    Abstract: The monthly salaries and allowances of Korean government employees are known in advance but vary greatly throughout the year. Using a large Korean monthly panel data set from 1994 to 2003, we examine how nondurable consumption expenditure in households headed by government employees responds to predictable income changes. We find excess sensitivity in consumption during the pre-Asian financial crisis era in households headed by young government employees with low liquid assets or low income. These household features are commonly associated with liquidity constraints. Further analysis shows that despite the apparent association, liquidity constraint is not the most convincing explanation for the excess sensitivity. Instead, the empirical finding is consistent with the theory that certain households deviate from consumption smoothing when the effort involved exceeds the welfare gained.
    Keywords: household consumption, excess sensitivity
    JEL: D12 E21
    Date: 2007–08–22
  28. By: Eswar S. Prasad (Cornell University and IZA)
    Abstract: Is the Chinese growth miracle - a remarkably high growth rate sustained for over two decades - likely to persist or are the seeds of its eventual demise contained in the policies that have boosted growth? For all its presumed flaws, the particular approach to macroeconomic and structural policies that has been adopted by the Chinese government has helped to deliver high productivity and output growth, along with a reasonable degree of macroeconomic stability. In tandem with a benign international environment, this approach makes it unlikely that the economy will face a collapse in growth. But there comes a point when the policy distortions needed to maintain this approach could generate imbalances, impose potentially large welfare costs, and themselves become a source of instability. The traditional risks faced by emerging market economies, especially those related to having an open capital account, do not loom large in the case of China. In the process of securing protection against external risks, however, Chinese policymakers may have increased the risks of internal instability. There are a number of factors that could trigger unfavorable economic dynamics that, even if they don’t rise to the level of a crisis, could have serious adverse repercussions on growth and welfare. The flexibility and potency of macroeconomic tools to deal with such negative shocks is constrained by the panoply of policies that has supported growth so far.
    Keywords: macroeconomic policies, exchange rate flexibility, capital account liberalization, financial sector reforms
    JEL: F3 E5 O1
    Date: 2007–08
  29. By: Juan Nicolás Hernández
    Abstract: El documento calcula la cuenta corriente óptima hacia el largo plazo, basándose en un enfoque de suavización intertemporal del consumo. La cuenta corriente actúa como una salvaguardia de manera que sí, hacia el largo plazo, se prevé una caída en el flujo del ingreso nacional, la mayor necesidad de ahorro en el presente implica un menor déficit en cuenta corriente. El trabajo coincide con trabajos anteriores en la identificación de los periodos en los cuales la cuenta corriente de Colombia ha estado alejada de la óptima. No obstante, al ampliar la muestra hasta 2004 y con proyecciones de la cuenta corriente hasta 2007, se identifica un agente representativo que tiende a consumir justamente su ingreso permanente en contraposición a aquel que tiende a consumir más allá de este. El progresivo relajamiento de las restricciones crediticias permite inferir en perspectiva, un comportamiento del consumo y por tanto de la cuenta corriente más cercanos al óptimo. Bajos los supuestos de déficit en cuenta corriente considerados se sugiere, a partir de 2006, la necesidad de un mayor ahorro.
    Keywords: Cuenta corriente, ingreso permanente, restricciones crediticias, ahorro, inversión. Classification JEL: E21; F41; C30
  30. By: Hans Genberg (Hong Kong Monetary Authority); Astrit Sulstarova (Graduate Institute for International Studies)
    Abstract: While the relationship between volatility and risk is central to much of the financial literature it has not been incorporated systematically into assessment of sovereign debt sustainability. This paper attempts to fill this gap by studying how the probability distribution of sovereign debt to GDP ratios depends on the stochastic properties of underlying macroeconomic variables. Using the right hand-tail of the distribution as a measure of the risk we are able to show how the volatility of the underlying variables as well as potential interactions between them influence country risk.
    Keywords: Macroeconomic volatility, debt dynamics, sovereign spreads
    JEL: C15 F34
    Date: 2005–10
  31. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Martin B. Schmidt (Department of Economics, College of William and Mary)
    Abstract: In this paper we address empirically the issue of the possible structural breaks in the public infrastructure investment series with the objective of identifying the existence and determining the timing of such breaks. Both heuristic and more formal tests suggest that a break in the mean of public investment occurred in the late 1970s or early 1980s. This is true for public infrastructure investment at the aggregate level as well as for most types of public infrastructures. We regard this evidence as the first step in the process of revisiting the analysis of the effects of such infrastructure investments in a VAR approach accounting for the presence of structural breaks.
    Keywords: public investment, infrastructure, structural breaks, VAR modeling
    JEL: C32 E62 H54
    Date: 2007–08–24
  32. By: Haibin Zhu
    Abstract: This paper develops a stochastic dynamic model to examine the impact of capital regulation on banks' financial decisions. In equilibrium, lending decisions, capital buffer and the probability of bank failure are endogenously determined. Compared to a flat-rate capital rule, a risk-sensitive capital standard causes the capital requirement to be much higher for small (and riskier) banks and much lower for large (and less risky) banks. Nevertheless, changes in actual capital holdings are less pronounced due to the offsetting effect of capital buffers. Moreover, the non-binding capital constraint in equilibrium implies that banks adopt an active portfolio strategy and hence the counter-cyclical movement of risk-based capital requirements does not necessarily lead to a reinforcement of the credit cycle. In fact, the results from the calibrated model show that the impact on cyclical lending behavior differs substantially across banks. Lastly, the analysis suggests that the adoption of a more risk-sensitive capital regime can be welfare-improving from a regulator's perspective, in that it causes less distortion in loan decisions and achieves a better balance between safety and efficiency.
    Keywords: Capital requirement, economic capital, regulatory capital, actual capital holding, procyclicality effect, dynamic programming, prudential regulation
    Date: 2007–07
  33. By: Nunes, Mauricio; Da Silva, Sergio
    Abstract: We detected rational bubbles in 22 emerging stockmarkets using both standard and threshold cointegration. Eighteen stockmarkets experienced explosive bubbles (and some of them periodically collapsing bubbles as well). The remaining four markets experienced periodically collapsing bubbles only.
    Keywords: bubbles; stockmarkets; emerging markets
    JEL: G12 E44
    Date: 2007–08–29
  34. By: Wensheng Peng (Hong Kong Monetary Authority); Dickson C. Tam (Hong Kong Monetary Authority); Matthew S. Yiu (Hong Kong Institute for Monetary Research)
    Abstract: This paper studies the nexus between the property market and the macroeconomy of Mainland China in 1998-2004, using panel data models covering 31 provinces and major cities. The estimates suggest three main conclusions. First, there seemed to be a two-way linkage between property price and GDP growth. In particular, property price increase had a significant positive impact on investment, but no evidence of a wealth effect on consumption is obtained. Second, bank credit expansion did not seem to play an 'accelerating' role in property price inflation, although the latter is found to have contributed to bank credit increase in recent years. Third, property price growth may have deviated from fundamentals in coastal areas, as evidenced by a negative relationship between housing and rental prices.
    Date: 2007–03
  35. By: Andrew B. Abel
    Abstract: In an economy with identical infinitely-lived households that obtain utility from leisure as well as consumption, Chamley (1986) and Judd (1985) have shown that the optimal tax system to pay for an exogenous stream of government purchases involves a zero tax rate on capital in the long run, with tax revenue collected by a distortionary tax on labor income. Extending the results of Hall and Jorgenson (1971) to general equilibrium, I show that if purchasers of capital are permitted to deduct capital expenditures from taxable capital income, then a constant tax rate on capital income is non-distortionary. Importantly, even though this specification of the capital income tax imposes a zero effective tax rate on capital, the capital income tax can collect substantial revenue. Provided that government purchases do not exceed gross capital income less gross investment, the optimal tax system will consist of a positive tax rate on capital income and a zero tax rate on labor income--just the opposite of the results of Chamley and Judd.
    JEL: E62 H21
    Date: 2007–08
  36. By: Douglas Gollin (Williams College); Christian Zimmermann (University of Connecticut and IZA)
    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
  37. By: Sonja Fagernäs; Prabirjit Sarkar; Ajit Singh
    Abstract: This paper uses a new time series dataset of shareholder protection consisting of 60 annual legal indicators for the period 1970-2005 for France, Germany, the UK and the US. On the basis of these data it examines developments in shareholder protection and reassesses the claims that common-law countries have better shareholder protection than civil law countries. Furthermore it examines the relationship between legal changes and stock market development. It casts serious doubt on the claim that common-law countries have better shareholder protection which in turn leads to more stock market development.
    Keywords: Stock Market, Corporate Governance, Financial Development, Leximetrics
    JEL: F02 F36 E44 G11 O16 K22
    Date: 2007–06
  38. By: LAMBERT Sylvie; RAVALLION Martin; VAN DE WALLE Dominique
    Abstract: We show how differences in aggregate human development outcomes over time and space can be additively decomposed into a pure economic-growth component, a component attributed to differences in the distribution of income, and components attributed to “non-income” factors and differences in the model linking outcomes to income or non-income characteristics. The income effect at the micro level is modeled non-parametrically, so as to flexibly reflect distributional changes. The decomposition is illustrated using data for Morocco and Vietnam, and the results offer some surprising insights into the observed aggregate gains in schooling attainments. A user friendly STATA program is available to implement the method in other settings.
    Keywords: macroeconomics, human development, distribution of income, Morocco, Vietnam.
    JEL: O15
    Date: 2007–07
  39. By: Andrés Langebaek R.; jaime Eduardo Ortiz E.
    Abstract: El trabajo evalúa el estado de las prácticas de gobierno corporativo en las empresas que negocian acciones ordinarias en la Bolsa de Colombia. Esta tarea se lleva a cabo mediante la construcción de un Índice de Gobierno Corporativo construido con información pública. Por otra parte se mide el impacto que las buenas prácticas de gobierno corporativo tienen sobre la relación del valor de mercado al valor en libros de las empresas ("q" de Tobin).
    Keywords: "q" de Tobin, Gobierno Corporativo, Bolsa de Valores, Regulación Financiera. Classification JEL: G30; G38; L20.
  40. By: Chao Gu (Department of Economics, University of Missouri-Columbia)
    Abstract: Traditional models of bank runs do not allow for herding effects, because in these models withdrawal decisions are assumed to be made simultaneously. I extend the banking model to allow a depositor to choose his withdrawal time. When he withdraws depends on his liquidity type (patient or impatient), his private, noisy signal about the quality of the bank's portfolio, and the withdrawal histories of the other depositors. In some cases, the optimal banking contract permits herding runs. Some of these "runs" are efficient in that the bank is liquidated before the portfolio worsens. Others are not efficient; these are cases in which the herd is misled.
    Keywords: Bank runs, herding, imperfect information, perfect Bayesian equilibrium, optimal bank contract, sequential-move game, fundamental-based bank runs.
    JEL: C73 D82 E59 G21
    Date: 2007–08–27
  41. By: Blanchard, Emily; Willmann, Gerald
    Abstract: This paper analyzes the dynamics of trade policy reform under democracy. In an overlapping generations model, heterogeneous agents may acquire skills when young, thereby determining the skill composition of their cohort. Current and anticipated trade policies influence education decisions, and thus the identity of the median voter. We show that there may exist two political steady states: one protectionist and one liberal. Transition from the former to the latter can be achieved by government announcements, temporary educational subsidies, or (exogenous) tariff liberalization by trading partners, but not, in general, by transfer payments to adversely affected workers. We find additionally that reform is politically feasible only if the proposed liberalization is sufficiently large, suggesting that radical reform may be necessary for escaping a “protectionist rut.”
    Keywords: Political Economy, Trade Policy, Skill Acquisition, Politically Stable Policy Paths, Referenda
    JEL: D72 E60 F13 F16
    Date: 2007
  42. By: Michael B Devereux (Centre for Economic Policy Research, University of British Columbia, and International Monetary Fund (E-mail: devm@
    Abstract: Although emerging market Asian economies have experienced high growth without crises for close to a decade, many commentators find the large buildup of foreign exchange reserves among these economies both puzzling and evidence of incipient global imbalances. This paper reviews some of the experience of Asian countries over the last decade. We focus on the degree to which Asian economies have experienced financial globalization, meaning that their gross external asset and liability positions have grown significantly. In particular, while Asian economies have become significant gross creditors in bonds and other fixed income assets, their liability position in equity and FDI assets has also grown significantly. We show that a simple dynamic general equilibrium model of portfolio choice in an emerging market economy can account for this trend remarkably well.
    Keywords: Asia, Financial Globalization, FDI, Foreign Exchange Rate Reserves
    JEL: E52 E58 F41
    Date: 2007–08

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