nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒09‒16
eighty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. On the Optimal Choice of a Monetary Policy Instrument By Andrew Atkeson; V. V. Chari; Patrick J. Kehoe
  2. Fiscal Explanations for Inflation: Any Evidence from Transition Economies? By Komulainen, Tuomas; Pirttilä , Jukka
  3. The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s? By Olivier J. Blanchard; Jordi Galí
  4. Monetary Policy In Islamic Economic Framework: Case of Islamic Republic of Iran By Kiaee, Hasan
  5. Wage Rigidity and Job Creation By Christian Haefke; Marcus Sonntag; Thijs van Rens
  6. One for Some or One for All? Taylor Rules and Interregional Heterogeneity By Olivier Coibion; Daniel Goldstein
  7. Some empirical tests on the integration of economic activity between the Euro area and the accession countries By Korhonen , Iikka
  8. A Small Macroeconomic Model to Support Inflation Targeting in Israel By Argov, Eyal; Binyamini, Alon; Elkayam, David; Rozenshtrom, Irit
  9. Rule of Thumb Consumers, Public Debt and Income Tax By Rossi, Raffaele
  10. Quasi-fiscal operations of central banks in transition economies By Markiewicz , Malgorzata
  11. The Impact of Monetary Policy Shocks on Stock Prices: Evidence from Canada and the United States By Yun Daisy Li; Talan B. Iscan; Kuan Xu
  12. Inflation Targeting in Georgia: Are We There Yet? By Andreas Billmeier; Giorgi Bakradze
  13. The optimal inflation target in an economy with limited enforcement By Gaetano Antinolfi; Costas Azariadis; James B. Bullard
  14. A Simple DGE Model for Inflation Targeting By Jaromir Benes; David Vávra; Marta de Castello Branco
  15. The Information Content of Elections and Varieties of the Partisan Political Business Cycle By Cameron A. Shelton
  16. Testing Globalization-Disinflation Hypothesis By Calani, Mauricio
  17. Globalisation and Inflation in OECD Countries By Gernot Pehnelt
  18. Where Have the Monetary Surprises Gone? The Effects of FOMC Statements By Andrew Swiston
  19. Similarity of supply and demand shocks between the Euro area and the CEECs By Fidrmuc, Jarko; Korhonen, Iikka
  20. The quest for a fiscal rule: Italy, 1861-1998 By Ricciuti, Roberto
  21. Three great American disinflations By Michael Bordo; Christopher Erceg; Andrew Levin; Ryan Michaels
  22. Win or Lose, It’s the Policy We Choose: Comparative economic performance of the inflation targeters By Beja, Jr., Edsel
  23. Money, Barter and Inflation in Russia By Kim, Byung-Yeon; Pirttilä, Jukka; Rautava , Jouko
  24. A two-dimensional non-equilibrium dynamic model By Gomes, Orlando
  25. The Golden Rule and the Economic Cycles By Keiko Honjo
  26. Money Shocks in a Small Open Economy with Dollarization, Factor Price Rigidities, and Nontradeables By Sarajevs, Vadims
  27. The international transmission of monetary shocks in a dollarized economy: The case of USA and Lebanon By Charbel Cordahi; Jean-François Goux
  28. Comparing Greenbook and Reduced Form Forecasts using a Large Realtime Dataset By Jon Faust; Jonathan H. Wright
  29. Notes on the inflation dynamics of the New Keynesian Phillips Curve By Andreas Hornstein
  30. Relative Price Stability, Creditor Rights, and Financial Deepening By Pablo Druck; Alexander Plekhanov; Mario Dehesa
  31. Capital Taxation and Ownership when Markets are Incomplete By Emmanuel Farhi
  32. Essential Interest-Bearing Money By Andolfatto, David
  33. Growth and Inflation Dispersions in EMU: Reasons, the Role of Adjustment Channels, and Policy Implications By Emil Stavrev
  34. Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach By Ivan Tchakarov; Roland Straub
  35. Monetary Policy Rules for Managing Aid Surges in Africa By Edward F. Buffie; Christopher Adam; Catherine A. Pattillo; Stephen A. O'Connell
  36. Integration of the Baltic States into the EU and Institutions of Fiscal Convergence By Kutan, Ali M.; Pautola-Mol , Niina
  37. Toward a Bias Corrected Currency Equivalent Index By Kelly, Logan; Barnett, William; Keating, John
  38. Adjustment of the US current account deficit By Kortelainen, Mika
  39. Determinants of Inflation in Poland: A Structural Cointegration Approach By Kim , Byung-Yeon
  40. Exchange rate regimes and nominal convergence in the CEECs By Järvinen , Marketta
  41. Some benefits of reducing inflation in transition economies By Blaszkiewicz, Monika; Konieczny, Jerzy; Myslinska, Anna; Radziwiland, Artur; Wozniak , Przemyslaw
  42. Estimating Discount Functions with Consumption Choices over the Lifecycle By David Laibson; Andrea Repetto; Jeremy Tobacman
  43. The Impact of Uncertainty Shocks By Nicholas Bloom
  44. Factor Analysis in a Model with Rational Expectations By Andreas Beyer; Roger E. A. Farmer; Jérôme Henry; Massimiliano Marcellino
  45. Measuring Central Bank Independence in Selected Transition Countries and the Disinflation Process By Dvorsky , Sandra
  46. What Has Financed Government Debt? By Hess Chung; Eric Leeper
  47. Leadership in Groups: A Monetary Policy Experiment By Alan S. Blinder; John Morgan
  48. Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter By Agustín Maravall; Ana del Río
  49. Fiscal Adjustments: Determinants and Macroeconomic Consequences By Daniel Leigh; Alexander Plekhanov; Manmohan S. Kumar
  50. Financial contagion, interest rates and the role of the exchange rate as shock absorber in Central and Eastern Europe By Habib , Maurizio Michael
  51. Decomposing and Analyzing Korea’s Declining GDP Growth: Some Cautions and Suggestions By Sumner La Croix
  52. The role of oil prices and the real exchange rate in Russia's economy By Rautava , Jouko
  53. What Explains Persistent Inflation Differentials Across Transition Economies? By Mark J Flanagan; Felix Hammermann
  54. Optimal fiscal policy in the design of Social Security reforms By Juan Carlos Conesa; Carlos Garriga
  55. "The Continuing Legacy of John Maynard Keynes" By L. Randall Wray
  56. Foreign Entanglements: Estimating the Source and Size of Spillovers Across Industrial Countries By Andrew Swiston; Tamim Bayoumi
  57. Causes of repressed inflation in the Soviet consumer market: Retail price subsidies, the siphoning effect, and the budget deficit By Kim , Byung-Yeon
  58. Investigating the Balassa-Samuelson hypothesis in transition: Do we understand what we see? By Égert , Balázs
  59. Rapid Growth in Transition Economies: Panel Regression Approach By Garbis Iradian
  60. Fiscal Policy and Structural Reforms in Transition Economies: An Empirical Analysis By Pirttilä , Jukka
  61. Global Aging Pressures: Impact of Fiscal Adjustment, Policy Cooperation, and Structural Reforms By Dennis P. J. Botman; Manmohan S. Kumar
  62. "Minsky’s Approach to Employment Policy and Poverty Employer of Last Resort and the War on Poverty" By L. Randall Wray
  63. Ensuring Fiscal Sustainability in G-7 Countries By Daniel Leigh; David Hauner; Michael Skaarup
  64. Freight Transportation Activity, Business Cycles and Trend Growth By Andersson, Fredrik N G; Elger, Thomas
  65. An Empirical Analysis of Labor Income Processes By Fatih Guvenen
  66. How do the OECD Growth Projections for the G7 Economies Perform?: A Post-Mortem By Lukas Vogel
  67. Coping with Capital Inflows: Experiences of Selected European Countries By Inci Ötker; Zbigniew Polanski; Barry Topf; David Vávra
  68. Substituting a Substitute Currency – The Case of Estonia By Heimonen , Kari
  69. Explaining China's Low Consumption: The Neglected Role of Household Income By Li Cui; Jahangir Aziz
  70. Does Tax Competition Really Promote Growth? By Koethenbuerger, Marko; Lockwood, Ben
  71. A Model of Russia’s "Virtual Economy" By Ericson, R. E.; Ickes , B. W.
  72. Capital Flight and Economic Performance By Beja, Jr., Edsel
  73. Fiscal competition in a transition economy By Solanko, Laura
  74. Incomplete information and self-fulfilling prophecies By Pengfei Wang; Yi Wen
  75. Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises By Fernando Broner
  76. Nested Stochastic Possibility Frontiers with Heterogeneous Capital Inputs By Georg Erber; Reinhard Madlener
  77. Informal Sector, Income Inequality and Economic Development By Prabir C. Bhattacharya
  78. Export Processing Zones in Madagascar: the impact of the dismantling of clothing quotas on employment and labour standards By Jean-Pierre Cling; Mireille Razafindrakoto; François Roubaud
  79. The Role of Nonseparable Utility and Nontradeables in International Business Cycle and Portfolio Choice By Akito Matsumoto
  80. Economic Growth in Croatia: Potential and Constraints By David Moore; Athanasios Vamvakidis

  1. By: Andrew Atkeson; V. V. Chari; Patrick J. Kehoe
    Abstract: The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies.
    JEL: E3 E31 E4 E42 E51 E52 E58 E6 E61
    Date: 2007–09
  2. By: Komulainen, Tuomas (BOFIT); Pirttilä , Jukka (BOFIT)
    Abstract: Recent arguments, motivated partly by the new fiscal theory of price level, suggest that fiscal deficits undermine price stability in transition economies. This paper addresses these claims by examining vector-autoregressive models of inflation for three crisis-hidden transition economies (Bulgaria, Romania and Russia). The results indicate that while fiscal deficits have increased inflation in Bulgaria to a certain extent, this has not been the case in Romania and Russia. Even in the Bulgarian case, the usual money aggregate has proven more influential to inflation than fiscal deficits. The analysis based on this method therefore suggests that monetary policy plays an influential role in inflation determination in these countries. In other words, inflationary financing of deficits, rather than deficits themselves, accounts for inflation.
    Keywords: fiscal policy; inflation; vector autoregressive models; transition economies
    Date: 2007–09–13
  3. By: Olivier J. Blanchard; Jordi Galí
    Abstract: We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.
    Keywords: Great moderation, supply shocks, stagflation, monetary policy, real wage rigidities
    JEL: E20 E32 E52
    Date: 2007–08
  4. By: Kiaee, Hasan
    Abstract: Abstract When we accept money and its functions in the Islamic economic framework, the same as all other economic systems, we should consider monetary policy as an important available tool for governments to pursuit macroeconomic objectives. But the problem is that, in the conventional economic system, the interest rate plays a critical role for executing monetary policy while in the Islamic economic framework, interest rate is forbidden according to Shariah rules and we are not allowed to use interest based instruments for monetary policy. The dominant view between Islamic scholars is that, since interest based instruments like open market operation is forbidden in Islamic economics, hear, we should only use monetary aggregate instruments like credit ceiling for executing monetary policy. But in reality, many Islamic countries do not restrict theirselves to only monetary aggregate instruments; instead, they use widely profit rate instruments like Musharakah certificates as a substitute for interest based instruments. What we discuss in this paper is the explanation for this gap between theory and practice in the monetary policy of Islamic economic system. Comparing interest based instruments and monetary aggregate instruments from economic point of view shows that, when we use interest based instruments, there is more macroeconomic stability in goods and money markets after executing monetary policy. This advantage of interest based instruments over monetary aggregate instruments has made monetary officials of Islamic countries like Islamic republic of Iran, use extensively profit rate instruments like Musharakah certificates for executing monetary policy.
    Keywords: Islamic Economics; Islamic Monetary Policy; Iranian Monetary System
    JEL: E52 E43
    Date: 2007–04–13
  5. By: Christian Haefke; Marcus Sonntag; Thijs van Rens
    Abstract: Shimer (2005) and Hall (2005) have documented the failure of standard labor market search models to match business cycle fluctuations in employment and unemployment. They argue that it is likely that wages are not adjusted as regularly as suggested by the model, which would explain why employment is more volatile than the model predicts. We explore whether this explanation is consistent with the data. The main insight is that the relevant wage data for the search model are not aggregate wages, but wages of newly hired workers. Our results show that wages for those workers are much more volatile than aggregate wages and respond one-for-one to changes in labor productivity. Thus, we find no evidence for wage rigidity.
    Keywords: Wage Rigidity, Search and Matching Model, Business Cycle
    JEL: E24 E32 J31 J41 J64
    Date: 2007–04
  6. By: Olivier Coibion (Department of Economics, College of William and Mary); Daniel Goldstein (Department of Economics, Pennsylvania State University)
    Abstract: We document a novel empirical phenomenon: both the US Federal Reserve and the European Central Bank appear to set interest rates partly in response to regional disparities in unemployment rates. This result is remarkably robust – particularly for the US – even after controlling for a wide variety of factors, including the central bank’s information set and a battery of explanatory variables. Furthermore, including measures of interregional unemployment dispersion improves the precision of the estimates of the central banks’ responses to aggregate inflation and unemployment rates. Moreover, inclusion of the variance of unemployment across regions brings each bank’s policies with respect to macroeconomic aggregates into alignment with each other. We propose three models in which central bank policymaking is influenced by disparities across regions. Testing specific implications of these models suggests that each bank’s approach to policy may differ in fundamental ways.
    Keywords: Regional Heterogeneity, Monetary Policy, Taylor Rules
    JEL: E5 E6
    Date: 2007–09–11
  7. By: Korhonen , Iikka (BOFIT)
    Abstract: This note looks at the correlation of short-term business cycles in the euro area and the EU accession countries. The issue is assessed with the help of vector autoregressive models. There are clear differences in the degree of correlation between accession countries. For Hungary and Slovenia, euro area shocks can explain a large share of variation in industrial production, while for some countries this influence is much smaller. For the latter countries, the results imply that joining the monetary union could entail reasonably large costs, unless their business cycles converge closer to the euro area cycle. Generally, for smaller countries the relative influence of the euro area business cycle is larger. Also, it is found that the most advanced accession countries are at least as integrated with the euro area business cycle as some small present member countries of the monetary union.
    Keywords: optimal currency area; monetary union; EU enlargement
    JEL: E32 F15 F42
    Date: 2007–09–13
  8. By: Argov, Eyal; Binyamini, Alon; Elkayam, David; Rozenshtrom, Irit
    Abstract: This study presents a small New Keynesian model of Israel’s economy describing the relationships among the main variables relevant to the transmission mechanism of monetary policy. The model encompasses three structural equations––for inflation, the output gap, and the exchange rate––and an interest rate rule, that describes how the interest rate should be adjusted in order to eventually achieve the inflation target. The theory underlying the model is broadly in line with the current monetary theory prevailing in academia and central banks. The model is small, yet it includes the main channels through which the central bank’s interest rate affects inflation in a small open economy. An important advantage of a small model is its ability to describe, clearly and simply, the interrelation between the main variables that are related to the transmission mechanism of the monetary policy, while maintaining theoretical coherence. The model presented is intended to serve as an operational tool that can aid policy makers to assess the interest rate path required to achieve the inflation target, but it can also serve others interested in monitoring monetary developments or in forecasting the evolution of the relevant variables. The model can also help to focus the monetary-policy discussion and enhance the communication between the various entities, both within and outside the central bank, involved in monetary policy and its outcomes. To improve the forecasting ability of the model, in formulating the equations we tried to strike a balance between the need to maintain economic logic and the need to obtain an adequate empirical description of the relation between the relevant variables. The parameters of the model were estimated using quarterly data of Israel’s economy in the years 1992 to 2005.
    Keywords: MacroeconomicModel; Inflation Targeting; New Keynesian Model
    JEL: E5 E4
    Date: 2007–07
  9. By: Rossi, Raffaele
    Abstract: In this paper we show that the introduction of a set of rule of thumb consumers (ROTC) a la Gali' et Al.(2007) in a standard New Keynesian model, can reverse the traditional predictions of a change in government spending on the economy as a whole. In particular, we show that under a reasonable parametrization of the model, an increase in government spending can lead, against the common Keynesian wisdom, to a decrease in total output. Furthermore we analyze how the determinacy condition of the model is affected by the presence of a set of ROTC and a fiscal policy which levies a proportional income tax. In particular we find that, when the share of ROTC is high, the monetary-fiscal policy mix that guarantees a unique equilibrium requires for both policies to be, following the definition of Leeper (1991), either active or passive. Ultemetely we show that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a government spending shock. .
    JEL: E62 E32 H30
    Date: 2007–08–05
  10. By: Markiewicz , Malgorzata (BOFIT)
    Abstract: This paper reviews issues associated with quasi-fiscal operations (QFO) of central banks in a sample of countries in Central and Eastern Europe and the former Soviet Union. The concern is the problem of transparency in fiscal and monetary accounts when the central bank undertakes quasi-fiscal operations and the government falls short of providing full coverage of fiscal operations. QFO can also jeopardize monetary policy designed to maintain price stability. A simple framework is developed to estimate the extent of QFO. In some cases, the magnitude of QFO is significant in indicating underestimation of fiscal deficit figures. We claim that the lack of transparency in fiscal accounts of transition countries warrants serious concern.
    Keywords: quasi-fiscal operations; transition economy and transparency
    Date: 2007–09–12
  11. By: Yun Daisy Li; Talan B. Iscan; Kuan Xu (Department of Economics, University of Western Ontario; Department of Economics, Dalhousie University; Department of Economics, Dalhousie University)
    Keywords: monetary policy shocks; stock prices; open economy; structural vector autoregressive model
    Date: 2007–09–12
  12. By: Andreas Billmeier; Giorgi Bakradze
    Abstract: This paper evaluates whether Georgia is ready to adopt inflation targeting (IT), a monetary policy framework that several emerging markets have adopted recently. After reviewing selected prerequisites for successfully implementing IT, the paper focuses on whether one specific precondition is in place-an empirically stable monetary transmission mechanism. Building on a baseline VAR model, it presents several extensions to explore the various channels using causality tests, impulse responses, and variance decompositions. The paper finds that once the central bank overcomes some institutional and operational weaknesses and establishes a more reliable transmission mechanism, it could adopt IT over the medium term.
    Keywords: Inflation targeting , Georgia , Monetary policy , Monetary transmission mechanism , Working Paper ,
    Date: 2007–08–02
  13. By: Gaetano Antinolfi; Costas Azariadis; James B. Bullard
    Abstract: We formulate the central bank?s problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income. Households are divided into cash agents, who store value in currency alone, and credit agents who have access to both currency and loans. The planner?s problem is equivalent to choosing inflation and nominal rates consistent with a resource constraint along with an incentive constraint that ensures credit agents prefer the superior consumption-smoothing power of loans to that of currency. We show that the optimum rate of inflation is positive, and the optimum nominal interest rate is higher than the inflation rate, if the social welfare function weighs credit agents no more than their population fraction.
    Keywords: Inflation (Finance) ; Deflation (Finance) ; Monetary policy - United States
    Date: 2007
  14. By: Jaromir Benes; David Vávra; Marta de Castello Branco
    Abstract: The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model's calibration is intuitive and can draw on the vast experience many countries have with calibrating small 'gap' models of monetary policy transmission. Moreover, the definition of the model's steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model's properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.
    Date: 2007–08–03
  15. By: Cameron A. Shelton (Economics Department, Wesleyan University)
    Abstract: This event study uses economic forecasts and opinion polls to measure the response of expectations to election surprise. Use of forecast data complements older work on partisan cycles by allowing a tighter link between election and response thereby mitigating concerns of endogeneity and omitted variables. I fin that forecasters respond swiftly and significantly to election surprise. I further argue that the response ought to vary across countries with different institutional foundations. In support, I find that there exist three distinct patterns in forecasters' responses to partisan surprise corresponding to Hall and Soskice's three varieties of capitalism. In liberal market economies, forecasters expect the left to achieve jobless growth with virtually no cost to inflation. In Mediterranean market economies, forecasters expect the left to achieve deliver both higher output growth and lower unemployment but with higher inflation. And in coordinated market economies, forecasters expect the left to deliver lower growth, higher unemployment, and higher inflation.
    Keywords: political business cycle, varieties of capitalism, forecast data, opinion polls
    JEL: E32 E63 P16 P51
    Date: 2007–04
  16. By: Calani, Mauricio
    Abstract: This paper addresses the globalization - disinflation hypothesis from the perspective of a open economy neo keynesian framework. This hypothesis proposes that globalization has changed the long-run inflation process, resulting in a global disinflation. If true, it makes us wonder about the merit of central banks in this phenomenon. Even more, challenges our knowledge that long-run inflation is ultimately a monetary issue. This paper explicitly addresses this hyphotesis, analyzing how different degrees of globalization change the response of output and inflation to supply shocks. To accomplish this, the use of a general equilibrium approach in which we can identify shocks and openness is a must. Globalization is however, a complex process. In this paper I explicitly model globalization just as an openness process. Simulation results suggest that as long as there is one distortion - free market for assets, the discussion about the changed values of price stickiness measures which would affect the long-run inflation process is of reduced importance. It is also suggested that financial integration, and not trade or competition, is the key to understanding the link between globalization and inflation.
    Keywords: Disinflation; Globalization
    JEL: E31 E50
    Date: 2007–08–19
  17. By: Gernot Pehnelt (Friedrich-Schiller University Jena, School of Business and Economics Author-Workplace-Postal: Carl-Zeiss-Str. 3, D-07743 Jena)
    Abstract: During the last two decades, the world has experienced a remarkable process of disinflation, with average inflation rates in industrialized countries falling by 10 percentage points and an even sharper decline of the mean rate of inflation in developing countries. Parallel to the decline in inflation rates, a tremendous increase in economic integration - often referred to as globalisation - has been taking place. In this article, we analyse the effects of globalisation on inflation in OECD countries. We theoretically outline different channels through which globalisation may have influenced inflation dynamics and give an overview on the existing empirical evidence on this issue. In the empirical analysis we show that globalisation has contributed to the disinflation process in OECD countries since the 1980s. Inflation rates became much less prone to domestic parameters, especially the domestic output gap. Global factors such as the output gap of the main trading partners became more important in determining national inflation rates. Furthermore, economic freedom and the degree of globalisation are positively related to the disinflation process. Central bank independence seems to have contributed to the decline in inflation rates among OECD countries process, but the effect is rather modest. Though the inertia of inflation can still be observed, the persistence of inflation has considerably declined since the early 1990s.
    Keywords: inflation, globalisation, openness, panel analysis
    JEL: E30 E31 E58 F41
    Date: 2007–09–10
  18. By: Andrew Swiston
    Abstract: This paper examines the impact of central bank communication on market expectations of monetary policy and long-term interest rates by comparing Federal Open Market Committee (FOMC) action dates when a policy statement was made to dates before statements were issued. Increased communication has been associated with a reduction in the magnitude of short-term monetary surprises; a greater flow of information about the long-term path of policy that is distinct from the short-term surprise; and a larger role for these long-term surprises in the determination of long-term interest rates.
    Keywords: Working Paper , United States ,
    Date: 2007–07–26
  19. By: Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT)
    Abstract: We assess the correlation of supply and demand shocks between the countries of the euro area and the accession countries in the 1990s. Shocks are recovered from estimated structural VAR models of output growth and inflation. We find that some accession countries have a quite high correlation of the underlying shocks with the euro area. However, even for many advanced accession countries, the shocks remain significantly more idiosyncratic. Furthermore, many EU countries seem to have a much higher correlation with the core euro area countries than in the previous decades. Continuing integration within the EU seems to have aligned the business cycles of these countries as well.
    Keywords: optimum currency area; EMU; EU enlargement; structural VAR
    JEL: E32 F42
    Date: 2007–09–13
  20. By: Ricciuti, Roberto
    Abstract: The Italian fiscal history is characterised by a number of fiscal consolidations. In this paper we characterise fiscal policy in terms of non-linear deterministic processes. We find that government spending and taxes can be described as being non-linear trend stationary processes instead of unit roots. A long run equilibrium relationship - a non-linear co-trend - does exist between the two series, fulfilling the intertemporal government budget constraint. We interpret this result as evidence of a long run fiscal rule that different policy makers have adopted, putting public finance in balance.
    Keywords: taxes, government expenditure, intertemporal government budget constraint, non-linear trend stationarity, non-linear co-trending
    JEL: E62 H62 N10
    Date: 2007–09
  21. By: Michael Bordo; Christopher Erceg; Andrew Levin; Ryan Michaels
    Abstract: This paper analyzes the role of transparency and credibility in accounting for the widely divergent macroeconomic effects of three episodes of deliberate monetary contraction: the post-Civil War deflation, the post-WWI deflation, and the Volcker disinflation. Using a dynamic general equilibrium model in which private agents use optimal filtering to infer the central bank's nominal anchor, we demonstrate that the salient features of these three historical episodes can be explained by differences in the design and transparency of monetary policy, even without any time variation in economic structure or model parameters. For a policy regime with relatively high credibility, our analysis highlights the benefits of a gradualist approach (as in the 1870s) rather than a sudden change in policy (as in 1920-21). In contrast, for a policy institution with relatively low credibility (such as the Federal Reserve in late 1980), an aggressive policy stance can play an important signalling role by making the policy shift more evident to private agents.
    Keywords: Monetary policy - United States ; Deflation (Finance)
    Date: 2007
  22. By: Beja, Jr., Edsel
    Abstract: The inflation-growth relationship for the inflation targeters is estimated for the period 2001-2006. The results show that inflation is negatively correlated with economic growth, while the indicators for aggregate demand and aggregate supply are positively correlated with economic growth. The findings suggest that a combination of economic policies is more fruitful than a singular focus on inflation targeting. This conclusion is applicable to the case of the Philippines, where inflation is often driven by aggregate supply-linked factors rather than demand-linked factors.
    Keywords: Inflation targeting; inflation-growth tradeoff
    JEL: E30
    Date: 2007–04–25
  23. By: Kim, Byung-Yeon (BOFIT); Pirttilä, Jukka (BOFIT); Rautava , Jouko (BOFIT)
    Abstract: Using a macroeconometric framework, this paper analyses relationships among money, barter and inflation in Russia during the transition period. Following the development of a theoretical framework that introduces barter in a standard small open economy macro model, we estimate our model using structural cointegration and vector error correction methods. Our findings suggest that barter has resulted partly from output losses and partly from a reduction in real money balances, but to a lesser extent. There is some evidence that the effect of barter on prices is less than that of money. We also find that increases in barter are affected by banking failure. Our results imply that a macro model that excludes barter fails to capture all the relevant information for inference on money and inflation in Russia.
    Keywords: barter; money; inflation; cointegration; error-correction mechanism; Russia
    Date: 2007–09–13
  24. By: Gomes, Orlando
    Abstract: This paper develops a non-equilibrium dynamic model (NEDyM) with Keynesian features (it allows for a disequilibrium between output and demand and it considers a constant marginal propensity to consume), but where production is undertaken under plain neoclassical conditions (a constant returns to scale production function, with the stocks of capital and labor fully employed, is assumed). The model involves only two endogenous / prognostic variables: the stock of physical capital per unit of labor and a goods inventory measure. The two-dimensional system allows for a careful analysis of local and global dynamics. Points of bifurcation and long-term cyclical motion are identified. The main conclusion is that the disequilibrium hypothesis leads to persistent fluctuations generated by intrinsic deterministic factors.
    Keywords: NEDyM; Endogenous business cycles; Nonlinear growth; Keynesian macroeconomics; Cyclical dynamics and chaos.
    JEL: O41 E32 E12 C62
    Date: 2007–08
  25. By: Keiko Honjo
    Abstract: The present formulation of the golden rule in the United Kingdom allows fiscal performance to be tested explicitly on an ex-post basis. However, it requires precise dating of the economic cycle, which can lead to significant controversy. Also, the need to aim for current balance or better "over the cycle" may force fiscal policy to be procyclical toward the end of cycles. Using dynamic stochastic simulations, the paper suggests that making the formulation of the golden rule forward-looking and independent of the dating of the economic cycle would reduce the risk of procyclicality and enhance macroeconomic stability.
    Date: 2007–08–10
  26. By: Sarajevs, Vadims (BOFIT)
    Abstract: The impact of an unanticipated monetary shock in a small open economy with dollarization, factor price rigidities, and nontradeables is re-examined in an optimizing intertemporal general equilibrium model. The framework of an earlier study is extended to incorporate foreign real money balances into the repre-sentative agent's utility function and to account for the phenomenon of dollarization so characteristic of transition economies. The major finding is that in the event of small monetary shocks, the presence of dollarization does not alter the outcome that relates the sign of response of consumption, current account balance, and other macroeconomic variables to the difference between intertemporal and intratemporal elasticities of substitutions of the total consumption index. The solution also shows that the elasticity of intertemporal substitution of money services and the share of traded goods in total consumption - a proxy for openness of the economy - are the crucial parameters in determining the response and the possibility of overshooting of the model variables, with economic openness playing a stabilizing role for the econ-omy in the event of monetary shocks.
    Keywords: new open-economy macroeconomics; monetary shocks; dollarization; factor price rigidities; nontradeables; current account
    JEL: F31 F32 F41 F47
    Date: 2007–09–13
  27. By: Charbel Cordahi (Université Saint Esprit de Kaslik (USEK), Kaslik); Jean-François Goux (GATE CNRS)
    Abstract: We show that an American monetary shock wields an influence, though limited, over the Lebanese output in accordance with the literature advances. However, as we are waiting for a stronger transmission of U.S. short-term rates to Lebanese short-term rates, we notice that this transmission is weak in the first year. The result can be explained by the presence of pricing-to-market. After the end of the first year, we find the traditional result where the increase in the American interest rate is transmitted integrally to the Lebanese interest rate. We recognize this phenomenon as the dollarization effect.
    Keywords: interest rate - International transmission - law of one price - monetary shock - purchasing power parity
    JEL: E3 E4 F3 F4
    Date: 2007–07
  28. By: Jon Faust; Jonathan H. Wright
    Abstract: Many recent papers have found that atheoretical forecasting methods using many predictors give better predictions for key macroeconomic variables than various small-model methods. The practical relevance of these results is open to question, however, because these papers generally use ex post revised data not available to forecasters and because no comparison is made to best actual practice. We provide some evidence on both of these points using a new large dataset of vintage data synchronized with the Fed's Greenbook forecast. This dataset consists of a large number of variables, as observed at the time of each Greenbook forecast since 1979. Thus, we can compare real-time large dataset predictions to both simple univariate methods and to the Greenbook forecast. For inflation we find that univariate methods are dominated by the best atheoretical large dataset methods and that these, in turn, are dominated by Greenbook. For GDP growth, in contrast, we find that once one takes account of Greenbook's advantage in evaluating the current state of the economy, neither large dataset methods nor the Greenbook process offers much advantage over a univariate autoregressive forecast.
    JEL: C32 C53 E32 E37
    Date: 2007–09
  29. By: Andreas Hornstein
    Abstract: These notes contain the derivations for results stated without proof in Hornstein (2007). First, I derive the log-linear approximation of the inflation dynamics in the Calvo-model with elements of backward-looking pricing when the approximation takes place around a positive average inflation rate. I derive a version of the "hybrid" New Keynesian Phillips Curve (NKPC) that can be estimated using standard GMM techniques. Second, I characterize the inflation dynamics implied by the NKPC when marginal cost follows an AR(1) process. For this purpose I derive the autocorrelation and crosscorrelation structure of inflation.
    Date: 2007
  30. By: Pablo Druck; Alexander Plekhanov; Mario Dehesa
    Abstract: The paper provides a theoretical and cross-country empirical analysis of the determinants of financial deepening, and finds that higher credit-to-GDP ratios are associated with stronger creditor rights and lower inflation, and that the marginal effect of improvements in creditor rights protection is declining as the rate of inflation increases. The analysis suggests that in a high inflation environment, controlling inflation and reducing macroeconomic volatility should be given priority. Once these goals are achieved, the focus of attention should shift to creditor rights protection and credit information management.
    Date: 2007–06–22
  31. By: Emmanuel Farhi
    Abstract: This paper analyzes the theoretical and quantitative implications of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets. The model features a representative-agent economy with proportional taxes on labor and capital. I first consider the case that the only asset the government can trade is a real risk-free bond. Taxes on capital are set one period in advance, reflecting inertia in tax codes and ruling out replication of the complete markets allocation. Because capital income varies with the state of the economy, capital taxation provides a state contingent source of revenues. I thus identify a novel potential role for capital taxation as a risk sharing instrument between the government and private agents. However, this benefit must be weighted again the distortionary cost of capital taxation. For a baseline case, the optimal policy features a zero tax on capital. Moreover, numerical simulations show that the baseline case provides an excellent benchmark. I next allow the government to hold a non trivial position in capital. Capital ownership provides the same benefit or risk sharing but without the cost of tax distortions. In a variety of quantitative exercises, I show that capital ownership allows the government to realize about 90% of the welfare gains from moving to complete markets. Large positions are typically required for optimality. But smaller positions achieve substantial benefits. In a business-cycle simulation, I show that a 15% short equity position achieves over 40% of the welfare gains from completing markets.
    JEL: A1 E21 E22 E23 E6 E60 E62 E66 H21 H3 H31 H32 H6 H60 H61 H62
    Date: 2007–09
  32. By: Andolfatto, David
    Abstract: In this paper, I provide a rationale for why money should earn interest; or, what amounts to the same thing, why risk-free claims to non-interest-bearing money should trade at discount. I argue that interest-bearing money is essential when individual money balances are private information. The analysis also suggests one reason for why it is sufficient (as well as necessary) for interest to be paid only on large money balances; or equivalently, why bonds need only be issued in large denominations.
    Keywords: Money; Bonds; Monetary Policy; Friedman Rule
    JEL: E4
    Date: 2007–09–07
  33. By: Emil Stavrev
    Abstract: This paper's analysis of growth and inflation dispersions in the euro area reveals several findings. First, these dispersions have declined appreciably since EMU; remaining dispersions are small but persistent, relating mainly to country-specific shocks, not differences in the transmission of common shocks. Second, the different behavior of interest rates just before and after the introduction of the euro has contributed significantly to growth dispersions. However, this has been a one-off shock whose effects, particularly on construction, should be declining over time. Third, financial sector integration could do much more to insure countries against shocks and increase consumption smoothing.
    Keywords: Working Paper , Euro Area ,
    Date: 2007–07–17
  34. By: Ivan Tchakarov; Roland Straub
    Abstract: Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively affected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale two-country dynamic stochastic general equilibrium (DSGE) model. First, we identify the channels through which both temporary and permanent public investment shocks generate larger fiscal multipliers than exogenous increases in public consumption. Second, we quantify the negative impact of a change in fiscal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justified.
    Date: 2007–07–17
  35. By: Edward F. Buffie; Christopher Adam; Catherine A. Pattillo; Stephen A. O'Connell
    Abstract: Since the turn of the century, aid flows to Africa have increased on average and become more volatile. As a result, policymakers, particularly in post-stabilization countries where inflation has only recently been brought under control, have been increasingly preoccupied with how best to deploy the available instruments of monetary policy without yielding on hard-won inflation gains. We use a stochastic simulation model, in which private sector currency substitution effects play a central role, to examine the properties of alternative monetary and fiscal policy strategies in the face of volatile aid flows. We show that simple monetary rules, specifically an (unsterilized) exchange rate crawl and a 'reserve buffer plus float'-under which the authorities set a time-varying reserve target corresponding to the unspent portion of aid financing and allow the exchange rate to float freely once this reserve target is satisfied-have attractive properties relative to a range of alternative strategies including those involving heavy reliance on bond sterilization or a commitment to a 'pure' exchange rate float.
    Date: 2007–07–26
  36. By: Kutan, Ali M. (BOFIT); Pautola-Mol , Niina (BOFIT)
    Abstract: This paper evaluates the functioning, suitability, and effectiveness of the Maastricht convergence criteria regarding fiscal policy and the Stability and Growth Pact for the Baltic States. We argue that the Maastricht fiscal targets from the Baltic perspective should be considered as long-term goals as opposed to short-run objectives of fiscal policy. Using the European Commission's approach as well as impulse response and variance decomposition techniques, we assess the fiscal discipline and cyclical sensitivity of each state's budget to changes in output gap. Empirical evidence indicates that Estonia and Latvia have been more successful in maintaining fiscal discipline than Lithuania during 1996-2000. We also observe that the Stability and Growth Pact signed in July 1997 would offer enough room for automatic fiscal stabilizers in Estonia and Latvia, but not necessarily in Lithuania. Policy implications of the findings for future perspectives are also discussed.
    Keywords: EU-enlargement; fiscal policy; Baltic countries
    Date: 2007–09–11
  37. By: Kelly, Logan; Barnett, William; Keating, John
    Abstract: Measuring the economic stock of money, defined to be the present value of current and future monetary service flows, is a difficult asset pricing problem, because most monetary assets yield interest. Thus, an interest yielding monetary asset is a joint product: a durable good providing a monetary service flow and a financial asset yielding a return. The currency equivalent index provides an elegant solution, but it does so by making strong assumptions about expectations of future monetary service flows. These assumptions cause the currency equivalent index to exhibit significant downward bias. In this paper, we propose an extension to the currency equivalent index that will correct for a significant amount of this bias.
    Keywords: Currency Equivalent Index; Monetary Aggregation; Money Stock
    JEL: E49 C43
    Date: 2007–09–09
  38. By: Kortelainen, Mika (Bank of Finland Research)
    Abstract: We present a two country DGE model and estimate it using Bayesian techniques and euro area and US quarterly data for 1977–2004. In analysing the current accounts we find that a lower US rate of time preference or a higher dollar risk premium could render the deficit sustainable, but that these could push the interest rate to the zero bound. Secondly, we find that fiscal policy is not sufficiently effective to improve the current account although the zero bound is not hit.
    Keywords: current account; zero bound; policy coordination
    JEL: E61 F32
    Date: 2007–09–12
  39. By: Kim , Byung-Yeon (BOFIT)
    Abstract: Using cointegration and error-correction models, this paper analyses the relative impacts of the monetary, labour and foreign sectors on Polish inflation from 1990 to 1999. Following the development of a theoretical framework, we use a structural system approach in which cointegration relationships are used to derive deviations from steady-state levels. The deviations are interpreted as excess demand pressure on inflation in a given sector and subsequently incorporated in order to determine the short-run dynamics of Polish inflation. The results suggest that the labour and external sectors dominated the determination of Polish inflation during the above period, but their effects have been opposite since 1994. The appreciation of the domestic currency contributed to reducing inflation, while excessive wage increases prevented inflation from decreasing to a lower level. The monetary sector appears not to have exerted influence on inflation, suggesting monetary policy has been passive.
    Keywords: inflation; cointegration; error correction mechanism; Poland
    Date: 2007–09–13
  40. By: Järvinen , Marketta (BOFIT)
    Abstract: This paper examines, in the context of future EMU membership of the Central and Eastern European countries (CEECs), the interaction between fiscal policy and the price level in different exchange rate regimes. The theoretical framework is based on the Fiscal Theory of the Price Level (FTPL). The results show that a credibly fixed exchange rate is inconsistent with fiscal irresponsibility, while adopting the common currency enables the conduct of irresponsible policies with the result that a rise in the level of debt by one member country raises the common price level of the whole union.
    Keywords: exchange rate regimes; inflation; fiscal theory of the price level; transition economies
    JEL: E00 F33 O57
    Date: 2007–09–11
  41. By: Blaszkiewicz, Monika (BOFIT); Konieczny, Jerzy (BOFIT); Myslinska, Anna (BOFIT); Radziwiland, Artur (BOFIT); Wozniak , Przemyslaw (BOFIT)
    Abstract: We analyse welfare effects of the interactions between the tax system and inflation in Poland and in Ukraine, using the framework developed by Feldstein (1997, 1999). This approach stresses the fact that inflation increases distortions created by the tax system, in particular distortions to intertemporal saving decisions. We find that the effects are much smaller in the two transition countries than in developed marketeconomies. The reason is that taxation of investment returns is much more limited. Our results suggest that taxes on investment returns should be avoided in any future redesign of the tax system.
    Date: 2007–09–12
  42. 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%. JEL classi.cation: D91 (Intertemporal Consumer Choice; Lifecycle Models and Saving), E21 (Consumption; Saving).
    Date: 2007
  43. By: Nicholas Bloom
    Abstract: Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time varying second moment, which is numerically solved and estimated using firm level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity. Thus, second moment shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital convex and non-convex adjustment costs. Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not.
    JEL: C23 D8 D92 E22
    Date: 2007–09
  44. By: Andreas Beyer; Roger E. A. Farmer; Jérôme Henry; Massimiliano Marcellino
    Abstract: DSGE models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack or weakness of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the implications of using inappropriate instruments to achieve identification. In this paper we analyze the practical relevance of these problems and we propose to combine factor analysis for information extraction from large data sets and GMM to estimate the parameters of systems of forward looking equations. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of a standard New-Keynesian model.
    JEL: E5 E52 E58
    Date: 2007–09
  45. By: Dvorsky , Sandra (BOFIT)
    Abstract: The paper measures the degree of legal and actual central bank independence (CBI) in five Central and Eastern European transition economies striving for EU accession, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia (CEEC-5). The degree of legal CBI is measured by applying the two most widely used indices, the Cukierman and the Grilli-Masciandaro-Tabellini (GMT) indices. Moreover, the turnover rate of central bank governors is used as a proxy to measure actual CBI. The paper gives an interpretation of computed results, comparing the findings with those of other authors and earlier calculations. Furthermore, the indices on legal and actual CBI themselves are critically reviewed, in particular against the background of the Maastricht Treaty requirements, which in practice constitute the driving force for any amendment of central bank laws in the CEEC-5. Moreover, the role of CBI in bringing down inflation in the CEEC-5 at different stages of transition is briefly discussed. The paper concludes that the overall degree of legal CBI is comparatively high in all countries examined, while the measured turnover rates of governors do not seem to fully reflect the degree of actual CBI in the CEEC-5. Looking at the role of CBI in the disinflation process at different stages of transition, the main causes for inflation seem to have been beyond the direct control of the central bank. A high degree of CBI, together with a reasonable mix of fiscal and monetary policies as well as structural reforms, will be necessary for the CEEC-5 to meet all requirements for joining the EU and, in a more distant future, for adopting the euro.
    Keywords: transition; central bank independence; disinflation
    Date: 2007–09–13
  46. By: Hess Chung (Indiana University Bloomington); Eric Leeper (Indiana University Bloomington)
    Abstract: Equilibrium models imply that the real value of debt in the hands of the public must equal the expected present-value of surpluses. Empirical models of fiscal policy typically do not impose this condition and often do not even include debt. Absence of debt from empirical models can produce non-invertible representations, obscuring the true present-value relation, even if it holds in the data. First, we show that small VAR models of fiscal policy may not be invertible and that expanding the information set to include government debt has quantitatively important implications. Then we impose the present-value condition on an identified VAR and characterize the way in which the present-value support of debt varies across types of fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. Debt is supported almost entirely by changes in the present-value of surpluses for some fiscal shocks, but for other fiscal shocks surpluses fail to adjust, leaving a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long---on the order of 50 years or more.
    Keywords: fiscal policy, present-value restriction, taxes, government spending
    JEL: E6
    Date: 2007–09
  47. By: Alan S. Blinder; John Morgan
    Abstract: In an earlier paper (Blinder and Morgan, 2005), we created an experimental apparatus in which Princeton University students acted as ersatz central bankers, making monetary policy decisions both as individuals and in groups. In this study, we manipulate the size and leadership structure of monetary policy decisionmaking. We find no evidence of superior performance by groups that have designated leaders. Groups without such leaders do as well as or better than groups with well-defined leaders. Furthermore, we find rather little difference between the performance of four-person and eight-person groups; the larger groups outperform the smaller groups by a very small margin. Finally, we successfully replicate our Princeton results, at least qualitatively: Groups perform better than individuals, and they do not require more "time" to do so.
    JEL: E52 E58
    Date: 2007–09
  48. By: Agustín Maravall (Banco de España); Ana del Río (Banco de España)
    Abstract: Maravall and del Río (2001), analized the time aggregation properties of the Hodrick-Prescott (HP) filter, which decomposes a time series into trend and cycle, for the case of annual, quarterly, and monthly data, and showed that aggregation of the disaggregate component cannot be obtained as the exact result from direct application of an HP filter to the aggregate series. The present paper shows how, using several criteria, one can find HP decompositions for different levels of aggregation that provide similar results. We use as the main criterion for aggregation the preservation of the period associated with the frequency for which the filter gain is ½; this criterion is intuitive and easy to apply. It is shown that the Ravn and Uhlig (2002) empirical rule turns out to be a first-order approximation to our criterion, and that alternative —more complex— criteria yield similar results. Moreover, the values of the parameter λ of the HP filter, that provide results that are approximately consistent under aggregation, are considerably robust with respect to the ARIMA model of the series. Aggregation is seen to work better for the case of temporal aggregation than for systematic sampling. Still a word of caution is made concerning the desirability of exact aggregation consistency. The paper concludes with a clarification having to do with the questionable spuriousness of the cycles obtained with HP filter.
    Keywords: Time series, Filtering and Smoothing, Time aggregation, Trend estimation, Business cycles, ARIMA models
    JEL: C22 C43 C82 E32 E66
    Date: 2007–09
  49. By: Daniel Leigh; Alexander Plekhanov; Manmohan S. Kumar
    Abstract: The paper analyzes the determinants of success of recent fiscal consolidations in the OECD countries as well as the short-run and long-run effects of fiscal adjustments on economic activity by looking at fourteen case studies, panel data for OECD countries, and the results of simulations using a non-Ricardian multi-country dynamic general equilibrium model. The study finds that while fiscal consolidations tend to have short-run contractionary effects, they can be expansionary in the long run, provided that they do not rely excessively on cuts in productive government expenditure. They can also create positive spillover effects for the rest of the world.
    Date: 2007–07–23
  50. By: Habib , Maurizio Michael (BOFIT)
    Abstract: This paper studies the impact of external factors on daily exchange rates and short-term interest rates in the Czech Republic, Hungary and Poland during the period August 1997 – May 2001. I find that neither exchange rates nor interest rates are influenced by short-term German interest rates. Nevertheless, I show that shocks to emerging-market risk premia had a significant impact on exchange rates in all three Central and Eastern European countries and on interest rates in the Czech Republic. In addition, studying the second moment of the variables, I demonstrate that Czech and Polish exchange rates were affected by ‘volatility contagion’ coming from emerging markets. I find also some partial support for the ‘volatility contagion’ hypothesis on Czech interest rates. These findings shed some doubts on the alleged theoretical ability of a floating exchange rate – such as in the Czech Republic – to absorb external shocks and insulate a country's domestic monetary policy completely. However, the spill-over effect on Czech interest rates might be explained by the ‘managed’ nature of the exchange rate regime, thereby re-establishing some credibility of the theory.
    Keywords: exchange rates; short-term interest rates; volatility; Czech Republic; Hungary; Poland
    Date: 2007–09–11
  51. By: Sumner La Croix (Department of Economics, University of Hawaii at Manoa)
    Abstract: Chin Hee Hahn and Sukha Shin (2007) have developed new decompositions of Korean economic growth from 1990 to 2004. They find that Korea’s declining GDP growth has been accompanied by a sharp decline in capital deepening and an increase in total factor productivity. By contrast, Jorgenson and Vu’s (2007) decompositions of Korea’s GDP growth find that total factor productivity decreased over this period. This paper compares the two decompositions; evaluates Hahn and Shin’s hypothesis that competition from Chinese imports may be driving the decline in GDP growth; and briefly presents four other candidates (decline in Korean savings, business cycle effects, weak IT investment, and regulatory and wealth redistribution initiatives) that could be partially responsible for the slowdown in Korean GDP growth.
    Keywords: GDP, TFP, China, Korea, capital, labor, decomposition, productivity.
    Date: 2007–08–13
  52. By: Rautava , Jouko (BOFIT)
    Abstract: Most people seem to think that Russia's economy and fiscal situation are still crucially tied up with international oil prices and the exchange rate of the rouble, although this view has recently been challenged by some analysts. Empirical research on this topic is, however, scanty. In this paper, the impact of international oil prices and the real exchange rate on Russia's economy and fiscal policy is analysed using VAR methodology and cointegration techniques. The research period covered is 1995:Q1 - 2001:Q3. The results indicate that in the long run a 10% permanent increase (decrease) in international oil prices is associated with a 2.2% growth (fall) in the level of Russian GDP. Respectively, a 10% real appreciation (depreciation) of the rouble is associated with a 2.4% decline (increase) in the level of output. These long-run equilibrium relationships also have a significant impact on short-run dynamics through an error-correction mechanism. The estimation results confirm also a strong dependence of fiscal revenues on output and oil price fluctuations. Estimated parameters and diagnostic statistics do not indicate that Russia's dependence on oil and the real exchange rate would somehow have weakened in recent years.
    Keywords: Russian economy; fiscal policy; oil; real exchange rate; VAR; cointegration
    Date: 2007–09–11
  53. By: Mark J Flanagan; Felix Hammermann
    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.
    Date: 2007–07–31
  54. By: Juan Carlos Conesa; Carlos Garriga
    Abstract: The quantitative macroeconomics literature has documented that in the basic Overlapping Generations model a privatization of the social security system, going from a Pay-As-You-Go to a Fully Funded system, generates large long run welfare gains at the cost of substantial welfare losses for initial generations. We propose an alternative to previous literature. In this paper we maximize over the entire policy space, following the optimal fiscal policy approach, rather than comparing alternative policy paths one to one. That is, policies are chosen as part of the optimal design of a social security privatization in a Pareto improving way. The government decides endogenously how to finance the implicit social security liabilities and compensate the initial generations alive during the transition. In contrast with previous analysis the resulting allocation, by construction, lies on the constrained Pareto frontier. We find that the optimal design of reforms exhibits sizeable welfare gains, arising because of the reduction in labor supply distortions. In contrast, the welfare gains coming from the reduction of savings distortions are relatively small.
    Keywords: Fiscal policy ; Social security
    Date: 2007
  55. By: L. Randall Wray
    Abstract: This working paper examines the legacy of Keynes’s General Theory of Employment, Interest, and Money (1936), on the occasion of the 70th anniversary of the publication of Keynes’s masterpiece and the 60th anniversary of his death. The paper incorporates some of the latest research by prominent followers of Keynes, presented at the 9th International Post Keynesian Conference in September 2006, and integrates this with other work that has come out of the Keynesian tradition since the 1940s. It is argued that Keynes’s contributions still provide important guidance for real-world policy formation.
    Date: 2007–09
  56. By: Andrew Swiston; Tamim Bayoumi
    Abstract: VARs of real growth since 1970 are used to estimate spillovers between the U.S., euro area, Japan, and an aggregate of small industrial countries, which proxies for global shocks. U.S. and global shocks generate significant spillovers, while those from the euro area and Japan are small. This paper also calculates the standard errors of impulse-response functions including uncertainty over the proper Cholesky ordering. Extensions adding real net exports, commodity prices, and financial variables indicate that financial effects dominate spillovers. The results by subperiod underline the importance of the great moderation in U.S. output fluctuations and associated financial stability in lowering output volatility elsewhere.
    Keywords: Working Paper , Japan , United States ,
    Date: 2007–07–24
  57. By: Kim , Byung-Yeon (BOFIT)
    Abstract: Using recently available Soviet material, this paper analyses the causes of repressed inflation in the Soviet consumer market during 1965-1989. We found that retail price subsidies, which rose from 4% of state budget expenditure in 1965 to 20% in the late 1980s, intensified consumer market disequilibrium. The provision of these subsidies had negative effects on the market by maintaining the purchasing power of households for consumer goods and by increasing the budget deficit. Furthermore, the demand of enterprises for consumer goods without legitimate permission tended to increase during 1965-1989.
    Keywords: repressed inflation; Soviet Union; retail price; subsidies; siphoning effect; budget deficit;
    Date: 2007–09–13
  58. By: Égert , Balázs (BOFIT)
    Abstract: This paper studies the Balassa-Samuelson effect in the Czech Republic, Hungary, Poland, Slovakia and Slovenia. Time series and panel cointegration techniques are used to show that the BS effect works reasonably well in these transition economies during the period 1991:Q1 to 2001:Q2. However, productivity growth does not fully translate into price in-creases due to the structure of CPI indexes. We thus argue that productivity growth will not hinder the ability of the five EU accession candidates to meet the Maastricht criterion on inflation in the medium term. Moreover, the observed appreciation of the CPI-deflated real exchange rate is found to be systematically higher compared to the real appreciation justi-fied by the Balassa-Samuelson effect, particularly in the cases of the Czech Republic and Slovakia. This may be partly explained by the trend appreciation of the tradable-goods-price-based real exchange rate, increases in non-tradable sector prices due to price liberali-sation and demand-side pressures, and the evolution of the nominal exchange rate due to the exchange rate regime and magnitude of capital inflows.
    Keywords: Balassa-Samuelson effect; productivity; real exchange rate; transition; panel cointegration
    JEL: E31 F31 O11 P17
    Date: 2007–09–11
  59. By: Garbis Iradian
    Abstract: This paper analytically explores and empirically tests a number of hypotheses to explain the rapid growth in transition economies. The paper finds that growth in the Commonwealth of Independent States (CIS) has been higher because of the recovery of lost output, progress in macroeconomic stabilization and market reforms, and favorable external conditions. Some of these factors are unlikely to continue for a very long time. The challenge is to improve the investment climate in the non-primary sectors, which will require broadening the scope of macroeconomic reform into a second generation of reforms encompassing structural and institutional areas.
    Date: 2007–07–18
  60. By: Pirttilä , Jukka (BOFIT)
    Abstract: This paper makes an empirical examination of the relationship between fiscal balance and structural reforms using panel data from 25 transition economies. The results indicate that price liberalisation has a positive impact on fiscal performance, while privatisation and restructuring, via unemployment, affect the fiscal balance negatively. These findings are somewhat in contrast with earlier empirical work and theoretical transition economics that maintain fiscal pressures are most severe in fast-reforming countries. The analysis further suggests that countries with better fiscal positions may have benefited from favourable initial conditions.
    Keywords: fiscal policy; structural reforms; transition economies
    Date: 2007–09–13
  61. By: Dennis P. J. Botman; Manmohan S. Kumar
    Abstract: Demographic pressures will materialize in many economies over the next few decades. We examine the macroeconomic impact of alternative fiscal adjustment and structural reform strategies to address these global aging pressures using the IMF's Global Fiscal Model (GFM). The results suggest substantial spillover effects of aging through international financial channels. To maintain sustainability, fiscal adjustment needs to be broad-based, while avoiding increases in direct taxes. There are substantial benefits from fiscal cooperation, while negative growth effects can be offset by complementary structural reforms in product and labor markets with the benefits accruing early and to all incomegroups.
    Date: 2007–08–02
  62. By: L. Randall Wray
    Abstract: While Hyman P. Minsky is best known for his work on financial instability, he was also intimately involved in the postwar debates about fiscal policy and what would become the War on Poverty. Indeed, at the University of California, Berkeley, he was a vehement critic of the policies of the Kennedy and Johnson administrations, and played a major role in developing an alternative. Minsky insisted that the high investment path chosen by postwar fine-tuners would generate macroeconomic instability, and that the War on Poverty would never lower poverty rates significantly. In retrospect, he was correct on both accounts. Further, he proposed high consumption and an employer of last resort policy as essential ingredients of any coherent strategy for achieving macro stability and poverty elimination. This paper summarizes Minsky’s work in this area, focusing on his writings from the early 1960s through the early 1970s in order to explore the path not taken.
    Date: 2007–09
  63. By: Daniel Leigh; David Hauner; Michael Skaarup
    Abstract: Rising longevity, falling fertility rates, and the retirement of the baby boom generation will substantially raise age-related government spending in most advanced and many emerging market countries. This paper assesses the evolution of fiscal sustainability for each of the G-7 countries using two standard primary gap indicators. The estimated fiscal adjustment required to ensure long-run fiscal sustainability is substantial for all G-7 countries. In particular, ensuring fiscal sustainability would require an average improvement in the primary balance of about 4 percentage points of GDP. While the overall adjustment required to achieve long-run fiscal sustainability in G-7 countries is large, there are significant growth benefits to putting public finances on a sustainable footing in the near term versus delayed adjustment.
    Date: 2007–07–30
  64. By: Andersson, Fredrik N G (Department of Economics, Lund University); Elger, Thomas (Department of Economics, Lund University)
    Abstract: This paper studies empirical linkages between cycles and trends in freight transportation activity and real economic activity in Sweden. We find that cycles in freight transportation are highly contemporaneously correlated with cycles in economic variables over both the short run and the medium run. The pattern of long run growth in freight transportation activity coincides with growth in economic variables during long periods, but there are also periods with substantial differences. Furthermore, we observe and explain a large decline in trend growth in tonne-kilometres by road from the mid-nineties and onwards.
    Keywords: freight transportation; business cycles; trend growth; decoupling; efficiency
    JEL: C19 E29 L92
    Date: 2007–09–13
  65. By: Fatih Guvenen
    Abstract: In this paper we reassess the evidence on labor income risk. There are two leading views on the nature of the income process in the current literature. The first view, which we call the "Restricted Income Profiles" (RIP) process, holds that individuals are subject to large and very persistent shocks, while facing similar life-cycle income profiles. The alternative view, which we call the "Heterogeneous Income Profiles" (HIP) process, holds that individuals are subject to income shocks with modest persistence, while facing individual-specific income profiles.We first show that ignoring profile heterogeneity, when in fact it is present, introduces an upward bias into the estimates of persistence. Second, we estimate a parsimonious parameterization of the HIP process that is suitable for calibrating economic models. The estimated persistence is about 0.8 in the HIP process compared to about 0.99 in the RIP process. Moreover, the heterogeneity in income profiles is estimated to be substantial, explaining between 56 to 75 percent of income inequality at age 55. We also find that profile heterogeneity is substantially larger among higher educated individuals. Third, we discuss the source of identification -- in other words, the aspects of labor income data that allow one to distinguish between the HIP and RIP processes. Finally, we show that the main evidence against profile heterogeneity in the existing literature -- that the autocorrelations of income changes are small and negative -- is also replicated by the HIP process, suggesting that this evidence may have been misinterpreted.
    JEL: E24 J31
    Date: 2007–09
  66. By: Lukas Vogel
    Abstract: The quality of the OECD's Economic Outlook growth projections was last evaluated in-house at the peak of the previous business cycle, calling for a reassessment. This paper analyses the OECD's annual GDP growth projections for the G7 countries over the period 1991-2006 and compares them with the Consensus Economics forecasts. It shows that OECD growth projections display a number of desirable features: projections for the current year are unbiased and efficient; projection errors tend to shrink as the horizon shortens; and projections are directionally accurate most of the time. Like those produced elsewhere, the OECD projections also suffer from shortcomings: one-year-ahead projections display a positive bias, mainly reflecting a propensity to overpredict during slowdowns; spring one-year-ahead projections are far less informative than autumn ones; and turning points are poorly anticipated one year ahead. Regression tests suggest that the OECD and Consensus add value to naïve forecasts for spring current-year and autumn one-year-ahead projections. <P>Les projections de croissance de l'OCDE pour les pays du G7 : une analyse post mortem <BR>La dernière évaluation interne de la qualité des projections de croissance présentées dans les Perspectives économiques de l?OCDE remonte au pic du cycle précédent. Le temps est donc venu d'un réexamen. La présente étude analyse les projections de l'OCDE pour la croissance annuelle du PIB dans les pays du G7 sur la période 1991-2006 et les compare aux prévisions de Consensus Economics. Elle montre que les projections de l'OCDE possèdent un certain nombre de bonnes propriétés : celles pour l?année en cours sont non-biaisées et efficaces; les erreurs de projection ont tendance à diminuer à mesure que l'horizon de la projection se rapproche ; et dans la plupart des cas les projections anticipent correctement les ralentissements et accélérations de l'activité. Néanmoins, comme celles produites ailleurs, les projections ont aussi leurs limites : celles pour l'année suivante présentent un biais positif, reflétant principalement une propension à surestimer la croissance en phase de ralentissement; les projections de printemps pour l'année suivante sont beaucoup moins informatives que celles produites à l'automne; et les points de retournement sont rarement anticipés un an plus tôt. L'analyse économétrique montre que les projections de l'OCDE ainsi que les prévisions de Consensus Economics apportent de la valeur ajoutée aux projections naïves dans le cas des projections de printemps pour l'année en cours et des projections de l'automne pour l'année suivante.
    Keywords: growth, croissance, prévisions, forecasts, GDP, PIB, projections, projections, economic outlook, perspectives économiques
    JEL: E17 E27 E37
    Date: 2007–09–04
  67. By: Inci Ötker; Zbigniew Polanski; Barry Topf; David Vávra
    Abstract: This paper reviews the experiences of a number of European countries in coping with capital inflows. It describes the nature of the inflows, their implications for macroeconomic and financial stability, and the policy responses used to cope with them. The experiences suggest that as countries become more integrated with international financial markets, there is little room to regulate capital flows effectively. The most effective ways to deal with capital inflows would be to deepen the financial markets, strengthen financial system supervision and regulation, where needed, and improve the capacity to design and implement sound macroeconomic and financial sector policies. These actions will help increase the absorption capacity and resilience of the economies and financial systems to the risks associated with the inflows.
    Keywords: Capital inflows , Capital markets , Inflation targeting , Working Paper ,
    Date: 2007–07–31
  68. By: Heimonen , Kari (BOFIT)
    Abstract: This study evaluates substitution of foreign currency balances in Estonia, a transition economy neighbouring countries participating in EMU. The focus is on substitution between dollar and euro balances in the three basic functions of money - unit of account, store of value and means of payment. While traditional models for currency substitution concentrate on substitution between a domestic currency and aggregate foreign currency balances, we look for substitution between the dollar and the euro or euro-related foreign currency balances. We find substitution between dollarization and euroization to be asymmetric in the short run, which suggests that inertia, irreversibility and ratchet effects favour the euro. No significant evidence of asymmetries in the long run was detected. In general, the traditional model for currency substitution explains the dynamics of the euro and dollar as substitute foreign currencies.
    Keywords: euro; dollar; currency substitution; currency demand
    Date: 2007–09–13
  69. By: Li Cui; Jahangir Aziz
    Abstract: The Chinese government has recently focused on the need to increase consumption to rebalance the economy. A widely held view is that despite China's remarkably high growth, the share of consumption in total expenditure has been low and declining due to high and rising saving rate of Chinese households as uncertainty over provision of pensions, and healthcare and education costs have increased since the mid-1990s. This paper finds that the rise in saving rate has been a minor factor. Much larger has been the role of the declining share of household income in national income, which has occurred across-the-board in wages, investment income, and government transfers. The paper finds that financial sector weaknesses, by restricting firms' access to bank financing for working capital, have played quantitatively a major role in keeping wage and investment income shares low and on a declining trend.
    Keywords: Working Paper , China, People's Republic of ,
    Date: 2007–07–26
  70. By: Koethenbuerger, Marko (CES, University of Munich,); Lockwood, Ben (Department of Economics, University of Warwick,)
    Abstract: This paper considers the relationship between tax competition and growth in an endogenous growth model where there are stochastic shocks to productivity, and capital taxes fund a public good which may be for final consumption or an infrastructure input. Absent stochastic shocks, decentralized tax setting (two or more jurisdictions) maximizes the rate of growth, as the constant returns to scale present with endogenous growth implies “extreme” tax competition. Stochastic shocks imply that households face a portfolio choice problem, which may dampen down tax competition and may raise taxes above the centralized level. Growth can be lower with decentralization. Our results also predict a negative relationship between output volatility and growth, consistent with the empirical evidence.
    Keywords: tax competition ; uncertainty ; stochastic growth
    JEL: H77 E62 F43
    Date: 2007
  71. By: Ericson, R. E. (BOFIT); Ickes , B. W. (BOFIT)
    Abstract: The Russian Economy has evolved into a hybrid form, a partially monetized quasi-market system that has been called the virtual economy. In the virtual economy, barter and non-monetary transactions play a key role in transferring value from productive activities to the loss-making sectors of the economy. We show how this transfer takes place, and how it can be consistent with the incentives of economic agents. We analyze a simple partial-equilibrium model of the virtual economy, and show how it might prove an obstacle to industrial restructuring and hence marketizing transition.
    Keywords: Russia; quasi-market sytem; virtual economy
    Date: 2007–09–13
  72. By: Beja, Jr., Edsel
    Abstract: Capital flight aggravates resource constraints and contributes to undermine long-term economic growth. Counterfactual calculations on the Philippines suggest that capital flight contributed to lower the quality of long-term economic growth. Sustained capital flight over three decades means that capital flight had a role for the Philippines to lose the opportunities to achieve economic takeoff. Unless decisive policy actions are taken up to address enduring capital flight and manage the macroeconomy more effectively, the Philippines remains caught in the perpetuity of crises, its economy hollowed-out, the people trapped in poverty, and once again, the country is frustrated from realizing a takeoff.
    Keywords: Capital flight; economic growth; Philippines
    JEL: O53 E10 O40
    Date: 2007–02–12
  73. By: Solanko, Laura (BOFIT)
    Abstract: The paper analyses fiscal competition for mobile capital between identical regions in a transition country. A framework similar to Keen-Marchand (1997) is used to analyse welfare effects of regional competition. It is shown that in very early transition when the share of the old sector is overwhelming, consumers in a transition economy may be better off in a competitive equilibrium. The decision-makers, however, would prefer to coordinate their fiscal policies.
    Keywords: tax competition; fiscal competition; transition
    Date: 2007–09–12
  74. By: Pengfei Wang; Yi Wen
    Abstract: This paper shows that incomplete information can be a rich source of sunspots equilibria. This is demonstrated in a standard dynamic general equilibrium model of monopolistic competition … la Dixit-Stiglitz. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium, but there are also multiple stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. In other words, sunspots can exist in infinite-horizon dynamic models with a unique saddle path steady state. In contrast to the recent sunspots literature (e.g., Benhabib and Farmer 1994), sunspots arising under incomplete information can be serially correlated and are robust to parameters associated with production technologies and preferences. Markup is always countercyclical in sunspots equilibria (which is consistent with empirical evidence) and fluctuations driven by sunspots look very similar to fluctuations driven by technology shocks.
    Keywords: Business cycles ; Prices
    Date: 2007
  75. By: Fernando Broner
    Abstract: The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.
    Keywords: Currency Crises, First Generation Models, Private Information, Discrete Devaluations, Multiple Equilibria
    JEL: D8 E58 F31 F32
    Date: 2007–01
  76. By: Georg Erber; Reinhard Madlener
    Abstract: This paper studies the productivity impact of heterogeneous capital inputs of selected EU-15 member countries and of the U.S. at the macroeconomic level. The stochastic possibility frontiers approach of Battese and Coelli (1992) applied here is used to identify neutralities or non-neutralities between different heterogeneous capital and labor inputs. Owing to the introduction and estimation of two-stage nested translog possibility production frontiers, the otherwise huge parameter space for the seven input factors included in the model is reduced significantly. This gives more robust estimates of the remaining parameters. Due to the detailed data, specific types of biased technological change in heterogeneous capital inputs can be tested. Furthermore, time-varying inefficiency trajectories for each country are obtainable. Annual data from 1980 to 2004, calculated and published by the Groningen Growth and Development Centre, are used in the empirical analysis. The results obtained shed new light on how fast technological progress in a global economy can shift comparative advantages between countries. In particular the different factor specific impacts of ICT and non-ICT capital stocks give a more detailed picture of the structural dynamics between factor inputs than do most other empirical studies using more aggregate factor input data.
    Keywords: nested production possibility frontiers, (in-)efficiency benchmarking, technology adoption, convergence
    JEL: C23 C51 D24 E23 O33 O47 O57
    Date: 2007
  77. By: Prabir C. Bhattacharya
    Abstract: This paper addresses - with the help of numerical simulation - some of the issues relating to income distribution in the context of development of an economy with an informal sector and migration of both low and high skilled workers from the rural to the urban area. A major aim has been to see under what conditions we do or do not get an inverted U-shaped curve of income distribution. The paper finds that the tendency always is for the Gini coefficient to rise and then decline. However, once it starts declining, it need not continuously decline; it may rise, then decline, then rise again and indeed rise above the previous peak before starting to decline again and may well end at the end of the simulation at a higher value than at the start. Any case for the redistribution of income is seen to be much stronger at later stages of development that at earlier stages, even though at later stages, Gini coefficient may be lower than at earlier stages. The policy implications of the findings are briefly considered.
    Keywords: income inequality, Kuznets curve, informal sector, simulation
    JEL: E17
    Date: 2007
  78. By: Jean-Pierre Cling (DIAL); Mireille Razafindrakoto (DIAL, IRD, Paris); François Roubaud (DIAL, IRD, Paris)
    Abstract: (english) The success of Export Processing Zones (EPZs) or the Zone Franche in Madagascar is, with the exception of Mauritius, an isolated and unrecognized case in Africa. The Zone Franche has had a highly significant macroeconomic impact in terms of exports and jobs. Madagascar became the number two clothing exporter in sub-Saharan Africa. At its peek in 2004, the Zone Franche employed 100,000 employees. The final phase-out of the Multi-Fibre Arrangements in 2005 has had a negative impact on the Zone Franche. The export and employment growth has come to a halt. Our econometric estimates, based on first-hand data, show that average wages in the Zone Franche have become lower than in the formal industrial sector, other things being equal; labor standards are higher than average but are progressively being reduced in a context of increased international competition. As the example of Madagascar shows, EPZs can no longer be placed at the core of development and employment policies in Africa since the end of clothing quotas, although no alternative strategy has emerged yet. _________________________________ (français) Le succès de la Zone franche malgache est un cas méconnu et unique en Afrique sub-saharienne, si on excepte l'Ile Maurice. La Zone franche a eu un impact macro-économique important en termes d'exportations et d'emplois. Madagascar est ainsi devenu le deuxième exportateur de produits de l'habillement en Afrique sub-saharienne. A son maximum en 2004, la Zone franche comptait 100.000 employés. Le démantèlement final des quotas imposes dans le cadre des Accords Multi- Fibres depuis le début de 2005 a eu un impact négatif sur la Zone franche. La croissance des exportations et de l'emploi s'est interrompue. Nos estimations économétriques, basées sur des données individuelles auprès des ménages de première main, montre que les salaires dans la Zone franche sont devenus inferieurs a leur niveau dans le reste du secteur industriel formel, toutes choses égales par ailleurs. Par ailleurs, les normes de travail hors salaires restent meilleures mais cet avantage est en réduction progressive, dans un contexte de concurrence internationale accrue. Comme le montre l'exemple de Madagascar, les zones franches d'exportation ne peuvent plus être mises au centre d'une stratégie de développement et d'emploi en Afrique depuis la fin des quotas textiles, bien qu'aucune alternative n'ait encore émerge.
    Keywords: Export processing zones, employment, wages, labour standards, Madagascar, zones franches, emploi,salaires, normes de travail.
    JEL: E24 F16 J32 J81 O55
    Date: 2007–09
  79. By: Akito Matsumoto
    Abstract: This paper analyzes the role of nonseparable utility and nontradables in business cycles and portfolio choice. I find that nonseparability in utility can change the portfolio choice significantly. Unlike previous results in literature, the optimal portfolio of the traded-good sector equities is no longer a well diversified portfolio and becomes sensitive to parameter values. As a result, the model often generates extreme home bias or anti-home bias portfolios implying that some frictions in asset markets, which prevent agents from holding these extreme portfolios, can explain the lack of international risk sharing.
    Date: 2007–07–17
  80. By: David Moore; Athanasios Vamvakidis
    Abstract: This paper examines the factors and constraints that affect recent and potential growth in Croatia, as well as policies that can influence it. On current productivity trends, it estimates Croatia's potential growth rate at 4-4½ percent, a result reasonably robust to different methodologies. To sustain growth at a higher rate in line with the authorities' aspirations, the analysis highlights the critical need to improve the business environment through further measures to reduce the administrative burden, legal uncertainties, and corruption. It also emphasizes the importance of attracting more greenfield foreign direct investment, and reforms to reduce the role of the state in the economy through fiscal consolidation and faster privatization.
    Keywords: Economic growth , Croatia , Privatization , Foreign direct investment , Economic reforms , Working Paper ,
    Date: 2007–08–03

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