|
on Macroeconomics |
|
Issue of 2007‒09‒24
sixty-five papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies) |
| Abstract: | This paper argues that existing empirical models of interest rate rules are too simplistic. The hybrid Phillips curve implies that policymakers should respond to both current and expected future inflation rates, in contrast to existing models. We provide evidence that UK policymakers do this. |
| Keywords: | Optimal monetary policy; inflation persistence; Phillips curve |
| JEL: | C51 C52 E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/12&r=mac |
| By: | Sarajevs, Vadims (BOFIT) |
| Abstract: | An integrated stochastic macroeconomic model of transition economy at the early stage of reforms with optimising representative risk averse agents is constructed. The equilibrium growth rate of the economy, real asset returns, domestic money demand, and expected inflation rate are determined as functions of the exogenous risks in the economy. The main issue addressed are: domestic money demand, currency substitution ratio, expected rate of inflation, real asset returns, the equilibrium growth rate of the economy as well as government ability to control these variables. Analysis of the model finds that the equilibrium growth rate of the economy is not independent on the monetary and fiscal policies but can be affected by the government through its ability to fix the real cost of capital for the firm, expenditure and monetary policy parameters. |
| JEL: | D80 D90 E41 E44 E52 F41 O11 O23 |
| Date: | 2007–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:1999_007&r=mac |
| By: | John H. Cochrane |
| Abstract: | The parameters of the Taylor rule relating interest rates to inflation and other variables are not identified in new-Keynesian models. Thus, Taylor rule regressions cannot be used to argue that the Fed conquered inflation by moving from a "passive" to an "active" policy in the early 1980s. |
| JEL: | E3 E31 E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13410&r=mac |
| By: | John H. Cochrane |
| Abstract: | The new-Keynesian, Taylor-rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation, unless inflation jumps to one particular value on each date. However, there is nothing in economics to rule out hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under "active" interest rate targets as it is under standard fixed interest rate targets. Inflation determination requires ingredients beyond an interest-rate policy that follows the Taylor principle. |
| JEL: | E31 E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13409&r=mac |
| By: | Ehrmann, Michael; Fratzscher, Marcel; Gürkaynak, Refet S.; Swanson, Eric T |
| Abstract: | We study the convergence of European bond markets and the anchoring of inflation expectations in euro area countries using high-frequency bond yield data for France, Germany, Italy and Spain. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic data announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which since monetary union have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, the reaction of far-ahead forward interest rates to macroeconomic announcements has converged substantially across euro area countries and even been eliminated over time, thus underlining not only market integration but also the credibility that financial markets attach to monetary policy in the euro area. |
| Keywords: | anchoring; bond markets; convergence; credibility; EMU; euro area; monetary policy |
| JEL: | E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6456&r=mac |
| By: | Céline Poilly (Banque de France, DGEI-DIR, Service de Recherche en économie et finance, and University of Cergy-Pontoise,THEMA) |
| Abstract: | This paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard DSGE model. Considering SVAR models in which either the interest rate is predetermined for money or these two monetary variables are simultaneously determined, two DSGE models are estimated by Minimum Distance Estimation. We emphasize that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption. In addition, the estimated monetary policy rule is strongly sensitive to the identification scheme. This suggests that the way to introduce money in the identification scheme is not neutral for estimation of DSGE models. |
| Keywords: | SVAR model; DSGE model; Non recursive identification; Money. |
| JEL: | E41 E52 C52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2007-23&r=mac |
| By: | David K. Backus; Jonathan H. Wright |
| Abstract: | From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25%, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle. |
| JEL: | E43 E52 G12 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13419&r=mac |
| By: | Martin Menner |
| Abstract: | Search frictions in the goods market have proven to be a fruitful deviation from the fiction of a centralized Walrasian market providing a micro-foundation of the use of money as a medium of exchange. Moreover, persistent propagation of monetary shocks can arise in search-theoretic monetary models through the interaction of search-frictions in the goods and labor markets, and inventory holdings. Here, a search-theoretic monetary DSGE model with capital and inventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better, as well as it dominates the other models in the ability to predict the autocorrelations of inflation and the persistent disinflation process after a technology shock. It generates a hump-shaped but not strong enough output response to a monetary shock. Current and near current correlations between output growth inflation are predicted well. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we076235&r=mac |
| By: | Tharavanij, Piyapas |
| Abstract: | This paper investigates cross-country evidence on how capital market affects business cycle volatility. In contrast to the large and growing literature on the impact of finance and growth, empirical work on the relationship between finance and volatility has been relatively scarce. Theoretically, more developed capital market should lead to lower macroeconomic volatility. The major finding is that countries with more developed capital market have smoother economic fluctuations. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004. |
| Keywords: | business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based |
| JEL: | G00 G21 E44 E32 C33 |
| Date: | 2007–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4952&r=mac |
| By: | Keith Kuester (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Gernot J. Müller (Goethe University Frankfurt, Senckenberganlage 31, 60325 Frankfurt am Main, Germany.); Sarah Stölting (European University Institute, Villa Sao Paolo, via della Piazzuola 43, 50133 Florence, Italy.) |
| Abstract: | Macroeconomic data suggest that the New Keynesian Phillips curve is quite flat - despite microeconomic evidence implying frequent price adjustments. While real rigidities may help to account for the conflicting evidence, we propose an alternative explanation - if price markup/cost-push shocks are persistent and negatively correlated with the labor share, the latter being a widely used measure for marginal costs, the estimated pass-through of measured marginal costs into inflation is limited, even if prices are fairly flexible. Using a standard New Keynesian model, we show that the GMM approach to the New Keynesian Phillips curve leads to inconsistent and upward biased estimates if cost-push shocks indeed are persistent. Monte Carlo experiments suggest that the bias is quite sizeable - we find average price durations estimated as high as 12 quarters, when the true value is about 2 quarters. Moreover, alternative estimators appear to be biased as well, while standard diagnostic tests fail to signal a misspecification of the model. JEL Classification: E31, E32, C22. |
| Keywords: | Price Rigidities, New Keynesian Phillips Curve, Cost-push shocks, GMM estimation. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070809&r=mac |
| By: | Norikazu TAKAMI (Graduate School of Economics, Osaka University) |
| Abstract: | In this paper I examine A. C. Pigou's views on the unemployment policies, based on the premise that, as he himself acknowledged, his theory of business fluctuations was one integral part of his whole thought about unemployment. In his Industrial Fluctuations (1927), Pigou gave the most extensive treatment to the monetary policy among the measures against business fluctuations. There he advocated more prompt and smooth action by the Bank of England in order to effectively stabilize the movement of general prices and the economy as a whole. In order for its action not to be affected by external monetary shocks, he suggested the withdrawal from the gold standard should the public opinion and international diplomatic relations allow it. Pigou, meanwhile, placed much less importance on wage adjustment as a palliative against business cycle. The recent studies direct attention to the fact that Pigou pointed out that after World War I money wages were made rigid by such factors as contemporary institutional changes in labor markets. This picture, however, lacks a more important element of his thought: the monetary cause due to the gold standard on the prewar parity. Putting his indirect remarks on this influence together, I argue that Pigou was well aware of the monetary situation and seemed to place greater importance on the monetary influence than the wage rigidity. |
| Keywords: | history of economic thought, Pigou, unemployment |
| JEL: | B13 B31 E24 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0733&r=mac |
| By: | Oreste Tristani (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | This paper analyses the determinants of the natural rate of interest in a non-linear model where agents are uncertain over both future technology growth and the future course of monetary policy. I show that the real natural rate can be affected by sizable uncertainty premia, including premia associated with monetary uncertainty. This result is potentially problematic for both the estimation of the natural rate and its use as a policy indicator. Monetary uncertainty can also contribute to amplify the equity premium, and to account for its apparent, positive link with inflation. JEL Classification: E43, G11. |
| Keywords: | Natural rate of interest, equity premium puzzle, risk-free rate puzzle, robust control, model misspecification. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070808&r=mac |
| By: | Szilárd Erhart; Harmen Lehment; Jose L. Vasquez Paz |
| Abstract: | Previous research on the optimal size of a monetary policy committee (MPC) focused on theoretical analyses and experimental studies. These studies suggest that the ideal monetary policy committee may not have many more than five members. In this paper we conduct an empirical cross-country study to explore whether there is a link between the size of an MPC and inflation volatility. The analysis for 75 countries which have adopted MPCs provides some support for the above suggestion: countries with less than five MPC members tend to have larger deviations from trend inflation than MPCs with five members; raising the number of MPC members above five does not contribute to a further reduction in volatility. |
| Keywords: | Monetary Policy Committee; Inflation Volatility |
| JEL: | E31 E42 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1377&r=mac |
| By: | Marius Jurgilas (University of Connecticut and Elon University) |
| Abstract: | The consensus view is that central banks under currency boards do not have tools for active monetary policy. In this paper, we analyze the foreign exchange fee as a monetary policy instrument that can be used by a central bank under a currency board. We develop a general equilibrium model showing that changes in this fee may have the same effects as a change in the monetary policy stance. Thus central banks under the currency board are shown to have an avenue to implement active monetary policy. |
| Keywords: | interbank market, monetary policy, currency board |
| JEL: | E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2007-34&r=mac |
| By: | Cukierman, Alex |
| Abstract: | This is an extensive survey of worldwide developments in the area of monetary policymaking institutions during the second half of the twentieth century and beyond. In addition the last section discusses current open issues and future challenges. Section 2 reviews the changes that have occurred in the area of central bank independence (CBI) during the last twenty years, discusses reasons for those developments and provides an overview of accumulated empirical evidence on the relation between CBI and the performance of the economy. Section 3 discusses lessons from stabilization of inflation, reviews the evidence and implications of asymmetric central bank objectives and considers the issue of CBI within the broader context of choosing a nominal anchor. Section 4 reviews the impact of effective conservativeness (or independence) on economic performance in the presence of labour unions. A main insight is that, in the presence of large wage setters, CBI affects real variables like the rate of unemployment implying that conservativeness affects economic performance even in the long run. Section 5 considers future challenges facing modern central banks. The discussion presumes that CBI and price stability are here to stay and focuses on issues relating to the conduct of monetary policy by independent central banks in an era of price stability. The section discusses the risks associated with flexible inflation targeting, issues of accountability and transparency and the impact of central bank capital and finances on its independence. |
| Keywords: | central bank independence; economic performance; monetary institutions and future challenges; nominal anchors |
| JEL: | E31 E50 E52 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6441&r=mac |
| By: | John Lewis; Karsten Staehr |
| Abstract: | Following the Maastricht criteria, a country seeking to join the European Monetary Union cannot have inflation in excess of 1.5 percent plus the average inflation in the three \"best performing\" EU countries. This inflation reference value is a non-increasing function of the number of EU members. Looking backwards, the effect of increasing the number of EU countries from 15 to 27 would have been sizeable in 2003 and 2004, but relatively modest since 2005. Monte Carlo simulations show that the expansion of the EU from 15 to 27 members reduces the expected inflation reference value by 0.15-0.2 percentage points, but with a considerable probability of a larger reduction. The treatment of countries with negative inflation in the calculation of the reference value has a major impact on the results |
| Keywords: | Maastricht Treaty, European Monetary Union, inflation, convergence |
| JEL: | E31 E42 E63 |
| Date: | 2007–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2007-11&r=mac |
| By: | Fernando E. Alvarez; Francesco Lippi |
| Abstract: | We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We extend the Baumol-Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We characterize the solution of the model and show that qualitatively it is able to reproduce the empirical patterns. Estimating the structural parameters we show that the model quantitatively accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership. |
| JEL: | E31 E4 E41 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13416&r=mac |
| By: | Tharavanij, Piyapas |
| Abstract: | This paper investigates the effect of capital market development on severity of economic contraction, and probability of economic downturn. The major finding is that countries with deeper capital market would face less severe business cycle output contraction, and lower chance of an economic downturn. The results hold even after controlling for other relevant variables, country specific effects, and state dependence. However, marginal effects are relatively small. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004. |
| Keywords: | business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based |
| JEL: | C34 G00 G21 E44 E32 C35 C33 |
| Date: | 2007–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4953&r=mac |
| By: | Luis J. Álvarez (Banco de España) |
| Abstract: | The New Keynesian Phillips Curve (NKPC) is now the dominant model of inflation dynamics. In recent years, a large body of empirical research has documented price-setting behaviour at the individual level, allowing the assessment of the micro-foundations of pricing models. This paper analyses the implications of 25 theoretical models in terms of individual behaviour and finds that they considerably differ in their ability to match the key micro stylised facts. However, none is available to account for all of them, suggesting the need to develop more realistic micro-founded price setting models. |
| Keywords: | Pricing models, micro data, Phillips Curve, hazard rate |
| JEL: | E31 D40 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0729&r=mac |
| By: | Roger E. A. Farmer |
| Abstract: | This paper is part of a broader project that provides a microfoundation to the General Theory of J.M. Keynes. I call this project 'old Keynesian economics' to distinguish it from new-Keynesian economics, a theory that is based on the idea that to make sense of Keynes we must assume that prices are sticky. I describe a multi-good model in which I interpret the definitions of aggregate demand and supply found in the General Theory through the lens of a search theory of the labor market. I argue that Keynes' aggregate supply curve can be interpreted as the aggregate of a set of first order conditions for the optimal choice of labor and, using this interpretation, I reintroduce a diagram that was central to the textbook teaching of Keynesian economics in the immediate post-war period. |
| JEL: | E12 E2 E24 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13406&r=mac |
| By: | Robert Shimer |
| Abstract: | This paper uses readily accessible data to measure the probability that an employed worker becomes unemployed and the probability that an unemployed worker finds a job, the ins and outs of unemployment. Since 1948, the job finding probability has accounted for three-quarters of the fluctuations in the unemployment rate in the United States and the employment exit probability for one-quarter. Fluctuations in the employment exit probability are quantitatively irrelevant during the last two decades. Using the underlying microeconomic data, the paper shows that these results are not due to compositional changes in the pool of searching workers, nor are they due to movements of workers in and out of the labor force. These results contradict the conventional wisdom that has guided the development of macroeconomic models of the labor market during the last fifteen years. |
| JEL: | J6 E24 E32 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13421&r=mac |
| By: | Christian Merkl (Kiel Institute for the World Economy, University of Kiel and IZA); Dennis J. Snower (Kiel Institute for the World Economy, University of Kiel and IZA) |
| Abstract: | This paper explores the influence of wage and price staggering on monetary persistence. We show that, for plausible parameter values, wage and price staggering are complementary in generating monetary persistence. We do so by proposing the new measure of "quantitative inertia," after discussing weaknesses of the "contract multiplier," a standard measure of monetary persistence. The existence of complementarities means that beyond understanding how wage and price staggering work in isolation, it is important to investigate their interactions. Furthermore, our analysis indicates that the degree of monetary persistence generated by wage vis-à-vis price staggering depends on the relative competitiveness of the labor and product markets. We show that the conventional finding that wage staggering generates more persistence than price staggering holds under homogenous capital accumulation. Under firm-specific capital, wage staggering generates more persistence only when the labor market is sufficiently competitive relative to the product market. |
| Keywords: | monetary persistence, price staggering, wage staggering, firm-specific capital |
| JEL: | E40 E50 E52 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3033&r=mac |
| By: | Alexandre Manoel Angelo da Silva; José Oswaldo Cândido Júnior |
| Abstract: | On this paper, we evaluate the relationship among expectations of fiscal policy and fiscal policy consistency, which is denoted by some public account variables. Our main proposal is to investigate if the expectations are affected by fiscal policy consistency. The empirical analysis, based on Brazilian monthly data for the period of 2003-2006, suggests that the expectations have not been affected by fiscal policy consistency. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1266&r=mac |
| By: | Alvarez, Fernando E; Lippi, Francesco |
| Abstract: | We extend the Baumol-Tobin cash inventory model to a dynamic environment, which allows for the possibility of withdrawing cash at random times at a low cost. This modification captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We characterize the solution of the model and show that qualitatively it is able to reproduce such patterns. Estimating the structural parameters we show that the model accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership. |
| Keywords: | inventory models; money demand; technological progress |
| JEL: | E5 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6472&r=mac |
| By: | Tharavanij, Piyapas |
| Abstract: | This paper investigates the effect of capital market development on the frequency of recession and the fraction of time the economy in recession using quarterly data of thirty-five countries from 1975 to 2004. The main finding is that frequency of recession is not robustly linked to measures of capital market development. However, the fraction of time the economy spends in recession is significantly related to capital market development. This implies that countries with more advanced capital market would tend to spend lower proportion of time in recession, though the marginal effect is small. |
| Keywords: | business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based |
| JEL: | G00 G21 E44 E32 C35 C33 |
| Date: | 2007–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4954&r=mac |
| By: | Elcyon C. R. Lima; Alexis Maka; Mário Mendonça |
| Abstract: | This article estimates the monetary policy rule followed by the Brazilian Central Bank for setting its main policy instrument, the SELIC rate, for the period after the Real Plan. In order to overcome the uncertainty over the dates at which changes in parameters occurred, this paper uses regime-dependent-switching probabilities according to a hidden Markov chain to model possible deviations from a simple linear reaction function. From July 1996 to January 2006 the Brazilian monetary policy can be fully characterized by four policy regimes. The changes in monetary policy in this period are best described by recurring regime changes, instead of once-and-for-all shifts. We have identified substantial differences in the way monetary policy was conducted in the subperiods before and after 1999, when the Brazilian exchange rate policy regime changed from crawling peg to free-floating. At each of these subperiods there are two recurring regimes and the two regimes of one subperiod differ from the two regimes of the other. |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1285&r=mac |
| By: | Marika Karanassou; Hector Sala; Dennis Snower |
| Abstract: | We distinguish and assess three fundamental views of the labor market regarding the movements in unemployment: (i) the frictionless equilibrium view; (ii) the chain reaction theory, or prolonged adjustment view; and (iii) the hysteresis view. While the frictionless view implies a clear compartmentalization between the short- and long-run, the hysteresis view implies that all the short-run ‡uctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment view can overcome these problems since it implies that the short, medium, and long runs are interrelated, merging with one another along an intertemporal continuum. |
| Keywords: | unemployment, interactive labor market dynamics, interplay of lags and shocks, frictional growth, growth drivers. |
| JEL: | E22 E24 J21 J30 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1378&r=mac |
| By: | Jan Wenzelburger (Keele University, Centre for Economic Research and School of Economic and Management Studies); Hans Gersbach (Center of Economic Research at ETH Zurich and CEPR) |
| Abstract: | We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks with low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system. |
| Keywords: | Financial intermediation, macroeconomic risks, risk management, risk premia, banking regulation, rating. |
| JEL: | D40 E44 G21 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/08&r=mac |
| By: | Tommaso Proietti (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Alberto Musso (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | This paper is concerned with the estimation of euro area potential output growth and its decomposition according to the sources of growth. The growth accounting exercise is based on a multivariate structural time series model which combines the decomposition of total output according to the production function approach with price and wage equations that embody Phillips type relationships linking inflation and nominal wage dynamics to the output gap and cyclical unemployment, respectively. Assuming a Cobb-Douglas technology with constant returns to scale, potential output results from the combination of the trend levels of total factor productivity and factor inputs, capital and labour(hours worked), which is decomposed into labour intensity (average hours worked), the employment rate, the participation rate, and population of working age. The nominal variables (prices and wages)play an essential role in defining the trend levels of the components of potential output, as the latter should pose no inflationary pressures on prices and wages. The structural model is further extended to allow for the estimation of potential output growth and the decomposition according to the sources of growth at different horizons (long-run, medium run and short run); in particular, we propose and evaluate a model–based approach to the extraction of the low–pass component of potential output growth at different cutoff frequencies. The approach has two important advantages - the signal extraction filters have an automatic adaptation property at the boundaries of the sample period, so that the real time estimates do not suffer from what is often referred to as the ”end–of–sample bias”. Secondly, it is possible to assess the uncertainty of potential output growth estimates with different degrees of smoothness. JEL Classification: C32, C51, E32, O47. |
| Keywords: | Potential output, Output gap, Euro area, Unobserved components, Production function approach, Low-pass filters. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070804&r=mac |
| By: | Kelly, Logan |
| Abstract: | Aggregation theoretic measures of the capital stock of money have in the past been criticized for their dependence on future expectations. I attempt to answer some of those objections by using several forecasting methods to generate expectations needed for calculating the economic stock of money. I show that targeted factor model forecasting improves the accuracy of monetary capital stock measurements slightly. However, I also find, as has previous research, that monetary capital stock calculations are robust to assumptions about future expectation. I believe these findings tend to support the conclusion that concerns about the dependency of theoretical monetary stock aggregates on forecasted future expectations have been overstated. |
| Keywords: | Monetary Aggregation; Money Stoc; ; Economic Stock of Money; Targeted Factor Models |
| JEL: | E49 |
| Date: | 2007–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4914&r=mac |
| By: | Jonathan P Thomas (Economics, University of Edinburgh); Tim Worrall (Economics, Keele University) |
| Abstract: | We present an overview of models of long-term self-enforcing labour contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labour market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support. |
| Keywords: | Labour contracts, self-enforcing contracts, business cycle, unemployment. |
| JEL: | E32 J41 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/11&r=mac |
| By: | Taboga, Marco |
| Abstract: | In recent years, US and euro area long-term bond yields experienced a remarkable decline and remained at historically low levels even in the face of rising short-term rates. This unusual phenomenon (the so called ”conundrum”) has been the subject of numerous debates and extensive research. The most commonly held opinion is that it was primarily driven by an unprecedented reduction in risk premia. I partly counter this view by showing that, although risk premia played an important role in the ”conundrum” episode, other two equally important forces were at play, i.e. a decline in the real natural rate of interest and a structural reduction in inflation expectations. I use a small-scale macroeconometric model to provide evidence that structural changes in the economy lowered expectations about the future path of short-term policy rates and that, although risk premia did diminish, their current level is not unusual if considered from an historical perspective. |
| JEL: | G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4965&r=mac |
| By: | Korhonen , Iikka (BOFIT) |
| Abstract: | Straightforward exchange rate arrangements known as currency boards have gained popularity during the past dec-ade. Among transition economies, Estonia first introduced a currency board in 1992, followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have been useful in achieving macroeconomic stabilization, and they may have helped the Baltics become the first countries of the former Soviet Union (FSU) to achieve economic growth after the slump in production of the early 1990s. Moreover, Baltic inflation performance has been substantially better than in other FSU countries. Both in Estonia and Lithuania, the present exchange rate system has been ac-companied by strong real appreciation of the currency. Both in Estonia and Lithuania the present exchange rate system has been accompanied by strong real appreciation of the currency, although it is widely accepted that the currencies were very much undervalued at the beginning of their pegs. However, if rapid real appreciation is ac-companied with increases in the labor productivity, the present pegs can be maintained. Banking crises in Estonia and Lithuania have not been particularly severe, so apparently rigid currency pegs have not been accompanied by excessive financial sector instability. The tight fiscal policies pursued in both countries, especially Estonia, have been instrumental to the success of these currency board arrangements. |
| Keywords: | exchange rate; currency board; Baltic countries |
| JEL: | E50 E60 P20 |
| Date: | 2007–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:1999_006&r=mac |
| By: | Lars E.O. Svensson; Noah M. Williams |
| Abstract: | We study the problem of a policymaker who seeks to set policy optimally in an economy where the true economic structure is unobserved, and he optimally learns from observations of the economy. This is a classic problem of learning and control, variants of which have been studied in the past, but seldom with forward-looking variables which are a key component of modern policy-relevant models. As in most Bayesian learning problems, the optimal policy typically includes an experimentation component reflecting the endogeneity of information. We develop algorithms to solve numerically for the Bayesian optimal policy (BOP). However, computing the BOP is only feasible in relatively small models, and thus we also consider a simpler specification we term adaptive optimal policy (AOP) which allows policymakers to update their beliefs but shortcuts the experimentation motive. In our setting, the AOP is significantly easier to compute, and in many cases provides a good approximation to the BOP. We provide some simple examples to illustrate the role of learning and experimentation in an MJLQ framework. |
| JEL: | D81 E42 E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13414&r=mac |
| By: | Todd E. Clark; Michael W. McCracken |
| Abstract: | A body of recent work suggests commonly-used VAR models of output, inflation, and interest rates may be prone to instabilities. In the face of such instabilities, a variety of estimation or forecasting methods might be used to improve the accuracy of forecasts from a VAR. These methods include using different approaches to lag selection, different observation windows for estimation, (over-) differencing, intercept correction, stochastically time-varying parameters, break dating, discounted least squares, Bayesian shrinkage, and detrending of inflation and interest rates. Although each individual method could be useful, the uncertainty inherent in any single representation of instability could mean that combining forecasts from the entire range of VAR estimates will further improve forecast accuracy. Focusing on models of U.S. output, prices, and interest rates, this paper examines the effectiveness of combination in improving VAR forecasts made with real-time data. The combinations include simple averages, medians, trimmed means, and a number of weighted combinations, based on: Bates-Granger regressions, factor model estimates, regressions involving forecast quartiles, Bayesian model averaging, and predictive least squares-based weighting. Our goal is to identify those approaches that, in real time, yield the most accurate forecasts of these variables. We use forecasts from simple univariate time series models as benchmarks. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-42&r=mac |
| By: | Antonio Scialà (Università di Padova); Riccardo Tilli (Università di Roma) |
| Abstract: | We consider a model in which the labor market is characterized by search frictions and there is monopolistic competition in the goods market. We introduce proportional income taxation and unemployment benefits with Government balanced budget constraint. Then, we evaluate the effects of both more competition in the goods market and higher unemployment benefits on labor market equilibrium and equilibrium tax rate. We show that more competition has a positive effect on equilibrium unemployment and the Government budget. Higher unemployment benefits can be financed either by higher tax rate or increasing goods market competition. Liberalization policies could permit: a) to avoid an increase in unemployment if we allow some rise in the tax rate; b) to decrease unemployment if they are incisive enough to keep the tax rate unchanged. |
| Keywords: | Matching Models, Monopolistic Competition, Fiscal Policy, Unemployment Insurance |
| JEL: | H20 J64 J65 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0047&r=mac |
| By: | Todd E. Clark; Michael W. McCracken |
| Abstract: | Small-scale VARs are widely used in macroeconomics for forecasting U.S. output, prices, and interest rates. However, recent work suggests these models may exhibit instabilities. As such, a variety of estimation or forecasting methods might be used to improve their forecast accuracy. These include using different observation windows for estimation, intercept correction, time-varying parameters, break dating, Bayesian shrinkage, model averaging, etc. This paper compares the effectiveness of such methods in real time forecasting. We use forecasts from univariate time series models, the Survey of Professional Forecasters and the Federal Reserve Board's Greenbook as benchmarks. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-41&r=mac |
| By: | Margherita Borella (University of Turin and CeRP, Collegio Carlo Alberto, Turin); Elsa Fornero (University of Turin and CeRP, Collegio Carlo Alberto, Turin); Maria Cristina Rossi (Università di Roma, Tor Vergata and CeRP, Collegio Carlo Alberto, Turin) |
| Abstract: | This paper aims at detecting whether Italian households exhibit excess sensitivity in their consumption with regard to “severance pay”, a sizable, expected lump sum that workers receive at either retirement or whenever they leave their job for whatever reason. One of the implications of the life-cycle hypothesis is that consumption does not react when expected income changes are realized, as these are already incorporated by consumers into their (intertemporal) budget constraint. Should consumers exhibit a reaction to anticipated income changes this would be in contrast to one of the main implications of the life cycle hypothesis. Our analysis exploits a rotating panel data set of Italian households, the Survey of Household Income and Wealth (SHIW), for the years starting from 1989 to 2004. By using an Euler equation approach on different categories of consumption we estimate whether close to retirement households exhibit excess sensitivity of consumption with respect to severance pay.Our findings suggest that households do not alter their non-durable goods consumption while they increase their durable consumption in the year when they cash their severance pay. |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:62&r=mac |
| By: | Enrique G. Mendoza; Vincenzo Quadrini; José-Victor Ríos-Rull |
| Abstract: | It is widely argued that countries can reap large gains from liberalizing their capital accounts if financial globalization is accompanied by the development of domestic institutions and financial markets. However, if liberalization does not lead to financial development, globalization can result in adverse effects on social welfare and the distribution of wealth. We use a multi-country model with non-insurable idiosyncratic risk to show that, if countries differ in the degree of asset market incompleteness, financial globalization hurts the poor in countries with less developed financial markets. This is because in these countries liberalization leads to an increase in the cost of borrowing, which is harmful for those heavily leveraged, i.e. the poor. Quantitative analysis shows that the welfare effects are sizable and may justify policy intervention. |
| JEL: | E2 E44 F32 F36 F4 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13412&r=mac |
| By: | Arby, M. Farooq; Batool, Irem |
| Abstract: | In Pakistan, only annual estimates of national accounts are available officially. Although quarterly real gross domestic product has been estimated by some studies like Kemal & Arby (2004) and Bengaliwala (1995), no attempt has been made so far to estimate quarterly gross fixed capital formation – a key macroeconomic variable. This study presents a methodology to quarterise gross fixed investment in Pakistan and estimates a quarterly series for the period 1971Q3 to 2006Q2. Using the commodity flow approach, total gross fixed investment has been disaggregated into four components, i.e. machinery and equipment, furniture and fixture, structure and land improvement for annual data of selected years and then each component is quarterised on the basis of related indicators for which quarterly data is available officially. |
| Keywords: | gross fixed capital formation; investment; Pakistan |
| JEL: | E22 C82 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4956&r=mac |
| By: | Sergei Suarez Dillon Soares; Rafael Guerreiro Osorio |
| Abstract: | Our objective in this text is to analyze the evolution of welfare and inequality in the distribution of mercantile goods and services in Brazil from 1995 to 2005. This period was characterized by monetary stability but also by large changes in relative prices, which means that a homogeneous inflation index will not yield good welfare indicators. In this text, we build centile-specific inflation indices. To do this, we use the 2003 POF expenditure survey to estimate expenditure shares for each centile of the income distribution and the national consumer price system (SNPC) to calculate inflation for each of the goods that comprise each of these shares. We then calculate, for each centile, an average inflation index weighing the inflations for each expenditure category by the expenditure shares. We then apply these centile-specific inflation indices to each centile of the nominal income distributions from 1995 to 2005 calculated using the Pnad household surveys and with this new income distribution, we calculate purchasing power for each centile. With this new income distribution, we calculate average incomes and Gini coefficients for the distribution as a whole, we verify stochastic dominance relationships as well as Lorenz dominance, and finally, calculate Atkinson social welfare functions for inequality aversion parameters varying from 0.1 to 0.9. Our results are as follows: i) inflation during the 1995-2005 period was propoor up to centile 93 and from centile 93 onwards it was pro-rich, ii) as a consequence, the Gini coefficient fell 0.61 Gini points more than what is observed using a general price index, iii) surprisingly, average incomes deflated using centilespecific deflators differs significantly from average incomes deflated using the general IPCA price index, and iv) when centile-specific deflators are used, average income falls instead of raising slightly during the 1995-2005 period. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1270&r=mac |
| By: | Khemraj, Tarron |
| Abstract: | Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts. |
| Keywords: | bank liquidity; oligopoly banking; loan market; monetary policy |
| JEL: | O10 L13 O16 G10 O12 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4967&r=mac |
| By: | Michael Noel (Department of Economics, University of California - San Diego) |
| Abstract: | Asymmetric price cycles which look similar to Edgeworth Cycles are appearing in increasingly many retail gasoline markets in the U.S. and worldwide. The cycles can give the appearance of asymmetric prices responses to cost shocks under traditional methodologies. This article shows how to remove the confounding effect of the cycles and test for any true underlying asymmetry in price responses. Designing the correct counterfactual is key. The methodology is demonstrated for one strongly cycling market and some asymmetry to cost shocks is found. Covert collusion is unlikely, but the ability to coordinate cyclical price increases may play a role. Consumers can still reduce xpenditures on gasoline up to 7.7% with simple timing rules of thumb. |
| Keywords: | Price cycles, |
| Date: | 2007–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:2007-04&r=mac |
| By: | Jesus Gonzalo; Tae-Hwy Lee; Weiping Yang |
| Abstract: | Using the conventional VAR identification approach, Cochrane (1994) finds that substantial amounts of variation in GDP growth and stock returns are due to transitory shocks. Following the common trend decomposition of King, et al. (1991), we show that Cochrane's results depend on the assumption of weak exogeneity of one of the variables with respect to the cointegration vector. When this assumption holds both approaches coincide. If not, the shocks Cochrane called transitory are not totally transitory. In this case, the conventional VAR approach with the assumption of the weak exogeneity may overstate the magnitude of transitory shocks and understate that of permanent shocks. We find that the permanent components of GDP and stock prices are much larger than those estimates of Cochrane, although substantial (but much smaller than in Cochrane (1994)) variations in GDP growth and stock returns are attributed to transitory shocks. |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we20070525&r=mac |
| By: | Luis Eduardo Arango; Carlos Esteban Posada |
| Abstract: | Se estima una NAIRU que cambia en el tiempo de acuerdo con la composición de la fuerza laboral. Bajo este enfoque la NAIRU promedio para el período 1984- 2005 es 11,9%. Además, dada la existencia de metas de inflación, estimamos una curva de Phillips ampliada con una regla de formación de expectativas de inflación que tiene en cuenta tales metas. Esta estimación permitió calcular la “tasa de desempleo compatible con una inflación igual a la meta” (TADECIM) la cual también es cambiante en el tiempo. Su nivel promedio es 15% para el período 1911-2005. |
| Date: | 2007–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004021&r=mac |
| By: | Singh, Rupinder (BOFIT); Laurila , Juhani (BOFIT) |
| Abstract: | The macro economic stabilisation in Azerbaijan has been successful. Following cessation of conflict with Armenia, and decline of GDP by 60 per cent from 1990 to 1995, the government in effect implemented a big-bang reform process in 1995. The inflation rate has now declined to the lowest rate of any transition country and important reforms in the monetary-fiscal mix have been undertaken. The second plank of first generation reforms, liberalisation, has also been successfully implemented with liberalisation of prices, the trade and foreign exchange regimes and virtual completion of small-scale privatisation, although the onset of the Russian crisis in 1998 has impacted negatively both internal and external balances. The paper presents the current economic picture for Azerbaijan and then assesses economic policy issues facing the country. Azerbaijan is well endowed with natural resources, particularly oil but also gas. The second part of the paper considers the question by focussing on policy issues related to the potential flow of oil-based monies into Azerbaijan. The possibility of the “Dutch Disease” syndrome impacting Azerbaijan through a rising real exchange rate on the non-oil sector is not considered to be a problem at present but is expected to become a policy concern in the medium- to long term. Structural reforms in public finance to deal with expected surpluses are lagging and are necessary in the next phase of the transition of Azerbaijan. Moreover, significant reforms are required in banking – privatisation, improvement in regulation and supervision and in the implementation of supporting legal rights, given the current lack of financial intermediation. |
| Keywords: | Azerbaijan; economic development; oil; Dutch Disease; transition economies |
| JEL: | E60 P20 P30 |
| Date: | 2007–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:1999_005&r=mac |
| By: | AOKI Masanao; YOSHIKAWA Hiroshi |
| Abstract: | Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not necessarily go to zero even if the number of sectors or economic agents goes to infinity. This phenomenon known as non-self-averaging implies that even if the number of economic agents is large, dispersion can remain significant, and, therefore, that we can not legitimately focus on the means of aggregate variables. It, in turn, means that the standard microeconomic foundations based on the representative agent has little value for they are expected to provide us with dynamics of the means of aggregate variables. The paper also shows that non-self-averaging emerges in some representative urn models. It suggests that non-self-averaging is not pathological but quite generic. Thus, contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:07057&r=mac |
| By: | Komulainen, Tuomas (BOFIT) |
| Abstract: | The paper examines currency crisis theories and applies them in searching for the main causes of the Russian crisis. We first study the determination of the exchange rate and then the first and second generation theories on currency crisis and finally the recent theoretical discussions of the Asian crisis. The main reason for the Russian crisis was the long-standing federal budget deficit. During the last years the deficits were financed mainly via short-term domestic debt. This created expectations of government insolvency and central bank financing. Moreover, the Russian economy has its own basic weaknesses, which render the country incapable of growth and prone to crisis. The Asian crisis was a trigger for the Russian crisis. Lower prices for Russian export products, inadequate financial regulations and lack of information in emerging markets in general are factors explaining this contagion effect. But the main mistakes that led to the crisis were those of the Russians themselves - the federal budget deficits. Thus the repair work should also start from there. |
| Keywords: | currency crisis; Russia; budget; contagion |
| Date: | 2007–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:1999_001&r=mac |
| By: | Cláudio H. dos Santos; Manoel Carlos de Castro Pires |
| Abstract: | This article attempts to offer three specific contributions to the current debate on the macroeconomic impacts of taxation in Brazil and the ?trade-off? between taxation/income distribution and growth available to Brazilians. First, it attempts to ?map? the (relatively small) recent econometric literature on the behavior of aggregate investment in Brazil. Second, it discusses the (problematic) Brazilian data on aggregate investment and presents brand new quarterly estimates of Brazilian private investment based on primary data compiled by government agencies (more specifically, the Ministry of Finance and the Ministry of Planning) and on the work by Gobetti (2006). Third, it uses these estimates ? and quarterly estimates of the aggregate tax rate produced by Dos Santos and Costa (2007) and other, more traditional, variables ? to produce econometric specifications of the post-Real plan behavior of Brazil?s aggregate private investment. A potentially important finding is that the long-run aggregate tax rate elasticity of Brazilian private investment seems to be close to minus one. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1297&r=mac |
| By: | Tatsuyoshi Miyakoshi (Osaka School of International Public Policy (OSIPP), Osaka University); Masakatsu Okubo (Graduate School of Systems and Information Engineering,University of Tsukuba); Junji Shimada (School of Management, Aoyama Gakuin University) |
| Abstract: | This paper has measured the welfare cost, investigated the effects of and the recovery process of the 1997 Asian crisis, and evaluated the IMF-supported programs. The paper finds: (i) the ratios of ewhole costf to the consumption level of the hypothetical economy are large: 30% for Thailand, 50% for Indonesia, 36% for Korea, 18% for Malaysia and 39% for Hong Kong; (ii) the dynamic process of ecost at period tf quickly converges to 40% right after the crisis, but the costs for Indonesia and Hong Kong gradually increase towards 100%; (iii) the IMF-supported programs for Thailand, Indonesia and Korea have been implemented right after the cost hits peaks; (iv) the cost of the IMF-supported program was not expensive compared with the corresponding welfare cost of crisis. |
| Keywords: | dynamic welfare cost; time-varying model;1997 Asian crisis |
| JEL: | C32 C50 E32 E20 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0725&r=mac |
| By: | Schady, Norbert; Friedman, Jed; Baird, Sarah |
| Abstract: | The diffusion of cost-effective life saving technologies has reduced infant mortality in much of the developing world. Income gains may also play a direct, protective role in ensuring child survival, although the empirical findings to date on this issue have been mixed. This paper assembles data from Demographic and Health Surveys (DHS) in 59 countries to analyze the relationship between changes in per capita GDP and infant mortality. The authors show that there is a strong, negative association between changes in per capita GDP and infant mortality- in a first-differenced specification the implied elasticity of infant mortality with respect to per capita GDP is approximately -0.56. In addition to this central result, two findings are noteworthy. First, although there is some evidence of changes in the composition of women giving birth during economic upturns and downturns, the observed changes in infant mortality are not a result of mothers with protective characteristics timing fertility to correspond with the business cycle. Second, the association between infant mortality and per capita GDP is particularly pronounced for periods of large contractions in GDP, suggesting the inability of developing country households or health systems (or both) to smooth resources. Simple back-of-the-envelope calculations using the estimates suggest that there may have been more than 1 million " excess " deaths in the developing world since 1980 as a result of large, negative contractions in per capita GDP. |
| Keywords: | Population Policies,Health Monitoring & Evaluation,Early Child and Children ' s Health,Health Systems Development & Reform,Early Childhood Development |
| Date: | 2007–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4346&r=mac |
| By: | Morris Sebastian |
| Abstract: | Special economic zones following the enormous success of China have been widely imitated. But it is to be entirely anticipated that the results would vary greatly. Earlier avatars of SEZs in the form of Foreign Trade Zones (FTZs) and Export Promotion Zones (EPZs) were important in the export led growth of east Asia especially South Korea. But more than SEZs or EPZs per se it is the pursuit of “export led growth policies” which underlie the success of exporting and hence of SEZs. SEZz / EPZs can be seen as a (not necessary) microeconomic and spatial initiative in the pursuit of ELG under rather special circumstances by China, and South Korea and Taiwan to more limited extent in their early phases of transformation. In other countries not pursuing ELG the success of SEZs/EPZs has been rather modest. The roles played by the SEZs/ EPZs etc whatever their original purpose were constrained and determined by the macroeconomic policies, trade policies, and regional alignments. There is little meaning in studying SEZs beyond their layout and design without reference to these broader trade and macroeconomic policies. Thus early pioneers like India could make little out of their EPZs since the policies are severely biased against exports. We characterise export led growth (ELG) as the strategy that has allowed the late twentieth century industrialisations, which is far from both import substitution (as conventionally understood) and laissez faire, and to be the simultaneous pursuit of both IS and EP. With this framework we are able to understand the role and evolution of SEZs in a wide variety of countries. These help us to explain and anticipate that unless the policy turns sharply to favour exports (more correctly tradables over non tradables) the success of Indian SEZs would be modest and nowhere near that registered in China. Following from our characterisation of Import Substitution, Export Led Growth and Laissez Faire we also bring out the nature and performance of “special zones” when these are promoted under the very same regimes. |
| Keywords: | Special Economic Zones, SEZ, trade-strategy, export, infrastructure, Export-Led-Growth, China, India, Macroeconomic policy, trade theory, monetary trade theory, industrial-location, FDI, Fiscal-incentives |
| JEL: | F01 |
| Date: | 2007–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2007-09-02&r=mac |
| By: | Georges Prat (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Remzi Uctum (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]) |
| Abstract: | In the light of the economically rational expectation theory, this article shows how an expert chooses an optimal oil price forecast function given that information is costly. In this framework we propose an expectational process which nests all processes considered in the literature. By aggregating individual processes, it is shown that the overall expectational process may result from individual mixing effects and/or group heterogeneity effects. Using Consensus Forecast survey data, for three and twelve month horizons, we find that the rational expectation hypothesis is rejected and that none of the traditional extrapolative, regressive and adaptive processes and macroeconomic fundamentals is relevant. We show however, that a combination of the three traditional processes explains satisfactorily oil price expectations, which appear to exert a stabilizing strength in the oil market. |
| Keywords: | expectation formation; oil price |
| Date: | 2007–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00173113_v1&r=mac |
| By: | Steven Pennings; Rod Tyers |
| Abstract: | The 1990s appreciation of the US$ has been blamed on the “irrational exuberance” of investors in the US IT boom. A core of these investors appeared to believe that technology-related productivity growth (due, in part, to knowledge spill-over externalities) would raise the relative US rate of return over a sustained period. This paper introduces a two country, dynamic general equilibrium model with international financial capital mobility and trade to investigate the conditions under which a single technology shock could cause such a sustained change in capital flows. We find that a once-off productivity shock, whether in the presence of (small-medium) externalities or not, leads to capital inflow and a real appreciation in the short term but is followed in the long term by a stabilisation of the capital account and a net depreciation of the real exchange rate. For a single shock to trigger long-term growth in relative capital returns appears to require unrealistically large externalities. The presence of adaptive expectations can lead to persistence and cyclical behaviour in the real exchange rate and current account. |
| JEL: | F21 F31 F32 F41 F43 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-16&r=mac |
| By: | Juan Jose Dolado; Jesús Gonzalo; Laura Mayoral |
| Abstract: | This paper analyses the power properties, under fixed alternatives, of a Wald-type test, i.e., the (Efficient) Fractional Dickey-Fuller (EFDF) test of I(1) against I(d), d<1, relative to LM tests. Further, it extends the implementation of the EFDF test to the presence of deterministic trending components in the DGP. Tests of these hypotheses are important in many macroeconomic applications where it is crucial to distinguish between permanent and transitory shocks because shocks die out in I(d) processes with d<1. We show how simple is the implementation of the EFDF in these situations and argue that, under fixed alternatives, it has better power properties than LM tests. Finally, an empirical application is provided where the EFDF approach allowing for deterministic components is used to test for long-memory in the GDP p.c. of several OECD countries, an issue that has important consequences to discriminate between alternative growth theories. |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we20070625&r=mac |
| By: | Arnaud Mehl (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Lorenzo Cappiello (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | This paper tests for uncovered interest parity (UIP) at distant horizons for the US and its main trading partners, including both mature and emerging market economies, also exploring the existence of nonlinearities. At long and medium horizons, it finds support in favour of the standard, linear, specification of UIP for dollar rates vis-à-vis major floating currencies, but not vis-à-vis emerging market currencies. Moreover, the paper finds evidence that, not only yield differentials widen, but that US bond yields do react in anticipation of exchange rate movements, notably when these take place vis-à-vis major floating currencies. Last, the paper detects signs of nonlinearities in UIP at the medium term horizon for dollar rates vis-à-vis some of the major floating currencies, albeit surrounded by some uncertainty. JEL Classification: E43, F31, F41. |
| Keywords: | Uncovered interest parity, distant horizon, emerging economies, nonlinearities. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070801&r=mac |
| By: | Jie Zhang (MRG - School of Economics, The University of Queensland); Haoming Liu (Department of Economics, National University of Singapore) |
| Abstract: | This paper studies how donations respond to unexpected permanent changes in income and tax rates in a recursive dynamic model. The dynamic approach yields several interesting insights. If marginal tax rates are progressive, a permanent jump in a household’s income increases its consumption and donations in the short run, but has no effect in the long run. The permanent income elasticity of current donations is likely to exceed one. If the marginal tax rate is flat, the jump in income raises consumption and donations in both the short and the long run. A permanent marginal tax rate cut raises consumption and donations in the long run if marginal tax rates are progressive, while it reduces donations in the short run if it has little direct impact on tax payments. If the marginal tax rate is flat, a tax cut has a positive effect on consumption in both the short and the long run, but has an ambiguous effect on donations. |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqmrg6:16&r=mac |
| By: | Fernando Tenjo; Luisa F. Charrry V.; Martha López; Juan M. Ramírez |
| Abstract: | A partir del debate sobre la respuesta de política a fluctuaciones en los precios de los activos, en el presente documento se estudia la importancia de estos precios en el contexto de una economía emergente como la colombiana, caracterizada por un grado variable de represión financiera y vulnerabilidad a choques externos, en particular de flujos de capital y términos de intercambio. El trabajo encuentra evidencia sobre el funcionamiento del acelerador financiero y su relación con dichos choques en el período 1970 – 2006. A partir de allí se identifican tres ciclos de precios de los activos que coinciden con ciclos del PIB. Los resultados subrayan la incidencia de choques externos y del diseño macroeconómico de la política monetaria en la dinámica del acelerador financiero. Esto corrobora la importancia de variables como los precios de los activos y el crédito para el diseño de una política monetaria contra-cíclica. |
| Date: | 2007–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004019&r=mac |
| By: | Georges Prat (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Fredj Jawadi |
| Abstract: | This paper aims to modeling stock prices adjustment dynamics toward their fundamentals. We used the class of Switching Transition Error Correction Models (STECM) and we showed that stock prices deviations toward fundamentals could be characterized by nonlinear adjustment process with mean reversion. First, according to Anderson (1997), De Grauwe and Grimaldi (2005) and Boswijk et al.(2006), we justify these nonlinearities by the presence of heterogeneous transaction costs, behavioural heterogeneity and the interaction between shareholders expectations. After, we present STECM specification. We apply this model to describe the G7 indexes adjustment dynamics toward their fundamentals. We showed that the G7 stock indexes adjustment is smooth and nonlinearly mean-reverting and that the convergence speeds vary according to the disequilibrium extent. Finally, using two indicators proposed by Peel and Taylor (2000), we determine phases of under- and overvaluation of stock prices and measure intensity of stock prices adjustment strengths. |
| Keywords: | Stock Prices, Heterogeneous Transaction Costs, Nonlinear Adjustment |
| Date: | 2007–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00172896_v1&r=mac |
| By: | Jens H.E. Christensen; Francis X. Diebold; Glenn D. Rudebusch |
| Abstract: | We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage. |
| Keywords: | Interest rates ; Econometric models |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-20&r=mac |
| By: | Jan Wenzelburger (Keele University, Centre for Economic Research and School of Economic and Management Studies); Volker Böhm (Dept. of Business Administration and Economics, Bielefeld University,); Thorsten Pampel (Dept. of Business Administration and Economics, Bielefeld University,) |
| Abstract: | Common folklore in growth theory suggests that the stability of balanced growth paths in the capital-labor space is essentially guaranteed by conditions which imply stability of the corresponding steady states of the models in intensity form. We show by means of simple examples that, in general, these well-known conditions are only necessary. For a class of deterministic growth models with discrete time we provide new structural insights into the nature of this phenomenon by stating additional requirements that ensure stability of balanced growth paths in the original capital-labor space. We introduce a notion of path-wise convergence for stochastic growth models and generalize our sufficient conditions to the stochastic case. |
| Keywords: | Balanced growth, stability conditions, stochastic growth, pathwise convergence. |
| JEL: | O41 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/09&r=mac |
| By: | Holger Strulik (University of Hannover); Jacob Weisdorf (Department of Economics, University of Copenhagen) |
| Abstract: | This paper provides a unified growth theory, i.e. a model that explains the very long-run economic and demographic development path of industrialized economies, stretching from the pre-industrial era to present-day and beyond. Making strict use of Malthus’ (1798) so-called preventive check hypothesis – that fertility rates vary inversely with the price of food – the current study offers a new and straightforward explanation for the demographic transition and the break with the Malthusian era. The current framework lends support to existing unified growth theories and is well in tune with historical evidence about structural transformation. |
| Keywords: | economic growth; population growth; structural change; industrial revolution |
| JEL: | O11 O14 J10 J13 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0721&r=mac |
| By: | Strulik, Holger; Weisdorf, Jacob |
| Abstract: | This paper provides a unified growth theory, i.e. a model that explains the very long-run economic and demographic development path of industrialized economies, stretching from the pre-industrial era to present-day and beyond. Making strict use of Malthus' (1798) so-called preventive check hypothesis - that fertility rates vary inversely with the price of food - the current study offers a new and straightforward explanation for the demographic transition and the break with the Malthusian era. The current framework lends support to existing unified growth theories and is well in tune with historical evidence about structural transformation. |
| Keywords: | Economic Growth, Population Growth, Structural Change, Industrial Revolution |
| JEL: | O11 O14 J10 J13 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-375&r=mac |
| By: | Irina Kovrova (CeRP, Collegio Carlo Alberto, Turin) |
| Abstract: | This paper provides an estimation of the effects of the introduction of a mandatory funded pillar on households’ savings. To this purpose, I exploit the 2002 Russian pension reform that introduced a funded component along the pay-as-you-go one. The empirical evidence shows that the introduction of the funded pillar has a negative impact on the Russian households’ savings. I find that the introduction of the funded pillar entails a reduction of 1 percentage point in the saving rates of households who save and a reduction of 2.5 percentage points in the probability of having positive savings. |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:61&r=mac |
| By: | C. Mirjam van Praag (University of Amsterdam, Tinbergen Institute, Max Planck Institute of Economics Jena and IZA); Peter H. Versloot (University of Amsterdam and Tinbergen Institute) |
| Abstract: | This paper examines to what extent recent empirical evidence can collectively and systematically substantiate the claim that entrepreneurship has important economic value. Hence, a systematic review is provided that answers the question: What is the contribution of entrepreneurs to the economy in comparison to non-entrepreneurs? We study the relative contribution of entrepreneurs to the economy based on four measures that have most widely been studied empirically. Hence, we answer the question: What is the contribution of entrepreneurs to (i) employment generation and dynamics, (ii) innovation, and (iii) productivity and growth, relative to the contributions of the entrepreneurs’ counterparts, i.e. the ‘control group’? A fourth type of contribution studied is the role of entrepreneurship in increasing individuals’ utility levels. Based on 57 recent studies of high quality that contain 87 relevant separate analyses, we conclude that entrepreneurs have a very important - but specific - function in the economy. They engender relatively much employment creation, productivity growth and produce and commercialize high quality innovations. They are more satisfied than employees. More importantly, recent studies show that entrepreneurial firms produce important spillovers that affect regional employment growth rates of all companies in the region in the long run. However, the counterparts cannot be missed either as they account for a relatively high value of GDP, a less volatile and more secure labor market, higher paid jobs and a greater number of innovations and they have a more active role in the adoption of innovations. |
| Keywords: | entrepreneur, entrepreneurship, self-employment, productivity, economic development, growth, employment, innovation, patents, R&D, utility, remuneration, income |
| JEL: | D24 D31 E23 E24 J21 J28 J31 L26 M13 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3014&r=mac |