|
on Macroeconomics |
|
Issue of 2007‒09‒30
forty-six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Beck, Günter W.; Wieland, Volker |
| Abstract: | The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical “two-pillar” Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favor of ECB-style cross-checking does not require direct effects of money on output or inflation. |
| Keywords: | monetary policy, quantity theory, Phillips curve, European Central Bank, policy under uncertainty |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6141&r=mac |
| By: | Aoki, Kosuke; Kimura, Takeshi |
| Abstract: | We analyse the interaction between private agents’ uncertainty about inflation target and the central bank’s data uncertainty. In our model, private agents update their perceived inflation target and the central bank estimates unobservable economic shocks as well as the perceived inflation target. Under those two uncertainties, the learning process of both private agents and the central bank causes higher order beliefs to become relevant, and this mechanism is capable of generating high persistence and volatility of inflation even though the underlying shocks are purely transitory. We also find that the persistence and volatility become smaller as the inflation target becomes more credible, that is, the private agents’ uncertainty about inflation target (and hence the bank’s data uncertainty) diminishes. |
| Keywords: | Monetary policy, central banks |
| JEL: | E52 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6139&r=mac |
| By: | Woodford, Michael |
| Abstract: | Arguments for a prominent role for attention to the growth rate of monetary aggregates in the conduct of monetary policy are often based on references to low-frequency reduced-form relationships between money growth and inflation. The 'two-pillar Phillips curve' proposed by Gerlach (2004) has recently attracted a great deal of interest in the euro area, where it is sometimes supposed to provide empirical support for the wisdom of a 'two-pillar strategy' that uses distinct analytical frameworks to assess shorter-run and longer-run risks to price stability. I show, however, that regression coefficients of the kind reported by Assenmacher-Wesche and Gerlach (2006a) among others are quite consistent with a 'new Keynesian' model of inflation determination, in which the quantity of money plays no role in inflation determination, at either high or low frequencies. I also show that empirical results of this kind do not in themselves establish that money growth must be useful in forecasting inflation, either in the short run or over a longer run. Hence they provide little support for the ECB's monetary 'pillar'. |
| Keywords: | band-pass regression; ECB monetary policy strategy; monetarism |
| JEL: | E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6447&r=mac |
| By: | Edward E. Leamer |
| Abstract: | Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor's output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe. |
| JEL: | E17 E3 E32 E52 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13428&r=mac |
| By: | Peter Sinclair |
| Abstract: | price stability conflates two ideas: low inflation, and steady inflation. The typical quadratic objective function is unsatisfactory in various ways. Blindness to a mean-amplifying, variance-preserving transformation of inflation rates is one of them, and fixation with the year unit another. Average inflation steadiness over longer periods is valuable, but scores no weight. This paper explores these issues, and others, concerning the links that monetary policy has with both financial stability and fiscal stability. |
| Keywords: | Monetary Policy |
| JEL: | E52 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:07-12&r=mac |
| By: | Giannone, Domenico; Matheson, Troy |
| Abstract: | This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate consumer price data. Using disaggregate consumer price data we can directly compare the predictive performance of our core indicator with a wide range of other ‘core inflation’ measures estimated from disaggregate consumer prices, such as the weighted median and the trimmed mean. The medium term inflation target of Reserve Bank of New Zealand is used as a guide to define our target measure of core inflation - a centered 2 year moving average of past and future inflation outcomes. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models. |
| Keywords: | Core inflation; Monetary policy |
| JEL: | C32 E31 E32 E52 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6469&r=mac |
| By: | Weber, Anke |
| Abstract: | This paper is the first attempt to investigate the performance of different learning rules in fitting survey data of household and expert inflation expectations in five core European economies (France, Germany, Italy, Netherlands and Spain). Overall it is found that constant gain learning performs well in out-of-sample forecasting. It is also shown that households in high inflation countries are using higher best fitting constant gain parameters than those in low inflation countries. They are hence able to pick up structural changes faster. Professional forecasters update their information sets more frequently than households. Furthermore, household expectations in the Euro Area have not converged to the inflation goal of the ECB, which is to keep inflation below to but close to 2% in the medium run. This contrasts the findings for professional experts, which seem to be more inclined to incorporate the implications of monetary union for the convergence in inflation rates into their expectations. |
| Keywords: | Monetary policy, heterogeneous expectations, adaptive learning, survey expectations |
| JEL: | D84 E31 E37 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6137&r=mac |
| By: | Woodford, Michael |
| Abstract: | It has recently become popular to argue that globalization has had or will soon have dramatic consequences for the nature of the monetary transmission mechanism, and it is sometimes suggested that this could threaten the ability of national central banks to control inflation within their borders, at least in the absence of coordination of policy with other central banks. In this paper, I consider three possible mechanisms through which it might be feared that globalization can undermine the ability of monetary policy to control inflation: by making liquidity premia a function of 'global liquidity' rather than the supply of liquidity by a national central bank alone; by making real interest rates dependent on the global balance between saving and investment rather than the balance in one country alone; or by making inflationary pressure a function of 'global slack' rather than a domestic output gap alone. These three fears relate to potential changes in the form of the three structural equations of a basic model of the monetary transmission mechanism: the LM equation, the IS equation, and the AS equation respectively. I review the consequences of global integration of financial markets, final goods markets, and factor markets for the form of each of these parts of the monetary transmission mechanism, and find that globalization, even of a much more thorough sort than has yet occurred, is unlikely to weaken the ability of national central banks to control the dynamics of inflation. |
| Keywords: | capital mobility; global liquidity; global slack; inflation |
| JEL: | E31 E52 F41 F42 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6448&r=mac |
| By: | Kitov, Ivan |
| Abstract: | Potential links between inflation and unemployment in Canada have been examined. No consistent Phillips curve has been found likely due to strong changes in monetary policy of the Bank of Canada. However, there were two distinct periods where linear links between inflation and unemployment could exist - before 1983 and after 1983. A linear and lagged relationship between inflation, unemployment and labor force has been obtained for Canada. Similar relationships were reported previously for the USA, Japan, France and Austria. Changes in labor force level are simultaneously reflected in unemployment and lead inflation by two years. Therefore this generalized relationship provides a two-year ahead natural prediction of inflation based on current estimates of labor force level and unemployment rate. The goodness-of-fit for the relationship is of 0.7 for the period since 1965, i.e. including the periods of high inflation and disinflation. |
| Keywords: | inflation; unemployment; labor force; prediction; Canada |
| JEL: | C53 E31 J64 E37 |
| Date: | 2007–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5015&r=mac |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Gary Koop; Emi Mise; Shaun P Vahey |
| Abstract: | A popular account for the demise of the UK monetary targeting regime in the 1980s blames the weak predictive relationships between broad money and inflation and real output. In this paper, we investigate these relationships using a variety of monetary aggregates which were used as intermediate UK policy targets. We use both real-time and final vintage data and consider a large set of recursively estimated Vector Autoregressive (VAR) and Vector Error Correction models (VECM). These models differ in terms of lag length and the number of cointegrating relationships. Faced with this model uncertainty, we utilize Bayesian model averaging (BMA) and contrast it with a strategy of selecting a single best model. Using the real-time data available to UK policymakers at the time, we demonstrate that the in-sample predictive content of broad money fluctuates throughout the 1980s for both strategies. However, the strategy of choosing a single best model amplifies these fluctuations. Out-of-sample predictive evaluations rarely suggest that money matters for either inflation or real output, regardless of whether we select a single model or do BMA. Overall, we conclude that the money was a weak (and unreliable) predictor for these key macroeconomic variables. But the view that the predictive content of UK broad money diminished during the 1980s receives little support using either the real-time or final vintage data. |
| Keywords: | Money, Vector Error Correction Models, Model Uncertainty, Bayesian Model Averaging, Real Time Data |
| JEL: | C11 C32 C53 E51 E52 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0714&r=mac |
| By: | Greiber, Claus; Setzer, Ralph |
| Abstract: | This paper examines the relation between money and housing variables in the euro area and in the US. Our empirical model is based on a standard money demand relation which is augmented by housing market variables. In doing so, co-integrated money demand relationships can be established for both the euro area and the US. Furthermore, we find evidence for asset inflation channels, that is, liquidity fuels housing market developments. |
| Keywords: | money demand, asset inflation, housing, wealth |
| JEL: | E41 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6135&r=mac |
| By: | Krause, Michael; Lubik, Thomas A. |
| Abstract: | We show how on-the-job search and the propagation of shocks to the economy are intricately linked. Rising search by employed workers in a boom amplifies the incentives of firms to post vacancies. In turn, more vacancies induce more on-the-job search. By keeping job creation costs low for firms, on-the-job search greatly amplifies shocks. In our baseline calibration, this allows the model to generate fluctuations of unemployment, vacancies, and labor productivity whose magnitudes are close to the data, and leads output to be highly autocorrelated. |
| Keywords: | Search and matching, job-to-job mobility, worker flows, Beveridge curve, business cycle, propagation |
| JEL: | E24 E32 J64 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6136&r=mac |
| By: | Fabio Milani (Department of Economics, University of California-Irvine) |
| Abstract: | This paper presents a DSGE model in which agents' learning about the economy can endogenously generate time-varying macroeconomic volatility. Economic agents use simple models to form expectations and need to learn the relevant parameters. Their gain coefficient is endogenous and is adjusted according to past forecast errors. The model is estimated using likelihood-based Bayesian methods. The endogenous gain is jointly estimated with the structural parameters of the system. The estimation results show that private agents appear to have often switched to constant-gain learning, with a high constant gain, during most of the 1970s and until the early 1980s, while reverting to a decreasing gain later on. As a result, the model can generate a pattern of volatility, which is increasing in the 1970s and falling in the second half of the sample, with a decline that can roughly match the magnitude of the Great Moderation. The paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time-varying volatility in the exogenous shocks, even when these have constant variance by construction. |
| Keywords: | Adaptive learning; Constant gain; Monetary policy; Macroeconomic volatility; Inflation dynamics |
| JEL: | C11 D84 E30 E50 E52 E58 E66 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:070802&r=mac |
| By: | Kalckreuth, Ulf von; Wolff, Guntram B. |
| Abstract: | We propose a method for indentifying discretionary fiscal policy with real time data. The starting point is the observation that automatic stabilizers should depend on true GDP, while discretionary fiscal policy depends on the information that policy makers have in real time. We approximate the information set of policy makers with GDP data released in real time. True GDP is approximated using the last GDP release. Accordingly, we can compute a real time measurement error. Discretionary fiscal policy can be expected to react to this measurement error, whereas automatic fiscal policy will not. We apply this identification approach in order to test the central identifying assumption of Blanchard and Perotti’s (2002) seminal structural VAR. According to this assumption, fiscal policy makers do not react to GDP evolutions contemporaneously in a discretionary fashion. We find that government expenditure is adjusted upward if GDP in real time is lower than true GDP. This suggests that fiscal policy makers can use short-term funds to buy goods and services in response to GDP updates. Our results therefore call the identifying assumption of Blanchard and Perotti’s (2002) SVAR into question. |
| Keywords: | discretionary fiscal policy, real-time data, government spending, structural vector autoregression |
| JEL: | E62 H30 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6145&r=mac |
| By: | Mark J. Holmes (University of Waikato); Brian Silverstone (University of Waikato) |
| Abstract: | Markov regime-switching analysis is used to consider the relationship between business confidence and the probability of turning points in cyclical GDP. We find, in an application to New Zealand, that confidence is related to both the deepness and duration of the business cycle and is asymmetric regarding the probability of the economy remaining in a given regime. Overall, the New Zealand business confidence series is a useful indicator of cyclical turning points. |
| Keywords: | business confidence; Markov-switching; business cycles; New Zealand |
| JEL: | C22 E32 |
| Date: | 2007–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:wai:econwp:07/19&r=mac |
| By: | Cukierman, Alex |
| Abstract: | This paper probes the limits of transparency in monetary policymaking along two dimensions: feasibility and desirability. It argues that, due to limited knowledge about the economy, even central banks that are considered champions of openness are not very clear about their measures of the output gap and about their beliefs regarding the effect of policy on inflationary expectations. Consequently feasibility constraints on transparency are more serious than stylized models of the transmission mechanism would imply. In addition no central bank has made clear statements about its objective function, including in particular the relative weight on output versus inflation stabilization, the policy discount factor and the shape of losses from the inflation and the output gaps over the possible ranges of realizations of those variables. The paper also argues that there is a trade-off between full transparency and full utilization of information in setting policy and that excessive transparency may facilitate the exertion of political pressures on the central bank. The last section of the paper abstracts from feasibility constraints and discusses the desirable levels of openness in various areas of the policymaking process. It is argued that the strongest case against immediate transparency arises when the CB has private information about problems within segments of the financial system. Premature release of information may, in such a case, destroy efficient risk sharing arrangements and long term investments by triggering a run on the financial system. This is illustrated within the context of the classic Diamond Dybvig model of bank runs. The paper also probes the desirable levels of transparency in other areas of the policymaking process like the bank's objective function, the bank's output target, forecasts of economic shocks, disagreements within the CB board and the bank's own ignorance. |
| Keywords: | monetary policy; Transparency - actual and desirable |
| JEL: | E58 E61 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6475&r=mac |
| By: | Krause, Michael; Lubik, Thomas A. |
| Abstract: | We analyse the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback effect from the marginal revenue product to wage setting which leads firms to over-hire in order to reduce workers’ bargaining position within the firm. The key to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared to a bargaining framework in which firms neglect this feedback. However, the effects of intra-firm bargaining on adjustment dynamics, volatility and comovement are negligible. |
| Keywords: | Strategic wage setting, search and matching frictions, business cycle propagation |
| JEL: | E24 E32 J64 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6138&r=mac |
| By: | Jiri Podpiera |
| Abstract: | Operational monetary policy rules are characterized by a parsimonious specification and are therefore prone to specification error when estimated on real data. I devise a policy rule estimation procedure, which is robust to marginal misspecification, and study the effects of specification error in least squares. I find the robust evidence of upward bias in policy inertia in least squares applied to most commonly used Taylor type rule. In effect, least squares learning of a central bank can lead to increasing monetary policy inertia over time. |
| Keywords: | Monetary policy inertia, policy rule. |
| JEL: | E4 E5 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp315&r=mac |
| By: | Hess Chung; Eric M. Leeper |
| 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. |
| JEL: | E60 E62 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13425&r=mac |
| By: | Rene Lalonde; Dirk Muir |
| Abstract: | The Bank of Canada's version of the Global Economy Model (BoC-GEM) is derived from the model created at the International Monetary Fund by Douglas Laxton (IMF) and Paolo Pesenti (Federal Reserve Bank of New York and National Bureau of Economic Research). The GEM is a dynamic stochastic general-equilibrium model based on an optimizing representative-agent framework with balanced growth, and some additional features to help mimic the overlappinggenerations' class of models. Moreover, there is a concrete role for fiscal policy (albeit not fully optimized) and monetary policy. At the Bank, the model has been extended beyond the standard version with tradable and non-tradable goods sectors to include both oil and non-oil commodities. Furthermore, the oil sector is decomposed into oil for production and oil for retail consumption. The authors provide a detailed technical description of the model's structure and calibration. They also describe the model's simulation properties for Canadian and U.S. domestic shocks, and describe how the model can be used to analyze issues that currently are at the forefront for the Canadian and global economies, such as trade protectionism, global imbalances, and increasing oil prices. |
| Keywords: | Economic models; International topics; Business fluctuations and cycles |
| JEL: | C68 E27 E37 F32 F47 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocatr:98&r=mac |
| By: | Giulio PALOMBA ([n.a.]); Luca FANELLI (Universit… di Bologna, Dip. di Scienze Statistiche) |
| Abstract: | In this paper we propose simulation-based techniques to investigate the finite;sample performance of likelihood ratio (LR) tests for the nonlinear restrictions;that arise when a class of forward-looking (FL) models, typically used in monetary;policy analysis, is evaluated with Vector Autoregressive (VAR) models. We;consider both `one-shot' tests and sequences of tests under a particular form of;adaptive learning dynamics, where `boundedly rational' agents use VARs recursively;to update their beliefs. The analysis is based on the comparison of the likelihood of the unrestricted and restricted VAR, and the p-values associated;with the LR statistics are computed by Monte Carlo simulation. We also address;the case where the variables of the FL model are approximated as non-stationary;cointegrated processes. Application to the New Keynesian Phillips Curve in the;euro area shows that the FL model of inflation dynamics is not rejected once the;suggested simulation-based tests are applied. The result is robust to specification of the VAR as a stationary (albeit highly persistent) or cointegrated system.;However, in the second case the imposition of cointegration restrictions changes;the estimated degree of price stickiness. |
| Keywords: | Monte Carlo test, VAR, adaptive learning, cross-equation restrictions, forward-looking model, new Keynesian Phillips curve, simulation techniques |
| JEL: | C12 C32 C52 D83 E10 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:298&r=mac |
| By: | Yashiv, Eran |
| Abstract: | The picture of U.S. labour market dynamics is opaque. Empirical studies have yielded contradictory findings and debates have emerged regarding their implications. This paper aims at clarifying the picture, which is important for the understanding of the operation of the labour market, for the study of business cycles, for the explanation of wage behaviour, and for the formulation of policy. The paper determines what facts can be established, what are their implications, and what remains to be further investigated. The main contributions made here are: (i) Listing of data facts that can be agreed upon. These indicate that there is considerable cyclicality and volatility of both accessions to employment and separations from it. Hence, both are important for the understanding of the business cycle. (ii) Presenting the business cycle facts of key series. (iii) Pointing to specific gaps in the data picture: disparities in the measurement of the sizeable flows between employment and the pool of workers out of the labour force, disagreements about the relative volatility of job finding and separation rates across data sets, and the fact that the fit of the gross flows data with net employment growth data differs across studies and is not high. The definite characterization of labour market dynamics depends upon the closing of these data gaps. |
| Keywords: | business cycles; gross worker flows; hiring; job finding; labour market dynamics; separation |
| JEL: | E24 J63 J64 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6481&r=mac |
| By: | Perotti, Roberto |
| Abstract: | This paper surveys fiscal policy in developing countries from the point of view of long-run growth. The first section reviews existing methodologies to estimate the effects of fiscal policy shocks and of systematic fiscal policy, with time series or with cross-sectional methods, and their applicability to developing countries. The second section surveys optimal fiscal policy in developing countries, by considering the role of the intertemporal government budget, and sustainability and solvency. It also reviews the fuzzy deba te on " fiscal space " and " macroeconomic space " - and the usefulness (or lack thereof) of these terms for policy analysis. The third section asks what theory tells us about the optimal cyclical behavior of fiscal policy in developing countries. It shows that it very much depends on the assumptions about the interactions between credit market imperfections at the individual, firms, or government level, and on the supply of external funds to the country. Different sets of assumptions lead to different implications about optimal cyclical behavior. The available evidence on the cyclical behavior of fiscal policy, and possible reasons for the observed prevalence of a procyclical behavior in developing countries, is also reviewed. If one agrees that fiscal policy is indeed less countercyclical than we think is optimal, the issue is how to correct the problem. One obvious question is why government do not self-insure, i.e. why they do not accumulate assets in upturns and decumulate them in downturns. This leads to the analysis of fiscal rules and stabilization funds, in the fourth section. The last section concludes with what the author considers important research and policy questions in each part. |
| Keywords: | Economic Stabilization,Debt Markets,Public Sector Expenditure Analysis & Management,Economic Theory & Research, |
| Date: | 2007–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4365&r=mac |
| By: | Gosselin, Pierre; Lotz, Aileen; Wyplosz, Charles |
| Abstract: | The present paper extends the literature on central bank transparency that relies on information heterogeneity among private agents in four directions. First, it adds the interest rate to the list of signals that the central bank can reveal. Second, it allows for more than one economic fundamental. Third, it extends the range of uncertainties that matter. So far the literature has focused on uncertainty about the economic fundamentals, assumed to be estimated with known precision; we also allow for uncertainty about precision. Fourth, it derives results that are general in the sense that they do not depend on any particular social welfare criterion. Each extension sheds new light on the role of central bank transparency. Focusing on the signaling role of the interest rate, we consider various degrees of transparency, ranging from full opacity, to just publishing the interest rate, to also revealing the signals and estimates of their precision. While uncertainty about the fundamentals results in the now familiar common knowledge effect, uncertainty about information precision creates a fog effect, which reduces the quality of decisions taken by the central bank and the private sector. In the absence of the fog effect, full transparency is generally not desirable, because it deprives the central bank from the ability to optimally manipulate private sector expectations. When the central bank's fog is large, we find that full transparency is usually the best communication strategy. This result tends to survive when the private sector's fog is large. Full opacity is only desirable when the central bank is poorly informed. Another result that emerges from our analysis is that it is usually desirable for the central bank to divulge some information, even if it is erroneous, and known to be erroneous. The reason is that, when the private sector knows that the central bank is mistaken, it needs to evaluate the extent of its mistakes. |
| Keywords: | central bank transparency; information asymmetry; monetary policy |
| JEL: | E42 E52 E58 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6454&r=mac |
| By: | Giannitsarou, Chryssi; Toxvaerd, Flavio |
| Abstract: | The present paper contributes to the literature on dynamic games with strategic complementarities, in two interrelated ways. First, we identify a class of dynamic complete information games in which intertemporal complementarities and multiple equilibria can be fruitfully analyzed. Second, we extend the analysis to an incomplete information framework, where results from the literature on global games can be applied to select a unique Markov perfect equilibrium in monotone strategies. |
| Keywords: | dynamic global games; Dynamic supermodular games; endogenous cycles |
| JEL: | C73 D43 E32 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6470&r=mac |
| By: | Sarkar, Prabirjit |
| Abstract: | This study examines whether there exists a long-term relationship between Indian share price movements and growth through capital accumulation over more than half a century period since 1951. Using the Autoregressive Distributive Lag (ARDL) approach to cointegration developed by Pesaran and Shin, our study shows that no long-term relationship exists between the gross-fixed capital formation (total as well as private) as percentage of GDP and nominal or real share price. There is also no relationship between the growth rate and share prices (both nominal and real). There is also no relationship if we consider the growth rates in share price. |
| Keywords: | Globalisation; Liberalisation; Stock Market; India and Development |
| JEL: | E43 O16 G11 O53 |
| Date: | 2006–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5050&r=mac |
| By: | Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Mario Padula (Università di Salerno and CSEf) |
| Abstract: | We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth. |
| Date: | 2007–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:183&r=mac |
| By: | Bill Gibson (University of Massachusetts Amherst) |
| Abstract: | This paper is part of a broader project that attempts to gener- ate microfoundations for macroeconomics as an emergent property of complex systems. The multi-agents systems approach is seen to produce realistic macro properties from a primitive set of agents that search for satisfactory activities, "jobs", in an informationally constrained, computationally noisy environment. There is frictional and structural unemployment, inflation, excess capacity, fi- nancial instability along with the possibility of relatively smooth expansion. There is no Phillips curve but an inegalitarian distribution of income emerges as fundamental property of the system. |
| Keywords: | Multi-agent system, agent-based models, microeconomic foundations, macroeconomics. |
| JEL: | D58 D83 D30 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2007-10&r=mac |
| By: | Gita Gopinath; Oleg Itskhoki; Roberto Rigobon |
| Abstract: | A central assumption of open economy macro models with nominal rigidities relates to the currency in which goods are priced, whether there is so-called producer currency pricing or local currency pricing. This has important implications for exchange rate pass-through and optimal exchange rate policy. We show, using novel transaction level information on currency and prices for U.S. imports, that even conditional on a price change, there is a large difference in the pass-through of the average good priced in dollars (25%) versus non-dollars (95%). This finding is contrary to the assumption in a large class of models that the currency of pricing is exogenous and is evidence of an important selection effect that results from endogenous currency choice. We describe a model of optimal currency choice in an environment of staggered price setting and show that the empirical evidence strongly supports the model's predictions of the relation between currency choice and pass-through. We further document evidence of significant real rigidities, with the pass-through of dollar pricers increasing above 50% in the long-run. Lastly, we numerically illustrate the currency choice decision in both a Calvo and a menu-cost model with variable mark-ups and imported intermediate inputs and evaluate the ability of these models to match pass-through patterns documented in the data. |
| JEL: | E31 F3 F41 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13432&r=mac |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4885&r=mac |
| By: | David Andolfatto (Simon Fraser University) |
| 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-interestbearing 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. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp07-16&r=mac |
| By: | Thomas Philippon |
| Abstract: | Over the past 60 years, the value added of the U.S. financial sector has grown from 2.3% to 7.7% of GDP. I present a model of the equilibrium size of this industry and I study the factors that might explain its evolution. According to the model, a shift in the joint distribution of cash flows and investment opportunities across U.S. firms has increased the demand for financial services. Improvements in the relative efficiency of the finance industry also play a role. Without these improvements, a much larger fraction of firms would be financially constrained today. |
| JEL: | E2 G2 G3 O16 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13405&r=mac |
| By: | Matthias Morys |
| Abstract: | Conventional wisdom has that peripheral economies had to `play by the rules of the game` under the Classical Gold Standard (1870s-1914), while core countries could get away with frequent violations. Drawing on the experience of three core economies (England, France, Germany) and seven peripheral economies (Austria-Hungary, Bulgaria, Greece, Italy, Norway, Serbia, Sweden), my paper argues for a more nuanced perspective on the European periphery. While the conventional view might be true for some countries - most notably the Balkan countries - our findings, based on a VAR model and impulse response functions, suggest that the average gold drain that a specific peripheral economy was exposed to differed substantially from country to country. We also show that some of the peripheral economies, most notably Austria-Hungary, always enjoyed enough "pulling power" via discount rate policy to reverse quickly any such gold outflow. In sum, while the experience of some peripheral economies under gold was poor and hence normally short-lived, the experience of other peripheral countries resembled more those of the core economies. |
| JEL: | E52 E58 N13 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:353&r=mac |
| By: | Esteban Gómez; sandra Rozo |
| Abstract: | Asset prices have recently become a common topic in economic debate. Nevertheless, much time has been spent in determining if they effectively exhibit a bubble component, and not in examining whether asset prices affectively contain relevant information concerning future market developments. This paper is a first effort in Colombia in this direction, aimed towards the construction of early – warning indicators using financial and real variables. Results show evidence to support that there is relevant information embedded in these series, as all indicators (except the new housing price indicator) show a significant deviation for the year(s) prior to the 98-99 crisis. Additionally, the exercises here conducted show that the performance of asset price indicators is enhanced by including credit and investment. When the early-warning indicators are on, the role of the policy maker should be more active in the market; not necessarily in terms of altering interest rates, but in communicating with market agents, promoting portfolio and perspective (i.e. short and long-term) diversification and urging financial agents to make the best use of the tools that are available to them. |
| Date: | 2007–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004050&r=mac |
| By: | Jakub, GROWIEC (Warsaw School of Economics, Warsaw -Poland and CORE, UniversitŽ catholique de Louvain - Belgium); Ingmar, SCHUMACHER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)) |
| Abstract: | We derive an R&D-based semi-endogenous growth model where technological progress depends on the available amount of technological opportunity. Incremental innovations provide direct increases in the knowledge stock but they reduce technological opportunity and thus the potential for further improvements. Technological opportunity can be renewed only by radical innovations (which have no direct impact on factor productivity). Investigating the model for its implications on economic growth leads to two basic observations. One, in the long-run, a balanced growth path with a consstant and semi-endogenous long-run economic growth rate exists only in a specific knife-edge case which implies that technological opportunity and knowledge grow at equal rates. Two, the transition need not be monotonic. Specifically, we show under which conditions our model generates endogenous business cylces via complex dynamics without uncertainty. |
| Keywords: | Technological opportunity, incremental innovation, radical innovation, endogenous busuness cycles, balanced growth, Andronov-Hopf bifurcation, complex dynamics |
| JEL: | E32 O30 O41 |
| Date: | 2007–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2007034&r=mac |
| By: | Xavier Gabaix |
| Abstract: | This methodological paper presents a class of stochastic processes with appealing properties for theoretical or empirical work in finance and macroeconomics, the "linearity-generating" class. Its key property is that it yields simple exact closed-form expressions for stocks and bonds, with an arbitrary number of factors. It operates in discrete and continuous time. It has a number of economic modeling applications. These include macroeconomic situations with changing trend growth rates, or stochastic probability of disaster, asset pricing with stochastic risk premia or stochastic dividend growth rates, and yield curve analysis that allows flexibility and transparency. Many research questions may be addressed more simply and in closed form by using the linearity-generating class. |
| JEL: | E43 G12 G13 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13430&r=mac |
| By: | Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth |
| Abstract: | The authors study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. They develop a dynamic occupational choice model with endogenous wealth and entry into entrepreneurship. The model predicts that, with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth while the introduction of start-up costs tends to flatten this relationship. The theoretical predictions can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and business start-up costs. They use three highly comparable micro datasets (SHARE, ELSA and HRS) providing harmonized data on wealth and work status in 9 countries that characterized by very different levels of start-up costs and liquidity constraints. Their results support their theoretical predictions. While higher liquidity constraints yield a positive relationship with wealth profile for the fraction of workers in entrepreneurship, start-up costs weaken this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients. |
| Keywords: | entrepreneurship, wealth, liquidity constraints, start-up costs |
| JEL: | E20 D31 J62 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:ran:wpaper:500&r=mac |
| By: | Della Corte, Pasquale; Sarno, Lucio; Thornton, Daniel L |
| Abstract: | This paper re-examines the validity of the Expectation Hypothesis (EH) of the term structure of US repo rates ranging in maturity from overnight to three months. We extend the work of Longstaff (2000a) in two directions: (i) we implement statistical tests designed to increase test power in this context; (ii) more importantly, we assess the economic value of departures from the EH based on criteria of profitability and economic significance in the context of a simple trading strategy. The EH is rejected throughout the term structure examined on the basis of the statistical tests. However, the results of our economic analysis are favorable to the EH, suggesting that the statistical rejections of the EH in the repo market are economically insignificant. |
| Keywords: | economic value; expectation hypothesis; term structure of interest rates; vector autoregression |
| JEL: | E43 G10 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6445&r=mac |
| By: | David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics and CORE); FrŽdŽric DOCQUIER (FNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Philippe, LIEGEOIS (CEPS, INSTEAD, Luxemburg) |
| Abstract: | We forecast income growth over the periode 2000-2050 in the US, Canada, and France. To ground the forecasts on relationships that are as robust as possible t changes in the environment, we use a quantitative theoretical approach which consists in calibrating and simulating a general equilibrium model. Compared to existing studies to link taxes and public expenditures to demographic changes, and take into account the interaction between education and work experience. Forecasts show that growth will be weaker over the period 2010-2040. The gap between the US and the two other countries is increasing over time. France will catch-up and overtake Canada in 2020. Investigating alternative policy scenarios, we show that increasing the effective retirement age to 63 would be most profitable for France, reducing its gap with US by one third. A decrease in social security benefits would slightly stimulate growth but would have no real impact on the gap between the countries. |
| Keywords: | Aging, Forecast, Computable General Equilibrium, Education, Experience |
| JEL: | D58 E6 H55 J11 O40 |
| Date: | 2007–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2007029&r=mac |
| By: | van de Walle, Dominique; Ravallion, Martin; Lambert, Sylvie |
| Abstract: | This paper shows how differences in aggregate human development outcomes over time and space can be additively decomposed into a pure economic-growth component, a component attributed to differences in the distribution of income, and components attributed to " non-income " factors and differences in the model linking outcomes to income or non-income characteristics. The income effect at the micro level is modeled non-parametrically, so as to flexibly reflect distributional changes. The paper illustrates the decomposition using data for Morocco and Vietnam, and the results offer some surprising insights into the observed aggregate gains in schooling attainments. A user friendly STATA program is available to implement the method in other settings. |
| Keywords: | Primary Education,Education For All,Population Policies,Rural Poverty Reduction,Inequality |
| Date: | 2007–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4358&r=mac |
| By: | Bernardo S. da Silveira (Department of Economic, New York University); João Manoel Pinho de Mello (Department of Economics, PUC-Rio) |
| Abstract: | Despite the “minimal effects” conventional wisdom, the question of whether campaign advertising influence elections outcome remains open. This is paradoxical because in the absence of a causal link from advertising to candidate performance, it is difficult to rationalize the amounts spent on campaigns in general, and on TV advertising in particular. Most studies using US data, however, suffer from omitted variable bias and reverse causality problems caused by the decentralized market-based method of allocating campaign spending and TV advertising. In contrast with received literature, we explore a quasi-natural experiment produced by the Brazilian electoral legislation, and show that TV and radio advertising has a much larger impact on election outcomes than previously found by the literature. In Brazil, by law, campaign advertising is free of charge and allocated among candidates in a centralized manner. Gubernatorial elections work in a runoff system. While in the first round, candidates’ TV and radio time shares are determined by their coalitions’ share of seats in the national parliament, the two most voted candidates split equally TV time if a second round is necessary. Thus, differences in TV and radio advertising time between the first and second rounds are explored as a source of exogenous variation to evaluate the impact of TV advertising on election outcomes. Estimates suggest that a one percentage point increase in TV time causes a 0.241 percentage point increase in votes. Since TV advertising is the most important item in campaign expenditures, this result sheds light on the more general question of the effect of campaign spending on elections outcome. |
| Keywords: | Campaign Expenditures, Election Outcomes, Endogeneity, Quasi-Natural Experiments |
| JEL: | G12 C22 C53 E44 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:550&r=mac |
| By: | Rodríguez Norberto; Siado Patricia |
| Abstract: | En este trabajo se presentan los resultados de un ejercicio de pronóstico no paramétrico, múltiples pasos adelante, para la inflación colombiana mensual. En particular, se usa estimación kernel para la media condicional de los cambios de la inflación, dada su propia historia. Los resultados de pronóstico se comparan con un modelo ARIMA estacional y un modelo tipo STAR. Se encuentra que, excepto para el pronóstico un mes adelante, el pronóstico no paramétrico mejora a las otras dos metodologías que le compiten; además, de entre las tres alternativas consideradas, el no paramétrico es el único pronóstico que estadísticamente mejora al pronóstico que se hace con un modelo de caminata aleatoria. |
| Date: | 2007–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:col:000163:004086&r=mac |
| By: | Altug, Sumru G.; Filiztekin, Alpay; Pamuk, Sevket |
| Abstract: | This paper considers the sources of long-term economic growth for Turkey over the period 1880-2005. The period in question covers the decline and eventual dissolution of the former Ottoman Empire and the emergence of the new Turkish Republic in 1923. Hence, the paper provides a unique look at the growth experience of these two different political and economic regimes. The paper examines in detail the evolution of factors that led to growth in output across broad periods, including the post WWII period and the era or globalization beginning in the 1980's. It also considers output growth in the agricultural and non-agricultural sectors separately and allows for the effects of sectoral re-allocation. The lessons from this exercise have important implications for Turkey's future economic performance, for its ability to converge to per capita income levels of developed countries, and for the viability of its current bid for European Union membership. |
| Keywords: | determinants of growth; growth accounting; sectoral re-allocation |
| JEL: | E60 N15 O40 O50 O57 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6463&r=mac |
| By: | Imbs, Jean; Mauro, Paolo |
| Abstract: | We identify the groups of countries where international risk-sharing opportunities are most attractive. We show that the bulk of risk-sharing gains can be achieved in groups consisting of as few as seven members, and that further marginal benefits quickly become negligible. For many such small groups, the welfare gains associated with risk sharing are far larger than Lucas¡¦s classic calibration suggested for the United States, under similar assumptions on utility. Why do we not observe more arrangements of this type? Our results suggest that large welfare gains can only be achieved within groups where contracts are relatively difficult to enforce. International diversification can thus yield substantial gains, but they may remain untapped owing to potential partners¡¦weak institutional quality and a history of default on international obligations. Noting that existing risk-sharing arrangements often have a regional dimension, we speculate that shared economic interests such as common trade may help sustain such arrangements, though risk-sharing gains are smaller when membership is constrained on a regional basis. |
| Keywords: | diversification; enforceability; risk sharing |
| JEL: | E21 E32 F41 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6461&r=mac |
| By: | Antoine Jacquier (School of Economics, Mathematics & Statistics, Birkbeck); Saad Slaoui |
| Abstract: | In the recent years, banks have sold structured products such as Worst-of options, Everest and Himalayas, resulting in a short correlation exposure. They have hence become interested in offsetting part of this exposure, namely buying back correlation. Two ways have been proposed for such a strategy : either pure correlation swaps or dispersion trades, taking position in an index option and the opposite position in the components options. These dispersion trades have been traded using calls, puts, straddles, and they now trade variance swaps as well as third generation volatility products, namely gamma swaps and barrier variance swaps. When considering a dispersion trade via variance swaps, one immediately sees that it gives a correlation exposure. But it has empirically been showed that the implied correlation - in such a dispersion trade - was not equal to the strike of a correlation swap with the same maturity. Indeed, the implied correlation tends to be around 10 points higher. The purpose of this paper is to theoretically explain such a spread. In fact, we prove that the P&L of a dispersion trade is equal to the sum of the spread between implied and realised correlation - multiplied by an average variance of the components - and a volatility part. Furthermore, this volatility part is of second order, and, more precisely, is of Volga order. Thus the observed correlation spread can be totally explained by the Volga of the dispersion trade. This result is to be reviewed when considering different weighting schemes for the dispersion trade. |
| JEL: | E60 C22 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0712&r=mac |
| By: | Arndt, Christian; Buch, Claudia M.; Schnitzer, Monika |
| Abstract: | Previous empirical work on the link between domestic and foreign investment provides mixed results which partly depend on the level of aggregation of the data. We argue that the aggregated home country implications of foreign direct investment (FDI) cannot be gauged using firm-level data. Aggregated data, in turn, miss channels through which domestic and foreign activities interact. Instead, industry-level data provide useful information on the link between domestic and foreign investment. We theoretically show that the effects of FDI on the domestic capital stock depend on the structure of industries and the relative importance of domestic and multinational firms. Our model allows distinguishing intra-sector competition from inter-sector linkage effects. We test the model using data on German FDI. Using panel cointegration methods, we find evidence for a positive long-run impact of FDI on the domestic capital stock and on the stock of inward FDI. Effects of FDI on the domestic capital stock are driven mainly by intra-sector effects. For inward FDI, inter-sector linkages matter as well. |
| Keywords: | domestic capital stock; foreign direct investment |
| JEL: | E22 F21 F23 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6464&r=mac |