nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒10‒06
sixty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The role of credit aggregates and asset prices in the transmission mechanism: a comparison between the euro area and the US By Sylvia Kaufmann; Maria Teresa Valderrama
  2. Monetary Policy in Dual Currency Environment By Felices Guillermo; Tuesta Vicente
  3. No-Arbitrage Taylor Rules By Andrew Ang; Sen Dong; Monika Piazzesi
  4. Real Wage Rigidities and the Cost of Disinflations By Guido Ascari; Christian Merkl
  5. Successes and Failures of Monetary Policy Since the 1950s By David Laidler
  6. Efficiency of the Monetary Policy and Stability of Central Bank Preferences. Empirical Evidence for Peru By Rodriguez Gabriel
  7. Regional real exchange rates and Phillips curves in monetary unions - Evidence from the US and EMU By Jan Marc Berk; Job Swank
  8. Structural Fiscal Rules and The Business Cycle By Montoro Carlos; Moreno Eduardo
  9. Does the Federal Reserve Follow a Non-Linear Taylor Rule? By Kenneth Petersen
  10. The Long-run Risk Model: Dynamics and Cyclicality of Interest Rates By Hasseltoft, Henrik
  11. Twin Deficits, Openness and the Business Cycle By Corsetti, Giancarlo; Müller, Gernot
  12. Exact prediction of inflation and unemployment in Germany By Kitov, Ivan
  13. Escaping Nash and Volatile Inflation By Ellison, Martin; Yates, Tony
  14. Instability and nonlinearity in the Euro area Phillips curve. By Alberto Musso; Livio Stracca; Dick van Dijk
  15. Using cross-wavelets to decompose the time-frequency relation between oil and the macroeconomy By Luís Francisco Aguiar-Conraria; Maria Joana Soares
  16. Heterogeneous Consumers, Demand Regimes, Monetary Policy and Equilibrium Determinacy By Di Bartolomeo, Giovanni; Rossi, Lorenza
  17. Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk? By Jiminez, G.; Ongena, S.; Pedro, J.L.; Saurina, J.
  18. Oil Shocks and Optimal Monetary Policy By Montoro Carlos
  19. Inflation persistence - euro area and new EU Member States. By Michal Franta; Branislav Saxa; Katerina Smidkova
  20. Application of Three Alternative Approaches to Identify Business Cycles in Peru By Rodriguez Gabriel
  21. Monetary Policy, Default Risk and the Exchange Rate By Guimarães, Bernardo; Soares Gonçalves, Carlos Eduardo
  22. A Small Open Economy as a Limit Case of a Two-Country New Keynesian DSGE Model: A Bayesian Estimation With Brazilian Data. By Marcos Antonio C. da Silveira
  23. Public debt and aggregate risk. By Audrey Desbonnet; Sumudu Kankanamge
  24. Learning about Monetary Policy Rules when the Cost Channel Matters By Llosa Gonzalo; Tuesta Vicente
  25. A Multivariate Perspective for Modeling and Forecasting Inflation's Conditional Mean and Variance By Matteo Barigozzi; Marco Capasso
  26. News and Business Cycles in Open Economies By Nir Jaimovich; Sergio Rebelo
  27. Professor Becker on Free Banking: A Comment By van den Hauwe, Ludwig
  28. On the Dynamics of Profit- and Wage-led Growth By Amit Bhaduri
  29. Inflation Targeting, Credibility and Confidence Crises By Aloisio Pessoa de Araújo; Rafael Santos
  30. The Economic Impact of Central Bank Transparency: A Survey By Cruijsen, C. van der; Eijffinger, S.C.W.
  31. The Consumption-Wealth Ratio Under Asymmetric Adjustment By Fernando Alexandre; Vasco J. Gabriel; Pedro Bação
  32. The international transmission of monetary shocks in a dollarized economy: The case of USA and Lebanon By Jean-François Goux; Charbel Cordahi
  33. Independencia Legal y Efectiva del Banco Central de Reserva del Perú By Tuesta Vicente
  34. Capital Accumulation and Unemployment: New Insights on the Nordic Experience By Marika Karanassou; Hector Sala; Pablo F. Salvador
  35. Larger crises cost more: impact of banking sector instability on output growth By Serwa, Dobromił
  36. Using Wavelets to decompose time-frequency economic relations By Luís Francisco Aguiar-Conraria; Maria Joana Soares; Nuno Azevedo
  37. Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model By Olivier Cardi; Romain Restout
  38. CONSTRUCTING HISTORICAL EURO AREA DATA By Heather Anderson; Mardi Dungey; Denise R. Osborn; Farshid Vahid
  39. Monetary information arrivals and intraday exchange rate volatility : A comparison of the GARCH and the EGARCH models. By Darmoul Mokhtar; Nizar Harrathi
  40. The role of the exchange rate for adjustment in Boom and Bust episodes. By Reiner Martin; Ludger Schuknecht; Isabel Vansteenkiste
  41. Monetary Arrangements for Emerging Economies By Aloisio Pessoa de Araújo; Marcia Leon; Rafael Santos
  42. Housing, Credit Markets and the Business Cycle By Martin S. Feldstein
  43. The Causes of Excessive Deficits in the European Union By Vítor Castro
  44. Dynamic Programming, Maximum Principle and Vintage Capital By Fabbri, Giorgio; Iacopetta, Maurizio
  45. Will monetary policy become more of a science? By Frederic S. Mishkin
  46. Prices and Market Shares in a Menu Cost Model By Ariel Burstein; Christian Hellwig
  47. Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective By David Jamieson Bolder; Shudan Liu
  48. The Direct Effect of China on Canadian Consumer Prices: An Empirical Assessment By Louis Morel
  49. The Output Cost of Gender Discrimination: A Model-Based Macroeconomic Estimate By Cavalcanti, Tiago; Tavares, José
  50. Impact of Macro Shocks on Sovereign Default Probabilities By Marco S. Matsumura
  51. Reply to Solow By V. V. Chari; Patrick J. Kehoe
  52. The unusual behavior of the federal funds and 10-year Treasury rates: a conundrum or Goodhart’s Law? By Daniel L. Thornton
  53. Proyecciones desagregadas de inflación con modelos Sparce VAR robustos By Barrera Carlos
  54. Monetary Policy in East Asia: Common Concerns By Marvin Goodfriend
  55. The Fiscal Impact of Aid Flows: Evidence from Ethiopia By Pedro M. G. Martins
  56. Wall Street and Silicon Valley: A Delicate Interaction By George-Marios Angeletos; Guido Lorenzoni; Alessandro Pavan
  57. IPTU no Brasil: Progressividade, Arrecadação e Aspectos Extra-Fiscais By Pedro Humberto Bruno de Carvalho Jr.
  58. Liquidity Constraints and Entrepreneurial Performance By Hvide, Hans K; Møen, Jarle
  59. Innovation, Information and Financial Architecture By Solomon Tadesse; ;
  60. How Regulatory Reforms in Sweden have boosted Productivity By Espen Erlandsen; Jens Lundsgaard
  61. Financial Development and Technology By Solomon Tadesse; ;
  62. Can Openness Deter Corruption? The Role of Foreign Direct Investment By Larrain B., Felipe; Tavares, José

  1. By: Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, 1090 Vienna, Austria.); Maria Teresa Valderrama (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, 1090 Vienna, Austria.)
    Abstract: We analyze the interaction between credit and asset prices in the transmission of shocks to the real economy. We estimate a Markov switching VAR for the euro area and the US, including additionally GDP, CPI and a short-term interest rate. We find evidence for two distinct states in both regions. For the euro area, we find a regime which is correlated to the business cycle and which captures periods of very low real credit growth at the end of recessions. However, during this regime credit markets and asset price markets do not impede economic recovery. In the other regime, we do find a procyclical effect of credit and asset price shocks on GDP. Shocks in both variables explain each about 20% of GDP’s forecast error variance after four years. Credit shocks have a positive effect on inflation and explain about 35% of the forecast error variance, which confirms that credit aggregates contain information about the monetary stance. The effect of asset price shocks on inflation is insignificant and their share in explaining the forecast error variance negligible. For the US, regime 1 captures periods of stable GDP growth, and low and stable inflation, combined with accelerating asset prices. We find procyclical effects of credit and asset price shocks on GDP only in regime 2. Shocks in both variables explain about the same share (20%) of GDP forecast error variance, whereby the share explained by asset price shocks is about two and a half times larger than in regime 1. Shocks to credit and asset prices have no significant effect on CPI and explain each about 10% of its forecast error variance in both regimes. This is consistent with the view that monetary policy may achieve price stability without necessarily achieving financial stability. JEL Classification: C11, C32, E32, E44.
    Keywords: Asymmetry, asset prices, financial system, lending, transmission mechanism.
    Date: 2007–09
  2. By: Felices Guillermo (Bank of England); Tuesta Vicente (Central Reserve Bank of Peru)
    Abstract: We develop a small open economy general equilibrium model with sticky prices and partial dollarization -a situation where both domestic and foreign currencies coexist. We derive a tractable representation of the model in terms of domestic inflation and the output gap in which a trade-off, which depends on the degree of dollarization, arises endogenously due to the presence of foreign interest rate shocks. We use this framework to show analytically how higher degrees of dollarization induce larger volatilities of the output gap and inflation, thus hampering a central bank’s effectiveness in stabilizing the economy. Our impulse-response functions show that the transmission of such shocks has a positive (negative) effect on inflation and negative (positive) effect on the output gap when money aggregates and consumption are complements (substitutes). We also show that a standard Taylor rule guarantees real determinacy of the rational expectations equilibrium. Finally, we demonstrate that a higher degree of dollarization reduces the determinacy region when the overall money aggregate and consumption are substitutes.
    Keywords: Dollarization, Currency Substitution, Policy trade-off, Staggered Price Setting, Open Economy.
    JEL: E50 E52 F00 F30 F41
    Date: 2007–04
  3. By: Andrew Ang; Sen Dong; Monika Piazzesi
    Abstract: We estimate Taylor (1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques. Long-term interest rates are risk-adjusted expected values of future short rates and thus provide strong over-identifying restrictions about the policy rule used by the Federal Reserve. The no-arbitrage framework also accommodates backward-looking and forward-looking Taylor rules. We find that inflation and output gap account for over half of the variation of time-varying excess bond returns and most of the movements in the term spread. Taylor rules estimated with no-arbitrage restrictions differ from Taylor rules estimated by OLS, and the resulting monetary policy shocks are somewhat less volatile than their OLS counterparts.
    JEL: E43 E44 E52 G12
    Date: 2007–09
  4. By: Guido Ascari (University of Pavia); Christian Merkl (IfW, University of Kiel and IZA)
    Abstract: This paper analyzes the cost of disinflations under real wage rigidities in a micro-founded New Keynesian model. The consensus is that real wage rigidities can be a useful mechanism to induce the inflation persistence that is absent in the standard Calvo model. Real wage rigidities thus generate a slump in output after a credible disinflationary policy. This consensus is flawed, since it depends on analyzing the model in a linearized framework. Once nonlinearities are taken into account, the results change dramatically, both qualitatively and quantitatively. Real wage rigidities imply neither inflation persistence, nor output costs of disinflations. Real wage rigidities actually create a boom after a permanent reduction in the inflation target of the monetary policy.
    Keywords: disinflation, sticky prices, real wage rigidities, nonlinearities
    JEL: E31 E50
    Date: 2007–09
  5. By: David Laidler (University of Western Ontario)
    Abstract: Successes and failures in monetary policy stem mainly from coherence or lack thereof in the monetary order, rather than the tactical skills of policy makers. Crucial here are questions of consistency among the economic ideas that the policy regime embodies, the way in which the economy actually functions, and the beliefs of private agents and policy makers about these matters. These postulates are used to frame accounts of the Bretton Woods System and its collapse, the Great Inflation that followed, the subsequent disappointing performance of money-growth targeting, the breakdown of the Japanese "bubble economy" the onset of theEMS crisis at the beginning of the 1990s, and since then, the launch of the Euro and the apparent success of inflation targeting. Though monetary policy seems rather successful at present, certain weaknesses in currently prevailing monetary orders are noted.
    Keywords: monetary policy; policy regimes; crises; pegged exchange rates; flexible exchange rates; inflation; inflation targets; money supply; central banks, central bank independence.
    JEL: E42 E58 E65 F33
    Date: 2007
  6. By: Rodriguez Gabriel (Universidad of Ottawa and Central Bank of Peru)
    Abstract: Following the approach suggested by Favero and Rovelli (2003), I estimate a three-equations system for different sub-samples for Peru. The results indicate that the preferences of the monetary authority have changed between the diffeerent regimes. In particular, the parameter associated to the implicit target of in‡ation has been reduced significantly. The macroeconomic conditions from the side of the aggregate demand have been more favorable than those related to the aggregate supply. The standard deviation of the monetary rule suggests that it has been conducted successfully in the last regime.
    Keywords: Interest Rate Rule, Structural Breaks, Inflation Target-ing, Output Gap, Preferences, Macroeconomic Shocks
    JEL: C2 E5
    Date: 2007–05
  7. By: Jan Marc Berk; Job Swank
    Abstract: We study price level convergence within the US and EMU, using panel estimates of regional Phillips curves of the hybrid New-Keynesian type. The estimated half lives of deviations from trend PPP are around three years for US regions and two years for euro area countries. The start of EMU had no noticeable influence on PPP convergence in the euro area. Where nominal exchange rates accounted for the bulk of the adjustment process before 1999, this role was taken over by relative prices thereafter. Notwithstanding clear evidence of forward-lookingness, inflation persistence is substantial in both monetary unions, especially in the US.
    Keywords: Inflation; monetary union; purchasing power parity
    JEL: E31 E52 F41
    Date: 2007–09
  8. By: Montoro Carlos (Banco Central de Reserva del Perú and LSE); Moreno Eduardo (Banco Central de Reserva del Perú)
    Abstract: In this paper we extend the neoclassical model presented by Baxter and King (1993) to evaluate the effects of two alternative fiscal policy rules on the business cycle. The rules we analyze are similar to those implemented in practice by some countries, such as: limits to the structural fiscal deficit (which eliminates the effects of the business cycle on the government revenues) and limits to conventional fiscal deficit. We focus our analysis in a model calibrated to mimic Peruvian data to evaluate the short run dynamics and the conditions for the stability of the equilibrium. We find that the rule based on the structural balance generates a counter cyclical fiscal policy, which reduces significantly output volatility. Moreover, we find that a condition for a determinate equilibrium in the model endowed with the structural rule is that non-financial government expenditures react more than one–to-one to changes in interest expenditures.
    Keywords: Reglas Fiscales, Política fiscal, Volatilidad del Producto
    JEL: E62 H30 H60
    Date: 2007–08
  9. By: Kenneth Petersen (University of Connecticut)
    Abstract: The Taylor rule has become one of the most studied strategies for monetary policy. Yet, little is known whether the Federal Reserve follows a non-linear Taylor rule. This paper employs the smooth transition regression model and asks the question: does the Federal Reserve change its policy-rule according to the level of inflation and/or the output gap? I find that the Federal Reserve does follow a non-linear Taylor rule and, more importantly, that the Federal Reserve followed a non-linear Taylor rule during the golden era of monetary policy, 1985-2005, and a linear Taylor rule throughout the dark age of monetary policy, 1960-1979. Thus, good monetary policy is associated with a non-linear Taylor rule: once inflation approaches a certain threshold, the Federal Reserve adjusts its policy-rule and begins to respond more forcefully to inflation.
    Keywords: Taylor rule, Federal Reserve, non-linearity, monetary policy
    JEL: E4 E5
    Date: 2007–09
  10. By: Hasseltoft, Henrik (Swedish Institute for Financial Research)
    Abstract: This paper shows that the long-run risk model of Bansal and Yaron (2004) is able to simultaneously explain the dynamics and cyclical properties of interest rates and the level and volatility of equity returns. Specifically, the model accounts for deviations from the expectations hypothesis of interest rates, the upward sloping nominal yield curve, the downward sloping term structure of volatility and the predictive power of the yield spread. Real (nominal) rates are positively (negatively) correlated with consumption growth and the nominal yield spread predicts future real consumption growth, excess stock returns and inflation. The cyclical properties of nominal interest rates are shown to critically depend on the value of the elasticity of intertemporal substitution and on the correlation between consumption and inflation. The driving forces of the model are uncertainty about expected consumption growth, time-varying volatility of consumption growth and deviations from the Fisher hypothesis.
    Keywords: long run risk; cyclicality; interest rates
    JEL: E43 G12
    Date: 2007–07–15
  11. By: Corsetti, Giancarlo; Müller, Gernot
    Abstract: In this paper, we study the co-movement of the government budget balance and the trade balance at business cycle frequencies. In a sample of 10 OECD countries we find that the correlation of the two time series is negative, but less so in more open economies. Moreover, for the US the cross-correlation function is S-shaped. We analyze these regularities taking the perspective of international business cycle theory. First, we show that a standard model delivers predictions broadly in line with the evidence. Second, we show that conditional on spending shocks the model predicts a perfect correlation of the budget balance and the trade balance. Yet, the effect of spending shocks on the trade balance is contained if an economy is not very open to trade.
    Keywords: Business Cycle; Fiscal Policy; Openness; Twin Deficits
    JEL: E32 F41 F42
    Date: 2007–09
  12. By: Kitov, Ivan
    Abstract: Potential links between inflation, (t), and unemployment, UE(t), in Germany have been examined. There exists a consistent (conventional) Phillips curve despite some changes in monetary policy. This Phillips curve is characterized by a negative relation between inflation and unemployment with the latter leading the former by one year: UE(t-1) = -1.50(t) + 0.116. Effectively, growing unemployment has resulted in decreasing inflation since 1971, i.e. for the period where GDP deflator observations are available. The relation between inflation and unemployment is statistically reliable with R2=0.86, where unemployment spans the range from 0.01 to 0.12 and inflation, as represented by GDP deflator, varies from -0.01 to 0.07. A linear and lagged relationship between inflation, unemployment and labor force has been also obtained for Germany. Changes in labor force level are leading unemployment and inflation by five and six year, respectively. Therefore this generalized relationship provides a natural prediction of inflation at a six-year horizon, as based upon current estimates of labor force level. The goodness-of-fit for the relationship is 0.87 for the period between 1971 and 2006, i.e. including the periods of high inflation and disinflation.
    Keywords: inflation; unemployment; labor force; prediction; Germany
    JEL: J64 E52 C53 E31
    Date: 2007–09–30
  13. By: Ellison, Martin; Yates, Tony
    Abstract: Why is inflation so much lower and at the same time more stable in developed economies in the 1990s, compared with the 1970s? This paper suggests that the United Kingdom, United States and other countries may have escaped from a volatile inflation equilibrium. Our argument builds on the story proposed by Tom Sargent in The conquest of American inflation, where the fall in inflation in the 1980s was attributed to the changing beliefs informing monetary policy. To explain the escape in inflation volatility, we unwind one of Sargent's simplifications and allow the monetary authority to react to some of the shocks in the economy. In this new model, a revised account of recent history is that when the evidence turned against the existence of a long-run inflation-output trade-off in the 1980s there was an escape from high inflation, but the authorities were also persuaded to stop using changes in inflation to offset shocks. Inflation and inflation volatility therefore escaped in tandem. Our analysis also sheds some light on why the escape in inflation occurred at the time it did. Our model, like the Sargent model it derives from, omits the revolution in institutional design and understanding that underpins monetary policy. So the gloomy predictions for the future derived from a literal reading of it are likely to be unfounded.
    Keywords: beliefs; escapes; Phillips curve; volatility
    JEL: E2 E3
    Date: 2007–09
  14. By: Alberto Musso (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Livio Stracca (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Dick van Dijk (Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands.)
    Abstract: This paper provides a comprehensive analysis of the functional form of the euro area Phillips curve over the past three decades. In particular, compared to previous literature we analyse the stability of the relationship in detail, especially as regards the possibility of a time-varying mean of inflation. Moreover, we conduct a sensitivity analysis across different measures of economic slack. Our main findings are two. First, there is strong evidence of time variation in the mean and slope of the Phillips curve occurring in the early to mid 1980s, but not in inflation persistence once the mean shift is allowed for. As a result of the structural change, the Phillips curve became flatter around a lower mean of inflation. Second, we find no significant evidence of non-linearity, in particular in relation to the output gap. JEL Classification: E52, E58.
    Keywords: Inflation, output gap, structural change, asymmetry, smooth transition model.
    Date: 2007–09
  15. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE); Maria Joana Soares (Universidade do Minho - Departamento de Matemática)
    Abstract: A large body of empirical literature has suggested that oil price shocks have an important effect on economic activity. But in most of the literature the analysis is exclusively done in the time domain. However, interesting relations exist at different frequencies. We use (cross) wavelet analysis to uncover some of these relations, estimating the spectral characteristics of the time-series as a function of time. Our analysis suggests that the volatility of both the inflation rate and the output growth rate started to decrease in the decades of 1950 and 1960, suggesting that the great moderation started then,but that it was temporarily interrupted due to the oils crisis of the 1970s, whose effects extend until the mid 1980s. We also show that while at business cycle frequencies oil prices lead industrial production, in the very long run production increases lead oil price increases. The exception to this long-run relation occurred between the mid 1970s and mid 1980s. Our analysis also suggests that monetary policy became much more eficient after 1980 to deal with the inflationary pressures of oil shocks.
    Keywords: Business cycles, time-frequency analysis, non-stationary time series, wavelets, cross wavelets, wavelet coherency.
    JEL: C10 E32
    Date: 2007
  16. By: Di Bartolomeo, Giovanni; Rossi, Lorenza
    Abstract: This paper investigates the effects of monetary policy in presence of heterogeneous consumers. We study the effectiveness (quantitative effects) of monetary policy and equilibrium determinacy properties of a New Keynesian DSGE model where a fraction of households cannot smooth consumption. We show that two-demand regimes can emerge (according to the “slope” of IS curve) and that the main unconventional results, stressed by recent literature, only hold in the unconventional case of an IS curve positively sloped.
    Keywords: Heterogeneous consumers; liquidity constraints; determinacy; demand regimes
    JEL: E61 E63
    Date: 2005–09–05
  17. By: Jiminez, G.; Ongena, S.; Pedro, J.L.; Saurina, J. (Tilburg University, Center for Economic Research)
    Abstract: We investigate the impact of the stance and path of monetary policy on the level of credit risk of individual bank loans and on lending standards. We employ the Credit Register of the Bank of Spain that contains detailed monthly information on virtually all loans granted by all credit institutions operating in Spain during the last twenty-two years ? generating almost twenty-three million bank loan records in total. Spanish monetary conditions were exogenously determined during the entire sample period. Using a variety of duration models we find that lower short-term interest rates prior to loan origination result in banks granting more risky new loans. Banks also soften their lending standards ? they lend more to borrowers with a bad credit history and with high uncertainty. Lower interest rates, by contrast, reduce the credit risk of outstanding loans. Loan credit risk is maximized when both interest rates are very low prior to loan origination and interest rates are very high over the life of the loan. Our results suggest that low interest rates increase bank risk-taking, reduce credit risk in banks in the very short run but worsen it in the medium run. Risk-taking is not equal for all type of banks: Small banks, banks with fewer lending opportunities, banks with less sophisticated depositors, and savings or cooperative banks take on more extra risk than other banks when interest rates are lower. Higher GDP growth reduces credit risk on both new and outstanding loans, in stark contrast to the differential effects of monetary policy.
    Keywords: monetary policy;low interest rates;financial stability;lending standards;credit risk;risk-taking;business cycle;bank organization;duration analysis.
    JEL: E44 G21 L14
    Date: 2007
  18. By: Montoro Carlos (Banco Central de Reserva del Perú and LSE)
    Abstract: This paper investigates how monetary policy should react to oil shocks in a microfounded model with staggered price-setting and oil as a non-produced input in the production function. We extend Benigno and Woodford (2005) to obtain a second order approximation to the expected utility of the representative household when the steady state is distorted and the economy is hit by oil price shocks. The main result is that oil price shocks generate a trade-off between inflation and output stabilisation when oil has low substitutability in production. Therefore, it becomes optimal to the monetary authority to stabilise partially the effects of oil shocks on inflation and some inflation is desirable. We also find, in contrast to Benigno and Woodford (2005), that this trade-off remains even when we eliminate the effects of monopolistic distortions from the steady state. Our results also shed light on how technological improvements which reduces the dependence on oil, also reduce the impact of oil shocks on the economy. This can explain why oil shocks have lower impact on inflation in the 2000s in contrast to the 1970s. Since oil has become easier to substitute with other renewable resources, the impact of oil shocks has been dampened.
    Keywords: Optimal Monetary Policy, Welfare, Second Order Solution, Oil Price Shocks, Endogenous Trade-off.
    JEL: D61 E61
    Date: 2007–08
  19. By: Michal Franta (Czech National Bank and CERGE-EI, P.O. Box 882, Politickych veznu 7, 111 21 Praha 1, Czech Republic.); Branislav Saxa (Czech National Bank and CERGE-EI, P.O. Box 882, Politickych veznu 7, 111 21 Praha 1, Czech Republic.); Katerina Smidkova (Czech National Bank, Na Prikope 28, 115 03 Prague 1.)
    Abstract: Is inflation persistence in the new EU Member States (NMS) comparable to that in the euro area countries? We argue that persistence may not be as different between the two country groups as one might expect. We confirm that one should work carefully with the usual estimation methods when analyzing the NMS, given the scope of the convergence process they went through. We show that due to frequent breaks in inflation time series in the NMS, parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. Employing time-varying mean leads to the reversal of this result and suggests similar or lower inflation persistence for the NMS compared to euro area countries. Structural measures show that backward-looking behavior may be more important component in explaining inflation dynamics in the NMS than in the euro area countries. JEL Classification: E31, C22, C11, C32.
    Keywords: Inflation persistence, new Member States, time-varying mean, New Hybrid Phillips curve.
    Date: 2007–09
  20. By: Rodriguez Gabriel (Universidad of Ottawa and Central Bank of Peru)
    Abstract: Three alternative econometric approaches are used to estimate business cycles in the Peruvian economy. These approaches are the Plucking model due to Friedman (1964, 1993), the Markov Switching model proposed by Hamilton (1989) and the Smooth Transition Autoregressive (STAR) model suggested by Teräsvirta (1994). The results show strong rejection of the null hypothesis of linearity, presence of asymmetries and nonlinearities. Furthermore, the methods allow to find the principal episodes of recession for the Peruvian economy.
    Keywords: Asymmetries, Business Regional Fluctuations, Markov Switching, Transitory and Permanent Components
    JEL: C22 C52 E32
    Date: 2007–05
  21. By: Guimarães, Bernardo; Soares Gonçalves, Carlos Eduardo
    Abstract: In a country with high probability of default, higher interest rates may render the currency less attractive if sovereign default is costly. This paper develops that intuition in a simple model and estimates the effect of changes in interest rates on the exchange rate in Brazil using data from the dates surrounding the monetary policy committee meetings and the methodology of identification through heteroskedasticity. Indeed, we find that unexpected increases in interest rates tend to lead the Brazilian currency to depreciate. It follows that granting more independence to a central bank that focus solely on inflation is not always a free-lunch.
    Keywords: default; exchange rate; identification through heteroskedasticity; monetary policy
    JEL: E5 F3
    Date: 2007–09
  22. By: Marcos Antonio C. da Silveira
    Abstract: We build a two-country version of the DSGE model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new Keynesian Phillips curve as a new pushing-cost variable feeding the inflation, so that there is no more the direct relationship between marginal cost and output gap that characterizes the closed economies. Unlike most part of the literature, we derive the small domestic open economy as a limit case of the two-coutry model, rather than assuming exogenous processes for the foreign variables. This procedure preserves the role played by foreign nominal frictions in the way as international monetary policy shocks are conveyed into the small domestic economy. Using the Bayesian approach, the small-economy case is estimated with Brazilian data and impulse-response functions are build to analyse the dynamic effects of structural shocks.
    Date: 2006–12
  23. By: Audrey Desbonnet (Centre d'Economie de la Sorbonne); Sumudu Kankanamge (Centre d'Economie de la Sorbonne)
    Abstract: This paper assesses the optimal level of public debt in a new framework where aggregate fluctuations are taken into account. Agents are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against the risk. We find that the optimal level of debt is very different when aggregate risk is taken into account : a simple idiosyncratic model generates a quarterly optimal level of debt of 60 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP. Thus aggregate fluctuations have a strong positive impact on the level of public debt in the economy. Aggregate fluctuations exacerbate the overall risk level in the economy and households are forced to increase their precautionary saving in response. Public debt and the implied higher interest rate generate a strong effect that helps precautionary saving behavior.
    Keywords: debt, aggregate risk, precautionary saving.
    JEL: E32 E63 H31
    Date: 2007–09
  24. By: Llosa Gonzalo (UCLA); Tuesta Vicente (Banco Central de Reserva del Perú)
    Abstract: We study how the stability of rational expectations equilibrium may be affected by monetary policy when agents learn using adaptive learning (E-stability concept) and the cost channel of monetary policy matters. We focus on both instrumental taylor-type rules and optimal rules. We show, analytically, that standard instrument rules -contemporaneous and forecast based rules - can easily induce indeterminacy and expectational instability when the cost channel is present. Overall, a naive application of the Taylor principle in this setting could be misleading. Regarding optimal rules, we find that "expectational-based" rules, under discretion and commitment, do not always induce determinate and E-stable equilibrium. This result stands in contrast to the findings of Evans and Honkapohja (2003) for for the baseline “New Keynessian" model.
    Keywords: Monetary Policy Rules, Cost Channel, Indeterminacy
    JEL: C23 O40 O47
    Date: 2007–08
  25. By: Matteo Barigozzi; Marco Capasso
    Abstract: We test the importance of multivariate information for modelling and forecasting in- flation's conditional mean and variance. In the literature, the existence of inflation's conditional heteroskedasticity has been debated for years, as it seemed to appear only in some datasets and for some lag lengths. This phenomenon might be due to the fact that inflation depends on a linear combination of economy-wide dynamic common fac- tors, some of which are conditionally heteroskedastic and some are not. Modelling the conditional heteroskedasticity of the common factors can thus improve the forecasts of inflation's conditional mean and variance. Moreover, it allows to detect and predict con- ditional correlations between inflation and other macroeconomic variables, correlations that might be exploited when planning monetary policies. The Dynamic Factor GARCH (DF-GARCH) by Alessi et al. [2006] is used here to exploit the relations between inflation and the other macroeconomic variables for inflation fore- casting purposes. The DF-GARCH is a dynamic factor model as the one by Forni et al. [2005], with the addition of an equation for the evolution of static factors as in Giannone et al. [2004] and the assumption of heteroskedastic dynamic factors. When comparing the Dynamic Factor GARCH with univariate models and with the classical dynamic factor models, the DF-GARCH is able to provide better forecasts both of inflation and of its conditional variance.
    Keywords: Inflation, Factor Models, GARCH
    Date: 2007–10–01
  26. By: Nir Jaimovich; Sergio Rebelo
    Abstract: It is well known that the neoclassical model does not generate comovement among macroeconomic aggregates in response to news about future total factor productivity. We show that this problem is generally more severe in open economy versions of the neoclassical model. We present an open economy model that generates comovement both in response to sudden stops and to news about future productivity and investment-specific technical change. We find that comovement is easier to generate in the presence of weak short-run wealth effects on the labor supply, adjustment costs to labor, and/or investment, and whenever the real interest rate faced by the economy rises with the level of net foreign debt.
    JEL: F3
    Date: 2007–09
  27. By: van den Hauwe, Ludwig
    Abstract: Professor Becker´s paper about free banking written in 1956 was originally intended as a reaction to the 100-percent reserve proposals that were then popular at the University of Chicago. Today the original paper clearly illustrates how considerably our views and theories about free banking have evolved in the past 50 years. This development is to a considerable extent the result of the work and the writings of economists of the Austrian School. Professor Pascal Salin is one of the most prominent members of the Austrian free banking school. In a new introduction to this 1956 paper written especially for the Festschrift in honor of Professor Pascal Salin, Professor Gary Becker partially repudiates and mitigates some of his previous conclusions. This event offers a fitting opportunity to review some developments in the theory of free banking and related issues and to add a few clarifications concerning the present “state of the art” as regards an acceptable and adequate notion of free banking.
    Keywords: Free Banking; Monetary Regimes; Monetary Standards; Business Cycles
    JEL: E32 E42 E58
    Date: 2007–10–04
  28. By: Amit Bhaduri (University of Pavia, italy)
    Abstract: This paper examines how variable output and profit share jointly determine investment and saving, while the difference between investment and saving determines the changes in output and profit share. Analysis of the resulting pair of differential equations yields novel implications for the multiplier process. In this more general framework a number of separate strands of the Keynesian inspired literature can be understood. In particular the model incorporating both forced saving and profit squeeze analyses stability of the dynamical system to bring out the complex relation between in- and out-of-equilibrium profit- and wage-led regimes.
    Keywords: profit-led, wage-led, in- and out-of-equilibrium dynamics, local, Liapunov stability, stable-unstable bifurcation, forced saving, profit squeeze, multiplier
    JEL: B22 C62 D33 E12 E22 E31
    Date: 2007–03
  29. By: Aloisio Pessoa de Araújo (EPGE/FGV); Rafael Santos
    Date: 2007–09
  30. By: Cruijsen, C. van der; Eijffinger, S.C.W. (Tilburg University, Center for Economic Research)
    Abstract: We provide an up-to-date overview of the literature on the desirabil- ity of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its e?ects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: -the empirical research resolves all theoretical question marks, -how the ?ndings of the literature match the actual practice of central banks, and -where there is scope for more research.
    Keywords: Central Bank Transparency;Monetary Policy;Survey
    JEL: E31 E52 E58
    Date: 2007
  31. By: Fernando Alexandre (Universidade do Minho - NIPE); Vasco J. Gabriel (University of Surrey and Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra)
    Abstract: This paper argues that nonlinear adjustment may provide a better explanation of °uctuations in the consumption-wealth ratio. The nonlinearity is captured by a Markov-switching vector error-correction model that allows the dynamics of the relationship to di®er across regimes. Estimation of the system suggests that these states are related to the behaviour of ¯nancial markets. In fact, estimation of the system suggests that short-term deviations in the consumption-wealth ratio will forecast either asset returns or consumption growth: the ¯rst when changes in wealth are transitory; the second when changes in wealth are permanent. Our approach uncovers a richer and more complex dynamics in the consumption-wealth ratio than previous results in the literature, whilst being in accordance with theoretical predictions of a simple model of consumption under uncertainty.
    Keywords: Consumption; Financial markets; Uncertainty; Forecast; Markov switching
    JEL: C32 C5 E21 E44 G10
    Date: 2007
  32. By: Jean-François Goux (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines]); Charbel Cordahi (Université Saint Esprit de Kaslik (USEK) - [Université Saint Esprit de Kaslik (USEK)])
    Abstract: We show that an American monetary shock wields an influence, though limited, over the Lebanese output in accordance with the literature advances. However, as we are waiting for a stronger transmission of U.S. short-term rates to Lebanese short-term rates, we notice that this transmission is weak in the first year. The result can be explained by the presence of pricing-to-market. After the end of the first year, we find the traditional result where the increase in the American interest rate is transmitted integrally to the Lebanese interest rate. We recognize this phenomenon as the dollarization effect.
    Keywords: interest rate; International transmission; law of one price; monetary shock; purchasing power parity
    Date: 2007–07
  33. By: Tuesta Vicente (Banco Central de Reserva del Perú)
    Abstract: Este documento resume los conceptos que sustentan la independencia del banco central (IBC) así como la evidencia empírica reciente respecto a los índices de IBC para el Banco Central de Reserva del Perú (BCRP). En particular, se describe cómo han evolucionado tanto la independencia legal (de jure) del BCRP así como sus componentes (independencia económica e independencia política) en comparación con los índices de otros países de la región y de la OECD. Adicionalmente, en línea con Cukierman (2007), se construye un índice de independencia efectiva (IIE) del BCRP (1994- 2007) el cual diverge del índice de independencia legal. Los resultados son los siguientes: En general, los índices de independencia legal reportan una mejora importante a partir de los 90´s en el Perú y las economías de la región. En el caso peruano, la mejora en el índice ha sido liderada principalmente por la mayor independencia económica. A pesar de que la independencia legal no ha cambiado desde el año 1993, la adopción del régimen de metas explícitas de inflación desde el año 2002, el uso de la tasa de interés de referencia como instrumento de política y una política fiscal menos pro-cíclica, han contribuido a alcanzar un mayor índice de independencia efectiva entre los años 1998 y 2007. La mayor independencia efectiva del BCRP es un elemento adicional que sustenta el éxito del BCRP en mantener inflaciones bajas, consistente con su objetivo de preservar la estabilidad de precios.
    Keywords: Independencia del Banco Central, Inflación
    JEL: E42 E58
    Date: 2007–08
  34. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Pablo F. Salvador (Universitat Autònoma de Barcelona and Universitat Pompeu Fabra)
    Abstract: This paper takes a fresh look at the analysis of labour market dynamics and argues that capital accumulation plays a fundamental role in shaping unemployment movements. This role has generally been examined by considering indirect transmission channels of the capital stock effects, i.e. using variables like interest rates or investment ratios in the estimation of single-equation unemployment rate models. Here we advocate a different approach. We directly estimate the effects of capital stock in the labour market by applying the chain reaction theory of unemployment, and we find that capital stock is a major determinant of unemployment in the Nordic countries. In particular, the different unemployment experiences of these economies derive from the temporary (albeit prolonged) negative shocks to capital stock growth in Denmark and Sweden, and the permanent downturn of capital stock growth in Finland. We are thus able to explain why the crisis of the early 1990s had a more acute impact in Finland than in its twin economy, Sweden.
    Keywords: unemployment dynamics, chain reaction theory, capital accumulation, Nordic countries
    JEL: E22 E24 J21
    Date: 2007–09
  35. By: Serwa, Dobromił
    Abstract: We propose a method for calculating the macroeconomic costs of banking crises that controls for the downward impact of recessions on banking activity. In contrast to earlier research, we estimate the cost of crises based on the size of banking crises. The extent of a crisis is measured using banking sector aggregates. The results, based on our method and data from over 100 banking crises, suggest that the size of a crisis matters for economic growth. Lower credit, deposit and money growth during crises cause GDP growth to decline.
    Keywords: banking crises; costs; output growth; event-study
    JEL: G21 E51 C32 G15
    Date: 2007
  36. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE); Maria Joana Soares (Universidade do Minho - Departamento de Matemática); Nuno Azevedo (Universidade do Porto - Faculdade de Ciências)
    Abstract: Economic agents simultaneously operate at different horizons. Many economic processes are the result of the actions of several agents with different term objectives. Therefore, economic time-series is a combination of components operating on different frequencies. Several questions about the data are connected to the understanding of the time-series behavior at different frequencies. While Fourier analysis is not appropriate to study the cyclical nature of economic time-series, because these are rarely stationary, wavelet analysis performs the estimation of the spectral characteristics of a time-series as a function of time. In spite of all its advantages, wavelets are hardly ever used in economics. The purpose of this paper is to show that cross wavelet analysis can be used to directly study the interactions different time-series in the time-frequency domain. We use wavelets to analyze the impact of interest rate price changes on some macroeconomic variables: Industrial Production, Inflation and the monetary aggregates M1 and M2. Specifically, three tools are utilized: the wavelet power spectrum, wavelet coherency and wavelet phase-difference. These instruments illustrate how the use of wavelets may help to unravel economic time-frequency relations that would otherwise remain hidden.
    Keywords: Monetary policy, time-frequency analysis, non-stationary time series, wavelets, cross wavelets, wavelet coherency.
    Date: 2007
  37. By: Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - [CNRS : UMR7017] - [Université Panthéon-Assas - Paris II]); Romain Restout (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive.
    Keywords: current account; government spending; nontraded goods; temporary shocks
    Date: 2007–09
  38. By: Heather Anderson; Mardi Dungey; Denise R. Osborn; Farshid Vahid
    Abstract: Time series analysis for the Euro Area requires the availability of sufficiently long historical data series, but the appropriate construction methodology has received little attention. The benchmark dataset, developed by the European Central Bank for use in its Area Wide Model (AWM), is based on fixed-weight aggregation across countries with historically distinct monetary policies and financial markets of varying international importance. This paper proposes a new methodology, based on the historical distance from monetary integration between core and periphery countries, for producing back-dated monetary and financial series for the Euro Area. The impact of using the new methodology versus the AWM data is illustrated through a structural VAR analysis and estimates of an international DSGE model. An important advantage of the new methodology is that it can be applied to develop appropriate series as new member countries join the Euro Area.
    JEL: C82 C43 E58
    Date: 2007–10
  39. By: Darmoul Mokhtar (Centre d'Economie de la Sorbonne); Nizar Harrathi (LEGI - Ecole Polytechnique de Tunis)
    Abstract: In this article, we examine the intradaily Euro-dollar exchange rate volatility persistence result from the dissymmetric impact of monetary policy signals stemming from the ECB Council and the FOMC. A model is constructed by extending the AR(1)-GARCH (1,1) to an exponential process EGARCH (1,1), using high-frequency data (five minutes frequency) which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. It is found that, unlike the equity market, the best volatility predictions are derived from the EGARCH(1,1) process.
    Keywords: Exchange rate, official intervention, monetary policy, GARCH models.
    JEL: C22 E52 F31 G15
    Date: 2007–06
  40. By: Reiner Martin (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Ludger Schuknecht (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Isabel Vansteenkiste (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
    Abstract: Numerous countries have experienced boom-bust episodes in asset prices in the past 20 years. This study looks at stylised facts and conducts statistical and econometric analysis for such episodes, distinguishing between industrialised countries that experienced external adjustment (via real effective exchange rate depreciation during busts) and those that relied on an internal adjustment process (and experienced no depreciation). The study finds that different adjustment experiences are correlated with the degree of macroeconomic imbalances and balance sheet problems. Internal adjustment seems more prevalent when financial vulnerabilities, excess demand and competitiveness loss remain relatively contained in the boom. In the bust, internal adjusters experience more protracted but less deep downturns than external adjusters as imbalances unwind more slowly. Some Central and East European EU Member States are currently experiencing strong credit and asset price growth in conjunction with rapid economic expansion. Against this background the experience of other countries may raise awareness of related policy challenges. JEL Classification: E32, E63, E65.
    Keywords: Booms and busts, external and internal adjustment, exchange rates, financial imbalances, competitiveness.
    Date: 2007–09
  41. By: Aloisio Pessoa de Araújo (EPGE/FGV); Marcia Leon; Rafael Santos
    Date: 2007–09
  42. By: Martin S. Feldstein
    Abstract: The housing sector is now (September 2007) at the root of three distinct but related problems: (1) a sharp decline in house prices and the related fall in home building; (2) a subprime mortgage problem that has triggered a substantial widening of all credit spreads and the freezing of much of the credit markets; and (3) a decline in home equity loans and mortgage refinancing that could cause greater declines in consumer spending. Each of these could by itself be powerful enough to cause an economic downturn. The combination could cause a very serious recession unless there are other offsetting forces. In this paper, I discuss each of these and then comment on the implications for monetary policy.
    JEL: E3 E4
    Date: 2007–10
  43. By: Vítor Castro (Universidade do Minho - NIPE)
    Abstract: Several studies have identified the factors that cause public deficits in industrial democracies. They consider that economic, political and institutional factors play an important role in the understanding of those deficits. However, the study of the determinants of excessive deficits remains practically unexplored. Since excessive deficits can have large negative spillover effects when countries are forming a monetary union without a centralised budget – as it is the case for a group of European countries – this paper tries to explore that gap in the literature by identifying the main causes of excessive deficits and the ways of avoiding them. Binary choice models are estimated over a panel of 15 European Union countries for the period 1970-2006, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results show that a weak fiscal stance, low economic growth, the timing of parliamentary elections and majority left-wing governments are the main causes of excessive deficits in the EU countries. Moreover, the institutional constraints imposed after Maastricht over the EU countries’ fiscal policy have succeeded in reducing the probability of excessive deficits in Europe, especially in small countries. Therefore, this study concludes that supranational fiscal constraints, national efforts to reduce public debts, growth promoting policies and mechanisms to avoid political opportunism and partisan effects are essential factors for an EU country to avoid excessive deficits. Finally, the results presented in this paper raise the idea that a good strategy for the EU countries to avoid excessive deficits caused by the opportunistic behaviour of their policymakers would be to schedule elections for the beginning or the end of the year.
    Keywords: Excessive public deficits; European Union; Political opportunism; Binary choice models
    JEL: E62 H6 O52
    Date: 2007
  44. By: Fabbri, Giorgio; Iacopetta, Maurizio
    Abstract: We present an application of the Dynamic Programming (DP) and of the Maximum Principle (MP) to solve an optimization over time when the production function is linear in the stock of capital (Ak model). Two views of capital are considered. In one, which is embraced by the great majority of macroeconomic models, capital is homogeneous and depreciates at a constant exogenous rate. In the other view each piece of capital has its own finite productive life cycle (vintage capital). The interpretation of the time patterns of macroaggregates is quite different between the two cases. A technological shock generates an oscillatory movement in the time pattern of per capita output when capital has a vintage structure; conversely an instantaneous adjustment with no transitional dynamics occurs when capital is homogeneous. From a methodological point of view it emerges that the DP approach delivers sharper results than the MP approach (for instance it delivers a closed form solution for the optimal investment strategy) under slacker parameter restrictions. Cross-time and cross-country data on investments, income, and consumption drawn from the Penn World Table version 6.2 are used to evaluate the vintage and standard Ak model.
    Keywords: Vintage Capital; Penn World Table; Maximum Principle; Hilbert Space.
    JEL: E37 C61 E22 O47 O41
    Date: 2007–09–25
  45. By: Frederic S. Mishkin
    Abstract: This paper reviews the progress that the science of monetary policy has made over recent decades. This progress has significantly expanded the degree to which the practice of monetary policy reflects the application of a core set of "scientific" principles. However, there remains, and will likely always remain, elements of art in the conduct of monetary policy.
    Date: 2007
  46. By: Ariel Burstein; Christian Hellwig
    Abstract: Pricing complementarities play a key role in determining the propagation of monetary disturbances in sticky price models. We propose a procedure to infer the degree of firm-level pricing complementarities in the context of a menu cost model of price adjustment using data on prices and market shares at the level of individual varieties. We then apply this procedure by calibrating our model (in which pricing complementarities are based on decreasing returns to scale at the variety level) using scanner data from a large grocery chain. Our data is consistent with moderately strong levels of firm-level pricing complementarities, but they appear too weak to generate much larger aggregate real effects from nominal shocks than a model without these complementarities.
    JEL: E3
    Date: 2007–09
  47. By: David Jamieson Bolder; Shudan Liu
    Abstract: The primary objective of this paper is to compare a variety of joint models of the term structure of interest rates and the macroeconomy. To this end, we consider six alternative approaches. Three of these models follow from the work of Diebold and Li (2003) with a generalization in Bolder (2006). The fourth model is a regression-based approach motivated entirely by empirical considerations. The fifth model follows from the seminal work of Ang and Piazzesi (2003), who suggest a joint macro-finance model in a discrete-time affine setting. The final model, which we term an observed-affine model, represents an adjustment to the Ang-Piazzesi model that essentially relaxes restrictions on the state-variable dynamics by making them observable. The observed-affine model is similar in spirit to work by Colin-Dufresne, Goldstein, and Jones (2005) and Cochrane and Piazzesi (2006). Using monthly Canadian data from 1973 to 2005, we compare each of these models in terms of their out-of-sample ability to forecast the transition density of zero-coupon rates. We also examine a simple approach aimed at permitting a subset of the parameters in the non-affine models to vary over time. We find, similar to Bolder (2006), that the Diebold and Li (2003) motivated approaches provide the most appealing modelling alternative across our different comparison criteria.
    Keywords: Interest rates; Econometric and statistical methods; Financial markets
    JEL: C0 C6 E4 G1
    Date: 2007
  48. By: Louis Morel
    Abstract: The author investigates the direct effect of Chinese imported goods on consumer prices in Canada. On average, over the 2001-06 period, the direct effect of consumer goods imported from China is estimated to have reduced the inflation rate by about 0.1 percentage points per year. This disinflationary effect is due to two causes: first, the Chinese share of Canadian imports of consumer goods has been increasing rapidly in recent years, and second, the price of these goods is much lower in China than it is among Canada's other import sources, as well as domestic producers. Chinese goods will continue to have a disinflationary impact on Canadian prices as long as the price of these goods remains lower than what can be produced in Canada, or by other trading partners, and as long as the Chinese share of Canadian imports continues to increase.
    Keywords: Inflation and prices
    JEL: E31
    Date: 2007
  49. By: Cavalcanti, Tiago; Tavares, José
    Abstract: Gender-based discrimination is a pervasive and costly phenomenon. To a greater or lesser extent, all economies present a gender wage gap, associated with lower female labour force participation rates and higher fertility. This paper presents a growth model where saving, fertility and labour market participation are endogenously determined, and there is wage discrimination. The model is calibrated to mimic the performance of the U.S. economy, including the gender wage gap and relative female labour force participation. We then compute the output cost of an increase in discrimination, to find that a 50 percent increase in the gender wage gap leads to a decrease in income per capita of a quarter of the original output. We then compile independent estimates of the female to male earnings ratio for a wide cross-section of countries to construct a new economy, in line with the benchmark U.S. economy, except for the degree of discrimination. We compare the level of output per capita predicted by this model economy with the actual output per capita for each country. Higher discrimination leads to lower output per capita for two reasons: a direct decrease in female labour market participation and an indirect effect through an increase in fertility. We find that for several countries a large fraction of the actual difference in output per capita between the U.S. and the different economies is due to gender inequality. For countries such as Ireland and Saudi Arabia, wage discrimination actually explains all of the output difference with the U.S. Moreover, we find that the increase in fertility due to discrimination is responsible for almost half of the decrease in output per capita, and equivalent to the direct decrease in output due to lower female participation. Our basic model suggests the costs of gender discrimination are indeed quite substantial and should be a central concern in any macroeconomic policy aimed at increasing output per capita in the long-run.
    Keywords: Economic Development; Female Labour Force Participation; Fertility; Gender Inequality
    JEL: E0 J1 O1
    Date: 2007–09
  50. By: Marco S. Matsumura
    Abstract: We use macro finance models to study the interaction between macro variables and the Brazilian sovereign yield curve using daily data. We calculate the model implied default probabilities and a measure of the impact of macro shocks on the probabilities. An extension of the Dai-Singleton identification strategy for Gaussian models with latent and observable factors is described in order to estimate our models. Among the tested variables, VIX is the most important macro factor affecting short term bonds and default probabilities and the Fed short rate is the most important factor affecting the long term default probabilities.
    Date: 2006–12
  51. By: V. V. Chari; Patrick J. Kehoe
    Abstract: Here we reply to Robert Solow’s comment (forthcoming) on our work (Chari and Kehoe (2007)).
    Keywords: Macroeconomics
    Date: 2007
  52. By: Daniel L. Thornton
    Abstract: In February 2005, former Chairman Alan Greenspan referred to the decline in long-term rates in the wake of the Fed increasing the target for the federal funds rate by 150 basis points as a “conundrum.” Greenspan’s remarks generated considerable interest and research. I show that the relationship between the 10 year Treasury yield and the federal funds rate changed dramatically in the late 1980s, well in advance of Greenspan’s observation. I argue that the marked change in the relationship between the federal funds rate and long-term yields is a natural consequence of Goodhart’s Law.
    Date: 2007
  53. By: Barrera Carlos (Banco Central de Reserva del Perú)
    Abstract: En los bancos centrales se suele utilizar modelos no estructurales y semi-estructurales para predecir diversas variables, especialmente la inflación, cuyo control es su principal objetivo. El Sistema de Predicción Desagregada (SPD) es un conjunto de modelos SparseVAR no estructurales usados para predecir la inflación IPC y el crecimiento del PBI en el corto plazo. A pesar de que estos modelos logran protecciones de inflación precisión creciente debido a su parsimonia (Barrera(2005)), los estimadores de sus parámetros son sensibles a la presencia de observaciones fuera de patrón previamente establecido (outliers). El trabajo propone un procedimiento robusto multi-ecuacional para ellos y evalúa la ganancia en precisión para una muestra reciente que incluye una secuencia de outliers. Los resultados indican que las proyecciones de inflación IPC de la versión robusta de todos los modelos SparseVAR robustos logran mejorar la precisión para horizontes intermedios respecto a su versión no robusta. Sin embargo, el modelo cuyas proyecciones de inflación no subyacente IPC resultan menos sensibles ante la presencia de esta secuencia de outliers es la versión no robusta de aquél que considera la información del agregado de inflación IPC como la más relevante en todos los componentes, lo que se explicarían por una tendencia a fijar precios asignando temporalmente un mayor peso a la inflación IPC durante periodos típicamente inciertos.
    Keywords: modelos de series temporales, construcción y estimación de modelos, evaluación y selección de modelos, proyección y simulación, política monetaria
    JEL: C32 C51 C52 E37 E52
    Date: 2007–09
  54. By: Marvin Goodfriend (Professor, Carnegie Mellon University (E-mail:
    Abstract: The paper identifies and evaluates consequences for monetary policy of five features of East Asian development: export orientation, integrated regional trade, bank-dependent finance, the potential for persistent trade surpluses, and the aggressive accumulation of international reserves. The case for a flexible exchange rate is made in terms of the New Neoclassical Synthesis (NNS). NNS logic indicates why fluctuations in "export optimism" create problems for the sustainability of a fixed exchange rate. Cooperative credit policy in East Asia is discussed by analogy to a credit union. The paper outlines problems for monetary policy created by bank-dependent finance in East Asia. A two- country NNS model indicates that a revaluation of the RMB against the dollar is likely to exert little effect on the US trade deficit, although it should help control inflation in China. The paper argues that China can adopt a flexible exchange rate in a few years with modest reforms of its banking system. Finally, the paper considers various reasons for the accumulation of international reserves in East Asia.
    Keywords: East Asia, Monetary Policy, Banking Policy, Exchange Rates, Trade Balance, International Reserves
    JEL: F3 F4
    Date: 2007–09
  55. By: Pedro M. G. Martins (Visiting IPC Researcher, Institute for Development Studies, Sussex)
    Keywords: Fiscal; Impact; Aid; Flows; Evidence; Ethiopia; Poverty
    Date: 2007–09
  56. By: George-Marios Angeletos; Guido Lorenzoni; Alessandro Pavan
    Abstract: Financial markets look at data on aggregate investment for clues about underlying profitability. At the same time, firms' investment depends on expected equity prices. This generates a two-way feedback between financial market prices and investment. In this paper we study the positive and normative implications of this interaction during episodes of intense technological change, when information about new investment opportunities is highly dispersed. Because high aggregate investment is "good news" for profitability, asset prices increase with aggregate investment. Because firms' incentives to invest in turn increase with asset prices, an endogenous complementarity emerges in investment decisions -- a complementarity that is due purely to informational reasons. We show that this complementarity dampens the impact of fundamentals (shifts in underlying profitability) and amplifies the impact of noise (correlated errors in individual assessments of profitability). We next show that these effects are symptoms of inefficiency: equilibrium investment reacts too little to fundamentals and too much to noise. We finally discuss policies that improve efficiency without requiring any informational advantage on the government's side.
    JEL: E2 G1 G3
    Date: 2007–10
  57. By: Pedro Humberto Bruno de Carvalho Jr.
    Abstract: This paper intends to analyze the fiscal, distributive and extra-fiscal aspects of the Brazilian Real State Tax. The paper shows that the collection level of this tax in Brazil (1,21% of the GDP in 2002) is lower than in most developed countries (between 1,5% and 4,5% of theirs GDP) and that the poorest taxpayer loose a bigger portion of their income with this tax than the richest ones. The analysis of 16 Brazilians cities showed that the implementation of progressive taxes improved the distributive aspect of the tax. The existing official information about the real states is generally outdated and the system of evaluations is regressive and made with poor technique. The paper also estimated that only 60% of urban real states in Brazil are registered. The econometric model pointed out that the variables: municipal per capita yield, level of urbanization, per capita spend in habitation and urbanization and localization of the city have a positive effect in the collection level and, on the other hand, the level of per capita government transfer has negative impact.
    Date: 2006–12
  58. By: Hvide, Hans K; Møen, Jarle
    Abstract: If entrepreneurs are liquidity constrained and cannot borrow to operate on an efficient scale, those with more personal wealth should do better than those with less wealth. We investigate this hypothesis using a unique datset from Norway. Consistent with liquidity constraints being present, we find a strong positive relationship between founder prior wealth and start-up size. The relationship between prior wealth and start-up performance, as measured by profitability on assets, increases for the main bulk of the wealth distribution and decreases sharply at the top. We estimate that profitability on assets increases by about 8 percentage points from the 10th to the 75th percentile of the wealth distribution. This suggests an entrepreneurial production function with a region of increasing returns. Liquidity constraints may then stop entrepreneurs from being able to exploit a "hump" in marginal productivity. From the 75th to the 99th percentile returns drops by about 10 percentage points. This suggests that an abundance of liquidity may to do more harm than good.
    Keywords: Entrepreneurship; Household Finance; Private benefits; Start-ups; Wealth
    JEL: E44 G14 L26 M13
    Date: 2007–09
  59. By: Solomon Tadesse; ;
    Abstract: Does a financial system architecture anchored on banks better than one centered on markets in fostering technological innovations as engine of growth? In a panel of industrial sectors across a large cross section of countries, I find that while market-based systems have a general positive effect on innovations in all economic sectors, bank-based systems foster more rapid technological progress in more informationintensive industrial sectors, suggesting a heterogeneous impact of financial architecture. Thus, the relative performance of bank-based systems vis-à-vis market-based systems depends on the industrial structure of the economy.
    Keywords: Technological Progress, Innovation, Intangible Assets, Financial System Architecture, Bank-Based System, Market-Based System
    JEL: G1 G21 G32 E44 O14 O31 O34 O4
    Date: 2007–06–01
  60. By: Espen Erlandsen; Jens Lundsgaard
    Abstract: The economic crisis in the early 1990s prompted action on reforming the Swedish welfare state and its institutions, including deregulation of a wide range of product markets. In that way, Sweden took early action compared to other OECD countries currently struggling with how to make public finances more robust in an ageing context. The reforms that were implemented during the 1990s are now paying off in terms of productivity and GDP growth. Empirical evidence suggests that deregulation has delivered a considerable “productivity dividend”. Although significant progress therefore has been made, renewed regulatory reform is needed to safeguard Sweden’s ambitious public policy goals. Efforts should focus on improving enterprise formation and labour utilisation, as well as on providing better value for money in the public sector by raising its efficiency and delivering high quality services. <P>Comment les réformes réglementaires en Suède ont stimulé la productivité <BR>La crise économique du début des années 90 a servi de catalyseur pour la réforme de l’État providence suédois, qui s’est aussi accompagnée par une vaste libéralisation de des marchés des produits. Ce faisant, la Suède a agi de manière précoce comparée à d'autres pays de l’OCDE qui peinent à trouver une solution pour assainir les finances publiques dans le contexte du vieillissement de la population. Les réformes mises en oeuvre au cours des années 90 se sont révélées payantes en termes de productivité et de croissance du PIB. Les données disponibles suggèrent que la déréglementation s’est soldée par un « dividende de productivité » considérable. Malgré d’importants progrès dans ce domaine, de nouvelles réformes réglementaires sont nécessaires afin de sauvegarder les objectifs de politique publique ambitieux de la Suède. Il faudrait se concentrer sur l’amélioration des conditions de création d’entreprise et une meilleure utilisation de la main d’oeuvre, en plus d’une meilleure valeur ajoutée dans le secteur public en augmentant son efficacité et la qualité des services fournis.
    Keywords: product market regulation, network industries, industrie de réseau, regulatory reforms, réforme réglementaire
    JEL: D40 E20 E60 F40 H11 H40 H60 J20 L11 L50 L51 L53 O47
    Date: 2007–09–24
  61. By: Solomon Tadesse; ;
    Abstract: Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector.
    Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation
    JEL: G1 G21 G32 E44 O14 O31 O34 O4
    Date: 2007–06–01
  62. By: Larrain B., Felipe; Tavares, José
    Abstract: The economics literature provides ample evidence that higher corruption discourages FDI inflows. In this paper we address, for the first time in the literature in a systematic way, the exact reverse link, i.e., the empirical effect of FDI inflows on corruption. We present a simple model that illustrates the two-way relationship between foreign direct investment and corruption, identifying exactly the direction of causality that we address: how do “exogenous“ variations in FDI affect the degree of corruption in the host country. Our dataset covers a wide group of countries for the period 1981 – 2000, and we confront the issue of causality by constructing an original set of instrumental variables relying on geographical and cultural distance between FDI source and host countries to measure exogenous time-varying changes in FDI inflows. We find that FDI inflows (as a share of GDP) significantly decrease corruption in the host country. The quantitative impact of FDI inflows on corruption is stronger than the impact of trade openness and tariff rates on corruption and is validated by the use of instrumental variables. The results are robust to the inclusion of several determinants of openness, in addition to trade intensity and the average tariff level, including dependence on natural resources, ethnic fractionalization, size of the economy and government expenditure. Quantitatively, the impact of FDI inflows on corruption is of the same order of magnitude as the impact of per capita income on corruption.
    Keywords: Corruption; Foreign Direct Investment; Instrumental Variables; International Trade; Tariffs
    JEL: E5 F10 F13 F30 H10
    Date: 2007–09

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