nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒10‒20
68 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary policy, expected inflation and inflation risk premia By Ravenna , Federico; Seppälä, Juha
  2. Two Reasons Why Money and Credit May be Useful in Monetary Policy By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  3. Nominal Rigidities and The Real Effects of Monetary Policy in a Structural VAR Model By Pham The Anh
  4. Endogenous Indexing and Monetary Policy Models By Mash, Richard
  5. Interest Rate Rules and Welfare in Open Economies By Ozge Senay
  6. Modelling Inflation in Croatia By Maruška Vizek; Tanja Broz
  7. Monetary Policy and Swedish Unemployment Fluctuations By Alexius, Annika; Holmlund, Bertil
  8. Monetary policy in the New-Keynesian model: An application to the Euro-Area By Moons C.; Garretsen H.; Van Aarle B.; Fornero J.
  9. Monetary Policy Shocks in the Euro Area and Global Liquidity Spillovers By Joao Sousa; Andrea Zaghini
  10. Os mecanismos de transmissão da política monetária: uma abordagem teórica By Cláudio Gontijo
  11. Is Unemployment More Costly Than Inflation? By David G. Blanchflower
  12. Searching for Fiscal Effects: A VECM model of Household Consumption Expenditures By erdogdu, oya
  13. The External Finance Premium and the Macroeconomy: US post-WWII Evidence By F. DE GRAEVE
  14. The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe By Carlos Marinheiro
  15. Aggregating Phillips Curves By Jean Imbs; Eric Jondeau; Florian Pelgrin
  16. Technology Shocks and Employment in Open Economies By Tervala, Juha
  17. Unmeasured Investment and the Puzzling U.S. Boom in the 1990s By Ellen R. McGrattan; Edward C. Prescott
  18. A microfounded sectoral model for open economies By Plasmans J.; Fornero J.; Michalak T.
  19. Accession to the Euro-Area: A Stylized Analysis Using a NK Model By Van Aarle B.; Garretsen H.; Moons C.
  20. A Model of an Optimum Currency Area By Ricci, Luca Antonio
  21. House Prices, Real Estate Returns and the Business Cycle By Ivan Jaccard
  22. A Simple Business-Cycle Model with Shumpeterian Features By Costa, Luís F.; Dixon, Huw
  23. Prices and Market Shares in a Menu Cost Model By Burstein, Ariel Tomas; Hellwig, Christian
  24. Why are the Effects of Recent Oil Price Shocks so Small? By Torsten Schmidt; Tobias Zimmermann
  25. What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve? By Álvarez, Luis J.
  26. Financial fragility, macroeconomic shocks and banks’ loan losses: evidence from Europe By Pesola, Jarmo
  27. News and Business Cycles in Open Economies By Jaimovich, Nir; Rebelo, Sérgio
  28. Learning in Real Time: Theory and Empirical Evidence from the Term Structure of Survey Forecasts By Patton, Andrew J; Timmermann, Allan G
  29. The Political Economy of EDP Fiscal Forecasts: An Empirical Assessment By Álvaro Pina; Nuno Venes
  30. Actual versus Perceived Central Bank Transparency: The Case of the European Central Bank By Cruijsen, C. van der; Eijffinger, S.C.W.
  31. On-the-Job Search Over the Business Cycle By Giuseppe Tattara; Marco Valentini
  32. The Shrinking Endogeneity of Optimum Currency Areas Criteria: Evidence from the European Monetary Union – A Beta Regression Approach. By João Silvestre; António Mendonça; José Passos
  33. Production Constraints and the NAIRU By Driver, Ciaran; Hall, Stephen G.
  34. The Consumption-Wealth Ratio Under Asymmetric Adjustment By Vasco Gabriel; Fernando Alexandre; Pedro Bação
  35. Capital Accumulation and Unemployment: New Insights on the Nordic Experience By Marika Karanassou; Hector Sala; Pablo F. Salvador
  36. The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment By Bokan, Nikola; Hughes Hallett, Andrew
  37. Corporatism and Macroeconomic Stabilization Policies By Caeyers B.; Pauwels W.
  38. Consumer Credit, Liquidity, and Monetary Policy: May the Lending Channel (finally) Rest in Peace By Ryan R. Brady
  39. A Chronology Of Postwar U.S. Federal Income Tax Policy By Shu-Chun Susan Yang
  40. New Eurocoin: Tracking Economic Growth in Real Time By Filippo Altissimo; Riccardo Cristadoro; Mario Forni; Marco Lippi; Giovanni Veronese
  41. What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic. By António Afonso; Christophe Rault
  42. Oil supply news in a VAR: Information from financial markets By Alessio Anzuini; Patrizio Pagano; Massimiliano Pisani
  43. Asset Pricing, Habit Memory And The Labor By Ivan Jaccard
  44. Demanda efetiva, conflito distributivo e regime de acumulação em um modelo estruturalista de ciclo: os casos britânico e turco By Raphael Rocha Gouvêa; Gilberto A. Libânio
  45. Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations By Christian Ewerhart; Nuno Cassola; Natacha Valla
  46. Uma Análise de Credibilidade na Política Fiscal Brasileira By Manoel Carlos de Castro Pires
  47. L’étude des cycles de KONDRATIEFF nous permet-elle d’en savoir plus sur la nature sociale de la monnaie ? By Philippe Jourdon
  48. Wealth Inequality and Credit Markets: Evidence from Three Industrialized Countries By Bruckner, Markus; Gerling, Kerstin; Grüner, Hans Peter
  49. The cyclical behaviour of job and worker flows By Giuseppe Tattara; Marco Valentini
  50. Finance and Efficiency: Do Bank Branching Regulations Matter? By Viral V. Acharya; Jean Imbs; Jason Sturgess
  51. Forecasting the Yield Curve Using Priors from No Arbitrage Affine Term Structure Models By Andrea Carriero
  52. The Total Fiscal Cost of Indirect Taxation: an Approximation Using Catalonia's Recent Input-output Table By Ferran Sancho
  53. Modeling the Effects of Financial Constraints on Firm´s Investment By Tomat, Gian Maria
  54. A Causal Framework for Credit Default Theory By Wilson Sy
  55. Notas críticas sobre a macroeconomia novo-keynesiana By Cláudio Gontijo
  56. Real exchange rate dynamics in Macedonia: Old wisdoms and new insights By Bogoev, Jane; Terzijan, Sultanija Bojceva; Petrovska, Magdalena
  57. BNew Developments in the Australian Labour Market in 2006 By O'Brien, Martin; Valadkhani, Abbas; Waring, Peter; Denniss, Richard
  58. Uma Aplicação da Lei de Okun em Portugal By João Sousa Andrade
  59. Capital/Labor Substitution, Capital Deepening, and FDI By Juergen Antony
  61. Optimal Unemployment Insurance in Labor Market Equilibrium when Workers can Self-Insure By Reichling, Felix
  62. L’Intégration Européenne et la Soutenabilité Externe de l’Union Européenne: une application de la thèse de Feldstein-Horioka By João Sousa Andrade
  63. Political budget cycles and social security budget increases in the Republic of Ireland, 1923-2005 By Cousins, Mel
  64. Net Capital Stock and Capital Productivity for China and Regions: 1960-2005. An Optimal Consistency Method By Jose Miguel Albala-Bertrand
  65. Central Banks and Payment Instruments: a Serious Case of Schizophrenia By VAN HOVE, Leo
  66. Welfare effects of financial integration By Fecht, Falko; Grüner, Hans Peter; Hartmann, Philipp Christian Heinrich
  67. Economic Integration and the Co-movement of Stock Returns By Morgado, Pedro; Tavares, José
  68. Comparison of personal income inequality estimates based on data from the IRS and Census Bureau By Kitov, Ivan

  1. By: Ravenna , Federico (University of California, Department of Economics.); Seppälä, Juha (University of Illinois, Department of Economics)
    Abstract: Within a New Keynesian business cycle model, we study variables that are normally unobservable but are very important for the conduct of monetary policy, namely expected inflation and inflation risk premia. We solve the model using a third-order approximation that allows us to study time-varying risk premia. Our model is consistent with rejection of the expectations hypothesis and the business-cycle behaviour of nominal interest rates in US data. We find that inflation risk premia are very small and display little volatility. Hence, monetary policy authorities can use the difference between nominal and real interest rates from index-linked bonds as a proxy for inflation expectations. Moreover, for short maturities current inflation is a good predictor of inflation risk premia. We also find that short-term real interest rates and expected inflation are significantly negatively correlated and that short-term real interest rates display greater volatility than expected inflation. These results are consistent with empirical studies that use survey data and index-linked bonds to obtain measures of expected inflation and real interest rates. Finally, we show that our economy is consistent with the Mundell-Tobin effect: increases in inflation are associated with higher nominal interest rates, but lower real interest rates.
    Keywords: term structure of interest rates; monetary policy; expected inflation; inflation risk premia; Mundell-Tobin effect
    JEL: E43 E44 E50 G12
    Date: 2007–10–11
  2. By: Lawrence Christiano; Roberto Motto; Massimo Rostagno
    Abstract: We describe two examples which illustrate in different ways how money and credit may be useful in the conduct of monetary policy. Our first example shows how monitoring money and credit can help anchor private sector expectations about inflation. Our second example shows that a monetary policy that focuses too narrowly on inflation may inadvertently contribute to welfare-reducing boom-bust cycles in real and financial variables. The example is of some interest because it is based on a monetary policy rule fit to aggregate data. We show that a policy of monetary tightening when credit growth is strong can mitigate the problems identified in our second example.
    JEL: E41 E44 E52 E58
    Date: 2007–10
  3. By: Pham The Anh (Department of Economics, National Economics University, Vietnam)
    Abstract: The paper proposes an empirical VAR for the UK open economy in order to measure the effects of monetary policy shocks from 1981 to 2003. The identification of the VAR structure is based on short-run restrictions that are consistent with the general implications of a New Keynesian model. The identification scheme used in the paper is successful in identifying monetary policy shocks and solving the puzzles and anomalies regarding the effects of monetary policy shocks. The estimated dynamic impulse responses and the forecast error variance decompositions show a consistency with the New Keynesian approach and other available theories.
    Keywords: Structural VAR; Nominal Rigidities; Monetary Policy Shocks; New Keynesian Theory
    JEL: C30 E30 E32 E52
    Date: 2007–06
  4. By: Mash, Richard
    Abstract: Models in which firms use a rule of thumb or partial indexing in price setting are prominent in the recent monetary policy literature. The extent to which these firms adjust their prices to lagged inflation has been taken as fixed. We consider the implications of firms choosing the optimal degree of indexation so these simple pricing rules deliver prices as close as possible to those which would be chosen optimally. We find that the degree of indexation depends on the extent of persistence in the economy such that models with constant indexation are vulnerable to the Lucas critique. We also study the interactions between firms’ price setting and the macroeconomic environment finding that, for the models which appear most plausible on microeconomic grounds, the Nash equilibrium between firms and the policy maker is characterised by zero indexation and zero macroeconomic persistence.
    Keywords: Indexing, Monetary Policy, Phillips Curve, Inflation Persistence, Microfoundations
    JEL: E22 E52 E58
    Date: 2007
  5. By: Ozge Senay
    Abstract: This paper analyses the welfare performance of a set of five alternative interest rate rules in an open economy stochastic dynamic general equilibrium model with nominal rigidities. A rule with a lagged interest rate term, high feedback on inflation and low feedback on output is found to yield the highest welfare for a small open economy. This result is robust across different degrees of openness, different sources of home and foreign shocks, alternative foreign monetary rules and different specifications for price setting behaviour. The same rule emerges as both the Nash and cooperative equilibria in a two-country version of the model.
    Keywords: Welfare, Monetary Policy, Interest Rate Rules, Second Order Approximation.
    JEL: E52 E58 F41
    Date: 2007–10
  6. By: Maruška Vizek; Tanja Broz (The Institute of Economics, Zagreb)
    Abstract: The aim of this paper is to construct a quarterly inflation model for Croatia. In order to model inflation dynamics se use the general-to-specific approach. The advantage of this approach is its ability to deliver results based on underlying economic theories of inflation, which are also consistent with the properties of the data. A two step procedure is followed. In the first step, the long-run sectoral analysis of inflation sources is conducted, yielding long-run determinants of inflation (mark-up, excess money, nominal effective exchange rate and the output gap). In the second step, we estimate an equilibrium error correction model of inflation deploying, among other variables of interest, long-run solutions derived in the first step. The derived model of inflation suggests that mark-up and excess money relationships are very important for explaining the short-run behaviour of inflation, as well as the output gap and nominal effective exchange rate, import prices, interest rates and narrow money. Comparing the results of the model suggests that short-run inflation is more responsive to supply side and exchange rate changes than to monetary conditions.
    Keywords: inflation modelling, cointegration, general-to-specific, Croatia
    JEL: C51 C53 E31 E37
    Date: 2007–06
  7. By: Alexius, Annika; Holmlund, Bertil
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: Unemployment, Monetary policy, structural VARs
    JEL: E24 J60
    Date: 2007
  8. By: Moons C.; Garretsen H.; Van Aarle B.; Fornero J.
    Abstract: This paper analyses monetary policy in a stylized new-Keynesian model. A number of issues are focused upon: (i) optimal monetary policy under commitment or discretion vs. ad-hoc monetary policy based on simple rules, (ii) the effects of fiscal policies and foreign variables on monetary policy, (iii) the effects of fiscal deficit and interest rate smoothing objectives and the amount of forward-looking in the model. The model is estimated for the Euro-Area. Using simulations of the estimated model, it is analyzed how these aspects might affect monetary policy of the ECB and macro-economic fluctuations in the Euro-Area.
    Date: 2007–06
  9. By: Joao Sousa (Banco de Portugal); Andrea Zaghini (Banca d’Italia)
    Abstract: We analyse the international transmission of monetary policy shocks with a focus on the effects of foreign liquidity on the euro area. We estimate two domestic structural VAR models for the euro area and then we introduce a global liquidity aggregate. The impulse responses show that a positive shock to foreign liquidity leads for the euro area to a permanent increases in M3 and in the price level, a temporary rise in real output and a temporary appreciation of the euro real effective exchange rate. Moreover, we find that innovations in global liquidity play an important role in explaining price and output fluctuations.
    Keywords: Monetary policy, Structural VAR, International spillovers
    JEL: E52 F01
    Date: 2007–06
  10. By: Cláudio Gontijo (UFMG)
    Abstract: This article examines critically the dominant theory of the monetary transmission mechanisms. It shows that monetary policy has abandoned the money supply as the instrument for inflationary control in favor of the interest rate. Formed in the market of bank reserves, the basic interest rate represents the opportunity cost of capital, which makes it a variable that affects the value of real and financial assets, impacting the supply of money and credit and, through the "wealth effects" and the availability of credit, the demand for consumption goods, housing and inventories fluctuations, which is the most important variable to explain economic downturns. It shows that the main effects of aggregate demand variations are felt through changes in real output and not in prices. Considering the success of cambial anchoring in curbing high inflation/hyperinflation and the failure of aggregate-demand-based stabilization programs, it concludes that perhaps the main channel through which changes in the interest rate affects the price level is the exchange rate, though the money supply still has a secondary role.
    JEL: E31
    Date: 2007–10
  11. By: David G. Blanchflower
    Abstract: Previous literature has found that both unemployment and inflation lower happiness. This paper extends the literature by looking at more countries over a longer time period. It also considers the impacts on happiness of GDP per capita and interest rates. I find, conventionally, that both higher unemployment and higher inflation lower happiness. Interest rates are also found to enter happiness equations negatively. Changes in GDP per capita have little impact on more economically developed countries, but do have a positive impact in the poorest countries -- consistent with the Easterlin hypothesis. I find that unemployment depresses well-being more than inflation. The least educated and the old are more concerned about unemployment than inflation. Conversely, the young and the most educated are more concerned about inflation. An individual's experience of high inflation over their adult lifetime lowers their current happiness over and above the effects from inflation and unemployment. Unemployment appears to be more costly than inflation in terms of its impact on wellbeing.
    JEL: E24 E31
    Date: 2007–10
  12. By: erdogdu, oya
    Abstract: Consumption expenditure is an important component of aggregate demand. Recent theoretical and empirical studies search for possible Keynesian / Non Keynesian fiscal impacts on household consumption decisions. Besides providing insight to determinants of consumption decisions, these studies also provide guide to policy solutions to high and risky current account deficits and high and persisting inflation rate problems. This empirical study for Turkey is another attempt to search for possible Keynesian fiscal policy effects on private sector consumption decisions. Distinguishing long run and short run affects indicate that expansionary Keynesian impact of fiscal policy on private sector consumption decision is significant only if fiscal policy is sustainable
    Keywords: Consumption; Fiscal Policy; Vector Error Correction Models
    JEL: E21 C32
    Date: 2006
  13. By: F. DE GRAEVE
    Abstract: The central variable of theories of financial frictions -the external finance premium- is unobservable. This paper distils the external finance premium from a DSGE model estimated on US macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate -based solely on non-financial macroeconomic data- picks up over 70% of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected.
    Keywords: external finance premium, financial frictions, DSGE, Bayesian estimation
    JEL: E4 E5 G32
    Date: 2007–09
  14. By: Carlos Marinheiro (GEMF and Faculdade de Economia, Universidade de Coimbra)
    Abstract: Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP as always being accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries after the Maastricht Treaty. This paper concludes that this conclusion resists to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to a decrease in the use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999-2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in the forecast of the output gap, and not the result of a change in the intentions of policy makers. As a result, there is no evidence in favour of the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policy.
    Keywords: Fiscal policy, stabilization, Stability and Growth Pact, institutional arrangements, realtime data
    JEL: E62 H62
    Date: 2007
  15. By: Jean Imbs (University of Lausanne, HEC and Swiss Finance Institute); Eric Jondeau (University of Lausanne, HEC and Swiss Finance Institute); Florian Pelgrin (University of Lausanne, HEC and CIRANO)
    Abstract: The New Keynesian Phillips Curve is at the center of two raging empirical debates. First,vhow can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behavior is relevant to both questions. We detail the conditions under which imposing homogeneityresults in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias.
    Keywords: New Keynesian Phillips Curve, Heterogeneity, Inflation Persistence, Marginal Costs.
    JEL: C10 C22 E31 E52
    Date: 2007–02
  16. By: Tervala, Juha
    Abstract: A growing body of empirical evidence suggests that a positive technology shock leads to a temporary decline in employment. A two-country model is used to demonstrate that the open economy dimension can enhance the ability of sticky price models to account for the evidence. The reasoning is as follows. An improvement in technology appreciates the nominal exchange rate. Under producer-currency pricing, the exchange rate appreciation shifts global demand toward foreign goods away from domestic goods. This causes a temporary decline in domestic employment. If the expenditure-switching effect is sufficiently strong, a technology shock also has a negative effect on output in the short run.
    Keywords: Open economy macroeconomics, technology shocks, employment
    JEL: E24 E32 F41
    Date: 2007
  17. By: Ellen R. McGrattan; Edward C. Prescott
    Abstract: The basic neoclassical growth model accounts well for the postwar cyclical behavior of the U.S. economy prior to the 1990s, provided that variations in population growth, depreciation rates, total factor productivity, and taxes are incorporated. For the 1990s, the model predicts a depressed economy, when in fact the U.S. economy boomed. We extend the base model by introducing intangible investment and non-neutral technology change with respect to producing intangible investment goods and find that the 1990s are not puzzling in light of this new theory. There is compelling micro and macro evidence for our extension, and the predictions of the theory are in conformity with U.S. national products, incomes, and capital gains. We use the theory to compare current accounting measures for labor productivity and investment with the corresponding measures for the model economy with intangible investment. Our findings show that standard accounting measures greatly understate the boom in productivity and investment.
    JEL: E24 E32 O47
    Date: 2007–10
  18. By: Plasmans J.; Fornero J.; Michalak T.
    Abstract: In this paper we derive a microfounded macro New Keynesian model for open economies, be them large or small. We consider habit formation in consumption, sectoral linkages for tradable and non-tradable goods, capital stock investments with variable capital utilization, domestic and foreign governments, imperfect (exchange rate) pass-through in import prices and incomplete international financial markets. Sticky nominal prices and wages are modeled in Calvo and Taylor staggered ways. The model economy is composed of a continuum of infinitely-lived consumers and producers of final and intermediate goods. We provide a very general loglinearization method, from which we can easily obtain various special cases, as trend inflation or steady-state log-linearizations. Numerical simulations of the two-country sectoral model are provided for a relatively large number of structural shocks as domestic and foreign productivity shocks in final tradables and non-tradables, money demand shocks and a shock in the exchange rate. Such a model is well suited for monetary policy analysis at the international level and risk analysis.
    Date: 2006–12
  19. By: Van Aarle B.; Garretsen H.; Moons C.
    Abstract: This paper analyses the accession to the Euro-Area by new members using a stylized new-Keynesian model. We analyze macro-economic adjustment in the pre- and post accession case and calculate welfare in both situations to obtain net benefit/loss from accession. It is shown how the effects of accession is related to the conduct of monetary policy and fiscal policy in the pre- and post accession case. The simulation examples point at the potential costs that accession might entail due its consequences on monetary and fiscal policy design. These consequences from accession in terms of macro-economic stabilization ability of monetary and fiscal policies have not always been fully acknowledged and need attention in our opinion.
    Date: 2007–06
  20. By: Ricci, Luca Antonio
    Abstract: This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, and transactions costs. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Also, prospective member countries do not necessarily agree on whether a given currency union should be created.
    Keywords: Optimum currency areas, cost-benefit analysis, exchange rate regimes, currency union, monetary integration
    JEL: E42 E52 E61 F02 F31 F33 F36 F4 H77 J61
    Date: 2007
  21. By: Ivan Jaccard (Wharton School of Finance)
    Abstract: The main objective of this work is to develop a general equilibrium business cycle model linking financial and real estate markets to the macroeconomy. The ability of a production economy to account simultaneously for asset pricing, business cycle and real estate market facts is then evaluated by comparing the model predictions to the empirical facts. The observed high volatility of house prices, the equity premium and the difference between equity and real estate excess returns can be explained without giving rise to excessive risk-free rate variation.
    Keywords: house prices, real estate returns, equity premium, business cycles, production economies.
    JEL: E30 E22 G12
    Date: 2006–12
  22. By: Costa, Luís F.; Dixon, Huw (Cardiff Business School)
    Abstract: We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new 'prosperity plateau,' but contractionary shocks only affect the market power of mature industries.
    Keywords: Entry; Hysteresis; Mark-up
    JEL: E62 L13 L16
    Date: 2007–10
  23. By: Burstein, Ariel Tomas; Hellwig, Christian
    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 pricing complementarities.
    Keywords: Menu Costs; Nominal Rigidities; Pricing Complementarities
    JEL: E31 E32
    Date: 2007–10
  24. By: Torsten Schmidt; Tobias Zimmermann
    Abstract: Recent oil price shocks have relatively small effects on real economic activity and inflation compared to the experiences of the seventies and the early eighties. In this paper we analyse possible reasons for these phenomena using the example of the German economy. At first, by estimating a VAR-model and calculating impulse responses to an oil price shock it is confirmed that the macroeconomic effects have become much smaller. Moreover, our simulations show that oil price hikes are more closely related to global economic activity since the early nineties.Then, to get a deeper understanding of the structural changes which are responsible for these results we utilize a new Keynesian open economy model. It becomes obvious that the small effects of the recent oil price shocks on the German economy can be explained by a combination of a reduced energy cost share and good luck in terms of a strong growing global economy. Hence, if global economic growth decreases, pure oil price shocks may still have substantial effects on the German economy, even if the energy pricevulnerability has been reduced.These results should be valid also for other oil importing countries, at least from a qualitative point of view.
    Keywords: Oil prices, new Keynesian open economy model
    JEL: E31 E32 F41
    Date: 2007–09
  25. By: Álvarez, Luis J.
    Abstract: The New Keynesian Phillips curve (NKPC) is now the dominant model of inflation dynamics. In recent years, a large body of empirical research has documented price-setting behaviour at the individual level, allowing the assessment of the micro-foundations of pricing models. This paper analyses the implications of 25 theoretical models in terms of individual behaviour and finds that they considerably differ in their ability to match the key micro stylised facts. However, none is available to account for all of them, suggesting the need to develop more realistic micro-founded price setting models.
    Keywords: Pricing models, micro data, Phillips Curve, hazard rate
    JEL: D40 E31
    Date: 2007
  26. By: Pesola, Jarmo (Bank of Finland Research)
    Abstract: This paper tests the hypothesis that the more fragile a banking system is, the more likely it is to experience problems when an unexpected shock hits. The empirical framework where this test is conducted is a reduced form model, where macroeconomic factors explain banks’ loan losses. The dependent variable is the ratio of net loan losses to lending in a panel comprising the banking sectors of nine sample countries. An econometric model is estimated on pooled annual data mostly covering the period from the early 1980s to 2002. There are three separate explanatory terms. Two of these include a surprise change both in incomes and real interest rates. Both form a separate cross-product term with lagged aggregate indebtedness. The lagged dependent variable is the third explanatory term possibly capturing the feedback effect from loan losses back to the real economy. The underlying macroeconomic account that this paper puts forward is that loan losses seem basically to be generated by strong adverse aggregate shocks under high exposure of banks to such shocks. The model has been used in connection with stress testing in the Bank of Finland.
    Keywords: financial fragility; unexpected macroeconomic shock; loan loss; stress test
    JEL: E44 G21
    Date: 2007–10–09
  27. By: Jaimovich, Nir; Rebelo, Sérgio
    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 labour supply, adjustment costs to labour, and/or investment, and whenever the real interest rate faced by the economy rises with the level of net foreign debt.
    Keywords: comovement; news; open economy
    JEL: F4
    Date: 2007–10
  28. By: Patton, Andrew J; Timmermann, Allan G
    Abstract: We develop a theoretical framework for understanding how agents form expectations about economic variables with a partially predictable component. Our model incorporates the effect of measurement errors and heterogeneity in individual forecasters' prior beliefs and their information signals and also accounts for agents' learning in real time about past, current and future values of economic variables. We use the model to develop insights into the term structure of forecast errors, and test its implications on a data set comprising survey forecasts of annual GDP growth and inflation with horizons ranging from 1 to 24 months. The model is found to closely match the term structure of forecast errors for consensus beliefs and is able to replicate the cross-sectional dispersion in forecasts of GDP growth but not for inflation - the latter appearing to be too high in the data at short horizons. Our analysis also suggests that agents systematically underestimated the persistent component of GDP growth but overestimated it for inflation during most of the 1990s.
    Keywords: real time learning; survey forecasts; term structure of forecasts
    JEL: C53 E37
    Date: 2007–10
  29. By: Álvaro Pina; Nuno Venes
    Abstract: This paper analyses the track record of fiscal forecasts reported by 15 European countries in the context of the Excessive Deficit Procedure. For the budget balance, gross fixed capital formation (GFCF) and interest payments, we study the statistical properties of forecast errors and their politico-institutional determinants. While errors in interest and GFCF expenditure present few systematic patterns, budget balance errors are responsive to fiscal institutions and to opportunistic motivations, especially from 1999 onwards: upcoming elections induce over-optimism, whereas commitment or mixed forms of fiscal governance and numerical expenditure rules (but not deficit and debt rules) are associated to greater prudence.
    Keywords: fiscal forecasting; Stability and Growth Pact; Excessive Deficit Procedure; fiscal rules
    JEL: E62 H62 H68
    Date: 2007
  30. By: Cruijsen, C. van der; Eijffinger, S.C.W. (Tilburg University, Center for Economic Research)
    Abstract: Central banks have become more and more transparent about their monetary policy making process. In the central bank transparency lit- erature the distinction between actual and perceived central bank trans- parency is often lacking. However, as perceptions are crucial for the ac- tions of economic agents this distinction matters. A discrepancy between actual and perceived transparency may exist because of incomplete or in- correct transparency knowledge and other (psychological) factors. Even financial experts, the most important channel through which the central bank can influence the economy, might suffer from misaligned perceptions. We investigate the mismatch between actual and perceived transparency and its relevance by analyzing data of a Dutch household survey on the European Central Bank?s transparency. To benefit from higher trans- parency perceptions the European Central Bank might feel tempted to stress its transparency strengths, but hide its transparency weaknesses.
    Keywords: Central bank transparency;Perceptions;Survey;CentERpanel;Behavioral Economics.
    JEL: D80 E52 E58
    Date: 2007
  31. By: Giuseppe Tattara (Department of Economics, University Of Venice Cà Foscari); Marco Valentini (Tolomeo srl)
    Abstract: On-the-Job Search is one of the most common and efficient ways to look for a new job, most of the time workers move directly from one employment position to another (E-to-E) without an intervening spell of unemployment. E-to-E transitions are a relevant component of total labour flows and have a definite cyclical pattern. This paper computes E-to-E worker flows through the development of a vacancy chain model. An iterative procedure is used to compute the successive reallocation runs, beginning from an autonomous vacancy and then to reconstruct the complete E-to-E transition process. The procedure is implemented and applied to a large micro-panel based on a highly industrialized Italian region from 1982 to 1996. E-to-E transitions are an increasingly large portion of worker flows in the labour market. They are clearly cyclic and the number of transitions increases over time as the labour market becomes tighter. These are the flows that explain labour market dynamics in upswings and recessions. Search models that look only at flows between employment, unemployment and outside of the labour force underestimate labour mobility and its cyclical pattern.
    Keywords: Job Flows, Search and Matching, Job to Job Mobility, Worker Flows, Business Cycle, Propagation
    JEL: E24 E32 J63
    Date: 2007
  32. By: João Silvestre; António Mendonça; José Passos
    Abstract: The endogeneity of optimum currency areas criteria has been widely studied since Frankel and Rose (1998) seminal paper. Literature normally suggests that there is a positive relationship between trade and business cycles correlation. This paper develops work on this subject (Silvestre and Mendonça, 2007) where we confirm this hypothesis in euro area countries and UE-15 for 1967-2003 period using OLS and 2SLS estimates. However, we also find then that trade influence on cycles synchronization diminished in the last years. Now our goal was precisely to evaluate this question. Using a non-linear model based on Beta distribution in the same sample, we concluded that trade has a decreasing marginal effect on business cycles correlation. This result shows that trade flows are important in the first stages of economic integration, but become less important as trade intensity increases. Other factors must then be considered.
    Keywords: European Monetary Union (EMU); Business Cycles Correlation; Optimum Currency Areas; International Trade; Beta Regression.
    JEL: E32 E42
    Date: 2007
  33. By: Driver, Ciaran; Hall, Stephen G.
    Abstract: This paper argues that the production constraints in the basic NAIRU model should be distinguished by type: capital constraints and labour constraints. It notes the failure to incorporate this phenomenon in standard macro models. Using panel data for UK manufacturing over eighty quarters it is shown that capital constraints became relatively more important during the 1980s as industry failed to match the increase in labour flexibility with rising capital investment.
    Keywords: capital labour constraints nairu panel, data structural, breaks
    JEL: C23 D24 E22 E24
    Date: 2007
  34. By: Vasco Gabriel (Department of Economics, University of Surrey and NIPE, University of Minho); Fernando Alexandre (Department of Economics and NIPE, University of Minho); Pedro Bação (GEMF and Faculty of Economics, University of Coimbra)
    Abstract: This paper argues that nonlinear adjustment may provide a better explanation of fluctuations 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 differ across regimes. Estimation of the system suggests that these states are related to the behaviour of financial 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 first 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
  35. 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 accute impact in Finland than in its twin economy, Sweden.
    Keywords: Unemployment dynamics, Chain reaction theory, Capital accumulation, Nordic countries
    JEL: E22 E24 J21
    Date: 2007–10
  36. By: Bokan, Nikola; Hughes Hallett, Andrew
    Abstract: Most people accept that structural and labour market reforms are needed in Europe. However few have been undertaken. The usual conjecture is that reforms are costly in economic performance and costly to finance. Blanchard and Giavazzi (2003) and Spector (2004) develop a general equilibrium model with imperfect competition to show the impact of labour or product market deregulation. We extend that model to combine both reforms, and include the costs of financing them, the conflict between long run gains and short run costs, and to allow for reforms of distortionary taxation. We also extend the model to explain the natural rate of unemployment and non-wage employment costs, to show the impact of reform on the short and long run Phillips curve parameters. We find that structural reforms imply short run costs but long run gains (unemployment rises and then falls, while wages move in the opposite way); that the long run gains outweigh the short run costs; and that the financing of such reforms is the main stumbling block. We also find that the implications for welfare improvements and employment generation are quite different: tax reforms are more effective for welfare, but market liberalisation for employment.
    Keywords: Structural reform, wage bargains, short vs. long run substitutability, endogenous entry of firms
    JEL: E24 H23 J58
    Date: 2007
  37. By: Caeyers B.; Pauwels W.
    Abstract: This paper analyzes corporatism in a two-player game which integrates macroeconomic stabilization policy and a policy of social transfers. The government decides on the level of nominal social transfers, and the trade union decides on the nominal wage level. A central finding is that if one assumes that the trade union’s utility not only depends on employment, output and inflation, but also on the level of social transfers, there is always scope for Pareto-improvements, relative to the noncooperative Nash equilibrium. In particular, there always exists a bargained combination of lower wages and higher social benefits that is beneficial for both players. Another important result is that an increase in the degree of inflation aversion of the trade union leads to a lower wage level, a lower level of inflation and a higher level of output. The effect on social transfers depends, among other things, on the degree of inflation aversion of the government. Finally, the paper provides a detailed analysis of when the wage level and the level of social transfers are strategic complements or substitutes for each of the players.
    Date: 2006–12
  38. By: Ryan R. Brady (United States Naval Academy)
    Abstract: That households bear the weight of the loan-supply effect, even after many calls for the lending channel’s obsolesce, is at first glance a compelling notion given the growth in consumer credit. However, this paper shows with disaggregated consumer loan data that not only is the loan-supply effect irrelevant for consumer lending, but that this is likely due to the fact that in the aggregate households are awash in liquidity. These insights, gained in part by comparing aggregate credit balances to the unused portions of credit card lines, have important implications for further research on the monetary transmission mechanism and for business cycle research in general.
    Date: 2007–10
  39. By: Shu-Chun Susan Yang (Institute of Economics, Academia Sinica)
    Abstract: This note provides a chronology of major tax events that involved changes in federal taxes on individual and corporate income from 1948 to 2006. For each event, the note provides background and policy motivation, major provisions, legislative timeline, and estimated revenue changes. As most tax changes were preceded by extensive legislative delays, this chronology suggests that people were likely to have foreknowledge about tax policy. It also finds that postwar income tax policy was typically motivated by one of three rationales: 1) balancing the budget or reducing deficits, 2) controlling inflation, and 3) stimulating economic activity or promoting growth.
    Keywords: Policy Foresight, Timeline of Tax Events, Tax Policy, Fiscal Policy
    JEL: E62 E61 N42
    Date: 2007–10
  40. By: Filippo Altissimo (Brevan Howard Asset Management); Riccardo Cristadoro (Banca d'Italia); Mario Forni (Università di Modena); Marco Lippi (Università La Sapienza di Roma); Giovanni Veronese (Banca d'Italia)
    Abstract: This paper presents ideas and methods underlying the construction of an indicator that tracks the euro area GDP growth, but, unlike GDP growth, (i) is updated monthly and almost in real time; (ii) is free from hort-run dynamics. Removal of short-run dynamics from a time series, to isolate the mediumlong-run component, can be obtained by a band-pass filter. However, it is well known that band-pass filters, being two-sided, perform very poorly at the end of the sample. New Eurocoin is an estimator of the medium- long-run component of the GDP that only uses contemporaneous values of a large panel of macroeconomic time series, so that no end-of-sample deterioration occurs. Moreover, as our dataset is monthly, New Eurocoin can be updated each month and with a very short delay. Our method is based on generalized principal components that are designed to use leading variables in the dataset as proxies for future values of the GDP growth. As the medium- long-run component of the GDP is observable, although with delay, the performance of New Eurocoin at the end of the sample can be measured.
    Keywords: coincident indicator, band-pass filter, large-dataset factor models, generalized principal components
    JEL: C51 E32 O30
    Date: 2007–06
  41. By: António Afonso; Christophe Rault
    Abstract: We assess the sustainability of public finances in the EU15 over the period 1970-2006 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edgerton (2007), to a structural long-run equation between general government expenditures and revenues. While estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU15 panel set, and within subperiods (1970-1991 and 1992-2006).
    Keywords: intertemporal budget constraint; fiscal sustainability; EU; panel unit root; panel cointegration.
    JEL: C23 E62 H62 H63
    Date: 2007
  42. By: Alessio Anzuini (Bank of Italy, Economic Research Department); Patrizio Pagano (Bank of Italy, Economic Research Department); Massimiliano Pisani (Bank of Italy, Economic Research Department)
    Abstract: This paper analyzes the macroeconomic effects on the U.S. economy of news about oil supply by estimating a VAR. Information contained in daily quotations of oil futures contracts is exploited to estimate the dynamic path of oil prices following a shock. Hence, differently from the VAR literature on oil shocks we do not need to rely on recursive identification. Impulse response functions suggest that oil supply disruptions have stagflationary effects on the U.S. economy. Historical decomposition shows that oil shocks contributed significantly to the US recessions of the last thirty years, but not all exogenous increases in oil prices induced a recession. Finally, the contribution of oil shocks to inflation fluctuations seems to have declined over time.
    Keywords: vector autoregression, oil shock, futures, news
    JEL: C2 E3 O41
    Date: 2007–06
  43. By: Ivan Jaccard (The Wahrton School)
    Abstract: This study shows that introducing habit memory into a business cycle model allows to simultaneously explain a series of asset pricing and business cycle puzzles. First, combining habit memory with indivisible labor allows the framework that is proposed to increase the volatility of hours worked while giving rise to endogenous wage stickiness. Second, the high equity premium and the low mean risk free rate can be reproduced without generating counterfactually large variations in the risk free rate. Finally, the mechanism under study allows to amplify the propagation of technology shocks.
    Keywords: Equity Premium Puzzle, Labor Market, Indivisible Labor, Habit Formation
    JEL: E10 E20 G12
    Date: 2007–07
  44. By: Raphael Rocha Gouvêa (USP); Gilberto A. Libânio (Cedeplar-UFMG)
    Abstract: This paper discusses the existence of different accumulation regimes in developed and developing economies. The central issue to be analyzed refers to the effect of an increase in the wage share in national income on output growth. When such increase positively affects output, the accumulation regime is wage-led. Otherwise, the regime is profit-led. The main hypothesis to be tested is that developing economies are characterized by wage-led regimes, whereas in developed countries accumulation is profit-led. In this paper, we apply the model developed by Barbosa-Filho and Taylor (2006) to test this hypothesis for the cases of UK and Turkey. The empirical evidence presented here, by the use of a VAR model, supports the hypothesis.
    Keywords: effective demand; functional income distribution; accumulation regimes
    JEL: E32
    Date: 2007–10
  45. By: Christian Ewerhart (University of Zurich); Nuno Cassola (European Central Bank); Natacha Valla (Banque de France)
    Abstract: Among the most puzzling observations for the euro money market are the bid shading in the weekly refinancing operations and the development of interest rate spreads. To explain these observations, we consider a standard divisible-good auction à la Klemperer and Meyer (1989) with uniform or discriminatory pricing, and place it in the context of a secondary market for interbank credit. The analysis links the observations for the euro area to the endogenous choice of collateral in credit transactions. We also discuss the Eurosystem’s apparent preference for the discriminatory pricing rule.
    Keywords: Eurosystem, discriminatory auction, bid shading, collateral
    JEL: D44 E52
    Date: 2007–07
  46. By: Manoel Carlos de Castro Pires
    Abstract: The paper aims to study fiscal data of primary surplus expectation and debt expectation. The results showed gains of credibility in the Brazilian fiscal policy conduct because financial markets expecting less debt for near future. In addition, expectations that debt will grow up raises expectations that primary surplus will grow up too.
    Date: 2006–10
  47. By: Philippe Jourdon
    Abstract: La monnaie a été, jusqu’à KEYNES et FRIEDMAN, la grande absente de la littérature économique. Et, depuis eux, les relations entre cycles économiques longs (cycles de cinquante ans dits “de KONDRATIEFF” ou cycles d’une centaine d’années dits “de MODELSKI” ou “de GOLDSTEIN”) et la monnaie ont été à leur tour absentes des débats. Enfin, ces deux premiers manques de la théorie constituent peut-être une explication pour laquelle les relations logiques et chronologiques entre cycles des affaires d’une part, et cycles longs d’autre part, ont été si peu et donc si mal explorées. Pourtant, c’est bien dans ces trois directions qu’il faudrait rechercher une nouvelle théorie de la monnaie, plus dynamique que les précédentes (où des modèles de gestion pourraient permettre à un public plus large qu’à l’accoutumée de s’approprier cette monnaie, de la gérer et de la gouverner) et où la théorie économique s’enracinerait cependant davantage aussi dans l’anthropologie. Nous montrons donc les relations fluctuantes entre ces trois théories (macro économie monétaire, théorie des cycles longs, gestion des liens entre les cycles des affaires et les cycles longs) depuis les premières théories des cycles, jusqu’aux dernières théories de la monnaie (l’optique anthropologique d’AGLIETTA et ORLEAN) et les dernières théories des cycles longs (les cycles longs politiques, hégémoniques, monétaires) depuis les années 1980. Nous pouvons alors proposer deux modèles économiques orientés gestion, et inspirés des modèles du spécialiste en marketing et stratégie, PORTER, pour gérer la monnaie dans un tel nouveau paradigme par défaut. Il s’agira, d’une part, du Diamant Appliqué à la Monnaie (D.A.M.), qui montre les relations dynamiques, et permanentes, entre quatre éléments qui résident soit du côté des idées soit du côté des outils de gestion des faits tangibles, afin de prendre en compte cette nouvelle dimension de la monnaie, construite le long du cycle long au détour d’une double perception de la monnaie et du cycle, consciente-immédiate d’une part, et inconsciente (mais perceptible au travers du cycle long) d’autre part. Ces quatre dimensions seraient selon nous marxisme et psychanalyse, techniques traditionnelles de gestion monétaire (tirées du monétarisme ou du keynésianisme) et techniques logistiques. Ensuite, la Chaîne de Valeur de la Monnaie explique comment cette monnaie est construite dans les représentations et dans les faits, et donc devient apte à gérer le réel et à être gérée par l’humain, au terme du cycle long. Nous concluons, après avoir évoqué l’espace de débat ainsi ouvert et indiqué quelques directions, en rappelant que notre démarche de recherche vise à réfléchir davantage à “la dimension sociale de la monnaie” – et pas seulement la dimension sociale de la politique monétaire – et en évoquant les rythmes suivant lesquels cette perception et les moyens de gestion qu’elle donne par conséquent, se dévoilent au fil du cycle long.
    Date: 2007–10
  48. By: Bruckner, Markus; Gerling, Kerstin; Grüner, Hans Peter
    Abstract: Capital market theory predicts that the wealth distribution of an economy affects real interest rates. This paper empirically analyzes this relationship for the US, the UK and Sweden. We obtain that measures of wealth inequality are positively linked to the real rate on government securities in all three countries. This result is consistent with predictions from capital market equilibrium models with moral hazard such as Aghion and Bolton (1997) or Piketty (1997). Accordingly, rich individuals can only credibly commit to providing effort if the rate of return is not too high. When the rich are poorer, the rate of return has to be lower in order to guarantee entrepreneurial effort. Capital demand will therefore fall as inequality is reduced. The capital market is in equilibrium at a lower rate of return. The results bear important implications for economic growth and distributive policies.
    Keywords: interest rates; wealth distribution
    JEL: E20 E62
    Date: 2007–09
  49. By: Giuseppe Tattara (Department of Economics, University Of Venice Cà Foscari); Marco Valentini (Tolomeo srl)
    Abstract: This research exploits a large employer-level panel dataset in order to analyse employment and worker flows. Excess reallocation, the difference between worker and job flows at the firm level, is substantial and has a definite cyclical pattern. Both accessions and separations are cyclical in contrast to the conventional wisdom that assumes separation to be countercyclical. Separations increase in upswing, following the accession increase, and decline in recession. Unemployment during recession is not, to a large extent, due to an increase in the rate at which workers separate from their employers, as traditionally assumed among macroeconomists, but to the decline in job creations.
    Keywords: Job Flows, Worker Flows, Reallocation, Cyclical behaviour
    JEL: E24 E32 J21 J44
    Date: 2007
  50. By: Viral V. Acharya (London Business School & CEPR); Jean Imbs (University of Lausanne - HEC, CEPR & Swiss Finance Institute); Jason Sturgess (London Business School)
    Abstract: We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value added output, we calculate for each state the efficient frontier for investments in the real economy, the efficient Sharpe ratio, and the corresponding weights on investments in different industries. We study how rapidly different states converge to an efficient allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries, greater distance from the efficient frontier before liberalization and larger geographical area. These effects are robust to industries integrating across states and the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for the efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variancecovariance properties of investment returns, rather than on their average only.
    Keywords: Financial development, Growth, Sharpe ratio, Volatility, Diversification
    JEL: E44 F02 F36 O16 G11 G21 G28
    Date: 2006–11
  51. By: Andrea Carriero (Queen Mary, University of London)
    Abstract: In this paper we propose a strategy for forecasting the term structure of interest rates which may produce significant gains in predictive accuracy. The key idea is to use the restrictions implied by Affine Term Structure Models (ATSM) on a vector autoregression (VAR) as prior information rather than imposing them dogmatically. This allows to account for possible model misspecification. We apply the method to a system of five US yields, and we find that the gains in predictive accuracy can be substantial. In particular, for horizons longer than 1-step ahead, our proposed method produces systematically better forecasts than those obtained by using a pure ATSM or an unrestricted VAR, and it also outperforms very competitive benchmarks as the Minnesota prior, the Diebold-Li (2006) model, and the random walk.
    Keywords: Bayesian methods, Forecasting, Term structure
    JEL: C11 C53 E43 E47
    Date: 2007–10
  52. By: Ferran Sancho
    Abstract: In this note we quantify to what extent indirect taxation influences and distorts prices. To do so we use the networked accounting structure of the most recent input-output table of Catalonia, an autonomous region of Spain, to model price formation. The role of indirect taxation is considered both from a classical value perspective and a more neoclassical flavoured one. We show that they would yield equivalent results under some basic premises. The neoclassical perspective, however, offers a bit more flexibility to distinguish among different tax figures and hence provide a clearer disaggregate picture of how an indirect tax ends up affecting, and by how much, the cost structure.
    Keywords: tax load, fiscal cost, indirect taxation decomposition
    JEL: C81 D57 E37
    Date: 2007–10–15
  53. By: Tomat, Gian Maria
    Abstract: The paper develops a model of firm´s investment under uncertainty with financial market imperfections and analyzes the effects of financial constraints on firm´s investment. Firm´s investment is an increasing function of the firm´s marginal q, however the investment function is characterized by an upper bound that depends on the firm´s borrowing capabilities. The firm´s marginal q is the sum of the expected value of the marginal profitability of the physical capital stock and of a positive external finance premium. In the presence of financial market imperfections the firm forms expectations about future financial conditions and these expectations raise the firm´s current marginal q. Similarly, the shadow price of firm´s debt is the sum of the interest cost of debt repayment and of a provision for external finance that depends on the firm´s expectations over future financial conditions.
    Keywords: firm´s investment, financial constraints, Tobin´s marginal q, uncertainty
    JEL: D92 E22
    Date: 2007
  54. By: Wilson Sy (Australian Prudential Regulatory Authority)
    Abstract: Most existing credit default theories do not link causes directly to the effect of default and are unable to evaluate credit risk in a rapidly changing market environment, as experienced in the recent mortgage and credit market crisis. Causal theories of credit default are needed to understand lending risk systematically and ultimately to measure and manage credit risk dynamically for financial system stability. Unlike existing theories, credit default is treated in this paper by a joint model with dual causal processes of delinquency and insolvency. A framework for developing causal credit default theories is introduced through the example of a new residential mortgage default theory. This theory overcomes many limitations of existing theories, solves several outstanding puzzles and integrates both micro and macroeconomic factors in a unified financial economic theory for mortgage default.
    Keywords: causal framework; credit default risk; delinquency; insolvency; mortgage defualt
    JEL: B41 C81 D14 E44 G21 G32 G33
    Date: 2007–10–01
  55. By: Cláudio Gontijo (UFMG)
    Abstract: This article seeks to show that, in spite of major steps towards getting close to reality, new-Keynesian macroeconomics is still full of difficulties, like the "ad hoc" hypothesis used to explain the non neutrality of money and the existence of disequilibria in the short run. In particular, price and wage rigidities - which are recognized as "stylized facts" - seem to stand in sandy bases, while it seems problematic to derive the IS and LM curves from its neoclassical fundamentals. In this sense, the connections between the short run and the long run, which includes the relationships between the interest rate and money and between money and output do not seem consistent. Finally, the challenge of the neoclassical fundamentals posed by Joan Robinson and Sraffa criticisms remain largely uncontested.
    JEL: B22
    Date: 2007–10
  56. By: Bogoev, Jane; Terzijan, Sultanija Bojceva; Petrovska, Magdalena
    Abstract: The ambition of this paper is to analyse real exchange rate dynamics in Macedonia relying on a highly disaggregated dataset. We complement the indirect evidence reported in Loko and Tuladhar (2005) and we provide direct evidence on the irrelevance of the Balassa-Samuelson effect for overall inflation via service prices in the CPI. Furthermore, we estimate variants of the BEER model. We show that alternative econometric techniques and data definitions bear an impact on the robustness of the estimation results. Overall, productivity, government consumption and the openness variables were found to be fairly robust in terms of sign and size. An increase/decrease in the productivity variables is associated with an appreciation/depreciation of the real effective exchange rate. Given that the B-S effect admittedly has a very limited role to play through nontradable prices in the CPI, this relationship could be explained by the (inverse) quality effect proposed by Loko and Tuladhar and, possibly in addition to that, by the nontradable component of tradable prices.
    Keywords: real exchange rate, Balassa-Samuelson, Macedonia
    JEL: E31 F31 O11 P17
    Date: 2007
  57. By: O'Brien, Martin (University of Wollongong); Valadkhani, Abbas (University of Wollongong); Waring, Peter (University of New South Wales Asia, Singapore); Denniss, Richard (Parliament House, Canberra, ACT)
    Abstract: 2006 generally represented a solid year in terms of macroeconomic performance and labour market indicators, even under the threat of increasing inflation and interest rates. However, some favourable aggregate labour market indicators disguised major disparities at disaggregated regional, sectoral or demographic levels. The major development in the labour market was the implementation and operation of the WorkChoices legislation which will shape the industrial relations landscape in Australia for many years to come. This article presents an analysis of the performance of the macroeconomy and labour market, and reviews the developments of the WorkChoices legislation.
    Keywords: economic performance; industrial relations legislation; labour market; WorkChoices
    JEL: J40 E66 J21 J40 J53
    Date: 2007
  58. By: João Sousa Andrade (GEMF and Faculdade de Economia, Universidade de Coimbra)
    Abstract: We know from experience that weak economic growth increases the unemployment rate. In 1962 Okun proposed to measure potential output in terms of unemployment gap. From this relation a direct link between increase in unemployment and output growth was deduced, known as the Okun Law. This Law is one of the pillars of empirical macroeconomics. One of the problems of this Law is the iteration between the variables involved and the non-stationarity of these variables. As a consequence we must be careful with the stability and the possible asymmetry of Okun’s Law. We apply these ideas to the Portuguese economy in order to obtain an estimated Okun Law. We can conclude by the temporal stability of a dynamic formulation of the Law, although we also conclude by the presence of an asymmetric behaviour of the Law.
    Keywords: Okun Law, Cycles, Participation rate, Stability, Asymmetry
    JEL: C32 C51 J21 E24
    Date: 2007
  59. By: Juergen Antony (University of Augsburg, Department of Economics)
    Abstract: Empirical studies show that the elasticity of substitution between capital and labor is larger than one in developed countries but smaller in developing countries. This paper develops a production function which allows for this structure in the elasticity of substitution. The case of a falling real interest rate and capital deepening in the developed countries in the presence of FDI flows from the developed to the developing country is analyzed. It is shown that this structure in the elasticity of substitution can be responsible for a U-shaped relationship between the capital intensity of the developed country and the relative capital intensity of the developing country. This carries over to an inverted U-shaped relationship between the capital intensity of the developed country and FDI profitability.
    Keywords: Capital/Labor Substitution, FDI, Capital Deepening
    JEL: E23 F21 O11
    Date: 2007–10
  60. By: Hillinger, Claude
    Abstract: This paper has two sources: One is my own research in three broad areas: business cycles, economic measurement and social choice. In all of these fields I attempted to apply the basic precepts of the scientific method as it is understood in the natural sciences. I found that my effort at using natural science methods in economics was met with little understanding and often considerable hostility. I found economics to be driven less by common sense and empirical evidence, than by various ideologies that exhibited either a political or a methodological bias, or both. This brings me to the second source: Several books have appeared recently that describe in historical terms the ideological forces that have shaped either the direct areas in which I worked, or a broader background. These books taught me that the ideological forces in the social sciences are even stronger than I imagined on the basis of my own experiences. The scientific method is the antipode to ideology. I feel that the scientific work that I have done on specific, long standing and fundamental problems in economics and political science have given me additional insights into the destructive role of ideology beyond the history of thought orientation of the works I will be discussing.
    Keywords: Business cycles, Ideology, Science, Voting, Welfare measurement
    JEL: B40 C50 D6 D71 E32
    Date: 2007
  61. By: Reichling, Felix
    Abstract: I develop an equilibrium matching model in which workers have preferences over consumption and hours of work and are able to self-insure against unemployment risks by accumulating precautionary wealth. Wages and working hours are the outcomes of Nash bargaining between workers and firms. I focus on an unemployment insurance (UI) system with constant benefits of indefinite duration financed through a constant labor income tax. Low-wealth individuals work unusually long hours to quickly accumulate precautionary wealth. The Frisch elasticity of labor supply governs a worker’s utility cost of supplying labor and hence the cost of accumulating precautionary wealth. A lower elasticity implies a higher utility cost of adjusting hours. I take Frisch elasticities from recent research using household data and find that the optimal level of UI benefits is between 34 and 40 percent of average compensation. The potential welfare gains from moving from current 34 percent to the optimal policy are as large as 0.13 percent of lifetime consumption. The optimal replacement rate is decreasing in the Frisch elasticity of labor supply.
    Keywords: Unemployment insurance; Labor supply; Matching equilibrium; Self-insurance
    JEL: J22 H00 J65 E24
    Date: 2006–11–06
  62. By: João Sousa Andrade (GEMF and Faculdade de Economia, Universidade de Coimbra)
    Abstract: The Feldstein-Horioka thesis was considered one of the greatest puzzles in economics. Born to measure international capital mobility, has known a process of immunisation to be conformed to empirical evidence and respect econometric knowledge. We apply to EU countries a formulation of the thesis which is adequate to test external sustainability and international capital mobility. Applying appropriate methods we conclude for the external sustainability of enlarged Europe as well as for high level of capital mobility. The capital mobility is more important for the old EU than for the enlarged one.
    Keywords: Feldstein-Horioka, Mobilité du Capital, Épargne, Investissement, Contrainte extérieure
    JEL: E21 E22 F21
    Date: 2007
  63. By: Cousins, Mel
    Abstract: This paper examines social security increases in Ireland as a case study of the existence of political budget cycles in European countries. Ireland is an appropriate country to examine, first because it has a system of proportional representation and some studies suggest that proportional electoral systems are associated with expansions of welfare spending both before and after elections. Second, it is generally recognised that Irish political parties occupy the middle ground in terms of political ideology. Again studies would suggest that an absence of a strong ideological commitment to particular policies may make political budget cycles more likely. Utilising the distinctive nature of the public expenditure process in relation to welfare budget increases, this article examines the issue of whether or not a political budget cycle can be seen in Ireland in relation to social security expenditure. It draws a number of conclusions as to the existence and incidence of political budget cycles in an Irish context and also looks at whether political budget cycles have succeeded in their apparent objective i.e. securing election for the relevant political party.
    Keywords: Political budget cycle; welfare state; social security; public expenditure; Ireland
    JEL: I38 H55 H53
    Date: 2007–06–26
  64. By: Jose Miguel Albala-Bertrand (Queen Mary, University of London)
    Abstract: This analysis is based on the optimal consistency method (OCM) proposed by Albala-Bertrand (2003), which enables to estimate a capital stock for a benchmark year. This method, in contrast to most current approaches, pays due regards both to potential output and to the productivity of capital. From an initial OCM benchmark estimate, we produce series for the net capital stock, via a perpetual inventory method (PIM), for all China and some useful regional disaggregations over the 45-year period 1960-2005. As a by-product, we also make available the optimal productivities of incremental or “marginal” capital, corresponding to the net accumulated GFCF over 5-year sub-periods from 1960 onwards. We then attempt some structural analysis, showing that the quantity of resources rather than their quality appears to be largely behind growth rates, especially since the 1990s.
    Keywords: China, Benchmark capital, Perpetual Inventory Method (PIM), Potential output, Capital productivity, Optimal Consistency Method (OCM), Structural analysis
    JEL: O4 B4 E2
    Date: 2007–10
  65. By: VAN HOVE, Leo
    Abstract: This article analyses the competition between cash and payment cards against the backdrop of the dual role of central banks - as issuers of cash and as institutions with a mandate to foster the efficiency of payment systems in general. It is argued that this dual role results in a number of policy dilemmas, namely concerning pricing, traceability of banknotes and the choice of denominations of coins and banknotes. On a general level, the article argues that central banks should place greater emphasis on improving the efficiency of retail payments and less on protecting their self-interest. More concretely, the article repeats the suggestion - originally put forward in VAN HOVE & VUCHELEN (1996) - that the ECB should place the upper limit of its banknote series at EUR 50 instead of EUR 500. It is also argued that policy makers should explicitly foster the use of cost-based pricing and in particular create a legal environment that makes it possible for commercial banks to start using it.
    Keywords: payment instruments; central banks; cash; banknotes; payment cards; public policy; efficiency.
    JEL: G2 E6
    Date: 2007–06
  66. By: Fecht, Falko; Grüner, Hans Peter; Hartmann, Philipp Christian Heinrich
    Abstract: This paper compares four forms of inter-regional financial risk sharing: (i) segmentation, (ii) integration trough the secured interbank market, (iii) integration trough the unsecured interbank market, (iv) integration of retail markets. The secured interbank market is an optimal risk-sharing device when banks report liquidity needs truthfully. It allows diversification without the risk of cross-regional financial contagion. However, free-riding on the liquidity provision in this market restrains the achievable risk-sharing as the number of integrated regions increases. In too large an area this moral hazard problem becomes so severe that either unsecured interbank lending or, ultimately, the penetration of retail markets is preferable. Even though this deeper financial integration entails the risk of contagion it may be beneficial for large economic areas, because it can implement an efficient sharing of idiosyncratic regional shocks. Therefore, the enlargement of a monetary union, for example, extending the common interbank market might increase the benefits of also integrating retail banking markets through cross-border transactions or bank mergers.
    Keywords: Financial integration, interbank market, cross border lending, financial contagion
    JEL: D61 E44 G10 G21
    Date: 2007
  67. By: Morgado, Pedro; Tavares, José
    Abstract: In this paper we analyze the determinants of co-movements in stock returns among 40 developed and emerging markets, from the 1970s to the 1990s. We provide empirical estimates of the impact of bilateral indicators of economic integration such as bilateral trade intensity, the dissimilarity of export structures, the asymmetry of output growth and bilateral real exchange rate volatility. We find that each indicator has the expected effect on the correlation of stock returns: trade intensity increases the correlation of stock returns, while real exchange rate volatility, the asymmetry of output growth and the degree of export dissimilarity decrease it. We also find that countries with more developed and more analogous institutions - in terms of either rule of law or civil liberties - display a higher correlation of stock returns.
    Keywords: Bilateral Trade Intensity; Co-movement of Stock Returns; Economic Integration; Real Exchange Rate Volatility
    JEL: E44 F15 F36 G15
    Date: 2007–10
  68. By: Kitov, Ivan
    Abstract: This paper demonstrates quantitatively that modern estimates of income inequality based on the data reported by the IRS are not reliable. Principal problem of the IRS data consists in highly volatile income estimates in the low-end of personal income distribution. This volatility is likely related to measurement errors, changes in definitions or improper reporting. Personal income estimates at high and the highest incomes are robust and follow the Pareto law. At high incomes, personal income distributions for 1990 and 2004, when normalized to total population with income and total (gross) personal income, practically coincide. Hence, the inequality estimates based on the IRS data are distorted by inaccurate readings in the low-income zone. At the same time, income data provided by the US Census Bureau are consistent over time in all income ranges. Results presented by Kitov (2007) demonstrate that personal income distributions based on readings obtained in the Current Population Survey are characterized by practically constant Gini coefficient since 1960. This observation implies that normalized personal income distributions are also not changing with time.
    Keywords: personal income distribution; economic inequality; Gini coefficient; IRS; Census Bureau
    JEL: D31 O12 D01 J10 E64 E17
    Date: 2007–10–18

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