nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒11‒10
74 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Monetary Policy and Technological Shocks in the Post-War US Business Cycle By FÈVE, Patrick; MATHERON, Julien; SAHUC, Jean-Guillaume
  2. The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  3. Policy Words and Policy Deeds: The ECB and the Euro By Costas Milas; Christopher Martin
  4. The Elusive Persistence: Wage and Price Rigidities, the Phillips Curve, and Inflation Dynamics By Chris Tsoukis; George Kapetanios; Joseph Pearlman
  5. Alice Through the Looking Glass: Strategic Monetary and Fiscal Policy Interaction in a Liquidity Trap By Sanjit Dhami; Ali al-Nowaihi
  6. Productivity shocks and optimal monetary policy in a unionized labor market economy By Mattesini Fabrizio; Rossi Lorenza
  7. The Implications of Information Lags for the Stabilization Bias and Optimal Delegation. By Jean-Paul Lam; Florian Pelgrin
  8. A Post-Keynesian macroeconomic policy mix as an alternative to the New Consensus approach By Eckhard Hein; Engelbert Stockhammer
  9. Prudent Monetary Policy and Cautious Prediction of the Output Gap By Frederick van der Ploeg
  10. Identifying the Shocks Driving Inflation in China By Pierre L. Siklos; Yang Zhang
  11. Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model By Costas Milas
  12. The macroeconomics of social pacts By Acocella Nicola; Di Bartolomeo Giovanni; Tirelli Patrizio
  13. An Endogenous Taylor Condition in an Endogenous Growth Monetary Policy Model By Le, Vo Phuong Mai; Gillman, Max; Minford, Patrick
  14. The Effects of Monetary Policy in the Czech Republic: An Empirical Study By Magdalena Morgese Borys; Roman Horvath
  15. Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule By Pierre L. Siklos; Martin T. Bohl
  16. Optimal monetary policy with a regime-switching exchange rate in a forward-looking model By Fernando Alexandre; Pedro Bação; John Driffill
  17. Do tax distortions lead to more indeterminacy? A New Keynesian perspective By Di Bartolomeo Giovanni; Manzo Marco
  18. Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings By Max Gillman; Michal Kejak
  19. The REMSDB Macroeconomic Database of The Spanish Economy By J.E. Boscá; A. Bustos; A. Díaz; R. Doménech; J. Ferri; E. Pérez; L. Puch
  20. How the World Achieved Consensus on Monetary Policy By Marvin Goodfriend
  21. Heterogeneous consumers, demand regimes, monetary policy and equilibrium determinacy By Di Bartolomeo Giovanni; Rossi Lorenza
  22. The Complex Response of Monetary Policy to the Exchange Rate By Costas Milas; Christopher Martin; Ram Sharan Kharel
  23. Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery By Dimitrios D. Thomakos; Constantina Kottaridi; Diego MŽndez-Carbajo
  24. What Are In‡ation Expectations Rational? By David Andolfatto; Scott Hendry; Kevin Moran
  25. Analysis of revisions to general economic statistics. By Mariagnese Branchi; Christian Dieden; Wim Haine; Csaba Horwáth; Andrew Kanutin; Linda Kezbere
  26. Optimal monetary policy in a monetary union with non-atomistic wage setters By Cuciniello Vincenzo
  27. Welfare-maximizing monetary policy under parameter uncertainty By Rochelle M. Edge; Thomas Laubach; John C. Williams
  28. How committees reduce the volatility of policy rates By Etienne Farvaque; Norimichi Matsueda; Pierre-Guillaume Méon
  29. How Conservative Does the Central Banker Have to Be? On the Treatment of Expectations under Discretionary Policymaking By Alfred V. Guender
  30. Professor Becker on Free Banking: A Comment By van den Hauwe, Ludwig
  31. Corporatism and macroeconomic stabilization policies By Caeyers Bet; Pauwels Wilfried
  32. Do Markets Care About Central Bank Governor Changes? Evidence from Emerging Markets By Christoph Moser; Axel Dreher
  33. Constant Interest Rate Projections without the Curse of Indeterminacy By Jordi Galí
  34. Consumer Confidence and Elections By Dimitrios D. Thomakos; Gikas A. Hardouvelis
  35. The Austrian Business Cycle - A Role for Technology Shocks? By Sandra Martina Leitner
  36. What does excess bank liquidity say about the loan market in Less Developed Countries? By Tarron Khemraj
  37. Can a Representative Agent Model Represent a Heterogeneous Agent Economy? By Sungbae An; Yongsung Chang; Sun-Bin Kim
  38. Optimal monetary policy in economies with dual labor markets By Mattesini Fabrizio; Rossi Lorenza
  39. "Fiscal Deficit, Capital Formation, and Crowding Out in India Evidence from an Asymmetric VAR Model" By Lekha Chakraborty
  40. The Politics of IMF Forecasts By Axel Dreher; Silvia Marchesi; James Raymond Vreeland
  41. Economic Fluctuations and Mortality:Evidence from Wavelet Analysis for Sweden 1800-2000 By Krüger, Niclas A; Svensson, Mikael
  42. Partisan Public Investment and Debt: The Case for Fiscal Restrictions By Roel M.W.J. Beetsma; Frederick van der Ploeg
  43. A Quarterly Post-World War II Real GDP Series for New Zealand By Viv Hall; John McDermott
  44. The impact of Milton Friedman on modern monetary economics: setting the record straight on Paul Krugman’s 'Who Was Milton Friedman? By Edward Nelson; Anna J. Schwartz
  45. A Monetary Approach to Exchange Rate Dynamics in Low-Income Countries: Evidence from Kenya By Nandwa, Boaz; Mohan, Ramesh
  46. Country Portfolio Dynamics By Michael B Devereux; Alan Sutherland
  47. Real Options in a Dynamic Agency Model, with Applications to Financial Development, IPOs, and Business Risk By Thomas Philippon; Yuliy Sannikov
  48. The heterogeneous state of modern macroeconomics: a reply to Solow By V. V. Chari; Patrick J. Kehoe
  49. The Economic Situation and Outlook in Mid-2007 for the ECE Economies -- Europe, North America, and the CIS By Robert Shelburne
  50. Implied interest rate skew, term premiums, and the "conundrum" By J. Benson Durham
  51. Routes of Money Endogeneity: A Heuristic Comparison By MAN-SEOP PARK
  52. Information, heterogeneity and market incompleteness in the stochastic growth model By Liam Graham; Stephen Wright
  53. Labor Adjustment Costs in a Panel of Establishments: A Structural Approach By João Miguel Ejarque; Pedro Portugal
  54. Sticky prices and sectoral real exchange rates By Patrick J. Kehoe; Virgiliu Midrigan
  55. Expectations Hypothesis Tests in the Presence of Model Uncertainty By Erdenebat Bataa; Dong H. Kim; Denise R. Osborn
  56. Puzzles, Paradoxes and Regularities: Cyclical and Structural Productivity in the US (1950-2005) By Yongbok Jeon; Matías Vernengo
  57. Are Good Industrial Relations Good for the Economy? By John T. Addison; Paulino Teixeira
  58. Finanzsystem und wirtschaftliche Entwicklung: Tendenzen in den USA und in Deutschland aus makroökonomischer Perspektive By Petra Dünhaupt; Eckhard Hein; Till van Treeck
  59. Towards a new theory of economic policy: Continuity and innovation By Acocella Nicola; Di Bartolomeo Giovanni
  60. Winners and Losers in Housing Markets By Nobuhiro Kiyotaki; Alexander Michaelides; Kalin Nikolov
  61. Inflation convergence in central and eastern European economies By Alina Spiru
  62. ON THE EMPIRICS OF INTERNATIONAL SMOOTHING By Pierfederico Asdrubali; Soyoung Kim
  63. Incomplete Intertemporal Consumption Smoothing and Incomplete Risksharing By Pierfederico Asdrubali; Soyoung Kim
  64. Comparative Advantage in Cyclical Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim
  65. Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited By Frederick van der Ploeg
  66. Genuine Saving and the Voracity Effect By Frederick van der Ploeg
  67. Investment in High-Tech Industries: An Example from the LCD Industry By Huisman, K.J.M.; Kort, P.M.; Plasmans, J.E.J.
  68. What Determines Private Investment? The Case of Pakistan By Sajawal Khan; Muhammad Arshad Khan
  69. The Impacts of Renminbi Appreciation on Trades Flows and Reserve Accumulation in a Monetary Trade Model By Li Wang; John Whalley
  70. What is Learned from a Currency Crisis, Fear of Floating or Hollow Middle? Identifying Exchange Rate Policy in Recent Crisis Countries By Soyoung Kim
  71. Foreign Capital and Economic Growth in the First Era of Globalization By Michael D. Bordo; Christopher M. Meissner
  72. Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts By James D. Hamilton
  73. Trade and the (Dis)Incentive to Reform Labor Markets: The Case of Reform in the European Union By George Alessandria; Alain Delacroix
  74. Growth, Volatility and Political Instability: Non-Linear Time-Series Evidence for Argentina, 1896-2000 By Nauro F. Campos; Menelaos G. Karanasos

  1. By: FÈVE, Patrick; MATHERON, Julien; SAHUC, Jean-Guillaume
    JEL: E31 E32 E52
    Date: 2007–10
  2. By: Chengsi Zhang (School of Finance, Renmin University of China); Denise R. Osborn (Economics, School of Social Sciences, University of Manchester); Dong Heon Kim (Department of Economics, Korea University)
    Abstract: The New Keynesian Phillips Curve model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the US between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with US monetary policy in that period.
    Keywords: New Keynesian Phillips Curve, inflation survey forecasts, sticky prices, structural breaks, monetary policy
    JEL: E31 E37 E52 E58
    Date: 2007
  3. By: Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Italy.); Christopher Martin (Brunel University, UK)
    Abstract: This paper argues that existing empirical models of interest rate rules are too simplistic. The hybrid Phillips curve implies that policymakers should respond to both current and expected future inflation rates, in contrast to existing models. We provide evidence that UK policymakers do this.
    Keywords: optimal monetary policy; inflation persistence; Phillips curve
    JEL: C51 C52 E52 E58
    Date: 2007–07
  4. By: Chris Tsoukis (London Metropolitan University); George Kapetanios (Queen Mary, University of London); Joseph Pearlman (London Metropolitan University)
    Abstract: We review the main New Keynesian inflation equations that have arisen as a result of aggregation from individual firms' price rigidities. We find that, on the whole, they cannot account for inflation persistence, a key feature of the empirical dynamics of inflation, and with important policy implications. The only exception seems to be when price stickiness is combined with wage rigidity and staggering.
    Keywords: Inflation rigidity, Price stickiness, Phillips curve
    JEL: E31 E32
    Date: 2007–10
  5. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: The recent experience with low inflation has reopened interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. To reduce the real interest rate, and to stimulate the economy, the modern literature highlights the role of high inflationary expectations. Using the Dixit-Lambertini (2003) framework of strategic policy interaction, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as leader, is given optimal output and inflation targets. This keeps inflationary expectations sufficiently high and achieves the optimal rational expectations pre-commitment solution. Simulations show that this arrangement is (1) optimal even when the Treasury has no inflation target but follow's the optimal output target and (2) 'near optimal' even when the Treasury follows its own agenda through a suboptimal output target but is willing to follow an optimal inflation target. Finally, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one.
    Keywords: liquidity trap; strategic monetary-fiscal interaction; optimal Taylor rules
    JEL: E63 E52 E58 E61
    Date: 2007–10
  6. By: Mattesini Fabrizio; Rossi Lorenza
    Abstract: In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model is calibrated under different monetary policy rules and under the optimal rule. We show that the correlation between productivity shocks and employment is strongly influenced by the monetary policy regime. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility.
    JEL: E24 E32 E50 J23 J51
    Date: 2007–09
  7. By: Jean-Paul Lam (University of Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Florian Pelgrin (University of Lausanne, Switzerland)
    Abstract: Many papers for example Jensen (2002) and Walsh (2003) have shown that in a New Keynesian model with a significant degree of forward-looking behaviour, policy regimes that target either the change in the output-gap (speed limit targeting) or nominal income growth can considerably reduce the size of the stabilization biasÐthe inefficiency that arises when a central bank conducts policy under discretion as opposed to commitment. Inflation targeting can also reduce the size of the stabilization bias but unless inflation expectations in the model are predominantly backward-looking, this targeting regime does not perform as well as speed limit or nominal income growth targeting. Jensen (2002) and Walsh (2003) obtain their results using a New Keynesian model where changes in the policy rate affect macroeconomic variables immediately. In this paper, we compare the performance of several targeting regimes by using a New Keynesian model that includes a delayed response of monetary policy as a result of information lags. We find two results that are substantially different from Jensen (2002) and Walsh (2003). First the size of the stabilization bias is considerably reduced. Second, a regime that targets inflation outperforms a regime that targets either the change in the output-gap or the growth in nominal income even when inflation expectations are very forward-looking.
    Keywords: Stabilization bias, Inflation Targeting, Discretion, Commitment, Information Lag
    JEL: E52 E58 E62
    Date: 2007–07
  8. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Engelbert Stockhammer (Vienna University of Economics and Business Administration)
    Abstract: In a Post-Keynesian (PK) model we show that inflation targeting monetary policies, as the main stabilisation tool proposed by the New Consensus Model (NCM), in the short run are only adequate for certain values of the model parameters, but are either unnecessary, counterproductive, or limited in their effectiveness for other values. Taking into account medium-run cost and distribution effects of interest rate variations renders monetary policies completely inappropriate as an economic stabiliser. Based on these results we argue that the NCM macroeconomic policy assignment should be replaced by a PK assignment. Enhancing employment without increasing inflation will be possible if macroeconomic policies are coordinated along the following lines: The central bank targets distribution between rentiers, on the hand, and firms and employees, on the other hand, and sets low real interest rates, wage bargaining parties target inflation and fiscal policies are applied for short- and medium-run real stabilisation purposes.
    Keywords: Macroeconomic policies, New Consensus Model, Post-Keynesian Model, inflation targeting
    JEL: E12 E50
    Date: 2007
  9. By: Frederick van der Ploeg
    Abstract: Using the results of risk-adjusted linear-quadratic-Gaussian optimal control with perfect and imperfect observation of the economy, we obtain prudent Taylor rules for monetary policies and also allow for imperfect information and cautious Kalman filters. A prudent central bank adjusts the nominal interest rate more aggressively to changes in the inflation gap, especially if the volatility of cost-push shocks is large. If the interest rate impacts the output gap after a lag, the interest also responds to the output gap, especially with strong persistence in aggregate demand. Prudence pushes up this reaction coefficient as well. If data are poor and appear with a lag, a prudent central bank responds less strongly to new measurements of the output gap. However, prudence attenuates this policy reaction and biases the prediction of the output gap upwards, particularly if output targeting is important. Finally, prudence requires an extra upward (downward) bias in its estimate of the output gap before it feeds into the policy rule if inflation is above (below) target. This reinforces nominal interest rate reactions. A general lesson is that prudent predictions are neither efficient nor unbiased.
    Keywords: prudence, optimal monetary policy, Taylor rules, measurement errors, prediction
    JEL: C6 D8 E4 E5 E6
    Date: 2007
  10. By: Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Yang Zhang (University of Ottawa, Canada)
    Abstract: The time profile of inflation in China resembles the one experienced in major industrial countries. Given the uncertainty surrounding the sources of economic shocks, this paper compares results from three sets of alternative identification conditions, namely the standard Blanchard-Quah approach, the approach of Cover, Enders, and Hueng (2006), as well as the model considered by Bordo, Landon-Lane and Redish (2004). Our principal finding is that inflation in China has been primarily driven by monetary factors. While aggregate supply factors may have pushed inflation to cross the threshold leading to deflation, monetary policy is primarily responsible for Chinese inflationary outcomes.
    JEL: E31 E32 C32 C52
    Date: 2007–07
  11. By: Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Rimini, Italy.)
    Abstract: March 2007 saw an increase of 3.1 percent in the Consumer Price Index (CPI) annual inflation rate and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i) the relationship between inflation and M4 growth is not stable over time, and (ii) the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 10%. Above this threshold, a 1 percentage point increase in the annual growth rate of M4 increases annual inflation by only 0.09 percentage points, whereas a 1 percentage point increase in the disequilibrium between money and its long-run determinants increases annual inflation by only 0.07 percentage points. Since the money effects are very small, the implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates.
    Keywords: Monetary Policy Committee (MPC), M4, inflation targeting, regimeswitching model.
    JEL: C51 C52 E52 E58
    Date: 2007–07
  12. By: Acocella Nicola; Di Bartolomeo Giovanni; Tirelli Patrizio
    Abstract: In this paper we analyze macroeconomic interactions between trade unions, the central bank and the fiscal policymaker. We explicitly model unions’ concern for public expenditure, paving the way for an analysis of the potential gains from cooperation between the fiscal policymaker and the unions, i.e. the so-called corporatist or social pacts that have characterized economic policies in a number of European countries in the last few decades. We also highlight the profoundly different incentives generated by institutional arrangements such as the Maastricht criteria and the Stability and Growth Pact. The former has unambiguously induced more efficient outcomes; the latter is likely to backfire!
    Keywords: Corporatism, trade unions, fiscal policy, monetary conservativeness, policy game
    JEL: E42 E58 E61 E62 E64 H30 J51 J58
    Date: 2007–11
  13. By: Le, Vo Phuong Mai (Cardiff Business School); Gillman, Max (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: The paper derives a Taylor condition as part of the agent's equilibrium behavior in an endogenous growth monetary economy. It shows the assumptions necessary to make it almost identical to the original Taylor rule, and that it can interchangably take a money supply growth rate form. From the money supply form, simple policy experiments are conducted. A full central bank policy model is derived that includes the Taylor condition along with equations comparable to the standard aggregate-demand/aggregate-supply model.
    Keywords: Taylor Rule ;endogenous growth; money supply; policy model
    JEL: E51 E52 O0
    Date: 2007–11
  14. By: Magdalena Morgese Borys; Roman Horvath
    Abstract: In this paper, we examine the effects of Czech monetary policy on the economy within VAR and the structural VAR framework. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price persistence. There is a rationale in using the real-time output gap instead of current GDP growth as using the former results in much more precise estimates. There is no evidence for price puzzle within the system. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards.
    Keywords: Monetary policy transmission, VAR, real-time data, sectoral prices.
    JEL: E52 E58 E31
    Date: 2007–09
  15. By: Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Martin T. Bohl (WestfŠlische Wilhelms-University MŸnster, Germany)
    Abstract: This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.
    Keywords: Monetary policy reaction functions, Asset prices, Instruments, European Central Bank
    JEL: E52 E58 C52
    Date: 2007–07
  16. By: Fernando Alexandre (Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra); John Driffill (Birkbeck College, University of London)
    Abstract: We evaluate the macroeconomic performance of different monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases.
    Keywords: : Exchange Rates, Monetary Policy, Markov Switching.
    JEL: E52 E58 F41
    Date: 2007
  17. By: Di Bartolomeo Giovanni; Manzo Marco
    Abstract: Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule.
    Keywords: rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, and tax distortions
    Date: 2007–05
  18. By: Max Gillman; Michal Kejak
    Abstract: The paper presents a general equilibrium that can explain ten related sets of empirical results, providing a unified approach to understand usually disparate effects typically treated separately. These are grouped into two sets, one on financial development, investment and inflation, and one on inflations effect on other economy-wide variables such as growth, real interest rates, employment, and money demand. The unified approach also contributes a systematic explanation of certain nonlinearities that are found across these results, as based on the production function for financial intermediary services and the resultant money demand function.
    Keywords: Inflation, financial development, growth, exchange credit production
    JEL: C23 E44 O16 O42
    Date: 2007–11
  19. By: J.E. Boscá (University of Valencia, Spain); A. Bustos (Ministry of Economics and Finance, Spain); A. Díaz (Ministry of Economics and Finance, Spain); R. Doménech (University of Valencia, Spain. Economic Bureau of the Prime Minister, Spain); J. Ferri (University of Valencia, Spain); E. Pérez (Ministry of Economics and Finance, Spain); L. Puch (FEDEA, Universidad Complutense and ICAE, Spain)
    Abstract: This paper presents a new macroeconomic database for the Spanish economy, REMSDB. The construction of this database has been oriented to conducting medium-term simulations for policy evaluation with the REMS model, a large Rational Expectations macroeconomic Model for Spain. The paper provides a detailed description of the data and documents its main statistical properties. The database is thought to be of major interest to related applications,whether strictly associated with the REMS model or, rather, with empirical macroeconomic studies.
    Keywords: E32, E37
    Date: 2007–10
  20. By: Marvin Goodfriend
    Abstract: This article tells how the world achieved a working consensus on the core principles of monetary policy. The story begins with the muddled state of affairs in the late 1970s. It then asks: How did Federal Reserve policy produce an understanding of the practical principles of monetary policy? How did formal institutional support abroad for targeting low inflation follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? The article tells how the modern theoretical consensus known as the New Neoclassical Synthesis (aka, the New Keynesian model) reinforces key advances: the priority for price stability, the targeting of core rather than headline inflation, the importance of credibility for low inflation, and preemptive interest rate policy supported by transparent objectives and procedures. The conclusion identifies important practical issues that remain to be explored in theory.
    JEL: E3 E4 E5
    Date: 2007–11
  21. 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: 2007–09
  22. By: Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Italy.); Christopher Martin (Brunel University, UK); Ram Sharan Kharel (Brunel University, UK)
    Abstract: We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4% and over-valuations of more than 5%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.
    Keywords: monetary policy, asset prices, nonlinearity
    JEL: C51 C52 E52 E58
    Date: 2007–07
  23. By: Dimitrios D. Thomakos (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy.); Constantina Kottaridi (University of Peloponnese, Greece); Diego MŽndez-Carbajo (Illinois Wesleyan University, USA)
    Abstract: We explore the connection between inflation and its higher-order moments for three economies in the periphery of the European Union (E.U.), Greece, Portugal and Spain. Motivated by a micro-founded model of inflation determination, along the lines of the hybrid New Keynesian Phillips curve, we examine whether and how much does the cross-sectional skewness in producer prices affect the path of inflation. We develop our analysis with the perspective of economic integration/inflation harmonization (in the E.U.) and discuss the peculiarities of these three economies. We find evidence of a strong positive relation between aggregate inflation and the distribution of relative-price changes for all three countries. A potentially important implication of our results is that, if the cross-sectional skewness of prices is directly related to aggregate inflation, not only the direction but also the magnitude of a nominal shock would influence output and inflation dynamics. Moreover, the effect of such a shock could be received asymmetrically, even when countries share a common currency.
    Keywords: Inflation; Cross-sectional distribution of prices; Greece, Portugal, Spain; European Union; Harmonization.
    JEL: E31
    Date: 2007–07
  24. By: David Andolfatto (Simon Fraser University, Canada and The Rimini Centre for Economics Analysis, Italy.); Scott Hendry (Bank of Canada, Canada); Kevin Moran (UniversitŽ Laval, Canada)
    Abstract: Several recent papers report evidence of an apparent statistical bias in in‡ation expectations and interpret these …ndings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of in‡ation and in‡ation expectations over sample periods corresponding to those tests performed on actual data and …nd evidence of an apparent bias in in‡ation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.
    Keywords: Regime changes; Learning dynamics; Monte Carlo exp eriments; Sample size.
    JEL: E47 E52 E58
    Date: 2007–07
  25. By: Mariagnese Branchi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christian Dieden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Wim Haine (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Csaba Horwáth (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrew Kanutin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Linda Kezbere (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The preparations for the introduction of the euro in 1999 involved the need for a new set of statistics for the euro area. Since then, significant progress has been made with regard to the coverage, timeliness and accuracy of these statistics. The reliability of the first releases – i.e. their stability in the process of later revisions – is an important quality-related feature. New data releases for the euro area have generally shown a very small or no bias, i.e. data revisions have been very modest and comparable with those of, for example, the United States or Japan. Despite the relatively small size of revisions, however, their combination with the low growth of the euro area economy may have drawn attention to such revisions of economic data for the euro area. This paper quantifies the revisions to selected key indicators in the period from the start of Monetary Union in 1999 to July 2007 and compares them with the corresponding medium term averages (1999-2006). The analysis covers the euro area, its six largest member countries, the United Kingdom, the United States and Japan. For this purpose, available time series for the various periods involved are used, series that record all revisions to published statistical data releases. The analysis is carried out separately for GDP growth and its expenditure components, for employment, unemployment rates, compensation per employee, labour cost indicators, industrial production, retail trade turnover and consumer prices. Overall, the evidence presented in this paper suggests that euro area data releases have generally shown a very small or no bias and have been more stable than those for individual euro area countries. Furthermore, recent euro area data show levels of revisions similar to those of the past, or levels of revisions that stabilised after the implementation of harmonised statistical concepts had largely been completed. JEL classification: E01, E21, E24, E31, E5
    Date: 2007–10
  26. By: Cuciniello Vincenzo
    Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that a centralized wage setting (CWS) and central bank conservatism (CBC) curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. The comparison between the national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts inflation in the absence of strategic effects. However, when strategic interactions between CB(s) and trade unions are taken into account, the shift to a MU unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a sufficiently conservative CB or with fully CWS. Conversely, when labor market distortions are less relevant, the paper shows that an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving.
    Date: 2007–05
  27. By: Rochelle M. Edge; Thomas Laubach; John C. Williams
    Abstract: This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies not only uncertainty about the dynamics of the economy. It also implies uncertainty about the model's utility-based welfare criterion and about the economy's natural rate measures of interest and output. We analyze the characteristics and performance of alternative monetary policy rules given the estimated uncertainty regarding parameter estimates. We find that the natural rates of interest and output are imprecisely estimated. We then show that, relative to the case of known parameters, optimal policy under parameter uncertainty responds less to natural-rate terms and more to other variables, such as price and wage inflation and measures of tightness or slack that do not depend on natural rates.
    Date: 2007
  28. By: Etienne Farvaque (Equippe - Universités de Lille, Faculté des Sciences Economiques et Sociales, France.); Norimichi Matsueda (School of Economics, Kwansei Gakuin University, Japan.); Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels,)
    Abstract: This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling e¤ect. However, members of a monetary union are better off under symmetric rules (voting, consensus, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union.
    Keywords: Monetary Policy Committees, Decision Procedures, Interest-rate, Monetary Union
    JEL: D70 E43 E58 F33
    Date: 2007–07
  29. By: Alfred V. Guender (University of Canterbury)
    Abstract: This paper explores an issue that arises in the delegation process. The paper shows that a myopic central banker, one who treats expectations as constant in setting discretionary policy, can replicate the behavior of output and inflation under policy from a timeless perspective. For that to happen, society must delegate a price level target or a speed limit policy to a central banker who is more weight-conservative than society.
    Keywords: New Keynesian Model; Price Level Targeting; Speed Limit Policy; Conservative Central Banker
    JEL: E3 E5
    Date: 2007–10–01
  30. 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 the 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: E42 E32 E58
    Date: 2007–10–04
  31. By: Caeyers Bet; Pauwels Wilfried
    Date: 2007–02
  32. By: Christoph Moser (University of Mainz, Department of Economics,); Axel Dreher (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: Central bank governor changes in emerging markets may convey important signals about future monetary policy. Based on a new daily data set, this paper examines the reactions of foreign exchange markets, domestic stock market indices and sovereign bond spreads to central bank governor changes. The data cover 20 emerging markets over the period 1992-2006. We find that the replacement of a central bank governor negatively affects financial markets on the announcement day. This negative effect is mainly driven by irregular changes, i.e., changes occurring before the scheduled end of tenure, sending negative signals about perceived central bank independence. Personal characteristics of the central banker, to the contrary, are less important for market reactions. We find no evidence that changes in the central banker’s conservatism affect the reactions of the markets. Finally, market reactions are similar in countries with high and low degrees of central bank independence.
    Keywords: central bank governor turnover, monetary policy, emerging markets, risk premium
    JEL: E58 E42 F30 G14
    Date: 2007–10
  33. By: Jordi Galí
    Abstract: Constant interest rate (CIR) projections are often criticized on the grounds that they are inconsistent with the existence of a unique equilibrium in a variety of forward-looking models. This note shows how to construct CIR projections that are not subject to that criticism, using a standard New Keynesian model as a reference framework.
    Keywords: Interest rate peg, in.ation targeting, conditional forecasts, interest rate rules, multiple equilibria
    JEL: E37 E58
    Date: 2007–08
  34. By: Dimitrios D. Thomakos (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy.); Gikas A. Hardouvelis (University of Piraeus, Greece and CEPR)
    Abstract: We investigate the behavior of consumer confidence around national elections in the EU-15 countries during 1985:1-2007:3. Consumer confidence increases before the date of elections and falls subsequently by almost the same amount. It is able to predict the strength of the performance of the incumbent party and its probability of re-election both alone and in the presence of macroeconomic and fiscal variables. The post-election drop is negatively related to the previous run up and is a function of the political - but not the economic - environment. A similar rise and fall characterizes consumer confidence in the United States.
    Keywords: consumer confidence, national elections, incumbent party, macro-economy, fiscal conditions, political business cycle, EU-15, USA.
    Date: 2007–07
  35. By: Sandra Martina Leitner (Department of Economics, Johannes Kepler University Linz, Austria)
    Date: 2007–11
  36. By: Tarron Khemraj
    Abstract: Evidence about developing countries’ commercial banks’ liquidity preference suggests the following about their loan markets: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over a foreign interest rate, marginal transaction costs and a risk premium. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is consistent with the observed stylized facts.
    Keywords: Excess bank liquidity, oligopoly banking, loan market, monetary policy
    JEL: O10 O16 E52 G21 L13
    Date: 2007–11
  37. By: Sungbae An (Singapore Management University); Yongsung Chang (University of Rochester and Seoul National University); Sun-Bin Kim (Department of Economics, Korea University)
    Abstract: Accounting for observed uctuations in aggregate employment, consumption, and real wage using optimality conditions of a representative household often requires preferences that are incompatible with economic priors (e.g., Mankiw, Rotemberg, and Summers, 1985). This discrepancy between the equilibrium model and the aggregate data is often viewed as evidence of the failure of labor-market clearing. We argue that such a conclusion is premature. We construct a model economy where all prices are exible and all markets clear at all times but household decisions are not readily aggregated because of incomplete capital markets and the indivisible nature of labor supply. We demonstrate that if we were to explain the model-generated aggregate time series using decisions of a "fictitious" stand-in household, such a household is likely to have a non-concave or unstable utility. Our analysis suggests that the representative agent model often fails to represent an equilibrium outcome of a heterogeneous agent economy.
    Keywords: Representative agent model, Aggregation, Heterogeneity, Incomplete Markets, Indivisible Labor, GMM Estimation
    JEL: E24 E32 J21 J22
    Date: 2007
  38. By: Mattesini Fabrizio; Rossi Lorenza
    Date: 2007–04
  39. By: Lekha Chakraborty
    Abstract: This paper analyzes the real (direct) and financial crowding out in India between 1970–71 and 2002–03. Using an asymmetric vector autoregressive (VAR) model, the paper finds no real crowding out between public and private investment; rather, complementarity is observed between the two. The dynamics of financial crowding out is captured through the dual transmission mechanism via the real rate of interest—that is, whether private capital formation is interest-rate sensitive and, in turn, whether the rise in the real rate of interest is induced by a fiscal deficit. The study found empirical evidence for the former but not the latter, supporting the conclusion that there is no financial crowding out in India. The differential impacts of public infrastructure and noninfrastruture innovations on the private corporate sector are carried out separately to analyze the nonhomogeneity aspects of public investment. The results of the Impulse Response Function reinforced that no other macrovariables, including cost and quantity of credit and the output gap, have been as significant as public investment—in particular, public infrastructure investment—in determining private corporate investment in the medium and long terms, which has crucial policy implications.
    Date: 2007–10
  40. By: Axel Dreher; Silvia Marchesi; James Raymond Vreeland
    Abstract: Using panel data for 157 countries over the period 1999-2005 we empirically investigate the politics involved in IMF economic forecasts. We find a systematic bias in growth and inflation forecasts. Our results indicate that countries voting in line with the US in the UN General Assembly receive lower inflation forecasts. As the US is the Fund’s major shareholder, this result supports the hypothesis that the Fund’s forecasts are not purely based on economic considerations. We further find inflation forecasts are systematically biased downwards for countries with greater IMF loans outstanding relative to GDP, indicating that the IMF engages in “defensive forecasting.” Countries with a fixed exchange rate regime also receive low inflation forecasts. Considering the detrimental effects that inflation can have under such an exchange rate regime, we consider this evidence consistent with the Fund’s desire to preserve economic stability.
    Keywords: IMF; Economic Forecasts; Political Influence
    JEL: C23 D72 F33 F34
    Date: 2007–10
  41. By: Krüger, Niclas A (Department of Business, Economics, Statistics and Informatics); Svensson, Mikael (Department of Business, Economics, Statistics and Informatics)
    Abstract: In this paper we investigate the relationship between crude and age adjusted mortality andeconomic conditions by wavelet analysis in Sweden over the period 1800-2000. We use wavelet correlations and cross-correlations to analyze the contemporaneous connection as well as the lead/lag relationship between mortality and GDP at different time scales. Our results indicate a countercyclical relationship, i.e. mortality decreases in economic upturns, for all time horizons. The relationship is strongest and highly significant for dynamics with a period between 4 and 8 years, corresponding to the length of a typical Swedish business cycle. By means of vector autoregressive modelling, we further examine the dynamics of the response in mortality to an exogenous GDP growth shock. Our results indicate that economic upturns decreases contemporaneous mortality and increases mortality between six and eight years ahead.
    Keywords: Mortality; GDP growth; Wavelet
    JEL: E32 I12
    Date: 2007–10–29
  42. By: Roel M.W.J. Beetsma; Frederick van der Ploeg
    Abstract: The political distortions in public investment projects are investigated within a bipartisan framework. The role of scrapping and modifying projects of previous governments receives special attention. The ruling party overspends on large ideological public investment projects and accumulates too much debt to bind the hands of its successor, especially if the probability of being removed from office is large and the possibility of scrapping is not ruled out. These political distortions have implications for the appropriate format of a fiscal rule. A deficit rule, like the Stability and Growth Pact, mitigates the overspending bias in ideological investment projects and improves social welfare. The optimal second-best restriction on public debt exceeds the socially optimal level of public debt. Social welfare is boosted more by investment restrictions on ideological projects. The government then perceives a larger benefit of debt reduction. In fact, if scrapping is forbidden, optimal investment restrictions can yields the socially optimal outcome. Finally, debt and investment restrictions are not needed if investment projects only have a financial return.
    Keywords: political economy, bipartisan, public investment, ideological projects, market projects, scrapping public investment, golden rule, investment restriction, deficit rule
    JEL: E6 H6 H7
    Date: 2007
  43. By: Viv Hall (Victoria University of Wellington); John McDermott (Reserve Bank of New Zealand)
    Abstract: There are no official quarterly real GDP estimates for New Zealand for the period prior to 1977. We develop a seasonally adjusted series for 1947q2 to 2006q2, by linking quarterly observations from two recent official series to temporally disaggregated observations for an earlier time period. Annual real GDP series are disaggregated, using the information from two quarterly diffusion indexes, developed by Haywood and Campbell (1976). Three econometric models are used: the Chow and Lin (1971) model that disaggregates the level of GDP, and the Fernández (1981) and Litterman (1983) models that disaggregate changes in GDP. Statistical properties of the series are evaluated, and movements in the new series are benchmarked against qualitative research findings from New Zealand's post-WWII economic history. Our preferred quarterly series is based on results generated from the Chow-Lin model.
    Keywords: Quarterly real GDP series; temporal disaggregation; business cycles; New Zealand
    JEL: C22 C82 E01 E32
    Date: 2007–10
  44. By: Edward Nelson; Anna J. Schwartz
    Abstract: Paul Krugman’s essay “Who Was Milton Friedman?” seriously mischaracterizes Friedman’s economics and his legacy. In this paper we provide a rejoinder to Krugman on these issues. In the course of setting the record straight, we provide a self-contained guide to Milton Friedman’s impact on modern monetary economics and on today’s central banks. We also refute the conclusions that Krugman draws about monetary policy from the experiences of the United States in the 1930s and of Japan in the 1990s.
    Date: 2007
  45. By: Nandwa, Boaz; Mohan, Ramesh
    Abstract: The flexible price monetary model assumes that both the purchasing power parity (PPP) and uncovered interest parity (UIP) hold continuously. In addition, the model posits that money market equilibrium exists, which helps to determine the exchange rate. This paper explores exchange rate determination in low-income economies by applying a monetary model to Kenya to examine the exchange rate dynamics in a post-float exchange rate regime. We apply a multivariate cointegration and error correction model (ECM) to investigate whether the long-run exchange rate equilibrium and the rate of adjustment to the long-run equilibrium hold, respectively. Finally, we evaluate the relative performance of ECM versus a random walk framework in the out-of-sample forecasting. We find that the random walk performs better than the restricted model.
    Keywords: Exchange rate; volatility; regime changes; Kenyan Shilling
    JEL: C32 F31 E58 C53
    Date: 2007–11–02
  46. By: Michael B Devereux; Alan Sutherland
    Abstract: This paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two-country dynamic general equilibrium model. The method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.
    Keywords: Country portfolios, solution methods.
    JEL: E52 E58 F41
    Date: 2007–11
  47. By: Thomas Philippon; Yuliy Sannikov
    Abstract: We study investment options in a dynamic agency model. Moral hazard creates an option to wait and agency conflicts affect the timing of investment. The model sheds light, theoretically and quantitatively, on the evolution of firms' dynamics, in particular the decline of the failure rate and the decrease in the age of IPOs.
    JEL: D82 D86 D92 E22 G31 G32 G33
    Date: 2007–11
  48. By: V. V. Chari; Patrick J. Kehoe
    Abstract: Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing “Modern Macroeconomics in Practice.” Solow eloquently voices the commonly heard complaint that too much macroeconomic work today starts with a model with a single type of agent. We argue that modern macroeconomics may not end too far from where Solow prefers. He is also critical of how modern macroeconomists use data to construct models. Specifically, he seems to think that calibration is the only way that our models encounter data. To the contrary, we argue that modern macroeconomics uses a wide variety of empirical methods and that this big-tent approach has served macroeconomics well. Solow also questions our claim that modern macroeconomics is firmly grounded in economic theory. We disagree and explain why.
    Date: 2007
  49. By: Robert Shelburne (United Nations Economic Commission for Europe)
    Abstract: This paper provides an assessment of the economic situation and outlook for Europe, North America and the CIS economies as of mid-2007.
    Keywords: Macroeconomic, transition economies, Europe, CIS, North America
    JEL: E60 F01 P20 O52 O51 O50
    Date: 2007–03
  50. By: J. Benson Durham
    Abstract: The skew, irrespective of the mean and variance, of investors' interest rate expectations may affect required bond yields over expected short rates. Indeed, evidence suggests that the near-term skew of the option-implied distribution of expected short-term interest rates correlates with distant-horizon term premiums, as derived from a latent-factor affine term structure model (ATSM). Reduced-form models that include skew generally fit the data well and actually better "explain" variation in the term premium during the so-called "conundrum" than during other periods of the May 1989 to May 2006 sample. Moreover, estimates suggest that skew accounts for over half of the movement in term premiums during the "conundrum," considerably more than any other correlate. Caveats regard the term structure of skew as well as alternative measures of the term premium. Indeed, regression analysis of movements in term premiums is plagued by specification bias on both the left- and right-hand-side of the equation.
    Date: 2007
  51. By: MAN-SEOP PARK (Department of Economics, Korea University)
    Abstract: The paper sets up an analytical framework which is based on simplified balance sheets of the banking, the non-banking private and the government sectors, in order to identify four primary routes through which money can be generated endogenously and to discuss their characteristics. These routes approximate, if not precisely correspond to, the Post Keynesian accommodationist and structuralist views, the New Keynesian credit view (¡°bank lending channel¡±), and a hybrid one.
    JEL: E12 E51
    Date: 2007
  52. By: Liam Graham; Stephen Wright
    Abstract: We provide a microfounded account of imperfect information in the stochastic growth model which dramatically changes the properties of the model. We describe heterogenous households that acquire information about aggregates through their participation in markets. If markets are incomplete, household information will be imperfect. We solve the model taking account of the infinite regress of expectations that this lack of information implies. We derive analytical and numerical results to show that imperfect information can significantly change the properties of the model: under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative.
    Keywords: imperfect information; higher order expectations; Kalman filter; dynamic general equilibrium
    JEL: D52 D84 E32
    Date: 2007–11
  53. By: João Miguel Ejarque (University of Essex); Pedro Portugal (Bank of Portugal, Universidade Nova de Lisboa and IZA)
    Abstract: This paper estimates a structural model of the employment decision of the firm. Our establishment level data displays an extreme degree of rigidity in that employment levels are largely constant throughout our sample. This can be due to the fact that establishments face large shocks but also large adjustment costs, or alternatively that they incur no adjustment costs but that shocks are negligible. Given our identifying assumptions, we find that rigidity is due to adjustment costs and not to the shock process. We further find that these costs reduce the value of the firm as much as 5%. Finally, small fixed costs of adjustment have a large impact on entry and exit job flows.
    Keywords: adjustment costs, employment, rigidity
    JEL: C33 C41 E24 J23
    Date: 2007–10
  54. By: Patrick J. Kehoe; Virgiliu Midrigan
    Abstract: The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatiity fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.
    Date: 2007
  55. By: Erdenebat Bataa (Centre for Growth and Business Cycles Research, Economics, University of Manchester); Dong H. Kim (Department of Economics, Korea University and Economics, University of Manchester); Denise R. Osborn (Centre for Growth and Business Cycles Research, Economics, University of Manchester)
    Abstract: We extend vector autoregressive (VAR) model based expectations hypothesis tests of the term structure by relaxing some specification assumptions in order to reflect model uncertainty. Firstly, the wild bootstrap is used to allow for conditional heteroskedasticity of unknown form in the VAR residuals. Secondly, the model selection procedure is endogenized in the bootstrap replications and supplemented with a robust multivariate autocorrelation test. Finally, a stationarity correction is introduced to prevent the bias corrected VAR coefficients from becoming explosive. When the new methodology is applied to extensive US term structure data it emerges that the model uncertainty goes a long way in explaining the empirical rejections of the theory.
    Keywords: expectations hypothesis, term structure, wild bootstrap, conditional heteroskedasticity
    JEL: G10 E43
    Date: 2007
  56. By: Yongbok Jeon; Matías Vernengo
    Abstract: Changes in labor productivity have been a source of puzzlement and paradoxical results for economists. We suggest that puzzles and paradoxes vanish once two simple regularities are properly acknowledged. Okun and Verdoorn’s Laws explain 87 percent of all the variations in labor productivity. Also, our estimation method and our results suggest that conventional measures of Okun’s Law have overestimated the value of the Okun coefficient, and accepted a greater degree of variability than is actually guaranteed by the empirical evidence. Okun’s Law has been relatively stable through time, and there is no significant decrease in the value of the parameter since the 1960s.
    Keywords: Productivity, Cycle, Structural Change
    JEL: E32 O49 O51
    Date: 2007–05
  57. By: John T. Addison (QueenÕs University Belfast (U.K.) and GEMF, Portugal and The Rimini Centre for Economics Analysis, Italy.); Paulino Teixeira (Universidade de Coimbra, Portugal and GEMF, Portugal)
    Abstract: Using international data, we investigate whether the quality of industrial relations matters for the macro economy. We measure industrial relations inversely by strikes Ð which proxy we cross-check with an industrial relations reputation indicator Ð and our macro performance indicator is the unemployment rate. Independent of the role of other institutions, good industrial relations do seem to matter: greater strike volume is associated with higher unemployment. But these results apply in cross section. Holding country effects constant, the sign of the strikes coefficient is abruptly reversed. Although it does not seem to be the case that the line of causation runs from unemployment to strikes once we control for the endogeneity of strikes, it is also the case that support for the strikes proxy for industrial relations quality is much eroded.
    Keywords: strikes, industrial relations quality, unemployment, labor market institutions, cross-country data
    JEL: E24 J5 J64
    Date: 2007–07
  58. By: Petra Dünhaupt (IMK at the Hans Boeckler Foundation); Eckhard Hein (IMK at the Hans Boeckler Foundation); Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: This study analyses the longer term implications of 'financialisation' in the US and in Germany from a macroeconomic perspective. In the process of 'financialisation' the importance of the financial sector of an economy increases relative to that of the non-financial sector. While discussing both opportunities and risks involved with 'financialisation', particular emphasis is on the potential causes and implications of a phenomenon repeatedly observed since the early 1980s: whereas physical investment activity was relatively weak over extended periods of time, profits in the business sector have developed very favourably throughout the period. In the US, economic growth is increasingly driven by (wealth-based and debt-financed) private consumption, while in Germany growth and profits depend increasingly on exports. We examine the implications of these different growth patterns in light of the current turbulences in national and international financial systems.
    Date: 2007
  59. By: Acocella Nicola; Di Bartolomeo Giovanni
    Abstract: This paper outlines the evolution of the theory of economic policy from the classical contributions of Frisch, Hansen, Tinbergen and Theil to situations of strategic interaction. Andrew Hughes Hallett has taken an active and relevant part in this evolution, having contributed to both the development and recent rediscovery of the classical theory, with possible relevant applications for model building.
    Keywords: policy games, policy effectiveness, controllability, equilibrium existence
    JEL: C72 E52 E61
    Date: 2007–06
  60. By: Nobuhiro Kiyotaki; Alexander Michaelides; Kalin Nikolov
    Abstract: This paper is a quantitatively-oriented theoretical study into the interaction between housing prices, aggregate production, and household behaviour over a lifetime. We develop a life-cycle model of a production economy in which land and capital are used to build residential and commercial structures. We find that, in an economy where the share of land in the value of structures is large, housing prices react more to an exogenous change in expected productivity or the world interest rate, causing large redistribution effects between net buyers and net sellers of houses. Changing the financing constraint, however, has limited effects on housing prices.
    Keywords: Real estates, Land, Housing Prices, Life cycle, Collateral constraints.
    JEL: E21
    Date: 2007–11
  61. By: Alina Spiru
    Abstract: In this study, the degree of convergence of inflation rates of Central and East European economies to a variety of measures of European norm inflation is assessed using a range of techniques. These include unit root testing based upon panels of data and - an innovation to the pertinent literature - tests of nonlinear convergence. The results suggest that while convergence can be revealed in a number of cases, there is some sensitivity associated with the testing framework, in particular whether time series or panel methods are used. Furthermore, the inflation convergence performance of the CEE countries is conditional on the chosen inflation benchmark, the composition of the panel and the correlations among members. Moreover, by conducting a battery of linearity tests, it is found that nonlinear inflation convergence is virtually ubiquitous for the period that includes the accession of the Central and Eastern European former transition economies into the EU.
    Keywords: inflation convergence, panel data, linearity tests
    Date: 2007
  62. By: Pierfederico Asdrubali (John Cabot University); Soyoung Kim (Department of Economics, Korea University)
    Abstract: By fully exploiting the statistical properties of panel data, this paper improves upon existing methodologies to estimate consumption smoothing at least in three respects. First, we model explicitly incomplete risksharing as well as incomplete intertemporal smoothing, and couch the two mechanisms in a unified framework. Second, we fully exploit simple panel data analysis in order to measure degrees of both risksharing and intertemporal smoothing taking place in a given set of economic regions. In particular, we are able to measure not only the smoothing of idiosyncratic shocks, but also the dependence on aggregate (non-diversifiable) shocks. Third, we distinguish neatly between the effects of temporary vs. permanent shocks. This can be done by taking advantage of the complementarity between the ¡°within¡± estimator and the ¡°between¡± estimator in a panel regression. We apply the above methodology to a panel of 23 OECD countries in the period from 1955 to 2005. The main finding is consistent with the puzzle of negligible international risksharing, in line with the results of S©ªrensen and Yosha (1998), and despite the use of a different data source. Our analysis shows that industrial countries have tended to absorb output shocks mostly through intertemporal smoothing. About 25% of all temporary shocks are smoothed this way, while a comparable fraction of permanent shocks determine consumption growth.
    Keywords: Panel Data, Risksharing, Intertemporal Smoothing
    JEL: F41 E21
    Date: 2007
  63. By: Pierfederico Asdrubali (John Cabot University); Soyoung Kim (Department of Economics, Korea University)
    Abstract: This paper develops a method to estimate jointly the degree of intertemporal consumption smoothing and the degree of ¡±interregional¡± risksharing. The empirical results for the US states and OECD and EU countries suggest that: 1) regardless of the assumption on the degree of intertemporal consumption smoothing, the degree of risksharing within a country is larger than across countries; 2) the degree of intertemporal consumption smoothing within a country is also larger than across countries; 3) The difference between the degree of intertemporal consumption smoothing within US states and across OECD and EU countries is as large as the difference between the degree of risksharing, contrary to the findings of some past studies.
    Keywords: intertemporal consumption smoothing, risksharing, channels of risksharing, international vs. intranational
    JEL: E21 F36 F41
    Date: 2007
  64. By: Mark Bils (University of Rochester and NBER); Yongsung Chang (University of Rochester and Seoul National University); Sun-Bin Kim (Department of Economics, Korea University)
    Abstract: We introduce worker differences in labor supply, reecting differences in skills and assets, into a model of separations, matching, and unemployment over the business cycle. Separating from employment when unemployment duration is long is particularly costly for workers with high labor supply. This provides a rich set of testable predictions across workers: those with higher labor supply, say due to lower assets, should display more procyclical wages and less countercyclical separations. Consequently, the model predicts that the pool of unemployed will sort toward workers with lower labor supply in a downturn. Because these workers generate lower rents to employers, this discourages vacancy creation and exacerbates the cyclicality of unemployment and unemployment durations. We examine wage cyclicality and employment separations over the past twenty years for workers in the Survey of Income and Program Participation (SIPP).Wages are much more procyclical for workers who work more. This pattern is mirrored in separations; separations from employment are much less cyclical for those who work more. We do see for recessions a strong compositional shift among those unemployed toward workers who typically work less.
    Date: 2007
  65. By: Frederick van der Ploeg
    Abstract: If demand for human services is inelastic or manufactured goods are necessities, labour shifts from manufacturing to services and the budget share of services rises. Higher productivity growth in the market sector pushes up the tax rate and public employment if private goods and public services are poor substitutes, labour supply is inelastic and there are few dependants. Otherwise, private affluence and public squalor result. More dependants boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. Extensions to market and public employment being imperfect substitutes, varying utility of money and public sector productivity depends on pay.
    Keywords: Baumol's cost disease, Wagner's law, congestion, cost of public funds, dependency ratio
    JEL: E62 H0 J22 J31 J4 O40
    Date: 2007
  66. By: Frederick van der Ploeg
    Abstract: Many resource-rich countries have negative genuine saving rates, so deplete their exhaustible natural resource wealth faster than they build up wealth in other assets. This phenomenon is stronger in more fractionalized countries with poor legal systems. We explain this by a power struggle about the control of natural resources. Competing fractions in society thus have a private stock of financial assets and a common stock of natural resources. We solve a dynamic common-pool problem and obtain political economy variants of the Hotelling rule for resource depletion and the Hartwick saving rule necessary to sustain constant consumption in an economy with exhaustible natural resources. Resource depletion is faster than demanded by the Hotelling rule. As a result, the country has negative genuine saving rates and is running down its national wealth. The country saves more in financial assets than the current natural resource rents. Still, the erosion of natural wealth exceeds the accumulation of financial assets. Even though the power struggle boosts output, consumption is sub-optimally low. The highlighted political distortions are larger if the country is more fractionalized.
    Keywords: Exhaustible natural resources, Hotelling resource rents, Hartwick rule, genuine saving, capital, sustainable consumption, rapacious rent seeking, common pool, voracity, fractionalization
    JEL: E20 F32 O13 Q01 Q32
    Date: 2007
  67. By: Huisman, K.J.M.; Kort, P.M.; Plasmans, J.E.J. (Tilburg University, Center for Economic Research)
    Abstract: This paper considers a representative firm taking investment decisions in a high-tech environment where different generations of products are invented over time. First, we develop a real options investment model in which, according to standard practice, the sales price and the unit production cost both satisfy a geometric Brownian motion (GBM) process. However, from real life data of the LCD industry it follows that output prices behave according to a crystal cycle that does not match a GBM. We proceed by conducting a thorough econometric analysis, leading to the conclusion that a vector autoregressive model (V AR) provides the best fit. Integrating this model with the real options machinery, we find that (i) at the moment of investment the increased production capacity goes along with increasing production cost and decreasing price, (ii) a management effect is present in the sense that a price drop is followed by a cost decrease due to management pushing harder on cost decreasing programs, and (iii) investing can be optimal while at the same time a GBM yields a negative net present value (NPV). We also find that investment decisions taken in practice are better supported by our V AR model than by the standard real options model based on GBM.
    Keywords: High-tech Investment;Investment under Uncertainty;Product Innovation;Real Options;Vector Autoregressive Model
    JEL: C32 D92 E22 O33
    Date: 2007
  68. By: Sajawal Khan (Pakistan Institute of Development Economics, Islamabad.); Muhammad Arshad Khan (Pakistan Institute of Development Economics, Islamabad.)
    Abstract: This study is an attempt to analyse the determinants of private investment in Pakistan over the period 1972-2005. The ARDL co-integration approach is employed to check the existence of a long-run relationship as well as short-run dynamics of investment. The results show that most traditional factors have little or no impact on private investment. These results may support the idea that nontraditional factors such as quality of institutions, governance, entrepreneurial skill, etc., are prerequisites for private investment to flourish. We find partial support for the accelerator principle and the crowding-out hypothesis in the case of Pakistan. However, the hypothesis that the volume of the funds is as important as the cost of the funds used in financing private investment and the McKinnon-Shaw hypothesis are not verified in the case of Pakistan.
    Keywords: Private Investment, Growth, Crowding Out, Co-integration
    JEL: E22 O40 Z10 C20
    Date: 2007
  69. By: Li Wang; John Whalley
    Abstract: Given the rapidly growing reserves in Asia (China, Japan, Korea, Taiwan) and the pressures from trading partners to revalue, there is a need to examine commercial policy in more than a pure barter model. Here we evaluate the joint impacts of exchange rate appreciation on trade flows and country surpluses using a general equilibrium trade model with a simple monetary structure in which the trade surplus is endogenously determined in the exchange rate setting country and the exchange rate is exogenous. We illustrate its application to the Chinese case using calibration to 2005 data. Our results, while elasticity dependent, suggest that the impacts of Renminbi (RMB) revaluation on the surplus are proportionally larger than on trade flows, and that changes in trade flows can be substantial. Different treatments of China's processing trade have small impact on changes in China's trade flow under RMB appreciation, but significant impacts on the change in the surplus. Results are elasticity dependent; larger substitution elasticities in preferences yield larger effects on trade flows and the surplus.
    JEL: E5 F3 F43
    Date: 2007–11
  70. By: Soyoung Kim (Department of Economics, Korea University)
    Abstract: This paper develops a new methodology to infer the de facto exchange rate regime, based on a structural VAR model with sign restrictions. The methodology is applied to data from eleven emerging markets that recently experienced a currency crisis. The main findings are: (1) to be consistent with the “Hollow Middle?hypothesis, many countries moved toward hard pegs, such as dollarization and a currency board, or more flexible exchange rate arrangements that are close to the free float in the post-crisis period; and (2) the cases where a country over-states its exchange rate flexibility (including the case of “Fear of Floating? are found in all samples, but such cases tend to be less frequently found in the post-crisis period than in the pre-crisis period.
    Keywords: De Facto Exchange Rate Regime, structural VAR, Fear of Floating, Hollow Middle, Currency Crisis
    JEL: F33 E52 F31 C32
    Date: 2007
  71. By: Michael D. Bordo; Christopher M. Meissner
    Abstract: We explore the association between economic growth and participation in the international capital market. In standard growth regressions, we find mixed evidence of any association between economic growth and foreign capital inflows. If there is an impact, it comes with a long lag and it is transitory having no impact on either the steady state or the short run growth rate. This suggests a view that there were long gestation lags of large fixed investments and it is also consistent with a neoclassical growth model. We also argue for a negative indirect channel via financial crises. These followed on the heels of large inflows and sudden stops of capital inflows often erasing the equivalent of several years of growth. We then take a balance sheet perspective on crises and explore other determinants of debt crises and currency crises including the currency composition of debt, debt intolerance and the role of political institutions. We argue that the set of countries that gained the least from capital flows in terms of growth outcomes in this period were those that had currency crises, foreign currency exposure on their national balance sheets, poorly developed financial markets and presidential political systems. Countries with credible commitments and sound fiscal and financial policies avoided major financial crises and achieved higher per capita incomes by the end of the period despite the potential of facing sudden stops of capital inflows, major current account reversals and currency crises that accompanied international capital markets free of capital controls.
    JEL: E22 F21 F32 F43 N1 N20
    Date: 2007–11
  72. By: James D. Hamilton
    Abstract: This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the fed funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target. The paper shows that parameters estimated solely on the basis of the behavior of the fed funds and fed funds futures can account for the broad calendar regularities in the relation between fed funds futures and Treasury yields of different maturities. Although the methods are new, the conclusion is quite similar to that reported by earlier researchers-- changes in the fed funds target seem to be associated with quite large changes in Treasury yields, even for maturities up to ten years.
    JEL: E5
    Date: 2007–11
  73. By: George Alessandria; Alain Delacroix
    Abstract: In a closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find large welfare gains to removing firing restrictions. We explore the extent to which international trade alters this result. When economies trade, labor market policies in one country spill over to other countries through their effect on the terms of trade. A key finding in the open economy is that the share of the welfare gains from domestic labor market reform exported substantially exceeds the share of goods exported. In our baseline case, 105 percent of the welfare gains are exported even though the domestic economy only exports 30 percent of its goods. Thus, with international trade a country receives little to no benefit, and possibly even loses, from unilaterally reforming its labor market. A coordinated elimination of firing taxes yields considerable benefits. We find the welfare gains to the U.K. from labor market reform by its continental trading partners of 0.21 percent of steady state consumption. This insight provides some explanation for recent efforts toward labor market reform in the European Union.
    Keywords: Firing Costs, International Trade, Labor Market Reform
    JEL: D78 E24 E61 F16 F42 J65
    Date: 2007
  74. By: Nauro F. Campos (Brunel University CEPR, WDI and IZA); Menelaos G. Karanasos (Brunel University)
    Abstract: What is the relationship between economic growth and its volatility? Does political instability affect growth directly or indirectly, through volatility? This paper tries to answer such questions using a power-ARCH framework with annual time series data for Argentina from 1896 to 2000. We show that while assassinations and strikes (what we call "informal" political instability) have a direct negative effect on economic growth, "formal" political instability (constitutional and legislative changes) has an indirect (through volatility) negative impact. We also find preliminary support for the idea that while the effects of "formal" instability are stronger in the long-run, those of "informal" instability are stronger in the short-run.
    Keywords: economic growth, volatility, political instability, power-ARCH
    JEL: C14 O40 E23 D72
    Date: 2007–10

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