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on Macroeconomics |
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Issue of 2007‒12‒01
76 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| 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. |
| JEL: | E12 E13 E2 E20 E21 E22 E32 E4 E5 E52 E58 E6 E62 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13655&r=mac |
| By: | Ricardo Reis; Mark W. Watson |
| Abstract: | This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices to separate them into three components: idiosyncratic relative-price changes, aggregate relative-price changes, and changes in the unit of account. The model identifies a measure of "pure" inflation: the common component in goods' inflation rates that has an equiproportional effect on all prices and is uncorrelated with relative price changes at all dates. The estimates of pure inflation and of the aggregate relative-price components allow us to re-examine three classic macro-correlations. First, we find that pure inflation accounts for 15-20% of the variability in overall inflation, so that most changes in inflation are associated with changes in goods' relative prices. Second, we find that the Phillips correlation between inflation and measures of real activity essentially disappears once we control for goods' relative-price changes. Third, we find that, at business-cycle frequencies, the correlation between inflation and money is close to zero, while the correlation with nominal interest rates is around 0.5, confirming previous findings on the link between monetary policy and inflation. |
| JEL: | C32 C43 E31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13615&r=mac |
| By: | Josephine M. Smith; John B. Taylor |
| Abstract: | We first document a large secular shift in the estimated response of the entire term structure of interest rates to inflation and output in the United States. The shift occurred in the early 1980s. We then derive an equation that links these responses to the coefficients of the central bank's monetary policy rule for the short-term interest rate. The equation reveals two countervailing forces that help explain and understand the nature of the link and how its sign is determined. Using this equation, we show that a shift in the policy rule in the early 1980s provides an explanation for the observed shift in the term structure. We also explore a shift in the policy rule in the 2002-2005 period and its possible effect on long-term rates. |
| JEL: | E43 E44 E52 E58 E65 G12 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13635&r=mac |
| By: | Florin Bilbiie; Fabio Ghironi; Marc J. Melitz |
| Abstract: | This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to the sunk entry costs) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The stock-market price of investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts a procyclical number of producers and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can reproduce the variance and autocorrelation of GDP found in the data. |
| JEL: | E20 E32 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13646&r=mac |
| By: | Philip Liu |
| Abstract: | This paper examines the sources of Australia’s business cycle fluctuations focusing on the role of international shocks and short run stabilization policy. A VAR model identified using robust sign restrictions derived from an estimated structural model is used to aid the investigation. The results indicate that, in contrast to previous VAR studies, foreign factors contribute over half of domestic output forecast errors whereas innovation from output itself has little effect. Furthermore, monetary policy was largely successful in mitigating the business cycle fluctuations in a counter-cyclical fashion while the floating exchange rate also help offset foreign disturbances. For Australia’s stable economic success, good policy helped but so did good luck. |
| JEL: | E32 E52 E63 F41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-24&r=mac |
| By: | Anton Nakov; Andrea Pescatori |
| Abstract: | We assess the extent to which the period of great U.S. macroeconomic stability since the mid-1980s can be accounted for by changes in oil shocks and the oil share in GDP. To do this we estimate a DSGE model with an oil-producing sector before and after 1984 and perform counterfactual simulations. We nest two popular explanations for the Great Moderation: (1) smaller (non-oil) real shocks;and (2) better monetary policy. We find that the reduced oil share accounted for as much as one-third of the inflation moderation and 13% of the growth moderation, while smaller oil shocks accounted for 11% of the inflation moderation and 7% of the growth moderation. This notwithstanding, better monetary policy explains the bulk of the inflation moderation, while most of the growth moderation is explained by smaller TFP shocks. |
| Keywords: | Monetary policy ; Petroleum products - Prices ; Business cycles |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0717&r=mac |
| By: | Luisa Lambertini (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University) |
| Abstract: | We analyze the interaction of monetary and fiscal policies in a monetary union where the common central bank is more conservative than the fiscal authorities. When monetary and fiscal policies are discretionary, we find that the Nash equilibrium is sub-optimal with higher output and lower inflation than the cooperative Ramsey op- timum. In a further example of counterproductive cooperative, we find that fiscal cooperation makes matters worse. We also examine cooperative and non-cooperative fiscal policy in the case where the central bank can commit and has the same prefer- ences as the fiscal authorities. |
| Keywords: | fiscal-monetary policy interactions, fiscal cooperation and non-cooperation. |
| JEL: | F33 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1707&r=mac |
| By: | Danthine, Jean-Pierre; Kurmann, Andre |
| Abstract: | We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labour relations but contrast with traditional efficiency wage models which emphasize aggregate labour market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock. |
| Keywords: | Efficiency wages; Estimated DSGE models; Reciprocity |
| JEL: | E24 E31 E32 E52 J50 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6587&r=mac |
| By: | Hughes Hallett, Andrew; Libich, Jan; Stehlík, Petr |
| Abstract: | Monetary and Fiscal policies interact in many ways. Recently the stance of fiscal policy in a number of countries has raised concerns about the risks for the outcomes of monetary policy. This paper first shows that these concerns are justified since, under ambitious fiscal policy makers, inflation bias and lack of monetary policy credibility may obtain in equilibrium even if the central banker is fully independent, patient and responsible. To reach a solution, the paper proposes an asynchronous game framework that generalises the standard commitment analysis. It allows concurrent and partial commitment; both policies may be committed at the same time for varying degrees or different periods. It is demonstrated that these undesirable outcomes can be prevented if monetary commitment is sufficiently strong relative to fiscal commitment. Interestingly, that monetary commitment cannot only resist fiscal pressure, but also discipline and ambitious fiscal policy maker to achieve socially desirable outcomes for both policies. We extend the setting to the European monetary union case with a common central bank and many fiscal policy makers, to show that these results carry over. The implication therefore is: by explicitly committing to a long run inflation target, the central bank can not only ensure its credibility, but also indirectly induce more disciplined fiscal policies. The paper shows that these predictions are broadly supported empirically. |
| Keywords: | asynchronous moves; Battle of sexes; commitment; Game of chicken; inflation targeting; monetary-fiscal interactions |
| JEL: | C73 E61 E63 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6586&r=mac |
| By: | Rossi, Raffaele |
| Abstract: | This paper shows that the introduction of a set of rule of thumb consumers (ROTC) a' la Galí et al.(2007) in a standard New Keynesian model can reverse the traditional predictions of a change in government spending on the economy as a whole. In particular, we show that under a reasonable parametrization of the model, an increase in government spending can lead, against the common Keynesian wisdom, to a decrease in total output. Furthermore we analyze how the determinacy condition of the model is affected by the presence of a set of ROTC and a fiscal policy which levies a proportional income tax. In particular we find that, when the share of ROTC is above a specified threshold, the monetary-fiscal policy mix that guarantees a unique equilibrium requires both policies to be, following the definition of Leeper (1991), either active or passive. Finally we show that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a positive government spending shock. |
| Keywords: | Rule-of-thumb-consumers; monetary-fiscal policy interactions; distortive taxation; public spending; private consumption. |
| JEL: | E62 E32 H30 |
| Date: | 2007–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5904&r=mac |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | A DSGE model with a Taylor rule is augmented with an evolutionary switching between technical and fundamental analyses in currency trade, where the fractions of these trading tools are determined within the model. Then, a shock hits the economy. As a result, chaotic dynamics and long swings may occur in the exchange rate, which are appealing features of the model given existing empirical evidence on chaos and long swings in exchange rate fluctuations. |
| Keywords: | chaotic dynamics; foreign exchange; fundamental analysis; monetary policy; technical analysis |
| JEL: | C65 E32 E44 E52 F31 |
| Date: | 2007–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_019&r=mac |
| By: | Bittencourt, Manoel |
| Abstract: | We examine the impact of inflation on financial development in Brazil and the data available permit us to cover the period between 1985 and 2002. The results–based initially on time-series and then on panel time-series data and analysis, and robust for different estimators and financial development measures–suggest that inflation presented deleterious effects on financial development at the time. The main implication of the results is that poor macroeconomic performance, exemplified in Brazil by high rates of inflation, have detrimental effects to financial development, a variable that is important for affecting, e.g. economic growth and income inequality. Therefore, low and stable inflation, and all that it encompasses, is a necessary first step to achieve a deeper and more active financial sector with all its attached benefits. |
| Keywords: | Financial development, inflation, Brazil |
| JEL: | E31 E44 O11 O54 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec07:6524&r=mac |
| By: | Gregor W. Smith (Queen's University); James Yetman (University of Hong Kong) |
| Abstract: | Dynamic Euler equations restrict multivariate forecasts. Thus a range of links between macroeconomic variables can be studied by seeing whether they hold within the multivariate predictions of professional forecasters. We illustrate this novel way of testing theory by studying the links between forecasts of U.S. nominal interest rates, inflation, and real consumption growth since 1981. By using forecast data for both returns and macroeconomic fundamentals, we use the complete cross-section of forecasts, rather than the median. The Survey of Professional Forecasters yields a three-dimensional panel, across quarters, forecasters, and forecast horizons. This approach yields 14727 observations, much greater than the 107 time series observations. The resulting precision reveals a significant, negative relationship between consumption growth and interest rates. |
| Keywords: | forecast survey, asset pricing, Fisher effect |
| JEL: | E17 E21 E43 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1144&r=mac |
| By: | Alpanda, Sami; Honig, Adam |
| Abstract: | This paper examines the extent to which monetary policy is manipulated for political purposes by testing for the presence of political monetary cycles between 1972 and 2001. This is the first study of its kind to include not only advanced countries but also a large sample of developing nations where these cycles are more likely to exist. We estimate panel regressions of a monetary policy indicator on an election dummy and control variables. We do not find evidence of political monetary cycles in advanced countries but find strong evidence in developing nations. Based on our results, we construct a new de facto ranking of central bank independence derived from the extent to which monetary policy varies with the election cycle. Our ranking of CBI is therefore based on the behavior of central banks during election cycles when their independence is likely to be challenged or their lack of independence is likely to be revealed. The ranking also avoids well-known problems with existing measures of central bank independence. |
| Keywords: | Political monetary cycles; central bank independence |
| JEL: | E58 E52 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5898&r=mac |
| By: | Sayan, Serdar; Tekin-Koru, Ayca |
| Abstract: | ... |
| JEL: | E32 F24 I32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6030&r=mac |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing. |
| Keywords: | determinacy; DSGE model; interest rate rule; least-squares learning; technical trading |
| JEL: | C62 E52 F31 F41 |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_022&r=mac |
| By: | Corsetti, Giancarlo |
| Abstract: | 'New open economy macroeconomics' (NOEM) refers to a body of literature embracing a new theoretical framework for policy analysis in open economy, aiming to overcome the limitations of the Mundell-Fleming model while preserving the empirical wisdom and policy friendliness of traditional analysis. NOEM contributions have developed general equilibrium models with imperfect competition and nominal rigidities, to reconsider conventional views on the transmission of monetary and exchange rate shocks; they have contributed to the design of optimal stabilization policies, identifying international dimensions of optimal monetary policy; and they have raised issues about the desirability of international policy coordination. |
| Keywords: | exchange rates; international policy coordination; Mundell-Fleming model; open economy models; stabilization policy |
| JEL: | F33 F40 F41 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6578&r=mac |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | We embed an expectations-based optimal policy rule into a DSGE model for a small open economy that is augmented with trend extrapolation or chartism, which is a form of technical trading, in currency trade to examine the prerequisites for monetary policy. We find that a unique REE that is least-squares learnable is often the outcome when there is a limited amount of trend extrapolation, but that a less flexible inflation rate targeting may cause a multiplicity of REE. We also compute impulse-response functions for key macroeconomic variables to study how the economy returns to steady state after being hit by a shock. |
| Keywords: | determinacy; DSGE model; least-squares learning; targeting rule; technical trading; monetary policy |
| JEL: | C62 E52 F31 F41 |
| Date: | 2007–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_021&r=mac |
| By: | Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | The economic performances of the Eurozone look weaker than those of the United States over<br />the period 1999-2006, in spite of the fact that the former applies more thoroughly the 'new<br />macroeconomics' governance rules concerning public deficits and inflation control. The<br />literature emphasizes Alan Greenspan's pragmatism when discussing the relative success of<br />the Fed, but the reasons why pragmatism ought to do better than a thorough application of the<br />'new macroeconomics' theoretical recommendations remain unexplored. The paper focuses on<br />the advantage of monetary policy pragmatism in the face of Keynesian uncertainty. More<br />specifically, it points out the trials of the 'new macroeconomics' principles of monetary policy<br />when they are implemented in a Keynesian context, that is, within a system which does not<br />have any 'natural' anchor. |
| Keywords: | Monetary policy; Post Keynesian; Uncertainty |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00189225_v1&r=mac |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Bo Yang (University of Surrey) |
| Abstract: | Macroeconomics research has changed profoundly since the Kydland-Prescott seminal paper. In order to address the Lucas Critique, modelling now is based on microfoundations treating agents as rational utility optimizers. Bayesian estimation has produced models which are more data consistent than those based simply on calibration. With micro-foundations and new linear-quadratic techniques, normative policy based on welfare analysis is now possible. In the open economy, policy involves a ‘game’ with policymakers and private institutions or private individuals as players. This paper attempts to reassess the Kydland-Prescott contribution in the light of these developments. |
| Keywords: | Monetary rules, commitment, discretion, open economy, coordination gains. |
| JEL: | E52 E37 E58 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1807&r=mac |
| By: | Emmanuel Dubois; Jerome Hericourt; Valerie Mignon |
| Abstract: | The aim of this paper is to gauge quantitatively the macroeconomic costs or gains of EMU membership. Building on the Global VAR framework designed by Pesaran et al. (2004), we want to shed light on the following important questions: What if the euro had never been launched? How would have evolved national outputs and inflation rates? What would have been the consequences for Italy of not participating to Stage 3? We show that we cannot draw any general conclusion for the three largest euro area members, namely Germany, France and Italy. It is however certain that these countries had, and probably still have, conflicting interests regarding the most suitable monetary policy for each of them. Conversely, small euro area members like Finland, the Netherlands and Spain, seem to have benetted from the pre-euro convergence and from the single currency regime. Besides, the single currency regime probably did not have any significant impact on price developments. Finally, the non-participation of Italy to the single currency is quite neutral on the macroeconomic performances of the euro area. |
| Keywords: | Euro; counterfactual analysis; global VAR |
| JEL: | C32 E17 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2007-17&r=mac |
| By: | Juan Manuel Julio |
| Abstract: | In order to asses the credibility of their targets and policies, in- °ation targeting central banks always keep an eye on market expectations of the future in°ation rates and short maturity interest rates. In economies with developed ¯nancial markets the prices of ¯nancial assets are a prime source of expectations. The spot curve, in particular, is thought to contain a great deal of information on market expectations. In this paper we study the pos- sibility to obtain market expectations on short maturity interest rates, that is, on the future monetary policy. A natural starting point in the program of deriving expectations from the spot curve is the Expectations Hypothesis of the Term Structure of the Interest Rates. According to this hypothesis the slope of the spot curve, the forward curve, represents the market expectations on interest rates aside from a negligible or at least time invariant forward term premium. For this note we developed a unique database of spot curves span- ning the period from Nov-1999 to Sep-2006 in order to test the validity of the Expectations Hypothesis for short maturities in Colombia. Our results indi- cate that the spot curve contains information on the future behavior of short maturity interest rates only for very short horizons. Moreover, we found that the forward term premium tend to be time varying. These result comprise in the rejection of the Expectations Hypothesis. Although these results imply that market expectations on future short maturity interest rates can not be obtained as easily as just applying the prescription of the Expectations Hy- pothesis, they do not rule out the possibility to obtain market expectations of the future monetary policy from the time series of spot curves. |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004289&r=mac |
| By: | Rafael Di Tella; Robert MacCulloch |
| Abstract: | We show that data on satisfaction with life from over 600,000 Europeans are negatively correlated with the unemployment rate and the inflation rate. Our preferred interpretation is that this shows that emotions are affected by macroeconomic fluctuations. Contentment is, at a minimum, one of the important emotions that central banks should focus on. More ambitiously, contentment might be considered one of the components of utility. The results may help central banks understand the tradeoffs that the public is willing to accept in terms of unemployment for inflation, at least in terms of keeping the average level of one particular emotion (contentment) constant. An alternative use of these data is to study the particular channels through which macroeconomics affects emotions. Finally, work in economics on the design of monetary policy makes several assumptions (e.g., a representative agent, a summary measure of emotions akin to utility exists and that individuals only care about income and leisure) that can be used to interpret our results as weights in a social loss function. |
| JEL: | E0 E58 H0 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13622&r=mac |
| By: | Constantina Kottaridi; Diego Mendez-Carbajo; Dimitrios Thomakos |
| Abstract: | We explore the connection between inflation and its higherorder 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: | Cross-sectional distribution of prices; Greece, Portugal, Spain, European Union, Harmonization. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:0004&r=mac |
| By: | Thomas A. Eife (University of Heidelberg, Department of Economics); Stephan Meier (UniCredit Group) |
| Abstract: | One of the consequences of the euro changeover in 2002 was that for a period of several years people considerably overestimated actual inflation. The goal of this paper is to study whether misperceptions of this kind may have real effects, that is, whether they induce people to alter their behaviour. We also discuss the question how far the euro changeover and the ensuing discussion about price stability contributed to the recession that followed the changeover. Looking at the German restaurant sector, we find that people’s misperceptions can have significant negative effects. The contraction this sector experienced in the months after the changeover was too pronounced to be explained by normal business cycle movements. We provide a discussion about the causes of these misperceptions and how to avoid them in future changeovers. |
| Keywords: | euro changeover, perceived inflation |
| JEL: | D12 E21 C22 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0455&r=mac |
| By: | Guido Lorenzoni |
| Abstract: | This paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks. In particular, it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post. Even though, from a first-best perspective the equilibrium always displays under-borrowing, from a second-best point of view excessive borrowing can arise. The inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market. This generates a pecuniary externality that is not internalized in private contracts. The model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis. |
| JEL: | E32 E44 E61 G10 G18 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13639&r=mac |
| By: | Ricardo M. Sousa (Universidade do Minho - NIPE) |
| Abstract: | Modern literature departs from time-separable constant relative risk aversion preferences to explain asset pricing facts. This deviation typically implies that wealth shocks generate transitory variations in agents’ relative risk aversion and, possibly, portfolio re-allocations over time. I empirically analyze this relationship using U.S. macroeconomic data and and evidence for time-variation in portfolio shares that is consistent with counter-cyclical risk aversion. These results suggest, therefore, that wealth-dependent, habit-formation or loss and disappointment aversion utility functions are a good description of preferences. Controlling for observed versus expected asset returns, I also show that: (i) wealth effects are significant (although temporary) and there is no evidence of inertia contrary to Brunnermeier and Nagel (2006); and (ii) the consumption-wealth ratio (Lettau and Ludvigson, 2001), the labor income risk (Julliard, 2004) and the labor income-consumption ratio (Santos and Veronesi, 2006) partially explain changes in the risky asset share. |
| Keywords: | wealth, risk aversion. |
| JEL: | E21 G11 E44 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:28/2007&r=mac |
| By: | Minea, A.; Villieu, P. |
| Abstract: | In this paper, we study maximizing long-run economic growth trade-off in monetary and fiscal policies in an endogenous growth model with transaction costs. We show that both monetary and fiscal policies are subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, maximizing-growth government must choose relatively high seigniorage (respectively income taxation), if “tax evasion” and “financial repression” coefficients are high (respectively low). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax-rate, as result of maximizing-growth strategies in different structural environments (notably concerning tax evasion and financial repression). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts. |
| Keywords: | endogenous growth, threshold effects, monetary policy, fiscal policy, public deficit, policy mix, tax evasion, financial repression |
| JEL: | E5 E6 H6 O4 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec07:6546&r=mac |
| By: | van den Hauwe, Ludwig |
| Abstract: | Professor Becker´s 1956 paper about free banking 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. 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 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5928&r=mac |
| By: | Thomas A. Eife (University of Heidelberg, Department of Economics); W. Timothy Coombs (University of Illinois) |
| Abstract: | The discrepancy between popular impressions of how the 2002 changeover to the euro affected prices and its actual impact is perhaps the most surprising consequence of the single currency’s introduction. Following the changeover, perceived inflation rose significantly and returned to its prechangeover level only several months later. This paper argues that people’s inflation misperceptions could have been avoided. Using principles of crisis communication, we identify the mistakes made and present policy recommendations for future changeovers |
| Keywords: | euro changeover, perceived inflation, communication, perceptual crisis |
| JEL: | E50 E60 Y80 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0458&r=mac |
| By: | Dominique Guégan (Centre d'Economie de la Sorbonne); Florian Ielpo (Centre d'Economie de la Sorbonne) |
| Abstract: | US interest rates'overnight reaction to macroeconomic announcements is of tremendous importance trading fixed income securities. Most of the empirical studies achieved so far either assumed that the interest rates' reaction to announcements is linear or independent to the state of the economy. We investigate the shape of the tern structure reaction of the swap rates to announcements using several linear and non-linear time series models. The empirical results yield several not-so-well-known stylized facts about the bond market. First, and although we used a daily dataset, we find that the introduction of non linear models leads to the finding of a significant number of macroeconomic figures that actually produce an effect over the yield curve. Most of the studies using daily datasets did not corroborate so far this conclusion. Second, we find that the term structure response to announcements can be much more complicated that what is generally found : we noticed at least four types of patterns in the term structure reaction of interest rates across maturities, including the hump-shaped one that is generally considered. Third, by comparing the shapes of the rates' term structure reaction to announcements with the first four factors obtained when performing a principal component analysis of the daily changes in the swap rates, we propose a first interpretation and classification of these different shapes. Fourth, we find that the existence of some outliers in the one-day changes in interest rates usually leads to a strong underestimation of the reaction of interest rates to announcements, explaining the different results obtained between high-frequency and daily datasets : the first type of study seems to lead to the finding of fewer market mover announcements. |
| Keywords: | Macroeconomic announcements, interest rates dynamic, outliers, reaction function, principale component analysis. |
| JEL: | G14 E43 E44 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b07062&r=mac |
| By: | Richard W. Evans |
| Abstract: | Much empirical work has documented a negative correlation between different measures of globalization or openness and inflation levels across countries and across time. However, there is much less work exploring this relationship through structural international models based on explicit microeconomic foundations. This paper asks the question of how the degree of openness of an economy affects the equilibrium inflation level in a simple two-country OLG model with imperfect competition in which the monetary authority in each country chooses the money growth rate to maximize the welfare of its citizens. I find that a higher degree of openness in a country is associated with a higher equilibrium inflation rate. This result is driven by the fact that the monetary authority enjoys a degree of monopoly power in international markets as Foreign consumers have some degree of inelasticity in their demand for goods produced in the Home country. The decision of the monetary authority is then to balance the benefitsof increased money growth that come from the open economy setting with the well-known consumption tax costs of inflation. In addition, I find that the level of imperfect competition among producers within a country is a perfect substitute for the international market power of the monetary authority in extracting the monopoly rents available in this international structure. |
| Keywords: | Globalization ; Equilibrium (Economics) |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:01&r=mac |
| By: | John Lewis; Karsten Staehr |
| Abstract: | Following the Maastricht criteria, a country seeking to join the European Monetary Union cannot have an inflation rate in excess of 1.5 percent plus the average inflation rates in the three 'best performing' EU countries. This inflation reference value is a non-increasing function of the number of EU members. Looking backwards, the effect of increasing the number of EU countries from 15 to 27would have been sizeable in 2003 and 2004, but relatively modest since 2005. Monte Carlo simulations show that the expansion of the EU from 15 to 27 members reduces the expected inflation reference value by 0.15-0.2 percentage points, but with a considerable probability of a larger reduction. The treatment of countries with negative inflation rates in the calculation of the reference value has a major impact on the results. |
| Keywords: | Maastricht Treaty; European Monetary Union; inflation; convergence. |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:151&r=mac |
| By: | Jonathan Thomas; TIm Worrall |
| Abstract: | We present an overview of models of long-term self-enforcing labour contracts in which risk sharing is the dominant motive for contractual solutions. A base model is developed which is sufficiently general to encompass the two-agent problem central to most of the literature, including variable hours. We consider two-sided limited commitment and look at its implications for aggregate labour market variables. We consider the implications for empirical testing and the available empirical evidence. We also consider the one-sided limited commitment problem for which there exists a considerable amount of empirical support. |
| Keywords: | Labour contracts, self-enforcing contracts, unemployment, business cycle. |
| JEL: | E32 J41 |
| Date: | 2007–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:176&r=mac |
| By: | Rafael Santos; Aloisio Araujo |
| Abstract: | We study the interplay between the central bank transparency, its credibility, and the inflation target level. Based on a model developed in the spirit of the global games literature, we argue that whenever a weak central bank adopts a high degree of transparency and a low target level, a bad and self confirmed type of equilibrium may arise. In this case, an over-the-target inflation becomes more likely. The central bank is considered weak when favorable state of nature is required for the target to be achieved. On the other hand, if a weak central bank opts for less ambitious goals, namely lower degree of transparency and higher target level, it may avoid confidence crises and ensure a unique equilibrium for the expected inflation. Moreover, even after ruling out the possibility of confidence crises, less ambitious goals may be desirable in order to attain higher credibility and hence a better coordination of expectations. Conversely, a low target level and a high central bank transparency are desirable whenever the economy has strong fundamentals and the target can be fulfilled in many states of nature. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:140&r=mac |
| By: | Barnett, William A.; Keating, John W.; Kelly, Logan |
| Abstract: | Measuring the economic stock of money, defined to be the present value of current and future monetary service flows, is a difficult asset pricing problem, because most monetary assets yield interest. Thus, an interest yielding monetary asset is a joint product: a durable good providing a monetary service flow and a financial asset yielding a return. The currency equivalent index provides an elegant solution, but it does so by making strong assumptions about expectations of future monetary service flows. These assumptions cause the currency equivalent index to exhibit significant downward bias. In this paper, we propose an extension to the currency equivalent index that will correct for a significant amount of this bias. |
| Keywords: | Currency equivalent index; monetary aggregation; money stock |
| JEL: | E41 |
| Date: | 2007–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6008&r=mac |
| By: | Ricardo M. Sousa (Universidade do Minho - NIPE) |
| Abstract: | I use the consumer’s budget constraint to derive a relationship between stock market returns, the residuals of the trend relationship among consumption, aggregate wealth, and labour income, cay, and three major sources of risk: future changes in the housing consumption share, cr, future labour income growth, lr, and future consumption growth, lrc. Using a VAR, I compute measures of expected and unexpected long-run changes of the major determinants of asset returns and find that: (i) cay, cday, expected lr, cr, lrc and expected long-run changes in ex-ante real returns, lrret, strongly forecast future asset returns; (ii) unexpected lrc and unexpected lrret contain some predictive power for asset returns; (iii) unexpected lr and unexpected cr do not predict future asset returns. One can, therefore, use the intertemporal budget constraint and the forecasting properties of an informative VAR to generate the predictability of many economically motivated variables developed in the literature on asset pricing. The framework presented is sufficiently flexible to accommodate the implications of a wide class of optimal models of consumer behaviour without imposing a functional form on preferences. |
| Keywords: | expectations, shocks, asset returns, wealth, income, consumption, housing share. |
| JEL: | E21 E44 D12 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:29/2007&r=mac |
| By: | Tamim Bayoumi; Silvia Sgherri |
| Abstract: | An increasing body of evidence suggests that the behavior of the economy has changed in many fundamental ways over the last decades. In particular, greater financial deregulation, larger wealth accumulation, and better policies might have helped lower uncertainty about future income and lengthen private sectors' planning horizon. In an overlapping-generations model, in which individuals discount the future more rapidly than implied by the market rate of interest, we find indeed evidence of a falling degree of impatience, providing empirical support for this hypothesis. The degree of persistence of 'windfall' shocks to disposable income also appears to have varied over time. Shifts of this kind are shown to have a key impact on the average marginal propensity to consume and on the size of policy multipliers. |
| Keywords: | Fiscal Policy; Discount Rate; Overlapping Generations Model |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:152&r=mac |
| By: | Schuknecht, Ludger; von Hagen, Jürgen; Wolswijk, Guido |
| Abstract: | This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada. With regard to the European governments, we are interested in how these premiums were affected by the introduction of the euro. Using data for bond yield spreads relative to an appropriate benchmark, for the period 1991-2005, we find that risk premiums incurred by central governments of EU member states respond positively to central government debts and deficits. This is consistent with the notion of market-imposed fiscal discipline. We find that German states and, among them, especially those usually receiving transfers under the German fiscal equalization system, enjoyed a very favourable position in the financial markets before EMU as their risk premiums did not respond to fiscal balances. This special status seems to have disappeared with start of EMU. Monetary union, therefore, imposes more fiscal discipline on German states. In contrast, Spanish provinces paid risk premiums related to their fiscal balances both before and after the start of EMU. Both German and Spanish sub-central governments paid fixed interest rate premiums over their national governments which became smaller after the introduction of the euro and are more likely to be interpreted as liquidity premiums. We also estimate empirical models of risk premiums for Canadian provinces for which we find financial market penalties of adverse fiscal balances and debt indicators. However, as in the case of Germany before EMU, those provinces that typically receive transfers under the Canadian fiscal equalization scheme have a more favourable bond market treatment than others. The evidence of market discipline at work in European government bond markets supports the notion that the no-bailout clause in the EU Treaty is credible. |
| Keywords: | bail out; fiscal policy; government debt; interest rates; regional public finances |
| JEL: | E43 E62 H63 H74 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6579&r=mac |
| By: | António Caleiro (Universidade de Évora – Departamento de Economia); Esmeralda Ramalho (Universidade de Évora – Departamento de Economia) |
| Abstract: | Confidence, in general, and consumer confidence, in particular, are subject to an increasing interest by many agents, such as central banks and governments, at a national level, as well as by supra-national entities, such as the European Commission of the European Union. Although this interest is shared by the academic community, the literature in this area is mainly focused on the use of consumer confidence to predict variables which describe the business cycle, like consumption. Instead, the objective of our paper is to examine empirically which factors underpinne the formation of consumer confidence in Portugal. To the best of our knowledge, this kind of approach was only followed by De Boef and Kellstedt (2004) for the United States. Our empirical study uses monthly data for the period January 1987—December 2006. We found that consumer confidence, besides presenting some inertia, is basically explained by the unemployment rate as well as by electoral circumstances. |
| Keywords: | Consumer Confidence, Elections, Unemployment, Portugal |
| JEL: | C22 C51 D12 E21 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cfe:wpcefa:2007_03&r=mac |
| By: | Erceg, Christopher; Gust, Christopher; López-Salido, J David |
| Abstract: | This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labour supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices. |
| Keywords: | imported intermediate inputs; open economy Phillips Curve; variable markups |
| JEL: | E52 F41 F47 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6574&r=mac |
| By: | Edward J. Chambers (Western Centre for Economic Research, School of Business, University of Alberta) |
| Keywords: | Canada--Economic conditions--Statistics, Economic indicators--Canada. |
| JEL: | E3 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:alb:series:1096&r=mac |
| By: | Barnett, William A.; Duzhak, Evgeniya A. |
| Abstract: | Grandmont (1985) found that the parameter space of the most classical dynamic models are stratified into an infinite number of subsets supporting an infinite number of different kinds of dynamics, from monotonic stability at one extreme to chaos at the other extreme, and with many forms of multiperiodic dynamics between. The econometric implications of Grandmont’s findings are particularly important, if bifurcation boundaries cross the confidence regions surrounding parameter estimates in policy-relevant models. Stratification of a confidence region into bifurcated subsets seriously damages robustness of dynamical inferences. Recently, interest in policy in some circles has moved to New Keynesian models. As a result, in this paper we explore bifurcation within the class of New Keynesian models. We develop the econometric theory needed to locate bifurcation boundaries in log-linearized New-Keynesian models with Taylor policy rules or inflation-targeting policy rules. Central results needed in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the cases that we consider. |
| Keywords: | Bifurcation; Hopf bifurcation; Euler equations; New Keynesian macroeconometrics; Bergstrom-Wymer model |
| JEL: | C3 C5 E3 |
| Date: | 2007–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6005&r=mac |
| By: | Lanouar Charfeddine (OEP, Université Marne-la-Vallée); Dominique Guégan (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper analyzes the dynamics of the US inflation series using two classes of models : structural changes models and Long memory processes. For the first class, we use the Markov Switching (MS-AR) model of Hamilton (1989) and the Structural Change (SCH-AR) model using the sequential method proposed by Bai and Perron (1998, 2003). For the second class, we use the ARFIMA process developed by Granger and Joyeux (1980). Moreover, we investigate whether the observed long memory behavior is a true behavior or a spurious behavior created by the presence of breaks in time series. Our empirical results provide evidence for changes in mean, breaks dates coincide exactly with some economic and financial events such Vietnam War and the two oil price shocks. Moreover, we show that the observed long memory behavior is spurious and is due to the presence of breaks in data set. |
| Keywords: | Structural breaks models, long range dependance, inflation series. |
| JEL: | C13 C32 E3 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b07061&r=mac |
| By: | Dominique Guégan (Centre d'Economie de la Sorbonne); Florian Ielpo (Centre d'Economie de la Sorbonne) |
| Abstract: | In this paper, we introduce a new approach to estimate the subjective distribution of the future short rate from the historical dynamics of futures, based on a model generated by a Normal Inverse Gaussian distribution, with dynamical parameters. The model displays time varying conditional volatility, skewness and kurtosis and provides a flexible framework to recover the conditional distribution of the future rates. For the estimation, we use maximum likelihood method. Then, we apply the model to Fed Fund futures and discuss its performance. |
| Keywords: | Subjective distribution, autoregressive conditional density, generalized hyperbolic distribution, Fed Funds futures contracts. |
| JEL: | C51 E44 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b07056&r=mac |
| By: | Jean-Pierre Danthine (University of Lausanne, CEPR and Swiss Finance Institute); John B. Donaldson (Columbia University) |
| Abstract: | We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the ¯rm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own ¯rm ensures that her interests are aligned with the goals of ¯rm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends. |
| Keywords: | incentives, optimal contracting, stochastic discount factor |
| JEL: | E32 E44 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0733&r=mac |
| By: | Enrique Martinez-Garcia |
| Abstract: | Data for the U.S. and the Euro area during the post-Bretton Woods period shows that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Standard models with nominal rigidities match reasonably well the volatility and persistence of the nominal exchange rate, but require an average contract duration above 4 quarters to approximate the real exchange rate counterparts. I propose a two-country model with financial intermediaries and argue that: First, sticky and asymmetric information introduces a lag in the consumption response to currently unobservable shocks, mostly foreign. Accordingly, the real exchange rate becomes more volatile to induce enough expenditure-switching across countries for all markets to clear. Second, differences in the degree of price stickiness across markets and firms weaken the correlation between the nominal exchange rate and the relative CPI price. This correlation is important to match the moments of the real exchange rate. The model suggests that asymmetric information and differences in price stickiness account better for the stylized facts without relying on an average contract duration for the U.S. larger than the current empirical estimates. |
| Keywords: | Foreign exchange rates |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:02&r=mac |
| By: | Gikas Hardouvelis; Dimitrios Thomakos |
| Abstract: | We investigate the behavior of consumer confidence around national elections in the EU-15 coun- tries during 1985:1-2007:3. Consumer con¯dence 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 macro- economic and political 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 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:0003&r=mac |
| By: | Dora Gicheva; Justine Hastings; Sofia Villas-Boas |
| Abstract: | This paper examines the importance of income effects in purchase decisions for every-day products by analyzing the effect of gasoline prices on grocery expenditures. Using detailed scanner data from a large grocery chain as well as data from the Consumer Expenditure Survey (CES), we show that consumers re-allocate their expenditures across and within food-consumption categories in order to offset necessary increases in gasoline expenditures when gasoline prices rise. We show that gasoline expenditures rise one-for-one with gasoline prices, consumers substitute away from food-away-from-home and towards groceries in order to partially offset their increased expenditures on gasoline, and that within grocery category, consumers substitute away from regular shelf-price products and towards promotional items in order to save money on overall grocery expenditures. On average, consumers are able to decrease the net price paid per grocery item by 5-11% in response to a 100% increase in gasoline prices. Our results show that consumers respond to permanent changes in income from gasoline prices by substituting towards lower-cost food at the grocery store and lower priced items within grocery category. The substitution away from full-priced items towards sale items has implications for microeconomic discrete-choice demand models as well as for macroeconomic inflation measures that typically do not incorporate frequently changing promotional prices. |
| JEL: | E21 E31 L10 L16 L81 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13614&r=mac |
| By: | Francisco Covas; Shigeru Fujita |
| Abstract: | This paper studies cyclical properties of the private risk premium in a model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks, both of which are assumed to be highly persistent. The calibrated model matches highly skewed wealth and income distributions of entrepreneurs found in the Survey of Consumer Finances. The authors provide an accurate numerical solution to the model even though the model is shown to exhibit serious nonlinearities that are absent in incomplete market models with idiosyncratic labor income risk. The model is able to generate the aggregate private risk premium of 2-3 percent and the low risk-free rate. However, it generates very little variation in these variables over the business cycle, suggesting that the model lacks the ability to amplify aggregate shocks. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-30&r=mac |
| By: | Serwa, Dobromił |
| Abstract: | The paper employs a recently developed procedure, based on a bivariate Markov switching model, to analyze the asymmetric causality linkages between credit growth and output growth during banking crises. Using a sample of 103 banking crises, we find that neither credit nor output leads the other variable in calm and crisis periods, although there is evidence of instantaneous regime-interdependence between the banking and real sector during crises. The linear link between credit growth and output growth is also regime-dependent. |
| Keywords: | banking crises; credit growth; output growth; Markov switching model; causality |
| JEL: | E32 E51 C12 G21 |
| Date: | 2007–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5946&r=mac |
| By: | Christopher J. Erceg; Christopher Gust; David López-Salido |
| Abstract: | This paper uses an open economy DSGE model to explore how trade openness affects the transmission of domestic shocks. For some calibrations, closed and open economies appear dramatically different, reminiscent of the implications of Mundell-Fleming style models. However, we argue such stark differences hinge on calibrations that impose an implausibly high trade price elasticity and Frisch elasticity of labor supply. Overall, our results suggest that the main effects of openness are on the composition of expenditure, and on the wedge between consumer and domestic prices, rather than on the response of aggregate output and domestic prices. |
| JEL: | E52 F41 F47 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13613&r=mac |
| By: | Alpanda, Sami |
| Abstract: | The Japanese economy experienced a substantial increase and a subsequent crash in land and stock prices in the 1980s and 90s. I use a neoclassical growth model to determine how much of these asset price movements can be accounted for by the observed changes in fundamentals of the Japanese economy; in particular changes in productivity growth and government policy regarding land taxation. In the model, corporations issue land-collateralized debt to reduce their tax liabilities and the government follows a land-taxation policy that is countercyclical to land prices. These features substantially magnify the effect of small shocks by reducing the required return on land. With the model calibrated to Japanese data, I find that the observed changes in fundamentals cannot simultaneously account for the movements in asset prices and macroeconomic variables. In particular, with persistent changes in fundamentals, the observed asset prices can be justified, but at the cost of counter-predicting macroeconomic variables. |
| Keywords: | Japan; land prices; asset pricing; land taxation; general equilibrium. |
| JEL: | E62 G12 C68 O40 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5895&r=mac |
| By: | Solange Gouvea |
| Abstract: | In this paper, I investigate the patterns of price adjustments in Brazil. I derive the main stylized facts describing the behavior of price setters directly from a large data set of the CPI price quotes spanning approximately ten years until 2006. I find that on average prices remain unchanged for 2.7 to 3.8 months, exhibiting, however, a large degree of product and sector heterogeneity. Data on the frequency and sign of price changes show that there is a strong symmetry between price increase and decrease. Conversely, as expected under a positive inflation environment, the magnitude of positive price changes compensates this effect. I also provide some insights on the determinants of the patterns of price adjustment. The average duration of price spells decreased when the economy was hit by a confidence shock before 2002 presidential elections. The inflation rate of 5.9 % in 2000, jumped to 7.7% in 2001 and hiked to 12.6 % in 2002. Results suggest that substantial disturbances to average inflation imposed a high enough cost of not adjusting prices and triggered more frequent price reviews. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:143&r=mac |
| By: | Dominique Guégan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Florian Ielpo (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | US interest rates'overnight reaction to macroeconomic announcements is of tremendous importance trading fixed income securities. Most of the empirical studies achieved so far either assumed that the interest rates' reaction to announcements is linear or independent to the state of the economy. We investigate the shape of the tern structure reaction of the swap rates to announcements using several linear and non-linear time series models. The empirical results yield several not-so-well-known stylized facts about the bond market. First, and although we used a daily dataset, we find that the introduction of non linear models leads to the finding of a significant number of macroeconomic figures that actually produce an effect over the yield curve. Most of the studies using daily datasets did not corroborate so far this conclusion. Second, we find that the term structure response to announcements can be much more complicated that what is generally found : we noticed at least four types of patterns in the term structure reaction of interest rates across maturities, including the hump-shaped one that is generally considered. Third, by comparing the shapes of the rates' term structure reaction to announcements with the first four factors obtained when performing a principal component analysis of the daily changes in the swap rates, we propose a first interpretation and classification of these different shapes. Fourth, we find that the existence of some outliers in the one-day changes in interest rates usually leads to a strong underestimation of the reaction of interest rates to announcements, explaining the different results obtained between high-frequency and daily datasets : the first type of study seems to lead to the finding of fewer market mover announcements. |
| Keywords: | Macroeconomic announcements, interest rates dynamic, outliers, reaction function, principale component analysis. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00188331_v1&r=mac |
| By: | Kai, Guo; Conlon, John R. |
| Abstract: | This paper examines the effect of bubble-bursting policy in the case where the central bank sometimes tries to deflate an asset which is not, in fact, overpriced. We consider the case of a “semi-bubble,” where some traders know that an asset is overpriced, but others do not. Unlike most previous papers on bubble policy, our framework assumes rational traders. We also assume a finite time horizon, to rule out infinite horizon type bubbles. The market’s “fulfilled expectations” equilibria are derived, and standard tools of welfare economics are applied to evaluate the effect of anti-bubble policy. Under the assumption that the announcements of the financial authority can help less informed traders to learn more about a risky asset, market equilibria are presented and compared. We show that, if sellers care relatively more about the states where the central bank makes a negative bubble-bursting announcement, an announcement policy interferes with the asset’s ability to share risks. Conversely, if sellers care relatively less about the announcement states, an announcement policy improves risk sharing. “Information leakage” plays an important role in our analysis. Because of this leakage, central bank announcements can initiate further information revelation between traders. That is, the leakage effect can reveal information that the central bank, itself, does not have. However, this information leakage may not be welfare improving. Also, this leakage effect makes it difficult to predict the effects of bubble-bursting policy. This may complicate both private investment strategies and public policy analysis. |
| Keywords: | greater-fool; asset bubble; asymmetric information; information leakage; Hirshleifer effect. |
| JEL: | D53 E58 G18 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5927&r=mac |
| By: | D.S.G. Pollock |
| Abstract: | Methods are described that are available for extracting the trend from an economic data sequence and for isolating the cycles that might surround it. The latter often consist of a business cycle of variable duration and a perennial seasonal cycle. There is no evident distinction that can serve unequivocally to determine a point in the frequency spectrum where the trend ends and the business cycle begins. Unless it can be represented by a simple analytic function, such as an exponential growth path, there is bound to be a degree of arbitrariness in the definition of the trend. The business cycle, however defined, is liable to have an upper limit to its frequency range that falls short of the Nyquist frequency, which is the maximum observable frequency in sampled data. Therefore, if it is required to fit a parametric model to the business cycle, this ought to describe a band-limited process. The appropriate method for estimating a band-limited process is described for the case where the band includes the zero frequency. |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:07/17&r=mac |
| By: | Juan Carlos Conesa; Timothy J. Kehoe; Kim J. Ruhl |
| Abstract: | This paper is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990–93 was driven by a combination of a drop in total factor productivity (TFP) during 1990–92 and of increases in taxes on labor and consumption and increases in government consumption during 1989–94, which drove down hours worked in Finland. We attempt to endogenize the drop in TFP in variants of the model with an investment sector and with terms-of-trade shocks but are unsuccessful. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:401&r=mac |
| By: | Kateryna Shapovalova (Centre d'Economie de la Sorbonne et IXIS CIB); Alexander Subbotin (Centre d'Economie de la Sorbonne et Higher School of Economics) |
| Abstract: | Value and growth investment styles are a concept which has gained extreme popularity over the past two decades, probably due to its practical efficiency and relative simplicity. We study the mechanics of different factors' impact on excess returns in a multivariate setting. We use a panel of stock returns and accounting data from 1979 to 2007 for the companies listed on NYSE without survivor bias for clustering, regression analysis and constructing style based portfolios. Our findings suggest that value and growth labels often hide important heterogeneity of the underlying sources of risks. Many variables, conventionally used for style definitions, cannot be used jointly, because they affect returns in opposite directions. A simple truth that more variables does not necessarily mean better model nicely summaries our results. We advocate a more flexible approach to analyzing accounting-based factors of outperformance treating them separately before or instead of aggregating. |
| Keywords: | Style analysis, value puzzle, pricing anomalies, equity. |
| JEL: | E44 G11 E32 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b07066&r=mac |
| By: | Aruga, Osamu |
| Abstract: | This paper develops and analyzes a growth model that consists of complementary long-lived and short-lived vintage-specific capital. As a result of the existence of complementary capital that is vintage compatible but has different longevity, the model generates two distinct investment patterns: (i) if the rate of vintage-specific technological progress is above a threshold–which is the product of long-lived capital’s share and the difference in the rates of depreciation–then all new investment is allocated to the capital that embodies the frontier technology; (ii) otherwise, some investment is allocated to obsolete, short-lived capital to exploit the existing stock of obsolete long-lived capital. The result provides a new explanation for observed investment in obsolete technologies. An important implication of this result is that equipment price-changes do not necessarily reflect the rate of progress, since the prices of obsolete short-lived capital remain the same when the rate of the progress is slow enough (as mentioned in (ii) above). Another implication is that acceleration in the rate of vintage-specific technological progress can cause an abrupt reallocation of investment towards modern capital–consistent with investment booms that are concentrated in certain “high-tech” equipment. |
| Keywords: | vintage capital, intangible capital, capital heterogeneity, pricing of capital goods, maintenance and repair |
| JEL: | E22 O3 O4 |
| Date: | 2007–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5913&r=mac |
| By: | Francis, Johanna L. |
| Abstract: | The wealth distribution in the U.S. is more unequal, or skewed to the right, than either the income or earnings distribution, a fact current models of saving behavior have difficulty explaining. Using Max Weber's (1905) idea that individuals may have a `capitalist spirit', I construct and simulate a model where some individuals accumulate wealth for its own sake rather than as deferred consumption. Including capitalist-spirit preferences in the standard life cycle model, with no other modifications, generates a skewness of wealth consistent with that observed in the U.S. economy. Furthermore, capitalist-spirit preferences provide a way to generate decreasing risk aversion with increases in wealth without resorting to idiosyncratic rates of time preference. |
| Keywords: | capitalist spirit; life cycle; wealth |
| JEL: | D31 E21 |
| Date: | 2007–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5985&r=mac |
| By: | Michael T. Owyang; David E. Rapach; Howard J. Wall |
| Abstract: | We model the U.S. business cycle using a dynamic factor model that identifies common factors underlying fluctuations in state-level income and employment growth. We find three such common factors, each of which is associated with a set of factor loadings that indicate the extent to which each state’s business cycle is related to the national business cycle. According to the factor loadings, there is a great deal of heterogeneity in the nature of the links between state and national economies. In addition to exhibiting interesting geographic patterns, the factor loadings tend to be related to differences in industry mix. Finally, we find that the common factors tend to explain large proportions of the total variability in state-level business cycles, although there is a great deal of cross-state heterogeneity. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-050&r=mac |
| By: | Gábor Vadas (Magyar Nemzeti Bank) |
| Abstract: | As significant part of national wealth, households’ wealth is the central issue in both policy debate and academic literature. Nevertheless, in Hungary little effort has been made so far to conduct thorough evaluation of households’ wealth for the last decade. Under the auspices of ‘the plural of anecdote is not evidence’ axiom, this study provides a formal evaluation of Hungarian wealth and connects the development of wealth elements to economic events. Doing so, as a by-product, we also display the estimated wealth levels of households. Based on international comparison and econometric techniques, it is confirmed that the recent financial wealth level of Hungarian households is still relatively low, meanwhile the current housing wealth is not evidently below the equilibrium level. These results provide an explanation why governmental housing subsidy scheme has its major effect on house prices rather than housing stock. Besides, the soaring house prices, via housing loans, vanished financial savings. The ‘saving disaster’, i.e. small or in some periods even negative saving rates, experienced in early 2000’s, to a certain extent, is the other side of the ‘saving miracle’ of early and mid 90’s when households rearranged their wealth portfolio from real assets to financial assets implying decreasing house prices and high saving rate. |
| Keywords: | household wealth, housing subsidy scheme, house price. |
| JEL: | E00 E21 E31 H31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2007/68&r=mac |
| By: | Walentin, Karl (Research Department, Central Bank of Sweden) |
| Abstract: | We present data from the Survey of Consumer Finances showing that the increased earnings (labor income) inequality, in combination with increased stockmarket partic- ipation, has roughly doubled stockholders’share of aggregate labor income in the last four decades. We explore the impact of the increase in this share on returns to equity and returns to a risk-free bond in a model with limited stockmarket participation, labor income and borrowing constraints. The main result is that the increase in stockholders’ share of aggregate labor income has lead to 130 basis points (45 percent) decrease in the ex ante equity premium (i.e. the discount rate applied to equity). The reason for this change is that the increase in stockholders’share of aggregate labor income leads to a change in income composition for stockholders - an increase in the fraction of their income that consists of labor income and a decrease in the fraction that consists of dividend income. This reduces the covariance between stockholder income growth and dividend growth. The size of the decrease in the equity premium implied by our model roughly coincides with the historical change in the post-1951 equity premium implied by the simple dividend growth model in Fama and French (2002). |
| Keywords: | labor income; earnings inequality; asset pricing; equity premium; limited participation; borrowing constraints |
| JEL: | D31 E24 E44 G12 |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0215&r=mac |
| By: | Ryuzo Sato (Leonard N. Stern School of Business, New York University and Faculty of Economics, University of Tokyo); Tamaki Morita (National Graduate Institute for Policy Studies(GRIPS)) |
| Abstract: | This article deals with the empirical analyses of the growth for the United States and Japan from 1970 to 2005. Following our analysis in "Quantity or Quality: The Impact of Labor-saving Innovation on US and Japanese Growth Rates, 1960-2004" (March 2007), we applied the same method to a different data series in order to confirm our previous findings. As with the previous paper, the results shown in this paper support our view that Japan's declining population can be compensated for by additional quality improvement of the existing labor force. |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2007cf528&r=mac |
| By: | Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Recent developments in econometrics and economic theory attest more and more that the mainstream restricted definitions of uncertainty and rational expectations discard the powerful concepts Keynes put forward, therefore weakening dramatically the ‘new consensus’ theory. The paper emphasizes, in a formal way, how economic decisions in uncertain contexts transforms the standard four competitive macro-markets system into a shifting demand-driven system which may be in equilibrium at different levels of employment, depending on the views about the future and on the level where wages stabilize. Keynes’s theory therefore proves to be more general and realistic owing to its approach to uncertainty. |
| Keywords: | General equilibrium, Uncertainty, Post-Keynesian |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00189221_v1&r=mac |
| By: | Felipe Pinheiro; Caio Almeida; José Vicente |
| Abstract: | Recently, a myriad of factor models including macroeconomic variables have been proposed to analyze the yield curve. We present an alternative factor model where term structure movements are captured by Legendre polynomials mimicking the statistical factor movements identified by Litterman and Scheinkman (1991). We estimate the model with Brazilian Foreign Exchange Coupon data, adopting a Kalman filter, under two versions: the first uses only latent factors and the second includes macroeconomic variables. We study its ability to predict out-of-sample term structure movements, when compared to a random walk. We also discuss results on the impulse response function of macroeconomic variables. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:148&r=mac |
| By: | Dale F. Gray; Robert C. Merton; Zvi Bodie |
| Abstract: | This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk. |
| JEL: | E44 G0 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13607&r=mac |
| By: | Carlos Esteban Posada; Camilo Morales J. |
| Abstract: | Con posterioridad al año 2000 la inflación colombiana ha mostrado una declinación gradual a pesar de que la economía colombiana es relativamente abierta y su tasa de cambio está sujeta a vaivenes intensos de los flujos de capital. ¿Por qué? Podrían mencionarse varias respuestas alternativas. El presente documento ofrece una: para la autoridad monetaria no es óptimo imponer o tolerar variaciones fuertes de la tasa de inflación y, por ende, se inclina a contrarrestar los efectos que tienen los movimientos exógenos de los flujos de capital sobre la inflación con una política monetaria pro-cíclica. Los datos de los últimos 10 años no sugieren lo contrario. |
| Date: | 2007–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004291&r=mac |
| By: | Jens Rubart (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Willi Semmler (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld); Graduate Faculty, New School for Social Research, New York) |
| Abstract: | When reviewing the literature concerning the development of the Eastern German economy, a too rigid labor market and its respective institutions are considered as the main source of the persistent high unemployment rates and the slow economic performance. However, when important macroeconomic variables are considered a significant decline in investment in new technologies is observed. In addition, we find evidences that the decline in investment might be affected by the steady migration of young and skilled workers to West Germany. The decline in the proportion of skilled workers induces firms not to invest in Eastern Germany which leads to a general decline in job creating activities irrespective rigid labor markets and generous social benefits. In the recent paper we employ a rather standard Dynamic General Equilibrium model in order to study the effects of a decline in the proportion of skilled workers as well as the impacts of increasing benefit payments. Furthermore, we assume equilibrium unemployment due to search and matching frictions on the labor market. This approach enables us further to consider job creating activities of the firms. We show that an emigration shock of skilled- workers is capable to reproduce the findings for the decline in economic activity. This effect is strengthened by assuming generous social benefit payments. |
| Keywords: | DSGE Model, Heterogenous Labor, Skill Biased Technological Change, Search Unemployment, Employment Protection, Minimum Wages |
| JEL: | E20 J21 J24 J64 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:187&r=mac |
| By: | Carlos Esteban Posada; Camilo Morales J. |
| Abstract: | En los últimos años se ha desarrollado en la literatura internacional una corriente de estudio enfocada a examinar los efectos del libre comercio sobre la inflación. Este trabajo pone a prueba la hipótesis de una conexión entre el grado de apertura de la economía colombiana y su tasa de inflación. Con un modelo Pestrella, el artículo muestra que una mayor apertura al comercio internacional no implica mayores o menores tasas de inflación sino una mayor sensibilidad de esta a choques externos. El ejercicio requirió la construcción de tres variables: inflación externa, devaluación nominal del peso contra las monedas del mundo y un indicador de protección comercial. |
| Date: | 2007–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004286&r=mac |
| By: | Stefania Albanesi; Roc Armenter |
| Abstract: | We consider a very general class of public finance problems that encompasses the Ramsey model of optimal taxation as well as economies with limited commitment, private information, and political economy frictions, and allows for incomplete markets. We identify a sufficient condition to rule out permanent intertemporal distortions at the optimum. If there exists an admissible allocation that converges to the first best steady state, then all intertemporal distortions are temporary in the second best. We analyze a series of applications to illustrate the significance of this result. |
| JEL: | E6 H21 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13629&r=mac |
| By: | Robert Allen |
| Abstract: | The paper compares Feinstein`s and Clark`s consumer price and real wage indices for the British industrial revolution. The sources for their weights and component price series are evaluated. While some of Clark`s innovations are improvements, many of his changes degrade the price index. A new price index is developed using the best components of Clark`s and Feinstein`s. This index is much closer to Feinstein`s than to Clark`s. The implied growth in real wages is also close to Feinstein`s and contradicts Clark`s `optimistic` view of rising working class living standards during the industrial revolution. |
| Keywords: | Real Wage, Consumer Price Index, Inequality, Industrial Revolution |
| JEL: | D33 E25 N13 N33 O11 O15 O41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:314&r=mac |
| By: | David Backus; Espen Henriksen; Kjetil Storesletten |
| Abstract: | Despite enormous growth in international capital flows, capital-output ratios continue to exhibit substantial heterogeneity across countries. We explore the possibility that taxes, particularly corporate taxes, are a significant source of this heterogeneity. The evidence is mixed. Tax rates computed from tax revenue are inversely correlated with capital-output ratios, as we might expect. However, effective tax rates constructed from official tax rates show little relation to capital -- or to revenue-based tax measures. The stark difference between these two tax measures remains an open issue. |
| JEL: | E22 F21 H25 H32 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13624&r=mac |
| By: | Alexander K. Karaivanov (Simon Fraser University); Fernando M. Martin (Simon Fraser University) |
| Abstract: | We analyze the role of commitment in a dynamic principal-agent model of optimal insurance with hidden effort and observable but non-contractible savings. We argue that the optimal contract under full commitment is time-inconsistent. Consequently, we analyze the optimal time-consistent Markov-perfect insurance contract when both the agent and the principal cannot commit for longer than one period and contrast our results with the full commitment case from the existing literature. We find that the optimal contract under lack of commitment provides additional insurance relative to the autarky allocation and features non-degenerate long-run asset and consumption distributions. Furthermore, the no-commitment contract differs significantly from the commitment contract in the time profiles of consumption, savings, and welfare. We solve for the optimal insurance contracts in several environments featuring different degrees of market incompleteness and find that the welfare loss due to lack of commitment can be very high relative to the welfare costs of moral hazard or savings non-contractibility. |
| Keywords: | optimal insurance, time consistency, moral hazard |
| JEL: | D11 E21 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp07-22&r=mac |
| By: | Edward M. Bergman |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwsre:sre-disc-2007_04&r=mac |