nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒12‒08
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The yield curve and macroeconomic dynamics By Peter Hördahl; Oreste Tristani; David Vestin
  2. Deficit sustainability and inflation in EMU: An analysis from the fiscal theory of the price level By Oscar Bajo-Rubio; Carmen Díaz-Roldán; Vicente Esteve
  3. Monetary Policy Objectives in Pakistan: An Empirical Investigation By Wasim Shahid Malik
  4. The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse By Benjamin Eden
  5. Inertia in Taylor Rules By John Driffill; Zeno Rotondi
  6. The term structure of euro area break-even inflation rates - the impact of seasonality By Jacob Ejsing; Juan Angel García; Thomas Werner
  7. Modelling inflation in China - a regional perspective By Aaron Mehrotra; Tuomas Peltonen; Alvaro Santos Rivera
  8. Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime? By David Meenagh; Patrick Minford; Eric Nowell; Prakriti Sofat; Naveen Srinivasan
  9. International frictions and optimal monetary policy cooperation - analytical solutions By Matthieu Darracq Pariès
  10. Woodford goes to Africa By Kang Yong Tan; David Vines
  11. "Trying to Make Sense of the Bank of Japan's Monetary Policy since the Exit from Quantitative Easing" By Kazuo Ueda
  12. Federal Reserve Information During the Great Moderation By D'Agostino, A; Whelan, K
  13. Revisiting the Coyne Affair: A Singular Event That Changed the Course of Canadian Monetary History By Pierre Siklos
  14. Walsh’s Contract and Transparency about Central Bank Preferences for Robust Control. By Meixing DAI; Eleftherios SPYROMITROS
  15. US shocks and global exchange rate configurations By Marcel Fratzscher
  16. Endogenous Market Structure and the Business Cycle By Andrea Colciago; Federico Etro
  17. How is real convergence driving nominal convergence in the new EU Member States?. By Sarah M. Lein-Rupprecht; Miguel A. León-Ledesma; Carolin Nerlich
  18. Theoretical models of fiscal policies in the Euroland: The Lisbon Strategy, Macroeconomic Stability and the Dilemma of Governance with Governments By Stefan Collignon
  19. Business Cycle Accounting for the Japanese Economy Using the Parameterized Expectations Algorithm By INABA Masaru
  20. Credit and inflation under borrower’s lack of commitment By Antonia Diaz; Fernando Perera-Tallo
  21. Remittances, Business Cycles and Poverty: The Recent Turkish Experience By Sayan, Serdar; Tekin-Koru, Ayca
  22. The relationship between saving and credit from a Schumpeterian perspective By Bertocco Giancarlo
  23. Toward a Bias Corrected Currency Equivalent Index By William Barnett; John Keating; Logan Kelly
  24. Private Money and Bank Runs By Hongfei Sun; Xiuhua Huangfu
  25. Banking, Inside Money and Outside Money By Hongfei Sun
  26. Collateralized capital and News-driven cycles By KOBAYASHI Keiichiro; NUTAHARA Kengo
  27. Output Dynamics, Flow Equilibria and Structural Change – A Prolegomenon to Evolutionary Macroeconomics By U. Witt; T. Brenner
  28. Monetary and Financial Cooperation among Central Banks in East Asia and the Pacific By Hans Genberg; Dong He
  29. The transmission of domestic shocks in the open economy By Christopher J. Erceg; Christopher Gust; David Lopez-Salido
  30. Conventional or New? Optimal Investment Allocation across Vintages of Technology By Aruga, Osamu
  31. Estimates of Structural Changes in the Wage Equation:Some Evidence for Italy By Mauro Costantini; Sergio de Nardis
  32. Potential output growth in several industrialised countries: a comparison By Christophe Cahn; Arthur Saint-Guilhem
  33. Monetary Policy Rules For Manging Aid Surges In Africa By Christopher Adam; Stephen O’Connell; Edward Buffie
  34. Did F. A. Hayek Embrace Popperian Falsificationism? A Critical Comment About Certain Theses of Popper, Duhem and Austrian Methodology By van den Hauwe, Ludwig
  35. Exchange rate volatility, macro announcements and the choice of intraday seasonality filtering method By Laakkonen, Helinä
  36. Distribution and Growth in France (1982-2006): A Cointegrated VAR Approach By Olivier Allain; Nicolas Canry
  37. Quanto e come investire in ricerca per massimizzare la crescita economica? Analisi e implicazioni di politica economica per l’Italia e l’Europa By Coccia Mario
  38. Impact of Infrastructure Spending in Mali: A CGE modeling approach By Antonio Estache; Jean-François Perrault; Luc Savard
  39. Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis By Sonja Fagernas; Prabirjit Sarkar; Ajit Singh
  40. Il finanziamento pubblico alla ricerca spiazza l’investimento privato in ricerca? Analisi ed implicazioni per la crescita economica dei paesi By Coccia Mario
  41. Valuation of Japanese Corporations during the 1980s: evidence from an accounting dataset By Hiroki Arato; Katsunori Yamada
  42. European Economic and Employment Policy Briefs By Di Pane Fabrice
  43. A Balance-Sheet Approach to Fiscal Sustainability By Eduardo Levy Yeyati and Federico Sturzenegger
  44. Quali sono i fattori determinanti della moderna crescita economica? Analisi comparativa delle performance dei paesi By Coccia Mario
  45. Intangible Investment of Finnish Businesses in 2004: An Experiment with Micro-level Data (in Finnish with an English abstract/summary) By Mika Maliranta; Petri Rouvinen

  1. By: Peter Hördahl (Bank for International Settlements (BIS), Centralbahnplatz 2, CH-4002 Basel, Switzerland.); Oreste Tristani (Corresponding author, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); David Vestin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We show that microfounded DSGE models with nominal rigidities can be successful in replicating features of bond yield data which have previously been considered puzzling in general equilibrium frameworks. Consistent with empirical evidence, we obtain average holding period returns that are positive, increasing in maturity and sizable, as well as long-maturity bond yields that are almost as volatile as short-term interest rates. At the same time, we are able to fit sample moments of consumption and inflation relatively well. To improve our understanding of these results, we derive analytical solutions for yields that are valid up to a second order approximation and generally applicable, We demonstrate that the improved model performance does not arise directly from the presence of nominal rigidities: ceteris paribus, the introduction of sticky-prices in a simple model tend to reduce premia. Sticky prices help indirectly because they imply (short-run) monetary non-neutrality, so that the policy rule followed by the central bank affects consumption dynamics and the pricing of yields. A very high degree of “interest rate smoothing” in the policy rule is essential for our results. JEL Classification: E43, E44.
    Keywords: DSGE models, policy rules, term structure of interest rates, risk premia, second order approximations.
    Date: 2007–11
  2. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha and Instituto de Estudios Fiscales); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia)
    Abstract: Price determination theory typically focuses on monetary plicy, while the role of fiscal policy is ussually neglected. From a different point of view, the Fiscal Theory of Price Level takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. In this paper we try to test empirically whether the time path of the government budget in EMU countries would have affected price level determination. Our results point to the sustainability of fiscal policy in all the EMU countries but Finland, although no firm conclusions can be drawn about the prevalence of either monetary or fiscal dominance.
    Keywords: Fiscal Theory of the Price Level, monetary and fiscal dominance, central bank independence, fiscal solvency, inflation
    JEL: E62 H62 O52
    Date: 2007–04
  3. By: Wasim Shahid Malik (Pakistan Institute of Development Economics, Islamabad.)
    Abstract: The Taylor rule (1993) focuses only on two objectives: output and inflation. In practice, the central bank’s loss function (especially in developing countries) contains objectives other than these two, like the interest rate smoothing, exchange rate stabilisation, etc. In this study, the monetary policy reaction function has been estimated, including five objectives for monetary policy as well as controlling for the effect of three other factors. Whereas the results confirm the counter-cyclical response of monetary policy to the factors in the loss function, the response of interest rate to changes in the foreign exchange reserves and the government borrowing has been negative. Variance decomposition shows that most of the variation in the interest rate is explained by its own lagged values. Other variables, in explaining variation in the interest rate, can be ranked as inflation, government borrowing, exchange rate, output gap, trade deficit, and, finally, the foreign exchange reserves.
    Keywords: Monetary Policy Objectives, Variance Decomposition, Call Money Rate
    JEL: E52 E52 E58
    Date: 2007
  4. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I focus on a government loan program that crowds out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.
    Keywords: Welfare cost of inflation, money substitutes, wealth redistribution, Friedman rule
    JEL: E42 E51 E52 E58 H20 H21 H26
    Date: 2007–11
  5. By: John Driffill (Birkbeck, University of London); Zeno Rotondi (University of Ferrara)
    Abstract: The inertia found in econometric estimates of interest rate rules is a continuing puzzle. Many reasons for it have been offered, though unsatisfactorily, and the issue remains open. In the empirical literature on interest rate rules, inertia in setting interest rates is typically modeled by specifying a Taylor rule with the lagged policy rate on the right hand side. We argue that inertia in the policy rule may simply reflect the inertia in the economy itself, since optimal rules typically inherit the inertia present in the model of the economy. Our hypothesis receives some support from US data. Hence we agree with Rudebusch (2002) that monetary inertia is, at least partly, an illusion, but for different reasons.
    Keywords: Monetary Policy, Interest Rate Rules, Taylor rule, Interest Rate Smoothing, Monetary Policy Inertia, Predictability of Interest Rates, Term Structure, Expectations Hypothesis
    JEL: E52 E58
    Date: 2007–11
  6. By: Jacob Ejsing (Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Angel García (Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Thomas Werner (Corresponding author: Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides a toolkit for extracting accurate information about inflation expectations using inflation-linked bonds. First, we show how to estimate term structures of zero-coupon real rates and break-even inflation rates (BEIRs) in the euro area. This improves the analysis of developments in inflation expectations by providing constant maturity measures. Second, we show that seasonality in consumer prices introduces misleading and quantitatively important time-varying distortions in the calculated BEIRs. We explain how to correct for this in the estimation of the term structure, and thus provide a unified framework for extracting constant maturity BEIRs corrected for seasonality. JEL Classification: E31, E43, G12.
    Keywords: Term structure, break-even inflation rates, inflation-linked bonds, inflation seasonality.
    Date: 2007–11
  7. By: Aaron Mehrotra (Corresponding author: Bank of Finland, BOFIT, PO Box 160, 00101 Helsinki, Finland.); Tuomas Peltonen (European Central Bank, Directorate General International and European Relations, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alvaro Santos Rivera (European Central Bank, Directorate General International and European Relations, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forwardlooking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces. JEL Classification: E31, C22.
    Keywords: China, Inflation, Regional, New Keynesian Phillips Curve, GMM.
    Date: 2007–11
  8. By: David Meenagh (Cardiff University); Patrick Minford (Cardiff University / CEPR); Eric Nowell (University of Liverpool); Prakriti Sofat (IDEAglobal (Singapore)); Naveen Srinivasan (Indira Gandhi Institute of Development Research)
    Abstract: It has been widely argued that inflation persistence since WWII has been widespread and durable and that it can only be accounted for by models with a high degree of nominal rigidity. We examine UK post-war data and find that the varying persistence it reveals is largely due to changing monetary regimes and that models with moderate or even no nominal rigidity are best equipped to explain it.
    Date: 2007–07
  9. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyzes the implications of price-setting and incomplete financial markets for optimal monetary cooperation. The main objective is to provide the basic intuitions concerning the role of the main international frictions on optimal policy within a simple Dynamic Stochastic General Equilibrium model. We concentrate on a symmetric two-country DSGE with home bias, incomplete financial markets internationally and imperfect competition together with nominal price rigidities in which the export prices can be denominated either in the producer currency (PCP) or in the consumer currency (LCP). In addition, the model can account both for efficient and inefficient shocks. Our main results are derived in polar cases with efficient steady state and for which the design of the optimal policy is specifically illustrative and can be expressed in terms of targeting rules. In particular, the paper gives some new insights on the optimal exchange rate regime given the structure of shocks and the exchange rate pass-through, as well as on the optimal stabilization of CPI and PPI inflation. We also put into perspective the implication of financial autarky on the optimal management of international spillovers. JEL Classification: E5, F4.
    Keywords: DSGE models, optimal monetary policy, new open economy macroeconomics.
    Date: 2007–11
  10. By: Kang Yong Tan (University of Oxford); David Vines (University of Oxford)
    Abstract: This paper analyses the effects of inflation shocks, demands shocks, and aid shocks on low-income, quasi-emerging-market economies, and discusses how monetary policy can be used to manage these effects. We make use of a model developed for such economies by Adam et al. (2007). We examine the e¤ects of four things which this model features, which we take to be typical of such economies. These are: the existence of a tradeables/non-tradeables production structure, the fact that international capital movements are - at least initially - confined to the effects of currency substitution by domestic residents, the use of targets for financial assets in the implementation of monetary policy, and the pursuit, in some countries, of a fixed exchange rate. We then modify the model to examine the effect on such economies of three major changes, changes which we take to be part of the transition by such economies towards more fully- fledged emerging-market status: an opening of the capital account so that uncovered- interest-parity comes to hold, a move to floating exchange rates, and the replacement of fixed stocks of financial aggregates by the pursuit of a Taylor rule in the conduct of monetary policy.
    Keywords: currency substitution, emerging market macroeconomics, interactions between fiscal and monetary policy, Taylor rule
    JEL: E5 E61 O11
    Date: 2007–07
  11. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: In this short note I review the Bank of Japan's monetary policy since its exit from the so-called quantitative easing regime early in 2006. The major characteristic of the policy stance during the period, called Strategy 2 below, has been to adjust the policy interest rate gradually upward in response to a healthy real economy despite stagnant behavior in consumer prices. Such a policy stance can be contrasted with a hypothetical strategy, Strategy 1, whereby the Bank of Japan would have kept the policy rate at lower levels, possibly at zero percent, until inflation starts to show an upward trend more clearly. The two strategies are compared on many fronts with particular attention to well-known recent empirical regularities about inflation -a smaller response of inflation to output and larger uncertainties about the response. Various comparisons of the two strategies offered here, though far from conclusive, tend to support Strategy 1 over Strategy 2. In my discussion of the two strategies I also comment on some of the major features of the Nishimura article in this issue.
    Date: 2007–12
  12. By: D'Agostino, A; Whelan, K
    Abstract: Using data from the period 1970-1991, Romer and Romer (2000) showed that Federal Reserve forecasts of inflation and output were superior to those provided by commercial forecasters. In this paper, we show that this superior forecasting performance deteriorated after 1991. Over the decade 1992-2001, the superior forecast accuracy of the Fed held only over a very short time horizon and was limited to its forecasts of inflation. In addition, the performance of both the Fed and the commercial forecasters in predicting inflation and output, relative to that of "naive" benchmark models, dropped remarkably during this period.
    JEL: C53 E52
    Date: 2007–12
  13. By: Pierre Siklos (Wilfrid Laurier University)
    Abstract: The Coyne affair is the greatest institutional crisis faced by the Bank of Canada in its history. The crisis took place in 1959-1961 and led to the resignation of the Governor, once he was cleared of any wrongdoing. The crisis eventually resulted in a major reform of the Bank of Canada. The paper highlights the critical role played by the directive in central banking legislation. Archival and empirical evidence is used to assess the performance of monetary policy throughout the 1950s. In doing so, a real-time dataset is constructed for both Canada and the US that permits estimation of reaction functions. I find that the case against James Coyne is \'not proven\'.
    Keywords: Coyne Affair; monetary policy stance; Taylor rules; real-time data
    JEL: N10 E52 E58 C52
    Date: 2007
  14. By: Meixing DAI; Eleftherios SPYROMITROS
    Abstract: Within a New Keynesian model subject to misspecification, we examine the quadratic contracts in a delegation framework where government and private agents are uncertain about central bank preferences for model robustness. We show that, in the case of complete transparency, the optimal penalty is decreasing in terms of the preference for robustness. In effect, a central bank reacts more aggressively to supply shocks when the model misspecification grows larger. Furthermore, beginning from the equilibrium of perfect transparency and assuming that the average preference for robustness is sufficiently high, the central bank has then an incentive to be less transparent in order to reduce the optimal penalty. Under similar conditions, we also find that greater opacity will increase inflation and output variability.
    Keywords: Walsh’s contract, robust control, model uncertainty, central bank transparency.
    JEL: E42 E52 E58
    Date: 2007
  15. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The paper analyses the heterogeneity in the link between macroeconomic fundamentals and exchange rates. For a set of important US-specific economic shocks, it shows that such shocks have exerted a remarkably heterogeneous effect on global exchange rate configurations over the past 25 years. Despite a significant decline over time, this heterogeneity remains high as primarily currencies of a few industrialized countries provide the largest contribution to the adjustment of the effective US dollar exchange rate. The paper finds that this heterogeneity is not only due to policy choices of inflexible exchange rate regimes, but to an important extent due to market forces, in particular business cycle synchronization and the degree of financial integration – foremost in portfolio investment – but not to trade. The findings have implications for a potential unwinding of global imbalances and future exchange rate adjustment, as well as for monetary policy choices in emerging market economies. JEL Classification: F31, F4, G1.
    Keywords: Exchange rate, US dollar, cross-rates, shocks heterogeneity, global distribution, transmission channels.
    Date: 2007–11
  16. By: Andrea Colciago; Federico Etro
    Abstract: We introduce endogenous strategic interactions under competition in quantities and in prices together with endogenous entry in a dynamic stochastic general equilibrium model with ?exible prices. The endogenous mark ups depend on the form of competition and on the degree of substitutability between goods, and they vary countercylically while pro?ts are procyclical. Positive temporary shocks to productivity and government spending attract entry. Entry strengthens competition between ?rms, which temporary reduces mark ups and prices: this creates an intertemporal substitution e¤ect which provides an extra boost to consumption. The model outperforms the standard RBC framework in matching impulse response functions and second moments for US data.
    Keywords: Endogenous Market Structure, Firms?Entry, Business Cycle
    JEL: L11 E32
    Date: 2007–11
  17. By: Sarah M. Lein-Rupprecht (KOF Swiss Economic Institute ETH Zurich, Weinbergstrasse 35, CH-8092 Zürich, Switzerland.); Miguel A. León-Ledesma (Department of Economics, University of Kent, Canterbury, Kent, CT27NP, United Kingdom.); Carolin Nerlich (European Central Bank, DG-Economics, Kaiserstraße 29, 60311 Frankfurt, Germany.)
    Abstract: The purpose of this paper is to evaluate the empirical relevance of real convergence on the process of nominal convergence for the new EU Member States. We discuss two of the main channels through which real convergence could affect relative prices with respect to the euro area - productivity growth and increased trade openness. Productivity growth can have a positive effect on price levels via the Balassa Samuelson effect, whereas increased openness leads to reductions in mark ups and costs and therefore can have a negative impact on prices. In order to assess their empirical relevance, we used a Structural VAR model to which we applied a model reduction algorithm. This method accounts for endogeneity and simultaneity and circumvents the problem of limited data availability. Our findings show that, in general, openness has had a negative impact and productivity growth a positive one on price level convergence with respect to the euro area. JEL Classification: O52, E31.
    Keywords: Real convergence, nominal convergence, inflation, new EU Member States.
    Date: 2007–11
  18. By: Stefan Collignon
    Abstract: Due to collective action problems, the Eurozone is stuck in a sub-optimal macro-policy mix of too expansionary fiscal policy and too restrictive monetary policy. Although the Lisbon Strategy pays lip service to macro-economic policy coordination, no mechanisms, institutions or effective rules are established in order to overcome the collective action problem. Empirically, the failure is demonstrated by comparing the Eurozone policy mix with the US policy mix and attributing it to the low investment performance which resulted in low average GDP growth and low average productivity growth – contrary to the aims of the Lisbon Strategy to make the EU the world’s most dynamic economy. The paper also argues that in order to overcome these difficulties, a proper government for the European Union is needed. More delegation to the European level is only legitimate if European citizens can exert their democratic rights.
    Keywords: democracy; economic growth; European Central Bank; fiscal policy; legitimacy; policy coordination
    Date: 2007–11–15
  19. By: INABA Masaru
    Abstract: We propose an application of the parameterized expectations algorithm (PEA) to business cycle accounting (BCA). The PEA has an advantage in that it is simple and easier to understand and implement than the other non-linear solution methods for the dynamic stochastic general equilibrium model. Moreover, we apply BCA to the Japanese economy using the PEA which relaxes the perfect foresight assumption and show that the result is similar to the main result in the deterministic BCA by Kobayashi and Inaba (2006). The effects of the investment wedge are not a significant cause of the persistent recession during the 1990s. The output due to the efficiency wedge roughly replicates actual output, while the discrepancy widened during the 1990s. The labor wedge had a large depressing effect on output during 1989-2005. The efficiency wedge explains the recent economic recovery.
    Date: 2007–11
  20. By: Antonia Diaz; Fernando Perera-Tallo
    Abstract: Here we investigate the existence of credit in a cash-in-advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts. Defectors are banned from the credit market but they can use money balances for saving purposes. Without uncertainty, deflation crowds out credit completely. The equilibrium allocation, however, is efficient if the government deflates at the time preference rate. Efficiency can also be restored with positive inflation. For any non negative inflation rate below the optimal level, the volume of credit and the real interest rate increase with inflation. Our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance: efficiency cannot be restored if the deflation rate is nearby the rate of time preference. Our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion. Finally, we present a framework where the use of money arises endogenously and show that it is tantamount to our cash-in-advance framework. Our results hold in this modified environment.
    Date: 2007–11
  21. By: Sayan, Serdar; Tekin-Koru, Ayca
    Abstract: We investigate whether remittances sent to Turkey by Turkish workers living in Germany are countercyclical or procyclical with Turkish and German national outputs and discuss the possible reasons underlying the resulting patterns and their implications. We also take up a previously unexplored issue and discuss poverty alleviation potential of remittances at a macroeconomic level by examining the statistical properties of any co-movements between remittances cycles and cycles in consumption spending on food and durable goods in Turkey. Our results reveal that the real remittance flows from Germany to Turkey move procyclically with the real output in Turkey, and are primarily driven by (largely independent of) the developments in the Turkish economy (German economy). We also find that remittances cycles remain procyclical to the consumption cycles throughout our sample period. This direct co-movement between the two cycles becomes synchronous, however, only after a phase shift occurring around 1992, pointing to the increasing role of the level of economic activity in Turkey as the leading determinant of remittance receipts from Germany and the declining strength of consumption smoothing motive over time. Our results all together point out a low potential for remittances sent from Germany to reduce poverty in Turkey, at least as far as the past fifteen years are concerned.
    Keywords: Remittances; International migration; Business cycles and poverty.
    JEL: F22 E32 I32 F24
    Date: 2007
  22. By: Bertocco Giancarlo (Department of Economics, University of Insubria, Italy)
    Abstract: Mainstream economic theory underlines the close relation between saving decisions and credit supply: the saving decisions determine the credit supply and thus the investment flow carried out by all the firms. The objective of this paper is to highlight the theoretical limits of this causal sequence on the basis of the arguments developed by Schumpeter, who instead maintains that in a capitalist economy the credit supply and investment decisions are independent of saving decisions JEL classification code: E21, E22, G20, O10. Key words: saving, credit, investment, development, Schumpeter
    Date: 2007–11
  23. By: William Barnett (Department of Economics, The University of Kansas); John Keating (Department of Economics, The University of Kansas); Logan Kelly (School of Business and Economics, College of Charleston)
    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 equilivant 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 Equilivant Index, Monetary Aggregation, Money Stock
    JEL: E49
    Date: 2007–11
  24. By: Hongfei Sun (Queen's University); Xiuhua Huangfu (University of Sydney)
    Abstract: This paper studies bank runs in a model with coexistence of fiat money and private money. When fiat money is the only medium of exchange, there exist a bank run equilibrium and an equilibrium that achieves the optimal risk sharing. In contrast, when private money is also a medium of exchange, there exists a unique equilibrium where no one demands early withdrawals of fiat money and agents in need of liquidity only use private money to finance consumption. The unique equilibrium achieves the first-best outcome and eliminates bank runs without having resort to any government intervention.
    Keywords: private money, fiat money, bank runs
    JEL: E4 G2
    Date: 2007–12
  25. By: Hongfei Sun (Queen's University)
    Abstract: This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e., bank money that expires immediately after the settlement of debts. Short-term inside money makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
    Keywords: banking, inside money, outside money
    JEL: E4 G2
    Date: 2007–12
  26. By: KOBAYASHI Keiichiro; NUTAHARA Kengo
    Abstract: Kobayashi, Nakajima, and Inaba (2007) show that in the neoclassical business cycle models with collateral constraints, a boom can be generated in response to an optimistic change in expectations on the future state of the economy. They call this business cycle a news-driven cycle. In their models, land is used as collateral, and borrowing for working capital is limited by the value of collateralized land. We simplify their model to one without land. We show that in an economy where capital goods are used as collateral, news-driven cycles can be generated.
    Date: 2007–12
  27. By: U. Witt; T. Brenner
    Abstract: In an evolutionary approach to macroeconomics, the market disequilibrium dynamics resulting from structural change need to be properly represented at the aggregate level. As suggested by the late F.A.Hayek, a suitable equilibrium concept required to this end as a frame of reference, is that of a flow equilibrium. The paper explores the corresponding flow dynamics that draw attention to variables not usually considered in macroeconomic theorizing. Using statistical estimates for these new variables for the West German manufacturing sector during the German unification process allows some important new insights on the relationships between structural change and macroeconomic performance.
    Keywords: Length 15 pages
    JEL: B52 D50 E00 E11 E32
    Date: 2007–11
  28. By: Hans Genberg (Research Department, Hong Kong Monetary Authority); Dong He (Research Department, Hong Kong Monetary Authority)
    Abstract: In this paper we show that monetary policy frameworks in the East Asia and Pacific region are heterogeneous, with exchange rate policies being subordinate to domestic price stability objectives in most regional economies. We then argue that in this environment it is undesirable to focus regional cooperation on exchange rate policies because of the risk of creating conflicts with domestic objectives that would lead to loss of central bank credibility and possibly speculative attacks. We also argue that the case for coordinated exchange rate policies is in fact weak, even after taking into account the region¡¦s traditional emphasis on export performance and increasing regional trade integration. Rather than focusing cooperation on the setting of policy instruments, we suggest an alternative that centres on developing more liquid financial markets in the region in the foreseeable future, and on harmonising the objectives of monetary policy and designing institutions that could form the basis of deeper forms of cooperation in the longer-term future.
    Keywords: Regional monetary cooperation, exchange rate coordination, East Asia
    JEL: E42 F33 F36
    Date: 2007–11
  29. By: Christopher J. Erceg; Christopher Gust; David Lopez-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.
    Date: 2007
  30. 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
  31. By: Mauro Costantini (ISAE - Institute for Studies and Economic Analyses); Sergio de Nardis (ISAE - Institute for Studies and Economic Analyses)
    Abstract: This paper focuses on the influence of labour market reforms on the wage equation for Italy over the period 1981-2006. Using Gregory and Hansen (1996) residuals based tests for cointegration in model with regime shifts, we try to detect endogenously a possible structural break in the long run relationship between real wage, unemployment rate and labour productivity. Evidence of a structural shift is found and parameter elasticities of the equation before and after the break are estimated.
    Keywords: wage equation, cointegration, structural break.
    JEL: C22 E24
    Date: 2007–11
  32. By: Christophe Cahn (Corresponding author: Banque de France, DAMEP, 31 rue Croix des Petits Champs, 75049 Paris Cedex, France.); Arthur Saint-Guilhem (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we present international comparisons of potential output growth among several economies — Canada, the euro area, France, Germany, Italy, Japan, the Netherlands, the United Kingdom, and the United States — for the period 1991-2004. The main estimates rely on a structural approach where output of the whole economy is described by a Cobb-Douglas function. This framework enables us to take temporal considerations into account, depending on the assumed volatility of potential output. Moreover, this study presents two original features, in other words, the construction of consistent and homogenous capital stock series, and long-run estimates including capital-deepening effects based on a stable capital/output ratio in value terms, whereas standard estimations assume a stable ratio in volume terms. Lastly, we use univariate methods as a benchmark. Even though the final estimates are obviously sensitive to each method and the assumptions made for each of them, this paper might help to understand why some economies remained below their potential growth rate during the recent period by identifying the sources of long-run potential. JEL Classification: C51, E32, O11, O47.
    Keywords: potential growth, production function, total factor productivity, age of equipments.
    Date: 2007–11
  33. By: Christopher Adam (University of Oxford); Stephen O’Connell (Swarthmore College); Edward Buffie (Indiana University; International Monetary Fund)
    Abstract: We examine the properties of alternative monetary policy rules in response to large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to a range of conventional alternatives including those involving heavy reliance on bond sterilization or a commitment to a pure exchange rate float. These simple rules, which are shown to be robust across a range of fiscal responses to aid inflows, appear to be consistent with actual responses to recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.
    Keywords: Basle Committee, capital adequacy, financial governance, financial architecture, financial reform, international standards, capital flows, poor countries, cost of capital, international development
    Date: 2007–02
  34. By: van den Hauwe, Ludwig
    Abstract: Hayek´s methodological outlook at the time he engaged in business cycle research was actually closer to praxeological apriorism than to Popperian falsificationism. A consideration of the Duhem thesis highlights the fact that even from a mainstream methodological perspective falsificationism is more problematic than is often realized. Even if the praxeological and mainstream lines of argumentation reject the Popperian emphasis on falsification for different reasons and from a different background, the prospects for falsificationism in economic methodology seem rather bleak.
    Keywords: General methodology; falsificationism; Popper; Hayek; Duhem; Duhemian Argument; Testing of Theories; Meaning and Interpretation of Econometric Results; Correlation and Causality;
    JEL: E0 B4 C1
    Date: 2007
  35. By: Laakkonen, Helinä (University of Jyväskylä)
    Abstract: Filtering intraday seasonality in volatility is crucial for using high frequency data in econometric analysis. This paper studies the effects of filtering on statistical inference concerning the impact of news on exchange rate volatility. The properties of different methods are studied using a 5-minute frequency USD/EUR data set and simulated returns. The simulation results suggest that all the methods tend to produce downward-biased estimates of news coefficients, some more than others. The study supports the Flexible Fourier Form method as the best for seasonality filtering.
    Keywords: high-frequency; volatility; macro announcements; seasonality
    JEL: C22 C49 C52 E44
    Date: 2007–11–28
  36. By: Olivier Allain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Universite Paris Descartes - Université Paris Descartes - Paris V); Nicolas Canry (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this article, we propose a simple Post Keynesian model so as to test whether French economy is wage or profit-led i.e. whether a wage share increase has a negative or positive impact on economic growth. In that perspective, we estimate econometrically the three behaviour equations of our model (consumption, investment and net exports equations) by using a VECM. Once these equations estimated, we solve our model by using the estimated coefficients and can then conclude on the nature of the French economic regime. Our main conclusion is that French economy would be profit-led. However, although an increase of wage share would have a negative impact on economic growth, this negative impact is very weak, as a one point increase of profit share increases economic growth of only 0.1 %. <br />According to our econometric analysis, wage share increase has a positive impact on consumption and no significant direct effect on the balance of trade. Nevertheless, imports are very sensitive to any output increase, which implies a strong negative impact on the multiplier. Moreover, as the accelerator coefficient (in the investment equation) is not very important, the positive effect of a wage share increase on capital accumulation through consumption is not strong enough to outweigh the negative impact of a wage share increase on investment, consecutive to the decline of profitability. Finally, these two elements –weak accelerator and multiplier effects– well explain why any support of consumption through a wage increase would not have a positive and important impact on French economic growth nowadays. Symmetrically, no positive effect of a wage austerity policy on growth must be expected.
    Keywords: Income distribution; Wage moderation; Economic growth; VECM
    Date: 2007–10–26
  37. By: Coccia Mario (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (TO), Italy)
    Abstract: This paper analyzes the relationship between economic growth and research funding. The econometric analysis show that gross domestic expenditure on R&D (GERD) as percentage of GDP is a important driver of economic growth (R2 adj = 71%) that is measured by GDP per capita. The optimization shows that the level of GERD equal to 2.6 maximizes the GDP per capita, moreover is important that GERD financed by government is lesser than 30%. The paper also discusses the research policy implications of the Lisbon Strategy, the USA, Japan, and in particular of Italy.
    Keywords: Economic growth, Research funding, Comparative study, Economic policy, Optimization
    JEL: C00 E00 E60 H50 O38 O40 O57
    Date: 2007–05
  38. By: Antonio Estache (World Bank and, the European Centre for Advanced Research in Economics and Statistics at the Free University of Brussels); Jean-François Perrault (GREDI, Faculte d'administration, Université de Sherbrooke); Luc Savard (GREDI, Faculte d'administration, Université de Sherbrooke)
    Abstract: In this paper we construct a standard CGE model to explore the impact of scaling up infrastructure in Mali. As the debate on the importance of scaling up infrastructure to stimulate growth and provide a push to African economies, some analyst raise concern on financing these infrastructures after construction and that external funding of these can create major distortion and have a negative impact on the trade balance of these countries. This study aims to provide so insight into this debate. It draws from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and Fay and Yepes (2003) for operating cost associated with new infrastructure. We compare various infrastructure investment funded with different fiscal tools. These investments scenarios are compared to non productive investment that can be interpreted as a business as usual scenario. Our results show that foreign aid does produce Dutch disease effects but the negative impacts are strongly dependent on the type of investments performed. Moreover, growth effects contribute to attenuate the negative effects.
    Keywords: Investment externalities, foreign aid, exchange rate, fiscal reforms
    JEL: C68 E62 F35 H54
    Date: 2007
  39. By: Sonja Fagernas (University of Cambridge); Prabirjit Sarkar (Jadavpur University & University of Cambridge); Ajit Singh (University of Cambridge)
    Abstract: This paper uses a new time series dataset of shareholder protection consisting of 60 annual legal indicators for the period 1970-2005 for France, Germany, the UK and the US. On the basis of these data it examines developments in shareholder protection and reassesses the claims that common-law countries have better shareholder protection than civil law countries. Furthermore it examines the relationship between legal changes and stock market development. It casts serious doubt on the claim that common-law countries have better shareholder protection which in turn leads to more stock market development.
    Keywords: Stock Market, Corporate Governance, Financial Development, Leximetrics
    JEL: F02 F36 E44 G11 O16 K22
    Date: 2007–06
  40. By: Coccia Mario (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (TO), Italy)
    Abstract: The purpose of this paper is to analyze the relationship between public and private funding for research. Data from Eurostat are used. The methodology applies descriptive statistics, correlation, regression and cluster analyses. The main results are: public funding for research crowds out business funding one; moreover private rather than public funding for research is the cause of economic growth of countries. The best economic performance has been achieved by the USA, followed by Europe and Japan. Italy instead has higher public funds of research than private one and the result is low rate of economic growth over time.
    Keywords: Research Funding, Economic Growth, Comparative Study, Research Policy, Crowding-out
    JEL: C00 E00 E60 H50 O38 O40 O57
    Date: 2007–06
  41. By: Hiroki Arato (Japan Society for the Promotion of Science and Graduate School of Economics and Kyoto University); Katsunori Yamada (Japan Society for the Promotion of Science and Graduate School of Economics and Graduate School of Economics, Osaka University)
    Abstract: This paper applies the framework of McGrattan and Prescott (2005) to the Japanese economy using an accounting dataset. Restricting our attention to the steady growth path in the 1980s, we show that the estimated value of intangible capital in Japan is enormous compared to the U.S. and the U.K. cases. Interestingly, it is also found that when we consider the sub-period of 1987--1989, the so-called bubble period, the price-to-book-value ratio is quite close to one. This finding might imply that the stock price surge during the bubble period was not actually a bubble.
    Keywords: Intangible capital, Stock prices, Price-to-book-value ratio
    JEL: E01 E22
    Date: 2007–12
  42. By: Di Pane Fabrice (ETUC - ETUI-REHS)
    Abstract: European Economic and Employment Policy Briefs (EEEPBs) are edited by Senior Researcher Andrew Watt and issued electronically six to eight times a year. They are based on analytical work that is conducted both by the ETUI-REHS and cooperation partners. The aim of EEEPBs is to provide readers with short, critical, policy-oriented analyses of topical issues relating to European employment and the economy. Launched in 2005, the policy briefs have covered a number of important subjects including the European minimum wage policy, smart growth, accession to the euro area, and the role of demand-side policies in reducing unemployment.
    JEL: E00
    Date: 2007–10
  43. By: Eduardo Levy Yeyati and Federico Sturzenegger
    Abstract: Recent empirical research on emerging markets debt, currency crises and fiscal sustainability has placed a significant focus on the role of currency mismatches with the emphasis placed on the currency composition of explicit government liabilities . The key insight of this paper is that these liabilities, while relevant, usually represent a small share of actual government liabilities: indeed, as an indicator of fiscal solvency, they are relatively uninformative –and possibly misleading– if not matched with the remaining liabilities (promises of wage and pension payments among others) and the asset side of the government’s balance sheet: financial and real government assets as well as the present value of future tax collection. These non-debt liabilities and assets may be affected by changes in the real exchange rate in a way that dwarfs the effect on the explicit liabilities which are typically the focus of attention. With this in mind, this paper contributes proposes a balance-sheet approach that, as illustrated by the practical applications included here, may radically alter the results from traditional sustainability evaluations –and, more generally, the perception of a country’s fiscal vulnerability.
    Date: 2007
  44. By: Coccia Mario (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (TO), Italy)
    Abstract: The purpose of this paper is a comparative analysis of economic and technological performances of different countries. Data from Eurostat are used. The methodology applies descriptive statistics, correlation, regression and cluster analyses. The main results are: the best economic performance (and higher productivity) has been achieved by USA, followed by Europe and Japan. Italy instead has economic problems that breed an average low rate of economic growth over time. In all Japan case study shows that to be technological leader is not sufficient to increase economic growth but it is also necessaries to have a stability in economic and financial system.
    Keywords: Comparative Study, Economic Growth, Productivity, Science Policy
    JEL: C00 E00 E60 H50 O38 O40 O57
    Date: 2007–06
  45. By: Mika Maliranta; Petri Rouvinen
    Abstract: ABSTRACT : This report studies various categories of intangible investment in tandem with micro-level data available for research purposes at Statistics Finland. Already at the firm level the amount of intangible investment exceeds that of tangible investment, and taking it into account changes our understanding of many key measures : for example the adjusted value added of the business sector is nearly ten per cent higher than the unadjusted one. R&D is roughly one-third of business sector intangible investment, but the share of software and in-house programming is almost as large. Investments in relation to advertising and marketing are also quite sizable. Categories of intangible investments are interrelated : for example internal R&D is not only related to external purchases of R&D inputs but also to employee training, software investment and programming, as well as advertising and marketing. The approach of this report, based on an extensive mass-imputation of the various missing firm-level values, seems like a promising avenue for further research.
    Keywords: intangible capital, firm investment, national accounts
    JEL: D92 E01 E22 O47
    Date: 2007–11–29

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