nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒12‒19
23 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Do Central Banks React to House Prices? By Finocchiaro, Daria; Queijo von Heideken, Virginia
  2. Does global liquidity help to forecast US inflation? By D'Agostino, A; Surico, P
  3. Consumption-Leisure Trade-offs and Persistency in Business Cycles. By Ilaski Barañano; Paz Moral
  4. Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic By Ian Babetskii; Fabrizio Coricelli; Roman Horvath
  5. How Inside Money Makes Inflation Costly For Most (but Gainful For Some) By William Coleman
  6. The Riksbank’s Forecasting Performance By Andersson, Michael K.; Karlsson, Gustav; Svensson, Josef
  7. Preference heterogeneity in monetary policy committees By Alessandro Riboni; Francisco Ruge-Murcia
  8. Explaining The Great Moderation: It Is Not The Shocks By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  9. Does Immigration Affect the Phillips Curve? Some Evidence for Spain By Bentolila, Samuel; Dolado, Juan José; Jimeno, Juan Francisco
  10. The Convergence of a Transition Economy: The Case of the Czech Republic By Jan Bruha; Jiri Podpiera; Stanislav Polak
  11. The Expectations Hypothesis of the Term Structure: Some Empirical Evidence for Portugal (revised version) By Silva Lopes, Artur C.; Monteiro, Olga Susana
  12. A Note on Business Cycle Accounting By Gregor Baeurle; Daniel Burren
  13. Challenges in macro-finance modeling By Don H Kim
  14. Financial Development and Instability: the Role of the Labour Share By ORGIAZZI, Elsa
  15. Opinion-based surveys in the conjunctural analysis of the Spanish economy By Javier Jareño
  16. Monetary circulation, the paradox of profits, and the velocity of money By Olivier Allain
  17. The Impact of Emerging Asia on Commodity Prices By Calista Cheung; Sylvie Morin
  18. Proper valuation of perpetuities in an inflationary environment without real growth By Ignacio Velez-Pareja
  19. La curva de rendimientos como predictor de expectativas macroeconómicas By Juan Camilo Rojas
  20. Insurance and Opportunities: A Welfare Analysis of Labor Market Risk By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  22. Reinforcement Learning in Investment Behavior By James Choi; David Laibson; Brigitte Madrain; Andrew Metrick
  23. The Contribution of Sectoral Productivity Differentials to Inflation in Greee By Heather D. Gibson; Jim Malley

  1. By: Finocchiaro, Daria (Research Department, Central Bank of Sweden); Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden)
    Abstract: The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.K. and Japanese central bank reaction functions, while they did not in the U.S.
    Keywords: House prices; monetary policy; DSGE models; Bayesian estimation
    JEL: E31 E44 E52 E58
    Date: 2007–11–01
  2. By: D'Agostino, A; Surico, P
    Abstract: We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of US inflation that are significantly more accurate than the forecasts based on US money growth, Phillips curve, autoregressive and moving average models. The marginal predictive power of global liquidity is strong at three years horizons. Results are robust to alternative measures of inflation.
    JEL: C53 C22 E37 E47
    Date: 2007–11
  3. By: Ilaski Barañano (Dpt. Fundamentos Análisis Económico I, UPV/EHU); Paz Moral (Dpt. Economía Aplicada III (Econometría y Estadística), UPV/EHU)
    Abstract: This paper studies whether nonseparabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas' (1988) human capital investment model that includes labor adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend-reverting component found in US data. These results hold even if low adjustment costs of labor are considered. Hence, we conclude that an arguably simple margin not studied previously can provide useful insights into observed business cycle patterns.
    Keywords: Real Business Cycle Models; Endogenous Growth; Propagation Mechanism; Persistence.
    JEL: E32 O41 C52
    Date: 2007–12–12
  4. By: Ian Babetskii; Fabrizio Coricelli; Roman Horvath
    Abstract: The paper provides an empirical analysis of inflation persistence in the Czech Republic using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence.
    Keywords: Inflation dynamics, inflation targeting, persistence.
    JEL: D40 E31
    Date: 2007–11
  5. By: William Coleman
    Abstract: It is argued that inflation creates private incentives for (socially costly) inside money to supplant (socially costless) outside money. Consequently, the familiar 'shoe leather cost' of inflation, that operates through a reduced demand for money under inflation, is supplemented by a separate social cost of inflation that operates through an increased supply of (inside) money under inflation. It is further argued that allowance of the costliness of an inflation-induced expansion of inside money changes the character of the distribution of the costs of inflation. Certain suppliers of inside money may experience a net gain from an inflation. The upshot is that inflation is no longer necessarily a 'common enemy', but may be welcomed by some economic interests.
    JEL: E42 E51
    Date: 2007–12
  6. By: Andersson, Michael K. (Monetary Policy Department, Central Bank of Sweden); Karlsson, Gustav (Monetary Policy Department, Central Bank of Sweden); Svensson, Josef (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper describes the official Riksbank forecasts for the period 2000-06. The forecast variables are those that are important for monetary policy analysis, i.e. inflation, GDP, productivity, employment, labour force, unemployment and financial variables such as interest rate and foreign exchange rate. The Riksbank’s forecasts are presented and analyzed and compared with alternative forecasts, that is, those from other institutions and simple statistical models. One important message from the study is that macroeconomic forecasts are associated with an appreciable uncertainty; the forecast errors are often sizeable. The forecast memory, defined as how far the forecasts are more informative than the variables unconditional mean, is usually limited to the first year. Furthermore, we find that the inflation forecasts exhibit several appealing features, such as a predictability memory that (possibly) includes the second year, relatively low RMSE and weak efficiency. The forecasts for the investigated real variables are shown to be less precise and they have a shorter forecast memory. The exchange rate predictions demonstrate the least accurate (of the investigated variables) forecasts. Compared to other forecasters, the Riksbank’s predictions are often more accurate. This holds for a comparison with the National Institute of Economic Research, even though the differences are statistically insignificant, as well as for a comparison with the participants in the Consensus Forecasts panel, where the Riksbank’s predictions often are among the best. We also find indications that misjudgements for productivity growth have had effects on forecasts for both inflation and GDP, but the results suggest that the Riksbank has considered available information in an acceptable fashion. This is also true for the undertaken revisions (from one forecast occasion to another) of the published forecasts.
    Keywords: Judgements; Forecast Evaluation; Central Bank; Inflation; GDP; RMSE
    JEL: E27 E37 E52
    Date: 2007–12–01
  7. By: Alessandro Riboni; Francisco Ruge-Murcia
    Abstract: This short paper employs individual voting records of the Monetary Policy Committee (MPC) of the Bank of England to study heterogeneity in policy preferences among committee members. The analysis is carried out using a simple generalization of the standard Neo Keynesian framework that allows members to differ in the weight they give to output compared with inflation stabilization and in their views regarding optimal inflation and natural output. Results indicate that, qualitatively, MPC members are fairly homogeneous in their policy preferences, but that there are systematic quantitative differences in their policy reaction functions that are related to the nature of their membership and career background. 
    Keywords: Committees; reaction functions; Bank of England
    JEL: G23 G32
    Date: 2007–12
  8. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper shows that the explanation of the decline in the volatility of GDP growth since the mid-eighties is not the decline in the volatility of exogenous shocks but rather a change in their propagation mechanism.
    Keywords: Great Moderation; Information; Shocks
    JEL: C32 C53 E32 E37
    Date: 2007–12
  9. By: Bentolila, Samuel; Dolado, Juan José; Jimeno, Juan Francisco
    Abstract: The Phillips curve has flattened in Spain over 1995-2006: unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives’ and immigrants’ labour supply or bargaining power differ. Estimation of the curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration.
    Keywords: Immigration; Phillips curve
    JEL: E31 J64
    Date: 2007–12
  10. By: Jan Bruha; Jiri Podpiera; Stanislav Polak
    Abstract: In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run paths of a converging emerging market economy. The model’s novel feature is the inclusion of quality investment to the standard framework of applied general equilibrium two-country models. This extension proves crucial ingredient for explanation of the trend in real exchange rate. Using a case study calibration of productivity and deep parameters for the Czech economy we demonstrate the ability of the model to consistently explain dynamics in key macroeconomic variables that are essential inputs for commonly used ‘gap models’ in monetary policy practice.
    Keywords: Convergence, monetary policy, two-country modeling.
    JEL: F12 F41
    Date: 2007–09
  11. By: Silva Lopes, Artur C.; Monteiro, Olga Susana
    Abstract: The purpose of this paper is to test the (rational) expectations hypothesis of the term structure of interest rates using Portuguese data for the interbank money market. The results obtained support only a very weak, long-run or "asymptotic" version of the hypothesis, and broadly agree with previous evidence for other countries. The empirical evidence supports the cointegration of Portuguese rates and the "puzzle" well known in the literature: although its forecasts of future short-term rates are in the correct direction, the spread between longer and shorter rates fails to forecast future longer rates. In the single equation framework, the implications of the hypothesis in terms of the predictive ability of the spread are also clearly rejected, even for the more stable period which emerged in the middle nineties.
    Keywords: term structure of interest rates; expectations hypothesis; hypothesis testing; cointegration; Portugal.
    JEL: C3 E4 C2
    Date: 2007
  12. By: Gregor Baeurle; Daniel Burren
    Abstract: Chari, Kehoe and McGrattan (2007) (CKM) show that a large class of dynamic stochastic general equilibrium (DSGE) models with various frictions and shocks is observationally equivalent to a benchmark real business cycle (RBC) model with correlated “wedges” in the RBC model's first-order conditions. The wedges in the static first-order conditions of the RBC model can be readily computed by evaluating the first-order conditions at the data and then solving for the wedges. In contrast, identification of the “investment wedge” in the RBC model's dynamic Euler equation requires the researcher to make assumptions about the expectation formation by agents in the RBC model. In particular, CKM assume that expectations are formed as if, from the perspective of the model's agents, wedges followed a vector autoregressive process of order one (VAR(1)). We show that wedges generally do not have a VAR(1) representation, implying that CKM's procedure is based on model-inconsistent expectations. We also provide an alternative, model-consistent approach to modeling expectation formation. On the former issue, we present a necessary and sufficient ``rank condition'' under which a detailed economy can be mapped into a benchmark model where wedges follow a VAR(1) process. On the latter issue, we suggest that the information set underlying the expectation formation should not only contain current wedges, but also all predetermined variables.
    Keywords: Business Cycle Accounting; Model Consistent Expectations
    JEL: C50 E10
    Date: 2007–10
  13. By: Don H Kim
    Abstract: This paper discusses various challenges in the specification and implementation of "macro-finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. I classify macro-finance models into pure latent-factor models ("internal basis models") and models which have observed macroeconomic variables as state variables ("external basis models"), and examine the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro variables and their potentially adverse effect on the specification of external basis models. I also discuss the challenge of addressing features like structural breaks and time-varying inflation uncertainty. Empirical difficulties in the estimation and evaluation of macro-finance models are also discussed in detail.
    Keywords: Term structure of interest rates, inflation expectations, macro-finance modeling, no-arbitrage models
    Date: 2007–12
  14. By: ORGIAZZI, Elsa
    Abstract: This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee (2004) have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.
    Keywords: Financial liberalization; Volatility; Labour share; Credit constraint
    JEL: F40 E32 E25
    Date: 2007–10–12
  15. By: Javier Jareño (Banco de España)
    Abstract: Opinion-based surveys, or quantitative surveys, are potentially very powerful tools for conjunctural analysis in view of their rapid availability and nature. This paper addresses the usefulness of these surveys for monitoring the Spanish economy. To do this it analyses the two most important opinion-based surveys, namely the European Commission's Business and Consumer Survey and the NTC-Research Purchasing Managers’ Indices, and their relationship to the Quarterly National Accounts macroeconomic data and to the Spanish economy's key conjunctural indicators. The results show that opinion-based surveys are generally useful tools for the conjunctural analysis of the Spanish economy, although they should be used with caution. Their usefulness is apparent in all the areas analysed: as indicators of economic developments, as pointers to changes in the trend of the economy and as tools for predicting the economic situation.
    Keywords: opinion survey, short-term analysis, Spain
    JEL: E20
    Date: 2007–12
  16. By: Olivier Allain (Universite Paris Descartes - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Recent papers have reconsidered the paradox of profits, that is the difficulty to explain how monetary profits can be generated when firms borrow only the wage bill to finance their production. In this article, we use a stock-flow consistent approach give a solution to this paradox assuming that, when firms sell goods at prices which exceed their unit costs, the realised monetary profits are not used to pay back banks. These profits then remain in the circuit, allowing additional transactions. In a sense, profits result from their own expenditure. According to this interpretation, the velocity of money is higher than one because some monetary units are used in several transactions of goods.
    Keywords: paradox of profits; circulation; endogenous money;velocity of money; stock-flow consistent approach
    Date: 2007–12
  17. By: Calista Cheung; Sylvie Morin
    Abstract: Over the past 5 years, real energy and non-energy commodity prices have trended sharply higher. These relative price movements have had important implications for inflation and economic activity in both Canada and the rest of the world. China has accounted for the bulk of incremental demand for oil and many base metals over this period. As rapid economic growth in China has raised the level of world demand, this has put upward pressure on commodity prices. The effect has been amplified by rising resource intensities in China's production in recent years. This paper discusses the factors driving emerging Asia's demand for commodities and assesses the impact of emerging Asia on the real prices of oil and base metals in the Bank of Canada Commodity Price Index (BCPI). Two separate single-equation models are estimated for oil and the base metals price index. We employ a structural break approach for oil prices, while metals prices are modelled with an error correction model (ECM). In both cases, we find strong evidence that oil and metals prices have historically moved with the business cycle in the developed world, but that this relationship has broken down since mid-1997. Thereafter, industrial activity in emerging Asia appears to have become a more dominant driver of oil price movements. While metal price fluctuations have also become increasingly aligned with levels of industrial activity in emerging Asia, rising intensities of metal production may have been a more important factor behind the acceleration in prices in recent years.
    Keywords: Business fluctuations and cycles; International topics
    JEL: E3 F4 O19 Q11
    Date: 2007
  18. By: Ignacio Velez-Pareja
    Abstract: We examine the proper valuation of perpetuities without real growth. The case of a “pure” non growing perpetuity (zero real growth and zero inflation) is of academic interest but in practice it might be difficult to find. The findings contradict what is generally accepted in the literature. In particular we examine the textbook formula for calculating the value of a perpetuity. When working with perpetuities we are in presence of a Chinese box: we have found that when working with perpetuities in a scenario of non zero inflation and zero real growth value increases with inflation. On the other hand, the textbook formula for calculating a non growing perpetuity in the same scenario under values the value of the perpetuity by relevant amounts.
    Date: 2007–12–04
  19. By: Juan Camilo Rojas
    Abstract: La búsqueda de información basada en las diferentes herramientas que el mercado ha desarrollado, ha convertido a la curva de rendimientos en una de las más utilizadas. Diferentes autores a nivel internacional se han preocupado por investigar y extraer información, teniendo en cuenta la formación de expectativas de los agentes sobre las tasas de interés, el comportamiento de diferentes variables macroeconómicas como el producto y la inflación. La evidencia encontrada ha sido amplia, aunque no siempre en la misma vía. A nivel nacional, pocos autores se han preocupado por indagar en el comportamiento de la curva de rendimientos como posible herramienta para predecir el comportamiento de variables macroeconómicas. Una posible explicación de esto podría estar en el hecho que las bases de datos de la curva de rendimientos son muy recientes y la calidad de los datos no es la mejor, debido al reciente desarrollo de los mercados financieros en Colombia. Sin embargo, la evidencia que se ha obtenido de esos estudios es valiosa. *********************************************************************************************************** The search of information based on different tools that the financial market have developed, have converted to the term structure in one of the most used. Different authors around the world have tried to obtain information from the term structure to forecast the behavior of many macroeconomic variables like inflation and production. The evidence founded has been wide but opposed, in some cases. On the local literature, few authors has been interesed on investigate the behavior of the term structure like tool for forecast the evolution of local macroeconomic variables. A possible explanation for this apathy can be the recent development of the financial market that do not make possible have long database with high data quality. However the evidence obtained on this works has been valuable.
    Date: 2007–08–31
  20. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, we provide an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. Our analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers. Our welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk, or alternatively in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.
    JEL: E21 J22 J31
    Date: 2007–11
  21. By: José Pablo Dapena; ;
    Abstract: De acuerdo a la literatura el precio de un activo (financiero o real) experimenta una burbuja si su precio de mercado se encuentra desajustado de manera persistente en el tiempo con respecto a su valor "intrínseco" o fundamental. En un contexto de racionalidad y eficiencia es difícil aceptar la existencia de estos fenómenos, sin embargo la literatura se ha encargado de reflejar que dichas situaciones pueden ser consistentes en un contexto de optimización y racionalidad, sobre todo cuando el horizonte de vida de los inversores es finito, existe poca variedad de alternativas de inversión, o existen situaciones de información imperfecta con falta de coordinación. Dadas estas situaciones, en el proceso de sostenimiento de la burbuja las expectativas de los inversores acerca del precio del activo adquieren un rol fundamental. En el presente trabajo se expone un modelo donde bajo ciertas condiciones el equilibrio en precios es consistente con las expectativas de los inversores, reaccionando dicho equilibrio a los cambios en las mismas, es decir que el equilibrio es condicional en el nivel de expectativas y en el manejo que de ellas se pueda hacer, sin perjuicio de potenciales efectos de “manada” en situaciones de información imperfecta. En el final del trabajo exponemos información sintética sobre casos que pueden ser presentados como burbujas a los efectos de la discusión de su naturaleza.
    Keywords: Activos financieros, burbujas, expectativas, conducta, equilibrio.
    JEL: G12 G10 E32
    Date: 2007–12
  22. By: James Choi; David Laibson; Brigitte Madrain; Andrew Metrick
    Date: 2007–12–12
  23. By: Heather D. Gibson (Bank of Greece); Jim Malley (University of Glasgow and CESifo)
    Abstract: This paper estimates the magnitude of the Balassa-Samuelson effect for Greece. We calculate the effect directly, using sectoral national accounts data, which permits estimation of total factor productivity (TFP) growth in the tradeables and nontradeables sectors. Our results suggest that it is difficult to produce one estimate of the BS effect. Any particular estimate is contingent on the definition of the tradeables sector and the assumptions made about labour shares. Moreover, there is also evidence that the effect has been declining through time as Greek standards of living have caught up on those in the rest of the world and as the non-tradeables sector within Greece catches up with the tradeables.
    Keywords: Balassa-Samuelson effect, inflation, productivity
    JEL: E31 F36 F41
    Date: 2007–11

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