nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒01‒05
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Relative Goods’ Prices and Pure Inflation By Reis, Ricardo; Watson, Mark W
  2. Optimal simple and implementable monetary and fiscal rules By Stephanie Schmitt-Grohé; Martín Uribe
  3. Taylor Rules Cause Fiscal Policy Ineffectiveness By Guido Ascari; Neil Rankin
  4. Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs By Berger, Helge; Österholm, Pär
  5. Housing and Monetary Policy By John B. Taylor
  6. Should we take inside money seriously? By Livio Stracca
  7. Monetary policy and core inflation By Michele Lenza
  8. Debt Stabilization Bias and the Taylor Principle: Optimal Policy in a New Keynesian Model with Government Debt and Inflation Persistence By Sven Jari Stehn; David Vines
  9. Optimal fiscal feedback on debt in an economy with nominal rigidities By Tatiana Kirsanova; Simon Wren-Lewis
  10. Business cycle synchronization and insurance mechanisms in the EU By António Afonso; Davide Furceri
  11. Inflation Transmission in the EMU: A Markov-Switching VECM Analysis By Thams, Andreas
  12. Identification of Monetary Policy Shocks in the Brazilian Market for Bank Reserves By Adriana Soares Sales; Maria Tannuri-Pianto
  13. The Explanatory Power of Monetary Policy Rules By John B. Taylor
  14. A case for interest-rate smoothing By Bask, Mikael
  15. Simple Monetary Rules Under Fiscal Dominance By Michael Kumhof; Irina Yakadina; Ricardo Nunes
  16. Taylor Rules for the ECB using Consensus Data By Janko Gorter; Jan Jacobs; Jakob de Haan
  18. Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice By Michael Woodford
  19. Is Inflation in India an Attractor of Inflation in Nepal? By Edimon Ginting
  20. The determinants of stock and bond return comovements By Lieven Baele; Geert Bekaert; Koen Inghelbrecht
  21. The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s? By Olivier J. Blanchard; Jordi Galí
  22. Nominal Debt as a Burden on Monetary Policy By Ramon Marimon; Javier Díaz-Giménez; Giorgia Giovannetti; Pedro Teles
  23. What does the yield curve tell us about the Federal Reserve's implicit inflation target? By Taeyoung Doh
  24. Why capital maintenance should be a key development tool ? By Raouf, BOUCEKKINE; Blanca, MARTINEZ; Cagri, SAGLAM
  25. (Un)Predictability and Macroeconomic Stability By D'Agostino, Antonello; Giannone, Domenico; Surico, Paolo
  26. Avoiding the inflation tax By Huberto M. Ennis
  27. Kinky perceived demand curves and Keynes-Negishi equilibria By Jacques H., DREZE; Jean-Jacques, HERINGS
  28. Entry, exit and plant-level dynamics over the business cycle By Yoonsoo Lee; Toshihiko Mukoyama
  29. Fiscal Reaction Functions in the CFA Zone: An Analytical Perspective By Olumuyiwa Adedeji; Oral Williams
  30. Production sharing and real business cycles in a small open economy By Jose Joaquin Lopez
  31. DSGE Modeling at the Fund: Applications and Further Developments By Philippe D Karam; Dennis P. J. Botman; Douglas Laxton; David Rose
  32. Dynamic Pricing and Imperfect Common Knowledge By Kristoffer Nimark
  33. Indeterminacy under input-specific externalities and implications for fiscal policy. By Thomas Seegmuller
  34. Measuring real value and inflation By Hillinger, Claude
  35. GDP at risk in a DSGE model: an application to banking sector stress testing By Jokivuolle, Esa; Kilponen , Juha; Kuusi, Tero
  36. Global Factors, Unemployment Adjustment and the Natural Rate By Smith, Ron; Zoega, Gylfi
  37. On the Ramsey equilibrium with heterogeneous consumers and endogenous labor supply. By Stefano Bosi; Thomas Seegmuller
  38. Macroeconomic Theory and Policy (2nd Edition) By Andolfatto, David
  39. Optimal monetary policy committee size: Theory and cross country evidence By Szilárd Erhart; Jose-Luis Vasquez-Paz
  40. Securitisation and the bank lending channel By Yener Altunbas; Leonardo Gambacorta; David Marqués
  41. A Party without a Hangover? On the Effects of U.S. Government Deficits By Michael Kumhof; Douglas Laxton
  42. The Bank Lending Channel of Monetary Transmission: Does It Work in Turkey? By Petya Koeva Brooks
  43. Rare Disasters, Asset Prices, and Welfare Costs By Robert J. Barro
  44. The Short-Run Monetary Equilibrium with Liquidity Constraints By Mierzejewski, Fernando
  45. The determinants of household saving in China: a dynamic panel analysis of provincial data By Charles Yuji Horioka; Junmin Wan
  46. Permanent Structural Change in the US Short-Term and Long-Term Interest Rates By Chew Lian Chua; Chin Nam Low
  47. Electronic Transactions as High-Frequency Indicators of Economic Activity By John W. Galbraith; Greg Tkacz
  48. Measuring the Degree of Central Bank Independence in Egypt By Noha Farrag; Ahmed Kamaly
  49. The Baby Boom and World War II: A Macroeconomic Analysis By Matthias Doepke; Moshe Hazan; Yishay Maoz
  50. Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-founded Macroeconomics By Aoki, Masanao; Yoshikawa, Hiroshi
  51. Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data By Dirk Krueger; Hanno Lustig; Fabrizio Perri
  52. Testing fiscal sustainability in Poland : a Bayesian analysis of cointegration By Andrea, SILVESTRINI
  53. Comment on Harding and Pagan 'the econometric analysis of some constructed binary time series' By Michael J. Dueker
  54. The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data By Sumit Agarwal; Chunlin Liu; Nicholas S. Souleles
  55. Globalization and the effects of changes in functional income distribution on aggregate demand in Germany By Engelbert Stockhammer; Eckhard Hein; Lucas Grafl
  56. THE NEW FACE OF THE IMF By Mico, Apostolov
  57. "The Saving Rate in Japan: Why It Has Fallen and Why It Will Remain Low" By R. Anton Braun; Daisuke Ikeda; Douglas H. Joines
  58. Reservas internacionais ótimas para o Brasil: uma análise simples de custo-benefício para o período 1999-2007 By Marco Antônio F. de H. Cavalcanti; Christian Vonbun
  59. Precautionary Savings by Natives and Immigrants in Germany By Matloob Piracha; Yu Zhu

  1. By: Reis, Ricardo; Watson, Mark W
    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
    Keywords: Dynamic Factor Models; Inflation; Phillips relation; Relative prices
    JEL: C32 C43 E31
    Date: 2007–12
  2. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation and taxes are set as a function of total government liabilities. We implement a second-order accurate solution to the model. We have several main findings. First, the size of the inflation coefficient in the interest rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response to output can lead to significant welfare losses. Third, the welfare gains from interest rate smoothing are negligible. Fourth, optimal fiscal policy is passive. Finally, the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey optimal policy.
    Date: 2007
  3. By: Guido Ascari; Neil Rankin
    Abstract: With the aim of constructing a dynamic general equilibrium model where fiscal policy can operate as a demand management tool, we develop a framework which combines staggered prices and overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make tax cuts, financed by increasing government debt, effective in raising short-run output. Surprisingly, in our baseline model this fails to occur. We trace the cause to the assumption that monetary policy is governed by a Taylor Rule. If monetary policy is instead governed by a money supply rule, fiscal policy effectiveness is restored.
    Keywords: staggered prices, overlapping generations, fiscal policy effectiveness, Taylor Rules.
    JEL: E62 E63
    Date: 2007–11
  4. By: Berger, Helge (Department of Economics, Free University Berlin); Österholm, Pär (Department of Economics)
    Abstract: We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.
    Keywords: Granger Causality; Monetary Aggregates; Monetary Policy; European Central Bank
    JEL: E47 E52 E58
    Date: 2007–12–17
  5. By: John B. Taylor
    Abstract: Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.
    JEL: E22 E43 E52
    Date: 2007–12
  6. By: Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper presents a dynamic general equilibrium model with sticky prices, in which "inside" money, made out of commercial banks’ liabilities, plays an active, structural role role. It is shown that, in such a model, an inside money shock has a well-defined meaning. A calibrated version of the model is shown to generate small, but non-negligible effects of inside money shocks on output and inflation. I also simulate the effect of a banking crisis in the model. Moreover, I find that it is optimal for monetary policy to react to such shocks, although reacting to inflation alone does not result in a significant welfare loss. JEL Classification: E43.
    Keywords: Endogenous money, inside money, monetary policy, dynamic general equilibrium models, deposit in advance constraint.
    Date: 2007–12
  7. By: Michele Lenza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies optimal monetary policy responses in an economy featuring sectorial heterogeneity in the frequency of price adjustments. It shows that a central bank facing heterogeneous nominal rigidities is more likely to behave less aggressively than in a fully sticky economy. Hence, the supposedly excessive caution in the conduct of monetary policy shown by central banks could be partly explained by the existence of a relevant sectorial dispersion in the frequency of price adjustments. JEL Classification: F31, F4, G1.
    Keywords: Exchange rate, US dollar, cross-rates, shocks heterogeneity, global distribution, transmission channels.
    Date: 2007–12
  8. By: Sven Jari Stehn; David Vines
    Abstract: We analyse optimal monetary and fiscal policy in a New-Keynesian model with public debt and inflation persistence. Leith and Wren-Lewis (2007) have shown that optimal discretionary policy is subject to a 'debt stabilization bias' which requires debt to be returned to its pre-shock level. This finding has two important implications for optimal discretionary policy. Firstly, as Leith and Wren-Lewis have shown, optimal monetary policy in an economy with high steady-state debt cuts the interest rate in response to a cost-push shock - and therefore violates the Taylor principle. We show that this striking result is not true with high degrees of inflation persistence. Secondly, we show that optimal fiscal policy is more active under discretion than commitment at all degrees of inflation persistence and all levels of debt.
    Keywords: Working Paper , Public debt , Monetary policy , Fiscal policy , Inflation , Economic stabilization ,
    Date: 2007–08–22
  9. By: Tatiana Kirsanova; Simon Wren-Lewis
    Abstract: We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhance or detract from the ability of the monetary authorities to stabilize output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. A clear discontinuity exists in the behavior of monetary policy and welfare on either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However, this fiscal stabilization is less efficient than monetary policy, so welfare declines. In contrast, if fiscal feedback falls below some critical value, optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare.
    Date: 2007
  10. By: António Afonso (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Davide Furceri (University of Illinois at Chicago, Department of Economics (M/C 144), University of Illinois at Chicago, 601 S. Morgan Street, Chicago, 60607, Illinois, USA.)
    Abstract: In this paper we provide a positive exercise on past business-cycle correlations and risk sharing in the European Union, and on the ability of insurance mechanisms and fiscal policies to smooth income fluctuations. The results suggest in particular that while some of the new Member States have well synchronized business cycles, for some of the other countries, business cycles are not yet well synchronized with the euro area’s business cycle, and risk-sharing mechanisms may not provide enough insurance against shocks. JEL Classification: E32, E42, F41, F42.
    Keywords: EU, optimum currency areas, business cycle synchronization, insurance mechanisms.
    Date: 2007–12
  11. By: Thams, Andreas
    Abstract: This paper analyzes the transmission of inflation across the five largest economies in the European Monetary Union, i.e. France, Germany, Italy, Netherlands and Spain. We use monthly CPI inflation rates for the period 1970-2006. Given the long observation period and the continuing economic integration of Europe’s economies, we first try to investigate, if there were changes in inflation dynamics in these countries using univariate Markov-switching models. To assess the inflation transmission mechanism, we first establish a long-run relationship between the five countries using cointegration methods. As implied by the results of the univariate models, we allow for changes in the adjustment coefficients of the cointegrating relationships and the short-run dynamics. Using a Markov-switching vector error correction model we find evidence for multiple regime switches during the early 1970s till the mid 1980s. Exactly during this period we find evidence for Germany being weakly exogenous, which highlights the dominance of German monetary policy at this time. Since the mid-1980s we find evidence for a stable transmission mechanism both in the long- and the short-run characterized by a low degree of inflation persistence.
    Keywords: Inflation transmission; monetary integration; MS-VECM; cointegration; euro area
    JEL: E31 E30 E50
    Date: 2007–11
  12. By: Adriana Soares Sales; Maria Tannuri-Pianto
    Abstract: We estimate an identified VAR (SVAR) with contemporaneous restrictions derived from a model of the market for bank reserves, which allows us to disentangle monetary policy shocks from demand shocks for reserves in Brazil. The main results are: i) the Central Bank of Brazil acts in order to smooth the bank reserve market interest rate (Selic); ii) the spread between the Selic rate and the discount rate provides information to estimate the demand curve for borrowed reserves; iii) overidentifying restrictions show that we cannot reject, for any period or model, the interest rate operational target hypothesis, even during the fixed exchange rate regime; iv) the impulse response functions show that shocks to the demand for reserves and to borrowed reserves generate statistically significant responses in real output and the inflation rate; v) all models display the liquidity effect and a small inflation rate puzzle.
    Date: 2007–12
  13. By: John B. Taylor
    Abstract: This paper shows that the theory of monetary policy rules is able to explain, predict, and help understand a variety of phenomenon in macroeconomics and finance, including the Great Moderation, the correlation between exchange rates and interest rates, and the shift in the response of the term structure of interest rates to inflation and output. Although the theory was originally designed for normative reasons, it has turned out to have positive implications which validate it scientifically. And while initially focused on the United States, it has applied equally well in other countries.
    JEL: E43 E52
    Date: 2007–12
  14. By: Bask, Mikael (Bank of Finland Research)
    Abstract: The aim of this paper is to determine whether it would be desirable from the perspective of macroeconomic balance for central banks to take account of nominal exchange rate movements when framing monetary policy. The theoretical framework is a small, open DSGE economy that is closed by a Taylor rule for the monetary authority, and a determinate REE that is least-squares learnable is defined as a desirable outcome in the economy. When the policy rule contains contemporaneous data on the output gap and the CPI inflation rate, the monetary authority does not have to consider the exchange rate as long as there is sufficient inertia in policy-making. In fact, due to a parity condition on the international asset market, interest-rate smoothing and a response to changes in the nominal exchange rate are perfectly intersubstitutable in monetary policy. In other words, we give a rationale for the monetary authority to focus on the change in the nominal interest rate rather than its level in policy-making. Thus, we have a case for interest-rate smoothing.
    Keywords: determinacy; E-stability; foreign exchange; inertia; Taylor rule
    JEL: E52 F31
    Date: 2007–12–19
  15. By: Michael Kumhof; Irina Yakadina; Ricardo Nunes
    Abstract: Is aggressive monetary policy response to inflation feasible in countries that suffer from fiscal dominance? We find that if nominal interest rates are allowed to respond to government debt, even aggressive rules that satisfy the Taylor principle can produce unique equilibria. However, resulting inflation is extremely volatile and zero lower bound on nominal interest rates is frequently violated. Within the set of feasible rules the optimal response to inflation is highly negative, and more aggressive inflation fighting is inferior from a welfare point of view. The welfare gain from responding to fiscal variables is minimal compared to the gain from eliminating fiscal dominance.
    Keywords: Monetary policy , Inflation , Interest rates , Debt , Government expenditures ,
    Date: 2007–12–07
  16. By: Janko Gorter; Jan Jacobs; Jakob de Haan
    Abstract: We estimate Taylor rules for the euro area using Consensus expectations for inflation and output growth and we compare these estimates with more conventional specifications in which actual outcomes are used. According to the model with Consensus data, the ECB takes expected inflation and expected output growth into account in setting interest rates, while in the more conventional model specification the coefficient of inflation is not significantly different from zero. Only when using survey data we find that the ECB's policy has been stabilizing. Finally, using a framework suggested by English et al. (2003), we find support for both policy inertia and serially correlated errors in ECB Taylor rules.
    Keywords: Taylor rule; ECB; real-time data; policy inertia; serial correlation
    JEL: C22 E52
    Date: 2007–12
  17. By: Mardi Dungey; Renee Fry
    Date: 2007–12
  18. By: Michael Woodford
    Abstract: Forecast targeting is an innovation in central banking that represents an important step toward more rule-based policymaking, even if it is not an attempt to follow a policy rule of any of the types that have received primary attention in the theoretical literature on optimal monetary policy. This paper discusses the extent to which forecast targeting can be considered an example of a policy rule, and the conditions under which it would represent a desirable rule, with a view to suggesting improvements in the approaches currently used by forecast-targeting central banks. Particular attention is given to the intertemporal consistency of forecast-targeting procedures, the assumptions about future policy that should be used in constructing the forecasts used in such procedures, the horizon with which the target criterion should be concerned, the relevance of forecasts other than the inflation forecast, and the degree of robustness of a desirable target criterion for monetary policy to changing circumstances.
    JEL: E52 E58
    Date: 2007–12
  19. By: Edimon Ginting
    Abstract: The paper attempts to answer some important questions around the inflationary process in Nepal, particularly the transmission of inflation from India. Because the Nepali currency is pegged to the Indian rupee and the two countries share an open border, price developments in Nepal would be expected to mirror to those in India. The results show that inflation in India and inflation in Nepal tend to converge in the long run. Our estimates indicate that the passthrough of inflation from India to Nepal takes about seven months. The paper draws some implications for the conduct of monetary policy in Nepal.
    Keywords: Inflation , Nepal , India , Currency pegs ,
    Date: 2007–11–30
  20. By: Lieven Baele (Finance Department, CentER, and Netspar, Tilburg University); Geert Bekaert (Graduate School of Business, Columbia University); Koen Inghelbrecht (Department Financial Economics, Ghent University, and Finance Department, University College Ghent)
    Abstract: We study the economic sources of stock-bond return comovement and its time variation using a dynamic factor model. We identify the economic factors employing structural and non-structural vector autoregressive models for economic state variables such as interest rates, (expected) inflation, output growth and dividend payouts. We also view risk aversion, and uncertainty about inflation and output as additional potential factors. Even the best-fitting economic factor model fits the dynamics of stock-bond return correlations poorly. Alternative factors, such as liquidity proxies, help explain the residual correlations not explained by the economic models.
    Keywords: factor models, stock-bond return correlation, macroeconomic factors, new-Keynesian models, structural VAR, liquidity, flight-to-safety
    JEL: G11 G12 G14 E43 E44
    Date: 2007–10
  21. By: Olivier J. Blanchard; Jordi Galí
    Abstract: We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.
    Date: 2007–08
  22. By: Ramon Marimon; Javier Díaz-Giménez; Giorgia Giovannetti; Pedro Teles
    Abstract: We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive -- or negative -- debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.
    JEL: E40 E50 E58 E60
    Date: 2007–12
  23. By: Taeyoung Doh
    Abstract: This paper studies the time variation of the Federal Reserve’s in ation target between 1960 and 2004 using both macro and yield curve data. I estimate a New Keynesian dynamic stochastic general equilibrium model in which the in ation target follows a random-walk process. I compare estimation results obtained from both macroeconomic and yield curve data, two estimates obtained with only macro data, in order to determine what the yield curve tells us about the in ation target. In the joint estimation, the estimated in ation target is much higher during the mid 1980s than in the corresponding macro estimation. Also, some part of the decline in the in ation target during the early or the mid 1980s seems to be perceived as temporary when private agents have to lter out the random walk part of the in ation target from the composite in ation target. My ndings suggest that nancial market participants were skeptical of the Fed’s commitment to low in ation even after the Volcker disin ation period of the early 1980s.
    Keywords: Interest rates ; Inflation (Finance)
    Date: 2007
  24. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Blanca, MARTINEZ; Cagri, SAGLAM
    Abstract: We study optimal growth model ˆ la Nelson and Phelps (1966) where labor resources can be allocated either to production, technology adoption or capital maintenance. We first characterize the balanced growth paths of a benchmark model without maintenance. Then we introduce the maintenance activity via the depreciation rate of capital. We characterize the optimal allocation of labor across the three activities. Through maintenance deepens the technological gap by diverting labor ressources from adoption, we find that it generally increases the long run output level. Moreover we find that long term output response to policy shocks is slightly higher in the presence of maintenance.
    Keywords: Adoption, Maintenance, Technological gap, Output gap
    JEL: E22 E32 O40
    Date: 2007–12–14
  25. By: D'Agostino, Antonello; Giannone, Domenico; Surico, Paolo
    Abstract: The ability of popular statistical methods, the Federal Reserve Greenbook and the Survey of Professional Forecasters to improve upon the forecasts of inflation and real activity from naive models has declined significantly during the most recent period of greater macroeconomic stability. The decline in the predictability of inflation is associated with a break down in the predictive power of real activity, especially in the housing sector. The decline in the predictability of real activity is associated with a break down in the predictive power of the term spread.
    Keywords: Fed Greenbook; forecasting models; predictability; Survey of Professional Forecasts
    JEL: C22 C53 E37 E47
    Date: 2007–12
  26. By: Huberto M. Ennis
    Abstract: This paper is extensively revised from WP 05-10. I study the effects of inflation on the purchasing behavior of buyers in an economy where money is essential for certain transactions (as in Lagos and Wright, 2005). A long-standing intuition in this subject is that when inflation increases, agents try to spend their money holdings speedily. The standard framework fails to capture this kind of effect (see Lagos and Rocheteau, 2005). I propose a simple modification of the model that improves it in this dimension. I assume that buyers can rebalance their money holdings only sporadically (i.e., not every period). With this minimal change in the environment, I show that higher inflation induces some buyers to spend their money faster by frontloading their consumption, searching more intensively for transactions, and buying low-quality goods. In this way, the model is able to reproduce distortions in the pattern of transactions that, traditionally, have played an important role in the evaluation of the cost ofinflation.
    Keywords: Inflation (Finance) ; Money
    Date: 2007
  27. By: Jacques H., DREZE; Jean-Jacques, HERINGS
    Abstract: The label ÒKeynes-Negishi equiibriaÓ is attached here to equilibria in a monetary economy with imperfectly competitive product and labor markets where business firms and labor unions hold demand perceptions with kinks - as posited in NegishiÕs 1979 book Microeconomic Foundations of Keynesian Macroeconomics. Such equilibria are defined in a general equilibrium model, and shown to exist. Methodological implications are briefly discussed in a concluding section.
    Keywords: Equilibrium, imperfect competition, perceived demands, kinky demand, princing rules, union wage model, union objectives, cash-in-advance
    JEL: D50 E12 J51
    Date: 2007–12–06
  28. By: Yoonsoo Lee; Toshihiko Mukoyama
    Abstract: This paper analyzes the implications of plant-level dynamics over the business cycle. We first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of employment and productivity between 1972 and 1997. We show how entry and exit patterns vary during the business cycle, and that the cyclical pattern of entry is very different from the cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and employment and compare its predictions to the data. In our model, plants enter and exit endogenously, and the size and productivity of entering and exiting plants are also determined endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax that is constant over time can destabilize the economy by causing fluctuations in the entry rate. Entry subsidies are found to be effective in stabilizing the entry rate and output.
    Keywords: Business cycles ; Manufacturing industries
    Date: 2007
  29. By: Olumuyiwa Adedeji; Oral Williams
    Abstract: The stance of fiscal policy in CEMAC and WAEMU is strongly influenced by fiscal effort in the previous period. This persistence underscores the risks of a procyclical fiscal policy stance, given these countries' high degree of dependence on primary commodities and exposure to terms of trade shocks. This paper finds that the coefficient of the lagged debt stock was significant and positive, consistent with the theory that higher levels of debt warrant greater fiscal effort. Various measures of economic performance, as captured by economic growth and per capita GDP, openness, and the terms of trade were also found to be important factors in explaining fiscal performance. As fiscal performance seems to be strongly affected by both real GDP growth and terms of trade fluctuations, there appears to be a need to develop supplementary fiscal-related criteria that take into account the influence of output and the terms of trade.
    Keywords: Working Paper , Fiscal policy , Central African Economic and Monetary Community , West African Economic and Monetary Union , Debt sustainability analysis , Economic growth , Economic models ,
    Date: 2007–10–04
  30. By: Jose Joaquin Lopez
    Abstract: Production sharing and vertical specialization account for a significant share of trade between developed and developing countries. The Mexican maquiladora industry provides an ideal example of production sharing in a small open economy. The typical ?maquila? imports most of its inputs from and exports all its output to the United States. This article tries to determine to what extent production sharing, as in the Mexican maquiladora, can serve as a transmission mechanism of business cycles in small open economies. We utilize a simple two-sector small open economy model of real business cycles that incorporates production sharing in the traded sector. The transmission channel of business cycles is introduced in the model via demand shocks to the traded sector, originated in the United States? manufacturing sector. The model is successful in replicating real business cycles statistics for the maquiladora sector, as well as some of the characteristics of the non-traded sector.
    Keywords: Business cycles ; Transmission mechanism (Monetary policy) ; Trade ; Maquiladora
    Date: 2007
  31. By: Philippe D Karam; Dennis P. J. Botman; Douglas Laxton; David Rose
    Abstract: Researchers in policymaking institutions have expended significant effort to develop a new generation of macro models with more rigorous microfoundations. This paper provides a summary of the applications of two of these models. The Global Economy Model is a quarterly model that features a large assortment of nominal and real rigidities, which are necessary to create plausible short-run dynamics. However, because this model is based on a representative-agent paradigm, its Ricardian features make it unsuitable to study many fiscal policy issues. The Global Fiscal Model, which is an annual model that uses an overlappinggenerations structure, has been designed to analyze the longer-term consequences of alternative fiscal policies.
    Keywords: Working Paper , Fiscal policy , Economic models , Monetary policy ,
    Date: 2007–08–17
  32. By: Kristoffer Nimark (Reserve Bank of Australia)
    Abstract: This paper introduces private information into the dynamic pricing decision of firms in an otherwise standard new Keynesian model by adding an idiosyncratic component to firms’ marginal costs. The model can then replicate two stylised facts about price changes: aggregate inflation responds gradually and with inertia to shocks, while at the same time price changes of individual goods can be quite large. The inertial behaviour of inflation is driven by privately informed firms strategically ‘herding’ on the public information contained in the observations of lagged aggregate variables. The model also matches the average duration between price changes found in the data and it nests the standard new Keynesian Phillips curve as a special case. To solve the model, the paper derives an algorithm for solving a class of dynamic models with higher-order expectations.
    Keywords: higher-order expectations; idiosyncratic marginal cost; price dynamics; new Keynesian Phillips curve
    JEL: E30 F41
    Date: 2007–12
  33. By: Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we introduce input-specific externalities in a dynamic general equilibrium model with heterogeneous households and a finance constraint (Woodford (1986)). In contrast to existing papers, average labor and capital have not a positive impact on the total productivity of factors, but respectively on labor and capital efficiencies. Focusing on not too low degrees of capital-labor substitution, we show that indeterminacy requires not only a lower bound for the elasticity of capital-labor substitution, but also an upper bound, although the returns are increasing. As a direct implication, the well known wrong slopes condition (labor demand steeper than labor supply) is neither a necessary nor a sufficient condition for indeterminacy and larger increasing returns promote sadlle-path stability when inputs are high substitutes. Using this framework, we are also able to analyze the role of variable tax rates on capital and labor income on the dynamics. In contrast to existing results, we show that tax rates decreasing with their tax base do not promote instability due to self-fulfilling expectations when capital and labor are sufficiently high substitutes, but rather have a stabilizing effect.
    Keywords: Indeterminacy, externalities, capital-labor substitution, fiscal policy.
    JEL: C62 E32 H20
    Date: 2006–12
  34. By: Hillinger, Claude
    Abstract: The most important economic measures are monetary. They have many different names, are derived in different theories and employ different formulas. Yet, they all attempt to do basically the same thing: to separate a change in nominal value into a ‘real part’ due to the changes in quantities and an inflation due to the changes of prices. Examples are: real national product and its components, the GNP deflator, the CPI, various measures related to consumer surplus, as well as the large number of formulas for price and quantity indexes that have been proposed. The theories that have been developed to derive these measures are largely unsatisfactory. The axiomatic theory of indexes does not make clear which economic problem a particular formula can be used to solve. The economic theories are for the most part based on unrealistic assumption. For example, the theory of the CPI is usually developed for a single consumer with homothetic preferences and then applied to a large aggregate of diverse consumers with non-homothetic preferences. In this paper I develop a unitary theory that can be used in all situations in which monetary measures have been used. The theory implies a uniquely optimal measure which turns out to be the Törnqvist index. I review, and partly re-interpret the derivations of this index in the literature and provide several new derivations. The paper also covers several related topics, particularly the presently unsatisfactory determination of the components of real GDP.
    Keywords: consumer price index; consumer surplus; money metric; price and quantity indexes; welfare measurement
    Date: 2007–12–16
  35. By: Jokivuolle, Esa (Bank of Finland Research); Kilponen , Juha (Bank of Finland Research); Kuusi, Tero (Helsinki School of Economics)
    Abstract: We suggest a complementary tool for financial stability analysis based on stochastic simulation of a dynamic stochastic general equilibrium model (DSGE) of the macro economy. The paper relates to financial stability research in which financial aggregates crucial to financial stability are modelled as functions of macroeconomic variables. In these models, stress tests for eg banking sector loan losses can be generated by considering adverse scenarios of macro variables. A DSGE model provides a systematic way of generating coherent macro scenarios which can be given a rigorous economic interpretation. The approach is illustrated using a DSGE model of the Finnish economy and a simple model of Finnish banking sector loan losses.
    Keywords: DSGE models; financial stability; loan losses; stress testing
    JEL: E13 E37 G21 G28
    Date: 2007–12–19
  36. By: Smith, Ron; Zoega, Gylfi
    Abstract: OECD unemployment rates show long swings which dominate shorter business cycle components and these long swings show a range of common patterns. Using a panel of 21 OECD countries 1960-2002, we estimate the common factor that drives unemployment by the first principal component. This factor has a natural interpretation as a measure of global expected returns, which is given added plausibility by the fact that it is almost identical to the common factor driving investment shares. We estimate a model of unemployment adjustment, which allows for the influence both of the global factor and of labour market institutions and we examine whether the global factor can act as a proxy for the natural rate in a Phillips Curve. In 15 out of the 21 countries one cannot reject that the same natural rate, as a function of the global factor, appears in both the unemployment and inflation equations. In explaining both unemployment and inflation, the global factor is highly significant, suggesting that models which ignore the global dimension are likely to be deficient.
    Keywords: Unemployment dynamics, labour market institutions investment, principal components, global factors
    JEL: E2 J1
    Date: 2007
  37. By: Stefano Bosi (EQUIPPE - Université de Lille 1 et EPEE); Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we address the question of deterministic cycles in a Ramsey model with heterogeneous infinite-lived agents and borrowing constraints, augmented to take into account the case of elastic labor supply. Under usual restrictions, not only we show that the steady state is unique, but also we clarify its stability properties through a local analysis. We find that, in many cases, the introduction of elastic labor supply promotes convergence by widening the range of parameters for saddle-path stability and endogenous cycles can eventually disappear. These results are robustly illustrated by means of canonical examples in which consumers have separable, KPR or homogeneous preferences.
    Keywords: Saddle-path stability, endogenous cycles, heterogeneous agents, endogenous labor supply, borrowing constraint.
    JEL: C62 D30 E32
    Date: 2007–01
  38. By: Andolfatto, David
    Abstract: An intermediate level macroeconomics textbook that develops the core elements of modern macroeconomic theory in easily digestible bits using indifference curves, budgets constraints, and simple math. Core ideas and applications are stressed throughout.
    JEL: E0
    Date: 2008–01–01
  39. By: Szilárd Erhart (Magyar Nemzeti Bank); Jose-Luis Vasquez-Paz (Banco Central de Reserva del Peru)
    Abstract: Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The optimal monetary policy committee (MPC) size varies according to the uncertainty of MPC members’ information influenced by the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a 2006 survey of 85 countries. The survey is available for further research and published on the web. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.
    Keywords: monetary policy committe, mpc size, decision making.
    JEL: E50 E58
    Date: 2007
  40. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd LL57 2DG, United Kingdom.); Leonardo Gambacorta (Banca d’Italia, Economic Outlook and Monetary Policy Department, Via Nazionale 91, I-00184 Rome, Italy.); David Marqués (Correspondence author: European Central Bank, Monetary Policy Directorate, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The dramatic increase in securitisation activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. We claim that the changing role of banks from “originate and hold” to “originate, repackage and sell” has also modified banks’ abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. Using a large sample of European banks, we find that the use of securitisation appears to shelter banks’ loan supply from the effects of monetary policy. Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions and, notably, upon banks’ risk positions. In this respect, the recent experience of the sub-prime mortgage loans crisis is very instructive. JEL Classification: E44, E55.
    Keywords: Asset securitisation, bank lending channel, monetary policy.
    Date: 2007–12
  41. By: Michael Kumhof; Douglas Laxton
    Abstract: This paper develops a 2-country New Keynesian overlapping generations model suitable for the joint evaluation of monetary and fiscal policies. We show that a permanent increase in U.S. government deficits raises the world real interest rate and significantly increases U.S. current account deficits, especially in the medium- to long-run. A simultaneous increase in non-U.S. savings lowers the world real interest rate and further increases U.S. current account deficits. We show that conventional infinite horizon models are ill-equipped to deal with issues that involve permanent changes in public or private sector savings rates.
    Keywords: Budget deficits , United States , Working Paper , Taxes , Public debt , Economic models ,
    Date: 2007–08–21
  42. By: Petya Koeva Brooks
    Abstract: Does the bank lending channel of monetary transmission work in Turkey? Using the May- June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's monetary transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.
    Keywords: Liquidity , Turkey , Interest rates on loans ,
    Date: 2007–12–10
  43. By: Robert J. Barro
    Abstract: A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d. shocks, including rare disasters, accords with key asset-pricing observations. If the coefficient of relative risk aversion equals 3-4, the model accords with observed equity premia and risk-free real interest rates. If the intertemporal elasticity of substitution is greater than one, an increase in uncertainty lowers the price-dividend ratio for equity, whereas a rise in the expected growth rate raises this ratio. In a model with endogenous saving, more uncertainty lowers the saving ratio (because substitution effects dominate). The match with major features of asset pricing suggests that the model is a reasonable candidate for assessing the welfare cost of aggregate consumption uncertainty. In the baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by as much as 20% each year to eliminate the small chance of major economic collapses. The welfare cost from usual economic fluctuations is much smaller, though still important, corresponding to lowering GDP by around 1.5% each year.
    JEL: E2 G12 O4
    Date: 2007–12
  44. By: Mierzejewski, Fernando
    Abstract: A theoretical framework is presented to characterise the money demand in deregulated markets. The main departure from the perfect capital markets setting is that, instead of assuming that investors can lend and borrow any amount of capital at a single (and exogenously determined) interest rate, a bounded money supply is considered. The problem of capital allocation can then be formulated in actuarial terms, in such a way that the optimal liquidity demand can be expressed as a Value-at-Risk. Within this framework, the monetary equilibrium determines the rate at which a unit of capital is exchange by a unit of risk, or, in other words, it determines the market price of risk. In a Gaussian setting, such a price is expressed as a mean-to-volatility ratio and can then be regarded as an alternative measure to the Sharpe ratio. Finally, since the model depends on observable variables, it can be verified on the grounds of historical data. The Black Monday (October 1987) and the Dot-Com Bubble (April 2000) episodes can be described (if not explained) on this base.
    Keywords: Money demand; Monetary equilibrium; Economic capital; Distorted- probability principle; Value-at-Risk.
    JEL: G14 G15 E44 E41
    Date: 2007–12–31
  45. By: Charles Yuji Horioka; Junmin Wan
    Abstract: In this paper, we conduct a dynamic panel analysis of the determinants of the household saving rate in China using a life cycle model and panel data on Chinese provinces for the 1995-2004 period from China's household survey. We find that China's household saving rate has been high and rising and that the main determinants of variations over time and over space therein are the lagged saving rate, the income growth rate, and (in some cases) the real interest rate and the inflation rate. However, we find that the variables relating to the age structure of the population usually do not have a significant impact on the household saving rate. These results provide mixed support for the life cycle hypothesis as well as the permanent income hypothesis, are consistent with the existence of inertia or persistence, and imply that China's household saving rate will remain high for some time to come.
    Keywords: Saving and investment - China
    Date: 2007
  46. By: Chew Lian Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Chin Nam Low (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper uses a time-varying error correction model to examine the structural changes in the rate of adjustment to the long-run equilibrium and the cointegrating vector of the US short- and long-term interest rates. We show that agents’ expectations of interest rate movements vary according to policy changes as reflected by changes in the direction of movements of the underlying parameters.
    Date: 2007–08
  47. By: John W. Galbraith; Greg Tkacz
    Abstract: Since the advent of standard national accounts data over 60 years ago, economists have traditionally relied on monthly or quarterly data supplied by central statistical agencies for macroeconomic modelling and forecasting. However, technological advances of the past several years have resulted in new high-frequency data sources that could potentially provide more accurate and timely information on the current level of economic activity. In this paper we explore the usefulness of electronic transactions as real-time indicators of economic activity, using Canadian debit card data as an example. These data have the advantages of daily availability and the high market penetration of debit cards. We find that (i) household transactions vary greatly according to the day of the week, peaking every Friday and falling every Sunday; (ii) debit card data can help lower consensus forecast errors for GDP and consumption (especially non-durable) growth; (iii) debit card transactions are correlated with Statistics Canada’s revisions to GDP; (iv) high-frequency analyses of transactions around extreme events are possible, and in particular we are able to analyze expenditure patterns around the September 11 terrorist attacks and the August 2003 electrical blackout.
    Keywords: Business fluctuations and cycles
    JEL: E17 E27 E66
    Date: 2007
  48. By: Noha Farrag (Faculty of Management Technology, The German University in Cairo); Ahmed Kamaly (American University in Cairo)
    Abstract: The past few years have witnessed a trend of increased delegation of authority to central banks. Increasing central bank independence is a recommended strategy for governments to establish a credible commitment to price stability as the final objective of the monetary authority, even at the cost of other objectives that may be more appealing to the political authorities. Existing literature on measuring central bank independence focuses on developed countries where quantifying the independence of central banks is easier, since quantifying the legal charter is sufficient to reflect the degree of central bank independence. However, in developing countries this task is thorny as quantifying the legal charter is often insufficient, since laws are often incomplete, ambiguous, or simply not respected. Thus, quantifying other indicators that reflect actual practice is required to capture any divergence between legal and actual practices. This paper attempts to quantify the degree of independence in the central bank of Egypt (CBE), from both a legal and behavioural context, since its establishment in 1961 until 2004. The study uses four indices in line with the work of Jacome (2001), Cukierman, et al. (1992), and Cukierman and Webb (1995), where each index is designed in such a way to capture a somewhat different aspect of independence. This study captures the discrepancies between the degree of independence conferred to the CBE by law and actual practice. The empirical findings of this paper offers insights about the direction of efforts that should be made to enhance central bank independence which is the key to achieving price stability and the stability of the financial system in general.
    Keywords: Central bank independence, Central Bank of Egypt, price stability, central bank credibility, indices of central bank independence, monetary policy
    JEL: E42 E52 E58
    Date: 2007–12
  49. By: Matthias Doepke; Moshe Hazan; Yishay Maoz
    Abstract: We argue that one major cause of the U.S. postwar baby boom was the increased demand for female labor during World War II. We develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor-force participation decisions. We use the model to assess the long-term implications of a one-time demand shock for female labor, such as the one experienced by American women during wartime mobilization. For the war generation, the shock leads to a persistent increase in female labor supply due to the accumulation of work experience. In contrast, younger women who turn adult after the war face increased labor-market competition, which impels them to exit the labor market and start having children earlier. In our calibrated model, this general-equilibrium effect generates a substantial baby boom followed by a baby bust, as well as patterns for age-specific labor-force participation and fertility rates that are consistent with U.S data.
    JEL: D58 E24 J13 J20
    Date: 2007–12
  50. By: Aoki, Masanao; Yoshikawa, Hiroshi
    Abstract: Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not necessarily go to zero even if the number of sectors or economic agents goes to infinity. This phenomenon known as non-self-averaging implies that even if the number of economic agents is large, dispersion can remain significant, and, therefore, that we can not legitimately focus on the means of aggregate variables. It, in turn, means that the standard microeconomic foundations based on the representative agent has little value for they are expected to provide us with accurate dynamics of the means of aggregate variables. The paper also shows that non-self-averaging emerges in some representative urn models. It suggests that non-self-averaging is not pathological but quite generic. Thus, contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations.
    Keywords: Micro foundations, Macroeconomics, Non-self averaging phenomena, Power laws
    Date: 2007
  51. By: Dirk Krueger; Hanno Lustig; Fabrizio Perri
    Abstract: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
    JEL: D52 D53 E44 G12
    Date: 2007–11
  52. By: Andrea, SILVESTRINI
    Abstract: Fiscal sustainability is a central topic for most of the transition economics of Eastern Europe. This paper focuses on a particular country : Poland. The main purpose is to investigate, empirically, whether the post-transition fiscal policy is consistent with the intertemporal budget constraint, used as a formal theoretical framework. To test debt stabilization, the empirical analysis is made in two steps in which different inferential approaches are adopted. In the first step we perform the preliminary unit roots analysis and the selection of the cointegation rank using parametric and bootstrap procedures. In the second step we apply Bayesian inference to the estimation of the cointegrating vector and of the adjustment parameters. In this way, we experiment the usefulness of Bayesian inference in precisely assessing the magnitude of the cointegrating vector. Moreover, we show to what extent the likelihood of the data is important in revising the available prior information, relying on numerical integration techniques.
    Keywords: Bayesian inference, fiscal sustainability, cointegration, bootstrap
    JEL: C11 C32 E62
    Date: 2007–12–06
  53. By: Michael J. Dueker
    Abstract: This comment discusses Harding and Pagan's (2007) article that advocates modeling the NBER business cycle chronology as the outcome of the two-quarter rule. The comment shows that the two-quarter rule does not fare well as a description of the decision-making of the NBER with real-time data available at the time the NBER declared the turning points. In addition, it is not clear how generally one could posit tractable rules-such as the two-quarter rule-for other constructed binary time series, such as stock market booms and busts. As an alternative to modeling the NBER chronology per se, this comment suggests a modified Qual VAR that includes autoregressive dynamics in the latent business cycle index. Out-of-sample forecast results from this model look promising with real-time data without the econometric shortcomings highlighted in Harding and Pagan's critique of the literature to date.
    Keywords: Business cycles ; Time-series analysis
    Date: 2007
  54. By: Sumit Agarwal; Chunlin Liu; Nicholas S. Souleles
    Abstract: We use a new panel dataset of credit card accounts to analyze how consumers responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers' response to "lumpy" increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.
    JEL: D91 E21 E51 E62 G2 H31
    Date: 2007–12
  55. By: Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.); Eckhard Hein (Macroeconomic Policy Institute (IMK), Hans Boeckler Foundation, Duesseldorf); Lucas Grafl (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: Germany has experienced a period of extreme nominal and real wage moderation since the mid 1990s. Contrary to the expectations of liberal economists this has failed to improve Germany’s mediocre economic performance. However, Germany is now running substantial current account surpluses. One possible explanation for Germany’s disappointing performance is found in Kaleckian theory, which highlights that the domestic demand effect of a decline in the wage share will typically be contractionary, whereas net exports will increase (Blecker 1989). The size of the foreign demand effect will critically depend on the degree of openness of the economy. The paper aims at estimating the demand side of a Bhaduri-Marglin (1990) –type model empirically for Germany. The paper builds on the estimation strategy of Stockhammer, Onaran and Ederer (2007) and Hein and Vogel (2008a, 2008b). The main contribution lies in a careful analysis of the effects of globalization. Since Germany is a large open economy by now it is a particularly interesting case study.
    JEL: E12 E20 E22 E25 E61
    Date: 2007–12
  56. By: Mico, Apostolov
    Abstract: The idea for this report was the seminar for civil society organizations organized by the IMF at the JVI in cooperation with the Stability Pact for South Eastern Europe took place in Vienna at October 31 – November 2, 2007. Mr. Mico Apostolov attended the seminar as a CEA member and he has prepared a report upon which this report to USAID was prepared. The seminar was organized on the bases of the constant effort of IMF to introduce as much as possible transparency into its work with the wider sector of the civil society. The Civil Society Organizations (CSOs) are in the core and in fact shape the civil society. Thus, it is a perfect target group for transmission of the already achieved, the present engagements and the future projects and intentions of IMF. The quality of presented / learned was at the highest level, knowing that all of the presenters are key decision-makers and policy-creators for IMF and the region of Southeast Europe. Hence, the output was of importance, setting up the foundations of the current macroeconomic policies and giving indicators that are important milestones for national governments and CSOs in their day-to-day work. In a conclusion, it is evident that the overall macroeconomic parameters of the Southeast Europe show that this region is in phase of rapid convergence and the national economies will continue to grow rapidly, as expected, in the years to follow. Although second-generation (structural and institutional) reforms are underway in Southeastern European economies, the unprecedented levels and large variations of external imbalances occupy relatively high positions on the policymakers agenda. Widening external imbalances reflect either rapid capital formation or private consumption booms, but there are country-specific thresholds beyond which market participants are unwilling to finance these deficits. Even if the growth potential of these economies justifies the large and persistent deficits, in case of sudden shift in the market sentiment, the inevitable adjustment could have devastating macroeconomic implications. The ensuing reduction of current account deficits could lead to a slowdown in medium term growth and reduction of long run per capita income. Hence, despite the strengthened macroeconomic management, SEE economies must continue their cooperation with the Fund, particularly in terms of regular surveillance of macroeconomic and financial market developments. This report was prepared under the contract provisions signed between CEA and USAID for nonexclusive services to USAID as part of a grant agreement.
    JEL: E5 E6
    Date: 2007–12–01
  57. By: R. Anton Braun (Faculty of Economics, University of Tokyo); Daisuke Ikeda (Northwestern University and Bank of Japan); Douglas H. Joines (Department of Finance and Business Economics, Marshall School of Business, University of Southern California)
    Abstract: During the 1990s, Japan began experiencing demographic changes that are larger and more rapid than in other OECD countries. These demographic changes will become even more pronounced in future years. We are interested in understanding the role of lower fertility rates and aging for the evolution of Japan's saving rate. We use a computable general equilibrium model to analyze the response of the national saving rate to changes in demographics and total factor productivity. In our model aging accounts for 2 to 3 percentage points of the 9 percent decline in the Japanese national saving rate between 1990 and 2000 and persistently depresses Japan's national saving rate in future years.
    Date: 2007–12
  58. By: Marco Antônio F. de H. Cavalcanti; Christian Vonbun
    Abstract: This paper calculates the optimal level of foreign reserves for Brazil during 1999-2007, by applying various extensions of the Ben-Bassat and Gottlieb (1992b) framework. We also estimate the social loss due to differences between actual and optimal reserves holdings by the Brazilian Central Bank. Our results suggest that, under various alternative scenarios and hypotheses regarding the model´s main parameters, the actual level of reserves in Brazil has become "excessive" around 2005-2006, thereby generating high and increasing costs for the Brazilian economy.
    Date: 2007–12
  59. By: Matloob Piracha; Yu Zhu
    Abstract: This paper analyses the savings behaviour of natives and immigrants in Germany. It is argued that uncertainty about future income and legal status (in case of immigrants) is a key component in the determination of the level of precautionary savings. Using the German Socio-economic Panel data it is shown that, although immigrants have lower levels of savings and are less likely to have regular savings than natives, the gap is significantly narrowed once we take loan repayments and remittances into account. Moreover, we find that marginal propensity to save for immigrants is about 40% higher than that for natives. We then exploit a natural experiment arising from a change in nationality law in Germany in 2000 to estimate the importance of precautionary savings. Using a difference-in-differences approach, we find that the easing of the requirements for naturalization has caused significant reductions of savings and remittances for immigrants as a whole, in the magnitude of 13% and 29% respectively, comparing to the pre-reform period. Our parametric specification shows that the introduction of the new nationality law reduces the gap between natives and immigrants in marginal propensity to save by 40% to 65%, depending on the measure of savings used. These findings suggest that much of the differences in terms of the savings behaviour between natives and immigrants are driven by the precautionary savings arising from the uncertainties about future income and legal status rather than cultural differences.
    Keywords: migration, remittances, savings, uncertainty
    JEL: D80 E21 F22
    Date: 2007

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