nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒01‒12
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal monetary policy under low trend inflation By Guido Ascari; Tiziano Ropele
  2. ‘Some unpleasant fiscal arithmetic’: the role of monetary and fiscal policy in public debt dynamics since the 1970s By Hasko, Harri
  3. The general equilibrium effects of fiscal policy: estimates for the euro area By Lorenzo Forni; Libero Monteforte; Luca Sessa
  4. Inflation persistence, inflation targeting and the Great Moderation By Charles T. Carlstrom; Timothy S. Fuerst; Matthius Paustian
  5. Lessons from the 2007 Financial Crisis By Buiter, Willem H
  6. Actual versus Perceived Transparency: The Case of the European Central Bank By Carin van der Cruijsen en Sylvester Eijffinger
  7. Securitisation and the bank lending channel By Yener Altunbas; Leonardo Gambacorta; David Marqués
  8. A Panel Data Approach to the Demand for Money and the Effects of Financial Reforms in the Asian Countries By Rao, B. Bhaskara; Kumar, Saten
  9. Estimating Term Structure Equations Using Macroeconomic Variables By Ray C. Fair
  10. Quantitative implications of indexed bonds in small open economies By Ceyhun Bora Durdu
  11. Does Immigration Affect the Phillips Curve? Some Evidence for Spain By Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno
  12. Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance By Xavier Gabaix
  13. A Multivariate Band-Pass Filter By Valle e Azevedo, João
  14. exchange rate policy and income distribution in an open developing economy By tropeano, d; michetti, e
  15. The Expectations Hypothesis of Term Structure of Interest Rates Revisited By Fabrizio Casalin
  16. Household Need for Liquidity and the Credit Card Debt Puzzle By Telyukova, Irina A.
  17. Heterogeneous Life-Cycle Profiles, Income Risk and Consumption Inequality By Giorgio E. Primiceri; Thijs van Rens
  18. Policy games, policy neutrality and Tinbergen controllability under rational expectations By Di Bartolomeo Giovanni; Hughes Hallett Andrew; Acocella Nicola
  19. Fiscal forecasting - lessons from the literature and challenges By Teresa Leal; Javier J. Pérez; Mika Tujula; Jean-Pierre Vidal
  20. The Baby Boom and World War II: A Macroeconomic Analysis By Matthias Doepke; Moshe Hazan; Yishay D. Maoz
  21. Exchange Rate Pass-Through and Structural Macroeconomic Shocks in Developing Countries: An Empirical Investigation. By barhoumi, karim
  23. An alternative framework for foreign exchange risk management of sovereign debt By Melecky, Martin
  24. The Macroeconomic, Industrial and Distributional Effects of Removing Tariffs in Bangladesh By Serajul Hoque
  25. A Macroeconomic perspective on skill shortages and the skill premium in New Zealand By Razzak, Weshah; Timmins, Jason
  26. Interpretation of the Effects of Filtering Integrated Time Series By Valle e Azevedo, João
  27. Diagnosing labor market search models: a multiple-shock approach By Kenneth Beauchemin; Murat Tasci
  28. Choosing to keep up with the Joneses By Barnett, Richard C; Bhattacharya, Joydeep; Bunzel, Helle
  29. The National Banking System: the national bank note puzzle By Bruce Champ
  30. Hedonic Imputation versus Time Dummy Hedonic Indexes (with a commentary by Jan de Haan) By Diewert, Erwin; Saeed , Heravi; Silver, Mick
  31. Labor Market Policy Options of the Kurdistan Regional Government By Almas Heshmati
  32. “We do not share the troubles of our trans-Atlantic cousins": The statutory framework for accounting in the UK and the US in the interwar period By Maltby, Josephine
  33. On the Consistency of Arbitrary Money-Demand Functions with the Sidrauski and the Shopping-Time Models By Rubens Penha Cysne; David Turchick
  34. Infrastructure and Development: A Critical Appraisal of the Macro-level Literature By Stephane Straub
  35. Do Regional Price Levels Converge? : Paneleconometric Evidence Based on German Districts By Christian Dreger; Reinhold Kosfeld
  36. The Determinants of Foreign Direct Investment Flows to the Federal Region of Kurdistan By Almas Heshmati; Rhona Davis
  37. The Effect of the Federal Student Loan Program On College Enrollment and Default Rates By Ionescu, Anamaria Felicia
  38. International Job Search: Mexicans In and Out of the US By Sílvio Rendon; Alfredo Cuecuecha

  1. By: Guido Ascari (University of Pavia); Tiziano Ropele (Bank of Italy)
    Abstract: In the monetary policy literature it is commonly assumed that trend inflation is zero, despite overwhelming evidence that zero inflation is neither empirically relevant nor a practical objective for central bank policy. We therefore extend the standard New Keynesian model to allow for positive trend inflation, showing that even low trend inflation has strong effects on optimal monetary policy and the dynamics of inflation, output, and interest rates. Under discretion, the efficient policy deteriorates and there is no guarantee of determinacy. Even with commitment, targeting non-zero trend inflation leads to substantial welfare losses. Our results serve as a warning against indiscriminate use of models assuming zero trend inflation.
    Keywords: Optimal monetary policy, trend inflation
    JEL: E31 E52
    Date: 2007–11
  2. By: Hasko, Harri (Bank of Finland Research)
    Abstract: Shocks to monetary and fiscal policy have played a major role in public debt developments in the OECD countries since the mid-1970s. According to the applied VAR approach, these shocks, taken together, explained, on average, about half of the forecast error variation in the debt to GDP ratio, while the share of shocks to GDP growth was close to 30 percent. In contrast, shocks to inflation and the debt ratio itself played in most cases only a minor role. However, the inflation shocks were vital in initiating the public debt problems, as the increase in actual inflation, and particularly the persistence of high inflation expectations in the 1980s, led to a prolonged period of high real interest rates. Learning the implications of greater monetary discipline therefore gave rise to ‘some unpleasant fiscal arithmetic’ which aggravated debt problems. In most countries fiscal policy aimed at correcting the deterioration in fiscal balances, but the progress was in most cases slow and delayed. It is noticeable that public debt developments have been quite similar in both the United States and the euro area despite differences in fiscal policy and the role of the public sector. Shocks to GDP growth, inflation and monetary policy, which have been more similar in both continents, explain about two thirds of the forecast error variation of the debt to GDP ratio, while shocks to fiscal policy explain about 20 percent.
    Keywords: public debt dynamics; fiscal policy; monetary policy; VAR models
    JEL: C22 E62 H62
    Date: 2008–01–08
  3. By: Lorenzo Forni (Bank of Italy); Libero Monteforte (Bank of Italy); Luca Sessa (Bank of Italy)
    Abstract: This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the euro area by means of Bayesian techniques. The model accounts for distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees, and transfers to households. A newly computed quarterly dataset of fiscal variables is used. Our results point to a prevalence of mild Keynesian effects of fiscal policy. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensation of public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. On the revenue side, decreases in labor income and consumption tax rates have a sizable effect on consumption and output, while a reduction in capital tax favors investment and output in the medium run. Finally, with the exception of transfers to households and labor income tax rates, most fiscal policy variables contribute little to the cyclical variability of the main macro variables.
    Keywords: fiscal policy, distortionary taxation, DSGE modeling, Bayesian estimation
    JEL: E32 E62
    Date: 2007–11
  4. By: Charles T. Carlstrom; Timothy S. Fuerst; Matthius Paustian
    Abstract: There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980’s. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation.
    Keywords: Inflation (Finance) ; Phillips curve ; Inflation targeting
    Date: 2007
  5. By: Buiter, Willem H
    Abstract: The paper studies the causes of the current financial crisis and considers proposals for mitigation and prevention of future crises. The crisis is was the product of a ‘perfect storm’ bringing together a number of microeconomic and macroeconomic pathologies. Among the microeconomic systemic failures were: wanton securitisation, fundamental flaws in the rating agencies’ business model, the procyclical behaviour of leverage in much of the financial system and of the Basel capital adequacy requirements, privately rational but socially inefficient disintermediation, and competitive international de-regulation. Proximate local drivers of the specific way in which these problems manifested themselves were regulatory and supervisory failure in the US home loan market. Among the macroeconomic pathologies that contributed to the crisis were, first, excessive global liquidity creation by key central banks and, second, an ex-ante global saving glut, brought about by the entry of a number of high-saving countries (notably China) into the global economy and a global redistribution of wealth and income towards commodity exporters that also had, at least in the short run, high propensities to save. In the UK, failures of the Tripartite financial stability arrangement between the Treasury the Bank of England and the FSA, weaknesses in the Bank of England’s liquidity management, regulatory failure of the FSA, an inadequate deposit insurance arrangement and deficient insolvency laws for the banking sector contributed to the financial disarray. Despite this, it may well be possible to minimize the spillovers over from the crisis beyond the financial sectors of the industrial countries and the housing sectors of the US and a few European countries.
    Keywords: collateral; financial stability; leverage; liquidity; rating agencies; regulation; securitization
    JEL: D52 D53 E32 E44 E58 F37 G21 G24 G28
    Date: 2007–12
  6. By: Carin van der Cruijsen en Sylvester Eijffinger
    Abstract: Central banks have become more and more transparent about their monetary policy making process. In the central bank transparency literature the distinction between actual and perceived transparency is often lacking. However, as perceptions are crucial for the actions of economic agents this distinction matters. We investigate the mismatch between actual and perceived transparency and its relevance by analyzing data of a Dutch household survey on the European Central Bank's transparency. A discrepancy between actual and perceived transparency exists because of incomplete and incorrect transparency knowledge and other (psychological) factors. We find that respondents with relatively high transparency perceptions are more likely to have more trust in the ECB and better alligned inflation perceptions and expectations. Therefore, it might be beneficial for a central bank to increase transparency perceptions, either by improving its actual disclosure practices or by focusing on its transparency strengths in its communicationpolicy.
    Keywords: Central bank transparency; Perceptions; Survey; CentERpanel; Behavioral Economics
    JEL: D80 E52 E58
    Date: 2008–01
  7. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor); Leonardo Gambacorta (Bank of Italy); David Marqués (European Central Bank, Monetary Policy Directorate)
    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 as well as upon banks’ risk positions. In this respect the recent experience of the sub-prime mortgage loans crisis is very instructive.
    Keywords: asset securitisation, bank lending channel, monetary policy
    JEL: E44 E52
    Date: 2007–11
  8. By: Rao, B. Bhaskara; Kumar, Saten
    Abstract: Three panel data estimation methods are used to estimate the cointegrating equations for the demand for money (M1) in 14 developing Asian countries. Tests for the effects of financial reforms are made with estimates for two sub-samples of 1970-1985 and 1986-2005. Our results show that money demand functions in these Asian countries are stable and financial reforms have yet to have any significant effects. This implies that the central banks of these countries should use money supply, instead of the rate of interest, as the monetary policy instrument.
    Keywords: Pedroni; Mark and Sul and Breitung methods; Demand for money; Asian countries; Effects of financial reforms and Choice of monetary policy instruments
    JEL: E5 E1
    Date: 2008–01–07
  9. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper begins with the expectations theory of the term structure of interest rates with constant term premia and then postulates how expectations of future short term interest rates are formed. Expectations depend in part on predictions from a set of VAR equations and in part on the current and two lagged values of the short term interest rate. The results suggest that there is relevant independent information in both the VAR equations' predictions and the current and two lagged values of the short rate. The model fits the long term interest rate data well, including the 2004-2006 period, which some have found a puzzle. The properties of the model are consistent with the response of the long term U.S. Treasury bond rate to surprise price and employment announcements. The overall results suggest that long term rates can be fairly well explained by modeling expectation formation of future short term rates.
    Keywords: Term structure equations, Expectations theory
    JEL: E43
    Date: 2008–01
  10. By: Ceyhun Bora Durdu
    Abstract: This paper analyzes the macroeconomic implications of real-indexed bonds, indexed to the terms of trade or GDP, using a general equilibrium model of a small open economy with financial frictions. Although indexed bonds provide a hedge to income fluctuations and can thereby mitigate the effects of financial frictions, they introduce interest rate fluctuations. Because of this tradeoff, there exists a nonmonotonic relation between the "degree of indexation" (i.e., the percentage of the shock reflected in the return) and the benefits that these bonds introduce. When the nonindexed bond market is shut down and only indexed bonds are available, indexation strengthens the precautionary savings motive, increases consumption volatility and deepens the impact of Sudden Stops for degrees of indexation higher than a certain threshold. When the nonindexed bond market is retained, nonmonotonic relationship between the degree of indexation and the benefits of indexed bonds still remain. Degrees of indexation higher than a certain threshold lead to more volatile consumption than lower degrees of indexation. The threshold degree of indexation depends on the volatility and persistence of income shocks as well as on the relative openness of the economy.
    Date: 2007
  11. By: Samuel Bentolila (CEMFI, CEPR and CESifo); Juan J. Dolado (Universidad Carlos III de Madrid, CEPR and IZA); Juan F. Jimeno (Banco de España, CEPR and IZA)
    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
  12. By: Xavier Gabaix
    Abstract: This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset's fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and thus volatile asset prices and return predictability. Using the recent technique of linearity-generating processes (Gabaix 2007), the model is tractable, and all prices are exactly solved in closed form. In the "variable rare disasters" framework, the following empirical regularities can be understood qualitatively: (i) equity premium puzzle (ii) risk-free rate-puzzle (iii) excess volatility puzzle (iv) predictability of aggregate stock market returns with price-dividend ratios (v) value premium (vi) often greater explanatory power of characteristics than covariances for asset returns (vii) upward sloping nominal yield curve (viiii) a steep yield curve predicts high bond excess returns and a fall in long term rates (ix) corporate bond spread puzzle (x) high price of deep out-of-the-money puts. I also provide a calibration in which those puzzles can be understood quantitatively as well. The fear of disaster can be interpreted literally, or can be viewed as a tractable way to model time-varying risk-aversion or investor sentiment.
    JEL: E43 E44 G12
    Date: 2008–01
  13. By: Valle e Azevedo, João
    Abstract: We develop a multivariate filter which is an optimal (in the mean squared error sense) approximation to the ideal filter that isolates a specified range of fluctuations in a time series, e.g., business cycle fluctuations in macroeconomic time series. This requires knowledge of the true second-order moments of the data. Otherwise these can be estimated and we show empirically that the method still leads to relevant improvements of the extracted signal, especially in the endpoints of the sample. Our filter is an extension of the univariate filter developed by Christiano and Fitzgerald (2003). Specifically, we allow an arbitrary number of covariates to be employed in the estimation of the signal. We illustrate the application of the filter by constructing a business cycle indicator for the U.S. economy. The filter can additionally be used in any similar signal extraction problem demanding accurate real-time estimates.
    JEL: E32 C14 C22
    Date: 2008–01–02
  14. By: tropeano, d; michetti, e
    Abstract: In this work we are going to deal with the issue of distribution of income in an open economy within a simplified macroeconomic model with constant prices.this type of model could apply to middle-income developing countries, which have succeeded in fighting inflation through a policy of high interest rates.It will be assumed that the implicit target of monetary policy now becomes the exchange rate and interest rates are set to a high level to lower the exchange rate. Even if this strategy may work it may produce negative effects on output growth and the distribution of income.The lowering of the exchange rate target would have the following effects on distribution.It would cause a reduction in the growth of output,it would lower the wage rate.Domestically-produced income distributed abroad should increase instead.The domestic interst rate would rise only for suitable small values of the parameter which links imports to income.The effect on the profit share is indeed uncertain.
    Keywords: exchange rate policy balance of payments income distribution developing countries
    JEL: F40
    Date: 2008–01
  15. By: Fabrizio Casalin
    Abstract: This paper investigates the validity of the Expectations Hypothesis of the Term Structure (EHTS) employing standard forward-spot regressions which accommodate for the presence of time-varying term premia. The novelty of this paper is that the analysis is conducted by taking advan- tage of the following two properties of the Kalman Filter: first, it makes possible to model time-varying term premia as unobservables, and second it delivers recursive estimations of forward-spot regressions as more data become available. In fact, previous studies have modelled term premia by means of macroeconomic variables. To the extent that term premia are influenced by political and social climates which are difficult to ob- serve, it might be preferable to model them as unobservables, rather than by means of observed variables. Moreover, especially when tested over long periods of data, the EHTS might hold for certain periods while it might not for others. These periodic departures from and reversions to the EHTS cannot be detected by constant parameters models, which there- fore can provide only broad brush evidence. This paper shows that the recursive nature of the Kalman filter can be employed to construct a test for the EHTS which gives more refined evidence. The analysis is carried out focusing on the short-end of the US term structure spectrum.
    Keywords: Term structure of interest rates; Monetary regimes; Kalman filter
    JEL: C32 E43
    Date: 2007–11
  16. By: Telyukova, Irina A.
    Abstract: In the 2001 U.S. Survey of Consumer Finances (SCF), 27% of households report simultaneously revolving significant credit card debt and holding sizeable amounts of liquid assets. These consumers report paying, on average, a 14% interest rate on their debt, while earning only 1 or 2% on their liquid deposit accounts. This phenomenon is known in the literature as the “credit card debt puzzle.” In this paper, I pose and quantitatively evaluate the following explanation for this puzzle: households that accumulate credit card debt may not pay it off using their money in the bank, because they expect to use that money for goods for which credit cards cannot be used. Using both aggregate and survey data (SCF and CEX), I document that liquid assets are a substantial part of households’ portfolios and that consumption in goods requiring liquid payments may have a sizeable unpredictable component. This would warrant holding precautionary balances in liquid accounts. I develop a dynamic heterogeneous-agent model of household portfolio choice, where households are subject to uninsurable income and preference uncertainty, and consumer credit and liquidity coexist as means of consumption and saving/borrowing. The calibration of the model parameters is based on the simulated method of moments. The calibrated model accounts for 73% of the households in the data who hold consumer debt and liquidity simultaneously, and for at least 55 cents of every dollar held by a median household in the puzzle group. I argue that these results are a lower bound, and that the liquidity-need hypothesis is thus successful in rendering most of the puzzle a rational phenomenon.
    JEL: D12 E21 E41 D14
    Date: 2007–12–26
  17. By: Giorgio E. Primiceri (Northwestern University, NBER and CEPR); Thijs van Rens (CREI, Universitat Pompeu Fabra, CEPR and IZA)
    Abstract: Was the increase in income inequality in the US due to permanent shocks or merely to an increase in the variance of transitory shocks? The implications for consumption and welfare depend crucially on the answer to this question. We use CEX repeated cross-section data on consumption and income to decompose idiosyncratic changes in income into predictable lifecycle changes, transitory and permanent shocks and estimate the contribution of each to total inequality. Our model fits the joint evolution of consumption and income inequality well and delivers two main results. First, we find that permanent changes in income explain all of the increase in inequality in the 1980s and 90s. Second, we reconcile this finding with the fact that consumption inequality did not increase much over this period. Our results support the view that many permanent changes in income are predictable for consumers, even if they look unpredictable to the econometrician, consistent with models of heterogeneous income profiles.
    Keywords: consumption, inequality, risk, incomplete markets, heterogeneity
    JEL: D12 D31 D52 D91 E21
    Date: 2007–12
  18. By: Di Bartolomeo Giovanni; Hughes Hallett Andrew; Acocella Nicola
    Abstract: This paper shows the relationship between static controllability (the well-known Tinbergen golden rule), and the existence and other properties of the Nash equilibrium in a dynamic setting with rational expectations for future behavior. We show how to determine the existence of equilibrium outcomes; the conditions under which no equilibrium exists; and who will get to dominate (or who will find their policies to have become ineffective) in those equilibria, without having to compute and enumerate all the possible equilibria directly.
    Keywords: Policy games, policy effectiveness, controllability, Nash equilibrium existence, rational expectations
    JEL: C72 E52 E61
    Date: 2008–01
  19. By: Teresa Leal (Department of Economics and Statistics, University of Huelva, Dr. Cantero Cuadrado 6, 21071 Huelva, Spain.); Javier J. Pérez (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Mika Tujula (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jean-Pierre Vidal (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: While fiscal forecasting and monitoring has its roots in the accountability of governments for the use of public funds in democracies, the Stability and Growth Pact has significantly increased interest in budgetary forecasts in Europe, where they play a key role in the EU multilateral budgetary surveillance. In view of the increased prominence and sensitivity of budgetary forecasts, which may lead to them being influenced by strategic and political factors, this paper discusses the main issues and challenges in the field of fiscal forecasting from a practitioner’s perspective and places them in the context of the related literature. JEL Classification: H6, E62, C53.
    Keywords: Fiscal policies, government budget, forecasting, monitoring.
    Date: 2007–12
  20. By: Matthias Doepke (University of California, Los Angeles, CEPR, NBER and IZA); Moshe Hazan (Hebrew University and CEPR); Yishay D. Maoz (University of Haifa)
    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 laborforce participation and fertility rates that are consistent with U.S. data.
    Keywords: fertility, baby boom, World War II, female labor-force participation
    JEL: D58 E24 J13 J20
    Date: 2007–12
  21. By: barhoumi, karim
    Abstract: This paper investigates the exchange rate pass-through in 12 developing countries during the period 1980-2001 by adopting a new formulation . Rather than considering the traditional approach based on the exogenous exchange rate movement through correlation between exchange rate and prices, we focus on fundamental macroeconomic shocks that a¤ect both exchange rate and prices. In order to do that, we employ long-run restrictions à la Blanchard and Quah (1989) to identify the di¤erent shocks through an open economic macroeconomic model (ISLM framework). We use two empirical methodology : Structural VECM methodology used by Jang and Ogaki (2004) and the common trends approach proposed by Warne et al (1992). This allows us to calculate the pass-through as the responses of the exchange rate, CPI and import prices to the supply, the relative demand, the nominal and the foreign prices shocks. We show that the pass-through ratio in developing countries is di¤erent when considering di¤erent structural shocks.
    Keywords: Exchange rate pass-through; Developing countries; Long-run restrictions; Structural VECM; Common trend; Impulse response functions
    JEL: C32 E31 F31
    Date: 2006–10
  22. By: Albu, Lucian Liviu (Institute for Economic Forecasting)
    Abstract: Over the last decades a growing concern over the phenomenon of the underground economy has increased attention among officials, politicians, and economists. There are several important reasons why officials and the general public should be concerned in post-communist countries about the real size of the underground economy, as following: an impressive development of underground economy occurred after the collapse of former communist regimes and general liberalization of economic activity; under a growing underground economy, macroeconomics policy is based on mistaken official indicators (such as: income, consumption, unemployment, etc.). In such situation, an extended underground sector may cause severe difficulties to politicians, because it "provides” unreliable official indicators; an accelerated increase in the size of the underground economy, usually caused by a rise in the overall burden of taxes and regulations, may lead to an erosion of the tax base, a decrease in tax receipts and thus to a further rise of the budget deficit (in case of Eastern countries, these are perhaps accentuated due to a weak government bonds market and of a high inflation). First part of this study deals with a critical survey of main approaches of underground (informal) sector in specialized literature; second part focuses on models existing in literature, on their comparative estimating results of the size of underground economy and evaluation of fiscal policy effects. Also, some our results obtained by using specific models to investigate problems of underground economy in East European countries are presented. * This research was undertaken with support from the European Commission's Phare ACE Programme 1994, Contract Number: 94-0139-F.
    Keywords: underground economy, Laffer curve, informal activity, fiscal policy, transition
    JEL: E26 P26 H26 O17
    Date: 2007–12
  23. By: Melecky, Martin
    Abstract: This paper proposes a measure of synchronization in the movements of relevant domestic and foreign fundamentals for choosing suitable currency for denomination of foreign debt. The selection of explanatory variables for exchange rate volatility is motivated using a New Keynesian Policy model. The model predicts that not only traditional optimal currency area variables, but also variables considered by the literature on currency preferences, such as money velocity, should be relevant for explaining exchange rate volatility. The findings show that measures of inflation synchronization, money velocity synchronization, and interest rate synchronization can be useful indicators for decisions on the currency denomination of foreign debt.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,,Economic Theory & Research
    Date: 2008–01–01
  24. By: Serajul Hoque
    Abstract: This paper examines the economic effects of removing tariffs in Bangladesh using a computable general equilibrium (CGE) modelling approach. The results of the simulations indicate that in the short-run a funded tariff cut with fixed real national savings would increase employment slightly and hence would expand GDP. There would be a small economy-wide welfare gain as measured by real consumption. The sectoral results showed that export-oriented industries would experience an expansion in output and employment. There also would be positive effects on the suppliers to these industries. Lightly-protected industries, which rely heavily on imported intermediate inputs, are projected to show robust expansion as they would benefit from a cost reduction. However, highly-protected, import-competing industries would suffer a contraction in output and employment as they would face increased competition from imports due to the removal of tariffs. The simulation results also indicate that there would have some noticeable effects on the distribution of real consumption between different household groups. Overall, urban households would experience an expansion in real consumption and rural households would suffer a contraction as a consequence of the funded tariff cut with fixed real national savings.
    Keywords: CGE model, trade liberalisation, income distribution, Bangladesh
    JEL: C68 F13 O15
    Date: 2008–01
  25. By: Razzak, Weshah; Timmins, Jason
    Abstract: Qualification and occupation-based measures of skilled labour are constructed to explain the skill premium – the wage of skilled labour relative to unskilled labour in New Zealand. The data exhibit a more rapid growth in the supply of skilled labour than the skill premium, and a very large increase in the real minimum wage over the period from 1986 to 2005. We estimate the rate of increase in the relative demand for skills and the elasticity of substitution. The data are consistent with skill shortages and a skill-bias technical change. We examine the effects of the minimum wage, capital complementarity, and the exchange rate on the skill premium. We also test whether the demand for skills and the elasticity of substitution varied across industries and over time.
    Keywords: Skill-bias technical change; skill premium; the exchange rate
    JEL: J31 C23 O3
    Date: 2007–02–08
  26. By: Valle e Azevedo, João
    Abstract: We resort to a rigorous definition of spectrum of an integrated time series in order to characterise the implications of applying linear filters to such series. We conclude that in the presence of integrated series the transfer function of the filters has exactly the same interpretation as in the covariance stationary case, contrary to what many authors suggest. This disagreement leads to different conclusions regarding the link of the original fluctuations with the transformed fluctuations in the time series data, embodied in various unjustified criticisms to the application of detrending filters. Despite this, and given the frequency domain characteristics of filtered macroeconomic integrated series, we acknowledge that the choice of a particular detrending filter is far from being a neutral task.
    Keywords: Unit roots; Band-pass filters; Pseudo-spectrum
    JEL: E32 C22
    Date: 2007–09–21
  27. By: Kenneth Beauchemin; Murat Tasci
    Abstract: This paper constructs a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to under predict the volatility of key labor market variables. Data on U.S. job finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or ‘allocative’ efficiency. The authors show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile job separations to simultaneously account for high procyclical variations in jobfinding probabilities as well as relatively small net employment changes. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. This leads the authors to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, the authors conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research.
    Keywords: Labor market ; Business cycles
    Date: 2007
  28. By: Barnett, Richard C; Bhattacharya, Joydeep; Bunzel, Helle
    Abstract: Does a rise in income inequality induce people to work harder to stay in the rat race ("keep up with the Joneses") or to simply drop out? We investigate this issue in a simple new framework in which heterogeneous ability agents get extra utility if their consumption keeps up with the economy's average. The novelty is that agents are allowed to choose whether they want to stay in or drop out of the rat race. We show that sufficiently high ability agents choose to keep up with the Joneses and they enjoy higher consumption but lower leisure than those who don't. When income inequality rises in a mean-preserving manner, average leisure in the economy may fall. Our analysis touches on the question, why are Americans working so much compared to the Europeans? We posit that higher income inequality in the US, by inducing more people to join the rat race there, may be partly responsible for the transatlantic leisure divide.
    Keywords: keeping up with the Joneses, consumption externalities, leisure, labor supply
    JEL: E0
    Date: 2008–01–10
  29. By: Bruce Champ
    Abstract: The era of the National Banking System (1863–1913) has been a puzzling one for monetary theorists and economic historians for well over a century. The puzzles associated with this period take various forms. Despite calculations of high profit rates on note issue for certain periods of the era, national banks never fully utilized their note-issuing powers. Relatedly, the behavior of interest rates during the period is also puzzling given the regime of bank note issuance put in place by the National Bank Acts. On the surface, it appears that an arbitrage condition is broken. The observed inelasticity in aggregate national bank note issue also is puzzling, particularly given the behavior of interest rates. This paper examines many of the puzzles of the national banking era and provides a summary of the current attempts to explain those puzzles.
    Keywords: National banks (United States) ; National bank notes
    Date: 2007
  30. By: Diewert, Erwin; Saeed , Heravi; Silver, Mick
    Abstract: Statistical offices try to match item models when measuring inflation between two periods. However, for product areas with a high turnover of differentiated models, the use of hedonic indexes is more appropriate since they include the prices and quantities of unmatched new and old models. The two main approaches to hedonic indexes are hedonic imputation (HI) indexes and dummy time hedonic (HD) indexes. This study provides a formal analysis of the difference between the two approaches for alternative implementations of an index that uses weighting that is comparable to the weighting used by the Törnqvist superlative index in standard index number theory. This study shows exactly why the results may differ and discusses the issue of choice between these approaches. An illustrative study for desktop PCs is provided.
    JEL: C43 C82 E31
    Date: 2008–01–02
  31. By: Almas Heshmati (University of Kurdistan Hawler, HIEPR and IZA)
    Abstract: This study is a descriptive analysis of the labor market conditions in Iraqi Federal Kurdistan Region. It explores a number of integrated factors that covariate and determine the level and patterns of the labor market outcomes in the region. In the first step, each of the determinants of unemployment is described and establishes their causal and directions of possible effects. In the second step, the characteristic of the current labor market policy is investigated. Finally, after providing knowledge about the nature of (un)employment and current policy measures, a number policy measures are proposed to reduce the rate of unemployment or to reduce the negative effects of unemployment and to promote skills, capability and development potential.
    Keywords: employment, mismatch, government policy, skills, wages, public sector, Kurdistan
    JEL: E24 I28 J24 J31 J45
    Date: 2007–12
  32. By: Maltby, Josephine
    Date: 2007
  33. By: Rubens Penha Cysne (EPGE/FGV); David Turchick
    Date: 2008–01
  34. By: Stephane Straub
    Abstract: This survey reviews the existing macro-level empirical literature on the link between infrastructure and development outcomes in a critical light. After providing a general framework that casts the relevant terms of the controversy on the real effect of infrastructure on growth in the context of an aggregate production function, it signals what are the relevant empirical questions to be addressed. This guides the systematic review of a number of empirical studies and the discussion of the main econometric challenges to the identification of the effect of infrastructure on output and productivity. Finally, building on related research, in particular in contract theory and political economy, the paper spells out several promising research avenues.
    Date: 2008–01
  35. By: Christian Dreger; Reinhold Kosfeld
    Abstract: We investigate price index convergence on the base of regional data for 439 German districts. Prices refer to the overall consumer price index as well as to the index without housing prices. To increase the efficiency of the testing framework, a panel unit root analysis is performed, where cross section dependencies are taken into account. The tests indicate a lack of regional price convergence. While the idiosyncratic component of price differentials is mostly stationary, their common component is driven by a unit root. The results are very similar for the overall price index and the index without housing prices, and for the Western and Eastern part of the German economy. Obviously the elimination of housing prices is not sufficient to obtain a price index where tradable products dominate. One rationale of our findings is the persistent west-east divide in consumer prices. A second argument is related to the persistence of the price gradient between urban and rural regions.
    Keywords: Regional price differentials, price convergence, panel unit roots
    JEL: E31 R10 C33
    Date: 2007
  36. By: Almas Heshmati (University of Kurdistan Hawler, HIEPR and IZA); Rhona Davis (University of Kurdistan Hawler)
    Abstract: The flow of foreign direct investment (FDI) has increased dramatically in the last two decades. However, the distribution of FDI is highly unequal and the competition among countries to attract foreign investors is fierce. This report investigates the determinants of FDI inflows to developing countries in general and to the Federal Region of Kurdistan (FRK) in particular. The emphasis is on the impact of the Kurdistan Regional Government (KRG) active policy measures to encourage inward FDI to the region and at the same time to discourage outward FDI, respectively. We explore whether factors that affect FDI to developing countries affect Kurdistan differently and estimate the magnitude of heterogeneity and its effect by location and level of their development. The current regional investment law, the weaknesses and strengths of the law and infrastructures, institutions and their effectiveness in coordinating the efforts to facilitate inflow of FDI to the region, are investigated. Finally, we emphasize the need for the KRG to further promote investment in infrastructure and to impact economic growth, which in turn reinforce each other by attracting more investment in infrastructure and the productive sectors.
    Keywords: financial market, foreign direct investment, FDI, government policy, Kurdistan, KRG
    JEL: D53 E44 F21 G28 G38 O16
    Date: 2007–12
  37. By: Ionescu, Anamaria Felicia (Department of Economics, Colgate University)
    Abstract: I quantify the effects of alternative student loan policies on college enrollment, bor- rowing behavior, and default rates in a heterogeneous model of life-cycle earnings and human capital accumulation. I find that the combination of learning ability and initial human capital stock drives the decision to enroll in college while parental wealth has minimal effects on enrollment. Repayment flexibility increases enrollment significantly, whereas relaxation of eligibility requirements has little effect on enrollment or default rates. The former policy induces substantial welfare gains for bottom income quantiles, while the latter implies minimal welfare gains for bottom income quantiles.
    Keywords: Student loans; Human capital; Default
    JEL: D91 E44 J24 I28
    Date: 2007–12–31
  38. By: Sílvio Rendon (Stony Brook University and IZA); Alfredo Cuecuecha (ITAM)
    Abstract: It is argued that migration from Mexico to the US and its corresponding return migration are determined by international wage differentials and preferences for origin. We use a model of job search, savings and migration to show that job turnover is a crucial determinant of the migration process. We estimate this model by Simulated Method of Moments (SMM) and find that migration practically disappears if Mexico has American arrival rates while employed. Doubling migration costs reduces migration rates in half, while subsidizing return migration in $300 reduces migration rates of older migrants but increases migration rates of younger migrants.
    Keywords: international migration, job search, job turnover, savings, structural estimation
    JEL: F22 J64 E20
    Date: 2007–12

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