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on Macroeconomics |
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Issue of 2008‒01‒19
39 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Stephen McKnight (Department of Economics, University of Reading); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper re-considers the importance of trade openness for equilibrium determinacy when monetary policy is characterized by interest-rate rules. We develop a two-country, sticky-price model where money enters the utility function in a non-separable manner. Forward- and current-looking policy rules that react to domestic or consumer price inflation are analyzed. It is shown that the introduction of real balance effects substantially limits the validity of the Taylor principle and challenges recent conclusions concerning the relative desirability of the inflation indicator targeted. |
| Keywords: | Real indeterminacy; Open-economy macroeconomics; Interest-rate rules; Monetary policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-52&r=mac |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper presents a two-country sticky-price model that allows for capital and investment spending. It analyzes the conditions for equilibrium determinacy under alternative interest-rate rules that react to either domestic or consumer price inflation. It is shown that in the presence of investment, real indeterminacy is considerably easier to obtain once trade openness is permitted. Consequently we argue that sufficiently open economies should adopt a backward-looking rule and sufficiently closed economies should employ a current-looking rule, in order to minimize policy induced aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-51&r=mac |
| By: | Stephen McKnight (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the conditions under which interest-rate rules induce real equilibrium indeterminacy in a two-country, sticky-price, monetary model. Using a discrete-time framework, we employ the two most commonly used timing assumptions on which money balances enter into the utility function. This paper shows that the tim- ing equivalence result derived for a closed-economy no longer holds for open economies. This arises because modifications in the trading environment impact on the behavior of the real exchange rate. Consequently this helps explain the seemingly contradictory findings in the literature on real indeterminacy in open economies. Furthermore it challenges the belief that domestic inflation targeting is superior to consumer price inflation targeting, in minimizing aggregate instability. |
| Keywords: | Real indeterminacy; Open economy macroeconomics; Interest rate rules; Monetary Policy |
| JEL: | E32 E43 E53 E58 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:earg-wp2007-09&r=mac |
| By: | Michal Horvath |
| Abstract: | We analyze the characteristics of optimal dynamics in an economy in which neither prices nor wages adjust instantaneously and lump-sum taxes are unavailable as a source of government finance. We then propose that monetar and fiscal policy should be coordinated to satisfy a pair of simple specific targeting rules, a rule for (wage) inflation and a relationship that links the growth of real wages to past price and wage developments, and output gap dynamics. We show that such simple rule-based conduct of policy can do remarkably well in replicating the dynamics of the economy under optimal policy following a given shock. |
| Keywords: | Optimal Monetary and Fiscal Policy, Timeless Perspective, Nominal Rigidity, Simple Targeting Rules. |
| JEL: | E52 E61 E63 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0801&r=mac |
| By: | Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under ‘normal’ circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in ‘exceptional’ circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of ‘rules versus discretion’ has, thus, reappeared as the synthesis of ‘rules cum discretion’, in essence as inflation-forecast targeting. |
| Keywords: | optimal monetary policy, flexible rules, constrained discretion, central bank independence, inflation targeting |
| JEL: | E52 E58 E61 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-53&r=mac |
| By: | Francesco FURLANETTO |
| Abstract: | In this paper we study the impact of a government spending shock on aggregate consumption, building on the GLV (Gali, Lopez-Salido and Valles (2007)) model. We show that the GLV model implies a counterfactual increase in the real wage, the interest rate and the in.ation rate. The introduction of sticky wages solves these problems and preserves the main result of the model, i.e. the positive response of consumption. Moreover, once we relax the common wage assumption, sticky wages are even essential to reproduce the positive response of consumption. |
| Keywords: | sticky wages; rule-of-thumb consumers; fiscal shocks; firm-specific capital |
| JEL: | E32 E62 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.11&r=mac |
| By: | Laura Povoledo (Department of Economics, University of Reading) |
| Abstract: | This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a “New Open Economy” model having prices sticky in the producer’s currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments. |
| Keywords: | New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles |
| JEL: | F41 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:wpaper:em-dp2007-47&r=mac |
| By: | J.E. Boscá (University of Valencia, Spain); A. Díaz (Ministry of Economics and Finance, Spain); R. Doménech (Economic Bureau of the Prime Minister, Spain. University of Valencia, Spain); J. Ferri (University of Valencia, Spain); E. Pérez (Ministry of Economics and Finance, Spain); L. Puch (FEDEA, Universidad Complutense and ICAE, Spain) |
| Abstract: | This paper describes a Rational Expectations Model of the Spanish economy, REMS, which is in the tradition of small open economy dynamic general equilibrium models, with a strongly microfounded system of equations. The model is built on standard elements, but incorporates some distinctive features to provide an accurate description of the Spanish economy. We contribute to the existing models of the Spanish economy by adding search and matching rigidities to a small open economy framework. Our model also incorporates habits in consumption and rule-of-thumb households. As Spain is a member of EMU, we model the interaction between a small open economy and monetary policy in a monetary union. The model is primarily constructed to serve as a simulation tool at the Spanish Ministry of Economic Affairs and Finance. As such, it provides a great deal of information regarding the transmission of policy shocks to economic outcomes. The paper describes the structure of the model in detail, as well as the estimation and calibration technique and some examples of simulations. |
| Keywords: | general equilibrium, rigidities, policy simulations |
| JEL: | E24 E32 E62 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0706&r=mac |
| By: | Mierzejewski, Fernando |
| Abstract: | The money-demand of the economy is characterised, when national output is random and investors cannot attract any level of debt at any moment without incurring in additional costs. The optimal cash balance is then expressed as the probability-quantile (or Value-at-Risk) of the series of capital returns on income, and in this way, it is explicitly determined by risk. As a consequence, the interest-rate-elasticity depends on the kind of risks and expectations, in such a way that the more unstable the economy, the greater the interest-rate-elasticity of the money-demand. Therefore, the effectiveness of monetary policy is increased by diminishing the variability of output. Moreover, since flows of capital can affect the riskiness of financial securities by modifying the amounts involved in transactions, part of the adjustment to reestablish the short-run monetary equilibrium can be performed through volatility shocks. Finally, for different parametrisations of risks, aggregated parameters are expressed as the weighted average of sectorial estimations, so that multiple equilibria of the economy are allowed. |
| Keywords: | Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk. |
| JEL: | G11 E52 E44 E41 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6688&r=mac |
| By: | Jean-Pierre DANTHINE; André KURMANN |
| Abstract: | We develop a reciprocity-based model of wage determination and incorporate it into a modern dynamic general equilibrium framework. We estimate the model and find that, among potential determinants of wage policy, rent-sharing (between workers and firms) and a measure of wage entitlement are critical to fit the dynamic responses of hours, wages and inflation to various exogenous shocks. Aggregate employment conditions (measuring workers' outside option), on the other hand, are found to play only a negligible role in wage setting. These results are broadly consistent with micro-studies on reciprocity in labor relations but contrast with traditional efficiency wage models which emphasize aggregate labor market variables as the main determinant of wage setting. Overall, the empirical fit of the estimated model is at least as good as the fit of models postulating nominal wage contracts. In particular, the reciprocity model is more successful in generating the sharp and significant fall of inflation and nominal wage growth in response to a neutral technology shock. |
| Keywords: | efficiency wages; reciprocity; estimated DSGE models |
| JEL: | E24 E31 E32 E52 J50 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.12&r=mac |
| By: | Raffaele Rossi |
| Abstract: | This paper analyzes a New Keynesian model with Rule-of-Thumb consumers (ROTC) as in Galí et al.(2007) and a fiscal policy which levies a proportional income tax. We nd that, when the share of ROTC is above a specified threshold and di¤erently from the usual Leeper (1991) result, the determinacy condition requires for both monetary and fiscal policy to be either active of passive. Furthermore we show that the introduction of a set of ROTC can reverse the traditional predictions of a change in government spending on the economy as a whole: under a reasonable parametrization of the model, an increase in government spending can lead, against the common Keynesian wisdom, to a decrease in total output. Finally we point out that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a positive government spending shock. |
| Keywords: | Rule-of-thumb-consumers, monetary-fiscal policy interactions, distortive taxation, public spend- ing, private consumption. |
| JEL: | E32 E62 H30 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_44&r=mac |
| By: | Renzo Rossini (Central Reserve Bank of Peru); Marco Vega (Central Reserve Bank of Peru) |
| Abstract: | This paper analyzes the changes in the monetary policy transmission mechanism in Peru. A strong conclusion that emerges from this research is that both, the direct interest rate channel and the expectations channel have become more important in the recent years, especially after the Inflation Targeting adoption. The research further explores the implications of financial dollarization for the practice of monetary policy by performing two exercises. First, it compares different degrees of exchange rate flexibility and finds out that the more flexible the exchange rate is, the quicker but weaker the exchange rate pass-through becomes. Second, since financial dollarization may trigger contractionary depreciations, the document studies implications for monetary policy. The conclusion is that the effectiveness of monetary policy can be further improved if the economy becomes less dollarized. |
| Keywords: | Transmission Channels, Financial dollarization, Monetary Policy, Emerging Markets. |
| JEL: | E52 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-017&r=mac |
| By: | Tervala, Juha (University of Helsinki and HECER) |
| Abstract: | This paper analyses the international transmission of monetary policy in a case where all export prices are set in US dollars. ‘Dollar pricing’ implies that the international effects of US monetary shocks are different to those of European shocks because of asymmetric exchange rate pass-through to import prices. A dollar pricing model can explain the observed asymmetry in the transmission of monetary policy: US monetary policy affects US output more than European monetary policy affects European output. I also show that the dollar pricing model reintroduces the current account as an important channel through which monetary policy affects welfare in the short run. The paper concludes that under dollar pricing monetary expansion is a beggar-thy-neighbour policy. |
| Keywords: | open economy macroeconomics; monetary policy; international policy transmission |
| JEL: | F30 F41 F42 |
| Date: | 2007–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_029&r=mac |
| By: | Stéphane Auray (GREMARS - University of Lille 3); Aurélien Eyquem (CREM – CNRS - University of Rennes 1) |
| Abstract: | In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national infation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption. |
| Keywords: | monetary union, asymmetric shocks, price stickiness, financial market incompleteness, welfare |
| JEL: | E51 E58 F36 F4 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:200802&r=mac |
| By: | Peter Claeys (Grup d'Anàlisis Quantitativa Regional(AQR) i Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola. Facultat de Ciències Econòmiques i Empresarials de la Universitat de Barcelona.); Raúl Ramos (Grup d'Anàlisis Quantitativa Regional(AQR) i Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola. Facultat de Ciències Econòmiques i Empresarials de la Universitat de Barcelona.); Jordi Suriñach (Grup d'Anàlisis Quantitativa Regional(AQR) i Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola. Facultat de Ciències Econòmiques i Empresarials de la Universitat de Barcelona.) |
| Abstract: | This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of debt consolidation, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances. |
| Keywords: | Fiscal policy, fiscal rules, EMU, SGP, fiscal federalism. |
| JEL: | E61 E62 H11 H72 H77 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2007-14&r=mac |
| By: | Szilárd Erhart (Central Bank of Hungary); Jose Luis Vasquez-Paz (Banco Central de Reserva del Perú) |
| 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 number of monetary policy committee (MPC) size varies according to 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. |
| JEL: | E50 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2008-001&r=mac |
| By: | Daniel Laskar |
| Abstract: | The existing literature has shown that less political uncertainty, or more central bank transparency, may worsen macroeconomic performance by raising the nominal wage. We extend this analysis to a non-bayesian framework, where there is some aversion to ambiguity. We show that the result found in the literature under the bayesian approach does not hold when the distance from the bayesian case is large enough, or when a reduction in "Knigtian uncertainty" is considered. Then, less uncertainty, or more transparency of the central bank, does not raise the nominal wage and, as a consequence, macroeconomic performance is not worsened (and is in general strictly improved). |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2008-01&r=mac |
| By: | Marta Gómez-Puig (Universitat de Barcelona) |
| Abstract: | Yield spreads over 10-year German government securities of the EU-15 countries converged dramatically in the seven years after the beginning of Monetary Integration. In this paper, we investigate the relative influence of systemic and idiosyncratic risk factors on their behaviour. Our conclusions suggest that in EMU-countries the relative importance of domestic risk factors (both credit and liquidity risk factors) is higher than that of international factors, which appear to play a secondary but significant role in non-EMU countries. |
| Keywords: | Monetary integration, sovereign securities markets, systemic and idiosyncratic risk |
| JEL: | E44 F36 G15 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0703&r=mac |
| By: | Edouard Challe; François Le Grand; Xavier Ragot |
| Abstract: | We construct a general equilibrium model with incomplete markets and borrowing constraints, in order to study the term structure of real interest rates. Agents are subject to both aggregate and idiosyncratic income shocks, which latter may force them into early portfolio liquidation whilst in recession. We derive a closed-form equilibrium with limited agents heterogeneity (despite market incompleteness), which allows us to derive analytical expressions for bond prices and returns at any maturity. The desirability of bonds as liquidity makes the aggregate bond demand downward-sloping. One consequence of this is that a larger bond supply raises both the level and the slope of the yield curve. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2007-49&r=mac |
| By: | Edouard Challe; Xavier Ragot |
| Abstract: | This paper analyses the effect of transitory increases in government spending when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous, infinitely-lived households face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self-insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effect that are produced by the shock. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2007-48&r=mac |
| By: | Gonzalo Fernández-de-Córdoba (Universidad de Salamanca); José L. Torres (Universidad de Málaga) |
| Abstract: | Fiscal harmonization for the European Union member states is a goal that encounters major difficulties for its implementation. Each country faces a particular trade-off between fiscal revenues generated by taxation and the productive efficiency loss induced by their respective tax code. Countries for which a particular harmonized tax code requires more taxation will have to face an increased efficiency loss, whereas those required to decrease their taxes will have to face a loss in fiscal revenue. This paper provides a quantitative measure of these trade-offs, for a number of taxes and for the European Union member states, using a DGE model with public inputs. Calibration of the model for the EU-15 member states gives us the following results: i) The maximum tax revenue level is not far away from the current tax levels for most countries, ii) The cases of Sweden, Denmark and Finland are anomalous, as productive efficiency can be gained by lowering tax rates without affecting fiscal revenues, iii) In general, countries would obtain efficiency gains without changing fiscal revenues by reducing the capital tax and increasing the labor tax and iv) Capital tax harmonization to the average capital tax rate can be done with quite small changes in both fiscal revenues and output for the majority of countries. |
| Keywords: | Fiscal harmonization, applied general equilibrium |
| JEL: | E43 E62 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0702&r=mac |
| By: | Sérgio Tito Nícias Teixeira da Silva Filho |
| Abstract: | After being one the fastest growing countries in the world during the 1940-80 period, with an average growth rate of 6.8%, Brazil has experienced a severe growth slowdown since the 1980s, which coincided with the steep rise in inflation as of 1980. At the same time, real investment rates have plunged, shrinking around nine percentage points just in the 1980s. Moreover, they were unable to recover their 1989 level afterwards. This is unexpected as several pro-growth reforms took place since 1990, such as trade liberalization, privatization and economic stabilization. More strikingly, in the ten years following the stabilization of the economy, real investment rates have being at their lowest levels for, at least, fifty years. One major factor that could help explaining this dismal behavior is inflation uncertainty, which have remained high despite much lower inflation since 1994. Indeed, inflation uncertainty is at the root as many types of uncertainties faced by firms. For example, it also means uncertainty about future interest rates and demand. This work aims both at uncovering the main determinants that have driven M&E investment in Brazil since 1980 and testing the link between inflation uncertainty and investment. The evidence strongly suggests that inflation uncertainty has been an important investment deterrent in Brazil, both in the short and long runs. Moreover, its effects were found to be asymmetric. Also, despite the limited role played by price variables in empirical studies of investment, the real interest rate, itself importantly affected by inflation uncertainty and inflation risk premium, seems to be another key factor in explaining low investment rates in Brazil. |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:157&r=mac |
| By: | Minford, Patrick (Cardiff Business School); Pal, Soubarna |
| Abstract: | The objective of this paper is to establish the ability of a Real Business Cycle (RBC) model to account for the behaviour of the real exchange rate, using Indian data (1966-1997). We calibrate the dynamic general equilibrium open economy model (Minford, Sofat 2004) based on optimising decisions of rational agents, using annual data for India. The first order conditions from the households' and firms' optimisation problem are used to derive the behavioural equations of the model. The interaction with the rest of the world comes in the form of uncovered real interest rate parity and current account both of which are explicitly micro-founded. The paper discusses the simulation results of 1 percent per annum productivity growth shock, which shows that the real exchange rate appreciates and then goes back to a new equilibrium (lower than the previous one), producing a business cycle. Thus the behaviour of the real exchange rate may be explicable within the RBC context. Finally we test our model and evaluate statistically whether our calibrated model is seriously consistent with the real exchange rate data, using bootstrapping procedure. We bootstrap our model to generate pseudo real exchange rate series and find that the ARIMA parameters estimated for the actual real exchange rate data lie within the 95% confidence limits constructed by bootstrapping. We find the same result for the nominal rigidity version of the RBC model. So we conclude that the behaviour of the Indian real exchange rate (US $ / Indian Rupees) can be explained by RBC. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2008/1&r=mac |
| By: | Paul Hallwood (University of Connecticut); Ronald MacDonald (University of Glasgow) |
| Abstract: | We discuss the effectiveness of pegged exchange rate regimes from an historical perspective, drawing conclusions for their effectiveness today. Starting with the classical gold standard period, we point out that a succession of pegged regimes have ended in failure; except for the first, which was ended by the outbreak of World War I, all of the others we discuss have been ended by adverse economic developments for which the regimes themselves were partly responsible. Prior to World War II the main problem was a shortage of monetary gold that we argue is implicated as a cause of the Great Depression. After World War II, more particularly from the late-1960s, the main problem has been a surfeit of the main international reserve asset, the US dollar. This has led to generalized inflation in the 1970s and into the 1980s. Today, excessive dollar international base money creation is again a problem that could have serious consequences for world economic stability. |
| Keywords: | Bretton Woods, exchange rate expectations gold standard, new Bretton Woods, realignment expectations, pegged exchange rates, target zone, world economic instability |
| JEL: | F31 F33 N20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2008-02&r=mac |
| By: | Mariangela Bonasia; Oreste Napolitano |
| Abstract: | Since the turn of the millennium the problem of credibility of the social security system has spread to the private pension funds sector. This is evident for those countries, like Australia and Iceland, that have very large funded pensions assets as a result of strong pension reforms. The problem of trust could prevent pension fund investment from continuing to grow, weakening the privatization of the social security system. The objective of this study is to obtain new insights into the determinants of pension funds. We focus our analysis on the Australian and Icelandic experiences to study the credibility of pension fund performance and, as a consequence, of pension reform. Our credibility indicator is derived from a CAPM time-varying model. It can be used to investigate, using a Markov switching model, the linkages between economic fundamentals and the credibility of pension fund investment and the asymmetric effects of the fundamentals in the two regimes of low and hight credibillity. Our findings make a contribution to modelling policy credibility as a non-linear process with two distinct regimes. We also found large differences in the value of the coefficients for all macroeconomic variables between the low and high credibility regimes. This evidence strongly supports the hypothesis that the effects of macroeconomic fundamental variables on the level of credibility are asymmetric in all countries. |
| Keywords: | Credibility, pension funds, Kalman filter, Markov switching model |
| JEL: | E21 G23 H55 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp756&r=mac |
| By: | Juergen Antony (University of Augsburg, Department of Economics); Alfred Maussner (University of Augsburg, Department of Economics) |
| Abstract: | This note extends the finding of Benhabib and Rusticchini (1994) who provide a class of SDGE models, whose solution is characterized by a constant savings rate. We show that this class of models may be interpreted as a standard representative agent SDGE model with costly adjustment of capital and provides a solution to the traditional discrete time Ramsey problem. |
| Keywords: | capital and labor substitution, dynamic programming, growth, numerical solutions of SDGE models |
| JEL: | C61 C68 E21 O4 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:aug:augsbe:0297&r=mac |
| By: | Simón Sosvilla-Rivero (FEDEA and Universidad Complutense de Madrid); Francisco Pérez-Bermejo (KPMG-Spain) |
| Abstract: | This paper analyses the functioning of the European Exchange Rate Mechanism (ERM). To that end, we apply duration models to estimate an augmented target-zone model, explicitly incorporating political and institutional factors into the explanation of European exchange rate policies. The estimations are based on quarterly data of eight currencies participating in the ERM, covering the complete history of the European Monetary System. Our results suggest that both economic and political factors are important determinants of the ERM currency policies. Concerning economic factors, the money supply, the real exchange rate, the interest in Germany and the central parity deviation would have negatively affected the duration of a given central parity, while credibility and the price level in Germany would have positively influenced such duration. Regarding political variables, elections, central bank independence and left-wing administrations would have increased the probability of maintaining the current regime, while unstable governments would have been associated with more frequent regime changes. Moreover, we show how the political augmented model outperforms, both in terms of explanatory power and goodness of fit, the model which just incorporates pure economic determinants. |
| Keywords: | Duration analysis, political variables, exchange rates, European Monetary System |
| JEL: | C41 D72 F31 F33 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0705&r=mac |
| By: | Marylin Choy (Banco Central de Reserva del Perú); Roy Ayllón (Banco Central de Reserva del Perú) |
| Abstract: | The Peruvian financial system is highly dollarized with more than 50 per cent of deposits held in dollars. The structure and operation of the payment system reflect this financial dollarization. Not only does it settle payments in local and foreign currency, but the Intraday Financial Facility (IFF), through which the Central Bank provides liquidity to assure the uninterrupted operation of the payment system, reflects as well the financial system dollarization. Thus, due to the high dollar composition of deposits in the financial system, banks keep large amounts of dollar liquidity at the Central Bank, so as to meet the marginal reserve requirement of 30 per cent, while the lower soles share of deposits as well as the minimum requirement to maintain 1 per cent deposited at the Central Bank, makes the soles liquidity of banks insufficient to settle all the transactions undertaken by the payment system, which for the most part are carried out in local currency, in spite of the financial dollarization. This situation leads the banks to utilize the IFF by means mainly of foreign currency swaps, given the ample availability of dollar liquidity. Nevertheless, the gradual dedollarization and the increasing bankarization are reducing the need to utilize the IFF. It is worth noting that at present not only foreign currency liquidity but also the holdings of Central Bank and Government securities are ensuring that the financial system is able to make use of the IFF and have the excess liquidity in order to settle total payments, both in local and foreign currency, thus enabling the payment system to run smoothly and efficiently. |
| Keywords: | Sistema de pagos, liquidez intradiaria, dolarización e instrumentos de política monetaria. |
| JEL: | D53 E44 E58 G21 G28 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-019&r=mac |
| By: | Strulik, Holger |
| Abstract: | Does it make us unhappier when we compare our current consumption with that of the Joneses or our own past achievements? This paper tries an answer without recurring on interpersonal utility comparisons. It calibrates an economy under three different assumptions, non-comparing utility, and inward-looking and outward-looking habit formation. Using consumption equivalents it then calculates how much individual welfare is affected in each economy by unexpected losses and gains of wealth. |
| Keywords: | habit formation, happiness, welfare, economic growth |
| JEL: | D60 D91 E21 O40 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-382&r=mac |
| By: | John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA) |
| Abstract: | Falling exchange rates reduce the purchasing power of the dollar, increasing import prices. Higher import prices have two effects. (1) A substitution effect that shifts demand from imported to domestically produced goods. (2) An income effect that reduces the total amount of real income available for spending on domestic goods and foreign goods. Based on U.S. 1960 - 2000 data, this paper estimates an econometric model that finds that the income effects of falling exchange rates overwhelms the substitution effects, causing a net negative influence on the GDP and income. Results indicate demand for both imported and domestic consumer and investment goods is adversely affected because the income effect is so dominant.. For investment goods, there was a substitution effect into imported goods when import prices rose due to a falling exchange rate, presumably because the negative income effect so reduced income that demand was pushed toward cheaper imports, despite the fact that their own prices had recently risen, causing the U.S. real income decline. Declining real income also caused decreased demand for domestically produced investment goods, presumably for the same reason. For consumer goods, the substitution effect stimulated domestic demand, but was more than offset by the negative effects of declining income. The decrease in demand for domestic goods and services was 3.5 times as large as the decrease in demand for imports. In short, the trade deficit appears to fall far less than the GDP when the exchange rate drops. The study estimates that, other things equal, the trade deficit would have fallen from 4.3% to 2.8% of the GDP as a result of a 12.5 point (12%) weakening of the dollar against the Broad trade weighted real exchange rate, such as occurred 2000-07. Had the exchange rate not fallen during this period, we estimate the average annual growth rate of the real U.S. economy would have been 3.4%, not the 2.7% it has actually averaged, assuming sufficient capital and labor availability to do so. Finally, we find that a falling trade deficit induced by falling exchange rates, reduces the size of the annual transfer of U.S. assets to foreigners needed to finance the deficit, but does not result in a faster rate of net growth for U.S. – owned assets, because declining income also reduces domestic savings by about the same amount. |
| JEL: | E00 F40 F43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0803&r=mac |
| By: | John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA) |
| Abstract: | Falling exchange rates reduce the purchasing power of the dollar, increasing import prices. Higher import prices have two effects. (1) A substitution effect that shifts demand from imported to domestically produced goods. (2) An income effect that reduces the total amount of real income available for spending on domestic goods and foreign goods. Based on U.S. 1960 - 2000 data, this paper estimates an econometric model that finds that the income effects of falling exchange rates overwhelms the substitution effects, causing a net negative influence on the GDP and income. Results indicate demand for both imported and domestic consumer and investment goods is adversely affected because the income effect is so dominant.. For investment goods, there was a 2.52 billion substitution effect out of imported goods when import prices rose due to a one point drop in the nominal Broad exchange rate. Declining real income also caused decreased demand for domestically produced investment goods. For consumer goods, the substitution effect stimulated domestic demand, but was more than offset by the negative effect of declining income. The decrease in demand for domestic goods and services was 2.0 times as large as the decrease in demand for imports. Therefore, the trade deficit fell less in dollars ($198B) than the GDP ($321B) in real dollars. The study estimates that, other things equal, the trade deficit would fall from 4.3% to 2.3% of the GDP as a result of a large 16.1 percent drop in the nominal Broad exchange rate index, such as occurred 2000-07. Had the exchange rate not fallen during this period, we estimate the average annual growth rate of the U.S. economy would have been 3.2%, not the 2.7% it has actually averaged, assuming sufficient capital and labor availability to do so. Finally, we find that a falling trade deficit induced by falling exchange rates ($12.31B per point drop in the rate), reduces the size of the annual transfer of U.S. assets to foreigners needed to finance the deficit by the same amount, but does not result in an equally large change upward by the end of the period in U.S. ownership of assets, because about 2/3 of this gain is offset by an income – decline related drop in savings ($8.28B per point decline in the index) during the same period. |
| JEL: | E00 F40 F43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0802&r=mac |
| By: | Jokisch, Sabine; Mennel, Tim |
| Abstract: | Hydrogen is often seen as a promising future energy carrier given the major reliance of today’s transport sector on finite fossil fuels. This working paper assesses the macroeconomic effects of introducing hydrogen as fuel in passenger transport within the framework of the computable general equilibrium (CGE) model PACE-T(H2). Our simulation results suggest small improvements in the macroeconomic performance in almost all European countries from the introduction of hydrogen. The magnitude of economic effects however depends on the assumed learning curve of hydrogen cars and on the future development of hydrogen infrastructure costs. The results presented in this paper build on data and projections developed in the EU funded ‘HyWays’ project. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:6813&r=mac |
| By: | John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA) |
| Abstract: | Falling exchange rates reduce the purchasing power of the dollar, increasing import prices. Higher import prices have two effects. (1) A substitution effect that shifts demand from imported to domestically produced goods. (2) An income effect that reduces the total amount of real income available for spending on domestic goods and foreign goods. Based on U.S. 1960 - 2000 data, this paper estimates an econometric model that finds that the income effects of falling exchange rates overwhelms the substitution effects, causing a net negative influence on the GDP and income. Results indicate demand for both imported and domestic consumer and investment goods is adversely affected because the income effect is so dominant.. For investment goods, there was virtually no substitution effect out of imported goods when import prices rose due to a falling exchange rate. Declining real income also caused decreased demand for domestically produced investment goods. For consumer goods, the substitution effect stimulated domestic demand, but was more than offset by the negative effect of declining income. The decrease in demand for domestic goods and services was 3.6 times as large as the decrease in demand for imports. Therefore, the trade deficit fell far less in dollars than the GDP. The study estimates that, other things equal, the trade deficit would fall from 4.3% to 2.1% of the GDP as a result of a large twenty percent weakening of the dollar, such as occurred 2000-07. Had the exchange rate not fallen during this period, we estimate the average annual growth rate of the U.S. economy would have been 3.7%, not the 2.7% it has actually averaged, assuming sufficient capital and labor availability to do so. Finally, we find that a falling trade deficit induced by falling exchange rates, reduces the size of the annual transfer of U.S. assets to foreigners needed to finance the deficit, but does not result in a faster rate of net growth for U.S. assets, because declining income also reduces domestic savings by a comparable amount. |
| JEL: | E00 F40 F43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0801&r=mac |
| By: | Manuel Gomez (School of Economics, Universidad de Guanajuato); Daniel Ventosa-Santaularia (School of Economics, Universidad de Guanajuato) |
| Abstract: | Whilst the existence of a unit root implies that current shocks have permanent effects, in the long run, the simultaneous presence of a deterministic trend obliterates that consequence. As such, the long-run level of macroeconomic series depends upon the existence of a deterministic trend. This paper proposes a formal statistical procedure to distinguish between the null hypothesis of unit root and that of unit root with drift. Our procedure is asymptotically robust with regard to autocorrelation and takes into account a potential single structural break. Empirical results show that most of the macroeconomic time series originally analyzed by Nelson and Plosser (1982) are characterized by their containing both a deterministic and a stochastic trend. |
| Keywords: | Unit Root, Deterministic Trend, Trend Regression, R2. |
| JEL: | C12 C13 C22 E30 |
| URL: | http://d.repec.org/n?u=RePEc:gua:wpaper:em200801&r=mac |
| By: | Nicolas Roys (Institute for Fiscal Studies) |
| Abstract: | <p><p>We develop and solve analytically an investment model with fixed adjust-ment costs and complete irreversibility that reproduces observed investment dynamics at the micro-level. We impose a minimal set of restrictions on technology and uncertainty. Most of the results duplicate or generalize earlier findings that have been established either by simulations or under contrefactual assumptions.</p></p> |
| JEL: | C61 D21 E2 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:29/07&r=mac |
| By: | Philip R. Lane and Gian Maria Milesi-Ferretti |
| Abstract: | The deterioration in the U.S. net external position in recent years has been much smaller than the extensive net borrowing associated with large current account deficits would have suggested. This paper examines the sources of discrepancies between net borrowing and accumulation of net liabilities for the U.S. economy over the past 25 years. In particular, it highlights and quantifies the role played by net capital gains on the U.S. external portfolio and ‘residual adjustments’ in explaining this discrepancy. It discusses whether these ‘residual adjustments’ are likely to be originating from measurement errors in external assets and liabilities, financial flows, or capital gains, and explores the implications of these conjectures for the U.S. financial account and external position. |
| Date: | 2008–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp239&r=mac |
| By: | Bhattacharyya, Surajit |
| Abstract: | The paper models alternative investment-accelerator relationships within the neoclassical theory of Jorgenson followed by firm level panel data estimation and empirical test for other determinants of corporate investment e.g., internal liquidity, profitability, and firms’ financial strength. Athey and Laumas (1994) claimed that internal liquidity had replaced market demand in Indian firm level investment. Others indicate presence of finance constraints in Indian private sector investment activities; Kumar et al. (2001, 2002). Therefore, in the immediate aftermath of liberalization whether market demand had still not been important when availability of internal liquidity, firms’ profitability and creditworthiness are considered. We consider Indian manufacturing firms in the post-reform period of 1990s. There is significant support for the investment–accelerator relationship. Internal liquidity is relatively more important than profitability when it comes to firms’ investment decisions. There is also evidence that credit worthiness of firms to outside creditors is important for firm investment decision. |
| Keywords: | Business fixed investment; sales accelerator; retained earnings; profitability; financial strength. |
| JEL: | D21 G11 E22 L64 |
| Date: | 2008–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6702&r=mac |
| By: | Eric BERR (GREThA) |
| Abstract: | Since the beginning of the 1970s, the questions related to ecology come in the forefront and progressively led to the adoption of the concept of sustainable development, which now appears to be a new world-wide objective. We argue that numerous writings of Keynes contain the premises of such a sustainable development. We present his views relatively to the three pillars of sustainability: ecological, social and financial. Indeed, Keynes’ positions on uncertainty, money, the place of economics, arts, financing, philosophy, etc. are consistent with a strong sustainability. Finally, we try to give some insights for an indispensable 21st century post Keynesian sustainable development program. |
| Keywords: | Keynes, sustainable development, Post Keynesian |
| JEL: | B31 E12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2008-01&r=mac |
| By: | Luigi Guiso; Paola Sapienza; Luigi Zingales |
| Abstract: | To explain the extremely long-term persistence (more than 500 years) of positive historical experiences of cooperation (Putnam 1993), we model the intergenerational transmission of priors about the trustworthiness of others. We show that this transmission tends to be biased toward excessively conservative priors. As a result, societies can be trapped in a low-trust equilibrium. In this context, a temporary shock to the return to trusting can have a permanent effect on the level of trust. We validate the model by testing its predictions on the World Values Survey data and the German Socio Economic Panel. We also present some anecdotal evidence that differences in priors across regions are reflected in the spirit of the novels that originate from those regions. |
| JEL: | E0 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13712&r=mac |