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on Macroeconomics |
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Issue of 2008‒02‒09
67 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Marcus Hagedorn |
| Abstract: | This paper studies the joint business cycle dynamics of in ation, money growth, nominal and real interest rates and the velocity of money. I extend and estimate a standard cash and credit monetary model by adding idiosyncratic preference shocks to cash consumption as well as a banking sector. The estimated model accounts very well for the business cycle data, a finding that standard monetary models have not been able to generate. I find that the quantitative performance of the model is explained through substantial liquidity effects. |
| Keywords: | Money, Banking, Monetary Transmission Mechanism, Liquidity, Business Cycles |
| JEL: | E31 E32 E41 E42 E51 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:353&r=mac |
| By: | Marcus Hagedorn |
| Abstract: | Central bankers' conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption. |
| Keywords: | Disinflation, Optimal Monetary Policy, Nominal and Real Interest Rates |
| JEL: | E41 E43 E51 E52 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:352&r=mac |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Under inflation targeting inflation exhibits negative serial correlation in the United Kingdom, and little or no persistence in Canada, Sweden and New Zealand, and estimates of the indexation parameter in hybrid New Keynesian Phillips curves are either equal to zero, or very low, in all countries. Analogous results hold for the Euro area–and for France, Germany, and Italy–under European Monetary Union; for Switzerland under the new monetary regime; and for the United States, the United Kingdom and Sweden under the Gold Standard: under stable monetary regimes with clearly defined nominal anchors, inflation appears to be (nearly) purely forward-looking, so that no mechanism introducing backward-looking components is necessary to fit the data. These results question the notion that the intrinsic inflation persistence found in post-WWII U.S. data–captured, in hybrid New Keynesian Phillips curves, by a significant extent of backward-looking indexation–is structural in the sense of Lucas (1976), and suggest that building inflation persistence into macroeconomic models as a structural feature is potentially misleading. JEL Classification: E31, E42, E47, E52, E58. |
| Keywords: | Inflation, European Monetary Union, inflation targeting, Gold Standard, Lucas critique, median-unbiased estimation, Markov Chain Monte Carlo. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080851&r=mac |
| By: | Don Bredin (School of Business, University College Dublin); Stilianos Fountas (Department of Economics, University of Macedonia) |
| Abstract: | We use a very general bivariate GARCH-M model and monthly data on EU countries covering the 1962-2003 period to test for the impact of real (output growth) and nominal (inflation) macroeconomic uncertainty on inflation and output growth. Our evidence supports a number of important conclusions. First, in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in several countries is negative. Second, contrary to expectations, inflation uncertainty in several cases improves the output growth performance of an economy implying that the focus of European monetary policy strategy on stabilising inflation rather than output growth may be misplaced. Third, inflation and output uncertainty have a mixed effect on inflation. Our conclusions are based on adopting both a structural and a reduced form bivariate GARCH model. These results imply that macroeconomic uncertainty may even improve macroeconomic performance. Finally, we also and statistically significant evidence of regime switching for both inflation and output growth volatility throughout the sample. |
| Keywords: | Inflation, Output growth, Macroeconomic uncertanty |
| JEL: | C22 C52 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2008_01&r=mac |
| By: | Cuciniello Vincenzo |
| Abstract: | This paper analyzes the relation between inflation, output and government size by reexamining the time inconsistency of optimal monetary and fiscal policies in a general equilibrium model with staggered timing structure for the acquisition of nominal money a la Neiss (1999), and public expenditure financed by means of a distortive tax. It focuses on how macroeconomic institutions may affect output, inflation and taxation when monetary and fiscal policies strategically interact in presence of monopolistic distortions in labor markets. It is shown that, with pre determined wage setting, fiscal and monetary policy are subject to a time inconsistency problem, and the equilibrium rate of inflation is above the Friedman rule while the equilibrium tax rate is below the efficient level. In particular, the discretionary rate of inflation is nonmonotonically related to the natural output, positively related to government size, and negatively related to conservatism. Finally, a regime with commitment is always welfare improving over a regime with discretion. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0036&r=mac |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Peter Welz (Sveriges Riksbank) |
| Abstract: | This paper empirically assesses the performance of interest-rate monetary rules for interdependent economies characterized by model uncertainty. We set out a two-bloc dynamic stochastic general equilibrium model with habit persistence (that generates output persistence), Calvo pricing and wage-setting with indexing of non-optimized prices and wages (generating inflation persistence), incomplete financial markets and the incomplete pass-through of exchange rate changes. We estimate a linearized form of the model by Bayesian maximum-likelihood methods using US and Euro-zone data. From the estimates of the posterior distributions we then examine monetary policy conducted both independently and cooperatively by the Fed and the ECB in the form of robust inflation-targeting interest-rate rules. Comparing the utility outcome in a closed-loop Nash equilibrium with the outcome from a coordinated design of policy rules, we find a new result: the gains from monetary policy coordination rise significantly when CPI inflation targeting interest-rate rules are designed to account for model uncertainty. |
| Keywords: | monetary policy coordination, robustness, inflation-targeting interest-rate rules. |
| JEL: | E52 E37 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0208&r=mac |
| By: | Denise Osborn; Marianne Sensier |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0716&r=mac |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates a linearised DSGE model for the euro area. The model is New Keynesian and allows for a role for oil usage and endogenous price markups. We find that the price markup reacts positively to the ratio of expected discounted profits to current output, which is normally seen to give rise to a "countercyclical" markup. The importance of shocks to monetary policy and oil prices is estimated to have declined in the post-1990 period, in line with the higher predictability of policy and the fall in the persistence and - to a lesser extent - variability of oil disturbances. Counterfactual exercises show that oil efficiency gains would alleviate the inflationary and contractionary consequences of oil shocks, while higher wage flexibility would help ease the impact on real output at the expense of wider fluctuations in inflation. Finally, the rise in price markups induced by an oil disturbance is not found to considerably amplify the inflationary and contractionary effects of the shock. JEL Classification: C15, E31, E32, E37. |
| Keywords: | Estimated DSGE models, euro area, oil shocks, endogenous markup. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080860&r=mac |
| By: | Michael Woodford (Columbia University - Department of Economics) |
| Abstract: | I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long-run relationship between money growth and inflation. And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:0607-16&r=mac |
| By: | Marcus Hagedorn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Iourii Manovskii (Department of Economics, University of Pennsylvania, 160 McNeil Building, 3718 Locust Walk, Philadelphia, PA, 19104-6297, USA.) |
| Abstract: | Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We use data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters of the model - the value of non-market activity and the bargaining weights. Our calibration implies that the model is, in fact, consistent with the data. JEL Classification: E24, E32, J41, J63, J64. |
| Keywords: | Search, matching, business cycles, labor markets. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080853&r=mac |
| By: | Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt |
| Abstract: | This paper measures the welfare gains of switching from inflation-targeting to price-level targeting under imperfect credibility. Vestin (2006) shows that when the monetary authority cannot commit to future policy, price-level targeting yields higher welfare than inflation targeting. We revisit this issue by introducing imperfect credibility, which is modeled as gradual adjustment of the private sector's beliefs about the policy change. We find that gains from switching to pricelevel targeting, if any, are small. |
| Keywords: | Credibility; Monetary policy framework |
| JEL: | E31 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-3&r=mac |
| By: | Stefano Eusepi (Federal Reserve Bank of New York); Bruce Preston (Columbia University - Department of Economics) |
| Abstract: | The value of communication in monetary policy is analyzed in a model in which expectations need not be consistent with central bank policy - and, therefore, unanchored - because agents face difficult forecasting problems. When the central bank implements optimal policy without communication, the Taylor principle is not sufficient for macroeconomic stability: expectations are unanchored and self-fulfilling expectations are possible. To mitigate this instability, three communication strategies are contemplated to ensure consistency between private forecasts and monetary policy strategy: i) communicating the precise details of the monetary policy ¿ that is, the variables and coefficients; ii) communicating only the variables on which monetary policy decisions are conditioned; and iii) communicating the inflation target. The first two strategies restore the Taylor principle as a sufficient condition for anchoring expectations. In contrast, in economies with persistent shocks, communicating the inflation target fails to protect against expectations driven fluctuations. These results underscore the importance of communicating the systematic component of monetary policy strategy: announcing an inflation target is not enough to stabilize expectations ¿ one must also announce how this target will be achieved. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:0708-10&r=mac |
| By: | Marcus Hagedorn; Iourii Manovskii |
| Abstract: | Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We use data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters of the model - the value of non-market activity and the bargaining weights. Our calibration implies that the model is, in fact, consistent with the data. |
| Keywords: | Search, Matching, Business Cycles, Labor Markets |
| JEL: | E24 E32 J41 J63 J64 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:351&r=mac |
| By: | Jim Malley; Apostolis Philippopoulos; Ulrich Woitek |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of counter- cyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failure justifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the object of fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especially with respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of these alternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be very modest. |
| Keywords: | Fiscal Policy, Welfare, Europe |
| JEL: | E6 H5 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:312&r=mac |
| By: | Mirko Abbritti; Andreas Mueller |
| Abstract: | How do labor market institutions affect the volatility and persistence of inflation and unemployment in a monetary union? What are the implications for monetary policy? This paper sets up a DSGE currency union model with unemployment, hiring frictions and real wage rigidities. The model provides a rigorous but tractable framework for the analysis of the functioning of a currency union characterized by asymmetric labor market institutions. Positively, we find that inflation and unemployment differentials depend strongly on the underlying labor market structure: the hiring friction lowers the persistence and increases the volatility of the inflation differential whereas real wage rigidities imply more persistence and variability in output and unemployment differentials. Normatively, we find that macroeconomic stabilization is easier when labor market frictions are high and real wage rigidities are low. This has important implications for optimal monetary policy: The optimal inflation target should give a higher weight to regions with more sclerotic labor markets and more flexible real wages. |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp37&r=mac |
| By: | Michael Woodford (Columbia University - Department of Economics) |
| Abstract: | Arguments for a prominent role for attention to the growth rate of monetary aggregates in the conduct of monetary policy are often based on references to low-frequency reduced-form relationships between money growth and inflation. The "two-pillar Phillips curve" proposed by Gerlach (2004) has recently attracted a great deal of interest in the euro area, where it is sometimes supposed to provide empirical support for the wisdom of a "two-pillar strategy" that uses distinct analytical frameworks to assess shorter-run and longer-run risks to price stability. I show, however, that regression coefficients of the kind reported by Assenmacher-Wesche and Gerlach (2006a) among others are quite consistent with a "new Keynesian" model of inflation determination, in which the quantity of money plays no role in inflation determination, at either high or low frequencies. I also show that empirical results of this kind do not in themselves establish that money growth must be useful in forecasting inflation, either in the short run or over a longer run. Hence they provide little support for the ECB's monetary "pillar." |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:clu:wpaper:0607-06&r=mac |
| By: | Mattesini Fabrizio; Rossi Lorenza |
| Abstract: | We analyze, in this paper, a DSGE New Keynesian model with indivisible labor where firms may belong to two different final goods producing sectors: one where wages and employment are determined in competitive labor markets and the other where wages and employment are the result of a contractual process between unions and ?rms. Bargaining between firms and monopoly unions implies real wage rigidity in the model and, in turn, an endogenous trade-o¤ between output stabilization and inflation stabilization. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock is crucially determined by the proportion of firms that belong to the competitive sector. The larger is this number, the smaller are these effects. We derive a welfare based objective function as a second order Taylor approximation of the expected utility of the economy’s representative agent and we analyze optimal monetary policy. We show that the larger is the number of firms that belong to the competitive sector, the smaller should be the response of the nominal interest rate to exogenous productivity and cost-push shocks. If we consider, however, an instrument rule where the interest rate must react to inflationary expectations, the rule is not affected by the structure of the labor market. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is larger than real wage volatility. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0037&r=mac |
| By: | Grégory Levieuge (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Alexis Penot (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | Compared with the U.S., the amplitude of the European monetary policy rate cycle is strikingly narrow. Is it an evidence of a less reactive ECB? This observation can certainly reflect the preferences and then the strategy of the ECB. But its greater inertia must also be assessed in the light of the singularity of the European structure and of the shocks hitting it. From this perspective, several contributions assert that the nature, size and persistence of shocks mainly explain the different interest rate setting. Therefore, they rely on the idea that both areas share the same monetary policy rule and, more surprising, the same structure. This paper aims at examining this conclusions with an alternative modelling. The results confirm that the euro area and U.S. monetary policy rules are not fundamentally different. But we reject the differences of nature and amplitude of shocks. What is often interpreted as such is in fact the consequence of how distinctly both economies absorb shocks. So differences in the amplitude of the interest rate cycles in both areas are basically explained by structural dissimilarities. |
| Keywords: | interest rate; macroeconomic shocks; monetary policy rules ; policy activism; structural divergence |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00239381_v1&r=mac |
| By: | T. BERGER |
| Abstract: | This paper re-estimates potential output, the NAIRU, and the core inflation rate using aggregated euro area data. The empirical model consists of a Phillips curve linking inflation to unemployment. An Okun-type relationship is used to link the output gap to cyclical unemployment. Using recent developments in the field of New Keyenesian economics, the Phillips curve is forward-looking. The model further accounts for new developments in unobserved component models by allowing (i) for correlation between shocks to the trend and the cycle and (ii) structural breaks in the drift of potential output. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:08/498&r=mac |
| By: | John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London) |
| Abstract: | During 2005-2006, appreciation of the Kwacha, Zambia?s currency, had a significant negative impact on public income. This exchange-rate effect received little notice in the debate over macroeconomic policy. The appreciation reduced fiscal space largely because of binding IMF conditionalities on monetary polices. The fiscal effect had two major revenue components: a fall in the domestic-currency income equivalent of official development assistance and a fall in trade taxes. In 2005, the negative effect on the public budget of the Kwacha appreciation was largely balanced by the positive impact on reducing external debt service. This positive impact ended, however, with debt relief and was almost zero after 2005. Obviously, these revenue effects, though little noticed, had negative implications for Zambia?s ability to achieve the MDGs. The Zambia experience underscores some important general lessons. It indicates, for example, the necessity to coordinate fiscal, monetary and exchange-rate policy in order to achieve sustained growth, employment generation and poverty reduction. Most important, this experience is also a clear example of the dysfunctional consequences of having low-inflation targets rule monetary policy. In the context of currency appreciation, setting limits on the domestic money supply prevents effective exchange-rate management. This necessarily creates, as a by-product, larger fiscal deficits and, consequently, more public borrowing. And these negative fiscal consequences could significantly constrict the resources that some developing countries need to achieve the MDGs. |
| Keywords: | The Reduction of Fiscal Space in Zambia?Dutch Disease and Tight-Money Conditionalities |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:cstudy:14&r=mac |
| By: | Günter Coenen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (Corresponding author - European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We use a version of the New Area-Wide Model (NAWM) developed at the ECB in order to quantify the gains from monetary policy cooperation. The model is calibrated in order to match a set of empirical moments. We then derive the cooperative and (open-loop) Nash monetary policies, assuming that the central banks’ objectives is to maximize the welfare of the households. Our results show that given the current degree of openness of the US and euro area economies, the gains from monetary policy coordination are small, amounting to 0.03 percent of steady-state consumption. Nevertheless, the gains appear to be sensitive to the degree of openness and further economic integration between the two regions could generate sizable gains from cooperation. For example, increasing the trade shares to 32 percent of GDP in both regions, the gains from cooperation rise to about 1 percent of steady-state consumption. By decomposing the sources of the gains from cooperation with respect to the various shocks, we show that mark-up shocks are the most important source for gains from international monetary policy cooperation. JEL Classification: E32, F41, F42. |
| Keywords: | New Area Wide Model, international policy coordination, DSGE, two-country. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080858&r=mac |
| By: | Dees, Stephane (European Central Bank); Pesaran, Hashem (University of Cambridge); Smith, L. Vanessa (University of Cambridge); Smith, Ron P. (Birkbeck College, University of London) |
| Abstract: | New Keynesian Phillips Curves (NKPC) have been extensively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macroeconomic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global perspective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC. |
| Keywords: | New Keynesian Phillips Curve, identification, Global VAR (GVAR), trend-cycle decomposition |
| JEL: | C32 E17 F37 F42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3298&r=mac |
| By: | Marcus Hagedorn |
| Abstract: | This paper asks whether tax cycles can represent the optimal policy in a model without any extrinsic uncertainty. I show, in an economy without capital and where labor is the only choice variable (a Lucas-Stokey economy), that a large class of preferences exists, where cycles are optimal, as well as a large class where they are not. The larger government expenditures are, the larger the class of preferences for which cycles are optimal becomes. Tax cycles are also more likely to be optimal if frictions (deviations of the model from Walrasian markets) are added. While this cannot be shown in general and will not be true for arbitrary frictions, I demonstrate this in two specific worlds. I consider an economy with search frictions in the labor market, and one with frictions in the goods and credit market. A reasonable parametrization of both economies shows that results change considerably. Even with constant relative risk aversion, cycles can be optimal, whereas this class of preferences rules out cycles in the Lucas-Stokey economy. Finally, I characterize the optimal policy. No more than two tax rates are needed to implement the Ramsey policy both in the Lucas-Stokey economy and in the model with frictions. |
| Keywords: | Optimal Taxation, Tax Cycles, First-order Approach. |
| JEL: | H21 E32 E62 E63 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:354&r=mac |
| By: | Michael W. L. Elsby; Ryan Michaels |
| Abstract: | Much recent research has sought to explain the cyclical amplitude of unemployment fluctuations in the US. This paper shows that amplification of the cyclical variation of unemployment can be obtained from adding two very simple features to an otherwise standard model of the aggregate labor market, namely downward sloped short run labor demand and endogenous job destruction. This generalized model is able to match more closely the cyclicality of both job finding and employment to unemployment flows observed in US data. Contrary to standard models, the model can generate amplification while maintaining realistic surplus to employment relationships. In addition, we uncover a novel source of amplification of cyclical shocks that is generated by the interaction of countercyclical unemployment inflows and job creation. |
| JEL: | E24 E32 J63 J64 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13777&r=mac |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Massimiliano Caporin (Dipartimento di Scienze Economiche “Marco Fanno”, University of Padova); Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | This paper aims at the production of a chronology for the EU15 business cycle by comparing parametric and non-parametric procedures on monthly and quarterly data as well in a combined approach. The main innovation is the joint use of the monthly series for the EU15 Gross Domestic Product (GDP) and the EU15 Industrial Production Index (IPI) from 1970 to 2003. The monthly IPI and the quarterly GDP at the EU15 level have been reconstructed starting from the available national series. The monthly GDP has then been computed using temporal disaggregation techniques. The obtained chronology is directly comparable to ones produced by several authors for the euro area. |
| Keywords: | Business cycle, Chronology, Historical reconstruction, Monthly GDP |
| JEL: | E32 C82 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_19&r=mac |
| By: | Adam Elbourne; Debby Lanser; Bert Smid; Martin Vromans |
| Abstract: | We use the dynamic stochastic general equilibrium (DSGE) model of Altig et al. (2005) to analyse the resilience of an economy in the face of external shocks. The term resilience refers to the ability of an economy to propser in the face of shocks. The Altig et al. model was chosen because it combined both demand and supply shocks and because various market rigidities/imperfections, which have the potential to affect resilience, are modelled. We consider the level of expected discounted utility to be the relevant measure of resilience. The effect of market rigidities, eg. wage and price stickiness, on the expected level of utility is minimal. The effect on utility is especially small when compared to the effect of market competition, because the latter has a direct effect on the level of output. This conclusion holds for the family of constant relative risk aversion over consumption utility functions. A similar conclusion was drawn by Lucas (1987) regarding the costs of business cycles. We refer to the literature that followed Lucas for ideas for how a DSGE model might be adjusted to give a more meaningful analysis of resilience. We conclude that the Altig et al. DSGE model does not produce a relationship between rigidities and the level of output and, hence, does not capture the effect of inflexibility on utility that one observes colloquially. |
| Keywords: | Resilience; Nominal Rigidities; Capital Adjustment Costs; DSGE Models |
| JEL: | E17 E27 E37 C32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:96&r=mac |
| By: | Michael J. Artis; Mathias Hoffmann |
| Abstract: | In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have been unable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated. |
| Keywords: | Consumption Risk Sharing, International Business Cycles, Great Moderation, Financial Integration and Capital Flows, Home Bias |
| JEL: | C23 E21 F36 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:346&r=mac |
| By: | António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Davide Furceri (University of Illinois at Chicago, Department of Economics (M/C 144), 601 S. Morgan Street, Chicago, 60607, Illinois, USA.) |
| Abstract: | This paper analyses the effects in terms of size and volatility of government revenue and spending on growth in OECD and EU countries. The results of the paper suggest that both variables are detrimental to growth. In particular, looking more closely at the effect of each component of government revenue and spending, the results point out that i) indirect taxes (size and volatility); ii) social contributions (size and volatility); iii) government consumption (size and volatility); iv) subsidies (size); and v) government investment (volatility) have a sizeable, negative and statistically significant effect on growth. JEL Classification: E62, H50, O40. |
| Keywords: | Fiscal policy, government size, fiscal volatility, economic growth. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080849&r=mac |
| By: | Inoue, Atsushi; Rossi, Barbara |
| Abstract: | The objective of this paper is to identify which parameters of a model are stable over time. Existing procedures can only be used to test whether a given subset of parameters is stable, and cannot be used to find which subset of parameters is stable. We propose a new procedure that is informative on the nature of instabilities affecting economic models, and sheds light on the economic interpretation and causes of such instabilities. Furthermore, our procedure provides clear guidelines on which parts of the model are reliable for policy analysis and which are possibly mis-specified. Our empirical findings suggest that instabilities during the Great Moderation were mainly concentrated in Euler and IS equations as well as in monetary policy. Such results offer important insights to guide the future theoretical development of macroeconomic models. |
| Keywords: | Instability, Model Evaluation, Great Moderation |
| JEL: | E32 E52 E58 C22 C52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:08-02&r=mac |
| By: | Gert Wagner (Instituto de Economía. Pontificia Universidad Católica de Chile.); José Díaz (Instituto de Economía. Pontificia Universidad Católica de Chile.) |
| Abstract: | During the last two centuries Chile had three official monetary units of account, where changes from one to the other can be seen as related to price level variations stretching over many years . For description and analysis this prolonged but also highly variable inflation environment will require previous adjustment of time series expressed in current monetary terms. The present document discusses sources and explains the construction of price level indicators stretching over this long time period, both for wholesale and consumer prices. It also refers to exchange rate series and explains how a unique price is obtained in periods of multiple rate policy. Finally, various indicators for the real exchange rate are brought together. |
| Keywords: | price level indicators, exchange rate series, Chile |
| JEL: | E31 F3 N00 N16 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:328&r=mac |
| By: | Giuseppe Tattara (Department of Economics, University Of Venice Cà Foscari); Marco Valentini (Tolomeo srl) |
| Abstract: | On-the-Job Search is one of the most common and efficient ways to look for a new job, most of the time workers move directly from one employment position to another (E-to-E) without an intervening spell of unemployment. E-to-E transitions are a relevant component of total labour flows and have a definite cyclical pattern. This paper computes E-to-E worker flows through the development of a vacancy chain model. An iterative procedure is used to compute the successive reallocation runs, beginning from an autonomous vacancy and then to reconstruct the complete E-to-E transition process. The procedure is implemented and applied to a large micro-panel based on a highly industrialized Italian region from 1982 to 1996. E-to-E transitions are an increasingly large portion of worker flows in the labour market. They are clearly cyclic and the number of transitions increases over time as the labour market becomes tighter. These are the flows that explain labour market dynamics in upswings and recessions. Search models that look only at flows between employment, unemployment and outside of the labour force underestimate labour mobility and its cyclical pattern. |
| Keywords: | Job Flows, Search and Matching, Job to Job Mobility, Worker Flows, Business Cycle, Propagation |
| JEL: | E24 E32 J63 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_15&r=mac |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Jacques Anas (Coe Rexecode, Paris); Laurent Ferrara (Banque de Frances); Marco Lo Duca (European Central Bank) |
| Abstract: | We propose a dating process for the business and growth Euro-zone cycles. This process is a result of a non parametric algorithm and diverse criteria assessment (duration, deepness, diffusion, synchronisation), as well as of “expert judgments” based on a combination of the following principles: a comparison of direct and indirect dating; an objective of coherence between growth cycle and business cycle turning points (ABCD approach); an objective of coherence between industrial and GDP cycles. As a complement to the traditional direct approach based on the study of Euro-zone aggregates, the main contribution of this paper is to measure the degree of diffusion and synchronisation of the cycles among the countries. |
| Keywords: | Economic cycles, Turning point, Chronology, Non parametric approach, Euro-zone |
| JEL: | C50 C32 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_33&r=mac |
| By: | Pierre-Richard Agénor; Peter J. Montiel |
| Abstract: | This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is is the only source of external finance. At the heart of the model is the link between banks' lending rates (which incorporate a premium over and above the marginal cost of borrowing) and firms' net worth. In contrast to models in the Stiglitz-Weiss or Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing rate. The central bank sets the refinance rate and provides unlimited access to liquidity at that rate. The model is used to study the effects of changes in official interest rates, under both fixed and flexible exchange rates. Various extensions are also discussed, including income effects, the cost channel, the role of land as collateral, and dollarization. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:90&r=mac |
| By: | Jonas Dovern; Christina Ziegler |
| Abstract: | In this paper we analyze the power of various indicators to predict growth rates of aggregate production using real-time data. In addition, we assess their ability to predict turning points of the economy. We consider four groups of indicators: survey data, composite indicators, real economic indicators, and financial data. Almost all indicators are found to improve short-run growth forecasts whereas the results for four-quarter-ahead growth forecasts and the prediction of recession probabilities in general are mixed. We can confirm the result that an indicator suited to improve growth forecasts does not necessarily help to produce more accurate recession forecasts. Only composite leading indicators perform generally well in both forecasting exercises. |
| Keywords: | leading indicators, forecasting, recessions |
| JEL: | C25 C32 E32 E37 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1397&r=mac |
| By: | Andrew Feltenstein; Céline Rochon |
| Abstract: | In this paper, we study the impact of labor market restructuring and foreign direct investment on the banking sector, using a dynamic general equilibrium model with a financial sector. Numerical simulations are performed using stylized Chinese data, and banks failures are generated through increases in the growth rate of the labor force, a revaluation of the exchange rate or an increase in debt issue to finance the government deficit, as compared to a benchmark scenario in which banks remain solvent. Thus bank failures can result from what might seem to be either beneficial economic trends, or correct monetary and fiscal policies. We introduce fiscal policies that modify relative factor prices by lowering the capital tax rate and increasing the tax rate on labor. Such policies can prevent banking failures by raising the return to capital. It is shown that such fiscal policies are, in the short run, welfare reducing. |
| Keywords: | Banking failures; fiscal policies |
| JEL: | D58 E44 F37 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe03&r=mac |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Jacques Anas (Coe Rexecode, Paris); Laurent Ferrara (Banque de Frances); Marco Lo Duca (European Central Bank) |
| Abstract: | The class of Markov switching models can be extended in two main directions in a multivariate framework. In the first approach, the switching dynamics are introduced by way of a common latent factor. In the second approach a VAR model with parameters depending on one common Markov chain is considered (MSVAR). We will extend the MSVAR approach allowing for the presence of specific Markov chains in each equation of the VAR (MMSVAR). In the MMSVAR approach we also explore the introduction of correlated Markov chains which allow us to evaluate the relationships among phases in different economies or sectors and introduce causality relationships, which allow a more parsimonious representation. We apply our model to study the relationship between cyclical phases of the industrial production in the US and Euro zone. Moreover, we construct a MMS model to explore the cyclical relationship between the Euro zone industrial production and the industrial component of the European Sentiment Index. |
| Keywords: | Economic cycles, Multivariate models, Markov switching models, Common latent factors, Causality, Euro-zone |
| JEL: | C50 C32 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_32&r=mac |
| By: | Matthias Doepke; Moshe Hazan; Yishay D. Maoz |
| Abstract: | We argue that one major cause of the U.S. postwar baby boom was the increased demand for female labor during World War II. We develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor-force participation decisions. We use the model to assess the long-term implications of a one-time demand shock for female labor, such as the one experienced by American women during wartime mobilization. For the war generation, the shock leads to a persistent increase in female labor supply due to the accumulation of work experience. In contrast, younger women who turn adult after the war face increased labor-market competition, which impels them to exit the labor market and start having children earlier. In our calibrated model, this general-equilibrium effect generates a substantial baby boom followed by a baby bust, as well as patterns for age-specific labor-force participation and fertility rates that are consistent with U.S data. |
| Keywords: | Fertility, Baby Boom, World War II |
| JEL: | D58 E24 J13 J20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:355&r=mac |
| By: | Marzinotto Benedicta |
| Abstract: | Using theoretical models about the interaction between monetary policy-making and wage bargaining institutions, some researchers had been predicting an acceleration in wage growth under EMU (Iversen and Soskice 1998; Iversen et al 2000; Cukierman and Lippi 2001). However, the empirical evidence shows that, after the formation of the monetary union, wage growth has remained under control or even decelerated. Of the numerous explanations advanced to account for this trend, the most promising seems the one proposed by Posen and Gould (2006), who argue that behind the generalised shift towards wage restraint is enhanced monetary credibility in EMU. Whilst building on a similar argument, this paper adds to it in important respects. First, I show that the effects of a monetary union depend on labour market institutions. Second, and most originally, I argue that a strategic interaction between the ECB and non-atomistic labour unions is possible only in the case of large countries, whose price behaviour can potentially affect EU-13 inflation. This leads to the main finding behind this paper, namely that the relationship between wage growth and economy size is hump-shaped, with wage restraint more present in large and small countries, and less so in countries of intermediate size. Differently from a large country like Germany, small economies are free riders with respect to the monetary regime, but they care nonetheless for cost competitiveness, even if to different degrees. On the other hand, intermediate countries are trapped “inbetween” because neither do they believe capable of affecting euro-zone inflation, nor do they look at cost competitiveness as key to their economic survival. |
| Keywords: | Wage restraint, collective wage bargaining, EMU, openness, international trade |
| JEL: | J31 J51 E50 F15 F41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0035&r=mac |
| By: | Adnrew J. Clarke, Alok Johri |
| Abstract: | Most Real Business Cycle models have a hard time jointly explaining the twin facts of strongly pro-cyclical Solow residuals and extremely low correlations between wages and hours. We present a model that delivers both these results without using exogenous variation in total factor productivity (technology shocks). The key innovation of the paper is to add learning-by-doing to firms technology. As a result firms optimally vary their prices to control the amount of learning which in turn influences future productivity. We show that exogenous variation in labour wedges (preference shocks) measured from aggregate data deliver around fifty percent of the standard deviation in the efficiency wedge (Solow residual) as well as realistic second moments for key aggregate variables which is in sharp contrast to the model without learning-by-doing. |
| Keywords: | Business cycles, Learning-by-Doing, Productivity |
| JEL: | E2 E3 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2008-02&r=mac |
| By: | Francisco Rosende (Instituto de Economía. Pontificia Universidad Católica de Chile.) |
| Abstract: | A partir de mediados de los 80 se aprecia una caída importante en la inflación en las economías industrializadas, proceso que más tarde se extiende a numerosos países en desarrollo. Este proceso se produce en un contexto intelectual donde se aprecia la influencia de ideas como “la hipótesis de la tasa natural”, la importancia de las “expectativas racionales” y la “neutralidad de largo plazo” de la política monetaria. En esta perspectiva, resulta tentador suponer que la caída experimentada por la inflación en el mundo ha sido el resultado de un genuino progreso en el conocimiento adquirido por la Ciencia Económica. A partir de una revisión de la literatura reciente sobre las causas del aumento y posterior caída de la inflación en los Estados Unidos, se examina la validez y alcance de la visión optimista antes mencionada. En la segunda parte del trabajo, se revisan las causas de la caída que ésta ha experimentado la inflación en Chile en los últimos treinta años, a la luz de una identificación de las restricciones y objetivos de la política monetaria en dicho período. |
| Keywords: | Inflación, Política Monetaria, Expectativas |
| JEL: | E31 E32 E52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:330&r=mac |
| By: | Beckmann, Rainer |
| Abstract: | This paper analyses structural and cyclical determinants of banking profitability in 16 Western European countries. We find that financial structure matters, particularly through the beneficial effect of the capital market orientation in the respective national financial system. Furthermore, higher diversification regarding banks’ income sources shows a positive effect. The industry concentration of national banking systems, though, does not significantly affect aggregate profitability. Business cycle effects, in particular lagged GDP growth, display a substantial procyclical impact on bank profits. These results are obtained in a single equation panel framework using the Hausman-Taylor instrument variable estimator. The data set comprises aggregate annual country data and banking group data (commercial banks, cooperative banks and savings banks) over the period 1979-2003. |
| Keywords: | bank profits, financial structure, business cycle |
| JEL: | E32 G21 L11 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:6929&r=mac |
| By: | António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan González Alegre (European University Institute, Via della Piazzuola, 43, I-50133, Firenze, Italy.) |
| Abstract: | In this paper we test whether a reallocation of government budget items can enhance long-term GDP growth in a set of European countries. We apply modern panel data techniques to the period 1970-2006, and we use three alternative dependent variables in a growth regression: economic growth, total factor productivity and labour productivity. Our results are able to identify also the distortions induced by public expenditure in the private factors allocation. In particular, we detect a strong crowding-in effect associated to public investment, which have enhanced economic growth by boosting private investment. We also associate a significant dependence of productivity on public expenditure on education as well as the role of social security and health issues in growth and the labour market. JEL Classification: C23, E62, H50, O40. |
| Keywords: | Economic growth, panel models, fiscal policy. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080848&r=mac |
| By: | Andreea Halunga; Denise Osborn; Marianne Sensier |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0715&r=mac |
| By: | Bruno Eklund |
| Abstract: | This paper considers the modelling and forecasting of the Icelandic business cycle. The method of selecting monthly variables, coincident and leading, that mimic the cyclical behavior of the quarterly GDP is described. The general business cycle is then modelled by a vector autoregressive, VAR, model. The cyclical behavior of the business cycle is summarized by a composite coincident index, which is based on the root mean squared forecast error over a pseudo out of sample. By applying a bootstrap forecasting procedure, using the estimated VAR model, point and interval forecasts of the composite coincident index are estimated. |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp36&r=mac |
| By: | Mathias Hoffmann; Thomas Nitschka |
| Abstract: | Idiosyncratic consumption risk explains more than 60 percent of the cross-sectional variation in quarterly exchange rate changes and currency returns. Our results are obtained from data of 13 industrialized countries and are based on an international version of the consumption capital asset pricing model (CCAPM) in which we account for international consumption heterogeneity. We use this framework to dissect the consumption-exchange rate anomaly, the empirical fact that international variation in purchasing power alone does not appear to account for differences in consumption growth rates across countries. As an explanation for this phenomenon, we explore the presence of currency risk premia that also lead to departures from uncovered interest parity (UIP). We decompose the cross-sectional variation in consumption into one component that is due to cross-country differences in inflation rates and a second component that is due to international variation in nominal interest rates. We interpret these factors as indicators of goods and financial market segmentation respectively. We find that both help account to virtually equal parts for the cross-section of exchange rate changes. Interestingly, the price of aggregate consumption risk has declined over the 1990s, in line with a growing literature that documents a growing internationalisation of country portfolios over this period. |
| Keywords: | Uncovered interest rate parity, consumption CAPM, international financial integration, consumption risk sharing |
| JEL: | E21 F30 G12 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:331&r=mac |
| By: | Giuseppe Tattara (Department of Economics, University Of Venice Cà Foscari); Marco Valentini (Tolomeo srl) |
| Abstract: | This research exploits a large employer-level panel dataset in order to analyse employment and worker flows. Excess reallocation, the difference between worker and job flows at the firm level, is substantial and has a definite cyclical pattern. Both accessions and separations are cyclical in contrast to the conventional wisdom that assumes separation to be countercyclical. Separations increase in upswing, following the accession increase, and decline in recession. Unemployment during recession is not, to a large extent, due to an increase in the rate at which workers separate from their employers, as traditionally assumed among macroeconomists, but to the decline in job creations. |
| Keywords: | Job Flows, Worker Flows, Reallocation, Cyclical behaviour |
| JEL: | E24 E32 J21 J44 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_16&r=mac |
| By: | Cheng , Xiaoqiang (BOFIT); Degryse, Hans (BOFIT) |
| Abstract: | This paper provides evidence on the relationship between finance and high growth in China. Employing data for 27 Chinese provinces over the period 1995–2003, we assess the impact of banks and non-bank financial institutions on local economic growth. We argue that banks have had a larger impact than non-banks on local economic growth as they benefited earlier and more profoundly from China’s financial reforms than their non-bank counterparts. |
| Keywords: | growth; financial development; Chinese provinces; banks |
| JEL: | E44 G21 |
| Date: | 2008–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2007_022&r=mac |
| By: | Christos S. Savva; Kyriakos C. Neanidis; Denise R. Osborn |
| Abstract: | We examine business cycle synchronizations between the euro area and the recently acceded EU and currently negotiating countries. Strong evidence is uncovered of time-variation in the degree of comovement between the cyclical components of monthly industrial production indicators for each of these countries with a euro area aggregate, which is then modeled through a bivariate VAR-GARCH specification with a smoothly time-varying correlation that allows for structural change. Where required to account for the observed time-variation in correlations, a double smooth transition conditional correlation model is used to capture a second structural change event. After allowing for dynamics, we find that all new EU members and negotiating countries have at least doubled their business cycle synchronization with the euro area, or changed from negative to positive correlations, since the early 1990s. Furthermore, some have exhibited U-curved or hump-shaped business cycle correlation patterns. The results point to great variety in timing and speed of the correlation shifts across the country sample. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:91&r=mac |
| By: | Sang-Wook Stanley Cho (School of Economics, The University of New South Wales) |
| Abstract: | This paper constructs a quantitative general equilibrium lifecycle model with uninsurable labor income to account for the differences in the pattern of wealth accumulation across two countries, Korea and the United States. The model incorporates the differences in the housing market institution in the two countries, namely, the mortgage market and the rental market. As a focal point of the model, housing plays multiple roles for households: collateral as well as a source of service flows. The results from the calibrated model can quantitatively explain some empirical findings on the profile of wealth and homeownership in the aggregate as well as over the life cycle. The mortgage market can account for around 60 percent of the differences in the aggregate homeownership ratios in the two countries as well as 23 percent of the differences in the asset portfolio composition. However, the difference in the rental market does not play large role in accounting for the differences in wealth accumulation and homeownership patterns. |
| Keywords: | Lifecycle model; Consumption; Wealth; Housing Institution |
| JEL: | D91 E21 H31 R21 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2007-27&r=mac |
| By: | Michael J. Artis; Mathias Hoffmann |
| Abstract: | This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other's output (Shiller securities). Our framework allows us to distinguish between two channels of risk sharing: ex ante diversification that leads to income smoothing through capital income flows and ex-post consumption smoothing through savings and dissavings. The model successfully replicates the patterns of income and consumption smoothing observed in both U.S. state-level and international data. The increase in international consumption risk sharing is closely associated with the decline in international portfolio home bias. While capital income flows remain relatively limited as a channel of risk sharing at business cycle frequencies, we find that better international portfolio diversification has led to a considerable increase in capital income flows at medium and long horizons. |
| Keywords: | Consumption Risk Sharing, International and regional business cycles, Capital flows, Home Bias, Non-stationary panel data |
| JEL: | C23 E21 F36 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:316&r=mac |
| By: | Bonpasse, Morrison |
| Abstract: | As globalization continues, businesses are increasingly importing and exporting from countries with different currencies. To conduct that business, they must pay fees for exchanging one currency for another and they must determine the exchange rate for a particular time. If the transaction is to be conducted over time, they may purchase currency instruments to hedge against currency fluctuation. The costs of these tasks to such firms are significant. As an increasing number of international businesses understand that these expensive tasks are unnecessary for trade conducted within a monetary union, these businesses are likely to lead the effort to implement a Single Global Currency, to be managed by a Global Central Bank within a Global Monetary Union. In short, a "3-G" world. It's common cents. Much further research is needed to identify the benefits of a Single Global Currency and the steps and schedule necessary for implementation. |
| Keywords: | Single Global Currency; monetary union; dollar; euro; European Monetary Union; Global Central Bank; Global Monetary Union; international monetary system; Bretton Woods; foreign exchange; currency; currency crisis; transaction costs; trade; commerce |
| JEL: | F4 F5 E5 E6 |
| Date: | 2008–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7002&r=mac |
| By: | Bonpasse, Morrison |
| Abstract: | As globalization continues, businesses are increasingly importing and exporting from countries with different currencies. To conduct that business, they must pay fees for exchanging one currency for another and they must determine the exchange rate for a particular time. If the transaction is to be conducted over time, they may purchase currency instruments to hedge against currency fluctuation. The costs of these tasks to such firms are significant. As an increasing number of international businesses understand that these expensive tasks are unnecessary for trade conducted within a monetary union, these businesses are likely to lead the effort to implement a Single Global Currency, to be managed by a Global Central Bank within a Global Monetary Union. In short, a "3-G" world. It's common cents. Much further research is needed to identify the benefits of a Single Global Currency and the steps and schedule necessary for implementation. |
| Keywords: | Single Global Currency; monetary union; dollar; euro; European Monetary Union; Global Central Bank; Global Monetary Union; international monetary system; Bretton Woods; foreign exchange; currency; currency crisis; transaction costs; trade; commerce |
| JEL: | F4 F5 E5 E6 |
| Date: | 2008–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7036&r=mac |
| By: | Bill Gibson (University of Massachusetts Amherst) |
| Abstract: | Professor Crotty once casually observed that in his view economics could not be properly thought of as a science. This paper investigates the implications of this view in light of the question of how the scientific method has recently contributed to the evolution of economic practice. It is argued that agent-based models might provide a platform for an integration of recent micro and macroeconomic theories. |
| Keywords: | Agent-based models, macroeconomics, Keynes, James Crotty. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2008-02&r=mac |
| By: | Thomas Nitschka |
| Abstract: | Temporary fluctuations of the U.S. consumption-wealth ratio, cay, predict excess returns on international stock markets at the business cycle frequency. This finding is the reflection of a common, temporary component in national stock markets. Exposure to this common component explains up to 60 percent of the covariation among long-horizon returns on the G7 stock markets for the time period from 1973 to 2005. The impact of the common component on stock market comovement is particularly pronounced in the period from 1990 to 2005. |
| Keywords: | U.S. consumption-wealth ratio, stock market comovement, stock return predictability |
| JEL: | E21 G12 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:338&r=mac |
| By: | Pierre-Richard Agénor and Nihal Bayraktar |
| Abstract: | This paper provides empirical estimates of contracting models of the Phillips curve for eight middle-income developing countries (Chile, Colombia, Korea, Malaysia, Mexico, Morocco, Tunisia, and Turkey). Following an analytical review, a variety of models with one and more leads and lags are estimated using two-step GMM techniques. Nested and non-nested tests are used to select a specification for each country, and in-sample predictive capacity and stability are analyzed. Higher-dimension models tend to perform better than parsimonious models with one lead and one lag. Except for Colombia and Korea, backward-looking behavior has a relatively larger impact on inflation dynamics. World oil prices and relative input prices have a limited effect, whereas borrowing costs are significant for Korea and Mexico. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:94&r=mac |
| By: | Pierre van der Eng |
| Abstract: | This article surveys the growth of consumer credit in Australia during the 20th century, particularly after World War II. Until the 1970s, the regulation of Australia’s financial market caused formal consumer credit to be provided mainly by finance companies under hire-purchase contracts, largely for the purchase of cars and household durables. Deregulation of the financial market since the 1960s allowed banks to gain a dominant share in the market for personal loans. Quantification of long-term trends is difficult, but broad estimates suggest sustained growth in per capita indebtedness during 1945-2007. |
| JEL: | D14 E21 E51 G23 N27 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2008-489&r=mac |
| By: | Fernando Alvarez; Robert Shimer |
| Abstract: | This paper extends Lucas and Prescott's (1974) search model to develop a notion of rest unemployment. The economy consists of a continuum of labor markets, each of which produces a heterogeneous good. There is a constant returns to scale production technology in each labor market, but labor productivity is continually hit by idiosyncratic shocks, inducing the costly reallocation of workers across labor markets. Under some conditions, some workers may be rest-unemployed, waiting for local labor market conditions to improve, rather than engaged in time consuming search. The model has distinct notions of unemployment (moving to a new labor market or waiting for labor market conditions to improve) and inactivity (enjoying leisure while disconnected from the labor market). We obtain closed-form expressions for key aggregate variables and use them to evaluate the model. Quantitatively, we find that in the U.S. economy many more people may be in rest unemployment than in search unemployment. |
| JEL: | E24 J2 J6 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13772&r=mac |
| By: | Gerard Caprio, Jr. and Patrick Honohan |
| Abstract: | The history of banking around the world has been punctuated by frequent systemic crises. Not all crises are the same with distinct roles being played at different times by mismanagement, government interference and macroeconomic shocks. This review draws on experience from developing countries as well as advanced economies. It identifies common features of crises in recent decades, describes how costly they have been (especially in developing countries) in terms of fiscal burden and impact on macroeconomic growth. It proceeds to outline the conceptual issues identified by theoreticians and considers appropriate policy responses. A lull in the new millennium led to optimism that banking crises might be a thing of the past, but the events of recent months have shown such optimism to be unwarranted. |
| Date: | 2008–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp242&r=mac |
| By: | Koray Alper |
| Abstract: | Using different combinations of culture, development and openness to international trade, we test the variability in the incidences of corruption at different stages of development or in other words the non-linearities in the relationship between corruption and development. We employ formal threshold model developed by Hansen (2000), and unlike the existing literature, we find that: (1) non-linear models that search for the break points in the relationship between corruption and development are statistically preferable than linear regressions; (2) the effect of development at any stage is much lower than that has been suggested by studies using linear regressions approach; (3) both culture and openness do not affect corruption directly; rather they have an effect on the location of break points in the relationship between corruption and development. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:93&r=mac |
| By: | Bill Gibson (University of Massachusetts Amherst) |
| Abstract: | Since the "closure debate" of the 1980s it is well known that com- parative static derivatives in analytical macro models are highly sensitive to the closure rule selected. This led Keynesians to conclude that Keynesian closures were superior to those favored by the orthodoxy and vice-versa. It is argued that with the advent of agent-based or multi-agent systems, the clo- sure debate is superseded. While elements of both Keynesian and neoclassical models survive the transition to the more synthetic environment, an agent- based approach eliminates the need for drastic simplification that was at the root of the debate from the beginning. |
| Keywords: | Agent-based models, multi-agent systems, macroeconomic closure. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2008-03&r=mac |
| By: | Rebekka Christopoulou (DG-Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Philip Vermeulen (DG-Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides estimates of price-marginal cost ratios or markups for 50 sectors in 8 euro area countries and the US over the period 1981-2004. The estimates are obtained applying the methodology developed by Roeger (1995) on the EU KLEMS March 2007 database. Five stylized facts are derived. First, perfect competition can be rejected for almost all sectors in all countries; markup ratios are generally larger than 1. Second, average markups are heterogenous across countries. Third, markups are heterogeneous across sectors, with services having higher markups on average than manufacturing. Fourth, services sectors generally have higher markups in the euro area than the US, whereas the pattern is the reverse for manufacturing. Fifth, there is no evidence that there is a broad range change in markups from the eighties to the nineties. JEL Classification: D43, L11. |
| Keywords: | Price, marginal cost, markup. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080856&r=mac |
| By: | Agar Brugiavini (Department of Economics, University Of Venice Cà Foscari); Erich Battistin, (University of Padova); Enrico Rettore (University of Padova); Guglielmo Weber (University of Padova) |
| Abstract: | In this paper we investigate the size of the consumption drop at retirement in Italy. We use micro data on food and total non-durable household spending covering the period 1993-2004, and evaluate the change in consumption that accompanies retirement by exploiting the exogenous variability in pension eligibility to correct for the endogenous nature of the retirement decision. We take a regression discontinuity design approach, and make the identifying assumption that consumption would be the same around the threshold for pension eligibility if individuals would not retire. We check in our data that a non-negligible fraction of individuals retire as soon as they become eligible, and estimate at 9.8% the part of the non-durable consumption drop that is associated with retirement induced by eligibility. We show that such fall is not driven by liquidity problems for the less well off in the population, and can be accounted for by drops in goods that are work-related expenses or leisure substitutes. However, we also show that retirement induces a significant drop in the number of grown children living with their parents, and this can account for most of the retirement consumption drop. |
| Keywords: | Consumption, Regression Discontinuity Design, Retirement |
| JEL: | D9 E2 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_27&r=mac |
| By: | Philipp Maier |
| Abstract: | In light of the U.S. current account deficit, pressure is high on Asian countries to revalue their currencies. The calls from some U.S. policymakers for tariffs on imports from China has sparked fears that this could trigger a world-wide surge in protectionism. This study evaluates the risk of protectionism, considering two dimensions: first, the economic effects of tariffs; second, the incentives for policymakers to adopt tariffs. Following the political economy literature, we distinguish 'benevolent' policymakers - who care about long-term GDP - and 'myopic' policymakers, for whom short-term considerations are important. An analysis of the economic effects using the Bank of Canada's <em>Global Economy Model</em> shows that the gains from import tariffs are small: in the short-term, tariffs raise the price of imports and shift consumption toward domestically-produced goods; but they also lead to a real appreciation. This improves the terms of trade, but falling export volumes lead to a reduction in GDP in the long-run. As regards the political dimension, we conclude that a 'benevolent' policymaker would not adopt tariffs, because of negative long-term economic consequences, but 'myopic' policymakers might be tempted to exploit short-term political gains. Given the potentially high costs of protectionist trade policies, protectionism is therefore rightly viewed as an important risk. |
| Keywords: | International topics; Recent economic and financial developments; Regional economic developments |
| JEL: | E66 F32 F47 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-2&r=mac |
| By: | Ricardo J. Caballero; Pierre Yared |
| Abstract: | High commodity prices and a sustained global expansion have brought about a new policy dilemma for many economies: Why are governments accumulating so much wealth and what should be the fiscal response to this abundance? In this paper we characterize how politicians' rent-seeking incentives and their interaction with political and economic uncertainty affect the management of abundance. In the standard political economy model of debt, the presence of political risk leads current governments to over-borrow in order to starve the beast. However, when economic risk is significant, we show that the presence of rent-seeking politicians gives rise to an option value of rent-seeking. In this case, if economic risk is large relative to political risk, the standard result is overturned and politicians have an incentive to over-save or inflate the beast. In the latter scenario, the government also hedges less than is socially optimal. Finally, we show that incentive compatible rules that weaken political risk and the option value of rent-seeking can improve social welfare. |
| JEL: | E6 H2 H6 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13779&r=mac |
| By: | Sang-Wook Stanley Cho (School of Economics, The University of New South Wales) |
| Abstract: | This paper constructs a quantitative lifecycle model with uninsurable labor income and aggregate housing return risk to assess how Korean households make saving and portfolio allocation decisions. The model incorporates the special roles housing plays in the portfolio of households: collateral, a source of service flows, as well as a source of potential capital gains or losses. In the model, a household first makes the decision whether to rent or to buy a house and then chooses the housing value. The model adds to existing models of wealth accumulation some unique institutional features present in Korea, namely the rental system (`chonsae') and the lack of a mortgage system. When the model is calibrated to match the Korean economy, several key features of the data are better able to be reproduced. The paper also analyzes the role of institutional features by comparing several alternative housing market arrangements and the introduction of a pay-as-you-go social security system to assess their impact on wealth accumulation, portfolio choices, and the pattern of homeownership. I find that expanding the mortgage system significantly increases the homeownership ratio, while alternative rental arrangements have mixed effects on the homeownership ratio. All of the alternative market arrangements raise the fraction of household wealth invested into housing assets. I also find that the introduction of social security system will lower the overall savings in Korea by approximately 10% and lower the homeownership ratio by 6 percentage points. |
| Keywords: | Lifecycle model; Consumption; Wealth; Housing; Korea |
| JEL: | D91 E21 H31 R21 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2007-26&r=mac |
| By: | Andrei G.Simonassi; Camillo José Oswaldo Cândido Júnior |
| Abstract: | nível nacional e regional no período 1985-2002, visando tanto a investigar a falácia acerca do eventual trade-off existente entre responsabilidade fiscal e social, quanto a descrever os efeitos dos ciclos políticos e dos dispositivos constitucionais instituídos nas décadas de 1980 e 1990, tais como a emenda da reeleição e o processo de renegociação das dívidas estaduais (Lei no 9.496/1997), sobre a ética de responsabilidade fiscal. Modelos econométricos com dados em painel a efeitos fixos foram estimados em quatro especificações em nível nacional e para as três principais regiões do país como forma de captar os impactos das disparidades regionais sobre as estimativas. Constatase inexistir o trade-off entre as responsabilidades supracitadas em todas as especificações e desagregações. Entretanto, em relação aos determinantes políticos do comportamento fiscal dos estados, enquanto no Nordeste e Sul corroboram os resultados em nível nacional com a existência de ciclos políticos oportunistas e maior controle político advindo da emenda da reeleição, no Sudeste essa emenda contribuiu negativamente com o desempenho fiscal dos estados e os instrumentos de política fiscal, como a lei de renegociação das dívidas estaduais, mostraram-se insuficientes em viabilizar o atendimento aos limites da LRF. The article analyzes the fiscal performance of the brazilian states at national and regional level in the period 1985-2002, aiming to investigate both the fallacy concerning the eventual trade-off between fiscal and social responsibility, and to describe the effects of the political cycles of the constitutional devices instituted in the decades of 1980 and 1990, such as the amendment of the reelection and the Federal Law no 9496/1997 of renegotiation of the state debts under the ethics of fiscal responsibility. Econometric panel data models with fixed effects were estimated in four specifications at national level and other three ones for the main regions of the country so as to capture the impacts of the regional disparities. It is verified that exist no trade-off between such a responsibilities in all of the specifications, aggregated or not, performed. However, in relation to the political determinants of the fiscal policy in the states, the Northeastern and Southern regions match the results with the national level, while indicating the existence of opportunism political cycles and a greater political control from the reelection amendment. Particularly in the Southeast, this policy contributed negatively with the fiscal performance of the states, and the instruments of fiscal policy, such as the law of renegotiation state debts, shown to be ineffective in providing viability to the limits to the Fiscal Responsibility Federal Law (LRF). |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1323&r=mac |
| By: | Fabrizio Zilibotti |
| Abstract: | In the heart of the Great Crisis, amidst great uncertainty and concerns surrounding the future of capitalism, John Maynard Keynes launched his optimistic prophecy that growth and technological change would allow mankind to solve its economic problem within a century. He envisioned a world where people would work much less and be less oppressed by the satisfaction of material needs. To what extent have his predictions turned out to be accurate? This essays attempts to provide some answers. |
| Keywords: | Capitalism, Consumption, Environmental Sustainability, Growth, Keynes, Leisure. |
| JEL: | B31 E12 E66 I31 J22 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:344&r=mac |