nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒02‒16
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary policy actions and long-run inflation expectations By Michael T. Kiley
  2. Business Cycle Accounting for the Chinese Economy By Gao, Xu
  3. Why Do Central Banks Push for Structural Reforms? The Case of a Reform in the Labor Market By Álvaro Aguiar; Ana Paula Ribeiro
  4. US Inflation Dynamics 1981-2007: 13,193 Quarterly Observations By Gregor W. Smith
  5. The Business Cycle Implications of Reciprocity in Labor Relations By Jean-Pierre Danthine; André Kurmann
  6. The Case for Price Stability, Then and Now: A Retrospective Note on John W. Crow's 1988 Eric J. Hanson Memorial Lecture By David Laidler
  7. On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union By Stéphane Auray; Aurélien Eyquem
  8. A Modern Reconsideration of the Theory of Optimal Currency Areas By Giancarlo Corsetti
  9. Macroeconomic Rates of Return of Public and Private Investment: Crowding-in and Crowding-out Effects By António Afonso; Miguel St.Aubyn
  10. The Price Setting Behavior in Colombia: Evidence from PPI Micro Data By Juan Manuel Julio; Héctor Manuel Zárate
  11. Sticky Prices, Sticky Wages, and also Unemployment By Miguel Casares
  12. Nominal and real wage flexibility in EMU By Arpaia, Alfonso; Pichelmann, Karl
  13. How Much Inflation is Necessary to Grease the Wheels? By Kim, Jinill; Ruge-Murcia, Francisco J.
  14. Excess liquidity, oligopolistic loan markets and monetary policy in LDCs By Tarron Khemraj
  15. The TIPS yield curve and inflation compensation By Refet S. Gürkaynak; Brian Sack; Jonathan H. Wright
  16. Preference Heterogeneity in Monetary Policy Committees By RIBONI, Alessandro; RUGE-MURCIA, Francisco J.
  17. Estimating Central Bank Behavior in Emerging Markets: The Case of Turkey By Hatipoglu, Ozan; Alper, C. Emre
  18. Monetary Policy Transparency in Pakistan: An Independent Analysis By Wasim Shahid Malik; Musleh-ud Din
  19. Indebtedness, macroeconomic conditions and banks’ loan losses: evidence from Italy By Simona Castellani; Chiara Pederzoli; Costanza Torricelli
  20. Macroeconomics: A Survey of Laboratory Research By John Duffy
  21. Preventing financial instability and currency crises By Horst Siebert
  22. Nominal mortgage contracts and the effects of inflation on portfolio allocation By Joseph B. Nichols
  23. Is Volatility Good for Growth? Evidence from the G7 By Elena Andreou; Alessandra Pelloni; Marianne Sensier
  24. Co-movements between US and UK stock prices: the roles of macroeconomic information and time-varying conditional correlations By Nektarios Aslanidis; Denise R. Osborn; Marianne Sensier
  25. Quantitive Inflation Perceptions and Exectations of Italian Consumers By Marco Malgarini
  26. When does determinacy imply expectational stability? By James B. Bullard; Stefano Eusepi
  27. Menu Costs and Inflation Asymmetries - Some Micro Data Evidence By Karadi, Peter; Reiff, Adam
  28. International competition and inflation: a New Keynesian perspective By Luca Guerrieri; Christopher Gust; David Lopez-Salido
  29. Cyclical features of the ISAE business services series By Bianca Maria Martelli; Gaia Rocchetti
  30. Extending an SVAR Model of the Australian Economy By Mardi Dungey; Adrian Pagan
  31. Challenges in macro-finance modeling By Don Kim
  32. The Role of Sectoral Shifts in the Great Moderation By Daniel Burren
  33. The Retirement of a Consumption Puzzle By Erik Hurst
  34. Macroeconomic Interdependence and the International Role of the Dollar By Linda S. Goldberg; Cédric Tille
  35. Equity portfolio diversification under time-varying predictability and comovements: evidence from Ireland, the US, and the UK By Massimo Guidolin; Stuart Hyde
  36. International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities By Charles Engel; Jian Wang
  37. Rare Disasters and Exchange Rates By Emmanuel Farhi; Xavier Gabaix
  38. Bank core deposits and the mitigation of monetary policy By Lamont Black; Diana Hancock; Wayne Passmore
  39. Factor-MIDAS for Now- and Forecasting with Ragged-Edge Data: A Model Comparison for German GDP By Massimiliano Marcellino; Christian Schumacher
  40. Comparative Advantage in Cyclical Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim
  41. Housing and equity wealth effects of Italian households By Charles Grant; Tuomas A. Peltonen
  42. Index Formula of Laspeyres and the Inversion Test By von der Lippe, Peter
  43. Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions By Alain Guay; Florian Pelgrin
  44. Oil Price Movements and the Global Economy: A Model-Based Assessment By Selim Elekdag; Rene Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti
  45. Forecasting Macroeconomic Variables Using Diffusion Indexes in Short Samples with Structural Change By Anindya Banerjee; Massimiliano Marcellino; Igor Masten
  46. Aspectos Institucionales de la Banca Central en Colombia 1963-2004: La Junta Monetaria y la Junta Directiva del Banco de la República By Andrés Felipe Giraldo Palomino
  47. Inventories, Lumpy Trade, and Large Devaluations By George Alessandria; Joseph Kaboski; Virgiliu Midrigan
  48. Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship By William Kerr; Ramana Nanda
  49. Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship By William Kerr; Ramana Nanda
  50. Time Varying Determinants of Cross-Country Growth By Rachida Ouysse; Chris Nicholas
  51. France 0 - 0 Brésil. L'échec du réformisme. By Rémy Herrera; Mauricio Sabadini
  52. Occupational Mobility and the Business Cycle By Giuseppe Moscarini; Francis G. Vella
  53. Incomplete Information in a Long Run Risks Model of Asset Pricing By Prasad V. Bidarkota
  54. What explains changes in full-time and part-time employment in Western Germany? : A new method on an old question By Klinger, Sabine; Wolf, Katja
  55. On-the-job search and labor market reallocation By Murat Tasci
  56. The Indigenous Movement and the Economic Trajectory of Ecuador By Ken Jameson

  1. By: Michael T. Kiley
    Abstract: The degree to which inflation expectations are anchored at long horizons is important for many issues in macroeconomics and finance. There has been little research examining observable measures of long-run inflation expectations. We investigate the evolution of survey measures of long-run inflation expectations in the United States. Our analysis emphasizes the role of a time-varying inflation objective of monetary policymakers. This focus makes monetary policy actions a key determinant of long-run inflation expectations. Our results have important implications for work on inflation dynamics, monetary policy rules, the costs of disinflation, and the term structure of interest rates.
    Date: 2008
  2. By: Gao, Xu
    Abstract: We evaluate sources of business cycle fluctuations in China after 1978 with business cycle accounting method developed by Chari, Kehoe, and McGrattan (2007). We find that efficiency wedge, which represents institutional change and technology advance, was the main source of economic fluctuations in 1978 - 2006. The amplitude of it fluctuation declined after 1992, which resulted in moderation of business cycle fluctuations. We also find that distortions manifest themselves as taxes on investment, which represents frictions in the capital market, became another economic fluctuation source after 1992, which is different from results of business cycle accounting on US and Japan data. Our results also show that government consumption and net exports played minor roles in generating business cycles. Our results point out several promising directions for future research on China’s business cycle.
    Keywords: Business cycle fluctuations; Business cycle accounting; Chinese economy
    JEL: O47 E32 O53 E37
    Date: 2007–11
  3. By: Álvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ana Paula Ribeiro (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: In spite of being mainly concerned with stabilization policies, central banks in many developed countries often advocate the necessity of structural reforms. In turn, demand-side policies - such as monetary policy - can often help improving the political support of reforms (two-handed-approach). By arguing that labor market reforms influence the effectiveness of monetary policy, we assess if central banks have incentives to help promoting such reforms. In order to identify the channels through which the effects of the reform impinge on the effectiveness of monetary policy, we add stylized features of the labor market to a standard New Keynesian model for monetary policy analysis. In this framework, a labor market reform is modeled as a structural change inducing a permanent shift in the flexible prices unemployment and output levels. The reform-induced adjustments, under different sources of macroeconomic and reform implementation inertias, are then compared across different monetary policy rules. We find that, in general, labor market reform increases the effectiveness of monetary policy as a demand-management instrument. However, conditional to the presence of different inertias, the reform process can bring about transition stabilization costs, depending on the monetary policy rule. Choosing a particular monetary policy rule, as well as the business cycle timing of the reform, are means to reduce such costs.
    Keywords: Monetary policy effectiveness; Monetary policy rules; Labor market reform; New-Keynesian models
    JEL: E24 E52 E58
    Date: 2008–02
  4. By: Gregor W. Smith (Queen's University)
    Abstract: The new Keynesian Phillips curve (NKPC) restricts multivariate forecasts. I estimate and test it entirely within a panel of professional forecasts, thus using the time-series, cross-forecaster, and cross-horizon dimensions of the panel. Estimation uses 13,193 observations on quarterly US inflation forecasts since 1981. The main finding is a significantly larger weight on expected future inflation than on past inflation, a finding which also is estimated with much more precision than in the standard approach. Inflation dynamics also are stable over time, with no decline in inflation inertia from the 1980s to the 2000s. But, as in historical data, identifying the output gap is difficult.
    Keywords: forecast survey, new Keynesian Phillips curve
    JEL: E31 E37 C23
    Date: 2008–02
  5. By: Jean-Pierre Danthine; André Kurmann
    Abstract: We develop a reciprocity-based model of wage determination and incorporate it into a moder 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
  6. By: David Laidler (University of Western Ontario)
    Abstract: John Crow's 1988 Hanson Lecture argued for making price stability the goal of Canada's monetary policy, but in the early 1990s, political and economic circumstances led policy makers to settle for a 2 percent inflation target instead. The recently instituted review of the Inflation Control Program has put price stability on the policy menu again, and the current relevance of Crow's 1988 case is assessed in the light of the past 20 years' experience.
    Keywords: price stability; inflation targeting; Bank of Canada; monetary policy
    JEL: E42 E58 E61
    Date: 2008
  7. By: Stéphane Auray; Aurélien Eyquem
    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 inflation 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 F41
    Date: 2007
  8. By: Giancarlo Corsetti
    Abstract: What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50 years from its birth, in light of recent advances in open economy macro and monetary theory? This paper presents a stylized micro-founded model of the costs of adopting a common currency, relative to an ideal benchmark in which domestic monetary authorities pursue country-specific efficient stabilization. Costs from (a) limiting monetary autonomy and (b) giving up exchange rate flexibility are examined in turn. These costs will generally be of the same magnitude as the costs of the business cycle. However, to the extent that exchange rates do not perform the stabilizing role envisioned by traditional OCA theory, a common monetary policy can be as efficient as nationally differentiated policies, even when shocks are strongly asymmetric, provided that the composition of aggregate spending tends to be symmetric at unionwide level. Convergence in consumption (and spending) patterns thus emerges as a possible novel attribute of countries participating in an efficient currency area.
    Keywords: Optimum Currency Area, optimal monetary policy, costs of business cycle, exchange rate regime, international policy cooperation, New Open Economy Macroeconomics
    JEL: E31
    Date: 2008
  9. By: António Afonso; Miguel St.Aubyn
    Abstract: Using annual data from 14 European Union countries, plus Canada, Japan and the United States, we evaluate the macroeconomic effects of public and private investment through VAR analysis. From impulse response functions, we are able to assess the extent of crowding-in or crowding-out of both components of investment. We also compute the associated macroeconomic rates of return of public and private investment for each country. The results point mostly to the existence of positive effects of public investment and private investment on output. On the other hand, the crowding-in effects of public investment on private investment vary across countries, while the crowding-in effect of private investment on public investment is more generalised.
    Keywords: fiscal policy; public investment; private investment; impulse response; vector autoregression; European Union.
    JEL: C32 E22 E62
    Date: 2008–02
  10. By: Juan Manuel Julio; Héctor Manuel Zárate
    Abstract: In this paper we explore the price setting behavior of Colombian producers and importers using a unique database containing the monthly price reports underlying the Colombian PPI from Jun-1999 to Oct-2006. We focus on five particular questions: 1. Are prices sticky or flexible? 2. Is a price increase more likely than a decrease? 3. Are price changes synchronized? 4. Is the pricing rule state or time dependent? 5. Are price changes sizable? Answers to these questions provide some of the micro fundamentals for the design of monetary policy in this country.
    Keywords: Price Setting Behavior, Nominal Price Rigidities, Producers Price Index. Classification JEL: E31; E52; E58.
  11. By: Miguel Casares (Departamento de Economía-UPNA)
    Abstract: This paper shows a New Keynesian model where wages are set at the value that matches household´s labor supply with firm´s labor demand. Subsequently, wage stickiness brings industry-level unemployment fluctuations. After aggregation, the rate of wage in?ation is negatively related to unemployment, as in the original Phillips (1958) curve, with an additional term that provides forward-looking dynamics. The supply-side of the model can be captured with dynamic expressions equivalent to those obtained in Erceg, Henderson, and Levin (2000), though with different slope coefficients. Impulse-response functions from a technology shock illustrate the inter-actions between sticky prices, sticky wages and unemployment.
    Keywords: new Keynesian model, sticky wages, unemployment
    JEL: E12 E24 E32 J30
    Date: 2008
  12. By: Arpaia, Alfonso; Pichelmann, Karl
    Abstract: Both common macroeconomic shocks and country-specific developments have subjected the flexibility of wage setting mechanisms in the euro area to a stress test in recent years. Against this background, this paper takes a fresh look at wage flexibility in EMU and attempts to draw a few lessons from the experience of the early years. First, we set the stage for the analysis by providing a brief description of the stylised facts regarding nominal and real wage and unit labour cost developments in the euro area over the recent business cycle. Then, the paper presents an empirical assessment of wage inertia based on new econometric estimates of a Phillips-curve type wage equation across euro area countries and offers an interpretation of the main findings with respect to nominal and real wage flexibility. Finally, we investigate the cyclical responsiveness of relative competitive positions among euro area countries. We conclude that from a bird's eye perspective euro area wage and labour cost dynamics have been quite benign in the past couple of years. However, our estimates suggest that persistent cross-country differences in wage and labour cost developments have not always reflected warranted adjustment needs; they are rather indicative of an eventually insufficient degree of nominal and real wage flexibility in the euro area.
    Keywords: Phillips curve; nominal and real rigidities; unit labour costs; EMU
    JEL: J0 J30 E30 E31
    Date: 2007–06
  13. By: Kim, Jinill; Ruge-Murcia, Francisco J.
    Abstract: This paper studies Tobin's proposition that inflation "greases" the wheels of the labor market. The analysis is carried out using a simple dynamic stochastic general equilibrium model with asymmetric wage adjustment costs. Optimal inflation is determined by a benevolent government that maximizes the households' welfare. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Econometric results indicate that nominal wages are downwardly rigid and that the optimal level of grease inflation for the U.S. economy is about 1.2 percent per year, with a 95% confidence interval ranging from 0.2 to 1.6 percent.
    Keywords: Oimal inflation, asymmetric adjustment costs, nonlinear dynamics
    JEL: E4 E5
    Date: 2007
  14. By: Tarron Khemraj
    Abstract: Evidence about commercial banks’ liquidity preference says the following about the loan market in LDCs: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over an exogenous foreign interest rate, marginal transaction costs and a risk premium. The paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise tends to replicate the observed stylized facts.
    Keywords: excess bank liquidity, oligopoly loan market, monetary policy
    JEL: O10 O16 E52 G21 L13
    Date: 2008–02
  15. By: Refet S. Gürkaynak; Brian Sack; Jonathan H. Wright
    Abstract: For over ten years, the U.S. Treasury has issued index-linked debt. Federal Reserve Board staff have fitted a yield curve to these indexed securities at the daily frequency from the start of 1999 to the present. This paper describes the methodology that is used and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation (or breakeven inflation rates) to be computed. We discuss the interpretation of inflation compensation and its relationship to inflation expectations and uncertainty, offering some empirical evidence that these measures are affected by an inflation risk premium that varies considerably at high frequency. In addition, we also find evidence that inflation compensation was held down in the early years of the sample by a premium associated with the illiquidity of TIPS at the time. We hope that the TIPS yield curve and inflation compensation data, which are posted here and will be updated periodically, will provide a useful tool to applied economists.
    Date: 2008
  16. By: RIBONI, Alessandro; RUGE-MURCIA, Francisco J.
    Abstract: This short paper employs individual voting records of the Monetary Policy Committee (MPC) of the Bank of England to study heterogeneity in policy preferences among committee members. The analysis is carried out using a simple generalization of the standard Neo Keynesian framework that allows members to dier in the weight they give to output compared with in ation stabilization and in their views regarding optimal inflation and natural output. Results indicate that, qualitatively, MPC members are fairly homogeneous in their policy preferences, but that there are systematic quantitative dierences in their policy reaction functions that are related to the nature of their membership and career background.
    Keywords: Committees, reaction functions, Bank of England
    Date: 2007
  17. By: Hatipoglu, Ozan; Alper, C. Emre
    Abstract: Design of policy rules for an an emerging market central bank (EMCB) operating in an inflation-targeting framework presents additional challenges beyond those for describing the behavior of a central bank in a developed economy. Even though an inflation-targeting regime entails abolishing the exchange rate target in favor of an inflation target, it is more difficult for an EMBC to ignore movements in exchange rates given the relatively shallow depth of financial markets and the the high degree of dollarization. Additionally the EMCB may be forced to change the pursued exchange rate regime following a capital account reversal so that linear Taylor rules may be inadequate for describing EMCB reactions. We develop an empirical framework that addresses these issues and propose a new methodology to estimate unobserved variables such as expected inflation and potential output within the rule. Specifically, we employ a structural, nonlinear Kalman filter algorithm to estimate time-dependent parameters and unobserved variables, and we experiment with various exchange rate mechanisms that can be employed by an EMCB. This approach allows us to track any changes in EMCB behavior - including regime shifts - following a switch to inflation targeting. Using post-2001 data from Turkey, which is a fairly dollarized small open economy, we document that the Central Bank of Turkey has given relatively more importance to the inflation gap than to the output gap or to exchange rates, but not until some time after it had switched to an inflation-targeting framework.
    Keywords: Dual Extended Kalman Filter; Taylor Rule; inflation targeting; emerging markets
    JEL: C32 C50 E52
    Date: 2007
  18. By: Wasim Shahid Malik (Pakistan Institute of Development Economics, Islamabad); Musleh-ud Din (Pakistan Institute of Development Economics, Islamabad)
    Abstract: This paper analyses monetary policy transparency of the central bank (SBP) using the Eijffinger and Geraats (2006) index. The results show that the SBP scores 4.5 out of 15, which is lower than any of the central banks’ score in Eijffinger and Geraats (2006). The SBP is completely opaque on the procedural issues, whereas it is the least transparent in the policy transparency. On the political and the economic matters, the SBP is partially transparent. An area where the SBP is quite transparent, with moderate score, is operational transparency. In comparison with the other central banks, the SBP is at par with some of the central banks in political and operational transparency but ranks behind in all other respects.
    Keywords: Monetary Policy Transparency, State Bank of Pakistan, Developing Countries
    JEL: E52 E58
    Date: 2008
  19. By: Simona Castellani; Chiara Pederzoli; Costanza Torricelli
    Abstract: The Basel II capital accord has fostered the debate over the financial stability of the aggregate banking sector. There is a large empirical literature focused on the effects of macroeconomic disturbances on the banking system. Specifically, loan losses are an important factor for the banking stability and a stream of research in this field aims to identify explanatory variables for this critical indicator. This paper focuses on Italian banks data over the period 1990-2007 and investigates the relationship between the ratio of non-performing loans to total loans, the business cycle and firms’ indebtedness so as to test the impact of both real and financial fragility on banks’ default losses. We use a regression model with an interaction term representing the joint effect of real and financial fragility, which to our knowledge has never been applied before to Italian default data. The results show that the impact of financial fragility on default losses is enhanced by adverse economic conditions.
    Keywords: default; GDP; financial fragility
    JEL: G21 E44
    Date: 2008–01
  20. By: John Duffy
    Abstract: This chapter surveys laboratory experiments addressing macroeconomic phenomena. The first part focuses on experimental tests of the microfoundations of macroeconomic models discusing laboratory studies of intertemporal consumption/savings decisions, time (in)consistency of preferences and rational expectations. Part two explores coordination problems of interest to macroeconomists and mechanisms for resolving these problems. Part three looks at experiments in specific macroeconomic sectors including monetary economics, labor economics, international economics as well-as large scale, multi-sector models that combine several sectors simultaneously. The final section addresses experimental tests of macroeconomic policy issues.
    JEL: C9 E0
    Date: 2008–02
  21. By: Horst Siebert
    Abstract: Financial crises can have a severe impact on the real side of the economy with countries losing up to 20 percent of GDP. The paper studies rules that prevent financial instability and currency crises. These include institutional arrangements for a solid banking system, prudent regulations and appropriate principles of monetary policy. The paper studies the role of the IMF in light of the past experience in preventing currency crises and a systemic breakdown of the world’s financial system and points out necessary IMF reforms. It discusses how the IMF should adjust to the structural changes in the world economy.
    Keywords: Financial instability, rules for monetary stability, hedge funds, exchange rate crises, IMF, IMF quotas
    JEL: E5 F33 G2 P00
    Date: 2008–02
  22. By: Joseph B. Nichols
    Abstract: Households who wish to extract home equity through refinancing their mortgage face a hidden transaction cost. The real value of the fixed nominal mortgage payment declines over time with inflation. The change in the real value of the mortgage payments from taking on a new mortgage is positive and an increasing function of inflation; higher inflation thus discourages households from re-balancing their portfolio as frequently as they would otherwise. The life cycle model developed in this paper demonstrates how the share of total wealth held in housing is sensitive to the rate of inflation, even when perfectly anticipated. Households hold larger positions in home equity earlier in the life cycle and smaller positions later in the life cycle as the rate of inflation increases.
    Date: 2007
  23. By: Elena Andreou; Alessandra Pelloni; Marianne Sensier
    Abstract: We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7.
    Date: 2008
  24. By: Nektarios Aslanidis; Denise R. Osborn; Marianne Sensier
    Abstract: This paper develops an open-economy intertemporal growth model with We provide evidence on the sources of co-movement in monthly US and UK stock returns by investigating the role of macroeconomic and financial variables in a model with time-varying correlations. Cross-country communality in response is uncovered, with changes in US Federal Funds rate, UK bond yields and oil prices having negative effects in both markets. These effects do not, however, explain the marked increase in correlations from around 2000, which we attribute to time variation in the correlations of shocks to these markets. A regime-switching model captures this time variation well and shows the correlations increase dramatically around 1999-2000
    Date: 2008
  25. By: Marco Malgarini (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Since February 2003 ISAE collects quantitative inflation opinions, within its monthly survey on Italian consumers. Data confirms the severe overestimation of inflation already emerged in previous studies. Quantitative replies are in line with more traditional qualitative evaluations, indicating that overestimation is not a sort of random outcome derived from casual answers. A first explanation calls for inadequate knowledge of inflation statistics: however, scarce information does not explain per se overestimation. Indeed, overestimation varies across personal characteristics and it is strongly correlated with assessments on economic conditions, with those being more optimistic generally showing lower inflation opinions. It is possible that given a scarce statistical knowledge consumers attribute to high inflation an “economic distress” mainly determined by slow growth of disposable income and psychological factors linked to socio-economic conditions.
    Keywords: Inflation Expectations, Survey data
    JEL: D12 D8 E31
    Date: 2008–01
  26. By: James B. Bullard; Stefano Eusepi
    Abstract: We study the connections between determinacy of rational expectations equilibrium, and expectational stability or learnability of that equilibrium, in a relatively general New Keynesian model. Adoption of policies that induce both determinacy and learnability of equilibrium has been considered fundamental to successful policy in the literature. We ask what types of economic assumptions drive differences in the necessary and sufficient conditions for the two criteria. Our framework is sufficiently flexible to encompass lags in information, alternative pricing assumptions, a cost channel for monetary policy, and either Euler equation or infinite horizon approaches to learning. We are able to isolate conditions under which determinacy does and does not imply learnability, and also conditions under which long horizon forecasts make a clear difference to conclusions about expectational stability. The sharpest result is that informational delays break equivalence connections between determinacy and learnability.
    Keywords: Rational expectations (Economic theory)
    Date: 2008
  27. By: Karadi, Peter; Reiff, Adam
    Abstract: The paper explains the observed asymmetric inflation response to value-added tax (VAT) changes in Hungary by calibrating a standard sectoral menu cost model on a new micro-level CPI data set. The model is able to reproduce important moments of the data, and finds that the asymmetry can be explained by the interaction of menu costs, (sectoral) trend inflation and forward looking firms, thereby it provides direct evidence to the argument of Ball and Mankiw (1994).
    Keywords: Menu Cost; Inflation Asymmetry; Sectoral Heterogeneity; Value-Added Tax
    JEL: E30
    Date: 2007
  28. By: Luca Guerrieri; Christopher Gust; David Lopez-Salido
    Abstract: We develop and estimate an open economy New Keynesian Phillips curve (NKPC) in which variable demand elasticities give rise to changes in desired markups in response to changes in competitive pressure from abroad. A parametric restriction on our specification yields the standard NKPC, in which the elasticity is constant, and there is no role for foreign competition to influence domestic inflation. By comparing the unrestricted and restricted specifications, we provide evidence that foreign competition plays an important role in accounting for the behavior of inflation in the traded goods sector. Our estimates suggest that foreign competition has lowered domestic goods inflation about 1 percentage point over the 2000-2006 period. Our results also provide evidence against demand curves with a constant elasticity in the context of models of monopolistic competition.
    Date: 2008
  29. By: Bianca Maria Martelli (ISAE - Institute for Studies and Economic Analyses); Gaia Rocchetti (ISAE - Institute for Studies and Economic Analyses)
    Abstract: The paper presents some first analysis on the ISAE Market Service Survey Series, focusing on the subset referring to Business Services (BS). The aim of the work is to identify the cyclical characteristics of BS series in order to build a confidence indicator that, in our plan, would improve the forecasts on economic fluctuations. To this end, ISAE BS series are rebuilt by merging the quarterly information collected from 1992 Q1 to 2002 Q4, with those collected on a monthly basis since January 2003. The series are analysed in order to check whether the data arising from entrepreneurs’ opinions about their current and future economic situation are subject to business cycle fluctuations. For this purpose, we compare the BS series chronology, detected using the Bry-Boschan routine, to the ISAE official chronology based on the ISAE – Bank of Italy methodology (Altissimo et al., 2000); however, since the official chronology indicates December 2000 as the last valid peak, we add some more recent turning points on the basis of the preliminary analysis recently presented by ISAE. Furthermore, we check whether the BS series are correlated with the GDP annual rate of growth and if they improve the forecast of GDP cyclical fluctuations. Thus, on the basis of the results of the analysis of both turning point synchronization and forecast properties, we appropriately selected some BS series to built alternative confidence indicators and compare them to the current ISAE Confidence Climate. Finally, our analysis indicates that the predictive capacity of the ISAE Business Services Confidence Indicator could be improved replacing assessments and forecasts on order books with those on turnover. However, being the time series short and highly variable, our results are not conclusive.
    Keywords: Confidence Climate, Leading Indicators, Turning Points.
    JEL: E32 E37 E39
    Date: 2007–12
  30. By: Mardi Dungey; Adrian Pagan
    Abstract: Dungey and Pagan (2000) present an SVAR model of the Australian economy which models macro-economic outcomes as transitory deviations from a deterministic trend. In this paper we extend that model in two directions. Firstly, we relate it to an emerging literature on DSGE modelling of small open economies. Secondly, we allow for both transitory and permanent components in the series and show how this modification has an impact upon the design of macroeconomic models.
    Date: 2008–01–10
  31. By: Don Kim
    Abstract: This paper discusses various challenges in the specification and implementation of “macro-finance” models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. I classify macro-finance models into pure latent-factor models (“internal basis models”) and models which have observed macroeconomic variables as state variables (“external basis models”), and examine the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro variables and their potentially adverse effect on the specification of external basis models. I also discuss the challenge of addressing features like structural breaks and time-varying inflation uncertainty. Empirical difficulties in the estimation and evaluation of macro-finance models are also discussed in detail.
    Date: 2008
  32. By: Daniel Burren
    Abstract: In this paper, I study the drop of real GDP volatility which has been observed in the United States during the postwar period. This paper thoroughly estimates how much sectoral shifts contributed to this phenomenon called the Great Moderation. In a short section, Stock and Watson (2003) find that this contribution is negligible, however, their data is disaggregated only up to 10 sectors. Blanchard and Simon (2001) come to the same result. Using a new estimation method and more disaggregated data, I find that sectoral shifts contributed between 15% and 30% to the great moderation. Moreover, I find that if in the year 1949 sectoral shares had been equal to what they were in 2005, then the conditional and unconditional standard deviation of GDP growth would have been, on average, 20-25% lower in the postwar period. Finally, I find that the shift out of durable goods production has significantly stabilized real GDP growth. As a methodological contribution, I show how to use the particle filter to estimate latent covariance matrices when they follow a Wishart autoregressive process of order one. I use this in order to get, for each observation period, an estimation of the covariance matrix of the sectoral growth rates. Since real GDP growth is the sum of these sectoral growth rates weighted by the sectoral shares, it is then straightforward to use these covariance matrices to express the conditional variance of GDP growth in each period as a function of sectoral shares. Computing the unconditional variance of GDP growth as a function of sectoral shares is a bit more involved, but also quite easy using Monte Carlo simulations. My methodology to estimate covariance matrices is preferable to alternatives like estimating a multivariate GARCH model or using a Nadaraya-Watson estimator for the following reasons: The multivariate GARCH model has undesirable properties for the Monte Carlo simulations and involves estimating a large number of parameters. The Nadaraya-Watson estimator, on the other hand, does not guarantee to give positive definite covariance matrices due to the limited number of observations available for estimating the relatively big covariance matrices.
    Keywords: Great moderation; Sectoral Shifts; Stochastic Volatility; Wishart Autoregressive Process; Particle Filter; ARCH-GARCH; Bayesian Estimation
    JEL: C11 C32 E32
    Date: 2008–01
  33. By: Erik Hurst
    Abstract: This paper summarizes five facts that have emerged from the recent literature on consumption behavior during retirement. Collectively, the recent literature has shown that there is no puzzle with respect to the spending patterns of most households as they transition into retirement. In particular, the literature has shown that there is substantial heterogeneity in spending changes at retirement across consumption categories. The declines in spending during retirement for the average household are limited to the categories of food and work related expenses. Spending in nearly all other categories of non-durable expenditure remains constant or increases. Moreover, even though food spending declines during retirement, actual food intake remains constant. The literature also shows that there is substantial heterogeneity across households in the change in expenditure associated with retirement. Much of this heterogeneity, however, can be explained by households involuntarily retiring due to deteriorating health. Overall, the literature shows that the standard model of lifecycle consumption augmented with home production and uncertain health shocks does well in explaining the consumption patterns of most households as they transition into retirement.
    JEL: D11 E21 J26
    Date: 2008–02
  34. By: Linda S. Goldberg; Cédric Tille
    Abstract: The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy.
    JEL: F3 F4
    Date: 2008–02
  35. By: Massimo Guidolin; Stuart Hyde
    Abstract: We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets. We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of returns and short-term rates. This implies that we cannot reject the hypothesis that the regimes driving the markets in the small open economy are largely synchronous with those typical of the major markets. We compute time-varying Sharpe ratios and recursive mean-variance portfolio weights and document that a regime switching framework produces out-of-sample portfolio performance that outperforms simpler models that ignore regimes. Interestingly, the portfolio shares derived under regime switching dynamics implies a fairly low committment to the Irish market, in spite of its brilliant unconditional risk-return trade-off.
    Keywords: Stock exchanges
    Date: 2008
  36. By: Charles Engel; Jian Wang
    Abstract: Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries. Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models.
    JEL: E32 F3 F4
    Date: 2008–02
  37. By: Emmanuel Farhi; Xavier Gabaix
    Abstract: We propose a new model of exchange rates, which yields a theory of the forward premium puzzle. Our explanation combines two ingredients: the possibility of rare economic disasters, and an asset view of the exchange rate. Our model is frictionless, has complete markets, and works for an arbitrary number of countries. In the model, rare worldwide disasters can occur and affect each country's productivity. Each country's exposure to disaster risk varies over time according to a mean-reverting process. Risky countries command high risk premia: they feature a depreciated exchange rate and a high interest rate. As their risk premium mean reverts, their exchange rate appreciates. Therefore, currencies of high interest rate countries appreciate on average. To make the notion of disaster risk more implementable, we show how options prices might in principle uncover latent disaster risk, and help forecast exchange rate movements. We then extend the framework to incorporate two factors: a disaster risk factor, and a business cycle factor. We calibrate the model and obtain quantitatively realistic values for the volatility of the exchange rate, the forward premium puzzle regression coefficients, and near-random walk exchange rate dynamics. Finally, we solve a model of stock markets across countries, which yields a series of predictions about the joint behavior of exchange rates, bonds, options and stocks across countries. The evidence from the options market appears to be supportive of the model.
    JEL: E43 E44 F31 G12 G15
    Date: 2008–02
  38. By: Lamont Black; Diana Hancock; Wayne Passmore
    Abstract: We consider the business strategy of some banks that provide relationship loans (where they have loan origination and monitoring advantages relative to capital markets) with core deposit funding (where they can pass along the benefit of a sticky price on deposits). These "traditional banks" tend to lend out less than the deposits they take in, so they have a "buffer stock" of core deposits. This buffer stock of core deposits can be used to mitigate the full effect of tighter monetary policy on their bank-dependent borrowers. In this manner, the business strategy of "traditional banks" acts as a "core deposit mitigation channel" to provide funds to bank-dependent borrowers when there are monetary shocks. In effect, there is no bank lending channel of monetary policy associated with these traditional banks. ; In contrast, other banks mainly rely on managed liabilities that are priced at market rates. These banks do not have to shift from insured deposits to managed liabilities in response to tighter monetary policy. At the margin, their loans are already funded with managed liabilities. For these banks as well, there is no unique bank lending channel of monetary policy. ; The only banks that are likely to raise loan rates substantially in response to an increase in the federal funds rate are banks with a high proportion of relationship loans that are close to a loan-to-core deposit ratio of one. These banks must substitute higher cost nondeposit liabilities, which have an external finance premium, for core deposits, which do not because of deposit insurance. Some of these banks may also face higher marginal costs as their loan-to-core deposit ratio approaches one because of the costs associated with lending to default-prone relationship borrowers. It is among these banks (which we refer to as high relationship lenders), and only these banks, that we find evidence of a bank lending channel - they significantly reduce lending in response to a monetary contraction. Importantly, these banks hold only a small fraction of U.S. banking assets. Thus, in the United States, the bank lending channel seems limited in scope and importance, mainly because so few banks that specialize in relationship lending switch from core deposits to managed liabilities in response to changes in interest rates.
    Date: 2007
  39. By: Massimiliano Marcellino; Christian Schumacher
    Abstract: This paper compares different ways to estimate the current state of the economy using factor models that can handle unbalanced datasets. Due to the different release lags of business cycle indicators, data unbalancedness often emerges at the end of multivariate samples, which is sometimes referred to as the "ragged edge" of the data. Using a large monthly dataset of the German economy, we compare the performance of different factor models in the presence of the ragged edge: static and dynamic principal components based on realigned data, the Expectation-Maximisation (EM) algorithm and the Kalman smoother in a state-space model context. The monthly factors are used to estimate current quarter GDP, called the "nowcast", using different versions of what we call factor-based mixed-data sampling (Factor-MIDAS) approaches. We compare all possible combinations of factor estimation methods and Factor-MIDAS projections with respect to now-cast performance. Additionally, we compare the performance of the nowcast factor models with the performance of quarterly factor models based on time-aggregated and thus balanced data, which neglect the most timely observations of business cycle indicators at the end of the sample. Our empirical findings show that the factor estimation methods don't differ much with respect to nowcasting accuracy. Concerning the projections, the most parsimonious MIDAS projection performs best overall. Finally, quarterly models are in general outperformed by the nowcast factor models that can exploit ragged-edge data.
    Keywords: nowcasting, business cycle, large factor models, mixed-frequency data, missing values, MIDAS
    JEL: E37 C53
    Date: 2008
  40. By: Mark Bils (University of Rochester); Yongsung Chang (University of Rochester); Sun-Bin Kim (Korea University)
    Abstract: We introduce worker differences in labor supply, reflecting differences in skills and assets, into a model of separations, matching, and unemployment over the business cycle. Separating from employment when unemployment duration is long is particularly costly for workers with high labor supply. This provides a rich set of testable predictions across workers: those with higher labor supply, say due to lower assets, should display more procyclical wages and less countercyclical separations. Consequently, the model predicts that the pool of unemployed will sort toward workers with lower labor supply in a downturn. Because these workers generate lower rents to employers, this discourages vacancy creation and exacerbates the cyclicality of unemployment and unemployment durations. We examine wage cyclicality and employment separations over the past twenty years for workers in the Survey of Income and Program Participation (SIPP). Wages are much more procyclical for workers who work more. This pattern is mirrored in separations; separations from employment are much less cyclical for those who work more. We do see for recessions a strong compositional shift among those unemployed toward workers who typically work less.
    Date: 2008–01
  41. By: Charles Grant (University of Reading, Whiteknights, Reading, RG6 6AH, United Kingdom.); Tuomas A. Peltonen (DG International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The study quantifies stock market and housing market wealth effects on households' non-durable consumption using Italian household panel data (SHIW) of 1989-2002. We found all households react similarly to aggregate housing and stock market gains. We also found statistically and economically significant housing wealth effects with a marginal propensity to consume out of idiosyncratic housing wealth gains to be over 8 percent. The results from idiosyncratic equity wealth effects were lower, at around 0.4 percent. We also found that older households react more to changes in housing wealth. JEL Classification: D12, E21.
    Keywords: Marginal Propensity to Consume, Housing, Equities.
    Date: 2008–01
  42. By: von der Lippe, Peter
    Abstract: The fact that the famous price index of Laspeyres is unable to pass the so called inversion test (IT) gave rise to the idea that this formula tends to measure "spurious inflation" which renders it useless and fallacious. In the IT prices and quantities of n goods, relating to two periods, the base period 0 and the current period t are interchanged in way that the sums of prices, quantities as well as values (products of prices and quantities) remain constant. It therefore appears nonsensical that Laspeyres' price index nonetheless indicates "inflation" under such conditions. Yet this result can be explained and justified. The paper shows that violation of the IT does not prove uselessness of an index function. On the contrary a number of good reasons can be given why compliance with the IT does not at all make a formula preferable to other formulas and that the message of the IT and its relation to other tests is rather dubious.
    Keywords: Index theory; price indices; axiomatic approach in statistics
    JEL: C43 E31
    Date: 2008–02–07
  43. By: Alain Guay; Florian Pelgrin
    Abstract: In this paper, we investigate the information content of implied probabilities (Back and Brown, 1993) to improve estimation in unconditional moment conditions models. We propose and evaluate two 3-step euclidian empirical likelihood estimators and their bias-correction versions for weakly dependent data. The first one is the time series extension of the 3S-EEL proposed by Antoine, Bonnal and Renault (2007).The second one is new and uses in contrast only an estimator of the weighting matrix at an efficient 2-step GMM estimator, while leaving unrestricted the Jacobian matrix. Both estimators use implied probabilities to achieve higher-order improvements relative to the traditional GMM estimator. A Monte-Carlo study reveals that the finite and large sample properties of the (bias-corrected) 3-step estimators compare very favorably to the existing approaches: the 2-step GMM and the continuous updating estimator. As an application, we re-assess the empirical evidence regarding the New Keynesian Phillips curve in the US.
    Keywords: Information-based inference, Implied probabilities, Weak identification, Generalized method of moments, Philips curve
    JEL: C13 C14 E31
    Date: 2007
  44. By: Selim Elekdag; Rene Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti
    Abstract: We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labor income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.
    JEL: E66 F32 F47
    Date: 2008–02
  45. By: Anindya Banerjee; Massimiliano Marcellino; Igor Masten
    Abstract: We conduct a detailed simulation study of the forecasting performance of diffusion index-based methods in short samples with structural change. We consider several data generation processes, to mimic different types of structural change, and compare the relative forecasting performance of factor models and more traditional time series methods. We find that changes in the loading structure of the factors into the variables of interest are extremely important in determining the performance of factor models. We complement the analysis with an empirical evaluation of forecasts for the key macroeconomic variables of the Euro area and Slovenia, for which relatively short samples are officially available and structural changes are likely. The results are coherent with the findings of the simulation exercise, and confirm the relatively good performance of factor-based forecasts also in short samples with structural change.
    Keywords: Factor models, forecasts, time series models, structural change, short samples, parameter uncertainty
    JEL: C53 C32 E37
    Date: 2008
  46. By: Andrés Felipe Giraldo Palomino
    Abstract: En el presente trabajo se hace una comparación institucional del funcionamiento del Banco de la República bajo los dos regímenes que han tenido a su cargo la política monetaria en Colombia: La Junta Monetaria y la Junta Directiva. Para ello se usa la teoría de la inconsistencia dinámica y la literatura de los costos de la inflación para justificar la búsqueda por parte de la sociedad de la eliminación del sesgo inflacionario y de la existencia de una política monetaria anti-inflacionaria. Así mismo, se realiza una evaluación estadística del desempeño macroeconómico bajo las dos estructuras enfatizando la importancia de la estructura institucional en la búsqueda de mejores políticas monetarias. Los resultados no son concluyentes en decir cual de las dos muestran un mejor desempeño, en parte debido a la falta de datos para evaluar a la JD, aunque se muestra que la estructura de inflación objetivo puede contribuir a que la estructura institucional actual muestre un mejor desempeño en el futuro.
    Date: 2008–02–05
  47. By: George Alessandria; Joseph Kaboski; Virgiliu Midrigan
    Abstract: Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. Our study of 6 current account reversals following large devaluation episodes in the last decade provide strong support for the model's predictions.
    JEL: E31 F12
    Date: 2008–02
  48. By: William Kerr; Ramana Nanda
    Abstract: We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau’s Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in “churning” at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also “democratize” entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.
    Keywords: banking, financial constraints, entrepreneurship, entry, exit, creative destruction, growth, deregulation
    JEL: E44 G21 L26 L43 M13
    Date: 2007–12
  49. By: William Kerr (Harvard Business School, Entrepreneurial Management Unit); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in 'churning' at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also 'democratize' entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.
    Keywords: banking, financial constraints, entrepreneurship, entry, exit, creative destruction, growth, deregulation.
    JEL: E44 G21 L26 L43 M13
    Date: 2006–12
  50. By: Rachida Ouysse (School of Economics, The University of New South Wales); Chris Nicholas (The University of New South Wales)
    Abstract: In this paper we investigate the time variation in the short term growth determinants through five subperiod cross sectional growth regressions. We also use a panel regression to analyze the long term pervasive drivers of cross-country growth. A fully Bayesian approach in the spirit of Fernandez, Ley and Steel (2001) is used to determine the likely candidates for the best approximating growth model. Although the findings support the optimistic view that growth regression has empirical merit, there is evidence of time variation of the growth determinants. Some of the variables like, Ratio of Real Domestic Investment to GDP, Real GDP per capita, and Sub-Saharian African Dummy emerge as long term growth indicators, while Fertility Rate loses its historical status as ”core growth” factor. The findings also show that the convergence effect of Real GDP per Capita happens during the middle subperiods. Short run analysis shows evidence of a delay in the growth rate response to the initial conditions followed by an acceleration effect before hitting a plateau.
    Date: 2008–02
  51. By: Rémy Herrera (Centre d'Economie de la Sorbonne); Mauricio Sabadini (Centre d'Economie de la Sorbonne et Université fédérale du Espirito Santos)
    Abstract: This paper compares the economic policies of the "left-wing" governements in France (1981-1986) and Brazil (2003-2007) and analyzes the causes, manifestations et consequences of the failure of these "reformisms". The originality of the French neoliberalism is to have been introduced by "socialist" leaders - the strategic turning point being probably taken as soon as the meeting of F. Mitterrand with R. Reagan and M. Thatcher in Versailles summit in June 1982. The Lula government did not diverge from the line of neoliberal reforms of its predecessors, and has even deepened it. In both cases, the peoples were thus maintained apart, as if one was afraid of them and reduced to a passive role of spectators of politics -like watching a scorer play. The result ? France 0 - 0 Brazil.
    Keywords: Economic policy, South, France, Brazil, neoliberalism, finance.
    JEL: E5 E6 F43 G15 H6 O11
    Date: 2008–01
  52. By: Giuseppe Moscarini; Francis G. Vella
    Abstract: Do workers sort more randomly across different job types when jobs are harder to find? To answer this question, we study the mobility of male workers among three-digit occupations in the matched files of the monthly Current Population Survey over the 1979-2004 period. We clean individual occupational transitions using the algorithm proposed by Moscarini and Thomsson (2008). We then construct a synthetic panel comprising annual birth cohorts, and we examine the respective roles of three potential determinants of career mobility: individual ex ante worker characteristics, both observable and unobservable, labor market prospects, and ex post job matching. We provide strong evidence that high unemployment somewhat offsets the role of individual worker considerations in the choice of changing career. Occupational mobility declines with age, family commitments and education, but when unemployment is high these negative effects are weaker, and reversed for college education. The cross-sectional dispersion of the monthly series of residuals is strongly countercyclical. As predicted by Moscarini (2001)'s frictional Roy model, the sorting of workers across occupations is noisier when unemployment is high. As predicted by job-matching theory, worker mobility has significant residual persistence over time. Finally, younger cohorts, among those in the sample for most of their working lives, exhibit increasingly low unexplained career mobility.
    JEL: E24 E32 J62
    Date: 2008–02
  53. By: Prasad V. Bidarkota (Department of Economics, Florida International University)
    Abstract: We study the effects of incorporating incomplete information in the recently developed long run risks model of asset pricing. Studying the effects of incomplete information in such a setting is tractable, especially in the homoskedastic case with no fluctuating economic uncertainty. The incomplete information model is solved using approximate analytical methods as in the complete information framework analyzed in the literature. Model implications on moments of endogenous variables of interest including rates of return are compared in the long run risks model with and without incomplete information.
    Keywords: asset pricing; long run risks; incomplete information; Kalman filter; equity returns; riskfree returns
    JEL: G12 G13 E43
    Date: 2008–02
  54. By: Klinger, Sabine (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Wolf, Katja (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "From 1992 to 2005, part-time employment in Western Germany has grown by 82 percent, whereas full-time employment has shrunk by 14 percent. Behind these general figures there is substantial variation of employment schemes across industries. Beside this, the share of the service industries in gross value added has grown, whereas the importance of manufacturing and construction has decreased considerably. We analyse the extent to which the changes in part-time and full-time employment can be explained by changes in the sectoral composition of the economy or by other factors. Using West German yearly data from 1992-2005, we estimate a regression analogue shiftshare model. It allows us to divide the overall development of employment into the business cycle effect, the sector effect and the employment status effect. Moreover, we control for sectoral gross value added, unit labour costs and working time. As a methodological contribution we extend the shift-share approach into a dynamic panel model. We use a bias-corrected least squares dummy variable (LSDVc) estimator which is appropriate for our data structure. As a second step, we decompose the fixed effects of the LSDVc estimation into parameters for part-time, full-time, and self-employment as well as six sectors. Our results confirm previous deterministic shift-share analyses: Characteristics inherent in full-time or part-time employment dominantly explain changes in employment patterns in Western Germany. The sectoral composition of the economy plays a significant but minor role. The model extensions reveal that much of the status and sector effects in the simple shiftshare analysis can be captured by determinants of labour demand." (author's abstract, IAB-Doku) ((en))
    Keywords: Vollzeitarbeit - Determinanten, Teilzeitarbeit - Determinanten, Wirtschaftsstrukturwandel, Shift-Analyse, Arbeitskräftenachfrage, Westdeutschland, Bundesrepublik Deutschland
    JEL: C33 E24 J21 J23
    Date: 2008–02–15
  55. By: Murat Tasci
    Abstract: This paper studies amplification of productivity shocks in labor markets through on-the-job-search. There is incomplete information about the quality of the employee-firm match which provides persistence in employment relationships and the rationale for on-the-job search. Amplification arises because productivity changes not only affect firms’ probability of contacting unemployed workers but also of contacting already employed workers. Since higher productivity raises the value of all matches, even low quality matches become productive enough to survive in expansions. Therefore the measure of workers in low quality matches is greater when productivity is high, implying a higher probability of switching to another match. In other words, firms are more likely to meet employed workers in expansions and those they meet are more likely to accept a firm’s job offer because they are more likely to be employed in a low quality match. This introduces strongly procyclical labor market reallocation through procyclical job-to-job transitions.
    Keywords: Job hunting ; Labor market ; Business cycles
    Date: 2007
  56. By: Ken Jameson
    Abstract: On many measures, the indigenous movement in Ecuador has been the most successful in Latin America. This is particularly the case in political terms where they were key players until leaving the Gutiérrez cabinet. Their influence on the direction of economic policy has been minimal, however, and the rapid economic changes undertaken by the Correa administration since 2007 may marginalize them further. This paper examines Ecuador’s checkered economic performance in the Washington Consensus period and the notable changes undertaken by Pres. Correa. These changes are then set in the context of the economic programs of the indigenous movement, specifically of CONAIE (Confederación de Nacionalidades Indígenas del Ecuador). This allows us to isolate several significant areas of overlap where the interests of the indigenous movement and of the Correa administration coincide and where collaboration on economic policy may be feasible.
    Keywords: Ecuador, Indigenous movement, President Correa, Policy Space
    JEL: E65 O54 P40 Z13
    Date: 2008–05

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