nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒02‒23
35 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness By Giovanni Di Bartolomeo; Marco Manzo; Francesco Giuli
  2. Estimating the effects of fiscal policy under the budget constraint By Claeys Peter
  3. Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective By Giovanni Di Bartolomeo; Marco Manzo
  4. Are Central Bank Preferences Asymmetric? A Comment By Minford, Patrick; Srinivasan, Naveen
  5. Gender differences in the effect of monetary policy on employment: The case of nine OECD countries. By Takhtamanova, Yelena; Sierminska, Eva
  6. A Realistic Model for Official Interest Rates By Juan de Dios Tena; Edoardo Otranto
  7. Optimal fiscal and monetary policy in customer markets By David M. Arseneau; Sanjay K. Chugh
  8. How do nominal and real rigidities interact? A tale of the second best By Duval, Romain; Vogel, Lukas
  9. The New Keynesian Phillips curve tested on OECD panel data By Bjørnstad, Roger; Nymoen, Ragnar
  10. The Impact of the FOMC's Monetary Policy Actions on the growth of Credit Risk: the Monetary Policy - Liquidity Paradox By Kwamie Dunbar
  11. Private Consumption and Flourishing Exports Keep the Region on High Growth Track By Vladimir Gligorov; Leon Podkaminer
  12. Some Empirical Evidence on the Effects of U.S. Monetary Policy Shocks on Cross Exchange Rates By Sarantis Kalyvitis; Ifigeneia Skotida
  13. Monatery Policy Surprises and the Expectations Hypothesis at the Short End of the Yield Curve By Selva Demiralp
  14. Unit Roots Tests with Smooth Breaks: An Application to the Nelson-Plosser Data Set By Pascalau, Razvan
  15. Idiosyncratic Labour Income Risk and Aggregate Consumption: an Unobserved Component Approach By Lorenzo Pozzi
  16. Productivity Shocks, Unemployment Persistence, and the Adjustment of Real Wages in OECD Countries By Pascalau, Razvan
  17. Comovements between US and UK stock prices: the roles of macroeconomic information and timevarying conditional correlations By Nektarios Aslanidis; Denise R. Osborn; Marianne Sensier
  18. The Currency Equivalent Index and the Current Stock of Money By Kelly, Logan J
  19. On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms By Giorgio Fagiolo; Andrea Roventini
  20. Mr. Wicksell and the global economy: What drives real interest rates? By Michal Brzoza-Brzezina; Jesus Crespo Cuaresma
  21. Unemployment and Mortality in France, 1982-2002 By Tom Buchmueller; Michel Grignon; Florence Jusot
  22. Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks By C.S. Bos; S.J. Koopman; M. Ooms
  23. Dominancia Fiscal versus Dominancia Monetaria: Evidencia para Colombia, 1990-2007 By Ignacio Lozano; Magaly Herrera
  24. The Price Setting Behavior in Colombia:Evidence from PPI Micro Data By Juan Manuel Julio; Héctor Manuel Zárate
  25. Unsecured Debt, Consumer Bankruptcy, and Small Business By Césaire A. Meh; Yaz Terajima
  26. Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America By Roberto Chang
  27. Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters By Siem Jan Koopman; Max I.P. Mallee; Michel van der Wel
  28. The Effect of Consumers' Expectations in a Booming Housing Market By Jan Rouwendal; Simonetta Longhi
  29. How do Expenditure Rules affect Fiscal Behaviour? By Peter Wierts
  30. Central bank policy rate guidance and financial market functioning By Richhild Moessner; William Nelson
  31. Macro News, Riskfree Rates, and the Intermediary By Albert J. Menkveld; Asani Sarkar; Michel van der Wel
  32. Optimal Income Tax Policy and Wage Subsidy By Sheikh Selim
  33. Care for sick children as a proxy for gender equality in the family By Eriksson, Rickard; Nermo, Magnus
  34. Ageing and the Relative Price of Nontradeables By Leon Bettendorf; Hans Dewachter
  35. How Well do Individuals Predict the Selling Prices of their Homes? By Hugo Benítez-Silva; Selcuk Eren; Frank Heiland; Sergi Jiménez-Martín

  1. By: Giovanni Di Bartolomeo (University of Teramo); Marco Manzo; Francesco Giuli
    Abstract: This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities introduced by Dixit and Lambertini (American Economic Review, 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e. the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers¢ output target is equal to the natural level.
    Keywords: Monetary-fiscal policy interactions, uncertainty, symbiosis.
    JEL: E61 E63
    Date: 2008–02–17
  2. By: Claeys Peter
    Abstract: I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The main finding is that fiscal consolidation has expansionary effects on output and inflation. Non-Keynesian effects also dominate when debt expands. The expectation of policy adjustments to guarantee fiscal sustainability by future tax rises or spending cuts contracts output today.
    Keywords: Fiscal policy, sustainability, spending, taxes, common trends, SVAR
    JEL: E42 E63 E65
    Date: 2008–02
  3. By: Giovanni Di Bartolomeo (University of Teramo); Marco Manzo
    Abstract: We investigate the effect of fiscal policy on equilibrium determinacy in a New Keynesian economy with rule-of-thumb (liquidity constrained) consumers and capital accumulation by focusing on the inter-action between monetary policy and taxation under the assumption of balanced budget. Our main finding is that taxation of firms¢ monopoly rents reduces the parameter range within which the Taylor principle is insufficient to guarantee equilibrium determinacy; hence it supports the determinacy of the rational expectation equilibrium.
    Keywords: Rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, tax distortions, balanced government budget.
    JEL: E61 E63
    Date: 2008–02–15
  4. By: Minford, Patrick (Cardiff Business School); Srinivasan, Naveen
    Abstract: A recent paper by Ruge-Murcia [European Economic Review 48 (2004), 91-107] on asymmetric central bank objectives provides a new perspective on the policy roots of inflation in developed economies. More precisely, the paper demonstrates that if the distribution of the supply shocks is normal, then the reduced form solution for inflation implies a positive (or negative) relation between average inflation and the variance of shocks. We argue that the evidence offered in support of this hypothesis suffers from lack of identification because Phillips curve nonlinearity combined with quadratic central bank preferences yield the same reduced form solution for inflation. If so, estimating reduced form for inflation will not be able to discriminate between these models. Yet they have quite different implications for policy. Other, structural, evidence is needed.
    Keywords: Preference asymmetry; Phillips curve nonlinearity; Identification
    JEL: E52 E58 E61
    Date: 2008–02
  5. By: Takhtamanova, Yelena (Reserve Bank of San Francisco); Sierminska, Eva (CEPS/INSTEAD and DIW Berlin)
    Abstract: In many countries, the focus of monetary policy is increasingly shifting to low and stable inflation as it provides many benefits to the economy. However, there is evidence that costs of inflation reduction are inequitably distributed by gender in developing countries. This paper addresses employment costs of inflation reduction in developed countries. Using quarterly data for 1980-2006, we examine gender and country differences in the effects of interest rate on employment in nine OECD countries. We look at total employment, as well as employment dis-aggregated by three sectors: agriculture, industry and services. We find that the link between monetary policy instruments (short-term interest rates) and employment in the industrial countries under investigation is neither strong nor varies by gender.
    Keywords: employment; IS curve ; interest rates ; monetary policy inflation ; compensation
    JEL: E4 E5 J2
    Date: 2008–02
  6. By: Juan de Dios Tena; Edoardo Otranto
    Abstract: This paper extends the VAR methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates: 1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers; and 2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find evidence of both types of asymmetries. Moreover, the operational independence granted to the Bank of England involved drastic changes on the interpretation of the reaction function of the monetary authority and the consequences of monetary shocks. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission.
    Keywords: Monetary shocks, impulse-response functions, monetary policy,
    JEL: C22 C32 E52
    Date: 2008
  7. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: A growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics. We investigate whether the existence of such customer relationships has important consequences for the conduct of both long-run and short-run policy. Our central result is that when consumers and firms are engaged in long-term relationships, the optimal rate of price inflation volatility is very low even though all prices are completely flexible. This finding is in contrast to those obtained in first-generation Ramsey models of optimal fiscal and monetary policy, which are based on Walrasian markets. Echoing the basic intuition of models based on sticky prices, unanticipated inflation in our environment causes a type of relative price distortion across markets. Such distortions stem from fundamental trading frictions that give rise to long-lived customer relationships and makes pursuing inflation stability optimal.
    Date: 2008
  8. By: Duval, Romain; Vogel, Lukas
    Abstract: This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.
    Keywords: DSGE model; price stickiness; real wage rigidity; oil price shocks
    JEL: E30 F41 Q43
    Date: 2007–10–31
  9. By: Bjørnstad, Roger; Nymoen, Ragnar
    Abstract: In their work, Galí, Gertler and Lopez-Salido, GGL, assert that the hybrid New Keynesian Phillips curve (NPC) with dominance of forward-looking behavior and real marginal costs is robust to choices of estimation procedure, details of variables definitions and choice of data samples. In an estimation on panel data from OECD countries we replicate the typical empirical NPC from country studies. However, we also test an alternative economic interpretation of the empirical correlations. Specifically we find that the expected rate of future inflation and real marginal costs serve as replacements for equilibrium correction terms that are implied by the general imperfect competition model of wage and price setting. As a explanatory model of OECD inflation, the NPC is encompassed by an existing theory.
    Keywords: New Keynesian Phillips Curve, forward-looking price setting, panel data model, encompassing
    JEL: C23 C52 E12 E31
    Date: 2008
  10. By: Kwamie Dunbar (University of Connecticut)
    Abstract: Credit risk is influenced by interest rates and market liquidity. This paper examines the direct and indirect impacts of unexpected monetary policy shifts on the growth of corporate credit risk, with the aim of quantifying the size and direction of the response. The results surprisingly indicate that monetary policy and liquidity impulses move counter to each other in their effects on credit risk ("The monetary policy-liquidity paradox"). The analysis indicates that while contractionary monetary policy creates tight money which subsequently leads to a slowing in the growth of credit risk and a reduction of liquidity in credit markets, reduced liquidity indirectly affects credit risk by accelerating its growth. The net effect of these transitory opposing forces generates the final impact on credit risk. An unexpected policy shifts is captured via a combination of the forward Fed fund rate curve and the Fed's FOMC policy announcements. Following the approach of Bernanke and Kuttner (2005), Hausman and Wongswan (2006) who examined asset prices under FOMC announcements, the study found that the estimated credit risk responses to FOMC announcements vary across credit qualities. Hence the analyses indicates that a typical unanticipated 25 basis point cut in the target fed funds rate generally resulted in an acceleration in the growth of credit risk by 0.50 percent for AAA rated corporate grade debt, and by 3.5 percent for BB rated corporate debt. Moreover, the study found a direct effect of the FOMC's policy instrument on market liquidity which had a significant effect on the growth in credit risk. The results indicate that a 1 percentage point increase in liquidity for AAA and CCC rated bonds resulted in a 0.7% and 52.45% decrease in the rate of growth in credit risk respectively.
    Keywords: Credit Risk, Default Risk, Credit Default Swap, Monetary Policy, Credit Markets, Financial Markets, Vector Autoregressive Model, Federal funds rate.
    Date: 2008–02
  11. By: Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Fast economic growth - in excess of 5% per year - continues in most New EU Member States (NMS). Growth in Bulgaria and Romania (which joined the EU on 1 January 2007) was also accelerating throughout 2006. Everywhere, except Hungary, GDP growth has been driven predominantly by domestic demand. External trade, which significantly boosted GDP growth in a number of NMS in 2005, has been losing significance and continues to be a drag on growth in Bulgaria and Romania. wiiw growth forecasts of the GDP in individual NMS in 2007 and 2008 are looking very good. It is expected that household consumption will continue to rise strongly. Rising employment and wages (strengthening under the impact of emerging labour shortages) will be supportive. Rising remittances of migrant workers would be adding to fast rising consumer spending. Gross fixed capital investment is expected to remain strong in most NMS. With the exception of Hungary, fiscal policies will not interfere with real growth. The slight deceleration of growth in the EU-15 expected in 2007 is not likely to restrict the growth of both NMS exports and their overall GDP too much as further gains on industrial unit labour costs are expected. Given the ongoing structural changes and quality improvements in production and exports, the NMS should continue to gain market shares even despite further currency appreciation. However, growth in imports responding to growing domestic demand will be reducing the contribution of trade to GDP growth. This contribution is likely to be negative in the 'old' NMS, but small. In Bulgaria and Romania, the contributions of external trade to growth will be negative and large. Unlike the 'old' NMS, these two countries will be running very high current account deficits and rely on rising private foreign debt in order to finance consumption and investments. The risk of making big errors in growth forecasts for the 'old' NMS is fairly low. Their fundamentals are nowadays much sounder than in the past (Hungary being temporarily an exception). The rates of inflation are quite low and firmly under control. Interest rate differentials vs. the major international currencies are also low, falling, or even negative. Incentives for potentially destabilizing speculative capital inflows (and outflows) are therefore weak. Nominal currency appreciation is likely to continue, signifying the NMS' economic strength rather than potential weakness. The estimates of GDP growth rates for Bulgaria and Romania may be less certain. Both countries are growing turbulently. But, as in the Baltic countries, their growth is to a large extent induced by booming household consumption which is credit-driven and fed by excessive imports. Yet the experience of the Baltic countries indicates that such a type of growth can go on for a very long time. However, there are many examples of such debt-financed expansions coming to a rather sticky end. Thus, it might come as no surprise were the rising debt burden to put a lid on further expansion in Bulgaria and Romania. The Balkan economies continue to grow despite political risks and external shocks. Consumption is the main source of growth, with investments also increasingly contributing. High exports are accompanied by high imports and external balances remain strongly negative. Price and exchange rate stability, however, remain manageable because of strong growth of productivity and downward pressure on wages from excess supply of labour. The expectation of sustained growth is supporting growth of foreign investments in privatized assets but also increasingly in green-field projects. Fast rising prices of assets and declining interest rates due to strong credit expansion are proving worrisome for the central banks, which fear asset bubbles and weaknesses in the banking sector. These challenges are met with a tightening of monetary policy, which has led to some moderation of growth rates. Overall prospects are positive for growth and stability in the short and medium run. The main risks to positive expectations emanate from remaining political problems and from doubts about the process of EU integration and accession. The major political risk is connected with the upcoming decision on the Kosovo status. If that risk is managed well and if other political problems are addressed that will make it possible for all the countries in the region to either sign association agreements with the EU or continue or start negotiations on membership in the EU, rather positive economic news should be coming out steadily from the Balkans. That would also help the region to address the serious social risks, especially those connected with high or very high unemployment. Overall, prospects for growth are good in the short and medium run and prospects for stability are risky in the short run and good in the medium run. The region as a whole should be included in the EU by 2015, except perhaps for Kosovo and Turkey. Russian economic growth was once more over 6% in 2006, the cumulated GDP has increased by more than 40% since 2000. GDP growth is driven by the surging private consumption, recently also by investments. Owing to sluggish exports and booming imports, the contribution of real net exports to GDP growth has been negative already since 2003. The economic outlook remains positive with both consumption and investments (including FDI) growing rapidly. However, wiiw expects growth to settle between 5% and 6% in the coming years. With more oil and gas money as well as power consolidation at home, Russia's self confidence will grow further. In Ukraine, GDP growth accelerated markedly in 2006; macroeconomic imbalances were largely avoided and the 'gas price shock' reasonably well digested. Foreign debt increased by some 25%, reaching 47% of GDP by the end of the year - mainly caused by the banking sector's rapidly growing external borrowing, possibly associated with the growing presence of foreign banks. Inflation apart, the country's short-term economic outlook is good. In 2007 2008 we expect economic growth close to 6%. Despite the persistent stand-off between the president and the prime minister, the country is now living through a period of its greatest political stability since the 'orange revolution'. In China, GDP grew by 10.7%, driven by investment and an exploding trade surplus but supported by private consumption as well. For 2007-08, prospects remain good but a slight deceleration of growth may occur, due to a certain slowing down of investment and measures to contain the trade surplus.
    Keywords: Central and East European new EU member states, Southeast Europe, Balkans, former Soviet Union, China, Turkey, GDP, industry, productivity, labour market, foreign trade, exchange rates, inflation, fiscal deficits, EU integration.
    JEL: O52 O57 P24 P27 P33 P52
    Date: 2007–02
  12. By: Sarantis Kalyvitis (Athens University of Economics and Business); Ifigeneia Skotida (Bank of Greece and Athens University of Economics and Businesso)
    Abstract: This paper examines the impact of U.S. monetary policy shocks on the cross exchange rates of sterling, yen and mark. The main finding of the paper is a ‘delayed overshooting’ pattern for all currency cross rates examined (sterling/yen, yen/mark and mark/sterling) following an unexpected U.S. monetary policy change, which in turn generates excess returns. We also provide evidence that the ‘delayed overshooting’ pattern in cross exchange rates is accompanied by asymmetric interventions by central banks in the foreign exchange markets under consideration triggered by U.S. monetary policy shocks.
    Keywords: Monetary Policy; Delayed Overshooting; Foreign Exchange Intervention
    JEL: E52 F31
    Date: 2008–01
  13. By: Selva Demiralp (Koç University)
    Abstract: We test the expectations hypothesis by analyzing changes in three month T-Bill rates (TB3) after FOMC meetings. By estimating the revisions in expectations of future overnight rates, we find a one-to-one relationship between changes in TB3 and path revisions.
    Keywords: Expectations Hypothesis, Policy Path Revisions
    JEL: E43
    Date: 2008–02
  14. By: Pascalau, Razvan
    Abstract: This paper reconsiders the nature of the trends (i.e. deterministic or stochastic) in macroeconomic time series. For this purpose, the paper employs two new tests that display robustness to structural breaks of unknown forms, irrespective of the date and/or location of the breaks. These tests approximate structural changes as smooth processes via Flexible Fourier transforms. The tests deliver strong evidence in favor of a nonlinear deterministic trend for real GNP, real per capita GNP, employment, the unemployment rate, and stock prices. Further, the two tests confirm the existence of stochastic trends in nominal GNP, consumer prices, real wages, monetary aggregates, velocity, and bond yields. In general, it appears that real variables are stationary while nominal ones have a unit root.
    Keywords: Unit Roots; Stationarity Tests; Structural Change
    JEL: C50 E10
    Date: 2008–02–14
  15. By: Lorenzo Pozzi (Erasmus University Rotterdam)
    Abstract: We investigate the importance of aggregate and consumer-specific or idiosyncratic labour income risk for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of labour income risk on consumption changes is decomposed into an aggregate and into an idiosyncratic part. Empirically, aggregate risk is modelled through a GARCH process on aggregate labour income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate labour income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting idiosyncratic labour income risk is supported by the finding that it is negatively affected by received consumer transfers. Idiosyncratic labour income risk thus matters for the aggregate economy.
    Keywords: Labour income uncertainty; consumption; precaution; state space models; GARCH errors; unobserved component; Bayesian
    JEL: E21
    Date: 2007–09–12
  16. By: Pascalau, Razvan
    Abstract: This paper applies a set of unit root and cointegration tests with non-linear error-correction mechanisms to a subset of the OECD countries to investigate the empirical conclusions of some of the labor market models in the literature. I generally find that the unemployment rate, productivity, and real wages have a unit root even if one controls for threshold effects. This finding justifies the use of a cointegration approach to assess the existence of a long-run equilibrium among the variables of interest. For roughly half of the OECD countries in the sample, the unemployment rate, real wages, and productivity trend together over time. For four countries (i.e, Germany, Japan, Sweden, and the US) the adjustment to the long run relationship appears mostly asymmetric. Also, an impulse response function analysis suggests that real wages and productivity adjust faster to the long-run equilibrium, while shocks to unemployment take longer to extinguish. Also, according to the sign of the shocks, the unemployment rates respond differently. These findings suggest that a proper analysis of the behavior of productivity, real wages, and unemployment should consider non-linear adjustment mechanisms to long-run equilibrium since a liner approach would be biased.
    Keywords: Unemployment; Wages; Collective bargaining; Hysteresis
    JEL: E24 J52
    Date: 2007–07–11
  17. By: Nektarios Aslanidis; Denise R. Osborn; Marianne Sensier
    Date: 2008
  18. By: Kelly, Logan J
    Abstract: The currency equivalent index provides an elegant method for measuring the stock of money, but it rests upon assumptions that do not match an important characteristic of the data. Thus, it is unclear what, if anything, the CE measures. This paper attempts to answer this question by deriving the current stock of money (CSM), which is defined to be the discounted present value of the monetary service flows provided by only the current portfolio of monetary assets, and then analyzing the assumptions under which the current stock of money can be measured by the currency equivalent index.
    Keywords: Currency Equilivant Index, Monetary Aggregation, Money Stock
    JEL: C43 E49
    Date: 2008–02–15
  19. By: Giorgio Fagiolo; Andrea Roventini
    Abstract: In the last years, a number of contributions has argued that monetary -- and, more generally, economic -- policy is finally becoming more of a science. According to these authors, policy rules implemented by central banks are nowadays well supported by a theoretical framework (the New Neoclassical Synthesis) upon which a general consensus has emerged in the economic profession. In other words, scientific discussion on economic policy seems to be ultimately confined to either fine-tuning this "consensus" model, or assessing the extent to which "elements of art" still exist in the conduct of monetary policy. In this paper, we present a substantially opposite view, rooted in a critical discussion of the theoretical, empirical and political-economy pitfalls of the neoclassical approach to policy analysis. Our discussion indicates that we are still far from building a science of economic policy. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, etc.). We briefly introduce one of the most successful alternative research projects -- known in the literature as agent-based computational economics (ACE) -- and we present the way it has been applied to policy analysis issues. We conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.
    Keywords: Economic Policy, Monetary Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Post-Walrasian Macroeconomics, Evolutionary Economics.
    Date: 2008–02–14
  20. By: Michal Brzoza-Brzezina (National Bank of Poland and Warsaw School of Economics); Jesus Crespo Cuaresma (Department of Economics, University of Innsbruck)
    Abstract: We use a Bayesian dynamic latent factor model to extract world, regional and country factors of real interest rate series for 22 OECD economies. We find that the world factor plays a privileged role in explaining the variance of real rates for most countries in the sample, and accounts for the steady decrease in interest rates in the last decades. Moreover, the relative contribution of the world factor is rising over time. We also find relevant differences between the group of countries that follow fixed exchange rate strategies and those with flexible regimes.
    Keywords: Real interest rates, natural rate of interest, Bayesian dynamic factor models.
    JEL: E43 C11 E58
    Date: 2008–01–29
  21. By: Tom Buchmueller (University of Michigan, National Bureau of Economic Research); Michel Grignon (Centre for Health Economics and Policy Analysis, Department of Economics, McMaster University); Florence Jusot (Institut de Recherche et de Documentation en Economie de la Santé (IRDES), Paris, France)
    Abstract: This study uses aggregate panel data on 96 French départements for the period from 1982 to 2002 to investigate the relationship between macroeconomic conditions and mortality, controlling for local area and time fixed effects. Consistent with research using data from other countries, we find that increases in the local unemployment rates are associated with significant reductions in mortality. Models of mortality by source indicate that the negative relationship between unemployment and mortality is strongest for deaths due to cardiovascular disease and accidents. A finding that mortality among the elderly fluctuates with the unemployment rate suggests the possible importance of externalities associated with economic upturns.
    Keywords: unemployment, macroeconomic conditions, mortality, health
    JEL: E32 I12 J2
    Date: 2007
  22. By: C.S. Bos (VU University Amsterdam); S.J. Koopman (VU University Amsterdam); M. Ooms (VU University Amsterdam)
    Abstract: We investigate changes in the time series characteristics of postwar U.S. inflation. In a model-based analysis the conditional mean of inflation is specified by a long memory autoregressive fractionally integrated moving average process and the conditional variance is modelled by a stochastic volatility process. We develop a Monte Carlo maximum likelihood method to obtain efficient estimates of the parameters using a monthly dataset of core inflation for which we consider different subsamples of varying size. Based on the new modelling framework and the associated estimation technique, we find remarkable changes in the variance, in the order of integration, in the short memory characteristics and in the volatility of volatility.
    Keywords: Time varying parameters; Importance sampling; Monte Carlo simulation; Stochastic Volatility; Fractional Integration
    JEL: C15 C32 C51 E23 E31
    Date: 2007–12–18
  23. By: Ignacio Lozano; Magaly Herrera
    Abstract: Bajo un régimen No-Ricardiano o de dominancia fiscal, el banco central pierde autonomía en el control de la inflación, especialmente en circunstancias de insostenibilidad de las finanzas públicas. En este trabajo se evalúa la presencia de un régimen de esta naturaleza en la economía Colombiana, para el período 1990 a 2007, mediante el uso de un modelo de vectores autorregresivos que toma como fundamento teórico la restricción presupuestaria intertemporal del gobierno consolidado. Los resultados no permiten validar la existencia de este tipo de régimen. Se concluye, por consiguiente, que el régimen Ricardiano, o de dominancia monetaria, es el más apropiado para explicar la relación entre la política fiscal y la política monetaria durante estos años.
    Date: 2008–01–31
  24. 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.
    Date: 2008–01–31
  25. By: Césaire A. Meh; Yaz Terajima
    Abstract: In this paper we develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. We show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large fall in the fraction of entrepreneurs and a substantial welfare loss. These two findings suggest that the consumer bankruptcy system is desirable but it must be well-designed with regard to bankruptcy asset exemptions. In particular, excessive bankruptcy exemptions can be counter-productive. Finally, we argue that entrepreneurial activity is important when studying different bankruptcy rules or regulations.
    Keywords: Economic models; Financial stability; Financial system regulation and policies
    JEL: D31 E21 J23
    Date: 2008
  26. By: Roberto Chang
    Abstract: This paper examines whether central banks in Latin America have implemented conventional inflation targeting (IT) prescriptions, with a focus on foreign exchange intervention and official reserves accumulation policies. To this end, the paper reviews the experiences of Brazil, Chile, Colombia, and Peru, and finds significant departures from the dominant theory of IT. Foreign exchange intervention has often been used to prevent excessive financial volatility, bubbles, and panics. Ongoing patterns of reserves accumulation have been the outcome of an effort to build “war chests” against speculative attacks and, more recently, of a fight against real exchange appreciation. Possible justifications of the discrepancies between conventional IT theory and practice are discussed and generally found unsatisfactory.
    Date: 2008–02–14
  27. By: Siem Jan Koopman (VU University Amsterdam); Max I.P. Mallee (VU University Amsterdam); Michel van der Wel (VU University Amsterdam)
    Abstract: In this paper we introduce time-varying parameters in the dynamic Nelson-Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities, known as the term structure. The Nelson-Siegel model has been recently reformulated as a dynamic factor model where the latent factors are interpreted as the level, slope and curvature of the term structure. The factors are modelled by a vector autoregressive process. We propose to extend this framework in two directions. First, the factor loadings are made time-varying through a simple single step function and we show that the model fit increases significantly as a result. The step function can be replaced by a spline function to allow for more smoothness and flexibility. Second, we investigate empirically whether the volatility in interest rates across different time periods is constant. For this purpose, we introduce a common volatility component that is specified as a spline function of time and scaled appropriately for each series. Based on a data-set that is analysed by others, we present empirical evidence where time-varying loadings and volatilities in the dynamic Nelson-Siegel framework lead to significant increases in model fit. Improvements in the forecasting of the term structure are also reported. Finally, we provide an illustration where the model is applied to an unbalanced dataset. It shows that missing data entries can be estimated accurately.
    Keywords: Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values
    JEL: C32 C51 E43
    Date: 2007–12–07
  28. By: Jan Rouwendal (VU University Amsterdam); Simonetta Longhi (ISER, University of Essex)
    Abstract: Even though economic models have been relatively successful in explaining the long run patterns of house prices, they have more difficulties in explaining short run developments of the housing markets. However, the fact that during such ‘bubbles’ the spatial pattern of house prices, which can mainly be attributed to accessibility differences, usually remains unchanged, suggests that the irrational forces that are presumably responsible for unexplained movements in house prices obey some regularities: they seem to affect the level of house prices, but not their spatial pattern. This suggests that it is worthwhile to consider the explanatory power of psychological variables like those reflecting general (nation wide) feelings of optimism or pessimism. This paper considers the development of Dutch house prices in the years 1999 and 2000, when house prices increased fast. Existing explanations of the long run development of Dutch house prices on the basis of economic fundamentals (notably income and the mortgage interest rate) would suggest a much more modest development of house prices over these years. We also show that commonly used housing market indicators, notably the number of vacancies (houses for sale) and the time on the market, are unable to explain the development of house prices during this period. However, we find a strong relationship between the development of house prices and the Dutch index of consumer confidence.
    Keywords: House Prices; Consumer Confidence; Bubbles
    JEL: R31 R21 D84 E31 D40
    Date: 2007–10–04
  29. By: Peter Wierts
    Abstract: This paper investigates the role of self-enforced national expenditure rules in limiting the expenditure bias and procyclical expenditure increases/decreases due to revenue windfalls/shortfalls. A simple model predicts that expenditure rules can have the intended effects, but only if the political and institutional costs of non compliance are sufficiently large. Empirical estimations provide some support that expenditure rules affect expenditure outcomes in the hypothesised manner, especially when there are revenue shortfalls. We cannot disentangle, however, whether our results reflect a causal effect of expenditure rules on expenditure outcomes, or whether they are driven by a third variable of political preferences for addressing high expenditure to GDP ratios.
    JEL: E62 H50 H61
    Date: 2008–02
  30. By: Richhild Moessner; William Nelson
    Abstract: Central bank communication has changed dramatically over the past decade, with some central banks providing guidance about or explicit forecasts of likely future policy rates. One frequently made argument against the provision by central banks of such guidance or forecasts is that it runs the risk of impairing market functioning. In this paper, we evaluate the behaviour of financial markets in the United States, the euro area and New Zealand in light of the communication strategies of central banks, in order to assess whether the provision of policy rate guidance by central banks impairs market functioning. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that such guidance or forecasts impair market functioning in the United States, the euro area or New Zealand. The results suggest that the risk of impairing market functioning is not a strong argument against central banks' provision of policy rate guidance or forecasts.
    Keywords: Central bank communication, policy rate forecasts, financial market functioning
    Date: 2008–02
  31. By: Albert J. Menkveld (VU University, Amsterdam); Asani Sarkar (NY FED); Michel van der Wel (VU University, Amsterdam)
    Abstract: Signed customer order flow correlates with permanent price changes in equity and nonequity markets. We exploit macro news events in the 30Y treasury futures market to identify causality from customer flow to riskfree rates. We remove the positive feedback trading part and establish that, in the 15 minutes subsequent to the news, intermediaries rely on customer orders to determine a substantial part of the announcement's effect on riskfree rates, i.e. one-third relative to the instantaneous effect. They appear to benefit from privately observing informed customers, as, in the cross-section, their own-account trade profitability correlates with access to customer flow, controlling for volatility, competition, and the macro ``surprise''.
    Keywords: discount rate; macroeconomic announcements; customer order flow; intermediary; treasury futures
    JEL: G14 E44
    Date: 2007–11–06
  32. By: Sheikh Selim (Cardiff University, UK)
    Abstract: We show that in an imperfectly competitive economy, if the government cannot use wage subsidy, in a steady state and in the initial period the optimal labour income tax rate is zero. In an imperfectly competitive economy, since investment is primarily triggered by the motive to earn higher profits, over accumulation of capital induces suboptimal level of working hours. We argue that if the government is restricted to subsidize wage, the optimal policy should set zero tax on labour income which will encourage workers to increase working hours back to the optimal level.
    Date: 2008–01
  33. By: Eriksson, Rickard (Swedish Institute for Social Research, Stockholm University); Nermo, Magnus (Swedish Institute for Social Research, Stockholm University)
    Abstract: Swedish parents are entitled to government paid benefits to take care of sick children. In this paper we show that the gender distribution of paid care for sick children is a good proxy for the gender division of household work. Using two examples we show that registry data on care for sick children is a useful data source for studies on gender equality. Our first example shows that increased effort at work by one spouse leads to a lower effort in household work for this spouse, and a higher effort at home for the other spouse. Our second example provides some evidence for a procyclical pattern in gender equality.
    Keywords: gender equality; time use; household work; unemployment; business cycles
    JEL: E32 J12 J16
    Date: 2008–02–18
  34. By: Leon Bettendorf (Erasmus University Rotterdam); Hans Dewachter (Cath. University of Leuven)
    Abstract: In this paper we identify the effects of ageing on the relative price of nontradeables versus tradeables. We consider two cases. In a first specification, age effects only account for short-run dynamics. An alternative case allows for permanent age effects. Estimating the respective cases by means of an ECM on a panel of OECD countries we find significant effects of demographic composition on the relative prices, even after correcting for the standard explanatory variables. Simulations based on population projections of the UN show that ageing might substantially contribute to inflationary pressures in the near future.
    Keywords: relative price of nontradeables; age-specific effects; productivity differentials
    JEL: F41 E31 J11
    Date: 2007–08–24
  35. By: Hugo Benítez-Silva; Selcuk Eren; Frank Heiland; Sergi Jiménez-Martín
    Abstract: Self-reported home values are widely used as a measure of housing wealth by researchers employing a variety of data sets and studying a number of different individual and household level decisions. The accuracy of this measure is an open empirical question, and requires some type of market assessment of the values reported. In this research, we study the predictive power of self-reported housing wealth when estimating sales prices utilizing the Health and Retirement Study. We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. We also find a strong correlation between accuracy and the economic conditions (measured by the prevalent interest rate, the growth of household income, and the growth of median housing prices) at the time of the purchase of the property. While most individuals overestimate the value of their properties, those who bought during more difficult economic times tend to be more accurate, and in some cases even underestimate the value of their house. This cyclicality of the overestimation of house prices can provide some clues regarding the reasons for the difficulties currently faced by many homeowners.
    Keywords: Housing Prices, Self-Reported Housing Values, Instrumental Variables, Sample Selection, Business Cycle, Interest Rates, Health and Retirement Study
    JEL: E21 C34
    Date: 2008–02

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