nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒03‒08
23 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement By de Blas, Beatriz
  2. Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State By Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
  3. Rediscovering Fiscal Policy Through Minskyan Eyes By Philip Arestis; Elisabetta De Antoni
  5. Euro Area Enlargement and Euro Adoption Strategies By Zsolt Darvas; György Szapáry
  6. Designing fiscal rules for commodity exporters By Carlos Garcia; Jorge Restrepo; Evan Tanner
  7. Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices By Stefania D'Amico; Don H Kim; Min Wei
  8. How To Solve The U.S. Housing Problem and Avoid A Recession: A Revived HOLC and RTC By Davidson, Paul
  9. Monopolistic Competition and the Dependent Economy Model By Romain Restout
  11. Credit Expansion, the Prisoner´s Dilemma and Free Banking as Mechanism Design By van den Hauwe, Ludwig
  12. What drives the current account in commodity exporting countries? The cases of Chile and New Zealand By Juan Pablo Medina; Anella Munro; Claudio Soto
  13. Public Debt as Private Wealth By Schlicht, Ekkehart
  14. Efectividad de la política monetaria en algunas economías latinoamericanas By Carlos Garcia; Wildo Gonzalez
  15. Uncertainty, learning and growth By Galindev, Ragchaasuren
  16. Global Macro-Financial Shocks and expected default frequencies in the Euro area. By Olli Castrén; Stéphane Dées; Fadi Zaher
  17. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  18. On the Persistence of Job Creation in Old and New Firms By René Böheim; Alfred Stiglbauer; Rudolf Winter-Ebmer
  19. The Role of National Culture in Advertising’s Sensitivity to Business Cycles: An Investigation Across All Continents By Deleersnyder, B.; Dekimpe, M.G.; Steenkamp, J.B.E.M.; Leeflang, P.S.H.
  20. A Theory of Continuum Economies with Idiosyncratic Shocks and Random Matchings By Karavaev, Andrei
  21. Fiscal policy for growth and development in Tajikistan By Canagarajah, Sudharshan; Brownbridge, Martin
  22. Individual Risk and Lebesgue Extension without Aggregate Uncertainty By Sun, Yeneng; Zhang , Yongchao
  23. Equilibrium Concepts in the Large Household Model By Zhu, Tao

  1. By: de Blas, Beatriz (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: This paper analyzes the international transmission of shocks in economies with financial frictions. In a two-country flexible price monetary model with distribution costs in the imported good I study the transmission of shocks to productivity, money supply, government spending and to entrepreneurs' net worth. Financial frictions amplify the effects of shocks both at the domestic and at the international level. In the model, international business cycle comovement, measured as cross-country output correlations, is increasing in the degree of openness and distribution costs, and as in previous literature, decreasing in the degree of financial frictions. Finally, fiscal shocks play an important role in international business cycle comovement in the presence of financial frictions. First, because the crowding out effect is stronger on private consumption and weaker on investment if there are financial frictions, and second, because fiscal shocks may reduce the cross-country correlation of output.
    Keywords: international business cycles; distribution costs; financial frictions; flexible prices
    JEL: E32 E44 F41 F42
    Date: 2008–02
  2. By: Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: This paper establishes that one can generally obtain a purely quadratic approximation to the unconditional expectation of social welfare when the steady-state is distorted. A specific example is provided employing a canonical New Keynesian model. Unlike in the non-distorted steady state case, the approximate loss function is not defined simply over terms in inflation and output. Furthermore, optimal steady state inflation and the nominal interest rate are positive.
    Keywords: Unconditional expectations, Optimal monetary policy.
    JEL: E20 E32 F32 F41
    Date: 2008–02
  3. By: Philip Arestis; Elisabetta De Antoni
    Abstract: Recent developments in macroeconomic policy, both in terms of theory and practice, have elevated monetary policy while fiscal policy has been downgraded. The latter is rarely mentioned in policy discussion, apart from arguing to place limits on budget deficits and fiscal variables. This paper presents the opposite view of Hyman P. Minsky. Rejecting the orthodox assumptions of unbounded individual and collective rationality, Minsky places uncertainty and financial instability at the centre of his analysis. The limits of individual and collective rationality feed each other, generating deviation-amplifying mechanisms that make the economy unstable. The last one thus assumes a cyclical behaviour that drives it from the torrid summers of speculative booms to the gloomy winters of financial crises, debt deflations and deep depressions. Even if Minsky is generally considered as one of the main interpreters of Keynes, according to this work his economics is very different from Keynes’s one in terms both of business cycles and of growth. In comparison with the Keynesian tradition, according to Minsky fiscal policy is even more important and effective. Government intervention is not only necessary to reach and maintain full employment; it is also indispensable to contain capitalism’s instability and to avoid the disaster. The effect of fiscal policy is not only to underpin and stabilize aggregate demand, income and employment. It has also the task to protect the robustness of the financial system by stabilizing profits and by issuing government bonds. The opening up of the economy may increase its fragility, making fiscal policy even more important. The unprecedented growth of the domestic and international financial transactions, as well as the recent financial turmoil, confirm the validity of Minsky’s insights and make his views on fiscal policy even more noteworthy and fruitful.
    Keywords: Minsky, bounded rationality, business cycles, financial instability, fiscal policy.
    JEL: E12 E32 E42 E62
    Date: 2007
  4. By: Andrew Hughes Hallet; Jan Libich; Petr Stehlik
    Abstract: The paper considers a simple model in which monetary and fi?scal policies are formally independent, but still interdependent - through their spillovers onto the macroeconomic targets to which they are not primarilly assigned. It shows that the average equilibrium levels of inflation, deficit, debt, and output depend on the two policies' (i) potency (elas- ticity of output with respect to the policy instruments); (ii) ambition (the level of their output target); and (iii) conservatism (inflation vs output volatility aversion). However, it is the relative degrees of these characteristics that matter, rather than the absolute degrees for each policy. Therefore, and as expected, coordination of monetary and ?fiscal policy is found to be superior to non-cooperative Nash behaviour for both policymakers. Interestingly though, it is coordination in terms of the policies' ambition, rather than conservatism, that is essential. That is a new result. Furthermore, ambition-coordination can be welfare improving even if the policymakers' objectives are idiosyncratic, and/or even their coordinated output targets differ from the socially optimal one.
    JEL: E61 E63
    Date: 2008–03
  5. By: Zsolt Darvas (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest and Argenta ZRt.); György Szapáry (Central European University and former Deputy Governor of Magyar Nemzeti Bank)
    Abstract: The paper discusses the risks and challenges faced by the new members on the road to the euro and the strategies for and timing of euro adoption. We investigate the real-nominal convergence nexus from the perspective of euro area entry. We argue that the initial level of economic development as measured by per capita income and the speed of real convergence have a bearing on the strategies to follow and on the timing of entry into euro area. This is because the lower is the per capita income, the larger is the price level gap to close and the greater is the danger of credit booms and overheating. We argue that inflation targeting with floating rates is better suited than hard pegs to manage the price level catching-up process. We suggest a modification in the Maastricht inflation criterion which as currently defined has lost its economic logic.
    Keywords: euro area enlargement, convergence, exchange rate, inflation, Maastricht
    JEL: E31 E52 E60 F30
    Date: 2008–01–28
  6. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Evan Tanner (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: We compare welfare levels under two alternative fiscal rules: a procyclical balanced budget policy and an acyclical structural surplus (government accumulates assets). We use a dynamic, stochastic, general equilibrium model. The acylical rule benefits households that do not enjoy access to capital markets. It provides a financial cushion that they themselves cannot provide, while also boosting their mean consumption. By contrast, households that enjoy full access to capital markets suffer under this rule. Effectively, the government usurps their previous role in smoothing consumption and accumulating assets. However, a policy in between these extremes may be preferred by all.
    Keywords: welfare, small open economy, fiscal rules, rule of thumb consumers, government spending.
    JEL: E32 E61 E62 E63 F41
    Date: 2007–12
  7. By: Stefania D'Amico; Don H Kim; Min Wei
    Abstract: We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a "liquidity premium" that was until recently quite large (~1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS breakeven rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS breakeven inflation rates are a useful proxy for inflation expectations.
    Keywords: term structure model, inflation expectation, inflation risk premium, SPF, Treasury Inflation-Protected Securities (TIPS)
    Date: 2008–02
  8. By: Davidson, Paul
    Abstract: This paper exlains the cause of the sub prime market failure in the US and suggests policies to copy with the problem.
    Keywords: monetary policy; insolvency;
    JEL: D53 E00 E44 A11
    Date: 2008–01
  9. By: Romain Restout (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper explores the consequences of introducing a monopolistic competition in an intertemporal two-sector small open economy model which produces traded and non traded goods. It is assumed that the non traded sector is the locus of the imperfectly competition. Our analysis shows that markup depends on the composition of aggregate non traded demand and is therefore endogenously determined in the model. Calibrating the model with OECD parameters, the effects of fiscal and technological shocks are simulated. Our findings are as follows. First, the model is consistent with the observed saving-investment correlations found in the data. Second, unlike the perfectly framework and in accordance with empirical studies, fiscal shocks cause real appreciation of the relative price of non traded goods, which in turn enlarges the responses of current account and investment. Third, the model is consistent with the empirical report that technological shocks result in current account deficits and investment rises. Fourth, the strength of the relative price appreciation following sector productivity differentials, i.e. the Balassa-Samuelson effect, is affected by the monopolistic competition hypothesis. Assume perfect competition when it is not, biases upward estimates of the Balassa-Samuelson effect.
    Keywords: fiscal policy ; monopolistic competition ; productivity
    Date: 2008
  10. By: Matić, Branko
    Abstract: The author researches a singular monetary situation connected with the common issue of commemorative coin age by two states: Ireland, an EU member state that belongs to the Euro-system, and Croatia, an EU membership candidate. Although they belong to two different monetary systems, the two countries created a precedent by issuing a common commemorative coin on the grounds of ahistoric artistic design. This under­taking is affirmation of Croatian coinage, artistic and numismatic activities.
    Keywords: money; monetary solutions;issuing profit; European union
    JEL: E42 E5 E44 F31
    Date: 2007
  11. By: van den Hauwe, Ludwig
    Abstract: Despite the distinctive character of the Austrian approach to “microfoundations for macroeconomics”, the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner´s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner´s Dilemma. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a “myopic”, self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge.
    Keywords: Free Banking; Business Cycle Theory; Prisoner´s Dilemma; Mechanism Design;
    JEL: E32 E66 E58 E42 E31 G18 E52 D01 K39
    Date: 2008–02–21
  12. By: Juan Pablo Medina; Anella Munro; Claudio Soto
    Abstract: This paper uses an open economy DSGE model with a commodity sector and nominal and real rigidities to ask what factors account for current account developments in two small commodity exporting countries. We estimate the model, using Bayesian techniques, on Chilean and on New Zealand data, and investigate the structural factors that explain the behaviour of the two countries' current accounts. We find that foreign financial conditions, investment-specific shocks, and foreign demand account for the bulk of the variation of the current accounts of the two countries. In the case of New Zealand fluctuations in commodity export prices have also been important. Monetary and fiscal policy shocks (deviations from policy rules) are estimated to have relatively small e ects on the current account.We find interesting differences in Chilean and New Zealand responses to some shocks, despite similarities between the two economies and the common structural model employed.
    Keywords: current account, commodity price, small open economy, DSGE model
    Date: 2008–02
  13. By: Schlicht, Ekkehart
    Abstract: Government bonds are interest-bearing assets. Increasing public debt increases income, wealth, and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending or may even rule out the existence of macroeconomic equilibrium altogether. Domar(1944) and Gehrels(1957) have discussed similar issues in an unemployment setting. In contrast, this note considers the full employment case and looks at adjustments in debt, taxes and government spending that preserve full employment. The explicit modelling of some adjustment processes that have not been considered in the earlier contributions leads to somewhat different and, in a sense, more "debt-friendly" results.
    Keywords: stabilization policy; government debt; public debt; functional finance; Maastricht treaty; Ricardian equivalence
    JEL: E2 E12 E6 H6
    Date: 2008–02
  14. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile)
    Abstract: El objetivo de este artículo es realizar estimaciones de un modelo keynesiano simple de equilibrio general Monacelli (2003) para caracterizar la efectividad y los mecanismos de transmisión de la política monetaria en países latinoamericanos. Se estiman los parámetros por medio de métodos bayesianos para seis países latinoamericanos. Para estos países existe poca evidencia hasta el momento de la utilización de métodos bayesianos en modelos DSGE, por lo que esta artículo constituye un aporte para el mejor entendimiento de las economías latinoamericanas, por medio de los cuales se establecen las diferencias existentes en el mecanismo de transmisión de la política monetaria, siendo esto debido a la heterogeneidad en los parámetros que caracterizan a las economías de la región.
    Keywords: Economía Pequeña y Abierta, Métodos Bayesianos, Transmisión Política Monetaria.
    JEL: E52 E32 F41
    Date: 2007–12
  15. By: Galindev, Ragchaasuren
    Abstract: The paper extends Blackburn and Galindev (2003)' s stochastic growth model in which productivity growth entails both external and internal learning behaviour with a Constant Relative Risk Aversion utility function and productivity shocks. Consequently, the relationship between long-term growth and short-term volatility depends not only on the relative importance of each learning mechanism but also on a parameter measuring individuals' attitude towards risk.
    Keywords: Growth; Uncertainty; Learning
    JEL: E32 O40
    Date: 2007–07
  16. By: Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Dées (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Fadi Zaher (Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom.)
    Abstract: Modelling the link between the global macro-financial factors and firms’ default probabilities constitutes an elementary part of financial sector stress-testing frameworks. Using the Global Vector Autoregressive (GVAR) model and constructing a linking satellite equation for the firm-level Expected Default Frequencies (EDFs), we show how to analyse the euro area corporate sector probability of default under a wide range of domestic and foreign macroeconomic shocks. The results show that, at the euro area aggregate level, the median EDFs react most to shocks to the GDP, exchange rate, oil prices and equity prices. There are some intuitive variations to these results when sector-level EDFs are considered. Overall, the Satellite-GVAR model appears to be a useful tool for analysing plausible global macrofinancial shock scenarios designed for financial sector stress-testing purposes. JEL Classification: C33, F47, G32, G33.
    Keywords: Credit risk, Global VAR, corporate default probability, macro stress testing.
    Date: 2008–02
  17. By: Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Hellström, Jörgen (Department of Economics); Landström, Mats (Department of Economics)
    Abstract: It is something of a puzzle that politicians around the world have chosen to give up power to independent central banks, thereby reducing their possibilities to fine-tune the economy. In this paper the determinants of central bank independence (CBI) reforms are studied using a new data set on the possible event of such reforms in 119 countries. According to the data, as much as 81 countries had implemented CBI-reforms during the study period. The results indicate, moreover, that policymakers are more likely to delegate power to independent central banks when the foreign debt is relatively high. In non-OECD countries, the likelihood of a CBI-reform also seems to increase when policymakers face a high probability of getting replaced.
    Keywords: Central bank independence; political economy
    JEL: E42 E58 E61 P16
    Date: 2008–02–29
  18. By: René Böheim (Department of Economics, Johannes Kepler University Linz, Austria); Alfred Stiglbauer (Oesterreichische Nationalbank (National Bank of Austria)); Rudolf Winter-Ebmer (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: We suggest a new method to analyze the success of firm creation by looking at the persistence of new jobs created in old and in new firms. Compared to survival rates of new versus old firms, this measure has the advantage that the sustainability of job creation in different circumstances is investigated. We analyze 21 years of job creation in Austria and find that new jobs last significantly longer in new than in old firms. Moreover, the survival of new jobs depends upon the state of the business cycle at the time of job creation, on the number of jobs created, and, for existing firms, on firm age.
    Keywords: job creation, new firms, reallocation, persistence
    JEL: J23 J63 E24 E32
    Date: 2008–03
  19. By: Deleersnyder, B.; Dekimpe, M.G.; Steenkamp, J.B.E.M.; Leeflang, P.S.H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Cutting advertising budgets has traditionally been a popular reaction by companies around the globe when faced with a slacking economy. Still, anecdotal evidence suggests the presence of considerable cross-country variability in the cyclical sensitivity of advertising expenditures. We conduct a systematic investigation into the cyclical sensitivity of advertising expenditures in 37 countries across all continents, covering up to 25 years and four key media: magazines, newspapers, radio and television. While our findings confirm that advertising moves in the same direction as the general economic activity, we also show that advertising is considerably more sensitive to business-cycle fluctuations than the economy as a whole, with an average co-movement elasticity of 1.4. Interestingly, advertising’s cyclical dependence is systematically related to the cultural context in which companies operate. Advertising behaves less cyclically in countries high on long-term orientation and power distance, while advertising is more cyclical in countries high on uncertainty avoidance. Further, advertising is more sensitive to the business cycle in countries characterized by significant stock-market pressure and few foreign-owned multinationals. These results have important strategic implications for both global advertisers and their ad agencies.
    Keywords: advertising;business cycle;time-series econometrics;cross-country comparison;national culture
    Date: 2007–12–19
  20. By: Karavaev, Andrei
    Abstract: Many economic models use a continuum of negligible agents to avoid considering one person's effect on aggregate characteristics of the economy. Along with a continuum of agents, these models often incorporate a sequence of independent shocks and random matchings. Despite frequent use of such models, there are still unsolved questions about their mathematical justification. In this paper we construct a discrete time framework, in which major desirable properties of idiosyncratic shocks and random matchings hold. In this framework the agent space constitutes a probability space, and the probability distribution for each agent is replaced by the population distribution. Unlike previous authors, we question the assumption of known identity - the location on the agent space. We assume that the agents only know their previous history - what had happened to them before, - but not their identity. The construction justifies the use of numerous dynamic models of idiosyncratic shocks and random matchings.
    Keywords: random matching; idiosyncratic shocks; the Law of Large Numbers; aggregate uncertainty; mixing
    JEL: C78 D83 E00
    Date: 2008–02–25
  21. By: Canagarajah, Sudharshan; Brownbridge, Martin
    Abstract: Tajikistan ' s economy has recovered strongly after the collapse of the 1990s, but sustaining rapid economic growth over the long term and reducing poverty present major challenges for policymakers. This paper contributes to the debate over the strategic role for fiscal policy to play in meeting these challenges, utilizing the " fiscal space " approach to assess the long-term potential for expanding public provision of growth-promoting goods and services and evaluating the priorities for public spending. It also analyzes the long-term risks to fiscal sustainability, from external public debt and the quasi fiscal deficit of the electricity sector. The paper contends that institutional reforms in key areas, notably public financial management, tax administration, and the energy sector, are crucial for generating fiscal space and for ensuring that higher levels of public spending are translated into stronger economic growth and poverty reduction. The priorities for government spending should be education, health, and the maintenance of the core networks of the existing infrastructure for energy and transport, rather than new public investment projects.
    Keywords: Public Sector Expenditure Analysis & Management,Debt Markets,,Banks & Banking Reform,Access to Finance
    Date: 2008–02–01
  22. By: Sun, Yeneng; Zhang , Yongchao
    Abstract: Many economic models include random shocks imposed on a large number (continuum) of economic agents with individual risk. In this context, an exact law of large numbers and its converse is presented in Sun (2006) to characterize the cancelation of individual risk via aggregation. However, it is well known that the Lebesgue unit interval is not suitable for modeling a continuum of agents in the particular setting. The purpose of this note is to show that an extension of the Lebesgue unit interval does work well as an agent space with various desirable properties associated with individual risk.
    Keywords: No aggregate uncertainty; independence; exact law of large numbers; Fubini extension; Lebesgue measure.
    JEL: C43 E00 D80 C60
    Date: 2008–02–29
  23. By: Zhu, Tao
    Abstract: This paper formulates equilibrium concepts in the large (non atomic) household model under the team interpretation, characterizes a class of equilibrium allocations, explores whether an equilibrium allocation in the large-household model has a foundation in the finite-household model, and establishes the existence of equilibrium allocations generated by generalized Nash bargaining.
    Keywords: Search; Large household; Equilibrium concept; Team
    JEL: E40
    Date: 2007

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