nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒03‒15
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach By Pelin Ilbas
  2. Modelling bank lending in the euro area: A non-linear approach By Leonardo Gambacorta; Carlotta Rossi
  3. Productivity Growth and the Phillips Curve: A Reassessment of the US Experience By Marika Karanassou; Hector Sala
  4. Risk Management in Action. Robust monetary policy rules under structured uncertainty. By Paul Levine; Peter McAdam; Joseph Pearlman; Richard Pierse
  5. Skill Specific Unemployment with Imperfect Substitution of Skills By Runli Xie
  6. Real Business Cycles with Cournot Competition and Endogenous Entry By Andrea Colciago; Federico Etro
  7. Why capital maintenance should be a key development tool ? By Raouf, BOUCEKKINE; Blanca, MARTINEZ; Cagri, SAGLAM
  8. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  9. Tax Structure, Growth and Welfare in the UK By Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
  10. Debt and Deficit Fluctuations and the Structure of Bond Markets By Albert Marcet; Andrew Scott
  11. Does it Matter How to Measure Aggregates? The Case of Monetary Transmission Mechanisms in the Euro Area By Andreas Beyer; Katarina Juselius
  12. Risk Sharing and Commuting Among US Federal States By Juessen, Falko
  13. Fiscal Insurance and Debt Management in OECD Economies By Albert Marcet; Elisa Faraglia; Andrew Scott
  14. Endogenous Money in the Age of Financial Liberalization By Gökçer Özgür; Korkut A. Ertürk
  15. Econometric Analysis of Structural Systems with Permanent and Transitory Shocks By Adrian R. Pagan; M. Hashem Pesaran
  16. The Ins and Outs of European Unemployment By Petrongolo, Barbara; Pissarides, Christopher A.
  17. Price Adjustment to News with Uncertain Precision By Nikolaus Hautsch; Dieter Hess; Christoph Müller
  18. The Welfare Cost of Banking Regulation By TCHANA TCHANA , Fulbert
  19. Taxation, Aggregates and the Household By Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo
  20. Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks By Robert Lavigne
  21. Factor-MIDAS for now- and forecasting with ragged-edge data: a model comparison for German GDP By Marcellino, Massimiliano; Schumacher, Christian
  22. Budgetary Forecasting in India: Partitioning Errors and Testing for Rational Expectations By Chakraborty, Lekha S; Sinha, Darshy
  23. The Role of Labor Market Changes in the Slowdown of European Productivity Growth By Ian Dew-Becker; Robert J. Gordon
  24. Explaining the Evolution of Hours Worked and Employment across OECD Countries: An Equilibrium Search Approach By Langot, François; Quintero Rojas, Coralia
  25. A (Un)Pleasant Arithmetic of Fiscal Policy: the Case of Italian Public Debt By L. Marattin; M. Marzo
  26. Sosiaalietuuksien rahoituksen alueelliset kuluttajahintavaikutukset By Olavi Rantala
  27. National Revenue Funds: Their Efficacy for Fiscal Stability and Intergenerational Equity By Asfaha, Samuel
  28. Financialization and Capital Accumulation in the Nonfinancial Corporate Sector: A Theoretical and Empirical Investigation on the US Economy, 1973-2004 By Orhangazi, Ozgur
  29. Marriage and Divorce since World War II: Analyzing the Role of Technological Progress on the Formation of Households By Greenwood, Jeremy; Guner, Nezih
  30. Does product market competition improve the labour market performance ? By Gabriele, CARDULLO
  31. Estimating Regime Dependent Switches in Emerging Equity Markets By Turk, Mehmet; Ozun, Alper
  32. The Increase in Leisure Inequality By Mark Aguiar; Erik Hurst
  33. "Can Robbery and Other Theft Help Explain the Textbook Currency-demand Puzzle? Two Dreadful Models of Money Demand with an Endogenous Probability of Crime" By Greg Hannsgen
  34. Capital Inflows and Reserve Accumulation: The Recent Evidence By Carmen M. Reinhart; Vincent R. Reinhart
  35. International Evidence On Sticky Consumption Growth By Christopher D. Carroll; Jiri Slacalek; Martin Sommer
  36. Reference Prices and Nominal Rigidities By Martin Eichenbaum; Nir Jaimovich; Sergio Rebelo
  37. Regional Unemployment and Human Capital in Transition Economies By Stepan Jurajda; Katherine Terrell
  38. Moonlighting over the Business Cycle By Catalina Amuedo-Dorantes; Jean Kimmel
  39. Why Does Unemployment Hurt the Employed? Evidence from the Life Satisfaction Gap between the Public and the Private Sector By Luechinger, Simon; Meier, Stephan; Stutzer, Alois
  40. Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device By Brown, Martin; Falk, Armin; Fehr, Ernst
  41. The Analysis of a Deviation of Investment and Corporate Governance By Shoichi Hisa
  42. How important are human capital, physical capital and total factor productivity for determining state economic growth in the United States: 1840-2000? By Turner, Chad; Tamura, Robert; Mulholland, Sean
  43. Valuation of Convexity Related Derivatives By Jiří Witzany
  44. Incentive Contracts and Efficient Unemployment Benefits By Dominique Demougin; Carsten Helm

  1. By: Pelin Ilbas (Center for Economic Studies, Catholic University of Leuven)
    Abstract: In this paper we adopt a Bayesian approach towards the estimation of the monetary policy preference parameters in a general equilibrium framework. We start from the model presented by Smets and Wouters (2003) for the euro area where, in the original set up, monetary policy behaviour is described by an empirical Taylor rule. We abandon this way of representing monetary policy behaviour and assume, instead, that monetary policy authorities optimize an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialize our estimates by considering a presample period of 40 quarters. This allows us to approach, empirically, the timeless perspective framework.
    Keywords: optimal monetary policy, commitment, central bank preferences, euro area monetary policy
    JEL: E42 E52 E58 E61
    Date: 2008–03
  2. By: Leonardo Gambacorta (Banca d'Italia); Carlotta Rossi (Banca d'Italia)
    Abstract: This paper investigates possible non-linearities in the response of bank lending to monetary policy shocks in the euro area. The credit market is modelled over the period 1985-2005 by means of an Asymmetric Vector Error Correction Model (AVECM) involving four endogenous variables (loans to the private sector, real GDP, lending rate, and consumer price index) and one exogenous variable (money market rate). The main features of the model are the existence of two co-integrating equations representing the long-run credit demand and supply and the possibility for loading and lagged-term coefficients to assume different values depending on the monetary policy regime (easing or tightening). The paper finds that the effect on credit, GDP, and prices of a monetary policy tightening is larger than the effect of a monetary policy easing. This result supports the existence of an asymmetric broad credit channel in the euro area.
    Keywords: monetary policy transmission, credit market, credit view, asymmetries
    JEL: C32 C51 E44 E52
    Date: 2007–11
  3. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA)
    Abstract: In this paper we analyse a new Phillips curve (NPC) model and demonstrate that (i) frictional growth, i.e. the interplay of wage-staggering and money growth, generates a nonvertical NPC in the long-run, and (ii) the Phillips curve (PC) shifts with productivity growth. On this basis we estimate a dynamic system of macrolabour equations to evaluate the slope of the PC and explain the evolution of inflation and unemployment in the US from 1970 to 2006. Since our empirical methodology relies heavily on impulse response functions, it represents a synthesis of the traditional structural modelling and (structural) vector autoregressions (VARs). We find that the PC is downward-sloping with a slope of -3.58 in the long-run. Furthermore, during the stagflating 70s, the productivity slowdown contributed substantially to the increases in both unemployment and inflation, while the monetary expansion was quite ineffective and led mainly to higher inflation. Finally, the monetary expansion and productivity speedup of the roaring 90s were both responsible for the significant lowering of the unemployment rate.
    Keywords: New Phillips curve, Frictional growth, Productivity growth, Stagflating seventies, Roaring nineties, Impulse response functions
    JEL: E24 E31
    Date: 2008–03
  4. By: Paul Levine (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joseph Pearlman (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, U.K.); Richard Pierse (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K.)
    Abstract: Recent interest in ‘Risk Management’ has highlighted the relevance of Bayesian analysis for robust monetary-policy making. This paper sets out a comprehensive methodology for designing policy rules inspired by such considerations. We design rules that are robust with respect to model uncertainty facing both the policymaker and private sector. We apply our methodology to three simple interest-rate rules: inflation-forecast-based (IFB) rules with a discrete forward horizon, one targeting a discounted sum of forward inflation, and a current wage inflation rule. We use an estimated DSGE model of the euro area and estimated measures of structured exogenous and parameter uncertainty for the exercise. We find that IFB rules with a long horizon perform poorly with or without robust design. Our discounted future targeting rule performs much better, indicating that policy can be highly forward-looking without compromising stabilization. The wage inflation rule dominates whether it is designed to have good robust properties or not. JEL Classification: E52, E37, E58.
    Keywords: Interest-rate rules, robustness, structured uncertainty.
    Date: 2008–02
  5. By: Runli Xie
    Abstract: A large body of literature explains the inferior position of unskilled workers by imposing a structural shift in the labor force skill composition. This paper takes a different approach by emphasizing the connection between cyclical variations in skilled and unskilled labor markets. Using a stylized business cycle model with search frictions in the respective sub-markets, I find that imperfect substitution between skilled and unskilled labor creates a channel for the variations in the sub-markets. Together with a general labor augment- ing technology shock, it can generate downward sloping Beveridge curves. Calibrating the model to US data yields higher volatilities in the unskilled labor markets and reproduces stylized business cycle facts.
    Keywords: business cycle, search frictions, skill specific unemployment, skill substitutability
    JEL: E24 E32 J63
    Date: 2008–03
  6. By: Andrea Colciago; Federico Etro
    Abstract: We introduce Cournot competition and endogenous entry in an oth- erwise neoclassical macroeconomic framework. First, we develop a model with exogenous savings à la Solow describing the dynamic path of busi- ness creation. Then, we develop a model à la Ramsey describing the dynamic interaction of consumption and business creation. Our models are able to explain why markups vary countercylically and pro?ts are procyclical. The analysis of permanent and temporary technology and preference shocks and of the second moments suggests that our model can outperform the Real Business Cycle framework in many dimensions.
    Date: 2007–09
  7. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Blanca, MARTINEZ; Cagri, SAGLAM
    Abstract: We study optimal growth model à la Nelson and Phelps (1966) where labor resources can be allocated either to production, technology adoption or capital maintenance. We first characterize the balanced growth paths of a benchmark model without maintenance. Then we introduce the maintenance activity via the depreciation rate of capital. We characterize the optimal allocation of labor across the three activities. Through maintenance deepens the technological gap by diverting labor ressources from adoption, we find that it generally increases the long run output level. Moreover we find that long term output response to policy shocks is slightly higher in the presence of maintenance.
    Keywords: Adoption, Maintenance, Technological gap, Output gap
    JEL: E22 E32 O40
    Date: 2007–12–14
  8. By: Daunfeldt, Sven-Olov (Högskolan i Gävle); Hellström, Jörgen (Department of Economics, Umeå University); Landström, Mats (Högskolan i Gävle)
    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: Institutional reforms; inflation; time-inconsistency; political stability; probit
    JEL: E31 E42 E52 E58
    Date: 2008–03–10
  9. By: Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
    Abstract: This paper studies the quantitative implications of changes in the composition of taxes for long-run growth and expected lifetime utility in the UK economy over 1970-2005. Our setup is a dynamic stochas- tic general equilibrium model incorporating a detailed .scal policy structure, and whose engine of endogenous growth is human capital accumulation. The government.s spending instruments include pub- lic consumption, investment and education spending. On the revenue side, labour, capital and consumption taxes are employed. Our results suggest that if the goal of tax policy is to promote long-run growth by altering relative tax rates, then it should reduce labour taxes while simultaneously increasing capital or consumption taxes to make up for the loss in labour tax revenue. In contrast, a welfare promoting policy would be to cut capital taxes, while concurrently increasing labour or consumption taxes to make up for the loss in capital tax revenue.
    Keywords: Fiscal policy, Economic growth, Welfare
    JEL: E62 O52
  10. By: Albert Marcet; Andrew Scott
    Abstract: We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit. Data for US government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness.
    Keywords: Complete vs incomplete markets, Debt Management, Fiscal
    JEL: E62 H62 H63
    Date: 2007–09–23
  11. By: Andreas Beyer (European Central Bank); Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: Beyer, Doornik and Hendry (2000, 2001) show analytically that three out of four aggregation methods yield problematic results when exchange rate shifts induce relative-price changes between individual countries and found the least problematic method to be the variable weight method of growth rates. This papers shows, however, that the latter is sensitive to the choice of base year when based on real GDP weights whereas not on nominal GDP weights. A comparison of aggregates calculated with different methods shows that the differences are tiny in absolute value but highly persistent. To investigate the impact on the cointegration properties in empirical modelling, the monetary model in Coenen & Vega (2001) based on fixed weights was re-estimated using flexible real and nominal GDP weights. In general, the results remained reasonably robust to the choice of aggregation method.
    Keywords: aggregation; flexible weights; Eurowide money demand; cointegration
    JEL: C32 C42 E41
    Date: 2008–03
  12. By: Juessen, Falko (University of Dortmund)
    Abstract: Financial markets provide imperfect insurance of labor income risk. However, workers can partly insure against labor market risk by commuting to adjacent regions. Since commuters own wage claims to output produced in adjacent regions, the business cycle in the neighborhood becomes a relevant risk factor at the regional level. In our empirical analysis for US states, we show this effect to be important. State-specific consumption comoves with business cycle shocks that hit adjacent states, in particular if a state is integrated by commuter flows. This labor market perspective on regional risk sharing complements previous studies that investigated risk sharing through financial markets.
    Keywords: risk sharing, consumption smoothing, commuting, labor market risk
    JEL: E21 C33 R20
    Date: 2008–02
  13. By: Albert Marcet; Elisa Faraglia; Andrew Scott
    Abstract: Assuming the role of debt management is to provide hedging against fiscal shocks we consider three questions: i) what indicators can be used to assess the performance of debt management? ii) how well have historical debt management policies performed? and iii) how is that performance affected by variations in debt issuance? We consider these questions using OECD data on the market value of government debt between 1970 and 2000. Motivated by both the optimal taxation literature and broad considerations of debt stability we propose a range of performance indicators for debt management. We evaluate these using Monte Carlo analysis and find that those based on the relative persistence of debt perform best. Calculating these measures for OECD data provides only limited evidence that debt management has helped insulate policy against unexpected fiscal shocks. We also find that the degree of fiscal insurance achieved is not well connected to cross country variations in debt issuance patterns. Given the limited volatility observed in the yield curve the relatively small dispersion of debt management practices across countries makes little difference to the realised degree of fiscal insurance.
    Date: 2007–10–09
  14. By: Gökçer Özgür; Korkut A. Ertürk
    Abstract: The paper reports results that show a much weakened statistical relationship between total bank credit, total deposits and the broad money supply for the period after 1995 for the US, where no statistical causation can be discerned in either direction. This has been the result of the changing nature of the credit creation process where banks have acquired almost total independence from required reserves and core deposits in extending credit, and even an ability to circumvent the constraint posed by capital requirements through asset securitization, giving rise to an explosive increase in nonbank intermediation. As a result, the expansion of bank credit did not result in a commensurate increase of bank deposits because financial intermediation spilled over to nondepository institutions, and with the growing importance of nonbank deposits in M3, broad money supply became broader than banks’ total deposits.
    Keywords: Endogenous Supply of Money, Broad Money, Financial Intermediation, Asset Securitization
    JEL: B22 E12 E51
    Date: 2008–06
  15. By: Adrian R. Pagan (School of Economics, The University of New South Wales); M. Hashem Pesaran (Faculty of Economics, University of Cambridge)
    Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations with known permanent shocks can not contain error correction terms, thereby freeing up the latter to be used as instruments in estimating their parameters. The approach is illustrated by a re-examination of the identification schemes used by Wickens and Motto (2001), Shapiro and Watson (1988), King, Plosser, Stock, Watson (1991), Gali (1992, 1999) and Fisher (2006).
    Keywords: Permanent shocks; structural identification; error correction models; IS-LM models
    JEL: C30 C32 E10
    Date: 2008–03
  16. By: Petrongolo, Barbara (London School of Economics); Pissarides, Christopher A. (London School of Economics)
    Abstract: In this paper we study the contribution of inflows and outflows to the dynamics of unemployment in three European countries, the United Kingdom, France and Spain. We compare performance in these three countries making use of both administrative and labor force survey data. We find that the impact of the 1980s reforms in Britain is evident in the contributions of the inflow and outflow rates. The inflow rate became a bigger contributor after the mid 1980s, although its significance subsided again in the late 1990s and 2000s. In France the dynamics of unemployment are driven virtually entirely by the outflow rate, which is consistent with a regime with strict employment protection legislation. In Spain, however, both rates contribute significantly to the dynamics, very likely as a consequence of the prominence of fixed-term contracts since the late 1980s.
    Keywords: unemployment dynamics, job finding rates, job separation rates
    JEL: E24 E32 J6
    Date: 2008–01
  17. By: Nikolaus Hautsch; Dieter Hess; Christoph Müller
    Abstract: Bayesian learning provides a core concept of information processing in financial markets. Typically it is assumed that market participants perfectly know the quality of released news. However, in practice, news’ precision is rarely disclosed. Therefore, we extend standard Bayesian learning allowing traders to infer news’ precision from two different sources. If information is perceived to be imprecise, prices react stronger. Moreover, interactions of the different precision signals affect price responses nonlinearly. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and reveal statistically and economically significant effects of news’ precision.
    Keywords: Bayesian learning, information quality, precision signals, macroeconomic announcements
    JEL: E44 G14
    Date: 2008–03
  18. By: TCHANA TCHANA , Fulbert
    Abstract: The Basel Accords promote the adoption of capital adequacy requirements to increase the banking sector's stability. Unfortunately, this type of regulation can hamper economic growth by shifting banks' portfolios from more productive risky investment projects toward less productive but safer projects. This paper introduces banking regulation in an overlapping-generations model and studies how it affects economic growth, banking sector stability, and welfare. In this model, a banking crisis is the outcome of a productivity shock, and banking regulation is modeled as a constraint on the maximal share of banks' portfolios that can be allocated to risky assets. This model allows us to evaluate quantitatively the key trade-off, inherent in this type of regulation, between ensuring banking stability and fostering economic growth. The model implies an optimal level of regulation that prevents crises but at the same time is detrimental to growth. We find that the overall effect of optimal regulation on social welfare is positive when productivity shocks are sufficiently high and economic agents are sufficiently risk-averse.
    Keywords: Overlapping Generations; Competitive Equilibrium; Economic Growth; Banking Regulation
    JEL: G28 E44 D92
    Date: 2007–10–15
  19. By: Guner, Nezih (Universidad Carlos III, Madrid); Kaygusuz, Remzi (Sabanci University); Ventura, Gustavo (University of Iowa)
    Abstract: We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labor supply: while hours per-worker display small increases, total hours and female labor force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labor supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy.
    Keywords: taxation, two-earner households, labor force participation
    JEL: E62 H31 J12 J22
    Date: 2008–01
  20. By: Robert Lavigne
    Abstract: The author examines recent trends in sterilized intervention among emerging-market economies, to determine the size and extent of this policy in relation to earlier periods of heavy reserve accumulation. He then analyzes whether the domestic costs and risks of substantial and prolonged sterilization are beginning to manifest themselves. In particular, the author discusses the fiscal costs of sterilization and the recent increase in non-market-friendly sterilization methods, such as the rapid rise in reserve requirement ratios.
    Keywords: Financial stability; Exchange rate regimes; International topics
    JEL: F31 E52 O24
    Date: 2008
  21. By: Marcellino, Massimiliano; Schumacher, Christian
    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 nowcast 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: MIDAS, large factor models, nowcasting, mixed-frequency data, missing values
    JEL: C53 E37
    Date: 2007
  22. By: Chakraborty, Lekha S; Sinha, Darshy
    Abstract: According to the theory of efficient markets, economic agents use all available information to form rational expectations. Fiscal marksmanship, the accuracy of budgetary forecasting, can be one important piece of such information the rational agents must consider in forming expectations. Using Theil’s inequality coefficient (U) based on the mean square prediction error, the paper estimates the magnitude of errors in the budgetary forecasts in India for the period 1990-91 to 2003-04 and also decomposed the errors into biasedness, unequal variation and random components to analyze the source of error. The test of rational expectations revealed that neither revenue nor expenditure forecasts in India is rational. However, capital budget revealed more forecast errors than revenue budget. The results also revealed that degree of errors in forecasting of receipts was relatively higher than that of expenditure. However there is no specific trend in the forecasting errors, which reveals that budgetary estimates are made not based on adaptive expectations. The proportion of error due to random variation has been significantly higher (which is beyond the control of the forecaster), while the errors due to bias has been negligible. The analysis related to efficiency of forecasts also showed that no significant improvement in forecasts over time.
    Keywords: fiscal marksmanship; Theils’ inequality coefficient; rational expectations; budgetary forecast errors
    JEL: E62 H68
    Date: 2008–01
  23. By: Ian Dew-Becker; Robert J. Gordon
    Abstract: Throughout the postwar era until 1995 labor productivity grew faster in Europe than in the United States. Since 1995, productivity growth in the EU-15 has slowed while that in the United States has accelerated. But Europe's productivity growth slowdown was largely offset by faster growth in employment per capita, leaving little difference in growth of output per capita between the EU and US going back to 1980. This paper is about the strong negative tradeoff between productivity and employment growth within Europe. We document this tradeoff in the raw data, in regressions that control for the two-way causation between productivity and employment growth, and we show that there is a robust negative correlation between productivity and employment growth across countries and time. Our primary explanatory variables to explain both the revival of EU employment growth and the slowdown in productivity growth include six policy and institutional variables. We find that several of these variables have significant negative effects on employment per capita, both before and after 1995. We also find a significant time effect, that the increase in European employment per capita increased after 1995 for reasons that go beyond our six explanatory variables, and we link this time effect to a secular increase in the labor-force participation of women, particularly in southern European countries. We conclude by suggesting that evaluations of alternative policy reforms in Europe should take into account any offsetting effects on employment and productivity by examining the ultimate impact on changes in income per capita.
    JEL: E0 E23 E24 E60 J20 J21 J23
    Date: 2008–03
  24. By: Langot, François (University of Le Mans); Quintero Rojas, Coralia (University of Le Mans)
    Abstract: Since 1960, the dynamics of the aggregate hours of market work exhibit dramatic differences across industrialized countries. Before 1980, these differences seem to come from the hours worked per employee (the intensive margin). However, since 1980 a notable feature of the data is that the divergence across countries responds to quantitatively important differences along the employment rate (the extensive margin). In this paper we develop an equilibrium matching model where both margins are endogenous. The model is rich enough to account for the behavior of the two margins of the aggregate hours when we include the observed heterogeneity across countries of both the taxes and the labor market institutions such as the unemployment benefits and the bargaining power. Because these findings come from an unified framework, they also give a strong support to the matching models.
    Keywords: hours worked, intensive and extensive margins, taxation, labor market institutions, matching model
    JEL: E2 J2 J6
    Date: 2008–02
  25. By: L. Marattin; M. Marzo
    Date: 2008–01
  26. By: Olavi Rantala
    Abstract: ABSTRACT : This study develops a model which can be used to evaluate the producer price effects and regional consumer price effects of alternative methods of financing social security, i.e. employers’ social security contributions and value added taxes. In the model system producer prices are determined by an input-output price model. National and regional consumer prices are determined by domestic producer prices, import prices and value added taxes. Simulations made by the model show e.g. that a decrease in the value added tax rate of food financed by a simultaneous increase in employers’ social security contributions leads to a fall in consumer price level and benefits mostly the elderly and pensioner households and the unemployed people, i.e. households with relatively large food expenditures. Regionally the largest consumer price fall takes place in Northern Finland. Consumer prices decrease least in Southern Finland.
    Keywords: producer prices, regional consumer prices
    JEL: D12 D57 E31
    Date: 2008–03–04
  27. By: Asfaha, Samuel
    Abstract: In countries where the political-economy incentives that governments face do not foster prudent revenue management, national revenue funds (NRFs) should not be used to impose optimal expenditure paths. In such countries, NRFs should instead be used as policy tools for re-aligning the diverging interests of governments, influential interest groups and society at large. This paper argues that nation-wide multi-stakeholder consultations are the way to go about it. Any multi-stakeholder consultation should target three important issues: establishing a national revenue management law which is acceptable to all stakeholders; establishing a multi-stakeholder independent oversight and monitoring committee to ensure checks-and-balances and compliance with the national revenue law; and giving the law constitutional status, to protect it from amendment or override by a single entity.
    Keywords: national revenue funds; Dutch disease; resource curse; polical-economy; rent-seeking; resource boom; consumption-smoothing; fiscal stabilization; revenue volatility
    JEL: H50 H20 H30 O13 Q33 E21 Q38 E30 N50 H60
    Date: 2007–08
  28. By: Orhangazi, Ozgur
    Abstract: Recent research has explored the growing ‘financialization’ process in the U.S. and other advanced economies. The term is a catch-all phrase used to denote important changes in the structure of non-financial corporations’ balance sheets, including the growth of income from financial subsidiaries and investment as well as growth in the transfer of earnings to financial markets in the forms of interest payments, dividend payments and stock buybacks. This paper seeks to empirically explore the relationship between financialization in the U.S economy and real investment at the firm level. Using data from a sample of non-financial corporations from 1973 to 2003, I find a negative relationship between real investment and financialization. First, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment. Second, increased payments to the financial markets may have impeded real investment by decreasing available internal funds, shortening the planning horizons of the firm management, and increasing uncertainty. These two channels can help explain the negative relationship I find between investment and financialization.
    JEL: D2 E2
    Date: 2007–10–01
  29. By: Greenwood, Jeremy (University of Pennsylvania); Guner, Nezih (Universidad Carlos III, Madrid)
    Abstract: Since World War II there has been: (i) a rise in the fraction of time that married households allocate to market work, (ii) an increase in the rate of divorce, and (iii) a decline in the rate of marriage. It is argued here that labor-saving technological progress in the household sector can explain these facts. This makes it more feasible for singles to maintain their own home, and for married women to work. To address this question, a search model of marriage and divorce, which incorporates household production, is developed. An extension looks back at the prewar era.
    Keywords: marriage, divorce, hours worked, household production, household size, technological progress
    JEL: E13 J12 J22 O11
    Date: 2008–01
  30. By: Gabriele, CARDULLO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: In this paper, I construct a general equilibrium model in which the labour market exhibits search frictions, whereas Cournot competition is assumed in the goods market. The properties of the long run free-entry equiibrium show that a more competitive product market raises employment, but it has ambiguous effects both on the real wage and on the utility of the employees. Moreover, from a normative viewpoint, the level of employment and the degree of competition may be inefficiently high. Numerical results based on Belgian data are finally performed.
    Keywords: product market competition, search matching equilibrium, barriers to entry
    JEL: E24 J64 L16
    Date: 2008–02–20
  31. By: Turk, Mehmet; Ozun, Alper
    Abstract: High and sudden volatility in the financial markets might cause unexpected losses. Increasing volatility in the prices of financial securities follows regime shifts in the markets. In general, there exist two regimes in the financial markets, namely, “stable” and “volatile” regimes. Therefore, estimating regime shifts in financial time series is crucial for the efficient risk management. From that perspective, the regime switching probabilities in emerging stock markets are examined with one of the regime switching models called Two State MSH(2)-AR, Autoregressive Markov Switching Heteroscedasticity Model. In the empirical analysis, we use daily time series data between 09/01/2004 and 13/09/2007 from i) emerging markets including Turkey, Russia, Ukraine, Brazil and Lebanon; ii) an advanced market, namely Dow Jones Industrial Average, iii) a world stock index, MSCI (Morgan Stanley Composite Index). Using data from different markets gives us to chance of evaluating the model’s performance with different time series. In addition, finding different regimes in the indexes within the same time period means that the investor have chance to diversify their portfolios.
    Keywords: Emerging markets; Regime switches; Markov chains; Volatility ; stock exchanges
    JEL: E32 G15 F21 F36
    Date: 2008
  32. By: Mark Aguiar; Erik Hurst
    Abstract: This paper examines the changing allocation of time within the United States that has occurred between 1965 and 2003-2005. We find that the time individuals have allocated to leisure has increased in the U.S. for both men and women during this period, with almost the entire gain occurring prior to 1985. We also find that post 1985 there has been a substantial increase in leisure inequality, particularly for men. Over the last 20 years, less educated men increased the time they allocated to leisure while more educated men recorded a decrease in leisure time. While the relative decline in the employment rate of less educated men is important, trends in employment status explain less than half of the increase in the leisure gap.
    JEL: E24 J22
    Date: 2008–03
  33. By: Greg Hannsgen
    Abstract: This paper attempts to explain one version of an empirical puzzle noted by Mankiw (2003): a Baumol-Tobin inventory-theoretic money demand equation predicts that the average U.S. adult should have held approximately $551.05 in currency and coin in 1995, while data show an average of $100. The models in this paper help explain this discrepancy using two assumptions: (1) the probabilities of being robbed or pick-pocketed, or having a purse snatched, depend on the amount of cash held; and (2) there are costs of being robbed other than loss of cash, such as injury, medical bills, lost time at work, and trauma. Two models are presented: a dynamic, stochastic model with both instantaneous and decaying noncash costs of robbery, and a revised version of the inventory-theoretic model that includes one-period noncash costs. The former model yields an easily interpreted first-order condition for money demand involving various marginal costs and benefits of holding cash. The latter model gives quantitative solutions for money demand that come much closer to matching the 1995 data--$75.98 for one plausible set of parameters. This figure implies that consumers held approximately $96 billion less cash in May 1995 than they would have in a world without crime. The modified Baumol-Tobin model predicts a large increase in household money demand in 2005, mostly due to reduced crime rates.
    Date: 2008–03
  34. By: Carmen M. Reinhart; Vincent R. Reinhart
    Abstract: Over the past decade, policymakers in many emerging market economies have opted to limit fluctuations of the value of their domestic currencies relative to the U.S. dollar. A simple interest-parity relationship is used to identify the potential sources of upward pressure on the value of a foreign exchange rate and to explain the policy options to damp them. The paper then documents the extent to which the accumulation of foreign exchange reserves has been sterilized and provides a comprehensive list of major policy initiatives related to stemming forces that would otherwise appreciate the exchange rate in over one hundred countries. This examination of policy efforts shows that a wide variety of tools are used in the attempt to stem the tide of capital flows.
    JEL: E0 F0 F3
    Date: 2008–03
  35. By: Christopher D. Carroll; Jiri Slacalek; Martin Sommer
    Abstract: We estimate the degree of 'stickiness' in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.
    Date: 2008–03
  36. By: Martin Eichenbaum; Nir Jaimovich; Sergio Rebelo
    Abstract: We assess the importance of nominal rigidities using a new weekly scanner data set from a major U.S. retailer, that contains information on prices, quantities, and costs for over 1,000 stores. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Weekly prices and costs fluctuate around reference values which tend to remain constant over extended periods of time. Reference prices are particularly inertial and have an average duration of roughly one year. So, nominal rigidities are present in our data, even though weekly prices change very frequently, roughly once every two weeks. We argue that the retailer chooses the frequency with which it resets references prices so as to keep the realized markups within plus/minus twenty percent of the desired markup over reference cost.
    JEL: E30
    Date: 2008–03
  37. By: Stepan Jurajda; Katherine Terrell
    Abstract: Differences in regional unemployment in post-communist economies are large and persistent. We show that inherited variation in human-capital endowment across the regions of four such economies explains the bulk of regional unemployment variation there and we explore potential explanations for this outcome through related capital and labor mobility patterns. The evidence suggests that regions with high inherited skill endowments attract skilled workers as well as FDI. This mobility pattern, which helps explain the lack of convergence in regional unemployment rates, is consistent with the presence of complementarities in skill and capital. Nevertheless, we find no supporting evidence of human capital wage spillovers implied by the complementarities story. Unemployment of the least-skilled workers appears lower in areas with a higher share of college-educated labor and future research is needed to see if this finding as well as the observed migration pattern arise from different adjustments to regional shocks by education level brought about in part by Central European labor-market institutions, such as guaranteed welfare income raising effective minimum wages.
    Keywords: Unemployment, Human capital, Regional labor markets, Transition economies, Labor Mobility, Complementarities, Spillovers, Czech Republic, Hungary, Romania, Ukraine.
    JEL: E24 J0 J61
    Date: 2007–12
  38. By: Catalina Amuedo-Dorantes (Department of Economics, San Diego State University); Jean Kimmel (Department of Economics, Western Michigan University)
    Abstract: Using data from the 1979 National Longitudinal Survey of Youth, we examine the cyclicality of moonlighting by gender. We estimate a random effects Tobit model of moonlighting among working men and women and find that, while male moonlighting behavior does not fluctuate significantly with the business cycle, female moonlighting does. The cyclicality of female moonlighting has, nonetheless, varied over the course of the past 35 years. Female moonlighting seemed to behave counter-cyclically during much of the 1980s and early 1990s, confirming the popular media belief that moonlighting is more likely to occur during periods of economic distress. Yet, this counter-cyclical behavior disappears during the 1993-99 period to become pro-cyclical by the early twentieth century. The recent pro-cyclicality of female moonlighting supports the idea that female workers respond to a need for “just-in-time” employment following the economic upturn of the mid to late 1990s.
    Date: 2007–09
  39. By: Luechinger, Simon (University of Zurich); Meier, Stephan (Federal Reserve Bank of Boston); Stutzer, Alois (University of Basel)
    Abstract: High rates of unemployment entail substantial costs to the working population in terms of reduced subjective well-being. This paper studies the importance of individual economic security, in particular job security, in workers’ well-being by exploiting sector-specific institutional differences in the exposure to economic shocks. Public servants have stricter dismissal protection and face a lower risk of their organization’s bankruptcy than private sector employees. The empirical results for individual panel data for Germany and repeated cross-sectional data for the United States and the European Union show that the sensitivity of subjective well-being to fluctuations in unemployment rates is much lower in the public sector than in the private. This suggests that increased economic insecurity constitutes an important welfare loss associated with high general unemployment.
    Keywords: unemployment, life satisfaction, job security, public sector
    JEL: E24 I31 J30 J45 J64
    Date: 2008–03
  40. By: Brown, Martin (Swiss National Bank); Falk, Armin (University of Bonn); Fehr, Ernst (University of Zurich)
    Abstract: When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is not third-party enforceable. But can implicit agreements – or relational contracts – also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance.
    Keywords: relational contracts, involuntary unemployment
    JEL: D82 J3 J41 E24 C9
    Date: 2008–02
  41. By: Shoichi Hisa
    Abstract: Investment of firms is affected by not only fundamentals factors, but liquidity constraint, ownership or corporate structure. Information structure between manager and owner is a significant factor to decide the level of investment, and deviation of investment from optimal condition. The reputation model between manager and owner suggest that the separate of ownership and management may induce the deviation of investment, and indicate that governance structure is important to reduce it. In this paper we estimate the deviation of investment using investment function, and investigate the relation of the derivation and ownership structure or corporate finance using data of Japanese listed firms. In empirical test the following results is induced. (i) The concentration of ownership reduces the deviation of investment. (ii) The deviation becomes smaller when main shareholder is government or individual. (iii) On the contrary it becomes larger when main shareholder is bank or foreign institution. These results suggested that the asymmetry of information between owner and manager bring the instability of investment, and bank system is not well functioned to solve the principal-agent problem to reduce the instability.
    Keywords: Reputation, Startegic Communication, Investment
    JEL: D82 D83 E22 G32
    Date: 2008–03
  42. By: Turner, Chad; Tamura, Robert; Mulholland, Sean
    Abstract: This paper creates a new data set on physical capital at the state level for the United States from 1840 - 2000. Combining these new data with state level human capital and output data enables us to estimate the contribution of aggregate input growth and total factor productivity (TFP) growth to output growth across states from 1840 - 2000, and to decompose the cross-sectional variance of output growth into the component explained by variation in aggregate inputs and the compenent explained by variation in TFP. As our data are across states instead of across countries, one would expect less institutional heterogeneity in this study than in studies using cross-country comparisons. We find that that 65% of average output growth from 1840 - 2000 is accounted for by average input growth. We find a plausible upper bound of output variation explained by TFP growth is 91%, while a plausible upper bound of output variation explained by input growth is 62%. Interestingly, even at the state level where the unit of observation is more homogeneous, TFP continues to be an important determinant of both the growth of and the variation of output per worker.
    Keywords: state physical capital; state human capital; state real output; state total factor productivity
    JEL: E01 O4
    Date: 2008–02–11
  43. By: Jiří Witzany (University of Economics, Prague, Czech Republic)
    Abstract: We will investigate valuation of derivatives with payoff defined as a nonlinear though close to linear function of tradable underlying assets. Derivatives involving Libor or swap rates in arrears, i.e. rates paid in a wrong time, are a typical example. It is generally tempting to replace the future unknown interest rates with the forward rates. We will show rigorously that indeed this is not possible in the case of Libor or swap rates in arrears. We will introduce formally the notion of plain vanilla derivatives as those that can be replicated by a finite set of elementary operations and show that derivatives involving the rates in arrears are not plain vanilla. We will also study the issue of valuation of such derivatives. Beside the popular convexity adjustment formula, we will develop an improved two or more variable adjustment formula applicable in particular on swap rates in arrears. Finally, we will get a precise fully analytical formula based on the usual assumption of log-normality of the relevant tradable underlying assets applicable to a wide class of convexity related derivatives. We will illustrate the techniques and different results on a case study of a real life controversial exotic swap.
    Keywords: interest rate derivatives, Libor in arrears, constant maturity swap, valuation models, convexity adjustment
    JEL: C13 E43 E47 G13
    Date: 2008–03
  44. By: Dominique Demougin (European Business School, Wiesbaden); Carsten Helm (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the workers' position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.
    Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalisation.
    JEL: J65 D82 J41 E24
    Date: 2008–03

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