nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒03‒25
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary policy and core inflation By Lenza, Michele
  2. Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment By Olivier Blanchard; Jordi Gali
  3. Helicopter Drops and Japanfs Liquidity Trap By Laurence Ball
  4. Housing market spillovers: Evidence from an estimated DSGE model By Matteo Iacoviello; Stefano Neri
  5. Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployement By Olivier Blanchard; Jordi Galí
  6. Monetary Policy Regimes and the Volatility of Long-Term Interest Rates By Queijo von Heideken, Virginia
  7. Search frictions, real rigidities and inflation dynamics By Carlos Thomas
  8. The Time-Varying Policy Neutral Rate in Real Time: A Predictor for Future Inflation? By Roman Horvath
  9. A Bayesian-Estimated Model of InflationTargeting in South Africa By Thomas Harjes; Luca Antonio Ricci
  10. Central Bank Financial Strength, Policy Constraints and Inflation By Peter Stella
  11. The effetcs of fiscal policy in Italy: Evidence from a VAR model By Raffaela Giordano; Sandro Momigliano; Stefano Neri; Roberto Perotti
  12. Using financial markets information to identify oil supply shocks in a restricted VAR By Melolinna, Marko
  13. Excess money growth and inflation dynamics By Barbara Roffia; Andrea Zaghini
  14. Productivity Growth and the Phillips Curve: A Reassessment of the US Experience By Marika Karanassou; Hector Sala
  15. Observed Inflation Forecasts and the New Keynesian Phillips Curve By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  16. Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs By Helge Berger; Pär Österholm
  17. Can capacity constraints explain asymmetries By Knüppel, Malte
  18. Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach By Lars E.O. Svensson; Noah Williams
  19. Money and the natural rate of interest: structural estimates for the United States and the euro area By Javier Andrés; David López-Salido; Edward Nelson
  20. Cyclical Skill-Biased Technological Change By Almut Balleer; Thijs van Rens
  21. Communication, decision-making and the optimal degree of transparency of monetary policy committees By Weber, Anke
  22. A Solution to the Default Risk-Business Cycle Disconnect By Enrique G. Mendoza; Vivian Z. Yue
  23. Emerging Market Sovereign Spreads, Global Financial Conditions and U.S. Macroeconomic News By Fatih Ozatay; Erdal Ozmen; Gülbin Sahinbeyoglu
  24. The cyclical response of fiscal policies in the euro area. Why do results of empirical research differ so strongly? By Roberto Golinelli; Sandro Momigliano
  25. On the importance of borrowing constraints for house price dynamics By Eerola, Essi; Määttänen, Niku
  26. Characterizing the Brazilian Term Structure of Interest Rates By Osmani T. Guillen; Benjamin M. Tabak
  27. Monetary Policy, Market Excesses and Financial Turmoil By Rudiger Ahrend; Boris Cournède; Robert Price
  28. Default risk and income fluctuations in emerging economies By Arellano, Cristina
  29. Business Cycle Accounting For Chile By Ina Simonovska; Ludvig Soderling
  30. A Comparative Study on the Role of Stochastic Trends in U.S. Macroeconomic Fluctuations, 1954-1988 By Seymen, Atilim
  31. Governing the Governors: A Clinical Study of Central Banks By Frisell, Lars; Roszbach, Kasper; spagnolo, giancarlo
  32. International Evidence on Sticky Consumption Growth By Christopher D. Carroll; Jiri Slacalek; Martin Sommer
  33. What’s behind “inflation perceptions”? A survey-based analysis of Italian consumers By Paolo Del Giovane; Silvia Fabiani; Roberto Sabbatini
  34. Understanding Sources of the Change in International Business Cycles By Necati Tekatli
  35. A Small Structural Monetary Policy Model for Small Open Economies with Debt Accumulation By Philippe D Karam; Adrian Pagan
  36. Central America's Regional Trends and U.S. Cycles By Shaun K. Roache
  37. Costly External Finance and Investment Efficiency in a Market Equilibrium Model By Jan Zabojnik
  38. Labor Market Fluctuations in the Small and in the Large By Richard Rogerson; Lodewijk P. Visschers; Randall Wright
  39. Modeling Smooth Structural Changes in the Trend of US Real GDP By Ting Qin; Walter Enders
  40. A "double coincidence" search model of money By Amendola, Nicola
  41. Bargaining Frictions, Labor Income Taxation and Economic Performance By Stéphane Auray; Samuel Danthine
  42. Budget Deficits and Interest Rates: A Fresh Perspective By Ari Aisen; David Hauner
  43. Accounting for Persistence and Volatility of Good-level Real Exchange Rates: The Role of Sticky Information By Mario J. Crucini; Mototsugu Shintani; and Takayuki Tsuruga
  44. External Linkages and Economic Growth in Colombia: Insights from A Bayesian VAR Model By Lisandro Abrego; Pär Österholm
  45. The Incidence of Reserve Requirements in Brazil: Do Bank Stockholders Share the Burden? By Fabia A. de Carvalho; Cyntia F. Azevedo
  46. The Elusive Persistence: Revisiting Useful Approaches to Data-Rich Macroeconomic Forecasting By Jan J.J. Groen; George Kapetanios
  47. The Wealth-Consumption Ratio By Hanno Lustig; Stijn Van Nieuwerburgh; Adrien Verdelhan
  48. An Investigation of the Cycle Extraction Properties of Several Bandpass Filters Used to Identify Business Cycles By Melvin J. Hinich; John Foster; Philip Wild
  49. Discrete Fourier Transform Filters as Business Cycle Extraction Tools: An Investigation of Cycle Extraction Properties and Applicability of ‘Gibbs’ Effect By Melvin J. Hinich; John Foster; Philip Wild
  50. Changes in the Terms of Trade and Canada's Productivity Performance By Diewert, Erwin
  51. Aggregate Investment Expenditures on Tradable and Nontradable Goods By Rudolfs Bems
  52. ICT-specific technological change and productivity growth in the US 1980-2004 By Diego Martínez; Jesús Rodríguez; José L. Torres
  53. ICT-specific technological change and productivity growth in the US 1980-2004 By Diego Martínez López; Jesús Rodríguez López; José Luis Torres Chacón
  54. The Significance of Switzerland’s Enormous Current-Account Surplus By Peter Jarrett; Céline Letremy
  55. Euro-zone Inflation Rates: Stationary or Regime-wise Stationary Processes By Claude Lopez
  56. Deconstructing Lifecycle Expenditure By Mark Aguiar; Erik Hurst
  57. Optimal saving in the presence of two small risks By M. Menegatti
  58. Pareto-Improving Optimal Capital and Labor Taxes By Albert Marcet; Katharina Greulich
  59. Investment and Value: A Neoclassical Benchmark By Janice Eberly; Sergio Rebelo; Nicolas Vincent
  60. Are Engel Curve Estimates of CPI Bias Biased? By Trevon D. Logan
  61. Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions By Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
  62. Growth, Unemployment and Tax/Benefit system in European Countries By Quintero-Rojas, Coralia; Adjemian, Stéphane; Langot, François
  63. This Time is Different: A Panoramic View of Eight Centuries of Financial Crises By Carmen M. Reinhart; Kenneth S. Rogoff
  64. Defense Policies Against Currency Attacks: on the Possibility of Predictions in a Global Game with Multiple Equilibria By George-Marios Angeletos; Alessandro Pavan; Christian Hellwig
  65. Employer-to-Employer Flows in the United States: Estimates Using Linked Employer-Employee Data By Melissa Bjelland; Bruce Fallick; John Haltiwanger; Erika McEntarfer
  66. Total factor productivity and the role of entrepreneurship By Hugo Erken; Piet Donselaar; Roy Thurik
  67. The Labor Market Impact of Immigration in Western Germany in the 1990's By Francesco D'Amuri; Gianmarco I.P. Ottaviano; Giovanni Peri
  68. The 2000-2001 Financial Crisis in Turkey: A Crisis for Whom? By Dufour, Mathieu; Orhangazi, Ozgur
  69. Capital Account Liberalization, Real Wages, and Productivity By Peter Blair Henry; Diego Sasson

  1. By: Lenza, Michele
    Abstract: This paper studies optimal monetary policy responses in an economy featuring sectorial heterogeneity in the frequency of price adjustments. It shows that a central bank facing heterogeneous nominal rigidities is more likely to behave less aggressively than in a fully sticky economy. Hence, the supposedly excessive caution in the conduct of monetary policy shown by central banks could be partly explained by the existence of a relevant sectorial dispersion in the frequency of price adjustments.
    Keywords: core inflation, elasticity of intertemporal substitution, heterogeneity, nominal rigidity
    JEL: E43 E52 E58
    Date: 2007
  2. By: Olivier Blanchard; Jordi Gali
    Abstract: We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation tradeoff and for the conduct of monetary policy.<br><br>We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment.<br><br>We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.
    JEL: E3 E31 E32 E52
    Date: 2008–03
  3. By: Laurence Ball (Johns Hopkins University (E-mail:
    Abstract: This paper examines the effects of a money-financed fiscal expansion -- a helicopter drop -- when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4% of GDP end the output slump and guide the economy to a steady state with 2% inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy's long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt.
    Keywords: Helicopter Drop, Liquidity Trap, Deflation
    JEL: E31 E52 E58 E63
    Date: 2008–03
  4. By: Matteo Iacoviello (Boston College); Stefano Neri (Bank of Italy, Economics and International Relations)
    Abstract: The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.
    Keywords: House prices, Collateral Constraints, Bayesian methods, Two-sector Models
    JEL: E32 E44 E47 R21 R31
    Date: 2008–01
  5. By: Olivier Blanchard; Jordi Galí
    Abstract: We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation trade- off and for the conduct of monetary policy. We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in un- employment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.
    Keywords: New-Keynesian model, labor market frictions, search model, unemployment, sticky prices, real wage rigidities
    JEL: E32 E50
    Date: 2006–03
  6. By: Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden)
    Abstract: This paper addresses two important questions that have, so far, been studied separately in the literature. First, the paper aims at explaining the high volatility of long-term interest rates observed in the data, which is hard to replicate using standard macro models. Building a small-scale macroeconomic model and estimating it on U.S. and U.K. data, I show that the policy responses of a central bank that is uncertain about the natural rate of unemployment can explain this volatility puzzle. Second, the paper aims at shedding new light on the distinction between rules and discretion in monetary policy. My empirical results show that using yield curve data may facilitate the empirical discrimination between different monetary policy regimes and that U.S. monetary policy is best understood as originating from a discretionary regime since 1960.
    Keywords: long-term interest rates; optimal monetary policy; discretion; commitment; Bayesian estimation
    JEL: C11 C13 C15 E32 E42 E43 E47 E50
    Date: 2008–02–01
  7. By: Carlos Thomas (Banco de España)
    Abstract: I analyze the effect of search frictions on inflation dynamics, in a New Keynesian model where firms make both pricing and vacancy posting decisions. I find that search frictions create real rigidities in price setting. This mechanism flattens the New Keynesian Phillips curve, relative both to the standard model with a frictionless labor market and a model where pricing and vacancy posting decisions are made by different subsets of firms. This helps the model improve its empirical performance along a number of dimensions. First, inflation becomes more persistent. Second, output responses to monetary shocks become larger and more persistent. Finally, unemployment becomes more volatile.
    Keywords: search and matching, real rigidities, New Keynesian Phillips curve
    JEL: E32 J40
    Date: 2008–03
  8. By: Roman Horvath
    Abstract: This paper examines the time-varying policy neutral interest rate in real time for the Czech Republic in 2001:1-2006:09, estimating various specifications of simple Taylor-type monetary policy rules. For this reason, we apply a structural time-varying parameter model with endogenous regressors. The results indicate that the policy neutral rate gradually decreased over the sample period to levels comparable to those in the euro area. Next, we propose a measure of the monetary policy stance based on the deviation of the actual interest rate from the estimated policy neutral rate and find it a useful predictor of the level as well as the change of the future inflation rate.
    Keywords: Policy neutral rate, Taylor rule, time-varying parameter model with endogenous regressors.
    JEL: E43 E52 E58
    Date: 2007–12
  9. By: Thomas Harjes; Luca Antonio Ricci
    Abstract: This paper estimates a small dynamic macroeconomic model for the South African economy with Bayesian methods. The model is tailored to assessing the impact of domestic as well as external shocks on inflation within an inflation targeting framework, by incorporating forward-looking behavior of private agents and of the monetary authority. The model is able to display important empirical features of the monetary transmission mechanism that have been found in other studies. It helps to integrate the short-term inflation outlook into a consistent medium-term framework and to design the policy response for various shocks that affect inflation.
    Keywords: Inflation targeting , South Africa , Inflation , Energy prices , Exchange rate instability , Demand ,
    Date: 2008–02–29
  10. By: Peter Stella
    Abstract: Central bank financial strength is positively associated with good policy performance. Financially weak central banks generate losses which undermine macroeconomic stability and call into question the credibility of their policies. In assessing central bank financial strength a careful examination of the policy regime and the volatility of the economic environment is necessary. Conventional measures of private enterprise financial strength- profitability and capital-can be very misleading when applied to central banks. The way in which a central bank balance sheet is strengthened matters. Providing the central bank with marketable government debt that can be used to develop a money market that in turn may become the locus of central bank monetary operations serves both to directly strengthen the institution and improve the quality of the environment in which it operates, thereby facilitating the attainment of its ultimate performance objectives.
    Keywords: Central banks , Transparency , Fiscal policy , Fiscal stability , Inflation ,
    Date: 2008–02–29
  11. By: Raffaela Giordano (Bank of Italy, Economic Research and International Relations); Sandro Momigliano (Bank of Italy, Economic Research and International Relations); Stefano Neri (Bank of Italy, Economic Research and International Relations); Roberto Perotti (IGIER- Bocconi University)
    Abstract: This paper studies the effects of fiscal policy on private GDP, inflation and the long-term interest rate in Italy using a structural vector autoregression model. To this end, a database of quarterly cash data for selected fiscal variables for the period 1982:1-2004:4 is constructed, largely relying on the information contained in the Italian Treasury Quarterly Reports. The main results of the study can be summarized as follows. A shock to government purchases of goods and services has a sizeable and robust effect on economic activity: an exogenous one per cent (in terms of private GDP) shock increases private real GDP by 0.6 per cent after 3 quarters. The response goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on employment, private consumption and investment are also positive. The response of inflation is positive but small and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on output, while the effects on employment turn negative after two quarters. Shocks to net revenue have negligible effects on all the variables.
    Keywords: Fiscal policy, Government spending, Fiscal multipliers, VAR
    JEL: E62 H30
    Date: 2008–01
  12. By: Melolinna, Marko (Bank of Finland Research)
    Abstract: This paper introduces a methodology for identifying oil supply shocks in a restricted VAR system for a small open economy. Financial market information is used to construct an identification scheme that forces the response of the restricted VAR model to an oil shock to be the same as that implied by futures markets. Impulse responses are then calculated by using a bootstrapping procedure for partial identification. The methodology is applied to Finland and Sweden in illustrative examples in a simple 5-variable model. While oil supply shocks have an inflationary effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is more ambiguous.
    Keywords: oil futures; partial identification; macroeconomic shocks
    JEL: C01 E32 E44
    Date: 2008–03–18
  13. By: Barbara Roffia (European Central Bank, DG Economics); Andrea Zaghini (Bank of Italy, Economic Research Department)
    Abstract: The paper analyzes the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialized economies. We find that when robust money growth is accompanied by large increases in stock and house prices and loose credit conditions, the probability of recording an inflationary outburst over a three-year horizon is significantly increased. In contrast, significant money stock expansions which are not associated with sustained credit increases and strong dynamics in other asset prices seem to be less likely to have inflationary consequences and thus, less worrying from a policy perspective.
    Keywords: Inflation, money growth, quantity theory of money
    JEL: E31 E40
    Date: 2008–01
  14. By: Marika Karanassou (Queen Mary, University of London); Hector Sala (Universitat Autonoma de Barcelona)
    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
  15. By: Chengsi Zhang (School of finance, Renmin University of China, China); Denise R. Osborn (Center for Growth and Business Cycle Research, Economics,University of Manchester, UK); Dong Heon Kim (Department of Economics, Korea University, Seoul, South Korea)
    Abstract: Empirical estimations of the micro-founded New Keynesian Phillips Curve (NKPC) using rational inflation expectation proxies have often found that the output gap is an invalid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation when observed measures of inflation expectations are used in conjunction with the output gap. The paper also contributes to the literature by addressing the important problem of serial correlation in the stylized NKPC and developing an extended model to account for this serial correlation. Contrary to recent results indicating no role for the output gap, we find it to be a statistically significant driving variable for inflation, with this finding robust to whether the inflation expectations series used relates to individual consumers, professional forecasters or the US Fed. In most of our estimations, however, lagged inflation dominates the role of inflation expectations, casting doubt on the extent to which price setting is forward-looking over the period 1968 to 2005. From an econometric perspective, the paper uses GMM estimation to account for endogeneity while also addressing concerns raised in recent studies about weak instrumental variables used in estimating NKPC models.
    Keywords: New Keynesian Phillips Curve, serial correlation, GMM, inflation forecasts
    JEL: E31 E58
    Date: 2008
  16. By: Helge Berger; Pär Österholm
    Abstract: We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.
    Keywords: Inflation , Euro Area , Demand for money , Monetary policy , Monetary aggregates ,
    Date: 2008–03–04
  17. By: Knüppel, Malte
    Abstract: In this paper, we investigate the ability of a modified RBC model to reproduce asymmetries observed for macroeconomic variables over the business cycle. In order to replicate the empirical skewness of major U.S. macroeconomic variables, we introduce a capacity constraint into an otherwise prototypical RBC model. This constraint emerges due to the assumption of kinked marginal costs of utilization, where the kink is located at a utilization rate of 100 percent. We find that a model with a suitably calibrated cost function reproduces the empirical coe􀀡cients of skewness remarkably well.
    Keywords: Capacity utilization, capacity constraints, asymmetry, RBC model
    JEL: E32
    Date: 2008
  18. By: Lars E.O. Svensson; Noah Williams
    Abstract: We study the design of optimal monetary policy under uncertainty in a dynamic stochastic general equilibrium models. We use a Markov jump-linear-quadratic (MJLQ) approach to study policy design, approximating the uncertainty by different discrete modes in a Markov chain, and by taking mode-dependent linear-quadratic approximations of the underlying model. This allows us to apply a powerful methodology with convenient solution algorithms that we have developed. We apply our methods to a benchmark New Keynesian model, analyzing how policy is affected by uncertainty, and how learning and active experimentation affect policy and losses.
    JEL: E42 E52 E58
    Date: 2008–03
  19. By: Javier Andrés (Universidad de Valencia); David López-Salido (Federal Reserve Board); Edward Nelson (Federal Reserve Bank of St. Louis)
    Abstract: We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.
    Keywords: Money, natural rate, New Keynesian models
    JEL: E51 E52
    Date: 2008–03
  20. By: Almut Balleer; Thijs van Rens
    Abstract: Over the past two decades, technological progress has been biased towards making skilled labor more productive. The evidence for this finding is based on the persistent parallel increase in the skill premium and the supply of skilled workers. What are the implications of skill-biased technological change for the business cycle? To answer this question, we use the CPS outgoing rotation groups to construct quarterly series for the price and quantity of skill. The unconditional correlation of the skill premium with the cycle is zero. However, using a structural VAR with long run restrictions, we find that technology shocks substantially increase the premium. Investment-specific technology shocks are not skill-biased and our findings suggest that capital and skill are (mildly) substitutable in aggregate production.
    Keywords: Skill-biased technology, skill premium, VAR, long-run restrictions, capital-skill complementarity, business cycle
    JEL: E24 E32 J24 J31
    Date: 2008–03
  21. By: Weber, Anke
    Abstract: This paper develops a theoretical model of dynamic decision-making of a monetary policy committee with heterogeneous members. It investigates the optimal transparency, and the optimal way of transmitting information of committees, by analysing the effects different communication strategies have on financial markets. It is shown that the communication strategy of the central bank committee has a significant effect on the predictability of monetary policy decisions when there is asymmetric information between the committee and market agents. Transparency about the diversity of views of the committee surrounding the economic outlook makes future monetary policy more predictable. However, communicating the diversity of views regarding monetary policy decisions may lead to less predictability of monetary policy in the short term. In addition, it is shown that communication in the form of voting records has the greatest effect on market participants' near term policy expectations. These results support findings of the empirical literature and have strong implications for the optimal communication strategies of committees including the question whether individual voting records should be published.
    Keywords: Monetary Policy Committees, Uncertainty, Communication, Transparency
    JEL: E50 E52 E58
    Date: 2008
  22. By: Enrique G. Mendoza; Vivian Z. Yue
    Abstract: Models of business cycles in emerging economies explain the negative correlation between country spreads and output by modeling default risk as an exogenous interest rate on working capital. Models of strategic default explain the cyclical properties of sovereign spreads by assuming an exogenous output cost of default with special features, and they underestimate debt-output ratios by a wide margin. This paper proposes a solution to this default risk-business cycle disconnect based on a model of sovereign default with endogenous output dynamics. The model replicates observed V-shaped output dynamics around default episodes, countercyclical sovereign spreads, and high debt ratios, and it also matches the variability of consumption and the countercyclical fluctuations of net exports. Three features of the model are key for these results: (1) working capital loans pay for imported inputs; (2) imported inputs support more efficient factor allocations than when these inputs are produced internally; and (3) default on the foreign obligations of firms and the government occurs simultaneously.
    JEL: E32 E44 F32 F34
    Date: 2008–03
  23. By: Fatih Ozatay (Department of Economics, ETU); Erdal Ozmen (Department of Economics, METU); Gülbin Sahinbeyoglu (CBRT)
    Abstract: This paper investigates the impact of global financial conditions, US macroeconomic news and domestic macroeconomic fundamentals on the evolution of EMBI spreads for a panel of 18 emerging market (EM) countries using daily data. To this end, we employ not only the conventional panel data estimation procedures but also the recently developed common correlated effects panel mean group method which incorporates heterogeneity by allowing country-specific coefficients whilst accounting for the effects of common global shocks such as contagion. The results strongly suggest that the long-run evolution of EMBI spreads depends on external factors such as changes in global liquidity conditions, risk appetite and crises contagion. Domestic macroeconomic fundamentals proxied by sovereign country ratings are also found to be important in explaining the spreads. The results from panel equilibrium correction models suggest that EMBI spreads respond substantially also to US macroeconomic news and changes in the Federal Reserve’s target interest rates. The magnitude and the sign of the effect of US macroeconomic news, however, crucially depend on the state of the US economy, such as the presence of an inflation dominance.
    Keywords: Bond spreads, Emerging markets, Macroeconomic news
    JEL: E43 E58 F36 G14 G15
    Date: 2007–12
  24. By: Roberto Golinelli (University of Bologna, Department of Economics); Sandro Momigliano (Bank of Italy, Department for Structural Economic Analysis)
    Abstract: Whether discretionary fiscal policies in industrialized countries act counter- or pro-cyclically and whether their reaction is symmetric or asymmetric over the cycle are still largely unsettled questions. This uncertainty remains even when attention is restricted to euro-area countries, where these questions have important implications for the debate on European fiscal rules. We review the recent empirical literature to explain why the results of the various studies differ so greatly. We find that differences are driven partly by the choices made in modelling fiscal behaviour and in the related notions of fiscal policy cyclicality. Results are also affected by data source and vintage (ex post or real-time). The time period chosen is relatively less important. We conclude that the notion of pro-cyclical fiscal policies often upheld in the debate is not justified by the data. Ex post data suggest either a-cyclicality or weak counter-cyclicality. Real-time information gives clearer indications of counter-cyclical behaviour, especially when we progress from a very simple “core” model to a more complex one, including at least the impact of fiscal rules. As for symmetry or asymmetry, the answer varies with sources of data and time periods. With the more complex model the indications of asymmetric behaviour are more robust. Whenever asymmetry is present, it entails shifts in all the parameters of the fiscal rule and not necessarily in the output gap parameter.
    Keywords: fiscal policy, euro-area countries, fiscal rules, pro and counter-cyclical policies, policy symmetry over the cycle, ex post and real-time data, dynamic panel models.
    JEL: E61 D72 E62 H60
    Date: 2008–01
  25. By: Eerola, Essi (University of Helsinki and HECER); Määttänen, Niku (The Research Institute of the Finnish Economy)
    Abstract: We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks.
    Keywords: house prices; dynamics; borrowing constraints; down payment constraint
    JEL: E21 R21
    Date: 2008–03–17
  26. By: Osmani T. Guillen; Benjamin M. Tabak
    Abstract: This paper studies the Brazilian term structure of interest rates and characterizes how the term premia has changed over time. We employ a Kalman filter approach, which is extended to take into account regime switches and overlapping forecasts errors. Empirical evidence suggests that term premia depends on international global liquidity and domestic factors such as the composition of public debt and inflation volatility. These results provide guidance for the formulation of fiscal and monetary policies.
    Date: 2008–08
  27. By: Rudiger Ahrend; Boris Cournède; Robert Price
    Abstract: This paper addresses the question of whether and how monetary policy ease may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and consequent financial imbalances -- the (partial) unwinding of which helped trigger the 2007 financial market turmoil. Moreover, the paper points out that in certain situations policy rates may be a rather blunt tool for dealing with both the build-up and aftermath of financial imbalances, raising the question whether “macro-prudential” regulation could be useful. <P>Politique monétaire, excès des marchés et troubles financiers <BR>Dans quelle mesure la politique monétaire a-t-elle pu conduire à des excès dans les marchés d'actifs réels et financiers et in fine mener aux récentes perturbations financières ? Cette étude aborde cette question en fournissant des éléments qui laissent à penser que, lorsque les taux courts se trouvent de manière durable nettement au-dessous de ce que prescrirait une règle de Taylor, les prix des actifs, notamment immobiliers, ont tendance à s'élever (hormis ceux des actions). D'importantes augmentations des prix des actifs sont aussi observées lors des périodes de dérégulation ou d'innovation financières. Cette étude avance des arguments selon lesquels le relâchement monétaire observé en 2002-2005, se combinant à une rapide innovation financière, apparaît rétrospectivement comme l'un des facteurs ayant contribué à l'envolée des prix des actifs et au gonflement des déséquilibres financiers qui en a résulté, un processus dont la résorption a alimenté les troubles financiers de 2007. En outre, cette étude souligne que, dans certaines situations, les taux directeurs sont un instrument peu adapté pour répondre à la formation et au dégonflement de déséquilibres financiers, ce qui soulève la question de savoir si la réglementation « macro-prudentielle » ne serait pas alors plus utile.
    Keywords: financial markets, marchés financiers, housing, logement, house prices, regulation, monetary policy, politique monétaire, asset prices, prix des actifs, interest rate, taux d'intérêt
    JEL: E44 E5 F3 G15
    Date: 2008–03–10
  28. By: Arellano, Cristina
    Abstract: Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.
    JEL: F34 F32 E44
    Date: 2008
  29. By: Ina Simonovska; Ludvig Soderling
    Abstract: We investigate sources of economic fluctuations in Chile during 1998-2007 within the framework of a standard neoclassical growth model with time-varying frictions (wedges). We analyze the relative importance of efficiency, labor, investment, and government/trade wedges for business cycles in Chile. The purpose of this exercise is twofold: (i) focus the policy discussion on the most important wedges in the economy; and (ii) identify which broad class of models would present fruitful avenues for further research. We find that different wedges have played different roles during our studied period, but that the efficiency and labor wedges have had the greatest impact. We also compare our results with existing studies on Argentina, Brazil, and Mexico.
    Date: 2008–03–19
  30. By: Seymen, Atilim
    Abstract: The paper attempts to provide an appropriate model specification for identifying technology and other macroeconomic shocks in a structural VAR framework. The investigation is conducted based on two seminal structural VAR studies by Gali (1999) and King et al. (1991). The models of these studies are compared and contrasted, and then modified based on the findings. The analysis builds on two studies of Alexius and Carlsson (2001, 2005) that examine the ability of structural VAR models to identify technology shocks. The original and augmented models are used for investigating the driving forces behind business cycle fluctuations.
    Keywords: Structural Vector Autoregression, Long-Run Restrictions, Error Variance Decomposition
    JEL: C32 C51 C52
    Date: 2008
  31. By: Frisell, Lars (Financial Stability Department, Central Bank of Sweden); Roszbach, Kasper (Research Department, Central Bank of Sweden); spagnolo, giancarlo (University of Rome)
    Abstract: We study the specific corporate governance problems of central banks in their complex role of inflation guardians, bankers’ banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review the current institutional arrangements of a number of central banks, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information. Research on central bank governance appears to have focused almost only on their monetary policy task. As shown by the sub-prime loan market turmoil, central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their stability. In this paper, we contrast the current governance practices at central banks with the structures suggested in the corporate governance literature. Our analysis highlights a number of specific issues that appear to have been unsatisfactorily addressed by existing research, such as the incentive structure for governors and board members, the balance between central banks’ multiple objectives and the need for term limits.
    Keywords: accountability; bank regulation; board structure; central banks; corporate governance; central bank independence; governor remuneration; term limits
    JEL: E58 G18 G34 G38
    Date: 2008–03–01
  32. 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.
    JEL: E21 F41
    Date: 2008–03
  33. By: Paolo Del Giovane (Banca d'Italia); Silvia Fabiani (Banca d'Italia); Roberto Sabbatini (Banca d'Italia)
    Abstract: This study investigates inflation perceptions in both qualitative and quantitative terms and their relationship with factors likely to affect them. This has been done in a unified framework through a survey of a representative sample of Italian consumers carried out at the end of 2006. The results show that reported inflation is, on average, much higher than measured by official statistics. Inflation perceptions are higher for women, the unemployed and less educated individuals, as well as for consumers with some forms of financial distress. A very low knowledge of the inflation concept and related statistics and an inaccurate memory of past prices turn out to play a significant role in explaining the highest class of perceptions. In contrast, the characteristics of individual shopping activity do not result to be significant. All in all, these results suggest that when consumers express their opinions on what they report as “inflation”, they are incorporating a complex combination of forces that go well beyond the phenomena measured by official inflation statistics.
    Keywords: inflation, consumers, perceptions, euro
    JEL: D12 E31
    Date: 2008–01
  34. By: Necati Tekatli
    Abstract: Macroeconomic activity has become less volatile over the past three decades in most G7 economies. Current literature focuses on the characterization of the volatility reduction and explanations for this so called "moderation" in each G7 economy separately. In opposed to individual country analysis and individual variable analysis, this paper focuses on common characteristics of the reduction and common explanations for the moderation in G7 countries. In particular, we study three explanations: structural changes in the economy, changes in common international shocks and changes in domestic shocks. We study these explanations in a unified model structure. To this end, we propose a Bayesian factor structural vector autoregressive model. Using the proposed model, we investigate whether we can find common explanations for all G7 economies when information is pooled from multiple domestic and international sources. Our empirical analysis suggests that volatility reductions can largely be attributed to the decline in the magnitudes of the shocks in most G7 countries while only for the U.K., the U.S. and Italy they can partially be attributed to structural changes in the economy. Analyzing the components of the volatility, we also ï¬nd that domestic shocks rather than common international shocks can account for a large part of the volatility reduction in most of the G7 countries. Finally, we ï¬nd that after mid-1980s the structure of the economy changes substantially in ï¬ve of the G7 countries: Germany, Italy, Japan, the U.K. and the U.S..
    Date: 2007–10–20
  35. By: Philippe D Karam; Adrian Pagan
    Abstract: We extend a small New Keynesian structural model used for monetary policy analysis to address a richer class of policy issues that arise in open economy analysis. We draw a distinction between absorption and domestic output, and as the difference between the two is effectively the current account, there is now an explicit accumulation or decumulation of foreign liabilities in response to various shocks affecting the system. Such stock equilibria can now have an impact back on to the flows in the domestic economy. We perform simulations using parameters calibrated to the Canadian economy and compare the differences in impulse responses from the original model. Advantages in a forecasting environment owing to the ability to impose explicit projections about imports and exports are also exposed.
    Date: 2008–03–19
  36. By: Shaun K. Roache
    Abstract: The economies of Central America share a close relationship with the United States, with considerable comovement of GDP growth over a long period of time. Trade, the financial sector, and remittance flows are all potential channels through which the U.S. cycle could affect the region. But just how dependent is growth in the region on the U.S.? Using the common cycles method of Vahid and Engle (1993), this paper suggests that the business cycle is dominated by the U.S.; region-specific growth drivers tend to be long-lasting shocks, rather than temporary fluctuations. The most cyclically sensitive countries include Costa Rica, El Salvador, and Honduras.
    Keywords: Economic integration , Central America , Costa Rica , El Salvador , Honduras , Trade , United States , Financial sector , Salary remittances ,
    Date: 2008–02–29
  37. By: Jan Zabojnik
    Abstract: The corporate finance literature suggests that a financially constrained firm invests less than an identical unconstrained firm. This does not imply that financial frictions cause firms to invest less than they would in a frictionless economy. When firms compete for investment funds, an increase in financial frictions can lead individual firms to increase their investment levels. A greater than the frictionless level of investment is likely in low productivity firms, in cash-rich firms, and in firms with cheap external capital. Government programs that make capital cheaper for small firms may lead to lower levels of investment for all firms and decrease efficiency.
    Keywords: Financial Frictions, Investment distortions
    JEL: O16 E22 E44 G20
    Date: 2008–03
  38. By: Richard Rogerson; Lodewijk P. Visschers; Randall Wright
    Abstract: Shimer's calibrated version of the Mortensen-Pissarides model generates unemployment fluctuates much smaller than the data. Hagedorn and Manovskii present an alternative calibration that yields fluctuations consistent with the data, but this has been challenged by Costain and Reiter, who say it generates unrealistically big differences in unemployment from the differences in policy we sees across countries. We argue this concern may be unwarranted, because one cannot assume elasticities relevant for small changes work for large changes. Models with fixed factors in market or household production can generate large effects from small changes and reasonable effects from large changes. This is reminiscent of attempts to improve the labor market in the Kydland-Prescott model, especially ones incorporating household production, like Benhabib, Rogerson and Wright.
    JEL: E2 E3 J2 J6
    Date: 2008–03
  39. By: Ting Qin; Walter Enders (Department of Economics, St. Cloud State University)
    Abstract: A key feature of Gallant’s Flexible Fourier Form is that the essential characteristics of one or more structural breaks can be captured using a small number of low frequency components from a Fourier approximation. We introduce a variant of the Flexible Fourier Form into the trend function of U.S. real GDP in order to allow for gradual effects of unknown numbers of structural breaks occurring at unknown dates. We find that the Fourier components are significant and that there are multiple breaks in the trend. In addition to the productivity slowdown in the 1970s, our trend also captures a productivity resumption in the late 1990s and a slowdown in the late 1950s. Our cycle corresponds very closely to the NBER chronology. We compare the decomposition from our model with those from a standard unobserved components model, the HP filter, and the Perron and Wada (2005) model. We find that our decomposition has several favorable characteristics over the other models and has very different implications about the recovery from the recent recession.
    Keywords: Flexible Fourier Form, Smooth Trend Breaks, Fourier Approximation
    Date: 2007–01
  40. By: Amendola, Nicola
    Abstract: According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share.
    Keywords: Money; Search; Double Coincidence; Bargaining
    JEL: C78 E40
    Date: 2008–03–19
  41. By: Stéphane Auray (Department of Economic, Université Charles-de-Gaulle lille 3); Samuel Danthine (Department of Economic Theory, Universidad de Málaga; Department of Economics, Université du Québec à Montréal)
    Abstract: A matching model with labor/leisure choice and bargaining frictions is used to explain (i ) differences in GDP per hour and GDP per capita, (ii) differences in employment, (iii ) differences in the proportion of part{time work across countries. The model predicts that the higher the level of rigidity in wages and hours the lower are GDP per capita, employment, part-time work and hours worked, but the higher is GDP per hour worked. In addition, it predicts that a country with a high level of rigidity in wages and hours and a high level of income taxation has higher GDP per hour and lower GDP per capita than a country with less rigidity and a lower level of taxation. This is due mostly to a lower level of employment. In contrast, a country with low levels of rigidity in hours and in wage setting but with a higher level of income taxation has a lower GDP per capita and a higher GDP per hour than the economy with low rigidity and low taxation. In this con¯guration,the level of employment is similar in both economies but the share of part-time work is larger.
    Keywords: models of search and matching, bargaining frictions, economic performance, labor market institutions, part-time jobs, labor market rigidities
    JEL: E24 J22 J30 J41 J50 J64
    Date: 2008–03
  42. By: Ari Aisen; David Hauner
    Abstract: We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system GMM. There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.
    Keywords: Budget deficits , Interest rates , Fiscal policy ,
    Date: 2008–02–20
  43. By: Mario J. Crucini (Department of Economics, Vanderbilt University (E-mail:; Mototsugu Shintani (Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:,; and Takayuki Tsuruga (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law- of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.- Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment.
    Keywords: Good-level Real Exchange Rates, Law of One Price, Sticky Information, Dynamic Panel
    JEL: E31 D40 F31
    Date: 2008–03
  44. By: Lisandro Abrego; Pär Österholm
    Abstract: This paper investigates the sensitivity of Colombian GDP growth to the surroundingmacroeconomic environment. We estimate a Bayesian VAR model with informative steady-statepriors for the Colombian economy using quarterly data from 1995 to 2007. A variancedecomposition shows that world GDP growth and government spending are the most importantfactors, explaining roughly 17 and 16 percent of the variance in Colombian GDP growthrespectively. The model, which is shown to forecast well out-of-sample, can also be used toanalyse alternative scenarios. Generating both endogenous and conditional forecasts, we showthat the impact on Colombian GDP growth of a substantial downturn in world GDP growthwould be non-negligible but still a mild decline by historical standards.
    Keywords: Economic growth , Colombia , Private investment , Forecasting models ,
    Date: 2008–02–25
  45. By: Fabia A. de Carvalho; Cyntia F. Azevedo
    Abstract: There is consensus in the economic literature that the reserve requirements are a tax levied upon financial intermediation, yet the incidence of the tax remains controversial. In this paper, we test whether changes in reserve requirements in Brazil impact the stock returns of the financial system distinctly from the rest of the economy. We find evidence that Brazilian bank stock returns were affected by changes in reserve requirements on both time deposits and transaction accounts, which implies that the tax burden of required reserves was not fully passed through to banks' borrowers or clients. Stock returns of non-financial firms were also affected by these changes, suggesting that in some cases, reserve requirements on time deposits and transaction accounts served as a non-neutral instrument of monetary or fiscal policy in Brazil.
    Date: 2008–02
  46. By: Jan J.J. Groen (Federal Reserve Bank of New York); George Kapetanios (Queen Mary, University of London)
    Abstract: This paper revisits a number of data-rich prediction methods, like factor models, Bayesian ridge regression and forecast combinations, which are widely used in macroeconomic forecasting, and compares these with a lesser known alternative method: partial least squares regression. Under the latter, linear, orthogonal combinations of a large number of predictor variables are constructed such that these linear combinations maximize the covariance between the target variable and each of the common components constructed from the predictor variables. We provide a theorem that shows that when the data comply with a factor structure, principal components and partial least squares regressions provide asymptotically similar results. We also argue that forecast combinations can be interpreted as a restricted form of partial least squares regression. Monte Carlo experiments confirm our theoretical result that principal components and partial least squares regressions are asymptotically similar when the data has a factor structure. These experiments also indicate that when there is no factor structure in the data, partial least squares regression outperforms both principal components and Bayesian ridge regressions. Finally, we apply partial least squares, principal components and Bayesian ridge regressions on a large panel of monthly U.S. macroeconomic and financial data to forecast, for the United States, CPI inflation, core CPI inflation, industrial production, unemployment and the federal funds rate across different sub-periods. The results indicate that partial least squares regression usually has the best out-of-sample performance relative to the two other data-rich prediction methods.
    Keywords: Macroeconomic forecasting, Factor models, Forecast combination, Principal components, Partial least squares, (Bayesian) ridge regression
    JEL: C22 C53 E37 E47
    Date: 2008–03
  47. By: Hanno Lustig; Stijn Van Nieuwerburgh; Adrien Verdelhan
    Abstract: We propose a new method to measure the wealth-consumption ratio. We estimate an exponentially affine model of the stochastic discount factor on bond yields and stock returns and use that discount factor to compute the no-arbitrage price of a claim to aggregate US consumption. We find that total wealth is much safer than stock market wealth. The consumption risk premium is only 2.2%, substantially below the equity risk premium of 6.9%. As a result, our estimate of the wealth-consumption ratio is much higher than the price-dividend ratio on stocks throughout the post-war period. The high wealth-consumption ratio implies that the average US household has a lot of wealth, most of it human wealth. The wealth-consumption ratio also has lower volatility than the price-dividend ratio on equity. A variance decomposition of the wealth-consumption ratio shows that future returns account for most of its variation. The predictability is mostly for future interest rates, not future excess returns. We conclude that the properties of total wealth are more similar to those of a long-maturity bond portfolio than those of a stock portfolio. Many dynamic asset pricing models require total wealth returns as inputs, but equity returns are commonly used as a proxy. The differences we find between the risk-return characteristics of equity and total wealth suggest that equity is special.
    JEL: E21 G10 G12
    Date: 2008–03
  48. By: Melvin J. Hinich; John Foster; Philip Wild (School of Economics, The University of Queensland)
    Abstract: The purpose of this article is to investigate the ability of bandpass filters commonly used in economics to extract a known periodicity. The specific bandpass filters investigated include a Discrete Fourier Transform (DFT) filter, together with those proposed by Hodrick and Prescott (1997) and Baxter and King (1999). Our focus on the cycle extraction properties of these filters reflects the lack of attention that has been given to this issue in the literature, when compared, for example, to studies of the trend removal properties of some of these filters. The artificial data series we use are designed so that one periodicity deliberately falls within the passband while another falls outside. The objective of a filter is to admit the ‘bandpass’ periodicity while excluding the periodicity that falls outside the passband range. We find that the DFT filter has the best extraction properties. The filtered data series produced by both the Hodrick-Prescott and Baxter-King filters are found to admit low frequency components that should have been excluded.
    Date: 2008
  49. By: Melvin J. Hinich; John Foster; Philip Wild (School of Economics, The University of Queensland)
    Abstract: The purpose of this article is to investigate the ability of an assortment of frequency domain bandpass filters proposed in the economics literature to extract a known periodicity. The specific bandpass filters investigated include a conventional Discrete Fourier Transform filter, together with the filter recently proposed in Iacobucci-Noullez (2004, 2005). We employ simulation methods whereby the above-mentioned filters are applied to artificial data in order to investigate their cycle extraction properties. We also investigate the implications and complications that may arise from the Gibbs Effect in practical settings that typically confront applied macroeconomists.
    Date: 2008
  50. By: Diewert, Erwin
    Abstract: Using new data from Statistics Canada, the paper shows that the productivity performance of the business sector of the Canadian economy has been reasonably satisfactory over the past 46 years. In particular, traditional gross income Total Factor Productivity (TFP) growth averaged 1.14 percentage points per year over the period 1961-2006 and when a net income framework was used, TFP growth averaged 1.26 percentage points per year. The focus of the study is on the real income generated by the business sector of the Canadian economy. Two concepts of income are used: a gross concept that includes depreciation as a part of income and a more appropriate net concept where depreciation is excluded from income. In both the gross and net income frameworks, the growth of quality adjusted labour input growth was the main driver of growth in real income followed by TFP growth, followed by growth in capital input and then by falling real import prices. However, in recent years, the contribution of falling real import prices turned out to be more than twice as important as capital deepening. The study encountered many data problems which should be addressed in future work on Canadian business sector productivity performance.
    JEL: C43 C67 C82 D24 E22 E43
    Date: 2008–03–11
  51. By: Rudolfs Bems
    Abstract: This paper shows that aggregate investment expenditure shares on tradable and nontradable goods are very similar across countries and regions. Furthermore, the two expenditure shares have remained close to constant over time, with the average expenditure share on nontradables varying between 0.54-0.62 over the 1960-2004 period. These empirical findings offer a new restriction for two-sector models of the aggregate economy. Combined with the fact that the relative price of nontradables correlates positively with income and exhibits large differences across space and time, our findings suggest that tradable and nontradable goods in investment can be modeled using the Cobb-Douglas aggregator.
    Keywords: Investment , Consumption , Income ,
    Date: 2008–02–25
  52. By: Diego Martínez (Universidad Pablo de Olavide); Jesús Rodríguez (Universidad Pablo de Olavide); José L. Torres (Universidad de Málaga)
    Abstract: This paper studies the impact of the information and communication technologies (ICT) on U.S. economic growth using a dynamic general equilibrium approach. We use a production function with six different capital inputs, three of them corresponding to ICT assets and other three to non-ICT assets. We find that the technological change mbedded in hardware equipment is the main leading non-neutral force of the U.S. roductivity growth and accounts for about one quarter of it during the period 1980-2004. As a whole, ICT-specific technological change accounts for about 35% of total labor productivity growth.
    Keywords: New economy, information and communications technologies, specific-technological change, neutral-technological change
    JEL: E22 O30 O40
    Date: 2008–03
  53. By: Diego Martínez López (Department of Economics, Universidad Pablo de Olavide); Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); José Luis Torres Chacón (Departamento de Teoría e Historia Económica, Universidad de Málaga)
    Abstract: This paper studies the impact of the information and communication technologies (ICT) on U.S. economic growth using a dynamic general equilibrium approach. We use a production function with six different capital inputs, three of them corresponding to ICT assets and other three to non-ICT assets. We find that the technological change embedded in hardware equipment is the main leading non-neutral force of the U.S. productivity growth and accounts for about one quarter of it during the period 1980-2004. As a whole, ICT-specific technological change accounts for about 35% of total labor productivity growth.
    Keywords: New economy, information and communication technologies, specific-technological change, neutral-technological change.
    JEL: E22 O30 O40
    Date: 2008–03
  54. By: Peter Jarrett; Céline Letremy
    Abstract: Switzerland has had a long-standing surplus on its current account. But over the past 15 years that surplus has surged to levels unmatched by nearly any other OECD country at any point. This paper looks at the surplus from a balance of payments vantage point as well as from the optic of the excess of national saving over domestic investment. It then seeks possible explanations for the uptrend and assesses whether it results to any extent from market, institutional or policy failures that could call for reforms. A number of important measurement issues are raised. But the key recommendation is that the authorities should prepare for a possible sharp increase in the value of the Swiss franc if and when investors engaged in the “carry trade” unwind their positions. To that end they should examine labour, capital and product markets with a view to ensuring they are as flexible as possible and that factors are as mobile as possible, both geographically and sectorally. This will allow any necessary adjustment to a higher exchange rate to be smoothly accommodated. This Working Paper is largely extracted from the 2007 OECD Economic Survey of Switzerland ( <P>La signification du colossal excédent des paiements courants de la Suisse <BR>La Suisse affiche depuis fort longtemps un excédent des paiements courants. Toutefois, au cours des 15 dernières années, cet excédent a atteint des niveaux quasiment sans précédent pour la zone OCDE. Dans le présent document, nous examinons cet excédent tant sous l’angle de la balance des paiements que dans l’optique de l’excédent de l’épargne nationale sur l’investissement intérieur. Nous recherchons ensuite les explications possibles de cette hausse, et tentons de déterminer si elle résulte dans quelque mesure que ce soit de défaillances des marchés, des institutions ou de l’action publique pouvant exiger la mise en oeuvre de réformes. Nous soulevons divers problèmes de mesure importants, mais notre principale recommandation est que les autorités devraient se préparer à la forte appréciation du franc suisse qui pourrait se produire dès lors que les investisseurs engagés dans des opérations de portage (« carry trade ») dénoueraient leurs positions. Dans cette optique, elles devraient examiner la situation des marchés du travail, des capitaux et des produits afin de veiller à ce qu’ils soient aussi flexibles que possible et à ce que la mobilité des facteurs de production soit maximale, tant en termes géographiques que sectoriels. Cela permettra un ajustement en douceur de l’économie en cas de hausse du taux de change. Ce Document de travail est largement extrait de l’Étude économique de l’OCDE de la Suisse 2007 (
    Keywords: Switzerland, Suisse, current account, compte courant
    JEL: E01 E21 E22 E44 E58 E65 F31 F32 O52
    Date: 2008–03–10
  55. By: Claude Lopez
    Abstract: This study investigates the stationary behavior of the inflation rates for the Euro- zone members and some neighboring countries, for the 1957:2 to 2007:3 period. The analysis uses univariate unit root tests with enhanced small-sample performances that allow up to two breaks in the intercept, namely those of Elliott et al. (1996) and Lopez (2008). The results strongly reject the unit root null hypothesis for all the countries. Furthermore, they demonstrate that some of the Euro-zone inflation rates are stationary and others are regime-wise stationary. While such results may reconcile some of the literature findings and provide empirical evidence that the Maastricht criterion is respected, they also highlight the importance of accounting for breaks when studying these series.
    Date: 2008
  56. By: Mark Aguiar; Erik Hurst
    Abstract: In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar "hump" shaped lifecycle profile of nondurable expenditures. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find, for example, that while food expenditures decline after middle age, expenditures on entertainment continue to increase throughout the lifecycle. These patterns pose a challenge to models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment, to explain the lifecycle profile of expenditures. Second, we document that the increase in the cross-sectional dispersion of expenditure over the lifecycle is not greater for luxuries. In particular, the dispersion in entertainment expenditure declines relative to food expenditures as households become older, casting further doubt on theories that emphasize (exclusively) shocks to permanent income to explain the rising cross sectional expenditure dispersion over the lifecycle. We propose and test a Beckerian model that emphasizes intra-temporal substitution between time and expenditures as the opportunity cost of time varies over the lifecycle. We find this alternative model successfully explains the joint behavior of food and entertainment expenditures in the latter half of the lifecycle. The model, however, is less successful in explaining expenditure patterns early in the lifecycle.
    JEL: D13 E21
    Date: 2008–03
  57. By: M. Menegatti
    Abstract: We examine optimal saving in the presence of two small risks: income risk and a background risk. First, we compute the necessary and sufficient condition for a positive precautionary saving, showing that it depends on two terms capturing respectively the direct effect of income risk and the interaction between the two risks. Secondly, we examine the necessary and sufficient condition for a positive extra-saving due to the contemporaneous presence of the two risks. We show that this condition also depends on a term capturing the direct effect of background risk and that it can hold independently of the previous one.
    Keywords: Precautionary saving, Background risk, Uncertainty
    JEL: D11 D81 E21
    Date: 2008
  58. By: Albert Marcet; Katharina Greulich
    Abstract: We show a standard model where the optimal tax reform is to cut labor taxes and leave capital taxes very high in the short and medium run. Only in the very long run would capital taxes be zero. Our model is a version of Chamley??s, with heterogeneous agents, without lump sum transfers, an upper bound on capital taxes, and a focus on Pareto improving plans. For our calibration labor taxes should be low for the first ten to twenty years, while capital taxes should be at their maximum. This policy ensures that all agents benefit from the tax reform and that capital grows quickly after when the reform begins. Therefore, the long run optimal tax mix is the opposite from the short and medium run tax mix. The initial labor tax cut is financed by deficits that lead to a positive long run level of government debt, reversing the standard prediction that government accumulates savings in models with optimal capital taxes. If labor supply is somewhat elastic benefits from tax reform are high and they can be shifted entirely to capitalists or workers by varying the length of the transition. With inelastic labor supply there is an increasing part of the equilibrium frontier, this means that the scope for benefitting the workers is limited and the total benefits from reforming taxes are much lower.
    Date: 2008–02–19
  59. By: Janice Eberly; Sergio Rebelo; Nicolas Vincent
    Abstract: Which investment model best fits firm-level data? To answer this question we estimate alternative models using Compustat data. Surprisingly, the two best-performing specifications are based on Hayashi's (1982) model. This model's foremost implication, that Q is a sufficient statistic for determining a firm's investment decision, has been often rejected because cash-flow and lagged-investment effects are present in investment regressions. However, we find that these regression results are quite fragile and ineffectual for evaluating model performance. So, forget what investment regressions tell you. Models based on Hayashi (1982) provide a very good description of investment behavior at the firm level.
    JEL: E22
    Date: 2008–03
  60. By: Trevon D. Logan
    Abstract: A recent literature has advanced the use of Engel curves to estimate overall CPI bias. In this paper, I show that the methodology is sensitive to the modeling of household demography. Existing estimates of CPI bias do not account for the changing effect of household size on budget shares, and this can lead to omitted variable bias. Since the effect of household size on demand changes over time the drift in Engel curves attributed to CPI bias is partially explained by this effect. My estimates of the annual rate of CPI bias from 1888 to 1935 are changed by at least 25%, and usually more than 50%, once the changing effect of household size is accounted for.
    JEL: D1 E3 J1 N3
    Date: 2008–03
  61. By: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
    Abstract: This paper analyzes a model that features frictions, an operative labor supply margin, and incomplete markets. We first provide analytic solutions to a benchmark model that includes indivisible labor and incomplete markets in the absence of trading frictions. We show that the steady state levels of aggregate hours and aggregate capital stock are identical to those obtained in the economy with employment lotteries, while individual employment and asset dynamics can be different. Second, we introduce labor market frictions to the benchmark model. We find that the effect of the frictions on the response of aggregate hours to a permanent tax change is highly non-linear. We also find that there is considerable scope for substitution between "voluntary" and "frictional" nonemployment in some situations.
    JEL: E2 J2
    Date: 2008–03
  62. By: Quintero-Rojas, Coralia; Adjemian, Stéphane; Langot, François
    Abstract: This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a Schumpeterian model of endogenous growth: agents have the choice of being employed or being doing R&D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) High labor costs or powerful trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with our empirical analysis based on 183 European Regions, between 1980-2003. Finally, in a welfare exercise, we show that the optimal growth rate can be reached by compensating the distortions on the goods-sector due to the growth process with the distortions induced by the labor market rigidities.
    Keywords: Endogenous growth; unemployment; labor market institutions; welfare.
    JEL: J51 E24 O33
    Date: 2008–03–14
  63. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper offers a “panoramic†analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that "this time is different" among policymakers and investors. A recent example of the "this time is different" syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.
    JEL: E6 F3 N0
    Date: 2008–03
  64. By: George-Marios Angeletos; Alessandro Pavan; Christian Hellwig
    Abstract: This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenses by raising domestic interest rates, or otherwise raising the cost of speculation, only when the value it assigns to defending the peg - its "type" - is intermediate. (ii) Devaluation occurs only for low types. (iii) the set of types who intervene shrinks with the precision of market information. (iv) A unique equilibrium policy survives in the limit as the noise in market information vanishes, whereas the devaluation outcome remains indeterminate. (v) The payoff of the central bank is monotonic in its type. (vi) The option to intervene can be harmful only for sufficiently strong types; and when this happens, weak types are necessarily better off. While these predictions seem reasonable, none of them would have been possible in the common-knowledge version of the model. Combined, these results illustrate the broader methodological point of the paper: global games can retain significant selection power and deliver useful predictions even when the endogeneity of information sustains multiple equilibria.
    Keywords: global games, robust predictions, signaling, currency crises, regime change, multiple equilibria.
    JEL: C7 D8 E5 E6 F3
    Date: 2007–08
  65. By: Melissa Bjelland; Bruce Fallick; John Haltiwanger; Erika McEntarfer
    Abstract: We use administrative data linking workers and firms to study employer-to-employer flows. After discussing how to identify such flows in quarterly data, we investigate their basic empirical patterns. We find that the pace of employer-to-employer flows is high, representing about 4 percent of employment and 30 percent of separations each quarter. The pace of employer-to-employer flows is highly procyclical, and varies systematically across worker, job and employer characteristics. Our findings regarding job tenure and earnings dynamics suggest that for those workers moving directly to new jobs, the new jobs are generally better jobs; however, this pattern is highly procyclical. There are rich patterns in terms of origin and destination of industries. We find somewhat surprisingly that more than half of the workers making employer-to-employer transitions switch even broadly-defined industries (NAICS super-sectors).
    JEL: E24 J62 J63
    Date: 2008–03
  66. By: Hugo Erken (Ministry of Economic Affairs, Erasmus University Rotterdam); Piet Donselaar (Ministry of Economic Affairs); Roy Thurik (Erasmus University Rotterdam; Max Planck Institute of Economics; EIM Business and Policy Research)
    Abstract: Total factor productivity of twenty OECD countries for a recent period (1971-2002) is explained using six different models based on the established literature. Traditionally, entrepreneurship is not dealt with in these models. In the present paper it is shown that - when this variable is added - in all models there is a significant influence of entrepreneurship while the remaining effects mainly stay the same. Entrepreneurship is measured as the business ownership rate (number of business owners per workforce) corrected for the level of economic development (GDP per capita).
    Keywords: Total factor productivity, research and development, entrepreneurship, OECD
    JEL: E20 L26 M13 O10 O30 O40 O50
    Date: 2008–03–14
  67. By: Francesco D'Amuri; Gianmarco I.P. Ottaviano; Giovanni Peri
    Abstract: We adopt a general equilibrium approach in order to measure the effects of recent immigration on the Western German labor market, looking at both wage and employment effects. Using the Regional File of the IAB Employment Subsample for the period 1987-2001, we find that the substantial immigration of the 1990's had no adverse effects on native wages and employment levels. It had instead adverse employment and wage effects on previous waves of immigrants. This stems from the fact that, after controlling for education and experience levels, native and migrant workers appear to be imperfect substitutes whereas new and old immigrants exhibit perfect substitutability. Our analysis suggests that if the German labor market were as 'flexible' as the UK labor market, it would be more efficient in dealing with the effects of immigration.
    JEL: E24 F22 J31 J61
    Date: 2008–03
  68. By: Dufour, Mathieu; Orhangazi, Ozgur
    Abstract: In this paper, we study the consequences of the 2000-2001 financial crisis in Turkey to identify the impacts of the crisis on capital and labor. We uncover three significant empirical effects of this crisis. First, international capital benefited from the crisis by both increasing its total assets in Turkey and income flows from these assets, while large domestic financial capitalists also increased their profits in the aftermath of the crisis. Second, industrial capital benefited via a repression of labor. Third, the attempt to ‘remedy’ the economy by imposing structural changes furthered the interests of capital in general.
    Keywords: : financial crisis; finance capital; IMF; external debt; precautionary cost; Turkey
    JEL: F3 F02 E6
    Date: 2007
  69. By: Peter Blair Henry; Diego Sasson
    Abstract: For three years after the typical developing country opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of seven. No such increase occurs in a control group of developing countries. The temporary increase in the growth rate of the real wage permanently drives up the level of average annual compensation for each worker in the sample by 752 US dollars -- an increase equal to more than a quarter of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the aftermath of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers' incomes actually coincides with a rise in manufacturing sector profitability.
    JEL: E2 F3 F4 F41 J3 O4
    Date: 2008–03

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