|
on Macroeconomics |
|
Issue of 2008‒04‒12
eighty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Stehn, Sven Jari; Vines, David |
| Abstract: | Leith and Wren-Lewis (2007) have shown that government debt is returned to its pre-shock level in a New Keynesian model under optimal discretionary policy. This has two important implications for monetary and fiscal policy. First, in a high-debt economy, it may be optimal for discretionary monetary policy to cut the interest rate in response to a cost-push shock - thereby violating the Taylor principle - although this will not be true if inflation is significantly persistent. Second, the optimal fiscal response to such a shock is more active under discretion than commitment, whatever the degree of inflation persistence. |
| Keywords: | Fiscal Policy; Government Debt; Monetary Policy; Stabilisation Bias |
| JEL: | E52 E60 E61 E63 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6696&r=mac |
| By: | Hans Dewachter; Marco Lyrio; Konstantijn Maes |
| Abstract: | This paper uses reprojection to develop a benchmark to assess ECB monetary policy since January 1999, the start of EMU. We first estimate an essentially affine term structure model for the German SWAP yield curve between 1987:04-1998:12. The German monetary policy is then reprojected onto the EMU period (1999:01-2001:08). We find that the German real interest rate in place during the EMU period is significantly lower than it would have been in case the Bundesbank were still in charge of monetary policy. We also show the effect of EMU on the German SWAP\ yield curve. Short- and medium-term bonds seem to have been more affected than long-term bonds. |
| Keywords: | EMU, ECB, Bundesbank, central bank monetary policy rule, essentially affine term structure model. |
| JEL: | E43 E44 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0205&r=mac |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan; Sekine, Toshitaka |
| Abstract: | Recently, the Bank of Japan outlined a “two perspectives” approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination of inflation in Japan. We find that inflation is related to money growth and real output growth at low frequencies and the output gap at higher frequencies. Moreover, this relationship reflects Granger causality from money growth and the output gap to inflation in the relevant frequency bands. |
| Keywords: | frequency domain; Phillips curve; quantity theory; spectral regression |
| JEL: | C22 E3 E5 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6650&r=mac |
| By: | Blanchard, Olivier J; Galí, Jordi |
| 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 unemployment. We show the role of labour 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 labour market frictions and real wage rigidities. We show the nature of the trade-off between inflation and unemployment stabilization, and its dependence on labour market characteristics. We draw the implications for optimal monetary policy. |
| Keywords: | Labour market frictions; New Keynesian Model; real wage rigidities; search model; sticky prices; unemployment |
| JEL: | E32 E50 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6765&r=mac |
| By: | Gersbach, Hans; Hahn, Volker |
| Abstract: | We examine whether the publication of forecasts concerning the likely future conduct of monetary policy is socially desirable. Introducing a new central bank loss function that accounts for the deviations from announcements, we incorporate forecasts about future inflation and interest rates into a dynamic monetary model. We show that the announcement of future interest rates is always socially detrimental. However, medium-term inflation projections tend to increase welfare. |
| Keywords: | central banks; commitment; ECB; Federal Reserve; policy inclinations; transparency |
| JEL: | E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6761&r=mac |
| By: | Blanchard, Olivier J; Galí, Jordi |
| Abstract: | We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labour markets, and (d) improvements in monetary policy. We conclude that all four have played an important role. |
| Keywords: | Great Moderation; Monetary policy credibility; Real wage rigidities; Sticky Prices |
| JEL: | E32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6631&r=mac |
| By: | Favero, Carlo A; Giavazzi, Francesco |
| Abstract: | The European Economic and Monetary Union (EMU) has created a new economic area, larger and closer with respect to the rest of the world. Area-specific shocks are thus more important in EMU than country-specific shocks used to be in the previous states, e.g. in Germany. It is thus not surprising that the models built by the staff of the European Central Bank (ECB) to study optimal monetary policy in the Euro area (for instance Smets and Wouters, 2004a, 2004b) typically assume that this works essentially as a closed economy, hit by domestic shocks - the same assumption made in standard models of U.S. monetary policy (see e.g. Christiano et al., 1999 ), where all shocks are domestic with the only possible exception of energy price shocks. Two-country models exist at the ECB (e.g. de Walque, Smets, Wouters, 2005) but they overlook asset price fluctuations and their international comovements. This paper studies monetary policy in the Euro area looking at the variable most directly related to current and expected monetary policy, the yield on long term government bonds. We explore how the behaviour of European long-term rates has been affected by EMU and whether the response of long-term rates to monetary policy has got any closer to that consistent with a closed economy. We find that the level of long-term rates in Europe is almost entirely explained by U.S. shocks and by the systematic response of U.S. and European variables (inflation, short term rates and the output gap) to these shocks. Our results suggest in particular that U.S. variables are more important than local variables in the policy rule followed by European monetary authorities: this was true for the Bundesbank before EMU and has remained true for the ECB, at least so far. Using closed economy models to analyze monetary policy in the Euro is thus inconsistent with the empirical evidence on the determinants of Euro area long-term rates. It is also inconsistent with the way the Governing Council of the ECB appears to make actual policy decisions. We also find that Euro area long rates respond more to financial shocks, in particular shocks to term premia, than they do to monetary policy "shocks" - i.e. instances when the ECB deviates from its rule. This finding point to the importance of incorporating into the analysis of Euro area monetary policy of the effects of fluctuations in international asset prices. |
| Keywords: | DSGE models; ECB; monetary policy; yield curve |
| JEL: | E43 E52 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6654&r=mac |
| By: | Wieland, Volker |
| Abstract: | This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms' expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank's targets. As firms abandon backward-looking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation. |
| Keywords: | disinflation; indexation; inflation targeting; learning; monetary policy; New-Keynesian model; recursive least squares |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6749&r=mac |
| By: | Yunus Aksoy; Tomasz Piskorski |
| Abstract: | Recent empirical research has found that the strong short-term relationship between US monetary aggregates and macroeconomic fundamentals, as outlined in the classical study of M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of B. Friedman and Kuttner (1992) information value approach we reevaluate the vanishing relationship between US monetary aggregates and macroeconomic fundamentals. By using the official US data constructed by Porter and Judson (1996) we find that the currency component of M1 corrected for the foreign holdings of dollars contains valuable information on US macroeconomic fundamentals, such as nominal and real income, as well as inflation. This correction for monetary aggregates is required because the rate of foreign holdings in total money creation is large and unstable. The statistical evidence provided in this paper suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. |
| Keywords: | foreign holdings, US monetary aggregates, information value, the Friedman-Schwartz's evidence. |
| JEL: | E3 E4 E5 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0107&r=mac |
| By: | Raquel Fonseca (RAND, 1776 Main Street P.O. Box 2138 Santa Monica, CA 90407-2138, USA); Lise Patureau (THEMA Université de Cergy-Pontoise, 33, boulevard du Port 95011 Cergy-Pontoise Cedex, France); Thepthida Sopraseuth (EPEE Université d’Evry and PSE, 4 Bd F. Mitterand, 91025 Evry Cedex, France) |
| Abstract: | This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. We first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. We then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, we model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Our conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Our overall results show that taking into account labor market heterogeneity improves our understanding of the quantity puzzle. |
| Keywords: | International business cycle, Search, Labor market institutions, Wage bargaining |
| JEL: | E24 E32 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-14&r=mac |
| By: | Hans Dewachter; Marco Lyrio |
| Abstract: | This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modeling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and Tinsley (2001). Application to the U.S. economy shows the importance of long-run inflation expectations in the modeling of long-term bonds. The paper also provides a macroeconomic interpretation for the factors found in a latent factor model of the term structure. More specifically, we find that the standard “level” factor is highly correlated to long-run inflation expectations, the “slope”' factor captures temporary business cycle conditions, while the “curvature” factor represents a clear independent monetary policy factor |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0304&r=mac |
| By: | Evans, George W; Honkapohja, Seppo |
| Abstract: | Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents' learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation. |
| Keywords: | determinacy; fluctuations; imperfect knowledge; interest-rate setting; learning; stability |
| JEL: | D84 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6640&r=mac |
| By: | Galí, Jordi; Gambetti, Luca |
| Abstract: | The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labour productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidence points to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behind the observed changes. |
| Keywords: | Great Moderation; Labour hoarding; Monetary policy rules; Structural VARs; Technology Shocks |
| JEL: | E32 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6632&r=mac |
| By: | Pelin Ilbas |
| Abstract: | This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period’s inflation rate seem to perform relatively worse. |
| Keywords: | optimal rules, commitment, discretion, stabilization bias |
| JEL: | E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0613&r=mac |
| By: | Paustian, Matthias; von Hagen, Jürgen |
| Abstract: | Due to the lack of pertinent evidence, there is currently no agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, qualitative statements such as the welfare ranking of alternative monetary policy rules are robust to changes in contracting schemes. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes. |
| Keywords: | Calvo Pricing; Monetary Policy Rules; Nominal Rigidities; Sticky Information; Taylor Contracts |
| JEL: | E32 E52 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6726&r=mac |
| By: | Annick Bruggeman; Marie Donnay |
| Abstract: | In this paper we gradually construct a monthly encompassing monetary model on the basis of its two constituting components: a money demand and a loan demand model. Each of the three models pays special attention to the intermediation role of banks by modelling the relation between the retail bank interest rates and the short-term market interest rate. The encompassing monetary model accounts for the possible interactions between money and loans induced by the intermediation role of the banking sector, which is represented in this paper by its interest rates setting behaviour. Our analysis indicates that, over the period January 1981-September 2001, our monthly money demand model corroborates the existing quarterly evidence. The same does not hold for our loan demand model where a correcting variable for the mergers and acquisitions wave of 1999-2000 is added as an exogenous variable to stabilise the loan demand equation. Our encompassing monetary model rejects the frequently used assumption of complete separability in the pricing of loans and deposits. It provides also some evidence on the existence of a bank lending channel in the euro area, although there is some indication of a possible instability in the link between money and loans towards the end of the sample period. The estimation of the Structural-VECM highlights very rich dynamics in the system. The common trends method results in the identification of seven shocks: an aggregate supply shock, an inflation objective shock, an institutional shock, a money demand shock, a loan demand shock, a banking shock and a monetary policy instrument shock. The first three shocks are permanent shocks, responsible for the main variability in the macro-economic variables in the long run; while the last four shocks are temporary ones, affecting the economy only in the short and medium run. |
| Keywords: | Euro area, Cointegration, Structural VECM, Money demand, Loan demand, Banking intermediation. |
| JEL: | C32 E41 E43 E50 G21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0309&r=mac |
| By: | Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea |
| Abstract: | Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in US output and hours. Moreover, these disturbances drive prices higher in expansions, like a textbook demand shock. We reach these conclusions by estimating a DSGE model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent, and even lower for hours. Labour supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model. |
| Keywords: | Bayesian; DSGE model; endogenous markups; imperfect competition |
| JEL: | C11 E30 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6739&r=mac |
| By: | Mumtaz, Haroon; Surico, Paolo |
| Abstract: | Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period. Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s. |
| Keywords: | factor model; Low inflation; monetary policy; time variation |
| JEL: | E30 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6767&r=mac |
| By: | Marie Donnay; Hans Degryse |
| Abstract: | The pass-through from the money market rate to several bank lending rates and the government bond rate is investigated for 12 European countries over the period 1980-2000, by applying a SVAR based on the Cholesky decomposition. Simulations of a one percent point rise in the money market rate, performed for all countries, reveal divergences within and between countries in the dynamics of the lending rate pass-through. Subsequently, this pass-through is introduced in an enlarged SVAR model to account for the intermediation role of banks in the transission process of monetary policy to the real economy, for 7 European countries. The simulation results indicate a significant role for the banking sector. Moreover some asymmetries in the price of credit both within and across countries in Europe exist. The different effects on the real economy (private consumption and investment) depend on the magnitude of the lending rate pass-through. |
| Keywords: | Transmission of monetary policy, EMU, Bank intermediation, Lending rates, Pass-through, SVAR, Impulse response analysis |
| JEL: | E43 E44 E52 G21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0117&r=mac |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in U.S. output and hours. Moreover, like a textbook demand shock, these disturbances drive prices higher in expansions. We reach these conclusions by estimating a dynamic stochastic general equilibrium (DSGE) model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model. |
| Keywords: | Business cycles ; Capital investments ; Stochastic analysis ; Equilibrium (Economics) ; Labor supply ; Competition |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:322&r=mac |
| By: | Mertens, Karel; Ravn, Morten O. |
| Abstract: | We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between "surprise" and "anticipated" tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980’s recession. |
| Keywords: | anticipation effects; fiscal policy; structural estimation; tax liabilities |
| JEL: | E20 E32 E62 H30 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6673&r=mac |
| By: | Liu, G.; Gupta, R.; Schaling, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Journal of Economic Literature Classification: E17, E27, E32, E37, E47 |
| Keywords: | DSGE Model;VAR and BVAR Model;Forecast Accuracy;DSGE Forecasts;VAR Forecasts;BVAR Forecasts |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200832&r=mac |
| By: | Beetsma, Roel; Giuliodori, Massimo |
| Abstract: | We explore how fiscal policies in the OECD have responded to unexpected information about the economy during the period 1995-2006. In particular, we first estimate standard fiscal rules using ex-ante data (i.e. forecasts). We then estimate how fiscal policy reacts to new information, especially on the business cycle. In this second step, we use various approaches in dealing with potential endogeneity and changes in data construction methodology after the ex ante data were released. All variants lead to similar results. There are marked differences between ex-ante behaviour and responses to new information, as well as between fiscal policy of the EU countries and the other OECD countries. In particular, the EU countries react in a pro-cyclical way to unexpected changes in the output gap, while the responses of the other OECD countries are a-cyclical. However, ex ante fiscal policy is a-cyclical for the EU countries and counter-cyclical for the other countries. |
| Keywords: | cyclicality; EU; first-release data; Fiscal policy; OECD; real-time data |
| JEL: | E62 H60 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6692&r=mac |
| By: | Corsetti, Giancarlo |
| Abstract: | What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50 years from its birth, in light of recent advances in open economy macro and monetary theory? This paper presents a stylized micro-founded model of the costs of adopting a common currency, relative to an ideal benchmark in which domestic monetary authorities pursue country-specific efficient stabilization. Costs from (a) limiting monetary autonomy and (b) giving up exchange rate flexibility are examined in turn. These costs will generally be of the same magnitude as the costs of the business cycle. However, to the extent that exchange rates do not perform the stabilizing role envisioned by traditional OCA theory, a common monetary policy can be as efficient as nationally differentiated policies, even when shocks are strongly asymmetric, provided that the composition of aggregate spending tends to be symmetric at union-wide level. Convergence in consumption (and spending) patterns thus emerges as a possible novel attribute of countries participating in an efficient currency area. |
| Keywords: | Exchange Rate Regime; International Policy Coordination; New Open Macro Macroeconomics; Optimal Monetary Policy; Optimum Currency Area |
| JEL: | E31 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6712&r=mac |
| By: | Angelini, Elena; Camba-Mendez, Gonzalo; Giannone, Domenico; Reichlin, Lucrezia; Rünstler, Gerhard |
| Abstract: | This paper evaluates models that exploit timely monthly releases to compute early estimates of current quarter GDP (now-casting) in the euro area. We compare traditional methods used at institutions with a new method proposed by Giannone, Reichlin and Small, 2005. The method consists in bridging quarterly GDP with monthly data via a regression on factors extracted from a large panel of monthly series with different publication lags. We show that bridging via factors produces more accurate estimates than traditional bridge equations. We also show that survey data and other `soft' information are valuable for now-casting. |
| Keywords: | Factor Model; Forecasting; Large data-sets; Monetary Policy; News; Real Time Data |
| JEL: | C33 C53 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6746&r=mac |
| By: | Bernoth, Kerstin; Hughes Hallett, Andrew; Lewis, John |
| Abstract: | Empirical fiscal policy reaction functions based on ex-post data cannot be said to describe fiscal policymakers intentions because they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policy makers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1995-2006 using both types of data. We exploit the information contained in real time and ex-post data and develop a new approach to estimating the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data in an attempt to estimate potential output or the structural budget. We find that the often commented on pro-cyclicality of discretionary policy only arises in the ex-post data; the real time data suggests that policymakers have tried to run counter-cyclical discretionary policy, but find it hard to do so due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal responses and stronger estimates of the discretionary responses to the output gap. |
| Keywords: | Discretion; Fiscal Policy; Real Time Data |
| JEL: | E61 E62 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6758&r=mac |
| By: | Canova, Fabio; López-Salido, J David; Michelacci, Claudio |
| Abstract: | We analyze the effects of neutral and investment-specific technology shocks on hours and output. Long cycles in hours are captured in a variety of ways. Hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks. The percentage of the variance of hours (output) explained by neutral shocks is small (large); the opposite is true for investment specific shocks. `News shocks' that generically change expectations about future productivity, are uncorrelated with the estimated technology shocks. |
| Keywords: | Long cycles; News shocks; Structural VARs; Technology disturbances |
| JEL: | E00 J60 O33 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6720&r=mac |
| By: | Yunus Aksoy |
| Abstract: | This paper extends the framework provided by De Grauwe, Dewachter and Aksoy (1998). Monetary policy effectiveness of the European Central Bank (ECB) in the open economy Euroland is addressed. The optimal feedback rules for the member states with the use of the backward looking variables are derived. The role of the real exchange rate is discussed. For alternative scenarios at the ECB Governing Council we simulate the monetary policy effectiveness and provide some welfare analysis. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9920&r=mac |
| By: | Evans, George W; Honkapohja, Seppo |
| Abstract: | We consider "robust stability" of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, i.e. rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter. |
| Keywords: | adaptive learning; Commitment; determinacy; interest-rate setting; stability |
| JEL: | D84 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6641&r=mac |
| By: | Orphanides, Athanasios; Wieland, Volker |
| Abstract: | Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers' forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers' own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections. |
| Keywords: | FOMC; forecasts; monetary policy; policy rules |
| JEL: | E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6748&r=mac |
| By: | Hardouvelis, Gikas A; Thomakos, Dimitrios D |
| Abstract: | We investigate the behavior of consumer confidence around national elections in the EU-15 countries during 1985:1-2007:3. Consumer confidence increases before the date of elections and falls subsequently by almost the same amount. It is able to predict the strength of the performance of the incumbent party and its probability of re-election both alone and in the presence of macro- economic and fiscal variables. The post-election drop is negatively related to the previous run up and is a function of the political - but not the economic - environment. A similar rise and fall characterizes consumer confidence in the United States. |
| Keywords: | consumer confidence; EU-15; fiscal conditions; incumbent party; macro-economy; national elections; political business cycle; USA |
| JEL: | D7 E6 H3 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6701&r=mac |
| By: | Kerstin Bernoth; Andrew Hughes Hallet; John Lewis |
| Abstract: | Empirical fiscal policy reaction functions based on ex post data cannot be said to describe fiscal policymakers intentions, since they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policymakers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1994-2006 using both types of data. We exploit the information contained in real-time and ex post data and develop a new approach to estimate the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data upfront in an attempt to estimate potential output or the structural budget. We find that the often commented upon pro-cyclicality of discretionary policy arises only with ex post data; the real time data suggests that policymakers are seeking to run counter cyclical discretionary policy, but find it hard to do so in practice due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal response and stronger estimates of the discretionary fiscal response to an output gap. |
| Keywords: | Fiscal Policy; Real Time Data; Discretion |
| JEL: | E62 E61 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:169&r=mac |
| By: | Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob de Haan; David-Jan Jansen |
| Abstract: | Over the last two decades, communication has become an increasingly importantaspect of monetary policy. These real-world developments have spawned a huge newscholarly literature on central bank communicationmostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:170&r=mac |
| By: | Yi Wen |
| Abstract: | This paper develops an analytically tractable general equilibrium model of inventory dynamics. Inventories are introduced into a standard RBC model through a precautionary stockout-avoidance motive. Under persistent aggregate demand shocks, the model is broadly consistent with the U.S. business cycle and key features of inventory behavior, including (i) a large inventory stock-to-sales ratio and a small inventory investment-to-sales ratio in the long run, (ii) excess volatility of production relative to sales, (iii) procyclical inventory investment but countercyclical stock-to-sales ratio over the business cycle, and (iv) more volatile input inventories than output inventories. Similar results can also be obtained under persistent aggregate supply shocks. |
| Keywords: | Inventories ; Business cycles |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-008&r=mac |
| By: | Charles Goodhart |
| Abstract: | The relative liquidity of financial assets is significantly influenced by the Central Bank’s willingness to buy such assets, or to accept them as collateral, in the course of providing additional cash to banks. Those assets which the Central Bank will deal in for such purposes become more liquid, and more marketable, than those that the Central Bank will not. When the banking system as a whole is short of cash, it has no other recourse than to go to the Central Bank for assistance. The Central Bank has to provide this, since otherwise interest rates will rise very sharply, given the banks’ inelastic demand for cash reserves. A Central Bank’s choice, in practice, is the price (interest rate) at which it will supply the requisite cash, not the volume of high-powered cash reserves to supply. Normally a Central Bank will supply just enough cash to hold very short-term (e.g. overnight) rates close to the policy rate, chosen generally on broad macro-economic grounds, e.g. to maintain medium-term price stability. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp179&r=mac |
| By: | Paul De Grauwe; Hans Dewachter; Yunus Aksoy |
| Abstract: | In this paper we compare the stabilizing properties of the EMU to those of a ERM system, controlled by Germany. We find that in general the EMU will provide better stabilization of inflation, output and the interest rate than the EMS system. However, these results only apply if the ECB can effectively control monetary policy.\ In the case that the ECB-representatives do not coordinate and take a nationalistic point of view, the EMS regime is preferred by various countries. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9921&r=mac |
| By: | Danny Leung |
| Abstract: | Many empirical studies have examined the cyclical nature of the markup ratio. Until recently, few have attempted to ascertain the changes in the markup over a longer time horizon. These changes are of no less interest in view of the posited effects of increasing import competition and lower inflation on the markup. This paper offers evidence on the evolution of the markups for the Canadian business sector and 33 disaggregate industries over the 1961–2004 period. It is found that the business sector markup has declined since the mid-1980s, and that import competition has made a statistically significant but small contribution to this decline. |
| Keywords: | Econometric and statistical methods |
| JEL: | E31 F41 L11 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-7&r=mac |
| By: | Danny Leung |
| Abstract: | Many empirical studies have examined the cyclical nature of the markup ratio. Until recently, few have attempted to ascertain the changes in the markup over a longer time horizon. These changes are of no less interest in view of the posited effects of increasing import competition and lower inflation on the markup. This paper offers evidence on the evolution of the markups for the Canadian business sector and 33 disaggregate industries over the 1961–2004 period. It is found that the business sector markup has declined since the mid-1980s, and that import competition has made a statistically significant but small contribution to this decline. |
| Keywords: | Econometric and statistical methods |
| JEL: | E31 F41 L11 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-8&r=mac |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | This paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions. |
| Keywords: | Time-series analysis ; Business cycles ; Stochastic analysis ; Keynesian economics ; Equilibrium (Economics) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:320&r=mac |
| By: | Carlo Altavilla |
| Abstract: | The paper compares the di¤erent timing and magnitude of mon-etary shocks across European countries. The problem the European Central Bank faces in setting a single monetary policy rule is analyzed starting from the di¤erences in the monetary transmission mechanism across EMU members. The econometric methodology applied is the Structural Vector Autoregression with constraints both on contem-poraneous and long term relationships among the variables of the estimated models. The results suggest the presence of asymmetric response to a monetary policy shock. In contrast with some empirical studies, the comparative analysis of the EMU members’ response to a contractionary monetary policy shock does not lead to an unambigu-ous positive relationship between country size and response widht. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0022&r=mac |
| By: | M. Hashem Pesaran; Til Schuermann; L. Vanessa Smith |
| Abstract: | This paper considers the problem of forecasting real and financial macroeconomic variables across a large number of countries in the global economy. To this end, a global vector autoregressive (GVAR) model previously estimated over the 1979:Q1-2003:Q4 period by Dees, de Mauro, Pesaran, and Smith (2007) is used to generate out-of-sample one-quarter- and four-quarters-ahead forecasts of real output, inflation, real equity prices, exchange rates, and interest rates over the period 2004:Q1-2005:Q4. Forecasts are obtained for 134 variables from twenty-six regions made up of thirty-three countries and covering about 90 percent of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the paper examines the effects of model and estimation uncertainty on forecast outcomes by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modeling problem and the heterogeneity of the economies considered, industrialized, emerging, and less developed countries, as well as the very real likelihood of multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed, the double-averaged GVAR forecasts performed better than the benchmark forecasts, especially for output, inflation, and real equity prices. |
| Keywords: | Economic forecasting ; Time-series analysis ; Econometric models ; Vector autoregression |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:317&r=mac |
| By: | Ugo Marani (in collaboration with Carlo Altavilla) |
| Abstract: | The aim of the research is the evaluation of the exchange rate of the Euro after the first six months of its existence. The main interpretative hypotheses of the research can be summarised in the following points: (i) the evolution of the Euro external value is strictly connected with the agents’ confidence on real, financial and foreign exchange markets; (ii) the ECB monetary policy strategy influenced negatively (or at least neglected) the agents’ confidence and expectations already affected by the negative cyclical conditions of european economy; (iii) the resulting portfolio reallocation determined a short-term capital outflow in favour of US Dollar denominated assets and, hence, an Euro depreciation. The consistency of the whole framework is checked by variables as the Industrial Sentiment, the Interest-Rate Spread, the Implied Volatility of exchange rates, the Risk Reversal, and by the building of a Structural Autoregressive Model. |
| JEL: | E58 F31 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9923&r=mac |
| By: | Artis, Michael J; Okubo, Toshihiro |
| Abstract: | Abstract: This paper studies the intranational business cycle - that is the set of regional (prefecture) business cycles - in Japan. One reason for choosing to examine the Japanese case is that long time series and relatively detailed data are available. A Hodrick-Prescott filter is applied to identify the cycles in annual data from 1955 to 1995 and bilateral cross-correlation coefficients are calculated for all the pairs of prefectures. Comparisons are made with similar sets of bilateral cross correlation coefficients calculated for the States of the US and for the member countries of a "synthetic Euro Area". The paper then turns to an econometric explanation of the cross-correlation coefficients (using Fisher’s z-transform), in a panel data GMM estimation framework. An augmented gravity model provides the basic model for the investigation, whilst the richness of the data base also allows for additional models to be represented. |
| Keywords: | Gravity Model; Heckscher Ohlin theorem; Hodrick-Prescott filter; Intranational business cycle; Market potential; Optimal Currency Area |
| JEL: | E32 F41 R11 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6686&r=mac |
| By: | Doepke, Matthias; Hazan, Moshe; Maoz, Yishay D |
| Abstract: | We argue that one major cause of the U.S. postwar baby boom was the increased demand for female labour during World War II. We develop a quantitative dynamic general equilibrium model with endogenous fertility and female labour-force participation decisions. We use the model to assess the long-term implications of a one-time demand shock for female labour, such as the one experienced by American women during wartime mobilization. For the war generation, the shock leads to a persistent increase in female labour supply due to the accumulation of work experience. In contrast, younger women who turn adult after the war face increased labour-market competition, which impels them to exit the labour market and start having children earlier. In our calibrated model, this general-equilibrium effect generates a substantial baby boom followed by a baby bust, as well as patterns for age-specific labour-force participation and fertility rates that are consistent with U.S data. |
| Keywords: | baby boom; female labour-force participation; fertility; World War II |
| JEL: | D58 E24 J13 J20 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6628&r=mac |
| By: | Petrongolo, Barbara; Pissarides, Christopher |
| 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 labour 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 employment 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: | Job finding rates; Job separation rates; Unemployment dynamics |
| JEL: | E24 E32 J6 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6681&r=mac |
| By: | Dominique Guillaume; David Stasavage |
| Abstract: | This paper analyses the experience with monetary policy in African countries which have participated in rule-based international monetary arrangements (CFA Franc Zone, Eastern African Currency Board and Rand Monetary Area). It argues that African countries have generally lack the political institutions necessary for governments to credibly commit through domestic institutions (exchange rate pegs or independent central banks). For such countries, monetary unions can provide an alternative source of credible commitment to sound macroeconomic policies, but only when exit from a union is made costly by the existence of parallel regional accords, and only when governance structures of monetary unions have been designed so as to maximise chances for the enforcement of monetary rules. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces09908&r=mac |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs and treatment of estimated deviations from the cross-equation restrictions. This paper develops and explores policy analysis approaches that are based on either the generalized shock structure for the DSGE model or the explicit modeling of deviations from cross-equation restrictions. Using post-1982 U.S. data, we first quantify the degree of misspecification in a state-of-the art DSGE model and then document the performance of different interest rate feedback rules. We find that many of the policy prescriptions derived from the benchmark DSGE model are robust to the various treatments of misspecifications considered in this paper, but that quantitatively the cost of deviating from such prescriptions varies substantially. |
| Keywords: | Time-series analysis ; Monetary policy ; Stochastic analysis ; Econometric models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:321&r=mac |
| 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: | business cycle; large factor models; MIDAS; missing values; mixed-frequency data; nowcasting |
| JEL: | C53 E37 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6708&r=mac |
| By: | Andrew K. Rose; Mark M. Spiegel |
| Abstract: | This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature. |
| Keywords: | Business cycles |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-01&r=mac |
| By: | Obstfeld, Maurice; Shambaugh, Jay C; Taylor, Alan M |
| Abstract: | The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt. |
| Keywords: | banking crises; capital flight; central banks; exchange rate regimes; financial development; foreign exchange; global imbalances; Guidotti-Greenspan rule; international liquidity; intervention; lender of last resort; net foreign assets; sterilization; sudden stop |
| JEL: | E44 E58 F21 F31 F36 F41 N10 O24 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6693&r=mac |
| By: | Marco Bonomo (EPGE/FGV and CIREQ); Cristina Terra (THEMA/Université de Cergy-Pontoise and EPGE/FGV) |
| Abstract: | In this paper we build a framework where the interplay between the lobby power of special interest groups and the voting power of the majority of the population leads to political business cycles. We apply our set up to explain electoral cycles in government expenditure composition as well as to cycles in aggregate expenditures and in real exchange rates. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-18&r=mac |
| By: | Favero, Carlo A; Pagano, Marco; von Thadden, Ernst-Ludwig |
| Abstract: | The paper explores the determinants of yield differentials between sovereign bonds in the Euro area. There is a common trend in yield differentials, which is correlated with a measure of aggregate risk. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We propose a simple model with endogenous liquidity demand, where a bond's liquidity premium depends both on its transaction cost and on investment opportunities. The model predicts that yield differentials should increase in both liquidity and risk, with an interaction term of the opposite sign. Testing these predictions on daily data, we find that the aggregate risk factor is consistently priced, liquidity differentials are priced for a subset of countries, and their interaction with the risk factor is in line with the model's prediction and crucial to detect their effect. |
| Keywords: | Bond yields; euro area; liquidity; risk |
| JEL: | E43 J12 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6649&r=mac |
| By: | Zwart, G. de; Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | This paper presents empirical evidence that security analysts do not efficiently use publicly available macroeconomic information in their earnings forecasts for emerging market stocks. Analysts completely ignore forecasts on political stability, while these provide valuable information for firm-level earnings growth. Analysts do incorporate output growth forecasts, but these actually bear no relevant information for firm-level earnings growth. Inflation forecasts are taken into account correctly. In addition, the information environment appears to be crucially important in emerging markets, as we find evidence that analysts handle macroeconomic information in a better way for more transparent firms. |
| Keywords: | analysts' earnings forecasts;emerging markets;macroeconomic forecasts;forecast accuracy |
| Date: | 2008–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765011556&r=mac |
| By: | Linda Goldberg; Cédric Tille |
| Abstract: | The U.S. dollar plays a key role in international trade invoicing along two complementary dimensions. First, most U.S. exports and imports are invoiced in dollars; second, trade flows that do not involve the United States are often invoiced in dollars, a fact that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that although exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal monetary policy. |
| Keywords: | Dollar, American ; Monetary policy ; International trade ; International finance ; Foreign exchange |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:316&r=mac |
| By: | Romain Houssa |
| Abstract: | We analyse the costs of a monetary union in West Africa by means of asymmetric aggregate demand and aggregate supply shocks. Previous studies have estimated the shocks with the VAR model. We discuss the limitations of this approach and apply a new technique based on the dynamic factor model. The results suggest the presence of economic costs for a monetary union in West Africa because aggregate supply shocks are poorly correlated or asymmetric across these countries. Aggregate demand shocks are more correlated between West African countries. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0411&r=mac |
| By: | Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:103&r=mac |
| By: | M. van leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loanmarket competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data; |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:171&r=mac |
| By: | Guner, Nezih; Kaygusuz, Remzi; Ventura, Gustavo |
| 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 labour supply. We restrict our model with observations on gender and skill premia, labour 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 labour supply: while hours per-worker display small increases, total hours and female labour 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 labour 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: | labour force participation; taxation; two-earner households |
| JEL: | E62 H31 J12 J22 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6702&r=mac |
| By: | Elekdag, Selim; Lalonde, Rene; Laxton, Doug; Muir, Dirk; Pesenti, Paolo |
| Abstract: | We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labour income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption. |
| Keywords: | DSGE models; Oil prices; World economy |
| JEL: | E66 F32 F47 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6700&r=mac |
| By: | Ignacio Lozano; Hernán Rincón; Miguel Sarmiento; Jorge Ramos |
| Abstract: | Las reglas fiscales aumentan la credibilidad en la política económica, permiten un manejo fiscal contracíclico y sostenible intertemporalmente, y contribuyen a la estabilidad y al crecimiento económico. El gobierno colombiano ha usado reglas fiscales para limitar el crecimiento del gasto y el endeudamiento de los entes territoriales y para propiciar la transparencia y responsabilidad fiscal del sector público. Sin embargo, el alcance de dichas reglas ha sido limitado, como lo evidencia la naturaleza estructural del desequilibrio fiscal del gobierno central y la procíclicidad de su política. En este documento se formula y evalúa una regla fiscal cuantitativa de 1% del PIB de superávit primario estructural para el gobierno central, con el fin de consolidar el proceso de ajuste de las finanzas públicas del país y blindar su manejo hacia el futuro. La aplicación contrafactual de la regla muestra que si se hubiera adoptado a comienzos de la década, el gobierno hubiera hecho ahorros anuales de por lo menos 0,7% del PIB entre 2001 y 2006. Si se acogiera este año, se lograrían ahorros del mismo monto entre 2008 y 2011, con lo cual se reduciría el nivel actual de la deuda en 3 puntos del PIB al final del período. |
| Date: | 2008–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004597&r=mac |
| By: | Banerjee, Anindya; Marcellino, Massimiliano; Masten, Igor |
| Abstract: | We conduct a detailed simulation study of the forecasting performance of diffusion index-based methods in short samples with structural change. We consider several data generation processes, to mimic different types of structural change, and compare the relative forecasting performance of factor models and more traditional time series methods. We find that changes in the loading structure of the factors into the variables of interest are extremely important in determining the performance of factor models. We complement the analysis with an empirical evaluation of forecasts for the key macroeconomic variables of the Euro area and Slovenia, for which relatively short samples are officially available and structural changes are likely. The results are coherent with the findings of the simulation exercise, and confirm the relatively good performance of factor-based forecasts in short samples with structural change. |
| Keywords: | Factor models; forecasts; parameter uncertainty; short samples; structural change; time series models |
| JEL: | C32 C53 E37 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6706&r=mac |
| By: | Eberly, Janice; Rebelo, Sérgio; Vincent, Nicolas |
| 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 behaviour at the firm level. |
| Keywords: | Cash flow; Tobin's q |
| JEL: | E22 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6737&r=mac |
| By: | Møller, Stig Vinther (Department of Business Studies, Aarhus School of Business) |
| Abstract: | This paper finds empirical support for the habit persistence model of Campbell and Cochrane (1999) along both cross-sectional and time-series dimensions of the US stock market over the period 1947-2005. GMM estimations show that the model is able to explain a substantial part of the cross-sectional variation in returns on the 25 Fama and French value and size portfolios, although it has difficulties in fully explaining the value premium. In addition, the model accounts for time-varying expected returns on stocks. The surplus consumption ratio forecasts future stock returns and the forecasting power is not diminished by including the 1990s stock market boom. The extended version of the model allows for cyclical variation in interest rates and provides a reasonable fit of the real risk free rate. |
| Keywords: | Campbell-Cochrane model; 25 Fama-French portfolios; GMM; return predictability by surplus-consumption ratio |
| Date: | 2008–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:aarbfi:2008-04&r=mac |
| By: | Hale, Galina B; Razin, Assaf; Tong, Hui |
| Abstract: | We study a mechanism through which strong creditor protection affect positively the level, and negatively the volatility, of the aggregate stock market price. In a Tobin-q model with liquidity and productivity shocks, two channels are at work: (1) Creditor protection raises the stock value in a credit-constraint regime; (2) Creditor protection lowers the probability of the credit crunch. We confront the key predictions of the model to a panel of 40 countries over the period from 1984 to 2004. We find support to the hypothesis that creditor protection have a positive effect on the level, and a negative effect of the volatility, of stock prices, via the negative effect of the creditor protection on the probability of credit crunch. |
| Keywords: | credit crunch; Probit estimation; Tobin q |
| JEL: | E1 G2 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6658&r=mac |
| By: | Grant, Charles; Koulovatianos, Christos; Michaelides, Alexander; Padula, Mario |
| Abstract: | Marginal income taxes may have an insurance effect by decreasing the effective fluctuations of after-tax individual income. By compressing the idiosyncratic component of personal income fluctuations, higher marginal taxes should be negatively correlated with the dispersion of consumption across households, a necessary implication of an insurance effect of taxation. Our study empirically examines this negative correlation, exploiting the ample variation of state taxes across US states. We show that taxes are negatively correlated with the consumption dispersion of the within-state distribution of non-durable consumption and that this correlation is robust. |
| Keywords: | Consumption Insurance; Tax Distortions; Undiversifiable Earnings Risk |
| JEL: | E21 H20 H31 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6710&r=mac |
| By: | Paul De Grauwe; Frauke Skudelny |
| Abstract: | The aim of this paper is to find out whether the Balassa-Samuelson effect is important in EMU. We use panel data going from 1970 to 1995 for the current EU members in order to estimate the long run effect of bilateral differences in productivity growth differential between the traded and non-traded goods sector on bilateral inflation differentials. The regression results indicate a significant effect of the productivity differential, as proposed by the theory. According to our regression results, the impact of a productivity shock on the inflation differential can be quite substantial, going up to an 8% increase in the inflation differential. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0015&r=mac |
| By: | Eichenbaum, Martin; Jaimovich, Nir; Rebelo, Sérgio |
| 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. |
| Keywords: | markups; nominal cost inertia; nominal price inertia |
| JEL: | E30 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6709&r=mac |
| By: | Hugo López; Remberto Rhenals; Jesús Botero; Christian Posso |
| Abstract: | Este artículo se ocupa de la conveniencia de una regla fiscal de balance estructural para Colombia. En primer lugar (sección A) se examina el papel y la racionalidad de las reglas fiscales y se estudia el tema de su diseño. La sección (B) está dedicada al examen de la regla fiscal Chilena y sus impactos macroeconómicos. En la sección (C) se hace una revisión sucinta de las tendencias de largo plazo del gasto público en Colombia, de su desempeño reciente y sus principales inflexibilidades y se examinan las recomendaciones que, en materia institucional, hizo recientemente la Comisión Independiente del Gasto público. Usando un modelo de equilibrio general, la sección (D) realiza una simulación de los impactos que –en el evento de una crisis futura- una regla fiscal tendría sobre el crecimiento, el empleo y la pobreza. En fin la sección (E) se ocupa de los problemas de diseño y, de manera muy preliminar, de los pasos institucionales necesarios para la puesta en marcha de una regla fiscal de balance estructural en el país. |
| Date: | 2008–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004578&r=mac |
| By: | Giavazzi, Francesco; McMahon, Michael |
| Abstract: | In 1997 Chancellor Kohl proposed a major pension reform and pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law---one that is crucial for our identification strategy---is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labour market choices: we find evidence of a labour supply response by those workers who can use the margin offered by part-time employment. |
| Keywords: | labour supply; policy uncertainty; precautionary saving |
| JEL: | E21 E61 J22 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6766&r=mac |
| By: | Dinger, Valeriya; von Hagen, Jürgen |
| Abstract: | In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks which allows us to explore the impact of interbank lending when exposures are long-term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks. |
| Keywords: | bank risk; interbank market; market discipline; transition countries |
| JEL: | E53 G21 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6635&r=mac |
| By: | Wolf, Nikolaus |
| Abstract: | The paper examines the timing of exit from the interwar gold-exchange standard for a panel of European countries, based on monthly data over the period January 1928 - December 1936. I show that the decision of exit from gold can be understood in terms of a trade-off between a quite limited set of factors commonly suggested in the theoretical literature on currency crises. A simple and parsimonious econometric framework that nests various hypotheses allows predicting the very month when a country will exit gold in the 1930s. |
| Keywords: | Europe; Gold-Exchange Standard; Interwar Period |
| JEL: | E42 E44 N14 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6685&r=mac |
| By: | Dew-Becker, Ian; Gordon, Robert J |
| Abstract: | Throughout the post-war era until 1995 labour 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 trade-off between productivity and employment growth within Europe. We document this trade-off 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, with policy changes that raised labour costs reducing employment both before and after 1995. These variables, together with employment per capita, are then used to explain productivity growth, using several alternative treatments with instrumental variables. We also find a significant time effect, and we link this to an increase in labour force participation by women, particularly in southern European countries. We find that the negative effect of changes in employment per capita on changes in productivity is robust to alternative instruments and to the inclusion or exclusion of particular countries like the US or Spain. 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. |
| Keywords: | Effects of tax wedge on employment; Employment protection legislation; European employment growth; European productivity growth; labour force participation of women; Product market regulation |
| JEL: | D24 E20 E23 J20 J30 N34 O47 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6722&r=mac |
| By: | Buiter, Willem H |
| Abstract: | The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council - the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly-based movement towards far-reaching political integration. And there is little evidence of that as yet. |
| Keywords: | convergence; currency union; exchange rate regime; GCC |
| JEL: | E42 E52 E63 F33 F42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6639&r=mac |
| By: | D'Amuri, Francesco; Ottaviano, Gianmarco I P; Peri, Giovanni |
| 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 labour market were as `flexible' as the UK labour market, it would be more efficient in dealing with the effects of immigration. |
| Keywords: | Employment; Immigration; Skill Complementarities; Wages |
| JEL: | E24 F22 J31 J61 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6736&r=mac |
| By: | Bovenberg, A Lans; Teulings, Coen N |
| Abstract: | We argue in favour of the shareholder model of the firm for three main reasons. First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle about the ultimate goal of the company. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs. Third, making shareholders the ultimate owner of the firm provides the best possible diversification of firm-specific risks. Diversification of firm-specific risk on capital markets is an efficient form of social insurance. Hence, firms should bear the full cost of specific investment, while workers should be paid only their outside option. Empirical results for Denmark, Portugal and the United States show that Denmark is closest to the first-best outcome, while Portugal and the United States deviate in different ways. Coordination in wage bargaining and collective norms help reduce the claim of workers on the firm’s surplus. Collective action, however, is a mixed blessing because politicians also face the temptation to please incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. The transition from the Rhineland towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights. |
| Keywords: | Corporate Governance; Employment Protection; Optimal Risk Sharing; Wage setting |
| JEL: | E24 G32 G34 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6645&r=mac |
| By: | Joanna Wolszczak-Derlacz |
| Abstract: | This article examines the price dispersion in the European Union in the last fifteen years (1990-2005). The analysis of price convergence is examined on aggregate and disaggregate levels. The macro approach is based on Comparative Price Level index calculated as the ratio between PPPs and exchange rate. The disaggregate analysis utilizes actual prices of 148 individual products sold in the 15 capital cities of the EU. The calculations comprise of sigma and beta convergence adopted from the real growth literature. The different results of the speed of convergence are obtained according to the different econometric methods. Moreover the gravity model is tested to measure the contribution of different factors in explaining the observed convergence pattern. |
| Keywords: | price convergence, international price dispersion, law of one price, |
| JEL: | E31 F36 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0614&r=mac |
| By: | Straetmans, Stefan; Versteeg, Roald; Wolff, Christian C |
| Abstract: | One of the reasons for governments to use capital controls is to obtain some degree of monetary independence. This paper investigates the link between capital controls and interest differentials/ forward premia. This to test whether they can indeed give governments the power to drive exchange rates away from parity conditions. Two capital control variables are constructed in addition to the standard IMF capital control dummy. These variables are used to determine the date of capital account liberalization in a panel of Western European as well as emerging countries. Results show that capital controls do not give governments extra monetary freedom. There is even some evidence that capital controls decrease the level of monetary freedom governments enjoy for a number of countries. |
| Keywords: | Capital controls; Exchange Rates; Forward premia; Interest differentials; Monetary freedom |
| JEL: | E42 F21 F31 G15 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6727&r=mac |
| By: | Hernando Zuleta |
| Abstract: | The industrial revolution and the subsequent industrialization of the economies occurred fi rst in temperate regions. We argue that this and the associated positive correlation between absolute latitude and GDP per capita is due to the fact that countries located far from the equator suffered more profound seasonal fluctuations in climate, namely stronger and longer winters. We propose a growth model of biased innovations that accounts for these facts and show that countries located in temperate regions were more likely to create or adopt capital intensive modes of production. The intuition behind this result is that savings are used to smooth consumption; therefore, in places where output fluctuations are more profound, savings are bigger. Because the incentives to innovate depend on the relative supply factors, economies where savings are bigger are more likely to create or adopt capital intensive technologies. |
| Date: | 2008–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:004592&r=mac |
| By: | Renato Galvão Flôres Junior (EPGE/FGV) |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:674&r=mac |
| By: | Carlos Gustavo Cano |
| Abstract: | La mayoría de los primeros bancos centrales que surgieron en el planeta ejercía ciertas formas incipientes de regulación y supervisión de los bancos comerciales. Posteriormente, algunos países optaron por depositar esa responsabilidad en agencias gubernamentales especializadas, entre ellos Colombia. Luego vinieron los Acuerdos Basilea I y II, que apuntaron hacia el establecimiento de un mínimo de patrones internacionales comunes. No obstante, con la liberalización y desregulación de los mercados de capitales, la multiplicación de nuevos intermediarios financieros no bancarios, y el desarrollo de nuevos productos financieros - varios orientados a dispersar los riesgos y a aislarlos de sus balances- , y en medio de la ostensible falta de independencia de no pocos órganos supervisores frente a gobiernos y sectores privados, se ha vuelto en extremo frágil la política monetaria convencional. Esto es, aquella basada fundamentalmente y de modo casi exclusivo en el manejo de las tasas de interés de intervención a cargo de los bancos centrales. En este documento el autor presenta, para el caso de Colombia, los principales argumentos que respaldan su propuesta de confiarle adicionalmente al banco central las funciones de regulación y supervisión. El propósito que con ello se busca es garantizar y salvaguardar la efectividad de la política monetaria, de cara al control de la inflación y a la estabilidad financiera, al considerar que, frente a las nuevas realidades, aquellas representan una pieza medular e inseparable de esta. |
| Date: | 2008–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:004587&r=mac |