nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒04‒29
77 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Technical Appendix to "Fiscal and Monetary Policy under Sectorial Heterogeneity" By Berriel, Tiago; Sinigaglia, Daniel
  2. The Term Structure of Inflation Expectations By Chernov, Mikhail; Mueller, Philippe
  3. Exchange Rates and the Money Demand Process during the Persistently High Inflation Period in the Turkish Economy: Causes and Dynamics By Savaþ Bilal
  4. Business cycle evidence on firm entry By Lewis, Vivien
  5. Inflation Dynamics with Search Frictions: A Structural Econometric Analysis By Krause, Michael; López-Salido, J David; Lubik, Thomas
  6. Can the Facts of UK Inflation Persistence be Explained by Nominal Rigidity? By Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen
  7. Monetary Policy Effects in Developing Countries with Minimum Wages By Kodama, Masahiro
  8. Too Many Cooks? Committees in Monetary Policy By Helge Berger; Volker Nitsch
  9. Monetary policy and bank distress: an integrated micro-macro approach By De Graeve, Ferre; Kick, Thomas
  10. Do expectations matter? The Great Moderation revisited By Fabio Canova; Luca Gambetti
  11. Economies of scale in banking, indeterminacy, and monetary policy By Dressler, Scott
  12. Monetary and Fiscal Policy Efficiency and Coordination in an Open-Economy General Equilibrium Model with Three Production Sectors. By Gilbert Koenig; Irem Zeyneloglu
  13. Oil Price Shocks, Rigidities and the Conduct of Monetary Policy: Some Lessons from a New Keynesian Perspective By Romain Duval; Lukas Vogel
  14. Labour Market Asymmetries in a Monetary Union By Andersen, Torben M; Seneca, Martin
  15. How should central banks define price stability? By Mark A. Wynne
  16. Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey By Berument, Hakan; Dogan, Nukhet; Tansel, Aysit
  17. Managing Chile’s Macroeconomy during and after the Copper Price Boom By Luiz de Mello
  18. Israel 1983: A Bout of Unpleasant Monetarist Arithmetic By Sargent, Thomas J; Zeira, Joseph
  19. Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  20. The Monetary Policy Decision-Making Process and the Term Structure of Interest Rates By Dillén, Hans
  21. The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting By Inaba, Masaru; Nutahara, Kengo
  22. The role of investment wedges in the Carlstrom-Fuerst economy and business cycle accounting By Masaru, Inaba; Kengo, Nutahara
  23. A Portfolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment By Stephen G Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
  24. Has globalisation changed the Phillips curve? Firm-level evidence on the effect of activity on prices By Gaiotti, Eugenio
  25. Global Business Cycles: Convergence or Decoupling? By Kose, M. Ayhan; Otrok, Christopher; Prasad, Eswar
  26. Forecasting Inflation in China By Mehrotra , Aaron; Sánchez-Fung, José R.
  27. Nonfundamental Representations of the Relation between Technology Shocks and Hours Worked By Matteo Barigozzi; Marco Capasso
  28. Emerging market business cycles revisited: learning about the trend By Emine Boz; Christian Daude; Ceyhun Bora Durdu
  29. Optimal monetary policy under sudden stops By Vasco Cúrdia
  30. Production Stages and the Transmission of Technological Progress By Louis Phaneuf; Nooman Rebei
  31. Globalization and monetary policy: an introduction By Enrique Martinez-Garcia
  32. Managing Financial Instability in Emerging Markets: A Keynesian Perspective By Yilmaz Akyuz
  33. Modeling the monetary policy reaction function of the colombian central bank By Jesús Otero; Manuel Ramírez Gómez
  34. Inflation-Targeting in Sub-Saharan Africa: Why Now? Why at All? By Terry McKinley
  35. Money and competing assets under private information By Guillaume Rocheteau
  36. Optimal fiscal and monetary policy: equivalence results By Isabel Correia; Juan Pablo Nicolini; Pedro Teles
  37. On the Explosive Nature of Hyper-Inflation Data By Nielsen, Bent
  38. Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model By Giese, Julia V.
  39. Oil and the U.S. macroeconomy: an update and a simple forecasting exercise By Kevin L. Kliesen
  40. Bargaining Frictions, Labor Income Taxation and Economic Performance By Stéphane Auray; Samuel Danthine
  41. The Forgotten History of Domestic Debt By Carmen M. Reinhart; Kenneth S. Rogoff
  42. Country portfolios in open economy macro models By Michael B. Devereux; Alan Sutherland
  43. Frontiers of real-time data analysis By Dean Croushore
  44. Macroeconomic Crises since 1870 By Robert J. Barro; José F. Ursúa
  45. Random Matrix Theory and the Evolution of Business Cycle Synchronisation, 1886–2006 By Ormerod, Paul
  46. Design Limits in Regime-Switching Cases By Beatrice Pataracchia
  47. Beyond the business cycle - factors driving aggregate mortality rates By Katja Hanewald
  48. The Spectral Representation of Markov-Switching Arma Models By Beatrice Pataracchia
  49. A solution to the default risk-business cycle disconnect By Enrique G. Mandoza; Vivian Z. Yue
  50. Competing Liquidities: Corporate Securities, Real Bonds and Bubbles By Emmanuel Farhi; Jean Tirole
  51. Globalization and inflation dynamics: the impact of increased competition By Argia M. Sbordone
  52. Adaptive microfoundations for emergent macroeconomics By Edoardo Gaffeo; Domenico Delli Gatti; Saul Desiderio; Mauro Gallegati
  53. Economic Fluctuations in Japan during the Interwar Period -- Re- estimations of the LTES Personal By Kiyohito Utsunomiya
  54. Demography, Financial Openness, National Savings and External Balance By Michael Graff; Kam Ki Tang; Jie Zhang
  55. How much structure in empirical models? By Canova, Fabio
  56. The financial turmoil of 2007-?: a preliminary assessment and some policy considerations By Clauio Borio
  57. Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information By Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
  58. Executive Compensation and Macroeconomic Fluctuations By Oxelheim, Lars; Wihlborg, Clas; Zhang, Jianhua
  59. Increasing Public Expenditures: Wagner’s Law in OECD Countries By Serena Lamartina; Andrea Zaghini
  60. Asset Prices, Debt Constraints and Inefficiency By Bloise, Gaetano; Reichlin, Pietro
  61. Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds By Francisco J. Gomes; Laurence J. Kotlikoff; Luis M. Viceira
  62. The Frequency Analysis of the Business Cycle By Prof D.S.G. Pollock
  63. Multivariate Feller conditions in term structure models: Why do(n't) we care? By Peter Spreij; Enno Veerman; Peter Vlaar
  64. "The International Monetary (Non-)Order and the 'Global Capital Flows Paradox'" By Joerg Bibow
  65. ¿Es Importante la Fijación de Precios para Entender la Dinámica de la Inflación en Bolivia? By Daney Valdivia
  66. Modeling Expectations with Noncausal Autoregressions By Lanne, Markku; Saikkonen, Pentti
  67. Housing, Credit and Consumer Expenditure By Muellbauer, John
  68. Have Euro Area Government Bond Spreads converged to their Common State? By Lorenzo Pozzi; Guido Wolswijk
  69. A look at the relationship between industrial dynamics and aggregate fluctuations By Domenico Delli Gatti; Edoardo Gaffeo; Mauro Gallegati
  70. An empirical model of international and domestic food inflation By Javier Gómez Pineda
  71. Credit, Asset Prices, and Financial Stress in Canada By Miroslav Misina; Greg Tkacz
  72. Price Setting Behavior in Turkish Industries: Evidence From Survey Data By Saygin Sahinoz; Bedriye Saracoglu
  73. Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical? By Gene Amromin; Steven A. Sharpe
  74. Predicting cycles in economic activity By Jane Haltmaier
  75. Vehicle currency By Michael B. Devereux; Shouyong Shi
  76. Endogenous Systemic Liquidity Risk By Cao, Jin; Illing, Gerhard
  77. Una discusión sobre la curva de Phillips de Friedman y la tasa natural de desempleo By Leonardo Raffo López

  1. By: Berriel, Tiago; Sinigaglia, Daniel
    Abstract: This is the complete technical appendix to "Fiscal and Monetary Policy under Sectorial Heterogeneity".
    JEL: E62 E52
    Date: 2008–04–24
  2. By: Chernov, Mikhail; Mueller, Philippe
    Abstract: We use evidence from the term structure of inflation expectations implicit in the nominal yields and survey forecasts of inflation to address the question of whether or not monetary policy is effective. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We extract private sector expectations of inflation from this model and establish that they are driven by inflation, real activity and one latent factor, which is correlated with survey forecasts. We show that the interest rate responds to this "survey" factor. The inflation premium and out-of-sample estimates of the inflation long-run mean and persistence suggest that monetary policy became effective over time. As an implication, our model outperforms a standard macro-finance model in inflation and yield forecasting.
    Keywords: inflation; macro-finance term structure model; monetary policy; survey forecasts
    JEL: C50 E52 G12
    Date: 2008–04
  3. By: Savaþ Bilal (Aksaray University)
    Abstract: The money demand process in Turkey during the period 1987:1-2002:3 can be explained better in the sense of Cagan (1956) rather than in the sense of Sargent et al.(1973).Cagan assumes the exogeneity of money. Sargent et al. suggest the endogeneity of money. Implicitly, the money supply process with regard to Turkish inflation is unpredictable with respect to the past history of prices, i.e. either inflation or currency depreciation. Therefore, the Turkish monetary regime may be described as a random walk monetary standard with short-term (myopic) discretionary policies used by the authorities. Moreover, the unpredictable money growth implies that the Central Bank’s passive monetary policy implementations help maintain the persistently high inflationary process in Turkey.
    Keywords: Demand for Money, High Inflation, Granger Causality, Exogeneity of Money, Endogeneity of Money, Exchange Rate-Based Pricing
    JEL: E31 E41 E65
    Date: 2008
  4. By: Lewis, Vivien
    Abstract: Business cycle models with sticky prices and endegenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. This paper tests some of these predictions using a vector autoregression with model-based sign restrictions. We find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new firms to survive when the number of startups rises.
    Keywords: firm entry, business cycles, VAR
    JEL: E30 E32
    Date: 2008
  5. By: Krause, Michael; López-Salido, J David; Lubik, Thomas
    Abstract: The New Keynesian Phillips curve explains inflation dynamics as being driven by current and expected future real marginal costs. In competitive labour markets, the labour share can serve as a proxy for the latter. In this paper, we study the role of real marginal cost components implied by search frictions in the labour market. We construct a measure of real marginal costs by using newly available labour market data on worker finding rates. Over the business cycle, the measure is highly correlated with the labour share. Estimates of the Phillips curve using GMM reveal that the marginal cost measure remains significant, and that inflation dynamics are mainly driven by the forward-looking component. Bayesian estimation of the full New Keynesian model with search frictions helps us disentangle which shocks are driving the economy to generate the observed unit labour cost dynamics. We find that mark-up shocks are the dominant force in labour market fluctuations.
    Keywords: Bayesian estimation; labour market frictions; marginal costs; Phillips curve
    JEL: E24 E32 J64
    Date: 2008–04
  6. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Nowell, Eric; Sofat, Prakriti (Cardiff Business School); Srinivasan, Naveen
    Abstract: It has been widely argued that inflation persistence since WWII has been widespread and durable and that it can only be accounted for by models with a high degree of nominal rigidity. We examine UK post-war data where after confirming previous studies, findings of varying persistence due to changing monetary regimes, we find that models with little nominal rigidity are best equipped to explain it.
    Keywords: inflation persistence; New Keynesian; New Classical; nominal rigidity; monetary regime shifts
    JEL: E31 E37
    Date: 2008–04
  7. By: Kodama, Masahiro
    Abstract: Using a Dynamic General Equilibrium (DGE) model, this study examines the effects of monetary policy in economies where minimum wages are bound. The findings show that the monetary-policy effect on a binding-minimum-wage economy is relatively small and quite persistent. This result suggests that these two characteristics of monetary policy in the minimum-wage model are rather different from those in the union-negotiation model which is often assumed to account for industrial economies.
    Keywords: Monetary policy, Sticky wage, Business cycles, Developing countries, Minimum wages
    JEL: E32 E52 J3 O11
    Date: 2008–03
  8. By: Helge Berger (Freie Universität Berlin, Economics Department, Berlin, Germany); Volker Nitsch (ETH Zurich, KOF Swiss Economic Institute, Zurich, Switzerland)
    Abstract: How many people should decide about monetary policy? In this paper, we take an empirical perspective on this issue, analyzing the relationship between the number of monetary policy decision-makers and monetary policy outcomes. Using a new data set that characterizes Monetary Policy Committees (MPCs) in more than 30 countries from 1960 through 2000, we find a U-shaped relation between the membership size of MPCs and inflation; our results suggest that the lowest level of inflation is reached at MPCs with about seven to ten members. Similar results are obtained for other measures, such as inflation variability and output growth. We also find that MPC size influences the success of monetary targeting regimes. In contrast, there is no evidence that either turnover rates of MPC members or the membership composition of MPCs affect economic outcomes.
    Keywords: central bank design, monetary policy committee, central bank board, central bank council, governance, inflation
    JEL: E52 E58 E61
    Date: 2008–04
  9. By: De Graeve, Ferre; Kick, Thomas
    Abstract: Evidence on the interdependency between monetary policy and the state of the banking system is scarce. We suggest an integrated micro-macro approach with two core virtues. First, we measure the probability of bank distress directly at the bank level. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between bank distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a relationship between monetary policy and bank distress. A monetary contraction increases the mean probability of distress. This effect disappears when neglecting micro effects, underlining the crucial importance of the former. Distress responses are economically most significant for weak distress events and at times when capitalization is low.
    Keywords: Stress testing, bank distress, monetary policy
    JEL: E42 E52 E58 G21 G28
    Date: 2008
  10. By: Fabio Canova; Luca Gambetti
    Abstract: We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and of interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Including or excluding expectations hardly changes the economic explanation of the Great Moderation. Results are robust to changes in the structure of the empirical model.
    Keywords: Indeterminacy, Expectations, Term structure, Structural VARs, Sunspot
    JEL: C11 E12 E32 E62
    Date: 2007–11
  11. By: Dressler, Scott
    Abstract: This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Consumption in the model can be purchased with currency and deposits, and ES in intermediation implies that deposit costs are decreasing in aggregate deposits. The results suggest that indeterminacy does not depend on a large degree of ES nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any degree of ES, while policies targeting nominal rates eliminates indeterminacy for all degrees of ES.
    Keywords: Financial Intermediation; Economies of Scale; Equilibrium Indeterminacy; Monetary Policy
    JEL: E52 E44 C62
    Date: 2008–03
  12. By: Gilbert Koenig; Irem Zeyneloglu
    Abstract: The paper analyzes monetary and fiscal policy efficiency and coordination in a stochastic new open economy macroeconomics (NOEM) model with three production sectors. Some or all of these sectors can be affected by unanticipated productivity shocks which can trigger monetary and fiscal policy reactions. The uncertainty over the shocks can be symmetric or asymmetric across the two countries. The paper first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative effects of unanticipated productivity shocks. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on monetary policy efficiency. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible-price equilibrium. However, their efficiency is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks. In case of high asymmetry, monetary cooperation can be counter-productive either for the home or for the foreign country.
    Keywords: Stabilization, international policy cooperation, monetary policy, fiscal policy.
    JEL: E63 F41 F42
    Date: 2008
  13. By: Romain Duval; Lukas Vogel
    Abstract: The strong and sustained rise in oil prices observed in recent years poses a challenge to monetary policy and its ability to simultaneously achieve low inflation and stable output. Against this background, the paper studies monetary policy in a small open economy New Keynesian DSGE model including oil as a production input and a component of final demand. It investigates the performance of alternative price level definitions, notably headline and core CPI, in standard interest rate rules with respect to output and inflation stabilisation. The analysis puts special emphasis on the impact of price and real wage rigidity and their interaction on the policy trade-off induced by the oil price shock. While the degree of price rigidity alone is found to have little impact on the shock transmission and generates only small differences between alternative monetary strategies, the simulations suggest a more important role for real wage stickiness. Real wage stickiness triggers second round effects and complicates stabilisation whatever the policy rule. A focus on core inflation tends to limit the contraction of output in this context. The results also point to some interaction between nominal price and real wage rigidities. In the presence of real wage rigidity, greater price flexibility is found to be destabilising, as it amplifies the initial inflation effect of shocks, thereby triggering a stronger monetary policy response and a larger output effect. <P>Chocs pétroliers, rigidités et conduite de la politique monétaire : quelques leçons tirées d’une perspective néo-keynésienne <BR>La hausse forte et persistante des prix pétroliers au cours des années passées constitue un défi pour la politique monétaire et sa capacité à stabiliser simultanément l’inflation et la production. Dans ce contexte, ce document étudie le comportement de la politique monétaire dans un modèle DSGE néo-keynésien d’une petite économie ouverte, incluant le pétrole à la fois comme bien de consommation final et comme facteur de production. L’analyse met l’accent sur la performance de définitions alternatives de l’indice des prix, notamment des indices de prix courant et sous-jacent, dans des règles de politique monétaire courantes, en matière de stabilisation du niveau de production et de l’inflation. En particulier, l’analyse met en évidence l’impact des rigidités de prix et de salaire réel, ainsi que de leur interaction, sur l’arbitrage engendré par le choc pétrolier. Tandis que le degré de rigidité des prix seul a peu d’effet sur la transmission des chocs et n’engendre que des écarts mineurs entre différentes stratégies de politique monétaire, les simulations suggèrent un impact plus important de la rigidité des salaires réels. La rigidité des salaires réels entraîne des effets de second tour et complique la stabilisation quelle que soit la règle de politique monétaire. Cibler l’inflation sous-jacente tend à limiter la contraction du niveau de production dans ce contexte. En outre, les résultats suggèrent une interaction entre rigidité des prix nominaux et rigidité des salaires réels. Pour un degré de rigidité donné des salaires réels, une forte flexibilité des prix apparait déstabilisatrice car elle amplifie l’effet initial du choc sur l’inflation, ce qui amplifie la réaction de politique monétaire et, ce faisant, entraîne une variation plus forte du niveau de production.
    Keywords: monetary policy, politique monétaire
    JEL: E30 F41 Q43
    Date: 2008–04–08
  14. By: Andersen, Torben M; Seneca, Martin
    Abstract: This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.
    Keywords: business cycles; monetary policy; monetary union; nominal wage rigidity; shocks; staggered contracts; wage formation
    JEL: E30 E52 F41
    Date: 2008–04
  15. By: Mark A. Wynne
    Abstract: It is now generally accepted that the primary objective of central banks should be the maintenance of price stability. This paper considers the question of how central banks should define price stability. I address three specific questions. First, should central banks target broad or narrow measures of inflation? Second, should central banks target headline or core measure of inflation? And third, should central banks define price stability as prevailing at some positive measured rate of inflation?
    Keywords: Inflation (Finance) ; Financial stability ; Price indexes ; Monetary policy
    Date: 2008
  16. By: Berument, Hakan (Bilkent University); Dogan, Nukhet (Gazi University); Tansel, Aysit (Middle East Technical University)
    Abstract: This paper investigates how macroeconomic policy shocks in Turkey affect the total unemployment and provides evidence on the differential responses of the unemployment by sectors of economic activity. Our paper extends the previous work in two respects. First, we consider not only the response of total unemployment but also the response of unemployment by sectors of economic activity. Second, we consider not only the effect of monetary policy shocks, but also the effects of several other macroeconomic shocks. The quarterly data used which covers the period 1988:01 to 2004:04 from Turkey. A VAR model with a recursive order is employed to estimate the effects of shocks in real GDP, price, exchange rate, interbank interest rate, money supply and own sectoral unemployment on unemployment by sectors of economic activity. The results indicate that the positive income shock is followed by a decrease in unemployment in all economic activity groups during the initial periods except the unemployment in the Electricity sector and the Community Services sector. A positive money shock decreases unemployment in sectors of Mining, Manufacturing, Construction, Wholesale-Retail Trade, Transportation and, Finance-Insurance. Opposite results are obtained with the interbank interest rate shocks. Even if, they are not statistically significant, a positive interbank interest rate shock increases the unemployment in all economic activities at the initial levels but derives down the unemployment in the Agriculture and the Community Services sectors at the initial level. Moreover, a positive price shock increases unemployment in all economic sectors in the long run except the Mining and the Community Services. Thus, unemployment in different sectors of economic activity responds differently to various macroeconomic policy shocks.
    Keywords: macroeconomic policy shocks, unemployment by economic activity
    JEL: E60 E24
    Date: 2008–04
  17. By: Luiz de Mello
    Abstract: Compliance with the structural budget surplus rule, which has been in place since 2001, has allowed the government to maintain a counter-cyclical fiscal stance in an environment of rising copper prices, while delivering a gradual reduction in public indebtedness. Monetary policy is conducted within a framework that combines inflation targeting with exchange-rate flexibility. A Fiscal Responsibility Law was promulgated in September 2006, strengthening the macroeconomic framework further by embedding the fiscal rule in law and setting out regulations for the use of fiscal savings. Complementary pension reform is being discussed in Congress with the objective of strengthening the pension system’s solidarity pillar and encouraging retirement saving. The tax system is also being improved with a view to removing obstacles to financial deepening and to business-sector development. Government spending on social programmes is budgeted to rise considerably, in line with the authorities’ emphasis on social development. The main challenge in the macroeconomic area is to maintain the policy setting that has served Chile so well over the recent copper-price upswing, while tempering demands for hiking public social spending and maintaining a lean public sector in a low-tax, low-debt environment. This paper relates to the 2007 Economic Survey of Chile ( <P>La gestion macroéconomique du Chili durant et après la forte hausse des prix du cuivre <BR>Respectant la règle d’excédent budgétaire structurel, appliquée depuis 2001, le gouvernement a pu maintenir une orientation budgétaire anticyclique dans un contexte de hausse des prix du cuivre tout en réduisant progressivement la dette publique. La politique monétaire s’appuie sur un cadre associant le ciblage de l’inflation à un taux de change flexible. Une loi de responsabilité budgétaire, adoptée en septembre 2006, a encore renforcé le dispositif macroéconomique en conférant un caractère législatif à la règle budgétaire et en réglementant l’utilisation des économies budgétaires. Une réforme complémentaire des retraites est actuellement examinée par le Congrès, son but étant de consolider le régime fondé sur la solidarité et d’encourager l’épargne retraite. Les autorités s’efforcent également d’améliorer le système fiscal afin d’éliminer les obstacles au développement du secteur financier et du secteur des entreprises. Les dépenses publiques devraient beaucoup augmenter pour les programmes sociaux, l’accent étant mis sur le développement social. Le principal enjeu macroéconomique est de préserver le cadre d’action qui a été si bénéfique pour le Chili durant la forte hausse récente des prix du cuivre, tout en tempérant les revendications d’augmentation des dépenses publiques sociales et en conservant un secteur public dimensionné au plus juste dans un environnement de faible fiscalité et de faible endettement. Ce document se rapporte à l’Étude économique du Chili 2007 (
    Keywords: fiscal policy, politique budgétaire, monetary policy, politique monétaire, pension reform, réforme des pensions, Chile, Chili
    JEL: E20 E52 E62
    Date: 2008–04–14
  18. By: Sargent, Thomas J; Zeira, Joseph
    Abstract: From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981).
    Keywords: Inflation; Inflation Tax; Public Debt; Rational Expectations
    JEL: E31 E50 H60
    Date: 2008–04
  19. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: This paper studies the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guard against financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited.
    Keywords: asset prices; monetary policy; panel VAR
    JEL: C23 E52
    Date: 2008–04
  20. By: Dillén, Hans (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper presents a theoretical model of the term structure of interest rates based on the monetary policy decision-making process at modern central banks. Evaluations of explicit expressions for the spot and forward rate curve render several important results: (i) Spot and forward rates are explicit functions of the number of policy meetings during the time to maturity rather than the time to maturity itself. Consequently, the forward rate curve is step-shaped. (ii) In addition, there are calendar time effects, i.e. the position within the policy cycle is also of importance, especially for short term interest rates. (iii) The forward rate curve exhibits hump-shaped responses to economic shocks and a modified version of the Nelson-Siegel model can be obtained as a special case.
    Keywords: The term structure of interest rates; interest rate stepping; policy gap; calendar time effects; hump-shaped responses
    JEL: E43 E52 G12
    Date: 2008–04–01
  21. By: Inaba, Masaru; Nutahara, Kengo
    Abstract: Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of representative models with investment frictions. We find that BCA leads us to conclude that models of investment wedges are not promising according to the criteria of BCA, although the true model contains investment frictions.
    Keywords: Business cycle accounting; investment wedge; investment friction; wedge decompsition
    JEL: C68 E32 E13
    Date: 2008–04–19
  22. By: Masaru, Inaba; Kengo, Nutahara
    Abstract: Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of representative models with investment frictions. We find that BCA leads us to conclude that models of investment wedges are not promising according to the criteria of BCA, although the true model contains investment frictions.
    Keywords: Business cycle accounting; investment wedge; investment friction; wedge decompsition
    JEL: C68 E32 E13
    Date: 2008–04–19
  23. By: Stephen G Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
    Abstract: As part of its monetary policy strategy, the European Central Bank has formulated a reference value for M3 growth. A pre-requisite for the use of a reference value for M3 growth is the existence of a stable demand function for that aggregate. However, a large empirical literature has emerged showing that, beginning in 2001, essentially all euro area M3 demand functions have exhibited instability. This paper argues that a proper understanding of the determination of money requires a portfolio analysis where the demand for broad money is seen as just one element in the wealth portfolio. Under this framework, wealth is the variable that constitutes the total budget constraint on the holdings of assets, including money, and changes in equity prices are a key transmission channel of monetary policy. Understanding money behaviour thus requires good data on euro area wealth which at present do not exist. Our basic premise is that there is a stable demand-for-money function but that the models that have been used until now to estimate euro area money-demand are not well-specified because they do not include a measure of wealth. Using two empirical methodologies - - a co-integrated vector equilibrium correction (VEC) approach and a time-varying coefficient (TVC) approach - - we find that a demand-for-money function that includes wealth is stable. The upshot of our findings is that M3 behaviour continues to provide useful information about medium-term developments on inflation.
    Keywords: Money demand; VEC, time varying coefficient estimation; Euro area
    JEL: C20 E41
    Date: 2008–04
  24. By: Gaiotti, Eugenio
    Abstract: It has been recently argued that the flattening of the Phillips curve, observed in the main industrial countries over the last two decades, is due to globalisation, which exposes domestic firms to fiercer international competition and severs the link between domestic demand and pricing. A more traditional explanation, with very different policy implications, centres on an increase in the credibility of the monetary regime. Substantial identification problems plague the empirical literature on this issue. We take advantage of a unique dataset including firm-level information on the pricing, capacity utilisation, export orientation, foreign competition, import penetration and delocalisation activity of about 2,000 Italian firms in the period 1988-2005; we test whether the finding of a weaker link between capacity utilisation and prices is confirmed at company level, whether it is robust to controlling for inflation expectations and whether it is concentrated among those firms that are more exposed to globalisation. According to the evidence presented, this is not the case. The conclusion is that the observed flattening of the Phillips curve is not due to globalisation.
    Keywords: Phillips curve; globalisation; inflation; monetary policy
    JEL: E31 E58 E52
    Date: 2008–04–11
  25. By: Kose, M. Ayhan (International Monetary Fund); Otrok, Christopher (University of Virginia); Prasad, Eswar (Cornell University)
    Abstract: This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups – industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates – output, consumption, and investment – into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries; (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries; (iii) country factors, which are common across all aggregates in a given country; and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.
    Keywords: globalization, business cycles, macroeconomic fluctuations, convergence, decoupling
    JEL: C11 C32 E32 F42 F41
    Date: 2008–04
  26. By: Mehrotra , Aaron (BOFIT); Sánchez-Fung, José R. (BOFIT)
    Abstract: This paper forecasts inflation in China over a 12-month horizon. The analysis runs 15 alternative models and finds that only those considering many predictors via a principal component display a better relative forecasting performance than the univariate benchmark.
    Keywords: inflation forecasting; data-rich environment; principal components; China
    JEL: C53 E31
    Date: 2008–04–21
  27. By: Matteo Barigozzi; Marco Capasso
    Abstract: Estimating the response of hours worked to technology shocks is often considered as a crucial step for evaluating the applicability of macroeconomic models to reality. In particular, Galí [1999] has considered the conditional correlation between employment and productivity as a key tool for building an empirical evaluation of Real Business Cycle theories and New-Keynesian models. Impulse-response functions are often identified by means of Structural Vector AutoRegressive models. However, a structural Moving Average model of the economy cannot be estimated by VAR techniques whenever the agents' information space is larger than the econometrician's one, that is when we face a problem of nonfundamentalness. We consider how factor models can be seen as an alternative to VAR for assessing the validity of an economic model without having to deal with the problem of nonfundamentalness. We apply this method to the well known business cycle model by Galí [1999], which originally was estimated using a VAR, and retrieve alternative nonfundamental representations of the relation between technology shocks and hours worked. Such representations always yield a positive correlation between productivity and hours worked when conditioning on a technology shock. This result is more robust than the results by Christiano et al. [2004], because it is independent of the transformation used for hours worked and moreover is perfectly consistent with the unconditional correlation observed between the common components of the variables considered.
    Keywords: technology, hours worked, factor models
    JEL: C52 E24 E60
    Date: 2008–04
  28. By: Emine Boz; Christian Daude; Ceyhun Bora Durdu
    Abstract: The data reveal that emerging markets do not differ from developed countries with regards to the variance of permanent TFP shocks relative to transitory. They do differ, however, in the degree of uncertainty agents face when formulating expectations. Based on these observations, we build an equilibrium business cycle model in which the agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks. When formulating expectations, they assign some probability to TFP shocks being permanent even when they are purely transitory. This is sufficient for the model to produce "permanent-like" effects in response to transitory shocks. The imperfect information model calibrated to Mexico predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output, without the predominance of trend shocks. The same model assuming perfect information and calibrated to Canada accounts for developed country business cycle regularities. The estimated relative variance of trend shocks in these two models is similar.
    Date: 2008
  29. By: Vasco Cúrdia
    Abstract: Emerging market economies often face sudden stops in capital inflows or reduced access to the international capital market. This paper analyzes what monetary policy should accomplish in such an event. Optimal monetary policy induces higher interest rates and exchange rate depreciation. The interest rate hike discourages borrowing and consumption, mitigating the impact of the increased cost of borrowing. The exchange rate depreciation provides a boost to export revenues, reducing the need for, but not averting, a domestic recession. The paper shows that the arrival of the sudden stop further aggravates the time inconsistency problem. Optimal policy is fairly well approximated by a flexible targeting rule, which stabilizes a basket composed of domestic price inflation, exchange rate and output. We show that from a welfare perspective, the success of a fixed exchange rate regime depends on the economic environment. For the benchmark parameterization, the peg performs the worst of the simple rules considered. For alternative parameterizations that feature low nominal rigidities or high elasticity of foreign demand, the fixed exchange rate regime performs relatively better.
    Keywords: Monetary policy ; International finance ; Macroeconomics ; Foreign exchange rates ; Inflation targeting
    Date: 2008
  30. By: Louis Phaneuf; Nooman Rebei
    Abstract: We develop and estimate a DSGE model which realistically assumes that many goods in the economy are produced through more than one stage of production. Firms produce differentiated goods at an intermediate stage and a final stage, post different prices at both stages, and face stage-specific technological change. Wage-setting households are imperfectly competitive with respect to labor skills. Intermediate-stage technology shocks explain most of short-run output fluctuations, whereas final-stage technology shocks only have a small impact. Despite the dominance of technology shocks, the model predicts a near-zero correlation between hours worked and the return to work and mildly procyclical real wages. The factors mainly responsible for these findings are an input-output linkage between firms operating at the different stages and movements in the relative price of goods. We show that, depending the source, a technology improvement may either have a contractionary or expansionary impact on employment.
    Keywords: Business Cycles, Production Stages, Technological Change, Nominal Rigidities
    JEL: E32
    Date: 2008
  31. By: Enrique Martinez-Garcia
    Abstract: Greater openness has become an almost universal feature of modern, developed economies. This paper develops a workhorse international model, and explores the role of standard monetary policy rules applied to an open economy. For this purpose, I build a two-country DSGE model with monopolistic competition, sticky prices, and pricing-to-market. I also derive the steady state and a log-linear approximation of the equilibrium conditions. The paper provides a lengthy explanation of the steps required to derive this benchmark model, and a discussion of: (a) how to account for certain well-known anomalies in the international literature, and (b) how to start "thinking" about monetary policy in this environment.
    Keywords: Monetary policy ; Equilibrium (Economics) ; Globalization ; Macroeconomics ; International finance ; Mathematical models
    Date: 2008
  32. By: Yilmaz Akyuz (UNCTAD)
    Abstract: The Keynesian analysis of financial stability as developed by Hyman Minsky, provides considerable insights into understanding the nature and dynamics of boom-bust cycles driven by international capital flows in emerging markets. Its main policy conclusion that financial control rather than macroeconomic policy holds the key to financial stability is equally valid. There is however, need to develop a new approach to financial control and place greater emphasis on managing capital inflows than has hitherto been the case
    Keywords: Financial instability, countercyclical policy, financial regulation
    JEL: E32 F32 G18
    Date: 2008
  33. By: Jesús Otero; Manuel Ramírez Gómez
    Abstract: This paper proposes a simple Ordered Probit model to analyse the monetary policy reaction function of the Colombian Central Bank. There is evidence that the reaction function is asymmetric, in the sense that the Bank increases the Bank rate when the gap between observed inflation and the inflation target (lagged once) is positive, but it does not reduce the Bank rate when the gap is negative. This behaviour suggests that the Bank is more interested in fulfilling the announced inflation target rather than in reducing inflation excessively. The forecasting performance of the model, both within and beyond the estimation period, appears to be particularly good.
    Date: 2008–04–14
  34. By: Terry McKinley (International Poverty Centre)
    Keywords: Sub-Saharan Africa, Inflation
    Date: 2008–04
  35. By: Guillaume Rocheteau
    Abstract: I study random-matching economies where at money coexists with real assets, and no restrictions are imposed on payment arrangements. I emphasize informational asymmetries about asset fundamentals to explain the partial illiquidity of real assets and the usefulness of at money. The liquidity of the real asset, as measured by its transaction velocity, is shown to depend on the discrepancy of its dividend across states as well as policy. I analyze how monetary policy affects payment arrangements, asset prices, and welfare.
    Keywords: Money ; Monetary policy
    Date: 2008
  36. By: Isabel Correia; Juan Pablo Nicolini; Pedro Teles
    Abstract: In this article, we analyze the implications of price-setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider standard monetary economies that differ in the price-setting restrictions imposed on the firms. We show that, independently of the degree or type of price stickiness, it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness. In this sense, environments with different price-setting restrictions are equivalent.
    Date: 2008
  37. By: Nielsen, Bent
    Abstract: Empirical analyses of Cagan’s money demand schedule for hyper-inflation have largely ignored the explosive nature of hyper-inflationary data. It is argued that this contributes to an (i) inability to model the data to the end of the hyper-inflation, and to (ii) discrepancies between “estimated” and “actual” inflation tax. A simple solution to these issues is found by replacing the conventional measure of inflation by the cost of holding money.
    Keywords: Cost of holding money, co-explosiveness, co-integration, explosive processes, hyper-inflation
    JEL: C32 E41
    Date: 2008
  38. By: Giese, Julia V.
    Abstract: Empirical evidence on the expectations hypothesis of the term structure is in-conclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy.
    Keywords: Yield Curve, Term Structure of Interest Rates, Expectations Hypothesis, Cointegration, Common Trends
    JEL: C32 E43 E44
    Date: 2008
  39. By: Kevin L. Kliesen
    Abstract: Recently, some analysts and economists had warned that the U.S. economy faces a much higher risk of falling into a recession should the price of oil rise to $100 per barrel or more. In February 2008, spot crude oil prices closed above $100 per barrel for the first time ever, and they have since climbed even further. Meanwhile, according to some surveys of economists, there is a high probability that a recession in the United States began in late 2007 or early 2008. Although the findings in this paper are consistent with the view that the U.S. economy has become much less sensitive to large changes in oil prices, a simple forecasting exercise reveals that a permanent increase in the price of crude oil to $150-per barrel-by the end of 2008 would have a significant negative effect on the growth rate of real GDP in the short run. However, the exercise also predicts such an increase in oil prices would have minimal effect on future inflation.
    Keywords: Petroleum products - Prices ; Economic conditions
    Date: 2008
  40. By: Stéphane Auray; Samuel Danthine
    Abstract: A matching model with labor/leisure choice and bargaining frictions is used to explain (i) differences in GDP per hour and GDP per capita, (ii) differences in employment and hours worked (per capita and per worker), (iii) differences in the proportion of part-time work across countries. The model predicts that the higher the level of rigidity in wages and hours the lower are GDP per capita, employment, part-time work and hours worked, but the higher is GDP per hour. In addition, it predicts that a country with a high level of rigidity in wages and hours and a high level of income taxation has higher GDP per hour and lower GDP per capita, employment and part-time work than a country with less rigidity and a lower level of taxation. This is due mostly to a lower level of employment. In contrast, a country with low levels of rigidity in hours and in wage setting but with a higher level of income taxtion has a lower GDP per capita and a higher GDP per hour than the economy with low rigidity and low taxation. In this configuration, the level of employment is similar in both economies but the share of part-time work is larger. The model accounts well qualitatively for the facts, and a plausible calibration accounts well qualitatively for the differences between the US, French and Dutch economies.
    Keywords: Models of search and matching, bargaining frictions, economic performance, labor market institutions, part-time jobs, labor market rigidities
    JEL: E24 J22 J30 J41 J50 J64
    Date: 2008
  41. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: There is a rich scholarly literature on sovereign default on external debt. Comparatively little is known about sovereign defaults on domestic debt. Even today, cross-country data on domestic public debt remains curiously exotic, particularly prior to the 1980s. We have filled this gap in the literature by compiling a database on central government public debt (external and domestic). The data span 1914 to 2007 for most countries, reaching back into the nineteenth century for many. Our findings on debt sustainability, sovereign defaults, the temptation to inflate, and the hierarchy of creditors only scratch the surface of what the domestic public debt data can reveal. First, domestic debt is big -- for the 64 countries for which we have long time series, domestic debt accounts for almost two-thirds of total public debt. For most of the sample, this debt carries a market interest rate (except for the financial repression era between WWII and financial liberalization). Second, the data go a long ways toward explaining the puzzle of why countries so often default on their external debts at seemingly low debt thresholds. Third, domestic debt has largely been ignored in the vast empirical work on inflation. In fact, domestic debt (a significant portion of which is long term and non-indexed) is often much larger than the monetary base in the run-up to high inflation episodes. Last, the widely-held view that domestic residents are strictly junior to external creditors does not find broad support.
    JEL: E6 F3 N0
    Date: 2008–04
  42. By: Michael B. Devereux; Alan Sutherland
    Abstract: This paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models. The method is widely applicable, simple to implement, and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods. We first illustrate the approach using a simple two-asset endowment economy model, and then show how the results extend to the case of any number of assets and general economic structure.
    Keywords: Econometric models ; Equilibrium (Economics) - Mathematical models ; Macroeconomics - Econometric models ; Monetary policy
    Date: 2008
  43. By: Dean Croushore
    Abstract: This paper describes the existing research (as of February 2008) on real-time data analysis, divided into five areas: (1) data revisions; (2) forecasting; (3) monetary policy analysis; (4) macroeconomic research; and (5) current analysis of business and financial conditions. In each area, substantial progress has been made in recent years, with researchers gaining insight into the impact of data revisions. In addition, substantial progress has been made in developing better real-time data sets around the world. Still, additional research is needed in key areas, and research to date has uncovered even more fruitful areas worth exploring.
    Keywords: Macroeconomics
    Date: 2008
  44. By: Robert J. Barro; José F. Ursúa
    Abstract: We build on the Maddison GDP data to assemble international time series from before 1914 on real per capita personal consumer expenditure, C. We also improve the GDP data in many cases. The C variable comes closer than GDP to the consumption concept that enters into usual asset-pricing equations. (A separation of consumer expenditure into durables and non-durables is feasible for only a minority of cases.) We have essentially full annual data on C for 22 countries and GDP for 35 countries, and we plan to complete the long-term time series for a few more countries. For samples that start as early as 1870, we apply a peak-to-trough method for each country to isolate economic crises, defined as cumulative declines in C or GDP by at least 10%. The principal world economic crises ranked by importance are World War II, World War I and the Great Depression, the early 1920s (possibly reflecting the influenza epidemic of 1918-20), and post-World War II events such as the Latin American debt crisis and the Asian financial crisis. We find 87 crises for C and 148 for GDP, implying disaster probabilities around 3.6% per year. The disaster size has a mean of 21-22% and an average duration of 3.5 years. A comparison of C and GDP declines shows roughly coincident timing. The average fractional decline in C exceeds that in GDP during wartime crises but is similar for non-war crises. We simulate a Lucas-tree model with i.i.d. growth shocks and Epstein-Zin-Weil preferences. This simulation accords with the observed average equity premium of around 7% on levered equity, using a "reasonable" coefficient of relative risk aversion of 3.5. This result is robust to a number of perturbations, except for limiting the sample to non-war crises, a selection that eliminates most of the largest declines in C and GDP. We plan a statistical analysis that uses all the time-series data and includes estimation of long-run effects of crises on levels and growth rates of C and GDP. We will also study the bond-bill premium (empirically around 1%) and allow for time-varying disaster probabilities.
    JEL: E01 E21 E23 E44 G12
    Date: 2008–04
  45. By: Ormerod, Paul
    Abstract: Bordo and Helbing (2003) examine the business cycle in Western economies over the 1881-2001 period. They examine four distinct periods in economic history and conclude that there is a secular trend towards greater synchronisation for much of the 20th century, and that it takes place across these different regimes. Most of the analytical techniques used in the business cycle convergence literature rely upon the estimation of an empirical correlation matrix of time series data of macroeconomic aggregates in the various countries. However due to the finite size of both the number of economies and the number of observations, a reliable determination of the correlation matrix may prove to be problematic. The structure of the correlation matrix may be dominated by noise rather than by true information. Random matrix theory was developed in physics to overcome this problem, and to enable true information in a matrix to be distinguished from noise. It has been successfully applied in the analysis of financial data. Using a very similar data set to Bordo and Helbing, I use random matrix theory, and the associated technique of agglomerative hierarchical clustering, to examine the evolution of convergence of the business cycle between the capitalist economies. The results confirm that there is a very clear degree of synchronisation of the business cycle across countries during the 1973-2006 period. In contrast, during the pre-First World War period it is not possible to speak of an international business cycle in any meaningful sense. The crosscountry correlations of annual real GDP growth are indistinguishable from those which could be generated by a purely random matrix. Contrary to the findings of Bordo and Helbing, it does not seem possible to speak of a ‘secular trend’ towards greater synchronisation over the 1886-2006 period as a whole. The periods 1920-1938 and 1948-1972 do show a certain degree of synchronisation – very similar in both periods in fact – but it is weak. In particular, the cycles of the major economies cannot be said to be synchronised during these periods. Such synchronisation as exists in the overall data set is due to meaningful comovements in sub-groups. So the degree of synchronisation has evolved fitfully, and it is only in the most recent period, 1973-2006, that we can speak of a strong level of synchronisation of business cycles between countries. More detailed analysis of the evolution of synchronisation of the 6 major economies since 1948 suggests it can vary considerably over relatively short periods of time. During the 1990s, for example, the degree of synchronisation of the cycle was similar to that of the 1950s, and lower than it was in the 1970s and 1980s following the oil shocks.
    Keywords: International business cycle, synchronisation, random matrix theory
    JEL: C69 E32 N10
    Date: 2008
  46. By: Beatrice Pataracchia
    Abstract: This paper characterizes the derivation and the assessment of design limits in the case of a regime-switching economy. The object of the analysis on design limits is to derive the restrictions on how feedback rules, the Taylor-type rules typically used in monetary economics, affect the frequency fluctuations underlying the state variable of interest. We extend the analysis in a structured context of model uncertainty where the uncertainty is described by the presence of different potential models whose probability of occurrence and switching is given by a known and ergodic Markov Chain transition matrix. The presence of switching modifies the characteristics of design limits in two main aspects. First, when the optimal variance minimizing rule is chosen, frequency specific restrictions appear more or less stringent with the respect to the linear case depending on the probability of switching: the higher it is, the worst is the performance in terms of frequency-specific fluctuations. Second, contrary to the linear case, design limits are also affected by the policy rule so that their role switches from a constraint to an externality that the policymaker may want to take into account.
    Keywords: Design Limits, Stabilization policy, Regime switching, Model Uncertainty
    JEL: C52 E6
    Date: 2008–03
  47. By: Katja Hanewald
    Abstract: This article provides a comprehensive econometric analysis of factors driving aggregate mortality rates over time. It differs from previous studies in this field by simultaneously considering an extensive set of macroeconomic, socio-economic and ecological factors as explanatory variables. Germany is chosen as an indicative example for other industrialized countries due to its advanced demographic transition process. Our regression analysis, which covers the time interval 1956-2004, indicates that sex- and age-specific mortality rates vary substantially in their response to external factors. Strongest associations are found with changes in real GDP, flu epidemics and the two life style variables alcohol and cigarette consumption in both univariate and multivariate setups. Further analysis shows that these effects are primarily contemporary, while other indicators such as weather conditions exert lagged effects. By combining variables in a multivariate model the share of explained data volatility can be substantially increased.
    Keywords: Aggregate mortality, business cycle, socio-economic factors, multivariate model
    JEL: I12 J11 C32
    Date: 2008–04
  48. By: Beatrice Pataracchia
    Abstract: In this paper we propose a method to derive the spectral representation in the case of a particular class of nonlinear models: Markov Switching ARMA models. The procedure simply relies on the application of the Riesz-Fisher Theorem which describes the spectral density as the Fourier transform of the autocovariance functions. We explicitly show the analytical structure of the spectral density in the simple Markov Switching AR(1). Finally, a monetary policy application of a Markov Switching VAR(4) is presented
    Keywords: Multivariate ARMA models; Regime-switching models; Markov switching models; Frequency Domain
    JEL: C32 C44 E52
    Date: 2008–03
  49. By: Enrique G. Mandoza; Vivian Z. Yue
    Abstract: Models of business cycles in emerging economies explain the negative correlation between country spreads and output by modeling default risk as an exogenous interest rate on working capital. Models of strategic default explain the cyclical properties of sovereign spreads by assuming an exogenous output cost of default with special features, and they underestimate debt-output ratios by a wide margin. This paper proposes a solution to this default risk-business cycle disconnect based on a model of sovereign default with endogenous output dynamics. The model replicates observed V-shaped output dynamics around default episodes, countercyclical sovereign spreads, and high debt ratios, and it also matches the variability of consumption and the countercyclical fluctuations of net exports. Three features of the model are key for these results: (1) working capital loans pay for imported inputs; (2) imported inputs support more efficient factor allocations than when these inputs are produced internally; and (3) default on the foreign obligations of firms and the government occurs simultaneously.
    Date: 2008
  50. By: Emmanuel Farhi; Jean Tirole
    Abstract: We explore the link between liquidity and investment in a an overlapping generation model with a standard asynchronicity between firms' access to and need for cash. Imperfect pledgeability hinders the capacity of capital markets to resolve this asynchronicity, resulting in credit rationing and a net demand for stores of value -- liquidity -- by the corporate sector. At the heart of the model is a distinction between inside liquidity -- liquidity created within the private sector -- and outside liquidity -- assets that do not originate in private investment decisions. In the model, outside liquidity comes in two forms: rents and asset bubbles. We make four contributions. First, we show that imperfect pledgeability severs the link between dynamic efficiency and the level of the interest rate. Bubbles are possible even when the economy is dynamically efficient. Second, we demonstrate that the link between outside liquidity and investment is ambiguous: on the one hand, outside liquidity eases the asynchronicity problem of firms, boosting investment -- the liquidity effect; on the other hand it competes with inside liquidity, reduces the value of firms' collateral and lowers investment -- the competition effect. We characterize precisely the conditions under which outside liquidity and investment are complements or substitutes. Third, we explore the possibility of stochastic bubbles. We show that they trade at a liquidity discount. Bubble bursts can be endogenously triggered by bad shocks to corporate balance sheets and have potentially amplified effects on investment through liquidity dry-ups. Fourth, in an extension where corporate governance is endogenously determined by a trade-off striked by firms between collateral and value, we show that bubbles are accompanied by loose corporate governance.
    JEL: E2 E44
    Date: 2008–04
  51. By: Argia M. Sbordone
    Abstract: This paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the magnitude observed in the United States in the 1990s might have a significant quantitative impact. I find that it is difficult to argue that such an increase in trade would have generated a sufficiently large increase in U.S. market competition to reduce the slope of theinflation-marginal cost relation.
    Keywords: Price levels ; Inflation (Finance) ; Deflation (Finance) ; Competition
    Date: 2008
  52. By: Edoardo Gaffeo; Domenico Delli Gatti; Saul Desiderio; Mauro Gallegati
    Abstract: In this paper we present the basics of a research program aimed at providing microfoundations to macroeconomic theory on the basis of computational agentbased adaptive descriptions of individual behavior. To exemplify our proposal, a simple prototype model of decentralized multi-market transactions is offered. We show that a very simple agent-based computational laboratory can challenge more structured dynamic stochastic general equilibrium models in mimicking comovements over the business cycle.
    Keywords: Microfoundations of macroeconomics, Agent-based economics, Adaptive behavior
    JEL: C63 E10 O11
    Date: 2008
  53. By: Kiyohito Utsunomiya (Senior Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: To date, most research on Interwar Period economic fluctuations in Japan has been based on Estimates of Long-term Economic Statistics of Japan (LTES), edited by Kazushi Ohkawa et al. Regardless, the LTES data are just one set of estimations. They require scrutiny, especially for the measurement of personal consumption, which has a high weight in GNE. This paper re-estimates the LTES personal consumption expenditures by adjusting the estimation methods for certain expense categories and deducting imputations (which may have a large measurement error), and then calculates real GDP (adjusted real GDP) focusing on the market economy. The re-estimation presents no major changes from the LTES in the shape of the economic fluctuations of the 1920s, when the Japanese economy continuously posted gunbalanced growth.h From the Showa Depression forward, however, while the LTES shows continued positive real GDP growth, the re-estimation indicates negative growth in adjusted real GDP in 1931. These findings remain robust after considering the bias from the deflator formula. Given the characteristics of national accounts and the measurement error, these re-estimation results suggest that the severity of the Showa Depression may have been underestimated in the prior research.
    Keywords: Japanese Economy, Interwar Period, Showa Depression, Great Depression, Personal Consumption, National Accounts, Deflator, Imputation
    JEL: E01 N15
    Date: 2008–04
  54. By: Michael Graff (KOF Swiss Economic Institute, ETH Zurich); Kam Ki Tang (School of Economics, University of Queensland, Australia); Jie Zhang (School of Economics, University of Queensland, Australia)
    Abstract: This paper examines the impact of demographic factors on saving, investment, and external balances. We derive a number of semi-structural equations from national accounting principle and the principle that external balances for the world as a whole must sum to zero. The resulting equations embody both closed, partially open and completely open economies as special cases, and are arguably more properly specified than those previously used in the literature. We apply these semi-structural equations to a large panel data set. While our findings by and large are in agreement with most previous studies, our semi-structural equations give much more plausible estimation results for saving and investment than conventional specification
    Keywords: Demography, openness, saving, investment, current account, panel data
    JEL: E21 F32 J10
    Date: 2008–04
  55. By: Canova, Fabio
    Abstract: This chapter highlights the problems that structural methods and SVAR approaches have when estimating DSGE models and examining their ability to capture important features of the data. We show that structural methods are subject to severe identification problems due, in large part, to the nature of DSGE models. The problems can be patched up in a number of ways, but solved only if DSGEs are completely reparametrized or respecified. The potential misspecification of the structural relationships give Bayesian methods an hedge over classical ones in structural estimation. SVAR approaches may face invertibility problems but simple diagnostics can help to detect and remedy these problems. A pragmatic empirical approach ought to use the flexibility of SVARs against potential misspecification of the structural relationships but must firmly tie SVARs to the class of DSGE models which could have have generated the data.
    Keywords: DSGE models; Identification; Invertibility; SVAR models
    JEL: C10 C52 E32 E50
    Date: 2008–04
  56. By: Clauio Borio
    Abstract: The unfolding financial turmoil in mature economies has prompted the official and private sectors to reconsider policies, business models and risk management practices. Regardless of its future evolution, it already threatens to become one of the defining economic moments of the 21st century. This essay seeks to provide a preliminary assessment of the events and to draw some lessons for policies designed to strengthen the financial system on a long-term basis. It argues that the turmoil is best seen as a natural result of a prolonged period of generalised and aggressive risk-taking, which happened to have the subprime market at its epicentre. In other words, it represents the archetypal example of financial instability with potentially serious macroeconomic consequences that follows the build-up of financial imbalances in good times. The significant idiosyncratic elements, including the threat of an unprecedented involuntary "reintermediation" wave for banks and the dislocations associated with new credit risk transfer instruments, are arguably symptoms of more fundamental common causes. The policy response, while naturally taking into account the idiosyncratic weaknesses brought to light by the turmoil, should be firmly anchored to the more enduring factors that drive financial instability. This essay highlights possible mutually reinforcing steps in three areas: accounting, disclosure and risk management; the architecture of prudential regulation; and monetary policy.
    Keywords: financial turmoil, risk, liquidity, prudential regulation, accounting, ratings, monetary policy
    Date: 2008–03
  57. By: Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
    Abstract: Volatile and persistent real exchange rates are observed not only in aggregate series but also on the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of priceadjustment.
    Keywords: Prices ; Price levels ; Foreign exchange rates
    Date: 2008
  58. By: Oxelheim, Lars (Lund University and Research Institute of Industrial Economics); Wihlborg, Clas (Chapman University and Copenhagen Business School); Zhang, Jianhua (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Macroeconomic fluctuations affect corporations’ performance through demand and cost conditions. Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences if management is unable to forecast macroeconomic fluctuations or unable to adjust operations in response to changes in macroeconomic conditions. In this paper we analyze the impact of macroeconomic, industry and firm-specific factors on salaries and bonus of CEOs in 131 Swedish corporations during the period 2001-2006. A distinction is made between anticipated and unanticipated macroeconomic fluctuations. The macroeconomic influences on performance and compensation can be expected to vary from firm to firm in terms of magnitude of effects, as well as in terms of relevant macroeconomic variables. The estimates obtained in this paper refer to the average impact across the sample of firms. We find that the average Swedish CEOs’ compensation is explained to a substantial extent by macroeconomic factors; less so by unanticipated factors alone.<p>
    Keywords: executive compensation; macroeconomic factors; cash compensation
    JEL: L14 L16 M14 M21 M52
    Date: 2008–04–21
  59. By: Serena Lamartina (European Central Bank); Andrea Zaghini (Banca d’Italia & Center for Financial Studies, Frankfurt)
    Abstract: The paper proposes a panel cointegration analysis of the joint development of government expenditures and economic growth in 23 OECD countries. The empirical evidence provides indication of a structural positive correlation between public spending and per-capita GDP which is consistent with the so-called Wagner’s law. A long-run elasticity larger than one suggests a more than proportional increase of government expenditures with respect to economic activity. In addition, according to the spirit of the law, we found that the correlation is usually higher in countries with lower per-capita GDP, suggesting that the catching-up period is characterized by a stronger development of government activities with respect to economies in a more advanced state of development.
    Keywords: Fiscal Policy, Wagner’s Law, Panel Cointegration
    JEL: E62 H50 C23
    Date: 2008–04
  60. By: Bloise, Gaetano; Reichlin, Pietro
    Abstract: In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass (1972)) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.
    Keywords: Asset Prices; Cass Criterion; Constrained Inefficiency; Default; Private debt; Solvency Constraints
    JEL: D50 D52 D61 E44 G13
    Date: 2008–04
  61. By: Francisco J. Gomes; Laurence J. Kotlikoff; Luis M. Viceira
    Abstract: We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated life-cycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the optimal share of equities generally declining prior to retirement. However, variable labor materially alters pre-retirement portfolio choice by significantly raising optimal equity holdings. Using this model, we also investigate the welfare costs of constraining portfolio allocations over the life cycle to mimic popular default investment choices in defined-contribution pension plans, such as stable value funds, balanced funds, and life-cycle (or target date) funds. We find that life-cycle funds designed to match the risk tolerance and investment horizon of investors have small welfare costs. All other choices, including life-cycle funds which do not match investors' risk tolerance, can have substantial welfare costs.
    JEL: D1 D91 E21 G11 G2 G23 H31 H55
    Date: 2008–04
  62. By: Prof D.S.G. Pollock
    Abstract: An account is given of some techniques of linear filtering that can be used for extracting the business cycle from economic data sequences of limited duration. It is argued that there can be no definitive definition of the business cycle. Both the definition of the business cycle and the methods that are used to extract it must be adapted to the purposes of the analysis; and different definitions may be appropriate to different eras.
    Keywords: Linear filtering; Frequency-domain analysis; Flexible trends
    JEL: C22
    Date: 2008–04
  63. By: Peter Spreij; Enno Veerman; Peter Vlaar
    Abstract: In this paper, the relevance of the Feller conditions in discrete time macro-finance term structure models is investigated. The Feller conditions are usually imposed on a continuous time multivariate square root process to ensure that the roots have nonnegative arguments. For a discrete time approximate model, the Feller conditions do not give this guarantee. Moreover, in a macro-finance context the restrictions imposed might be economically unappealing. At the same time, it has also been observed that even without the Feller conditions imposed, for a practically relevant term structure model, negative arguments rarely occur. Using models estimated on German data, we compare the yields implied by (approximate) analytic exponentially affine expressions to those obtained through Monte Carlo simulations of very high numbers of sample paths. It turns out that the differences are rarely statistically significant, whether the Feller conditions are imposed or not. Moreover, economically the differences are negligible, as they arealways below one basis point.
    Keywords: macro-finance models; affine term structure model; expected inflation; ex-antereal short rate; Monte Carlo simulations
    Date: 2008–04
  64. By: Joerg Bibow
    Abstract: This paper sets out to investigate the forces behind the so-called "global capital flows paradox" and related "dollar glut" observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that resulted in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. The hypothesis put forward here is that systemic deficiencies in the international monetary and financial order have been the root cause behind today’s situation. Furthermore, it is argued that the United States’ position as issuer of the world's premiere reserve currency and supremacy in global finance explain the related conundrum of a positive investment income balance despite a negative international investment position. The assessment is carried out in light of John Maynard Keynes’s views on a sound international monetary and financial order.
    Date: 2008–04
  65. By: Daney Valdivia (Ministry of Finance, Bolivia)
    Abstract: El presente trabajo estudia la dinámica de la inflación en Bolivia usando la Curva de Phillips Híbrida Nueva Keynesiana (HNKPC), incorporando características del país como: grado de dolarización debido a la influencia de este sobre las expectativas de los agentes, determinados conflictos sociales y políticas de gobierno que afectaron el nivel de precios. La estimación se la realiza por el Método Generalizado de Momentos. El principal resultado es la alta frecuencia de fijación de precios (en promedio cada trimestre y medio) lo cual sugiere que el rol de la fijación de precios no es determinante en la dinámica de la inflación a pesar de los bajos niveles observados a partir del año 2000. Por consiguiente, una curva de Phillips semi vertical que muestra un trade – off débil entre inflación y desempleo. Los resultados obtenidos de los parámetros estructurales confirman la importancia del componente forward – looking. Además, de hallar un coeficiente de traspaso del tipo de cambio a precios alto consistente conforme a otros estudios hechos para Bolivia.
    Keywords: Inflación, Curva de Phillips, Pass – through
    JEL: E31 C13
    Date: 2008–02
  66. By: Lanne, Markku; Saikkonen, Pentti
    Abstract: This paper is concerned with univariate noncausal autoregressive models and their potential usefulness in economic applications. We argue that noncausal autoregressive models are especially well suited for modeling expectations. Unlike conventional causal autoregressive models, they explicitly show how the considered economic variable is affected by expectations and how expectations are formed. Noncausal autoregressive models can also be used to examine the related issue of backward-looking or forward-looking dynamics of an economic variable. We show in the paper how the parameters of a noncausal autoregressive model can be estimated by the method of maximum likelihood and how related test procedures can be obtained. Because noncausal autoregressive models cannot be distinguished from conventional causal autoregressive models by second order properties or Gaussian likelihood, a detailed discussion on their specification is provided. Motivated by economic applications we explicitly use a forward-looking autoregressive polynomial in the formulation of the model. This is different from the practice used in previous statistics literature on noncausal autoregressions and, in addition to its economic motivation, it is also convenient from a statistical point of view. In particular, it facilitates obtaining likelihood based diagnostic tests for the specified orders of the backward-looking and forward-looking autoregressive polynomials. Such test procedures are not only useful in the specification of the model but also in testing economically interesting hypotheses such as whether the considered variable only exhibits forward-looking behavior. As an empirical application, we consider modeling the U.S. inflation dynamics which, according to our results, is purely forward-looking.
    Keywords: Noncausal autoregression; expectations; inflation persistence
    JEL: C52 E31 C22
    Date: 2008
  67. By: Muellbauer, John
    Abstract: Many factors have contributed to the development of credit markets, easing access of households to credit. This paper considers the implications of easier credit for the influence of higher house prices on consumer expenditure. It argues that with poorly developed credit markets, the effect is likely to be negative, but becomes positive as access to housing collateral increases and down-payments for first time home buyers fall in relation to values. The implications for differences between countries and changes in consumer behaviour over time are explored. Previous studies are reviewed: the omission of credit liberalization and other controls has often biased estimates of housing ‘wealth’ effects on consumption. New empirical estimates for the UK and US suggest that there was no housing ‘wealth effect’ before credit market liberalization, but that the housing collateral effect is now significant, larger than the stock market wealth effect, and about twice as large in the US as the UK.
    Keywords: consumer expenditure; credit channel; housing wealth
    JEL: E21 E51
    Date: 2008–04
  68. By: Lorenzo Pozzi (Erasmus University Rotterdam); Guido Wolswijk (European Central Bank)
    Abstract: We derive a model in which a standard international capital asset pricing (ICAPM) model is nested within an ICAPM model with market imperfections. In the latter model an idiosyncratic stochastic factor affects the return of risky assets (over a risk-free rate) on top of the systematic component that is common to all countries (and that is interacted with a timevarying idiosyncratic “beta”). We introduce asymptotic convergence from the full ICAPM model with imperfections to the standard model by multiplying the idiosyncratic factor by convergence operators. The model is then estimated using the weekly 10 year government bond spreads of Belgium, France, Italy, and the Netherlands versus Germany over the period 1991-2006. We find that the idiosyncratic components have converged towards zero for all countries after the introduction of the euro implying that the efficiency of the euro area government bond markets under consideration has increased. Full convergence has not yet occurred however.
    Keywords: Government bonds; euro area; interest rate spreads; state space methods
    JEL: E43 G12
    Date: 2008–04–18
  69. By: Domenico Delli Gatti; Edoardo Gaffeo; Mauro Gallegati
    Abstract: The firmly established evidence of right-skewness of the firms’ size distribution is generally modelled recurring to some variant of the Gibrat’s Law of Proportional Effects. In spite of its empirical success, this approach has been harshly criticized on a theoretical ground due to its lack of economic contents and its unpleasant long-run implications. In this chapter we show that a right-skewed firms’ size distribution, with its upper tail scaling down as a power law, arises naturally from a simple choice-theoretic model based on financial market imperfections and a wage setting relationship. Our results rest on a multi-agent generalization of the prey-predator model, firstly introduced into economics by Richard Goodwin forty years ago.
    Keywords: Firm size; Prey-predator model; Business Fluctuations
    JEL: L11 D92 E32
    Date: 2008
  70. By: Javier Gómez Pineda
    Abstract: En empirical model of the pass-through of international to domestic food inflation is proposed. The key liking variable between international and domestic food inflation of food products in the PPI for food imports and exports. Not only the inflation rates of the relevant countries but also their exchange rates can exert important influences on the prices of imported and exported food products.
    Date: 2008–04–22
  71. By: Miroslav Misina; Greg Tkacz
    Abstract: Historical narratives typically associate financial crises with credit expansions and asset price misalignments. The question is whether some combination of measures of credit and asset prices can be used to predict these events. Borio and Lowe (2002) answer this question in the affirmative for a sample of 34 countries, but the question is surprisingly difficult to answer for individual developed countries that have faced very few, if any, financial crises in the past. To circumvent this problem, we focus on financial stress and ask whether credit and asset price movements can help predict it. To measure financial stress, we use the Financial Stress Index (FSI) developed by Illing and Liu (2006). Other innovations include the estimation and forecasting using both linear and endogenous threshold models, and a wide range of asset prices (stock and housing prices, for example). The exercise is performed for Canada, but the methodology is suitable for any country that fits the above description.
    Keywords: Credit and credit aggregates; Financial stability
    JEL: G10 E5
    Date: 2008
  72. By: Saygin Sahinoz (Central Bank of Turkey); Bedriye Saracoglu (Gazi University)
    Abstract: This study investigates the price setting behavior of Turkish industries based on the results of a survey that was conducted by the Central Bank of the Republic of Turkey. The results show that under normal conditions, the majority of the firms follow time-dependent pricing rule but when significant events occur substantial fraction of them alter their behavior to state dependent reviewing. The median Turkish firm reviews its prices every month, but changes its prices four times a year. Price reviews and changes are affected by: the market share, price discrimination, customer type, firm size and the existence of regulated prices.
    Keywords: price-setting, price-rigidity, survey
    JEL: E30 D40
    Date: 2008
  73. By: Gene Amromin; Steven A. Sharpe
    Abstract: Data obtained from special questions on the Michigan Survey of Consumer Attitudes over several years are used to analyze stock market beliefs and portfolio choices of household investors. Consistent with other survey results, expected future returns appear to be extrapolated from past realized returns. The data also indicate that expected risk and return are strongly influenced by economic prospects. When investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility, which implies that household Sharpe ratios are procyclical. Separately, perceived risk in equity returns is found to be strongly influenced by household investor characteristics, consistent with documented behavioral biases. These expectations reported by respondents are given credence by the finding that the proportion of equity holdings in respondent portfolios tends to be higher for those who report higher expected returns and lower uncertainty. Finally, the finding of procyclical expected returns holds up when we instead condition on conventional business cycle proxies such as the dividend yield and CAY, which yields a stark contrast with the inferences from studies based on actual returns.
    Date: 2008
  74. By: Jane Haltmaier
    Abstract: Predicting cycles in economic activity is one of the more challenging but important aspects of economic forecasting. This paper reports the results from estimation of binary probit models that predict the probability of an economy being in a recession using a variety of financial and real activity indicators. The models are estimated for eight countries, both individually and using a panel regression. Although the success of the models varies, they are all able to identify a significant number of recessionary periods correctly.
    Date: 2008
  75. By: Michael B. Devereux; Shouyong Shi
    Abstract: While in principle, international payments could be carried out using any currency or set of currencies, in practice, the US dollar is predominant in international trade and financial flows. The dollar acts as a "vehicle currency" in the sense that agents in nondollar economies will generally engage in currency trade indirectly using the US dollar rather than using direct bilateral trade among their own currencies. Indirect trade is desirable when there are transactions costs of exchange. This paper constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency, and show how this depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency's government. We find that there can be very large welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetry weighted towards the residentsof the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle country.
    Keywords: International trade ; Dollar, American ; Equilibrium (Economics) - Mathematical models ; Monetary policy
    Date: 2008
  76. By: Cao, Jin; Illing, Gerhard
    Abstract: Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing, 2007), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback between lender of last resort policy and incentives of private banks, determining the aggregate amount of liquidity available. We show that imposing minimum liquidity standards for banks ex ante are a crucial requirement for sensible lender of last resort policy. In addition, we analyse the impact of equity requirements and narrow banking, in the sense that banks are required to hold sufficient liquid funds so as to pay out in all contingencies. We show that such a policy is strictly inferior to imposing minimum liquidity standards ex ante combined with lender of last resort policy.
    Keywords: Liquidity risk; Free-riding; Narrow banking; Lender of last resort
    JEL: E5 G21 G28
    Date: 2008–04–21
  77. By: Leonardo Raffo López
    Abstract: Resumen: En este escrito se evalúa la consistencia teórica de la Curva de Phillips de Milton Friedman. Para esto se retoma la exposición de Friedman, destacando sus aportes al análisis de corto plazo del desempleo, los salarios y los precios, frente a la teoría de los clásicos y a la de Keynes. Se examina la hipótesis basada en la tasa natural de desempleo, revisando la utilización de los conceptos de desempleo involuntario, equilibrio macroeconómico e información imperfecta, así como los mecanismos de formación de expectativas de empresarios y trabajadores. Se concluye que su modelo es impreciso e incompleto y que su hipótesis se derrumba si la tasa natural de desempleo es endógena y cambia con los choques exógenos de demanda agregada.
    Date: 2007–12–05

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