nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒05‒05
28 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Productivity Shock and Optimal Monetary Policy in a Unionized Labor Market. Forthcoming: The Manchester School By Rossi, Lorenza; Mattesini, Fabrizio
  2. Nominal and real interest rates during an optimal disinflation in New Keynesian models. By Marcus Hagedorn
  3. Are Weekly Inflation Forecasts Informative? By Amstad, Marlene; Fischer, Andreas
  4. A quantitative perspective on optimal monetary policy cooperation between the US and the euro area. By Frank Smets; Matthieu Darracq Pariès; Stéphane Adjemian
  5. Introducing the Euro-STING: Short Term INdicator of Euro Area Growth By Maximo Camacho; Gabriel Perez-Quiros
  6. What are the effects of fiscal shocks? A VAR-based comparative analysis. By Dario Caldara; Christophe Kamps
  7. The predictability of monetary policy. By Tobias Blattner; Marco Catenaro; Michael Ehrmann; Rolf Strauch; Jarkko Turunen
  8. Learning, Adaptive Expectations, and Technology Shocks By Kevin X.D. Huang; Zheng Liu; Tao Zha
  9. An Inflated Ordered Probit Model of Monetary Policy: Evidence from MPC Voting Data By Spencer, Christopher; Harris, Mark; Brooks, Robert
  10. International evidence on sticky consumption growth. By Christopher D. Carroll; Jiri Slacalek; Martin Sommer
  11. Government risk premiums in the bond market. EMU and Canada. By Ludger Schuknecht; Jürgen von Hagen; Guido Wolswijk
  12. Impact of bank competition on the interest rate pass-through in the euro area. By Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel
  13. On policy interactions among nations. When do cooperation and commitment matter? By Hubert Kempf; Leopold von Thadden
  14. Macroeconomic and monetary policies from the "eductive" viewpoint By Roger Guesnerie
  15. Durable Goods and ICT: The Drivers of Euro Area Productivity growth? By Jukka Jalava; Ilja Kristian Kavonius
  16. Financial Market Integration Under EMU By Marco Pagano; Marco Pagano
  17. Stock Retruns and Inflation: Pakistan Case By Akmal, Muhammad Shahbaz
  18. Do Large Cabinets Favor Large Governments? Evidence on Institutional Restraints on the Fiscal Commons Problem for Swiss Cantons By Christoph A. Schaltegger; Lars P. Feld
  19. Managing Capital Flows: Experiences from Central and Eastern Europe By Jurgen Von Hagen; Iulia Siedschlag
  20. Modeling the Informal Economy in Mexico. A Structural Equation Approach By Brambila Macias, Jose
  21. Vehicle Currency By Michael B. Devereux; Shouyong Shi
  22. Promoting clean technologies: The energy market structure crucially matters. By Azomahou, Théophile; Boucekkine, Raouf; Nguyen-Van, Phu
  23. Reflections on the Macro Foundations of the Middle Class in the Developing World By Nancy Birdsall
  24. MACROECONOMIC DETERMINANTS OF POOR’S HAPPINESS By Muhammad Shahbaz, Shahbaz; Naveed Aamir, Naveed
  25. Old Wine in New Bottles Growth-Savings Nexus an Innovation Accounting Technique in Pakistan By Mohammad Shahbaz, Shahbaz
  26. Behavioural and Welfare Effects of Basic Income Policies: A Simulation for European Countries. By Ugo Colombino; Marilena Locatelli; Edlira Narazani; Cathal O’Donoghue; Isilda Shima
  27. The Dynamics of Economic Functions: Modelling and Forecasting the Yield Curve By Clive G. Bowsher; Roland Meeks
  28. Consumer Preferences and Demand Systems By William A. Barnett; Apostolos Serletis

  1. By: Rossi, Lorenza; Mattesini, Fabrizio
    Abstract: This paper presents a New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The bargaining process between unions and firms introduces real wage rigidity and creates an endogenous trade-off between inflation and output stabilization. Under an optimal discretionary monetary policy a negative productivity shock requires an increase in the nominal interest rate. Moreover, an operational instrument rule will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model calibration studies the response of the unionzed economy to productivity shocks under different monetary policy rules. Download Info
    JEL: E24 E52
    Date: 2007
  2. By: Marcus Hagedorn (Institut for Empirical Research (IEW), University of Zurich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland.)
    Abstract: Central bankers’ conventional wisdom suggests that nominal interest rates should be raised to implement a lower inflation target. In contrast, I show that the standard New Keynesian monetary model predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption. JEL Classification:
    Date: 2008–03
  3. By: Amstad, Marlene (Swiss National Bank); Fischer, Andreas (CEPR)
    Abstract: Are weekly inflation forecasts informative? Although several central banks review and discuss monetary policy issues on a bi-weekly basis, there have been few attempts by analysts to construct systematic estimates of core inflation that supports such a decision-making schedule. The timeliness of news releases and macroeconomic revisions are recognized to be an important information source in real-time estimation. We incorporate real-time information from macroeconomic releases and revisions into our weekly updates of monthly Swiss core inflation using a common factor procedure. The weekly estimates for Swiss core inflation find that it is worthwhile to update the forecast at least twice a month.
    Keywords: Inflation; Common Factors; Sequential Information Flow
    JEL: E52 E58
    Date: 2008–01–29
  4. By: Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.)
    Abstract: The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macroeconomics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions. JEL Classification: E4, E5, F4.
    Keywords: DSGE models, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation.
    Date: 2008–03
  5. By: Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España)
    Abstract: We propose a model to compute short-term forecasts of the Euro area GDP growth in real-time. To allow for forecast evaluation, we construct a real-time data set that changes for each vintage date and includes the exact information that was available at the time of each forecast. In this context, we provide examples that show how data revisions and data availability affect point forecasts and forecast uncertainty.
    Keywords: business cycles, output growth, time series
    JEL: E32 C22 E27
    Date: 2008–04
  6. By: Dario Caldara (Stockholm University, Institute for International Economic Studies, Universitetsvägen 10, House A, 8th Floor, SE-106 91 Stockholm, Sweden.); Christophe Kamps (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The empirical literature using vector autoregressive models to assess the effects of fiscal policy shocks strongly disagrees on even the qualitative response of key macroeconomic variables to government spending and tax shocks. We provide new evidence for the U.S. over the period 1955-2006. We show that, controlling for differences in specification of the reduced-form model, all identification approaches used in the literature yield qualitatively and quantitatively very similar results as regards government spending shocks. In response to such shocks real GDP, real private consumption and the real wage all significantly increase following a hump-shaped pattern, while private employment does not react. In contrast, we find strongly diverging results as regards the effects of tax shocks, with the estimated effects ranging from non-distortionary to strongly distortionary. The differences in results can to a large extent be traced back to differences in the size of automatic stabilizers estimated or calibrated for alternative identification approaches. These differences also translate into uncertainty about the effects of policy experiments typically considered in theoretical models. JEL Classification: C32, E60, E62, H20, H50.
    Keywords: Fiscal policy, vector autoregression, identification, robustness.
    Date: 2008–03
  7. By: Tobias Blattner (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Catenaro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rolf Strauch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longerterm predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be – and indeed has been – instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more diffi cult to measure. JEL Classification: E52, E58, E61.
    Keywords: Predictability, central bank transparency, central bank communication.
    Date: 2008–03
  8. By: Kevin X.D. Huang (Department of Economics, Vanderbilt University); Zheng Liu (Department of Economics, Emory University); Tao Zha (Federal Reserve Bank of Atlanta)
    Abstract: This study explores theoretical and macroeconomic implications of the self-confirming equilibrium in a standard growth model. When rational expectations are replaced by adaptive expectations, we prove that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium, but that dynamics around the steady state are substantially different between the two equilibria. We show that, in contrast to \citet{nWilliams03}, the differences are driven mainly by the lack of the wealth effect and the strengthening of the intertemporal substitution effect, not by escapes. As a result, adaptive expectations substantially alter the amplification and propagation mechanisms and allow technology shocks to exert much more impact on macroeconomic variables than do rational expectations.
    Keywords: Self confirming equilibrium, amplification, labor market dynamics, wealth and substitution effects, hump-shaped responses <br><br>
    JEL: E32 E37
    Date: 2008–08
  9. By: Spencer, Christopher; Harris, Mark; Brooks, Robert
    Abstract: Even in the face of a continuously changing economic environment, interest rates often remain unadjusted for long periods. When rates are moved, the norm is for a series of small unidirectional discrete basis-point changes. To explain these phenomena we suggest a two-equation system combining a “long-run” equation explaining a binary decision to change or not change the interest-rate, and a “shortrun” one based on a simple monetary policy rule. We account for unobserved heterogeneity in both equations, applying the model to unique unit-record level data on the voting preferences of Bank of England Monetary Policy Committee (MPC) members.
    Keywords: Interest rates; voting; discrete data; ordered models; inflated outcomes; monetary policy committee
    JEL: E5 C2
    Date: 2007–08
  10. By: Christopher D. Carroll (Johns Hopkins University, Department of Economics, 440 Mergenthaler Hall 3400 N. Charles Street, Baltimore, MD 21218, USA.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Sommer (International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, USA.)
    Abstract: We estimate the degree of ‘stickiness’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption- growth and Campbell–Mankiw models work about equally well. JEL Classification: E21, F41.
    Keywords: Sticky Expectations, Consumption Dynamics, Habit Formation.
    Date: 2008–03
  11. By: Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jürgen von Hagen (University of Bonn, Indiana University, and CEPR; Address: Department of Economics, University of Bonn, Lennéstrasse 37, 53113 Bonn, Germany.); Guido Wolswijk (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada. With regard to the European governments, we are interested in how these premiums were affected by the introduction of the euro. Using data for bond yield spreads relative to an appropriate benchmark, for the period 1991-2005, we find that risk premiums incurred by central governments of EU member states respond positively to central government debts and deficits. This is consistent with the notion of market-imposed fiscal discipline. We find that German states and, among them, especially those usually receiving transfers under the German fiscal equalization system, enjoyed a very favourable position in the financial markets before EMU as their risk premiums did not respond to fiscal balances. This special status seems to have disappeared with start of EMU. Monetary union, therefore, imposes more fiscal discipline on German states. In contrast, Spanish provinces paid risk premiums related to their fiscal balances both before and after the start of EMU. Both German and Spanish sub-central governments paid fixed interest rate premiums over their national governments which became smaller after the introduction of the euro and are more likely to be interpreted as liquidity premiums. We also estimate empirical models of risk premiums for Canadian provinces for which we find financial market penalties of adverse fiscal balances and debt indicators. However, as in the case of Germany before EMU, those provinces that typically receive transfers under the Canadian fiscal equalization scheme have a more favourable bond market treatment than others. The evidence of market discipline at work in European government bond markets supports the notion that the no-bailout clause in the EU Treaty is credible. JEL Classification: E43, E62, H63, H74.
    Keywords: Interest rates, fiscal policy, government debt, bail out, regional public finances.
    Date: 2008–03
  12. By: Michiel van Leuvensteijn (CPB Netherlands Bureau for Economic Policy Analysis, P.O. Box 80510, 2508 GM The Hague, The Netherlands.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jacob A. Bikker (De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Adrian A.R.J.M. van Rixtel (Banco de España, International Economics and International Relations Department, Alcalá 48, 28014 Madrid, Spain.)
    Abstract: This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model(ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. JEL Classification: D4, E50, G21, L10.
    Keywords: Monetary transmission, banks, retail rates, competition, panel data.
    Date: 2008–03
  13. By: Hubert Kempf (Banque de France, Paris School of Economics and Université Paris-1, Panthéon-Sorbonne; Contact address: Banque de France, 39 Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, in linear-quadratic models with multiple policymakers commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is su??ciently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations. JEL Classification: E52, E63.
    Keywords: Monetary policy, Fiscal regimes.
    Date: 2008–03
  14. By: Roger Guesnerie
    Abstract: The "eductive" viewpoint provides a theoretically sophisticated analysis as well as an intuitively plausible shortcut to the study of expectational coordination in economic models. From the review of expectational criteria in a class of dynamical models of macroeconomic theory, the paper shows how such an "eductive" viewpoint completes and deepens rather than contradicts standard analysis. It however argues that the "eductive" approach, when correctly implemented, challenges the conditions of learning in infinite-horizon models with infinitely-lived agents. In particular, in a simple monetary model adopting such a framework, Taylor rules may be stabilizing, in the demanding sense under scrutiny, but only within a small window for the reaction coefficient.
    Date: 2008
  15. By: Jukka Jalava; Ilja Kristian Kavonius
    Abstract: ABSTRACT : The purpose of this paper is to estimate the effect of durable goods and ICT on Euro Area economic growth and productivity change; when expenditure on consumer durables is recorded as capital investment. The capitalization of consumer durables impacts both the levels and growth rates of the capital stock, productivity and GDP. Our growth accounting computations demonstrated that the capital services of durables contributed one-tenth of economic growth and one-eight of labour productivity growth in 1995-2004. ICT´s impacts were larger, i.e., one-fifth of GVA growth and one-sixth of labour productivity growth.
    Keywords: durable good, asset, productivity, ICT, growth accounting, capital services, household production
    JEL: E13 E21 E22 O11 O47 O52
    Date: 2008–04–23
  16. By: Marco Pagano (Università di Napoli, CSEF and CEPR); Marco Pagano (Università di Napoli, CSEF and CEPR)
    Abstract: The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets.
    Date: 2008–04–28
  17. By: Akmal, Muhammad Shahbaz
    Abstract: According to theory there establishes the relationship between stock market prices and inflation, this study investigates whether this holds for Pakistan, over the period 1971-2006. I examined the concerned relationship taking into account the existence of structural break over the considered time episode. The empirical practice utilizes ARDL, co-integration technique in said conjunction to detect the long run and short run affects between involves variable by Error Correction Approach (ECM). The results supports the hypothesis that stocks hedges against inflation in log run but not in short, while black economy promotes the stock market prices to heave both in long run as well as in short run.
    Keywords: Stock Return; Inflation; Pakistan
    JEL: G1 G11
    Date: 2007–06–01
  18. By: Christoph A. Schaltegger; Lars P. Feld
    Abstract: The fiscal commons problem is one of the most prominent explanations of excessive spending in political economics. The more fragmented a government, the higher its spending. In this paper we investigate to what extent this problem can be mitigated by different fiscal or constitutional insti-tutions. We distinguish between two variants of fragmented governments: cabinet size and coali-tion size. In addition, we analyze whether constitutional rules for executive and legislature as well as formal fiscal restraints shape the size of government and how different rules interact with fragmentation in determining government size. The empirical analysis of the role of fragmented governments for fiscal policy outcomes is based on a panel of 26 Swiss cantons from 1980-1998. The results indicate that the number of ministers in the cabinet is negatively associated with fiscal discipline. Furthermore, fiscal referendums effectively restrict the size of government, while for-mal fiscal restraints more effectively restrict the fiscal commons problem. (This is a thoroughly revised version of Crema WP Nr. 2004-15)
    Keywords: Fragmentation; Fiscal Policy; Referendums; Legislative Rules; Formal fiscal restraints
    JEL: E61 E63 H61
    Date: 2008–04
  19. By: Jurgen Von Hagen (University of Bonn); Iulia Siedschlag (Economic and Social Research Institute (ESRI))
    Abstract: The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies.
    Keywords: International financial integration, Macroeconomic policy, Central and Eastern Europe, Emerging Asian economies
    JEL: E44 F36 F41
    Date: 2008–04
  20. By: Brambila Macias, Jose
    Abstract: This paper uses annual data for the period 1970-2006 in order to estimate and investigate the evolution of the Mexican informal economy. In order to do so, we model the informal economy as a latent variable and try to explain it through relationships between possible cause and indicator variables using structural equation modeling (SEM). Our results indicate that the Mexican informal sector at the beginning of the 1970’s initially accounted for 40 percent of GDP while slightly decreasing to stabilize around 30percent of GDP in the late 1980’s until our days. The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. The results confirm in particular the importance of salaries and excessive regulation as causes of the informal economy in Mexico and confirm a positive relation between informality and GDP.
    Keywords: Informal Economy; Economic Growth; Structural Equations
    JEL: C39 O17 E26
    Date: 2008–04
  21. 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 non-dollar 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 asymmetrically weighted towards the residents of the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle country.
    Keywords: Vehicle currency; Transactions cost; Welfare gains
    JEL: F40 F30 E42
    Date: 2008–04–25
  22. By: Azomahou, Théophile (UNU-MERIT); Boucekkine, Raouf (CORE, Universite Catholique de Louvain); Nguyen-Van, Phu (CNRS, Université de Cergy-Pontoise,)
    Abstract: We develop a general equilibrium vintage capital model with embodied energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. It is shown that the impact of investment subsidies heavily depends on the structure of the energy market, the mechanism explaining this outcome relying on the tight relationship between the lifetime of capital goods and energy prices via the scrapping conditions inherent to vintage models. In particular, under a free entry structure for the energy sector, investment subsidies boost investment, while the opposite result emerges under natural monopoly if increasing returns in the energy sector are not strong enough.
    Keywords: Energy-saving, Technological change, Vintage capital, Energy market, Natural monopoly, Investment subsidies
    JEL: E22 O40 Q40
    Date: 2008
  23. By: Nancy Birdsall
    Abstract: In this working paper I define inclusive growth as growth conducive to increasing the size and economic command of the middle class. I suggest a definition of the middle class based on absolute and relative measures of country-based income distributions, and present evidence of change in the size of the “middle class” for selected developing countries. I then review how macroeconomic policies shape the environment and incentives for inclusive growth, focusing on three areas: fiscal discipline, the more rule-based the better; a fair tax and redistribution system; and a business friendly exchange rate. The adoption of macro policies that favor the middle class lays the foundation for more economically and politically sustainable development. While on the whole sound macro policy that is good for the middle class is also likely to be pro-poor, tradeoffs may exist with respect to tax, expenditure and transfer programs and responses to economic shocks. Governments should consider the weighted welfare outcomes of alternative approaches to macro policy, rather than un-weighted growth or overly weighted poverty outcomes.
    Keywords: macroeconomics, sustainable development, middle class
    Date: 2007–10
  24. By: Muhammad Shahbaz, Shahbaz; Naveed Aamir, Naveed
    Abstract: There is not much research on welfare-economics from human wellbeing (happiness) side, the main reason is that this is qualitative and subjective phenomenon & not so easy to capture for measurement. In the present endvour, we tried to capture it (happiness) from the opposite side of poverty index. We employed modified ARDL technique for long run friendship between Poor’s happiness and some macroeconomic influencing factors; short run dynamic behavior is scrutinized through ECM. The findings about Poor’s happiness and its determinants show that happiness of poor individuals is highly influenced from macroeconomics shocks prevailed in the economy. Economic growth or rise in GDP per capita declines the level of Poor’s happiness due to upper-echelon phenomenon in long span of time in Pakistan. Inflation influences the purchasing power of poor segments of population and definitely affects the happiness negatively in both the periods. Enhancement in remittances seems to push happiness or Poor’s welfare levels upward significantly. Increase in indirect taxes especially sales taxes associated with low levels of happiness of poor individuals in a small developing economy like Pakistan. Trade-openness improves happiness rankings of poor segments of population through its direct & indirect channels. Finally, a low level of happiness is associated with low urbanization in short span of time.
    Keywords: Happiness; modified ARDL Co-integration
    JEL: I31 C22
    Date: 2007–10–09
  25. By: Mohammad Shahbaz, Shahbaz
    Abstract: The present endeavor investigated the rapport between economic growth and gross domestic saving by employing new technique for causal relationship between two variables. Utilizing time series data, in the model ARDL Bounds Testing, Johanson Cointegration Approach for long run association, not only Innovation Accounting Techniques but also Toda and Yamamato (1995) for causal friendship between economic growth and domestic saving are applied. Ng-Perron De-trended Test is used for order of integration of running actors. Results of particular study revealed that there exists a long run relationship between economic growth and domestic saving and tier association is robust at least in long span of time. Causal results through innovation accounting technique assert that there is one-way causality running from economic growth to gross domestic savings and very weak from opposite side supporting Sinha (1996) findings regarding Pakistan. Results by Toda and Yamamato’s (1995) also confirm that economic growth leads gross domestic savings in Pakistan.
    Keywords: Growth; Savings; Causality
    JEL: C32 O1 E21
    Date: 2007–12–24
  26. By: Ugo Colombino; Marilena Locatelli; Edlira Narazani; Cathal O’Donoghue; Isilda Shima
    Abstract: In this paper we develop and estimate a microeconometric model of household labour supply for four European countries representative of different economies and welfare policy regimes: Denmark, Italy, Portugal and United Kingdom. We then simulate, under the constraint of constant net tax revenue, the effects of 10 hypothetical tax-transfer reforms which include various alternative versions of a Basic Income policy. We produce various indexes and criteria according to which the reforms can be ranked. It turns out that in every country there are many reforms that can improve upon the current status according to many criteria and that might be “politically” feasible. Overall, the non meanstested policies have a better performance and progressive tax rules are somehow more efficient than the flat tax rules.
    Keywords: Welfare, Basic Income, Simulation
    JEL: D10 D33 E64
    Date: 2008–02
  27. By: Clive G. Bowsher (Nuffield College, Oxford University); Roland Meeks (Federal Reserve Bank of Dallas)
    Abstract: The class of Functional Signal plus Noise (FSN) models is introduced that provides a new, general method for modelling and forecasting time series of economic functions. The underlying, continuous economic function (or `signal') is a natural cubic spline whose dynamic evolution is driven by a cointegrated vector autoregression for the ordinates (or 'y-values') at the knots of the spline. The natural cubic spline provides flexible cross-sectional fit and results in a linear, state space model. This FSN model achieves dimension reduction, provides a coherent description of the observed yield curve and its dynamics as the cross-sectional dimension N becomes large, and can feasibly be estimated and used for forecasting when N is large. The integration and cointegration properties of the model are derived. The FSN models are then applied to forecasting 36-dimensional yield curves for US Treasury bonds at the one month ahead horizon. The method consistently outperforms the Diebold and Li (2006) and random walk forecasts on the basis of both mean square forecast error criteria and economically relevant loss functions derived from the realised profits of pairs trading algorithms. The analysis also highlights in a concrete setting the dangers of attempts to infer the relative economic value of model forecasts on the basis of their associated mean square forecast errors.
    Keywords: FSN-ECM models, functional time series, term structure, forecasting interest rates, natural cubic spline, state space form.
    JEL: C33 C51 C53 E47 G12
    Date: 2008–04–27
  28. By: William A. Barnett; Apostolos Serletis
    Abstract: This paper is an up-to-date survey of the state-of-the art in consumer demand modelling. We review and evaluate advances in a number of related areas, including different approaches to empirical demand analysis, such as the differential approach, the locally flexible functional forms approach, the semi-nonparametric approach, and a nonparametric approach. We also address estimation issues, including sampling theoretic and Bayesian estimation methods, and discuss the limitations of the currently common approaches. We also highlight the challenge inherent in achieving economic regularity, for consistency with the assumptions of the underlying neoclassical economic theory, as well as econometric regularity, when variables are nonstationary.
    JEL: D12 E21
    Date: 2008–01–29

This nep-mac issue is ©2008 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.