nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒05‒10
forty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Income Taxation, Interest-Rate Control and Macroeconomic Stability with Balanced-Budget By Seiya Fujisaki; Kazuo Mino
  2. Achieving a Soft Landing: The Role of Fiscal Policy By Daniel Leigh
  3. Optimal operational monetary policy rules in an endogenous growth model: a calibrated analysis By Arato, Hiroki
  4. The Backward Bending Phillips Curves: A Simple Model By Thomas I Palley
  5. Challenges to Monetary Policy in the Czech Republic—An Integrated Monetary and Fiscal Analysis By Céline Allard; Sònia Muñoz
  6. Hyperbolic Discounting and the Phillips Curve By Graham, Liam; Snower, Dennis J.
  7. The Effects of Joining a Monetary Union on Output and Inflation Variability in Accession Countries By Holtemöller, Oliver
  8. Taylor-type rules versus optimal policy in a Markov-switching economy By Fernando Alexandre; Pedro Bação; Vasco Gabriel
  9. Striving to Be "Clearly Open" and "Crystal Clear": Monetary Policy Communication of the CNB By Katerina Smídková; Ales Bulir
  10. Sacrifice ratio dispersion within the Euro Zone:<br />What can be learned about implementing a Single Monetary Policy? By Marilyne Huchet-Bourdon; Jean-Jacques Durand; Julien Licheron
  11. Business Cycles, Core and Periphery in Monetary Unions: Comparing Europe and North America By Alexandra Ferreira Lopes; Álvaro M. Pina
  12. Business Cycles in Small Developed Economies: The Role of Terms of Trade and Foreign Interest Rate Shocks By Jaime Guajardo
  13. Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey By Hakan Berument; Nukhet Dogan; Aysit Tansel
  14. Productive government expenditure and fiscal sustainability By Arai, Real
  15. A Naïve Sticky Information Model of Households’ Inflation Expectations By Lanne, Markku; Luoma, Arto; Luoto, Jani
  16. Real Interest Rates, Intertemporal Prices and Macroeconomic Stabilization A Journey Through the History of Economic Thought By Peter Spahn
  17. Wage Flexibility or Wage Coordination? Economic Policy Implications of the Wage-Led Demand Regime in the Euro Area By Engelbert Stockhammer
  18. Equilibrium Determinacy of Endogenous Growth with Generalized Taylor Rule: A Discrete-Time Analysis By Seiya Fujisaki
  19. Intelligible Factors for the Yield Curve By Lengwiler, Yvan; Lenz, Carlos
  20. Essential Interest-Bearing Money (2008) By Andolfatto, David
  21. Aluminium market and the macroeconomy By Melisso Boschi; Luca Pieroni
  22. Pass-Through of External Shocks to Inflation in Sri Lanka By Nombulelo Duma
  23. Some Stylized Facts on the Finance-Dominated Accumulation Regime By Engelbert Stockhammer
  24. Euler Testing Ricardo and Barro in the EUs By António Afonso
  25. The Implications of Aging for the Structure and Stability of Financial Markets By Jane D'Arista
  26. Either Capital Account Openness Regressive or Progressive: Econometric Evidence from Pakistan By Shahbaz, Muhammad; Ahmad, Khalil; Amin, Muhammad; Sabihuddin, Muhammad
  27. The driving force of labor force participation in developed countries By Kitov, Ivan; Kitov, Oleg
  28. Regime Switching, Learning, and the Great Moderation By James Murray
  29. Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia By Herman kamil
  30. Evaluating the New Keynesian Phillips Curve under VAR-Based Learning By Fanelli, Luca
  31. Calculating Welfare Costs of Inflation in a Search Model with Preference Heterogeneity: A Calibration Exercise By Pedro de Araujo
  32. How Can Voters Classify an Incumbent under Output Persistence By Caleiro, António
  33. The theoritical framework of the IMF supported programs By Benzarour, Choukri
  34. Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility By Thomas I Palley
  35. Issues on the choice of Exchange Rate Regimes and Currency Boards – An Analytical Survey By Moheeput, Ashwin
  36. Testing a DSGE model of the EU using indirect inference By David Meenagh; Patrick Minford; Michael Wickensy
  37. Reforming the IMF: Lessons from Modern Central Banking By Philipp Maier; Eirc Santor
  38. The Monetary Model Strikes Back: Evidence from the World By Valerie Cerra; Sweta Chaman Saxena
  39. A New Fiscal Rule: Should Israel go Swiss? By Xavier Debrun; Natan P. Epstein; Steven A. Symansky
  40. Economic Growth and Threatened and Endangered Species Listings: A VAR Analysis By Catherine M. Chambers; Paul E. Chambers; John C. Whitehead;
  41. The Relative Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model By Thomas I Palley
  42. Is Full Employment Possible Under Globalization? (revised) By Robert Pollin
  43. Breaking the Impediments to Budgetary Reforms: Evidence from Europe By Ashoka Mody; Stefania Fabrizio
  44. "Fiscal Stimulus--Is More Needed?" By Dimitri B. Papadimitriou; Greg Hannsgen; Gennaro Zezza
  45. Integration, Cointegration and Long-Horizont Forecasting of Credit-Default-Cycles By Wagatha, Matthias
  46. International Trends in Current Account Deficit: The Case of Turkey By TOPRAK, Metin

  1. By: Seiya Fujisaki (Graduate School of Economics, Osaka University); Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: This paper studies stabilization effects of fiscal and monetary policy rules in the context of a standard real business cycle model with money. We assume that the fiscal authority adjusts the rate of income tax subject to the balanced-budget constraint, while the monetary authority controls the nominal interest rate by observing inflation. Inspecting macroeconomic stability of the steady state equilibrium of the model economy, we demonstrate that whether or not policy rules eliminate the possibility of sunspot-driven fluctuations critically depends upon the appropriate combination of progressiveness of taxation and activeness of interest-rate control.
    Keywords: balanced budget, interest rate control, determinacy of equilibrium
    JEL: E52 E62 E63
    Date: 2008–04
  2. By: Daniel Leigh
    Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.
    Keywords: Fiscal policy , Colombia , Monetary policy , Business cycles , Tax revenues ,
    Date: 2008–03–21
  3. By: Arato, Hiroki
    Abstract: We construct an endogenous growth model with new Keynesian-type sticky prices and wages. In this model, monetary policy affects long-run output growth. We characterize the optimal operational monetary policy rule in this economy. We find that even though stabilization of output growth increases long-run output growth, the optimal monetary policy rule is the rule that makes interest rate respond to price and wage actively and output growth mutely, similar as in exogenous growth models. We also find that the optimal monetary policy rule virtually maximizes mean growth. These results suggest that although long-run growth is important for welfare, new Keynesian's claim that monetary policy should stabilize nominal variables is highly robust.
    Keywords: Monetary policy; Sticky price and wage; Business cycle fluctuations; Productivity growth
    JEL: E32 O41 E52
    Date: 2008–05
  4. By: Thomas I Palley
    Abstract: This paper develops a simple macroeconomic model of the backward bending Phillips curve that allows easy comparison with the neo-Keynesian and new classical models of the Phillips curve. There are two separate explanations of the backward bending Phillips curve and the model incorporates both. One explanation focuses on near-rational inflation expectations and aggregation of expectations across workers. The other explanation focuses on nominal wage setting behavior and aggregation of nominal wage behavior across sectors. The paper concludes with some observations about the implications of the backward bending Phillips curve for monetary policy.
    Keywords: Backward bending Phillips curve, minimum unemployment rate of inflation
    JEL: E00 E31 E52
    Date: 2008
  5. By: Céline Allard; Sònia Muñoz
    Abstract: This paper uses the Global Integrated Monetary and Fiscal Model (GIMF), a New Keynesian open-economy general equilibrium model suitable for an integrated evaluation of monetary and fiscal policies, to analyze monetary policy challenges facing the Czech Republic. In the context of the recent rising inflation pressures, we analyze how the authorities' fiscal reform package and the planned reduction in the inflation target in 2010 would weigh on the conduct of monetary policy.
    Keywords: Monetary policy , Czech Republic , Inflation targeting , Fiscal policy ,
    Date: 2008–03–25
  6. By: Graham, Liam (University College London); Snower, Dennis J. (Kiel Institute for the World Economy)
    Abstract: Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.
    Keywords: inflation, unemployment, Phillips curve, nominal inertia, monetary policy, dynamic general equilibrium
    JEL: E20 E40 E50
    Date: 2008–04
  7. By: Holtemöller, Oliver
    Abstract: New EU member countries are supposed to adopt the Euro as soon as economic convergence is achieved. This paper analyzes the effects of joining a monetary union on output and inflation variability in small acceding countries. An asymmetric macroeconomic two-country model is specified and combined with two different monetary policy regimes: (i) national monetary policy, (ii) monetary union. The performance of the two regimes is analyzed in terms of inflation and output variability for a broad range of structural parameter specifications.
    Keywords: European monetary union; open economy macroeconomic models; optimal monetary policy
    JEL: F42 E52 F41
    Date: 2007–12–14
  8. By: Fernando Alexandre (NIPE and University of Minho); Pedro Bação (GEMF and Faculdade de Economia, Universidade de Coimbra); Vasco Gabriel (Department of Economics, University of Surrey, UK and NIPE-UM)
    Abstract: We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.
    Keywords: Asset Prices, Monetary Policy, Markov Switching
    JEL: E52 E58
    Date: 2008
  9. By: Katerina Smídková; Ales Bulir
    Abstract: The Czech National Bank has a respectable track record in terms of its policy actions and the corresponding inflation outturns. Using a simple forward-looking policy rule, we find that its main communication tools-inflation targets, inflation forecasts, verbal assessments of the inflation risks contained in quarterly inflation reports, and the voting within the CNB Board-provided a clear message in about three out of every four observations in our 2001- 2005 sample.
    Date: 2008–04–04
  10. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen); Jean-Jacques Durand (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen); Julien Licheron (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen)
    Abstract: This article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972-2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub-period analysis as well as ten-year-period rolling estimates lead to two main conclusions. Firstly empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Secondly, we can't provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty didn't involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, since structural differences imply asymmetric responses of real national economies to the same monetary impulse.
    Keywords: Sacrifice ratio; monetary policy; convergence; Economic and Monetary Union (EMU)
    Date: 2008–09–30
  11. By: Alexandra Ferreira Lopes; Álvaro M. Pina
    Abstract: We compare Europe with the USA and Canada as regards business cycle synchronization and core-periphery patterns. A long sample (1950-2005) makes it possible to study how these aspects have evolved over time. Results support the economic viability of EMU. Average cyclical correlations among European countries have risen significantly, reaching levels close to, or even higher than, those of North American regions. Applying fuzzy clustering to the analysis of core-periphery issues, we find Europe to actually outperform North America: the core-periphery divide is milder, and peripheral status seems generally less protracted.
    Keywords: European Union, Canada, United States, Monetary Unions, Business Cycles, Fuzzy Clustering.
    JEL: C65 E32 E42 F33
    Date: 2008–03
  12. By: Jaime Guajardo
    Abstract: Empirical evidence for small developed economies finds that consumption is procyclical and as volatile as output, and real net exports are coutercyclical. Earlier studies have not been able to reproduce these regularities in a DSGE small open economy model when productivity shocks drive the business cycles and households have a normal intertemporal elasticity of substitution. Instead, these studies have reduced this elasticity to make consumption more procyclical and volatile and real net exports countercyclical. This paper shows that a standard model can reproduce these regularities, without lowering the intertemporal substitution, if the terms of trade and foreign interest rate are added as source of business cycle fluctuations. These shocks, compared to productivity shocks, make consumption and investment more volatile and procyclical relative to output, and make real net exports countercyclical.
    Date: 2008–04–04
  13. By: Hakan Berument (Bilkent University); Nukhet Dogan (Gazi University); Aysit Tansel (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
  14. By: Arai, Real
    Abstract: We consider an overlapping generations model in which public spending directly contributes to grow up productivity as Barro (1990) and a government comforms the constant spending-GDP and debtspending ratio rules. We analyse policy effects on fiscal sustainability, growth rate and welfare. This paper gives some remarks as follows: First, we demonstrate that when spending-GDP ratio rises it may be more sustainable fiscal policy. Second, we show analytically that if higher spending-GDP ratio is more sustainable fiscal policy, it brings higher growth rate in both short-term and long-term. Third, such policy change is Pareto improving. These remarks are not obtained in previous researches on fiscal sustainability.
    JEL: E62 H54 H63
    Date: 2008–05–02
  15. By: Lanne, Markku; Luoma, Arto; Luoto, Jani
    Abstract: This paper provides a simple epidemiology model where households, when forming their inflation expectations, rationally adopt the past release of inflation with certain probability rather than the forward-looking newspaper forecast as suggested in Carroll [2003, Macroeconomic Expectations of Households and Professional Forecasters, Quarterly Journal of Economics, 118, 269-298]. The posterior model probabilities based on the Michigan survey data strongly support the proposed model. We also extend the agent-based epidemiology model by deriving for it a simple adaptation, which is suitable for estimation. Our results show that this model is able to capture the heterogeneity in households’ expectations very well.
    Keywords: Inflation expectations; heterogeneous expectations; survey expectations; sticky information; Bayesian analysis
    JEL: D84 C53 C82 E31 C11
    Date: 2008
  16. By: Peter Spahn
    Abstract: The notion of a "real rate of interest" has been a centre of confusion in the history of economic thought. In neoclassical economics, real interest rates were designed as relative prices of contemporary and future goods and Böhm-Bawerk believed that misalignments were corrected by market forces, restoring the allocation of saving and investment as well as macroeconomic equilibrium. The intertemporal perspective in goods market analysis was modified in Wicksell and Keynes; the focus shifted to financial markets. According to the new Keynesian theory, monetary policy should be used to support intertemporal consumption smoothing. Because investment is neglected, this approach is unable to grasp the intertemporal coordination problem and delivers poor microfoundations for macroeconomic stabilization.
    Keywords: Zinsspannentheorie, Neukeynesianische Makroökonomik, Realzins
    JEL: E4 B1
    Date: 2007–12
  17. By: Engelbert Stockhammer
    Abstract: <span>Wage shares have fallen substantially in Europe since the early 1980s. To some extent this is due to a macroeconomic policy package that encourages wage flexibility and wage competition. A system of wage coordination in the Euro area would facility a return to a productivity-oriented wage policy by reducing wage competition. In a recent study on the demand effects of changes in functional income distribution Stockhammer, Onaran und Ederer (2007) find that the Euro area is in a wage-led demand regime. According to their results a reduction of the wage share by 1%-point leads to a reduction of demand by around 0.2%-points of GDP. This finding has far reaching implications for economic policy. A stable wage share would help stabilize demand. The paper aims, first, at clarifying some conceptual issues in the design of a European system of productivity-oriented wage coordination and, second, it discusses the economic policy implications of wage coordination. The present policy package assigns wages the role of a shock absorber. However, as wage reductions do have negative demand effects in a wage-led demand regime, this policy has a deflationary bias. A system of wage coordination will thus have to be complemented by a more active nation fiscal policies and more fiscal redistribution within the EU. If so a regime of productivity oriented wage coordination will help to stabilize demand and it is consistent with price stability. </span><p class="MsoNormal"><span> </span></p>
    Keywords: macroeconomics, economic policy, policy mix, wage coordination, European Union
    JEL: E20 E24 E50 E60 J30 J50
    Date: 2008
  18. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: This paper examines equilibrium determinacy of a discrete-time AK growth model with a generalized Taylor rule under which interest rate responds to the growth rate of real income as well as to the rate of inflation. We use the standard money-in-the-utility formulation in which money is superneutral on the balanced-growth path. We show that even in such a simple environment, the generalized Taylor rule may yield indeterminacy of equilibrium easily. We also demonstrate that equilibrium determinacy depends on the timing of money holding of households as well.
    Keywords: equilibrium determinacy, the Taylor rules, endogenous growth, timing of money holdings
    JEL: O42 E52
    Date: 2008–04
  19. By: Lengwiler, Yvan (Universitaet Basel); Lenz, Carlos (Swiss National Bank)
    Abstract: We construct a factor model of the yield curve and specify time series processes for these factors, so that the innovations are mutually orthogonal. At the same time, the factors are constructed in such a way that they assume clear, intuitive interpretations. The resulting "intelligible factors" should prove useful for investment professionals to discuss expectations about yield curves and the implied dynamics. Moreover, they allow us to distinguish announced changes of the monetary policy stance versus monetary policy surprises, which are ctually rare. We identify two such events, namely September 11, 2001, and the Fed reaction to the recent subprime crisis.
    Keywords: yield curve; factor models; structural vector autoregression; monetary policy
    JEL: E43
    Date: 2008–04–30
  20. By: Andolfatto, David
    Abstract: I consider a model of intertemporal trade where agents lack commitment, agent types are private information, there is an absence of recordkeeping, and societal penalties are infeasible. Despite these frictions, I demonstrate that policy can be designed to implement the first-best allocation as a (stationary) competitive monetary equilibrium. The optimal policy requires a strictly positive interest rate with the aggregate interest expenditure financed in part by an inflation tax and in part by an incentive-compatible lump-sum fee. An illiquid bond is essential only in the event that paying interest on money is prohibitively costly.
    JEL: E4
    Date: 2008–05–03
  21. By: Melisso Boschi; Luca Pieroni
    Abstract: We propose and test a structural model of the interaction between the aluminium market and the macroeconomy incorporating the rational expectations hypothesis. Based on a competition à la Cournot, our model predicts that aluminium spot price and inventories will respond to macroeconomic shocks to line up supply to the demand level. The model also includes incomplete adjustments to shocks that occur near the delivery date of futures contracts with the implication of a likely high persistence in the aluminium spot price. Estimation results show that the aluminium price is significantly affected by the real exchange rate, while the influence of the real interest rate is small. We argue that this result is largely expected once we consider the peculiar features of the aluminium market. Further support to this view is provided by the large persistence of the aluminium price response to its own shock and by the negligible contribution of stockholdings innovations to the price forecast error variance. Finally, macroeconomic shocks explain on the whole a relevant share of the aluminium market variables forecast error variance.
    Keywords: Metal commodities, Monetary transmission mechanism, Rational Expectations Hypothesis test, SVAR
    JEL: L11 D84 C32
    Date: 2008–01–01
  22. By: Nombulelo Duma
    Abstract: This paper investigates pass-through of external shocks (exchange rate, oil price, and import price shocks) to inflation in Sri Lanka. The analysis is based on a vector autoregression (VAR) model that incorporates a distribution chain of pricing. The paper finds low and incomplete pass-through of external shocks to consumer inflation, reflecting a combination of factors including the existence of administered prices, high content of food in the consumption basket, and low persistence and volatility of the exchange rate. External shocks explain about 25 percent of the variation in consumer price inflation, reflecting room for domestic policies in controlling inflation.
    Date: 2008–03–28
  23. By: Engelbert Stockhammer
    Abstract: While there is an agreement that the Fordist accumulation regime has come to an end in the course of the 1970s, there is no agreement on how to characterize the post-Fordist regime (or if a such is already in place). The paper seeks put together various arguments related to financialization (in the broad sense) from a macroeconomic point of view and investigate the relevance of these arguments by means of an analysis stylized facts for EU countries. The paper discusses changes in investment behaviour, consumption behaviour and government expenditures, investigating to what extent changes are related to financialization. Households experience higher debt levels. Rising profits of businesses come with only moderate investment. The notion of a “finance-dominated” accumulation regime is proposed to highlight that financial developments crucially shape the pattern and the pace of accumulation. The finance dominated accumulation regime is characterized by a mediocre growth performance and by higher volatility. However, so far deregulated financial markets have not lead to major financial crises in advanced capitalist economies. A possible reason for this is that the size of the state sector has not been substantially reduced despite neoliberal attempts to do so.
    Keywords: financialization, finance-dominated accumulation regime, macroeconomics consumption, investment, financial system, financial stability
    JEL: B50 E20 E21 E E44 E60 P17
    Date: 2007
  24. By: António Afonso
    Abstract: According to Keynesian economics wisdom, government debt has an effect on the economy since consumers see government debt as net wealth. However, according to the debt neutrality hypothesis of Ricardo (1817), popularised by Barro (1974), such effects would be absent. This paper’s results, obtained from Euler equation estimations using a panel data approach, indicate that it would be wise to reject the debt neutrality hypothesis for the EU and that higher government indebtedness could actually deter private consumption.
    Keywords: debt neutrality; private consumption; EU; panel data
    JEL: C23 E21 E62 H63
    Date: 2008–04
  25. By: Jane D'Arista
    Abstract: Aging populations have altered saving and investment patterns in many developed and emerging market economies. The structural changes that have occurred have important implications for financial stability and for the conduct of monetary policy. As assets and borrowing shifted from banks to pension funds and other institutional investors, the market-based systems that replaced bank-based systems became more procyclical and more vulnerable to systemic risk. In addition, banks’ receding share of financial assets undermined their role in channeling monetary policy initiatives and thus eroded central banks’ ability to counter excessive credit growth and contraction, defuse asset bubbles and act as effective lenders-of-last-resort in crises. This paper offers policy choices and proposals to address the adverse outcomes of these structural and institutional developments that are likely to intensify under the ongoing pressure of demographic change.
    Keywords: aging, banks, pension funds, financial stability, monetary policy
    Date: 2008
  26. By: Shahbaz, Muhammad; Ahmad, Khalil; Amin, Muhammad; Sabihuddin, Muhammad
    Abstract: This paper explores the impact of capital account openness on inflationary pressures in a small developing economy like Pakistan not only in longer periods of time but also in short span of time. To obtain reliable interpretations, we utilized three advanced techniques (ARDL, FMOLS & DOLS) to check the robustness for long run rapport and ECM for short run dynamics. Our findings suggest that capital account openness is regressive in long span of time. Monotonic (Non-linear) friendship between said variables also proves our hypotheses because shape of Non-Linear relation is U-shaped. Rational expectations push the inflationary pressures upward and same words for import-inflation nexus. Exports seem to decline inflation in Pakistan but exchange rate raises it. Money supply and Central Bank Independence also contribute in inflation rise while rise in GNP per capita lowers inflation in Pakistan; this study opens new direction for policy making authorities in Pakistan.
    Keywords: Capital Account Openness; Inflation
    JEL: B22
    Date: 2007–12–11
  27. By: Kitov, Ivan; Kitov, Oleg
    Abstract: The evolution of labor force participation rate is modeled using a lagged linear function of real economic growth, as expressed by GDP per capita. For the U.S., our model predicts at a two-year horizon with RMSFE of 0.28% for the period between 1965 and 2007. Larger part of the deviation between predicted and measured LFP is explained by artificial dislocations in measured time series induced by major revisions to the CPS methodology in 1979 and 1989. Similar models have been developed for Japan, the UK, France, Italy, Canada, and Sweden.
    Keywords: labor force participation; real GDP per capita; prediction
    JEL: D31 C20 E60 J20
    Date: 2008–05–08
  28. By: James Murray (Indiana University Bloomington)
    Abstract: This paper examines the "bad luck" explanation for changing volatility in U.S. inflation and output when agents do not have rational expectations, but instead form expectations through least squares learning with an endogenously changing learning gain. It has been suggested that this type of endogenously changing learning mechanism can create periods of excess volatility without the need for changes in the variance of the underlying shocks. Bad luck is modeled into a standard New Keynesian model by augmenting it with two states that evolve according to a Markov chain, where one state is characterized by large variances for structural shocks, and the other state has relatively smaller variances. To assess whether learning can explain the Great Moderation, the New Keynesian model with volatility regime switching and dynamic gain learning is estimated by maximum likelihood. The results show that learning does lead to lower variances for the shocks in the volatile regime, but changes in regime is still significant in differences in volatility from the 1970s and after the 1980s.
    Keywords: Learning, regime switching, great moderation, New Keynesian model, maximum likelihood
    JEL: C13 E31 E50
    Date: 2008–04
  29. By: Herman kamil
    Abstract: Policymakers in many emerging markets are attempting to resist currency appreciation while simultaneously meeting targets for inflation. Using the recent experience of Colombia between 2004 and 2007, this paper examines the effectiveness of the Central Bank's intervention in stemming domestic currency appreciation under an inflation targeting regime. The results indicate that exchange rate intervention was effective during 2004-2006, when foreign currency purchases were undertaken during a period of monetary easing. During 2007, on the other hand, intervention was ineffective in reversing or slowing down domestic currency appreciation, as large-scale intervention became incompatible with meeting the inflation target in an overheating economy. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention.
    Date: 2008–04–09
  30. By: Fanelli, Luca
    Abstract: This paper proposes the econometric evaluation of the New Keynesian Phillips Curve (NKPC) in the euro area, under a particular specification of the adaptive learning hypothesis. The key assumption is that agents’ perceived law of motion is a Vector Autoregressive (VAR) model, whose coefficients are updated by maximum likelihood estimation, as the information set increases over time. Each time new data is available, likelihood ratio tests for the crossequation restrictions that the NKPC imposes on the VAR are computed and compared with a proper set of critical values which take the sequential nature of the test into account. The analysis is developed by focusing on the case where the variables entering the NKPC can be approximated as nonstationary cointegrated processes, assuming that the agents’ recursive estimation algorithm involves only the parameters associated with the short run transient dynamics of the system. Results on quarterly data relative to the period 1981–2006 show that: (i) the euro area inflation rate and the wage share are cointegrated; (ii) the cointegrated version of the ‘hybrid’ NKPC is sharply rejected under the rational expectations hypothesis; (iii) the model is supported by the data over relevant fractions of the chosen monitoring period, 1986–2006, under the adaptive learning hypothesis, although this evidence does not appear compelling.
    Keywords: Adaptive learning, cointegration, cross-equation restrictions, forward-looking model of inflation dynamics, New Keynesian Phillips Curve
    JEL: C32 C52 D83 E10
    Date: 2008
  31. By: Pedro de Araujo (Indiana University Bloomington)
    Abstract: Using U.S. cross-sectional data, this paper calculates the welfare cost of a 10% inflation for different individuals and finds that the difference in cost between the poorest 10%, measured by their expenditure share on cash goods, and the richest 10% is in the order of 176%. That is, a poor person is on average willing to forgive 176% more of their total consumption in order to have inflation reduced from 10% to 0. In absolute terms this represents a cost of 2.687% of consumption for the poorest and 0.974% for the richest. I accomplish this by introducing preference heterogeneity in a monetary search model first developed by Lagos and Wright (2005), and calibrate the model to match the expenditure share on cash goods and total expenditures for each individual type using data from the Consumer Expenditure Survey (CEX) for the second quarter of 1996. I also show that this welfare difference increases to 210% (10.522% for the poorest 10% and 3.401% for the richest 10%) whenever frictions in the use of money are imposed (holdup problem). The ability to explicitly model these frictions is the advantage of using this model. Hence, inflation in this framework, as other studies have shown, acts as a regressive consumption tax; and this regressiveness is augmented with the holdup problem.
    Keywords: Inflation, welfare, search, holdup
    JEL: C63 C78 E41
    Date: 2008–04
  32. By: Caleiro, António
    Abstract: The literature on electoral cycles has developed in two distinct phases. The first one considered the existence of non-rational (naive) voters whereas the second one considered fully rational voters. In our perspective, an intermediate approach is more interesting, i.e. one that considers learning voters, which are boundedly rational. In this sense, neural networks may be considered as learning mechanisms used by voters to perform a classification of the incumbent in order to distinguish opportunistic (electorally motivated) from benevolent (non-electorally motivated) behaviour. The paper shows in which circumstances a neural network, namely a perceptron, can resolve that problem of classification. This is done by considering a model allowing for output persistence, which is a feature of aggregate supply that, indeed, may make it impossible to correctly classify the incumbent.
    Keywords: Classification, elections, incumbent, neural networks, output, persistence, perceptrons
    JEL: C45 D72 E32
    Date: 2008
  33. By: Benzarour, Choukri
    Abstract: ABSTRACT: this present study aims at describing the analytical framework of the IMF and WB structural adjustment programs (SAP).It focuses on the theoretical foundation of the SAP and reviews the absorption approach, the monetary approach and the exchange rate approach.
    Keywords: structural adjustment; absorption approach; monetary approach; exchange rate approach.
    JEL: E6 E61
    Date: 2001
  34. By: Thomas I Palley
    Abstract: This paper extends Tobin’s (1975) Keynesian analysis of deflation to include a range of additional channels through which deflation exacerbates Keynesian unemployment. The paper provides further theoretical reasons why downward price level adjustment may not solve the Keynesian problem. These arguments challenge the received wisdom that Keynes’ <i>General Theory</i> is a special case resting on downwardly rigid prices and nominal wages. This conventional wisdom has led many economists to recommend policies promoting downward flexibility. These policies have created an environment in which deflation is more likely, giving new relevance to Keynesian analysis of deflation.<p></p>
    Keywords: deflation, liquidity trap, Fisher debt effect, price flexibility
    JEL: E30 E31
    Date: 2008
  35. By: Moheeput, Ashwin (Department of Economics, University of Warwick)
    Abstract: Currency boards have often been at the heart of monetary reforms proposed by the International Monetary Fund (IMF) : they have been instrumental either as a short term crisis management strategy that successfully restores financial order for many countries seeking stabilization in the aftermath of prolonged economic crisis or as a way of importing monetary credibility as part of a medium / long term strategy for conducting monetary policy. As backbone of a credible exchange-rate based stabilisation programme, they have also been the linchpin of several heterodox or orthodox programmes aimed at mitigating hyperinflation. This paper attempts to synthetize our thinking about currency boards by reviewing their strengths and weaknesses and endeavours to seek real world examples to rationalise their applicability as opposed to alternative exchange rate regimes. Architects of international financial stability at the IMF or at central banks often ponder about the prerequisites for such programme to work well. These are also reviewed using appropriate economic theory where necessary. Finally, this paper sheds light on the best exchange rate regime that may be adopted in the intermediate term by those countries wishing to adopt a currency board, not as a quick fix solution to end an economic chaos but rather, as integral part of a long term monetary strategy.
    Keywords: Currency Boards ; IMF ; Crisis Management ; Monetary Credibility ; Heterodox / Orthodox Programs ; Hyperinflation ; Exchange Rate Regimes
    Date: 2008
  36. By: David Meenagh; Patrick Minford; Michael Wickensy
    Abstract: We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data; the test is based on the Wald statistic. We find that their model generates excessive variance compared with the data. If the errors are scaled down, then the original model marginally passes the Wald test. We compare a New Classical version of the model which passes the test but generates a combination of excessive inflation variance and inadequate output variance. If the large consumption and investment errors are removed as possibly due to low frequency events, then the New Classical version passes easily while the original version is strongly rejected.
    Keywords: Bootstrap, DSGE Model, VAR model, Model of EU, indirect inference, Wald statistic.
    JEL: C12 C32
    Date: 2008–03
  37. By: Philipp Maier; Eirc Santor
    Abstract: The authors examine the institutional and governance framework of modern central banks to determine whether there are lessons that can be applied to the International Monetary Fund's (IMF's) institutional framework. Such a comparison is appealing for two reasons. First, both central banks and the IMF carry out tasks that can be described as "delegated responsibilities." Second, while monetary policy has yielded mixed results in many countries for decades, it has recently enjoyed considerable success in reducing inflation. Substantial changes to the institutional frameworks of central banks have, at least partly, contributed to this success. This raises a simple question: can the lessons learned from modern central banking help to strengthen the governance of the IMF? The authors argue they can. Governance reform would enhance the IMF's decision-making process and make the Fund more transparent and accountable, thus improving the effectiveness of its main instruments -- surveillance and lending. The reforms proposed by the authors in this paper should not be viewed as immediately achievable goals; rather, they constitute a set of guiding principles for long-term governance reform.
    Keywords: International topics
    JEL: F3
    Date: 2008
  38. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentalsbased models very successful in beating a random walk in out-of-sample prediction.
    Keywords: Exchange rates , Forecasting models ,
    Date: 2008–03–28
  39. By: Xavier Debrun; Natan P. Epstein; Steven A. Symansky
    Abstract: We propose a fiscal rule that fulfills a specific debt reduction objective while maintaining significant fiscal flexibility-two overarching concerns in Israel. Not unlike the Swiss "debt brake," the rule incorporates an error-correction mechanism (ECM) through which departure from the debt objective affects binding medium-run expenditure ceilings. Two variants of our ECM rule are shown to be superior to a comparable deficit rule in terms of attaining the debt objective and allowing for fiscal stabilization while supporting medium-term expenditure planning. Given its relative sophistication, a proper implementation of the ECM rule requires supportive fiscal institutions, including independent input and assessment.
    Keywords: Working Paper , Israel ,
    Date: 2008–04–07
  40. By: Catherine M. Chambers (University of Central Missouri); Paul E. Chambers (University of Central Missouri); John C. Whitehead (Appalachian State University);
    Abstract: We conduct several analyses to examine the link between threatened and endangered species listings and macroeconomic activity. Preliminary tests using ordinary least squares are run on both time series data on the national level and cross sectional data at the state level. The analysis is then extended using vector autoregressive (VAR) techniques. VAR results, impulse response functions and variance decompositions are reported to shed more light on the causal relationships between threatened and endangered species, GDP and population. Our results indicate that there is little or no empirical evidence that GDP growth rates lead to changes in the number of threatened and endangered species listings.
    Date: 2008–05
  41. By: Thomas I Palley
    Abstract: This paper presents a theoretical model of consumption behavior that synthesizes the seminal contributions of Keynes (1936), Friedman (1956) and Duesenberry (1948). The model is labeled a “relative permanent income” theory of consumption. The key feature is that the share of permanent income devoted to consumption is a negative function of household relative permanent income. The model generates patterns of consumption spending consistent with both long-run time series data and modern empirical findings that high-income households have a higher propensity to save. It also explains why consumption inequality is less than income inequality.
    Keywords: Consumption, permanent income, relative income, Keynes, Duesenberry, Friedman
    JEL: E3
    Date: 2008
  42. By: Robert Pollin
    Abstract: <p>To honor the life work of Professor Sumner Rosen, this lecture examines approaches to promoting full employment at decent jobs within our contemporary era of globalization.<span> </span>The lecture briefly summarizes the theories of unemployment of Marx, Friedman, Keynes and Kalecki.<span> </span>It then addresses the meaning of full employment within the alternative theories and under different historical and country settings.<span> </span>It next considers the issue of the inflation/unemployment trade-off, and the Meidner-Rehn Swedish approach to inflation control under full employment.<span> </span>It concludes by presenting a sketch of something approximating a full employment program for the contemporary <st1:country-region w:st="on">U.S.</st1:country-region> economy, focusing on ending the <st1:country-region w:st="on"><st1:place w:st="on">Iraq</st1:place></st1:country-region> war and reallocation public spending toward health care, education, and green growth.<span> </span></p><span></span>
    Keywords: full employment, globalization, theories of unemployment, inflation
    JEL: E24 E61
    Date: 2008
  43. By: Ashoka Mody; Stefania Fabrizio
    Abstract: Under what conditions are budget institutions likely to be strengthened? We find that fiscal deficits do not help in focusing policymakers on undertaking reforms. To the contrary, the larger the deficit, the lower is the likelihood of reforms. Large deficits apparently imply strong claims on the budget and, hence, generate unwillingness to impose self-discipline. As such, countries will tend to move either to small fiscal deficits and good institutions or large deficits and weak institutions. Economic shocks (if they are large enough) can help build a constituency for improving budget institutions. However, if forgiving markets accommodate economic shocks, even such pressure may be insufficient. Forwardlooking and credible leadership appears to be an important ingredient of the solution.
    Date: 2008–04–01
  44. By: Dimitri B. Papadimitriou; Greg Hannsgen; Gennaro Zezza
    Abstract: In its November 2007 Strategic Analysis, the Levy Institute's Macro-Modeling Team called for an immediate, sustained fiscal stimulus of 2 percent of GDP, as well as a plan for a much larger additional fiscal stimulus should the economic slowdown continue over the next two to three years. Since then, conditions have significantly worsened. Foreclosures reached an all-time high late last year, and home prices have continued to fall. According to Federal Reserve flow-of-funds data, household net worth declined by over $500 billion in the fourth quarter alone. In response, Congress approved a $168 billion stimulus package earlier this year, one made up largely of tax rebates that will begin arriving in May. While the authorities have not declared a recession in progress, many economists have begun to speculate how steep a possible downturn might be. In this latest Strategic Analysis, President Dimitri B. Papadimitriou and Senior Scholars Greg Hannsgen and Gennaro Zezza explore the possibility of an additional fiscal stimulus of about $450 billion spread over three quarters, challenging the notion that a larger and more prolonged additional stimulus will be unnecessary and generate inflationary pressures. They find that, given a projection of even a moderate recession, an additional $600 billion stimulus would not be too much. They also find that a temporary stimulus—even one lasting four quarters—will have only a temporary effect. An enduring recovery will depend on a prolonged increase in exports, the authors say, due to the weak dollar, a modest increase in imports, and the closing of the current account gap.
    Date: 2008–04
  45. By: Wagatha, Matthias
    Abstract: Summary: This paper examines the longterm forecast performance of cointegrated systems relative to forecast performance of comparable VAR that fails to recognize that the system is characterized by cointegration. I use Monte Carlo simulation, real data sets, and multi-step-ahead forecasts to study this question. The cointegrated system I examine is composed of six vectors, five macoreconomic variables, and a credit-default-cycle. The forecasts produced by the vector error correction modell associated with this system are compared with those obtained from a corresponding differenced vector autoregression, as well as a vector autoregression based upon the levels of the data. Alternative measures of forecast accuracy (full-system) are discussed. My findings suggest that selective forecast performance improvement may be observed by incorporating knowledge of cointegration rank. Furthermore the results indicate that a cointegration modeling of credit risk should be favored against the prevalent level or differenced estimation.
    Keywords: Integration; Cointegration; Forecasting; Credit-default-cycle; Integration; Kointegration; Langzeitprognose; Kreditausfallzyklus
    JEL: C32 C52
    Date: 2007–07–01
  46. By: TOPRAK, Metin
    Abstract: Bugünün serbest piyasa ortamında cari açık sorunu, 1980 öncesi kontrollü dış ekonomi politikaları dönemine nazaran, üstesinden daha kolay gelinebilecek bir sorundur. Bundan 54 yıl önce, temelinde ülkelerin ödemeler dengesi sorunlarıyla uğraşmak için kurulan IMF’nin, bugün benzer bir karar vermek gerekseydi, muhtemelen kurulmasına gerek kalmayacaktı. Cari açık, ülkelerin tasarruf-yatırım dengesi ve kamu bütçe dengesi ile de yakından ilişkilidir. Bugün için dünyada yaygın bir cari açık sorununundan bahsetmek oldukça güç. Bireysel bazda ülkelerin cari açıkları ve fazlaları sözkonusudur. Ne var ki, ABD’nin 750 milyar dolar civarındaki cari açığı kadar önemli diğer bir husus, cari fazla veren ülkelerin ellerindeki döviz rezervidir. Çin, Japonya, Rusya, G.Kore, Hindistan ve Brezilya gibi ülkelerin ellerindeki devasa döviz rezervleri, dünya ödemeler sistemi ve referans parası için istikrarsızlık kaynağı olabilecek bir husustur. Dünya finans ve üretim piyasalarının temel yöneticisi ve yönlendiricisi olan ABD ekonomisindeki dalgalanmalar, daha düşük düzeylerde de olsa bütün dünyayı paralel yönde etkileyecektir. Türkiye’de kamu bütçe açığı ve özel kesim tasarruf açığının giderilmesinde dış borçlar ve yatırım ve portföy akımlarının büyük bir katkısı sözkonusudur. Türkiye’nin dış kaynakla iç tasarruf açığını karşılamaya devam edebilmesi için AB üyeliği, Batı dünyasıyla dostane ilişkiler ile başta Körfez sermayesi olmak üzere doğal kaynak zengini ülkelerden doğrudan yatırım girişleri hayati önemdedir. Türkiye’nin bölgesinde demokrasi ve piyasa ekonomisi üssü olmasının önünde iç çatışma ve dirençlerin dışında kayda değer bir dışsal engel bulunmamaktadır. Cari açığın Türkiye için yakın tehdit olmaya başlayacağı zaman, dışa kapalı, yabancı düşmanlığının yükseldiği, piyasa ekonomisi ve demokrasinin kesintiye uğradığı, özgürlüklerin kısıtlandığı zamandır. Bugün itibariyle, Türkiye mevcut siyasal ve dışa açık ekonomi politikası yürüyüşünü koruduğu takdirde, kısa vadede bir cari açık kriziyle karşılaşması beklenmemektedir.
    Keywords: cari açık; türkiye; döviz rezervi; dış ticaret açığı
    JEL: F4 F0 F50 E01
    Date: 2008–03–01

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