nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒05‒17
forty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Policy Under Uncertainty in an Estimated Model with Labour Market Frictions By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  2. Why money growth determines inflation in the long run: answering the Woodford critique By Edward Nelson
  3. Inflation, monetary policy and stock market conditions By Michael D. Bordo; Michael J. Dueker; David C. Wheelock
  4. The Effect of Fiscal Policy on Private Sector Savings By Erdogdu, Oya Safinaz
  5. Taylor-type rules versus optimal policy in a Markov-switching economy By Fernando Alexandre; Vasco J. Gabriel; Pedro Bação
  6. Optimal Taxation and (Female)-Labor Force Participation over the Cycle By Jung, Philip
  7. Uncertainty, Inflation, and Welfare By Jonathan Chiu; Miguel Molico
  8. Price Level versus Inflation Targeting under Model Uncertainty By Gino Cateau
  9. How Resilient is the German Banking System to Macroeconomic Shocks? By Jonas Dovern; Carsten-Patrick Meier; Johannes Vilsmeier
  10. Does Stabilizing Inflation Contribute To Stabilizing Economic Activity? By Frederic S. Mishkin
  11. Currency Substitution and Financial Repression By Rangan Gupta
  12. Monetary policy: why money matters and interest rates don't By Daniel L. Thornton
  13. The Inflation-Unemployment Trade-Off at Low Inflation By Pierpaolo Benigno; Luca Antonio Ricci
  14. Monetary Non-Neutrality in a Multi-Sector Menu Cost Model By Emi Nakamura; Jon Steinsson
  15. Political constraints on monetary policy during the Great Inflation By Weise, Charles L
  16. "Wage Redistribution and the Long Run Phillips Curve" By Lundborg, Per
  17. On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms By Giorgio Fagiolo; Andrea Roventini
  18. Robust Monetary Policy with the Consumption-Wealth Channel By Araújo, Eurilton
  19. Optimal Monetary Policy and Interest Income Taxation By Araújo, Eurilton
  20. Rent seeing distortions and fiscal procyclicality By Ilzetzki, Ethan
  21. Forecasting Business Cycles in a Small Open Economy: A Dynamic Factor Model for Singapore By Hwee Kwan Chow; Keen Meng Choy
  22. Temporary price changes and the real effects of monetary policy By Patrick J. Kehoe; Virgiliu Midrigan
  23. Exchange Rate Pass-Through And Monetary Policy By Frederic S. Mishkin
  24. Good Times Are Drinking Times: Empirical Evidence on Business Cycles an Alcohol Sales in Sweden 1861-2000 By Krüger, Niclas A; Svensson, Mikael
  25. Business surveys modelling with seasonal-cyclical long memory models. By Laurent Ferrara; Dominique Guegan
  26. Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model By Kolasa, Marcin
  27. Driving Forces of the Canadian Economy: An Accounting Exercise By Simona E. Cociuba; Alexander Ueberfeldt
  28. Sophisticated monetary policies By Andrew Atkeson; V. V. Chari; Patrick J. Kehoe
  29. Testing a DSGE model of the EU using indirect inference By Meenagh, David; Minford, Patrick; Wickens, Michael
  30. Macroeconomic Shocks and the Co-movement of Stock Returns in Latin America By Araújo, Eurilton
  31. Fiscal Foresight: Analytics and Econometrics By Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang
  32. Money demand and financial liberalization in Mexico: A cointegration approach By L. Arnaut, Javier
  33. Banking Reform in China: An Assessment in Macroeconomic Perspective By Beoy Kui Ng
  34. Inflation-Finance Nexus: A Case Study of Pakistan An Econometric ARDL Co-integration Approach By Sabihuddin, Muhammad; Nasir, Najeeb; Shahbaz, Muhammad
  35. Business surveys modelling with Seasonal-Cyclical Long Memory models By Laurent Ferrara; Dominique Guegan
  36. Asymmetric Volatility Spillovers between Stock Market and Real Activity: Evidence from UK and US By Nikolaos Giannellis; Athanasios Papadopoulos
  38. Taxation, aggregates and the household By Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
  39. Structural and Statistical Approaches to Estimating output Gap for Pakistan By Khan, Safdar Ullah; Adnan, S. Adnan H. A. Bukhari
  40. Real Wage Rigidity and the Taylor Principle By Araújo, Eurilton
  41. Creating Maryland's Paper Money Economy, 1720-1739: The Role of Power, Print, and Markets By Farley Grubb
  42. Wage, Price and Unemployment Dynamics in the Spanish Transition to EMU Membership By Jusélius, Katarina; Ordóñez, Javier
  43. The Real Consequences of Financial Market Integration when Countries Are Heterogeneous By Kerstin Gerling
  44. Long-run Estimates of Physical Capital in Spain, 1850-2000 By Leandro Prados de la Escosura; Joan R. Roses
  45. A non-parametric method to nowcast the Euro Area IPI. By Laurent Ferrara; Thomas Raffinot
  46. Euroization: What Factors drive its Persistence? Household Data Evidence for Croatia, Slovenia and Slovakia By Helmut Stix
  47. A Model of Tiered Settlement Networks By James Chapman; Jonathan Chiu; Miguel Molico
  48. Autarkic Indeterminacy and Trade Determinacy By Nicholas C.S. Sim; Kong-Weng Ho
  49. Indeterminacy and Market Instability By Nicholas C.S. Sim; Kong-Weng Ho

  1. By: Sala, Luca; Söderström, Ulf; Trigari, Antonella
    Abstract: We study the design of monetary policy in an estimated model with sticky prices, search and matching frictions, and staggered nominal wage bargaining. We find that the estimated natural rate of unemployment is consistent with the NBER description of the U.S. business cycle, and that the inflation/unemployment trade-off facing monetary policymakers is quantitatively important. We also show that parameter uncertainty has a limited effect on the performance or design of monetary policy, while natural rate uncertainty has more sizeable effects. Nevertheless, policy rules that respond to the output or unemployment gaps are more efficient than rules responding to output or unemployment growth rates, also in the presence of uncertainty about the natural rates.
    Keywords: Labour market search; Monetary policy; Natural rate uncertainty; Parameter uncertainty; Unemployment
    JEL: E24 E32 E52 J64
    Date: 2008–05
  2. By: Edward Nelson
    Abstract: Woodford (2007) argues that it is not appropriate to regard inflation in the steady state of New Keynesian models as determined by steady-state money growth. Woodford instead argues that the intercept term in the monetary authority's interest-rate policy rule determines steady-state inflation. In this paper, I offer an alternative interpretation of steady-state behavior, according to which it is appropriate to regard steady-state inflation as determined by steady-state money growth. The argument relies on traditional interpretations of the central bank's power in the long run and appeals to model properties that are common to textbook and New Keynesian analysis. According to this argument, the only way the central bank can control interest rates in the long run is via affecting inflation, and its only means available for determining inflation is by determining the money growth rate.
    Keywords: Monetary policy ; Macroeconomics
    Date: 2008
  3. By: Michael D. Bordo; Michael J. Dueker; David C. Wheelock
    Abstract: This paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century. We estimate a latent variable VAR to examine how macroeconomic and policy shocks affect the condition of the stock market. Further, we examine the contribution of various shocks to market conditions during particular episodes and find evidence that inflation and interest rate shocks had particularly strong impacts on market conditions in the postwar era. Disinflation shocks promoted market booms and inflation shocks contributed to busts. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation.
    Keywords: Inflation (Finance) ; Monetary policy ; Stock market
    Date: 2008
  4. By: Erdogdu, Oya Safinaz
    Abstract: The economics literature argues that once Ricardian hypothesis is valid fiscal policy do not have any real impact on macroeconomy via consumption decisions. However, it has beeen argued by many studies on fiscal dominance that there are exceptions to the validity of Ricardian Equivalence theorem and under certain conditions, fiscal policy can effect monetary policy and macroeconomic variables like inflation through consumption decisions. Using threshold vector aurotregression (TVAR) methodology, this study analyzes the possible non linear fiscal impact of government debt on consumption / saving decisions of economic agents. The empirical analysis of government debt, interest rate and private savings of Turkey documents that fiscal policy effects on private agents saving behavior and monetary policy variable follows a non linear pattern. Hence, the effects of interest rate on saving decisions of agents differ according to a threshold level of debt. The impulse response analysis indicates that under high (low) debt regime, higher interest rate leads to higher (lower) consumption levels. This result supports the argument on the requirement for joint commitment of fiscal and monetary policies to control inflation. The empirical results also notes the positive impact of decreasing government debt on private savings under every state, but also notes this this effect is persistent under low debt regime.
    Keywords: savings;threshold VAR; government debt
    JEL: C32 E21
    Date: 2007–11–28
  5. By: Fernando Alexandre (Universidade do Minho - NIPE); Vasco J. Gabriel (University of Surrey and Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra)
    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 modelled 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
  6. By: Jung, Philip
    Abstract: Optimal labor tax results over the cycle are, quantitatively, typically driven by an estimate of the intratemporal elasticity of substitution that governs the reaction of hours worked to business cycle shocks and tax rate changes. A recent literature tries to decompose this intratemporal elasticity into its main components, the "Ins and Outs of Unemployment" (Shimer(2007)) to emphasize the importance of the extensive margin. This paper provides a model that a.) endogenizes all transition rates including firings and quits on the job as well as movements in and out of inactivity, b.) explains the fluctuations in these rates quantitatively while allowing for differences across gender and c.) remains tractable and open to Ramsey-optimal policy. We estimate the model on US-data for the years 1970:1 to 2004:4 and show that the model predicts all labor market flows very well. We apply our model to show that observed labor tax rates over the cycle correspond fairly closely to the implied Ramsey-optimal ones.
    Keywords: search theory; unemployment; hours worked
    JEL: E32 E31 E24
    Date: 2007–03–01
  7. By: Jonathan Chiu; Miguel Molico
    Abstract: This paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk, in a micro-founded search-theoretical monetary model. We calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households, and study the effects of inflation under the implied degree of market incompleteness. We show that in the presence of imperfect insurance the estimated long-run welfare costs of inflation are on average 40% smaller compared to a complete markets, representative agent economy, and that inflation induces important redistributive effects across households. For example, the welfare gains of reducing inflation from 10% to 0% is 0.59% of income. Furthermore, we estimate that the long-run welfare gains of reducing the typical current inflation target of 2 to 1 percent to be 0.06% of income.
    Keywords: Inflation: costs and benefits; Monetary policy framework
    JEL: E40 E50
    Date: 2008
  8. By: Gino Cateau
    Abstract: The purpose of this paper is to make a quantitative contribution to the inflation versus price level targeting debate. It considers a policy-maker that can set policy either through an inflation targeting rule or a price level targeting rule to minimize a quadratic loss function using the actual projection model of the Bank of Canada (ToTEM). The paper finds that price level targeting dominates inflation targeting, although it can lead to much more volatile inflation depending on the weight assigned to output gap stabilization in the loss function. The price level targeting rule is also found to mimic the full-commitment solution quite well. There is, however, an important difference: the full-commitment solution does not require stationarity in the price-level. The paper then analyzes the extent to which the results are sensitive to Hansen and Sargent (2004) model uncertainty. The paper finds the price level targeting rule to be robust; its performance deteriorates slower than the inflation targeting rule and the absolute decline in performance is small in magnitude.
    Keywords: Uncertainty and monetary policy
    JEL: E5 E58 D8 D81
    Date: 2008
  9. By: Jonas Dovern; Carsten-Patrick Meier; Johannes Vilsmeier
    Abstract: Macro-stress testing studies often rely on rather short sample periods due to the limited availability of banking data. They may fail to appropriately account for the cyclicality in the interaction between the banking system and macroeconomic developments. In this paper we use a newly constructed data set on German banks’ income and loss statements over the past 36 years to model the interaction between the banking sector and the macroeconomy. Our identified-VAR analysis indicates that the level of stress in the banking sector is strongly affected by monetary policy shocks. The results rationalize the active behavior of central banks observed during periods of financial market crises
    Keywords: stress testing, banking, VAR
    JEL: C32 E44
    Date: 2008–04
  10. By: Frederic S. Mishkin
    Abstract: This paper discusses recent economic research that demonstrates that the objectives of price stability and stabilizing economic activity are often likely to be mutually reinforcing. Thus, the answer to the title of this paper--"Does stabilizing inflation contribute to stabilizing economic activity?"--is, for the most part, yes.
    JEL: E31 E32 E52
    Date: 2008–05
  11. By: Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: In this paper, we use a general equilibrium overlapping generations monetary endogenous growth model of a small open economy, to analyze whether financial repression, measured via the "high" mandatory reserve-deposit requirements of financial intermediaries, is an optimal response of a consolidated government following an increase in the degree of currency substitution. We find that higher currency substitution can yield higher reserve requirements, but, the result depends crucially on how the consumer weighs money in the utility function relative to domestic and foreign consumptions, and also the size of the government.
    Keywords: Currency Substitution, Endogenous Growth Models, Financial Repression, Small Open Economy, Public Finance
    JEL: E31 E44 E63 F43
    Date: 2008–04
  12. By: Daniel L. Thornton
    Abstract: Monetary policy is now conducted by targeting a very short-term interest rate. The Fed and other central banks attempt to control the price level by manipulating aggregate demand by adjusting their interest rate target. At best, money's role is tertiary. Indeed, a few prominent and influential macroeconomists have suggested that money is not essential, or perhaps is irrelevant, for the determination of the price level. Against this backdrop, this paper argues that the essential feature of money is that it guarantees "final payment" and is essential for price determination. It also suggests that the ability of the central banks to control interest rates may be greatly exaggerated.
    Keywords: Monetary policy
    Date: 2008
  13. By: Pierpaolo Benigno; Luca Antonio Ricci
    Abstract: Wage setters take into account the future consequences of their current wage choices in the presence of downward nominal wage rigidities. Several interesting implications arise. First, nominal wages tend to be endogenously rigid also upward, at low inflation. Second, a closed-form solution for a long run Phillips curve relates average unemployment to average wage inflation; the curve is virtually vertical for high inflation rates but becomes flatter as inflation declines. Third, macroeconomic volatility shifts the Phillips curve outward, implying that stabilization policies can play an important role in shaping the trade-off. Fourth, when inflation decreases, volatility of unemployment increases whereas the volatility of inflation decreases: this implies a long-run trade-off also between the volatility of unemployment and that of wage inflation.
    JEL: E0 E24 E30
    Date: 2008–05
  14. By: Emi Nakamura; Jon Steinsson
    Abstract: Empirical evidence suggests that roughly 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 26% of the U.S. business cycle.
    JEL: E30
    Date: 2008–05
  15. By: Weise, Charles L
    Abstract: The U.S. Great Inflation of the 1970s was characterized by repeated, failed attempts at disinflation by the Federal Reserve as well as periods of inaction despite rising inflation. Previous research has attributed these failures to policymakers’ “misperceptions” about monetary policy and the macroeconomy. This paper argues instead that the Fed’s behavior during this period can be explained as a response to political constraints. Members of the Fed understood that a serious attempt to tackle inflation would be unpopular with the public and would generate opposition from Congress and the Executive branch. The result was a commitment to the policy of gradualism, under which the Fed would attempt to reduce inflation with mild policies that would not trigger an outright recession, and premature abandonment of anti-inflation policies at the first sign of recession. The Fed managed to disinflate successfully under Chairman Volcker only when the political constraints on Fed policy were lifted after 1979, allowing the Fed to abandon the policy of gradualism and knowingly take actions that risked recession. Evidence for this explanation of Fed behavior is found in Minutes and Transcripts of FOMC meetings and speeches of Fed chairmen.
    Keywords: Great Inflation; monetary policy; Federal Reserve
    JEL: E58 E50
    Date: 2008–05
  16. By: Lundborg, Per (Swedish Institute for Social Research, Stockholm University)
    Abstract: We derive a long-run Phillips curve that is negatively sloped at low inflation rates. Due to exogenous changes, unions want to redistribute wages across different members also in the long run. Wage stickiness, inflation targeting and union solidarity are central characteristics of our New Keynesian model. In the model, high enough inflation becomes the grease of the economy that allows wage redistribution across unions without causing unemployment to rise above NAIRU. We show that under nominal wage rigidity, long-run unemployment may rise drastically and at zero inflation, unemployment may be trapped at very high levels even if demands for wage redistribution tapers off. Under real wage rigidity, the economy may get trapped at high unemployment also at positive but low inflation rates irrespective of demand for wage redistribution has vanished or not. Thus, a period of wage redistribution may cause an economy of full real wage rigidity to get trapped at a high unemployment rate. A policy conclusion is that economies characterized by extensive wage rigidity should not target inflation at too low levels.
    Keywords: -
    Date: 2008–04–09
  17. By: Giorgio Fagiolo (Sant'Anna School of Advanced Studies, Pisa, Italy); Andrea Roventini (Università di Verona; Dipartimento di Scienze economiche (Università di Verona))
    Abstract: In the last years, a number of contributions has argued that monetary - and, more generally, economic - policy is finally becoming more of a science. According to these authors, policy rules implemented by central banks are nowadays well supported by a theoretical framework (the New Neoclassical Synthesis) upon which a general consensus has emerged in the economic profession. In other words, scientific discussion on economic policy seems to be ultimately confined to either fine-tuning this ''consensus'' model, or assessing the extent to which ''elements of art'' still exist in the conduct of monetary policy. In this paper, we present a substantially opposite view, rooted in a critical discussion of the theoretical, empirical and political-economy pitfalls of the neoclassical approach to policy analysis. Our discussion indicates that we are still far from building a science of economic policy. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, etc.). We briey introduce one of the most successful alternative research projects - known in the literature as agent-based computational economics (ACE) - and we present the way it has been applied to policy analysis issues. We conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.
    Keywords: Economic Policy, Monetary Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Post-Walrasian Macroeconomics, Evolutionary Economics.
    JEL: B41 B50 E32 E52
    Date: 2008–05
  18. By: Araújo, Eurilton
    Date: 2008–10
  19. By: Araújo, Eurilton
    Date: 2008–10
  20. By: Ilzetzki, Ethan
    Abstract: Recent research has demonstrated that while government expenditures are countercyclical in most industrialized countries, they tend to be procyclical in developing countries. We develop a dynamic political-economy model to explain this phenomenon. Simulations of the model allow us to quantitatively compare the relative role of common explanations for fiscal procyclicality. We conclude that rent seeking within the fiscal process can explain fiscal procyclicality better than other common explanations, such as borrowing constraints and macroeconomic volatility.
    JEL: E62 D72 F41
    Date: 2006–04–30
  21. By: Hwee Kwan Chow (School of Economics and Social Sciences, Singapore Management University, Singapore); Keen Meng Choy (Department of Economics, Nanyang Technological University, Singapore)
    Abstract: We apply multivariate statistical methods to a large dataset of Singapore’s macroeconomic variables and global economic indicators with the objective of forecasting business cycles in a small open economy. The empirical results suggest that three common factors are present in the time series at the quarterly frequency, which can be interpreted as world, regional and domestic economic cycles. This leads us to estimate a factor-augmented vector autoregressive (FAVAR) model for the purpose of optimally forecasting real economic activity in Singapore. By taking explicit account of the common factor dynamics, we find that iterative forecasts generated by this model are significantly more accurate than direct multi-step predictions based on the identified factors as well as forecasts from univariate and vector autoregressions.
    Keywords: business cycles; principal components; dynamic factor model; factor-augmented VAR; forecasting; Singapore
    Date: 2008–02
  22. By: Patrick J. Kehoe; Virgiliu Midrigan
    Abstract: the data, a large fraction of price changes are temporary. We provide a simple menu cost model which explicitly includes a motive for temporary price changes. We show that this simple model can account for the main regularities concerning temporary and permanent price changes. We use the model as a benchmark to evaluate existing shortcuts that do not explicitly model temporary price changes. One shortcut is to take the temporary changes out of the data and fit a simple Calvo model to it. If we do so prices change only every 50 weeks and the Calvo model overestimates the real effects of monetary shocks by almost 70%. A second shortcut is to leave the temporary changes in the data. If we do so prices change every 3 weeks and the Calvo model produces only 1/9 of the real effects of money as in our benchmark. We show that a simple Calvo model can generate the same real effects as our benchmark model if we set parameters so that prices change every 17 weeks.
    Date: 2008
  23. By: Frederic S. Mishkin
    Abstract: This paper discusses what recent economic research tells us about exchange rate pass-through and what this suggests for the control of monetary policy. It first focuses on exchange rate pass-through from a macroeconomic perspective and then examines the microeconomic evidence. In light of this evidence, it then discusses the implications of exchange rate movements on the conduct of monetary policy.
    JEL: E52 F41
    Date: 2008–05
  24. By: Krüger, Niclas A (Department of Business, Economics, Statistics and Informatics); Svensson, Mikael (Department of Business, Economics, Statistics and Informatics)
    Abstract: This paper studies the relationship between the business cycle and alcohol sales in Sweden using a data set for the years 1861-2000. Using wavelet based band-pass filtering it is found that there is a pro-cyclical relationship, i.e. alcohol sales increases in short-term economic upturns. Using moving window techniques we see that the pro-cyclical relationship holds over the entire time period. We also find that alcohol sales are a long-memory process with non-stationary behavior, i.e. a shock in alcohol sales has persistent effects
    Keywords: Businesscycles:Alcohol:Sweden
    JEL: E32 I12
    Date: 2008–05–08
  25. By: Laurent Ferrara (Banque de France et Centre d'Economie de la Sorbonne); Dominique Guegan (Centre d'Economie de la Sorbonne et Paris School of Economics)
    Abstract: Business surveys are an important element in the analysis of the short-term economic situation because of the timeliness and nature of the information they convey. Especially, surveys are often involved in econometric models in order to provide an early assessment of the current state of the economy, which is of great interest for policy-makers. In this paper, we focus on non-seasonally adjusted business surveys released by the European Commission. We introduce an innovative way for modelling those series taking the persistence of the seasonal roots into account through seasonal-cyclical long memory models. We empirically prove that such models produce more accurate forecasts than classical seasonal linear models.
    Keywords: Euro area, nowcasting, business surveys, seasonal, long memory.
    JEL: C22 C53 E32
    Date: 2008–05
  26. By: Kolasa, Marcin
    Abstract: This paper presents a two-country model linking Poland and the euro area and applies it for assessment of heterogeneity across these two regions. Overall, our results can be seen as rather inconclusive about the differences in parameters describing agents' decision-making in Poland and in the euro area. On the contrary, we find strong evidence for heterogeneity in terms of volatility and synchronization of shocks hitting both economies. Our results may be viewed as a step towards estimating the costs of Poland's entry to the European Monetary Union, associated with giving up the monetary autonomy and losing benefits from stabilizing movements of the exchange rate.
    JEL: E32 D58 F41 C11
    Date: 2008–05
  27. By: Simona E. Cociuba; Alexander Ueberfeldt
    Abstract: This paper analyses the Canadian economy for the post 1960 period. It uses an accounting procedure developed in Chari, Kehoe, and McGrattan (2006). The procedure identifies accounting factors that help align the predictions of the neoclassical growth model with macroeconomic variables observed in the data. The paper finds that total factor productivity and the consumptionleisure trade-off -- the productivity and labor factors -- are key to understanding the changes in output, labor supply and labor productivity observed in the Canadian economy. The paper performs a decomposition of the labor factor for Canada and the United States. It finds that the decline in the gender wage gap is a major driving force of the decrease in the labor market distortions. Moreover, the milder reduction in the labor market distortions observed in Canada, compared to the US, is due to a relative increase in effective labor taxes in Canada.
    Keywords: Labour markets; Potential output; Productivity
    JEL: E65 E24
    Date: 2008
  28. By: Andrew Atkeson; V. V. Chari; Patrick J. Kehoe
    Abstract: Sophisticated monetary policies can depend on the history of private actions and can differ on and off the equilibrium path. We show that such policies can uniquely implement any desired competitive outcome, even those in which along the equilibrium path interest rate policies violate the Taylor principle. We also show that the conventional restricted policies studied in the literature cannot uniquely support the best outcomes while sophisticated policies can. Finally, we show that sophisticated policies are robust to imperfect monitoring.
    Date: 2008
  29. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael
    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: 2008–05
  30. By: Araújo, Eurilton
    Date: 2008–10
  31. By: Eric M. Leeper (Indiana University Bloomington and NBER); Todd B. Walker (Indiana University Bloomington); Shu-Chun Susan Yang (Academia Sinica)
    Abstract: Fiscal foresight---the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future---is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with a non-invertible moving average component, which misaligns the agents' and the econometrician's information sets in estimated VARs. Economically meaningful shocks to taxes, therefore, cannot be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. Because non-invertibility arises as a natural outgrowth of the fact that agents' optimal decisions discount future tax obligations, it is likely to be endemic to the study of fiscal policy. In light of the implications of the analytical framework, we evaluate two existing empirical approaches to quantifying the impacts of fiscal foresight. The paper also offers a formal interpretation of the narrative approach to identifying fiscal policy.
    Keywords: tax foresight, non-invertible moving average, VAR
    JEL: E6 H3
    Date: 2008–05
  32. By: L. Arnaut, Javier
    Abstract: This paper examines the long run dynamics of Mexico’s money demand using Johansen’s cointegration approach with different specifications. The empirical evidence indicates that real balances, real income and the interest rate are cointegrated in all subperiods. The findings suggest that recent changes in economic policy through financial liberalization affected money demand functions; this due to the fact that income elasticity fell down during the transition through the subperiods, but simultaneously this did not affect the functional stability. The cointegrated coefficient on currency-money ratio (M0/M1) suggests that when the ratio falls, the demand for money falls too. Nevertheless, this last evidence is statistically weak. In addition, it was determined that alternative equations are not better than the conventional ones.
    Keywords: Money demand; financial liberalization; cointegration; error correction mechanism; currency-money ratio; Mexico
    JEL: C32 E50 G28 E41
    Date: 2008
  33. By: Beoy Kui Ng (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)
    Abstract: China has been delaying its adoption of a flexible exchange rate system with free capital flows. The main excuse is that its financial sector is still in its fragile stage and is not able to withstand any external shocks. A big bang approach towards such liberalization will only lead to financial crisis as observed by experiences of many Asia-Pacific countries during the Asian Financial Crisis. With this in mind, this paper attempts to uncover the approach and strategies adopted by China in its banking reform since 1978 and then assess these reform measures in macroeconomic perspective. The paper argues that since China is still lingering on export-oriented strategy in promoting economic growth and monetary independence for demand management is still a long way to go, it is still in China’s best interest not to adopt a flexible exchange rate system at this point of time. As to capital account liberalization, the main focus is to engineer a controlled and systematic capital outflows through outward investment in particular portfolio investment. At the micro level, China should continue its banking reforms until the financial sector is strong enough to withstand the severe pressure of globalization. By then, will China, with its matured financial system be ready to consider the adoption of a flexible exchange system with free capital flows.
    Keywords: China, banking reform, non-performing loans, state-owned enterprises, corporate governance, regulation and supervision, financial liberalization
    JEL: E44 E5 G2 O16 O5
    Date: 2007–07
  34. By: Sabihuddin, Muhammad; Nasir, Najeeb; Shahbaz, Muhammad
    Abstract: Economic literature reveals that inflation is harmful for the health of financial sector through its detrimental affects. The present study also confirms the relationship between inflation and financial sector’s performance. We employed ARDL bounds testing approach to investigate log run relationships and Error Correction Method (ECM) for short run dynamics. Our findings argue that inflation lowers the efficiency of financial intermediaries not in short run but also in long run. Financial sector improves its performance through its previous policies and development in both the periods. Real GNP per capita also promotes the development of financial sector through their causal channels. Government spending enhances the efficiency of financial institutions in long run. Human capital formation declines the performance of financial sector due to low quality of education.
    Keywords: Finance; Inflation; ARDL Approach
    JEL: B22
    Date: 2007–03–25
  35. By: Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, DGEI-DAMEP - Banque de France); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I)
    Abstract: Business surveys are an important element in the analysis of the short-term economic situation because of the timeliness and nature of the information they convey. Especially, surveys are often involved in econometric models in order to provide an early assessment of the current state of the economy, which is of great interest for policy-makers. In this paper, we focus on non-seasonally adjusted business surveys released by the European Commission. We introduce an innovative way for modelling those series taking the persistence of the seasonal roots into account through seasonal-cyclical long memory models. We empirically prove that such models produce more accurate forecasts than classical seasonal linear models.
    Keywords: Euro area, nowcasting, business surveys, seasonal, long memory.
    Date: 2008–05
  36. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece)
    Abstract: By estimating bivariate EGARCH (2, 1) models, we find significant short run dynamic relations between stock market and real activity for the UK and the US over the period 1970-2002. There is evidence of significant reciprocal volatility spillovers between the two sectors within a country, implying stronger interdependencies in UK rather than in US. Volatility spillovers, transmitted via the balance sheet channel, are found to be asymmetric only in the case of UK. Namely, a negative shock in the stock market increases volatility in the real economy more than a positive shock.
    Keywords: Stock market, real activity, volatility spillovers, UK, US
    JEL: C32 E44 G12
    Date: 2007–02–01
  37. By: Antonio Estache (World Bank and, the European Centre for Advanced Research in Economics and Statistics at the Free University of Brussels); Jean-François Perrault (GREDI, Faculte d'administration, Université de Sherbrooke); Luc Savard (GREDI, Faculte d'administration, Université de Sherbrooke)
    Abstract: In this paper we construct an archetype CGE model and apply it to six sub-Saharan African countries to explore the impact of scaling up infrastructure in African countries. As part of the debate on the importance of scaling up infrastructure to stimulate growth and provide a push to African economies, some analysts have raised concerns on providing massive financing for the construction of these infrastructures as the process can create major distortion in the economies and have a negative impact by creating Dutch disease symptoms (Adam and Bevan 2006). This study aims to provide some insight into this debate. It draws from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and Fay and Yepes (2003) for operating cost associated with new infrastructure. We compare various infrastructure investment funded with different fiscal tools. These investments scenarios are compared to non productive investment that can be interpreted as a business as usual scenario. Our results show that increase in infrastructure investment does produce slight Dutch disease effects but the negative impacts are strongly dependent on the type of investments performed and type of financing scheme used. Moreover, the growth effects we introduced contribute to attenuate the negative effects.
    Keywords: Investment externalities, foreign aid, exchange rate, fiscal reforms
    JEL: C68 E62 F35 H54
    Date: 2008
  38. By: Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
    Abstract: We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labor supply: while hours per-worker display small increases, total hours and female labor force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labor supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy.
    Date: 2008
  39. By: Khan, Safdar Ullah; Adnan, S. Adnan H. A. Bukhari
    Abstract: The objective of this study is to estimate potential output vis-à-vis output gap for Pakistan’s economy. This paper reviews six commonly used techniques to estimate potential output and from that the output gap. The results suggest that while measures of output gap are not identical they nonetheless do show some degree of association among each other. Therefore, a bench mark output gap is calculated for 1950 to 2007. The benchmark output gap depicts that Pakistan economy has been observing a cyclical episode of excess supply corresponding with demand pressures in the period of analysis. Furthermore, evidence suggests that Pakistan economy is currently experiencing rising demand pressures since FY05.
    Keywords: gross domestic product; potential output; output gap
    JEL: E32 C53 O53 C23
    Date: 2008–02–05
  40. By: Araújo, Eurilton
    Date: 2008–10
  41. By: Farley Grubb
    Abstract: The British North American colonies were the first western economies to rely on legislature-issued fiat paper money as their principal internal medium of exchange. This system arose piecemeal across the colonies making the paper money creation story for each colony unique. It was true monetary experimentation on a grand scale. The creation story for Maryland, perhaps the most unique among the colonies, is analyzed to evaluate how market forces, media influences, and the power of various constituents combined to shape its particular paper money system.
    JEL: E42 E51 H20 N11 N21 N41
    Date: 2008–05
  42. By: Jusélius, Katarina; Ordóñez, Javier
    Abstract: This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed light on the impact of the European economic integration process on Spanish labour market and the convergence to a European level of prosperity. We find some important lessons to be learnt from the Spanish experience that should be relevant for the new member states. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. First, high competitiveness in the tradable sector seems crucial for the real and nominal convergence to be successful. The increase in consumption wages and consumer prices as a result of the Balassa-Samuelson effect should not be allowed to exceed the improvement in productivity. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. Third, there does not seem to be a short-cut to a European level of standard of living: the path to sustainable prosperity seems to follow the path of productivity improvement. Forth, excessive real wage increases seem to lead to increasing unemployment, slowdown in productivity growth, higher interest rates, and loss of competitiveness. On the other hand, the access to the European market and the possibility of increased export demand is likely to speed up the convergence process as long as competitiveness is not eroded by excess wage increases.
    Keywords: Balassa-Samuelson effect, nominal and real convergence, unemployment dynamics, purchasing power parity, cointegrated VAR
    JEL: C32 E24
    Date: 2008
  43. By: Kerstin Gerling (University of Mannheim, Department of Economics)
    Abstract: This paper studies the mechanisms through which financial integration affects the pattern of international capital flows and the domestic economic performances when explicitly accounting for wealth inequality on imperfect capital markets. Balancing the impact of a firm size and a credit rationing effect on the net credit position and on aggregate production will help predicting the distribution of gains and losses among and within countries on the basis of a country’s aggregate wealth and its distribution. Altogether, the results contribute new explanations for some empirical puzzles. They also bear important implications for policy making, supranational treaty design and financial stability.
    Keywords: international financial integration, inequality, imperfect capital markets and allocative efficiency
    JEL: D24 D31 D61 E44 F36
    Date: 2008–04–28
  44. By: Leandro Prados de la Escosura; Joan R. Roses
    Abstract: In this paper, new series of Spain’s capital stock and input are constructed for the last one-and-a-half centuries. Capital stock and input grew at average rates of 3.5 and 3.7 percent per year but not at a steady pace since rates accelerated dramatically during the ‘Golden Age’. Two major structural changes accompanied this process. Composition of capital stock and remuneration changed gradually as the contribution of productive capital rose while that of structures declined. Spanish economy experienced capital deepening in the long-run. Although the capital-output ratio increased over time, in phases of accelerated growth the productivity of capital rose.
    Keywords: capital stock and input, Spain, capital deepening, capital productivity
    JEL: E22 O16 N13 N14 E22
    Date: 2008–04
  45. By: Laurent Ferrara (Banque de France et Centre d'Economie de la Sorbonne); Thomas Raffinot (CPR Asset Management)
    Abstract: Non-parametric methods have been empirically proved to be of great interest in the statistical literature in order to forecast stationary time series, but very few applications have been proposed in the econometrics literature. In this paper, our aim is to test whether non-parametric statistical procedures based on a Kernel method can improve classical linear models in order to nowcast the Euro area manufacturing industrial production index (IPI) by using business surveys released by the European Commission. Moreover, we consider the methodology based on bootstrap replications to estimate the confidence interval of the nowcasts.
    Keywords: Non-parametric, kernel, nowcasting, bootstrap, Euro area IPI.
    JEL: C22 C51 E66
    Date: 2008–04
  46. By: Helmut Stix (Oesterreichische Nationalbank, Economic Studies Division)
    Abstract: The question asked in this paper is why people continue to use foreign currencies even after their economies have stabilized. Survey data for Croatia, Slovenia and Slovakia are employed to provide an answer. The results confirm the role of network effects and of remittances. Furthermore, the extent of currency substitution is found to be positively associated with the level of income and education. An important aspect of euroization seems to be age (the older are more likely to hold foreign currencies). In contrast, neither expectations about inflation rates, nor about exchange rates, do seem to affect the degree of euroization in a systematic and predictable way. Trust in the banking system is found to affect the choice between foreign currency cash and foreign currency deposits. Overall, the results support the view that the persistence in the use of foreign currencies is driven to a large extent by factors that are related to the past.
    Keywords: Dollarization, euroization, currency substitution, survey data.
    JEL: E41 E50 D14
    Date: 2008–04–16
  47. By: James Chapman; Jonathan Chiu; Miguel Molico
    Abstract: This paper develops a model of settlement system to study the endogenous structure of settlement networks, and the welfare consequences of clearing agent failure. The equilibrium degree of tiering is endogenously determined by the cost structure and the information structure. The degree of tiering is decreasing in the fixed cost of operating the second-tier network and the availability of public credit history. Furthermore, the welfare effects of clearing agent failure can be decomposed into operational inefficiency and the loss of private information.
    Keywords: Payment, clearing, and settlement systems
    JEL: E42 E58 G21
    Date: 2008
  48. By: Nicholas C.S. Sim (Department of Economics, Boston College, USA); Kong-Weng Ho (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)
    Abstract: We extend the model of Nishimura and Shimomura (2002) to consider a two-country framework where under autarky indeterminacy arises in one country but determinacy in the other, and show that indeterminacy could be eliminated when trade takes place between the two.
    Keywords: Indeterminacy, Trade, Two-Country Framework.
    JEL: E32 F00 F11 F43
    Date: 2007–06
  49. By: Nicholas C.S. Sim (Department of Economics, Boston College, USA); Kong-Weng Ho (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)
    Abstract: This note shows that indeterminacy arising from an economy exhibiting production with social constant returns to scale may be related to the instability of the consumption goods market equilibrium. Furthermore, trade does not contribute to indeterminacy; indeterminacy arises becasue each country’s equilibrium path is already indeterminate before trade.
    Keywords: Indeterminacy, Market Instability
    JEL: E32 F00 F11 F43
    Date: 2007–05

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