|
on Macroeconomics |
|
Issue of 2008‒05‒31
63 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Mumtaz, Haroon (Monetary Assessment and Strategy, Bank of England); Surico, Paolo (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | The dynamics of the US economy are modelled using a time-varying structural vector autoregression that incorporates information from the yield curve. We find important changes in the dynamics of macroeconomic variables such as inflation and the federal funds rate. In addition our results suggest a change in the relationship between the yield curve and macroeconomic variables. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the yield curve. Shocks to the level of the yield curve account for the persistence of the federal funds rate. We use our time-varying model provides to revisit the evidence on the expectations hypothesis. |
| Keywords: | Nelson-Siegel; time variation; inflation expectations; credibility building; evidence on expectations hypothesis |
| JEL: | C15 E44 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0023&r=mac |
| 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. |
| JEL: | E31 E52 G12 N12 N22 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14019&r=mac |
| By: | Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthias Mohr (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (Directorate General International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we examine the macroeconomic effects of alternative fiscal consolidation policies in the New Area-Wide Model (NAWM), a two-country open-economy model of the euro area developed at the European Central Bank (cf. Coenen et al., 2007). We model fiscal consolidation as a permanent reduction in the targeted government debt-to-output ratio and analyse both expenditure and revenue-based policies that are implemented by means of simple fiscal feedback rules. We find that fiscal consolidation has positive long-run effects on key macroeconomic aggregates such as output and consumption, notably when the resulting improvement in the budgetary position is used to lower distortionary taxes. At the same time, fiscal consolidation gives rise to noticeable short-run adjustment costs in contrast to what the literature on expansionary fiscal consolidations suggests. Moreover, depending on the fiscal instrument used, fiscal consolidation may have pronounced distributional effects. JEL Classification: E32, E62. |
| Keywords: | DSGE modelling, limited asset-market participation, fiscal policy, fiscal consolidation, euro area. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080902&r=mac |
| By: | Canzoneri, Matthew B; Cumby, Robert; Diba, Behzad; López-Salido, J David |
| Abstract: | It is commonly asserted that monetary and fiscal policy may have to be coordinated if they are to provide a nominal anchor and avoid the pathological outcomes of sunspots or explosive price paths. In this paper, we study a model in which government bonds are an imperfect substitute for money in the transactions technology, providing a new channel for debt dynamics to feed into inflation dynamics. This modification of an otherwise standard NNS model substantially alters the conditions for local determinacy and the requirements for macroeconomic policy coordination: the Taylor Principle is no longer sacrosanct; a weak fiscal response to debt is no longer the panacea for a weak monetary policy; sunspot equilibria may be less relevant than previously thought; and the need for coordination may be less than previously thought. In addition, our model provides a new way of thinking about the structural break that is thought to have occurred around 1980 in monetary policy and in the dynamics of government spending and private consumption. |
| Keywords: | Bonds; Monetary and Fiscal Policies; Transaction Services |
| JEL: | E51 E52 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6814&r=mac |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper adopts a three-equation New Keynesian model to evaluate the appropriateness of China's monetary policy framework. Our simulation results show that a hybrid rule that relies on both interest rate and quantity of money to conduct monetary policy appears to be more suitable than its alternatives at the current stage of economic and financial market development. Our simulation results also show that a sharp appreciation of the renminbi exchange rate would be disruptive to the inflation and output processes of the economy, despite its effectiveness in curbing inflation. |
| Keywords: | Monetary Policy Rule, New Keynesian Model, China |
| JEL: | E42 E52 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0718&r=mac |
| By: | Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen |
| Abstract: | It has been widely argued that inflation persistence since WWII has been widespread and durable and that it can only be accounted for by models with a high degree of nominal rigidity. We examine UK post-war data where after confirming previous studies’ findings of varying persistence due to changing monetary regimes, we find that models with little nominal rigidity are best equipped to explain it. |
| Keywords: | Inflation Persistence; Monetary Regime Shifts; New Classical; New Keynesian; Nominal Rigidity |
| JEL: | E31 E37 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6834&r=mac |
| By: | Canzoneri, Matthew B; Cumby, Robert; Diba, Behzad; López-Salido, J David |
| Abstract: | Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modelled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behaviour in the more complete Banks and Bonds model. We do this by comparing the models’ second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models. |
| Keywords: | Banks; Monetary Aggregates |
| JEL: | E51 E52 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6813&r=mac |
| By: | Marek Jaroci?ski (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates a Bayesian VAR for the US economy which includes a housing sector and addresses the following questions. Can developments in the housing sector be explained on the basis of developments in real and nominal GDP and interest rates? What are the effects of housing demand shocks on the economy? How does monetary policy affect the housing market? What are the implications of house price developments for the stance of monetary policy? Regarding the latter question, we implement a version of a Monetary Conditions Index (MCI) due to Céspedes et al. (2006). JEL Classification: E3-E4. |
| Keywords: | House prices, monetary conditions index, Bayesian VAR, monetary policy shock, conditional forecast. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080891&r=mac |
| By: | Yuki Teranishi (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp)) |
| Abstract: | The first aim of the paper is to investigate a new source of economic stickiness, staggered nominal loan interest rate contracts between a private bank and a firm under the monopolistic competition. We introduce this staggered loan contract mechanism with micro-foundation based on agent's optimized behaviors into a standard New Keynesian model in a tractable way. Simulation results show that staggered loan contracts play an important role in determining both the amplitude and the persistence of economic fluctuations. The second aim of the paper is to analyze optimal monetary policy in this environment with staggered loan contracts. To this end, we derive an approximated microfounded-welfare function in the model. Unlike the loss functions derived in other New Keynesian models, this model's welfare function includes a term that measures the first order difference in loan interest rates, which requires reduction of the magnitude of policy interest rate changes in the welfare itself. We derive the optimal monetary policy rule when the central bank can commit to its policy in the timeless perspective. One implication of the optimal policy rule is that the central bank has the incentive to smooth the policy interest rate. This empirically realistic conclusion can be seen in our simulation results. |
| Keywords: | Staggered Loan Interest Rate Contract, Optimal Monetary Policy, Economic Fluctuation |
| JEL: | E32 E44 E52 G21 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-08&r=mac |
| By: | Anna Lipinska (Bank of England, Monetary Analysis, International Economic Analysis Division, Threadneedle Street, London EC2R 8AH, UK.) |
| Abstract: | The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. This paper uses a DSGE model of a two-sector small open economy, to address the following question: How do the Maastricht convergence criteria modify optimal monetary policy in an economy facing domestic and external shocks? First, we derive the micro founded loss function that represents the objective function of the optimal monetary policy not constrained to satisfy the criteria. We find that the optimal monetary policy should not only target inflation rates in the domestic sectors and aggregate output fluctuations but also domestic and international terms of trade. Second, we show how the loss function changes when the monetary policy is constrained to satisfy the Maastricht criteria. The loss function of such a constrained policy is characterized by additional elements penalizing fluctuations of the CPI inflation rate, the nominal interest rate and the nominal exchange rate around the new targets which are potentially different from the steady state of the unconstrained optimal monetary policy. Under the chosen parameterization, the unconstrained optimal monetary policy violates two criteria: concerning the CPI in.ation rate and the nominal interest rate. The constrained optimal policy results in targeting the CPI inflation rate and the nominal interest rate that are 0.7% lower (in annual terms)than the CPI inflation rate and the nominal interest rate in the countries taken as a reference. The welfare costs associated with these constraints need to be offset against credibility gains and other benefits related to the compliance with the Maastricht criteria that are not modelled. JEL Classification: F41, E52, E58, E61. |
| Keywords: | Optimal monetary policy, Maastricht convergence criteria, EMU accession countries. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080896&r=mac |
| By: | Christian Dreger; Jürgen Wolters |
| Abstract: | Money growth in the euro area has exceeded its target since 2001. Likewise, recent empirical studies did not find evidence in favour of a stable long run money demand function. The equation appears to be increasingly unstable if more recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In contrast to the bulk of the literature, we are able to identify a stable long run money demand relationship for M3 with reasonable long run behaviour. This finding is robust for different (ML and S2S) estimation methods. To obtain the result, the short run homogeneity restriction between money and prices is relaxed. In addition, a rise in the income elasticity after 2001 is taken into account. The break might be linked to the introduction of euro coins and banknotes. The monetary overhang and the real money gap do not indicate significant inflation pressures. The corresponding error correction model survives a battery of specification tests. |
| Keywords: | Cointegration analysis, error correction, excess liquidity, money demand, monetary policy |
| JEL: | C22 C52 E41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp795&r=mac |
| By: | Buiter, Willem H |
| Abstract: | Central banks can go broke and have done so, although mainly in developing countries. The conventional balance sheet of the central bank is uninformative about the financial resources it has at its disposal and about its ability to act as an effective lender of last resort and market marker of last resort. As long as central banks don’t have significant foreign exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seigniorage). However, the scale of the recourse to seigniorage required to safeguard central bank solvency may undermine price stability. In addition, there are limits to the amount of real resources the central bank can appropriate by increasing the issuance of nominal base money. For both these reasons, it may be desirable for the Treasury to recapitalise the central bank should the central bank suffer a major capital loss as a result of its lender of last resort and market maker of last resort activities. The fiscal authorities of the Euro Area should as a matter of urgency agree on a formula for dividing the fiscal burden of recapitalising the European Central Bank/Eurosystem, should the need arise. |
| Keywords: | central bank insolvency; lender of last resort; market maker of last resort; recapitalising central banks |
| JEL: | E31 E41 E44 E52 E58 E63 F31 F41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6827&r=mac |
| By: | Andrés, Javier; López-Salido, J David; Nelson, Edward |
| Abstract: | We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behaviour of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate. |
| Keywords: | money; natural rate; New Keynesian models |
| JEL: | E51 E52 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6812&r=mac |
| By: | Paul De Grauwe (Catholic University of Leuven (KUL) - Department of Economics, B-3000 Leuven, Belgium.) |
| Abstract: | DSGE-models have become important tools of analysis not only in academia but increasingly in the board rooms of central banks. The success of these models has much to do with the coherence of the intellectual framework it provides. The limitations of these models come from the fact that they make very strong assumptions about the cognitive abilities of agents in understanding the underlying model. In this paper we relax this strong assumption. We develop a stylized DSGE-model in which individuals use simple rules of thumb (heuristics) to forecast the future inflation and output gap. We compare this model with the rational expectations version of the same underlying model. We find that the dynamics predicted by the heuristic model differs from the rational expectations version in some important respects, in particular in their capacity to produce endogenous economic cycles. JEL Classification: E10, E32, D83. |
| Keywords: | DSGE-model, imperfect information, heuristics, animal spirits. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080897&r=mac |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyze the of the natural rate of interest in an economy where nominal debt contracts generate a spread between loan rates and the policy interest rate. In our model, monetary policy has real effects in the flexible-price equilibrium, because it affects the credit spread. Relying on a definition suitable for this environment, we demonstrate that: (i) the natural rate is independent of monetary policy and (ii) it delivers price stability, if used as the intercept of a monetary policy rule. The second result hold exactly if real balances are remunerated at a constand spread below policy interest rates, approximately otherwise. We also highlight, however, that the natural rate is not robust to model uncertainty. The natural rate reacts differently to aggregate shocks - not only quantitatively but also qualitatively - depending on the underlying model assumptions (e.g. whether or not financial markets are frictionless). JEL Classification: E40, E50, G10. |
| Keywords: | Monetary policy, natural rate of interest, credit frictions. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080889&r=mac |
| By: | Stéphane Dées (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); M. Hashem Pesaran (Cambridge University and USC; The Old Schools, Trinity Lane, Cambridge CB2 1TN, United Kingdom.); L. Vanessa Smith (Centre for Financial Analysis and Policy (CFAP), Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK.); Ron P. Smith (Birkbeck, University of London, Malet Street, Bloomsbury, London WC1E 7HX, UK.) |
| Abstract: | New Keynesian Phillips Curves (NKPC) have been extensively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macroeconomic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global perspective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC. JEL Classification: C32, E17, F37, F42. |
| Keywords: | Global VAR (GVAR), identification, New Keynesian Phillips Curve, Trend-Cycle decomposition. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080892&r=mac |
| By: | Araújo, Eurilton |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_114&r=mac |
| By: | Modena, Matteo |
| Abstract: | Using data for U.S. and Canada, we find evidence of the time-varying nature of risk premia, which are obtained as difference between long term interest rates and their expected values. We then apply Kalman filtering to extract the conditional variance of term premia prediction errors; our results highlight that this variable is informative beyond term premia and spreads, and it significantly improves upon prediction capability of standard models. In particular, the conditional variance of term premia, reflecting the high volatility of financial markets, anticipates movements in the output growth. Empirical evidence supports the inverse correlation between term premia and business cycle fluctuations. Data suggest that a deterioration of financial markets conditions, as captured by the increased volatility of term premia, anticipates a decline in the output growth. Therefore, term premia conditional volatility has an adverse effect on the economy. |
| Keywords: | Term Structure; Term Premia; Kalman Filtering; Industrial Production Growth. |
| JEL: | E44 C01 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8839&r=mac |
| By: | Paul Levine (The University of Surrey, Guildford, Surrey GU2 7XH, UK.); Joseph Pearlman (London Metropolitan University - Department of Economics, Finance and InternationalBusiness (EFIB), London EC2M 6SQ, UK.) |
| Abstract: | This paper compares two contrasting approaches to robust monetary policy design. The first developed by Hansen and Sargent (2003, 2007) assumes unstructured model uncertainty and uses a minimax robustness criterion to design monetary rules. This contrasts with an older literature that structures uncertainty by seeking rules that are robust across competing views of the economy. This paper carries out and compares robust design exercises using both approaches using a standard ‘canonical New Keynesian model’. We pay particular attention to a number of issues: First, we distinguish three possible forms of the implied game between malign nature and the policymaker in the Hansen-Sargent procedure. Second, in both approaches, we examine the consequences for robust rules of the zero lower bound (ZLB) constraint on the nominal interest rate, the monetary instrument. Finally, again for both types of robustness exercise we explore the implications of policy design when the policymaker is obliged to use simple Taylor-type interest rate rules. JEL Classification: E52, E37, E58. |
| Keywords: | Robustness, structured and unstructured uncertainty, zero lower bound interest rate constraint. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080899&r=mac |
| By: | Groth, Charlotta (Monetary Policy Committee Unit, Bank of England); Wheeler, Tracy (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | We evaluate the degree of gradualism and inaction in UK monetary policy over the Monetary Policy Committee (MPC) period (1997-2007) at the quarterly and the monthly frequency. After accounting for misspecification in standard Taylor rules, we find little evidence for gradualism. A measure of optimal policy is calculated. Comparing this with actual policy suggests that there is less inaction in monetary policy decisions than previous work suggested for the period prior to the formation of the MPC. In an analysis of the MPC's monthly voting decisions, we find that the activity rate, defined as the probability that the MPC vote to change interest rates in a given month, has fallen over time. This reflects the increased stability of inflation and output growth, rather than changes in the degree of gradualism and/or inaction. There is some evidence for inaction at the monthly frequency however, demonstrated by the fact that the MPC is more active in the forecast month than in the non-forecast month. The MPC also tends to wait longer before reversing the direction of interest rate changes than continuing them. This difference appears not to be driven by gradualism, and so provides further evidence for inaction at the monthly frequency. A panel data analysis suggests that the MPC as a whole is equally active as its individual members, so inaction appears not to be driven by the use of a committee to set monetary policy. There is no evidence that activity rates fall with the length of time that a member has served on the committee, suggesting that learning about the transmission mechanism has no impact on the tendency for gradualism and inaction. |
| Keywords: | Monetary Policy; Taylor Rules; Voting Patterns |
| JEL: | D78 E43 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0021&r=mac |
| By: | Alessandro Calza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the “global output gap hypothesis”) holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area. JEL Classification: E3, F4. |
| Keywords: | Globalisation, inflation, global output gap. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080890&r=mac |
| By: | Luca Onorante (DG Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego J. Pedregal (ETSI Industriales, Edificio Politécnico, Universidad de Castilla-la-Mancha, campus universitario s/n, 13071 Ciudad Real, Spain.); Javier J. Pérez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sara Signorini (Global Economics & FI/FX Research, HVB Milan, Via Tommaso Grossi 10, 20121 Milan, Italy.) |
| Abstract: | Short-term fiscal indicators based on public accounts data are often used by European policy makers. They represent one of the main sources of publicly available intra-annual fiscal information. Nevertheless, these indicators have received limited attention from the academic literature analysing fiscal forecasting in Europe. Some recent literature suggests the validity of public accounts data to forecast government deficits in the euro area. We extend this literature on two fronts: (i) we shift the focus from indicators of government deficits to look at indicators for government total revenue and total expenditure; (ii) we use a mixed-frequency state-space model to integrate readily available monthly/quarterly cash-based fiscal data with annual general government series (National Accounts). By doing so, we are able to maintain the focus on forecasting and monitoring annual outcomes, while making use of infra-annual fiscal information, available within the current year. The paper makes a case for the use of monthly cash indicators for multilateral fiscal surveillance at the European level. JEL Classification: C53, E6, H6. |
| Keywords: | Leading indicators, Fiscal forecasting and monitoring, Euro area. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080901&r=mac |
| By: | Maik Schmeling; Andreas Schrimpf |
| Abstract: | We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. By empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis - inflation as a proxy for aggregate risk aversion - is not supported by the data. |
| Keywords: | Inflation expectations, Money Illusion, Proxy hypothesis, Stock returns |
| JEL: | G10 G12 E44 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-036&r=mac |
| By: | Besley, Timothy (Monetary Policy Committee Unit, Bank of England); Meads, Neil (Monetary Policy Committee Unit, Bank of England); Surico, Paolo (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | This paper looks at the voting patterns of internal and external members of the MPC to investigate how far there are differences between insiders and outsiders. We make three contributions. First, we assess the extent to which the Bank of England internally generated forecasts explain the MPC members' voting decisions. This is important as generating forecasts on a quarterly basis is a key part of the process used by the Bank of England. The forecast for inflation is made public in the Inflation Report while the output gap forecast is not. Second, we use a random coefficient method of estimation in which the parameters of the interest rate rule are allowed, but not required, to be different across members. Third, we find evidence of some heterogeneity in the intercept, a measure of experience on the MPC and the interest rate smoothing parameter, but no significant differences in the members' reaction to the forecasts of inflation and the output gap. |
| Keywords: | Monetary Policy; Voting Patterns |
| JEL: | D78 E52 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0020&r=mac |
| By: | Wheeler, Tracy (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | This paper investigates empirically whether the level or growth of cheap imports from China has had an impact on UK inflation. We use two methods; the first calculates UK weighted world export price inflation as the sum of the effect of the inflation level in the UK's trading partners and the effect of substituting imports from more expensive countries with imports from countries with lower price levels. The second estimates these two effects on UK inflation using panel regressions. The results from the first method suggest that the substitution of imports from more expensive countries with imports from China reduced UK weighted world export price inflation by an average of -0.75 percentage points per annum from 2000 to 2004. Similarly, the panel regressions suggest that over the 1997-2005 period this substitution had a small but significant downward impact on UK CPI inflation. However, the same regressions also suggest that higher inflation in imports from China than in imports from other countries has put upward pressure on some components of UK CPI inflation. As this upward 'inflation effect' is likely to have outweighed the downward 'substitution effect' the regressions suggest that the overall effect of Chinese imports on UK CPI inflation from 1997-2005 was positive. |
| Keywords: | Inflation; China; Imports |
| JEL: | E31 F15 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0022&r=mac |
| By: | van den Hauwe, Ludwig |
| Abstract: | Despite the distinctive character of the Austrian approach to “microfoundations for macroeconomics”, the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner´s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner´s Dilemma. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a “myopic”, self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge. |
| Keywords: | Free Banking; Business Cycle Theory; Prisoner´s Dilemma; Mechanism Design; |
| JEL: | E32 E66 E58 E42 E31 G18 E52 D01 K39 |
| Date: | 2008–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8832&r=mac |
| By: | Albert Marcet; Elisa Faraglia; Andrew Scott |
| Abstract: | A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these simulations we find no presumption that governments should issue long term debt ? policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc.. Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights. |
| Keywords: | Complete Markets, Debt Management, Government Debt, Maturity Structure, Yield Curve |
| JEL: | E43 E62 |
| Date: | 2008–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:743.08&r=mac |
| By: | Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang |
| 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. |
| JEL: | E6 H3 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14028&r=mac |
| By: | Aleksander Berentsen; Christopher Waller |
| Abstract: | When agents are liquidity constrained, two options exist — borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds. |
| Keywords: | Liquidity, Financial markets, Monetary policy, Search |
| JEL: | E4 E5 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:372&r=mac |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper revisits the relationship among consumption, income and wealth using Hong Kong data. We find that the permanent income hypothesis is weakly supported by Hong Kong¡¦s consumption data prior to 1997, but it is not supported for the sample period after 1997 and the whole sample period spanning from 1984 to 2006. Furthermore, we find that both anticipated and unanticipated income and wealth effects have influences on Hong Kong¡¦s consumption. While temporary tax changes may have some impact on consumption of durable goods, the evidence that they also affect overall consumption remains limited. |
| Keywords: | Permanent income hypothesis, consumption smoothness, anticipated and unanticipated effects |
| JEL: | E21 E32 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0716&r=mac |
| By: | Lippi, Francesco; Nobili, Andrea |
| Abstract: | We consider an economy where the oil price, industrial production, and other macroeconomic variables fluctuate in response to a variety of fundamental shocks. We estimate the effects of different structural shocks using robust sign restrictions suggested by theory using US data for the 1973-2007 period. The estimates show that identifying the shock underlying the oil price change is important to predict the sign and the magnitude of its correlates with the US production. The results offer a natural explanation for the smaller correlation between oil prices and US production in the recent years compared to the seventies. |
| Keywords: | Business cycle; Oil prices; Sign Restrictions; Structural VAR |
| JEL: | C32 E3 F4 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6830&r=mac |
| By: | Ciccarelli, Carlo; Fenoaltea, Stefano; Proietti, Tommaso |
| Abstract: | This paper examines the comovements of construction in Italy's regions from 1861 to 1913. The dynamic correlations of the series' deviation cycles decline in the case of buildings, remain very low in that of railways, and tend to decline in that of other infrastructure; the total-construction correlations instead peak in the 1870s, and again after 1900. Long-term comovements are examined by tracking the dispersion of the first differences of the measured trends. Increasing dispersion is obtained in the construction of buildings and of non-rail infrastructure; railway construction displayed a dramatic decline in dispersion, which dominates the aggregate. |
| Keywords: | construction; regions ; post-Unification Italy; trends; cycles; comovements |
| JEL: | H54 N63 E32 C14 N13 |
| Date: | 2008–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8870&r=mac |
| By: | Mário Jorge Mendonça; Cláudio H. dos Santos |
| Abstract: | Este artigo apresenta várias especificações econométricas - notadamente modelos Markov-Switching - para a "função de reação fiscal" do setor público consolidado brasileiro após o Plano Real. Os resultados obtidos sugerem fortemente que a política fiscal no Brasil apresentou dois regimes distintos após o Plano Real, sendo que o final do ano 2000 marca o período mais provável da transição entre esses dois regimes. O regime "pós-2000" se caracteriza por uma baixa (ou mesmo nula) reação do superávit primário a variações na dívida líquida do setor público (DLSP). Em contraste, no regime anterior a 2000 (de maior volatilidade) a reação do superávit primário a variações na DLSP é bastante evidente. Observou-se, ainda, que em ambos os regimes o superávit primário parece responder positivamente a variações no produto e que em nenhum dos dois regimes o governo parece ter utilizado explicitamente a política fiscal como instrumento de controle da inflação. This article presents various econometric specifications - most notably Markov- Switching models - for the "fiscal reaction function" of the Brazilian consolidated public sector after the 1994 ?Real Plan?. The results reported here strongly suggest that a major structural break has happened in the Brazilian fiscal policy around the year 2000. Indeed, while the "reaction" of primary balance to changes in net debt appears to be weak or even null when one looks at the 2000-2007 period, the contrary happens in the (more volatile) 1995-2000 years. Our results also suggest that the primary surplus is positively correlated with output and uncorrelated with inflation in both regimes. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1337&r=mac |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | This note investigates the transmission of volatility from longer maturities to the overnight segment of the Euro area money market. I use non-parametric estimates of the daily variance of swap rates to test for block exogeneity with respect to the overnight. The results suggest that there exists transmission of volatility shocks from the 1-year swap rate to the overnight market. The reform of the operational framework of March 2004 has improved the segmentation of the market, as it has insulated the overnight segment from spillovers in volatility stemming from swap rates up to 6 months of maturity. |
| Keywords: | Money Market; High-Frequency Data; Granger Causality |
| JEL: | C22 E58 |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2008_0005&r=mac |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper studies the significance of Mainland-related shocks in determining Hong Kong money market interest rates after controlling for the influences of US variables. Analysis using a vector auto-regression model suggests that an unexpected rise in the Mainland policy interest rate, or a higher-than-expected growth in Mainland output or money supply, in general produces a positive and hump-shaped effect on the three-month HIBOR. Forecast error variance decomposition shows that US shocks still dominate, but Mainland shocks have become more important in accounting for the unexpected fluctuations in HIBOR in recent years. A historical decomposition shows that from autumn 2003 to spring 2005 the large negative spread between HIBOR and LIBOR was mainly due to Mainland factors. Thus, while the HIBOR-LIBOR spread is expected to be bounded inside a band that reflects the width of the Convertibility Zone of the Linked Exchange Rate system, Mainland-related shocks could exert a significant influence on the actual size of the spread. |
| Keywords: | Hong Kong, HIBOR, Linked Exchange Rate system |
| JEL: | E4 F36 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0717&r=mac |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper estimates pass-through of exchange rate changes to domestic inflation in Hong Kong in a two-step approach. We first estimate exchange rate pass-through to import prices and then from import price to domestic inflation using a Phillips-Curve model. We find that Hong Kong¡¦s exchange rate pass-through to import prices is relatively high compared to the OECD average, although Hong Kong also witnessed a decline of pass-through after 1991. With respect to exchange rate pass-through to domestic prices, we find that a 10% depreciation of the US dollar against all currencies except for the Hong Kong dollar would lead domestic prices to increase by 0.82 and 1.61 percent in the short run and medium run, respectively. These results are also broadly consistent with those obtained from a calibration exercise that estimates exchange rate pass-through to domestic prices via channels of the tradable and non-tradable goods. |
| Keywords: | Exchange rate pass-through, Phillips Curve, Hong Kong |
| JEL: | F3 F4 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0802&r=mac |
| By: | NUTAHARA Kengo; INABA Masaru |
| Abstract: | Equivalence results in business cycle accounting imply that the prototype model with time-varying wedges can achieve the same allocation generated by a large class of frictional detailed models. Conventionally, the process of wedges is specified to be the first order vector autoregressive. In this paper, we characterize the class of models covered by the prototype model under the conventional specification and find that it is much smaller than that believed in previous literature. We also provide an alternative specification in order to let the prototype model cover a much larger class. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08015&r=mac |
| By: | Mahadeva, Lavan (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | This paper is a case study of the real world monetary policy data uncertainty problem. The initial and the latest release for growth rates of the distribution, hotels and catering sector are combined with official data on household income and two surveys in a state-space model. Though important to the UK economy, the distribution, hotels and catering sector is apparently difficult to measure. One finding is that the initial release data is not important in predicting the latest release. It could be that the statistical office develop the initial release as a building block towards the final release rather than an estimate of it. Indeed, there is multicollinearity between the initial release and the retail sales survey, which would then contain the same early available information. A second finding is that the estimate of the later release is sensitive to the estimate of the average historical growth rate. This means that establishing priors for this parameter and testing for shift structural breaks should be very important. |
| Keywords: | Data Uncertainty; Distribution Sector; Kalman Filter; Monetary Policy |
| JEL: | E52 L81 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0019&r=mac |
| By: | George-Marios Angeletos |
| Abstract: | This paper shows how rational investors can have different degrees of optimism regarding the prospects of the economy, even if they share exactly the same information regarding all economic fundamentals. The key is that heterogeneity in expectations regarding endogenous outcomes can emerge as a purely self-fulfilling equilibrium property when investment choices are strategic complements. This in turn has interesting novel positive and normative implications for a wide class of models that feature such complementarities: (i) It can rationalize idiosyncratic investor sentiment. (ii) It can be the source of significant heterogeneity in real and financial investment choices, even in the absence of any heterogeneity in individual characteristics and despite the presence of a strong incentive to coordinate on the same course of action. (iii) It can sustain rich fluctuations in aggregate investment and asset prices, including fluctuations that are smoother than those often associated with multiple-equilibria models. (iv) It can capture the idea that investors learn slowly how to coordinate on a certain course of action. (v) It can boost welfare. (vi) It can render apparent coordination failures evidence of improved efficiency. |
| JEL: | D82 D84 E32 G11 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14015&r=mac |
| By: | Sakurai, Sergio Naruhiko & Menezes, Naercio Aquino |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_115&r=mac |
| By: | Christian Ghiglino (Department of Economics, University of Essex - University of Essex); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility.<br />When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution.<br />Finally, we note that such a clear result is at odd with the existing related literature. |
| Keywords: | Wealth Inequality, Pareto distribution, Gini index, Elastic Labor Supply, Macroeconomic Volatility, Endogenous Equilibrium Business Cycles. |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281379_v1&r=mac |
| By: | Jan Willem van den End |
| Abstract: | This paper presents a macro stress-testing model for market and funding liquidity risks of banks, which have been main drivers of the recent financial crisis. The model takes into account the first and second round (feedback) effects of shocks, induced by behavioural reactions of heterogeneous banks, and idiosyncratic reputation effects. The impact on liquidity risk is simulated by a Monte Carlo approach. This generates distributions of liquidity buffers for each scenario round, including the probability of a liquidity shortfall. An application to Dutch banks illustrates that the second round effects have more impact than the first round effects and hit all types of banks, indicative of systemic risk. This lends support policy initiatives to enhance banks' liquidity buffers and liquidity risk management, which could also contribute to prevent financial stability risks. |
| Keywords: | banking; financial stability; stress-tests; liquidity risk |
| JEL: | C15 E44 G21 G32 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:175&r=mac |
| By: | Michael Artis; Toshihiro Okubo |
| Abstract: | This paper studies the intranational business cycle – that is the set of regional (prefecture) business cycles – in Japan. One reason for choosing to examine the Japanese case is that long time series and relatively detailed data are available. A Hodrick-Prescott filter is applied to identify the cycles in annual data from 1955 to 1995 and bilateral cross-correlation coefficients are calculated for all the pairs of prefectures. Comparisons are made with similar sets of bilateral cross correlation coefficients calculated for the States of the US and for the member countries of a “synthetic EuroArea”. The paper then turns to an econometric explanation of the cross-correlation coefficients (using Fisher’s z-transform), in a panel data GMM estimation framework. An augmented gravity model provides the basic model for the investigation, whilst the richness of the data base allows for additional models to be represented. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:101&r=mac |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper first investigates whether there is a cointegration relationship between Hong Kong¡¦s consumption and wealth using the latest cointegration tests that allow for structural breaks. Our tests show there is only limited empirical support for the existence of a cointegration relationship between consumption and wealth (including both housing and financial wealth). These test results thus cast doubt on the validity of the estimates based on the cointegration result. We then estimate a structural equation linking consumption and wealth derived from a habit formation consumption model. Our estimates show that the short run and the long run marginal propensities to consume out of a one Hong Kong dollar increase in total wealth are about 0.14 and 0.6 cents, respectively. These values are much smaller than those previously estimated using the cointegration approach. The housing wealth effect in Hong Kong is also relatively small compared to estimates for the United States obtained using a similar habit formation specification. |
| Keywords: | Cointegration test with structural breaks, habit formation model, wealth effect, Hong Kong |
| JEL: | E21 E32 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0720&r=mac |
| By: | Jaime Alonso-Carrera; Maria Jesus Freire-Seren; Baltasar Manzano |
| Abstract: | This paper proposes a multi-regional, general equilibrium model with capital accumulation to analyze the economic impact of the spatial distribution of public capital formation. This model is calibrated and solved by using data for the Spanish economy in order to simulate some comparative dynamic exercises of fiscal policy changes. These analyses illustrate the role that public investment plays in generating the existing imbalances in regional development. This is done by computing the spillover effects and the opportunity costs of regional distribution of public investment. Finally, two rankings of regional priorities in public investment can be derived: one based on the criterion of reducing regional disparities, and other based of an efficiency criterion. |
| JEL: | E62 H20 O40 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-09&r=mac |
| By: | Andreas Irmen (University of Heidelberg, Department of Economics); Johanna Kühnel (University of Heidelberg, Department of Economics) |
| Abstract: | We provide a comprehensive survey of the recent literature on the link between productive government expenditure and economic growth. Starting with the seminal paper of Robert Barro (1990) we show that an understanding of the core results of the ensuing contributions can be gained from the study of their respective Euler equations. We argue that the existing literature incorporates many relevant aspects, however, policy recommen- dations tend to hinge on several knife-edge assumptions. Therefore, future research ought to focus more on idea-based endogenous growth models to check the robustness of policy recommendations. Moreover, the inclusion of hitherto unexplored types of government expenditure, e. g., on the "rule of law", would be desirable. |
| Keywords: | Economic Growth, Government Expenditure, Public Goods, Fiscal Policy |
| JEL: | E62 H10 H21 H41 H54 O41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0464&r=mac |
| By: | Kazuo Nishimura (Kyoto University - Kyoto University); Harutaka Takahashi (Meiji Gakuin University - Meiji Gakuin University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | We consider a two-sector economy with Cobb-Douglas technologies,<br />labor-augmenting global external effects and increasing social returns. We prove the existence of a normalized balanced growth path and we give conditions for the occurrence of sunspot fluctuations that are compatible with both types of capital intensity configuration at the private level provided the elasticity of intertemporal substitution in consumption admits intermediary values. We finally show that the existence of period-two cycles requires the consumption good to be physical capital intensive at the private level. |
| Keywords: | Global externalities; increasing returns; endogenous growth; intertemporal substitution in consumption; indeterminacy; sunspot fluctuations; period-two cycles |
| Date: | 2008–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00282091_v1&r=mac |
| By: | Lorca-Susino, Maria |
| Abstract: | Until the 19th and mid-20th centuries, economic theory explained that the economic status of a country was represented by the strength of its currency. This strength is measured by the exchange rate of one currency vis-á-vis another currency, a “zero-sum” game in which one currency gains what the other loses. In fact, during the 19th century, the strength of the Pound Sterling facilitated Britain’s global hegemonic political and economic power known as the Pax Britanica. During the 20th century, the strength of the US dollar represented both the economic and political hegemony of the US around the world known as the Pax Americana. Nowadays, the weakness of the US dollar is making specialists wonder if we are witnessing the end of Pax Americana and the beginning of something else, possibly a Pax Europea, led by the strength of the euro. This is the argument surrounding the current behaviour of the US$-€ exchange rate and its effect on the economic performance of these two economic blocs. While the current exchange rate between the US dollar and the euro has been considered a blessing for the US, it has become a matter of concern for most Eurozone countries. In fact, we are witnessing an unprecedented scenario where the country with a weak currency is actually pleased and the group of countries with a strong currency is worried. The strength of the euro is becoming irritating for the Eurozone and, nevertheless, the weakness of the US dollar is also pushing it to the brink of losing its status as a global currency. This exchange rate debate is accompanied by another debate concerning how the latest monetary policy actions taken by the US and Eurozone monetary authorities , aimed at solving current economic imbalances, are affecting the US$-€ exchange rate. Scholars, economists, and politicians argue that these monetary policies seem unable to solve today’s economic problems in the EU as well as in the Eurozone, but are having a tremendous impact on the US$-€ exchange rate. This paper will explain in layman’s terms the relationship (or lack thereof) between two of today’s most important economic issues: the US dollar and euro exchange rate, and the monetary policy behind it. |
| Keywords: | Monetary policy; Euro; US Dollar; |
| JEL: | C32 E2 A10 E3 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8855&r=mac |
| By: | Jim Wong (Research Department, Hong Kong Monetary Authority); Eric Wong (Research Department, Hong Kong Monetary Authority); Phyllis Leung (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This study develops a probit econometric model to identify a set of leading indicators of banking distress and estimate banking distress probability for Hong Kong and other EMEAP economies. Macroeconomic fundamentals, currency crisis vulnerability, credit risk of banks and companies, asset price bubbles, credit growth, and the occurrence of distress of other economies in the region are found to be important leading indicators of banking distress in the home economy. The predictive power of the model is reasonably good. A case study of Hong Kong based on the latest estimate of banking distress probability and stress testing results shows that currently the banking sector in Hong Kong is healthy and should be able to withstand well certain possible adverse shocks. Under some extreme shocks originating from real GDP growth and property prices such as those that occurred during the Asian financial crisis, the model indicates a non-negligible risk of an occurrence of banking distress in Hong Kong. However, the chances of the occurrence of such severe events are extremely low. Simulation results also suggest that compared to the period before the Asian financial crisis, the local banking sector is currently more capable of withstanding shocks similar to those that occurred during that crisis. The study also finds that banking distress is contagious, suggesting that to be effective in monitoring banking distress, close cooperation between central banks should be in place. |
| Keywords: | Banking distress, Asia Pacific economies, econometric model |
| JEL: | E44 E47 G21 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0722&r=mac |
| By: | Erwin Diewert; Saeed Heravi; Mick Silver |
| Abstract: | Statistical offices try to match item models when measuring inflation between two periods. However, for product areas with a high turnover of differentiated models, the use of hedonic indexes is more appropriate since they include the prices and quantities of unmatched new and old models. The two main approaches to hedonic indexes are hedonic imputation (HI) indexes and dummy time hedonic (HD) indexes. This study provides a formal analysis of the difference between the two approaches for alternative implementations of an index that uses weighting that is comparable to the weighting used by the Törnqvist superlative index in standard index number theory. This study shows exactly why the results may differ and discusses the issue of choice between these approaches. An illustrative study for desktop PCs is provided. |
| JEL: | C43 C82 E31 O47 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14018&r=mac |
| By: | Yurko, Anna |
| Abstract: | The average age of vehicles in the US has increased by more than 40 percent since the early 1960s. Over the same time period, consumer incomes on average have been growing faster than prices of new vehicles. This paper asks whether greater affordability of vehicles and the resulting increase in vehicle ownership among lower-income consumers can explain some of the aging of vehicles in the US. Consumers with lower incomes are more likely to purchase used vehicles and hold on to them longer, so their decisions affect the age composition of the vehicle population. I evaluate this hypothesis using a dynamic, non-stationary, heterogeneous agents model, with consumer incomes and prices of new vehicles growing over time at the rates calibrated from the data. The agents in the model buy and sell both new and used vehicles. These vehicles are differentiated by age-dependent quality (high, medium and low), with the assumption that older vehicles are more likely to be of poorer quality. The prices of used vehicles depend on their quality level and are allowed to change over time at endogenous rates. The estimated model predicts a significant increase in the average age of vehicles from 1967 to 2001. The conclusion is that consumer incomes are an important factor in vehicle ownership decisions, including the ages of vehicles held, and changes in incomes have contributed to the aging of the vehicle stock in the US. |
| Keywords: | motor vehicles; heterogeneous agents models; intertemporal consumer choice; discrete choice |
| JEL: | D11 D91 E21 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8850&r=mac |
| By: | Auer, Raphael; Fischer, Andreas M |
| Abstract: | When labor abundant nations grow, their exports increase more in labor intensive than in capital intensive sectors. We utilize this difference in how exports are affected by growth to identify the causal effect of trade with low-income countries (LICs) on U.S. industry. Our framework relates differences in sectoral inflation rates to differences in comparative advantage-induced import growth rates and abstracts from aggregate fluctuations and sector specific trends. In a panel covering 325 six-digit NAICS manufacturing industries from 1997 to 2006, we find that LIC exports are associated with strong downward pressure on U.S. producer prices and a large effect on productivity. When LIC exporters capture 1% U.S. market share producer prices decrease by 3%, which is nearly fully accounted by a 2.4% increase in productivity and a 0.3% decrease in markups. We also document that while LICs on average find it easier to penetrate sectors with elastic demand, the price and productivity response to import competition is much stronger in industries with inelastic demand. Overall, between 1997 and 2006, the effect of LIC trade on manufacturing PPI inflation was around two percentage points per year, far too large to be neglected in macroeconomic analysis. |
| Keywords: | comparative advantage; globalization; low-wage country import competition |
| JEL: | F14 F15 F16 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6819&r=mac |
| By: | Jennifer Huang; Jiang Wang |
| Abstract: | In this paper, we develop an equilibrium model for stock market liquidity and its impact on asset prices when constant market presence is costly. We show that even when agents' trading needs are perfectly matched, costly market presence prevents them from synchronizing their trades and hence gives rise to endogenous order imbalances and the need for liquidity. Moreover, the endogenous liquidity need, when it occurs, is characterized by excessive selling of significant magnitudes. Such liquidity-driven selling leads to market crashes in the absence of any aggregate shocks. Finally, we show that illiquidity in the market leads to high expected returns, negative and asymmetric return serial correlation, and a positive relation between trading volume and future returns. We also propose new measures of liquidity based on its asymmetric impact on prices and demonstrate a negative relation between these measures and expected stock returns. |
| JEL: | E43 E44 G11 G12 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14013&r=mac |
| By: | Pedro M.D.C.B. Gouveia; Denise R. Osborn; Paulo M.M. Rodrigues |
| Abstract: | Forecast combination methodologies exploit complementary relations between different types of econometric models and often deliver more accurate forecasts than the individual models on which they are based. This paper examines forecasts of seasonally unadjusted monthly industrial production data for 17 countries and the Euro Area, comparing individual model forecasts and forecast combination methods in order to examine whether the latter are able to take advantage of the properties of different seasonal specifications. In addition to linear models (with deterministic seasonality and with nonstationary stochastic seasonality), more complex models that capture nonlinearity or seasonally varying coefficients (periodic models) are also examined. Although parsimonous periodic models perform well for some countries, forecast combinations provide the best overall performance at short horizons, implying that utilizing the characteristics captured by different models can contribute to improved forecast accuracy. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:102&r=mac |
| By: | Miki Matsuo (Kyoto University - Kyoto University); Kazuo Nishimura (Kyoto University - Kyoto University); Tomoya Sakagami (Kumamoto Gakuen University - Gakuen University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | In this paper, we study the two-sector CES economy with sector-specific externality (feedback effects) following Nishimura and Venditti \(2004). We characterize the equilibrium paths in the case that allows negative externality. That equilibrium paths were not explicitly discussed by Nishimura and Venditti and show how the degree of externality may generate equilibrium cycles around the steady state. |
| Keywords: | Two-sector economy, sector-specific externalities, indeterminacy, period-two cycles, capital-labor substitution |
| Date: | 2008–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00282089_v1&r=mac |
| By: | Mario J. Crucini (Department of Economics, Vanderbilt University); Mototsugu Shintani (Department of Economics, Vanderbilt University); Takayuki Tsuruga (Faculty of Economics, Kansai University) |
| Abstract: | We study the dynamics of good-by-good real exchange rates using a micro-panel of 270 goods prices drawn from major cities in 63 countries and 258 goods prices drawn from 13 major U.S. cities. We find the half-life of deviations from the Law-of-One-Price for the average good is about 1 year. The average half-life is very similar across the OECD, the LCD and within the U.S., suggesting little in the way of nominal exchange rate regime influences. The average non-traded good has a half-life of 1.9 years compared to 1.2 years for traded-goods, for the OECD, with modest differences elsewhere. Aggregating the micro-data increases persistence in the OECD by 6 months to 1.5 years, well below levels obtained using aggregate CPI data. We attribute these differences to conceptual and methodological factors and argue in favor of increased use of micro-price data in applied theory. |
| Keywords: | Real exchange rates, purchasing power parity, law of one price, dynamic panel |
| JEL: | E31 F31 D40 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0810&r=mac |
| By: | Niamh Hardiman (School of Politics & International Relations, University College Dublin); Patrick Murphy (School of Mathematical Sciences, University College Dublin); Orlaith Burke (PhD Candidate, School of Mathematical Sciences, University College Dublin) |
| Date: | 2008–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:200806&r=mac |
| By: | van der Ploeg, Frederick |
| Abstract: | Many resource-rich countries have poor economic performance and suffer from negative genuine saving rates, especially if they have many rival factions and badly functioning legal systems. We attempt to shed light on these stylized facts by analyzing a power struggle about the control of natural resources where competing factions in society have a private stock of financial assets and a common stock of natural resources. We solve a dynamic common-pool problem and obtain political economy variants of the Hotelling rule for resource depletion and the Hartwick saving rule necessary to sustain constant consumption in an economy with exhaustible natural resources. The rate of increase in the price of natural resources and resource depletion are faster than demanded by the Hotelling rule. As a result, the country substitutes away from resources to capital so that it saves and invests more than a homogenous society. The power struggle boosts output. Nevertheless, fractionalization depresses aggregate consumption and social welfare and leads to negative genuine saving if properly corrected for common-pool externalities. Fractionalization induces, however, positive genuine saving as measured by the World Bank. |
| Keywords: | capital; common pool; Exhaustible natural resources; fractionalization; genuine saving; Hartwick rule; Hotelling resource rents; rapacious rent seeking; sustainable consumption; voracity |
| JEL: | E20 F32 O13 Q01 Q32 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6831&r=mac |
| By: | Ebell, Monique (Department of Economics and Business Studies, Humboldt University of Berlin, and Centre for Economic Performance, London School of Economics and Political Science); Haefke, Christian (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Instituto de Análisis Económico, CSIC) |
| Abstract: | We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual bargaining. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980’s and 1990’s could be directly attributed to product market deregulation. Under a traditional calibration, our results suggest that a decrease of less than two-tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount. Under a small surplus calibration, however, product market deregulation can account for the entire decline in US trend unemployment over the 1980’s and 1990’s.; |
| Keywords: | Product market competition, barriers to entry, wage bargaining |
| JEL: | E24 J63 O00 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:223&r=mac |
| By: | Léonce Ndikumana (University of Massachusetts, Amherst, and UNECA, Addis Ababa); Mina Baliamoune-Lutz (University of North Florida) |
| Abstract: | This study investigates the impact of corruption on public and private investment in African countries as a way of exploring one channel through which corruption undermines growth. The empirical results indicate that corruption affects economic growth directly and through its impact on investment. We find that corruption has a negative and significant effect on domestic investment and that corruption affects public and private investment differently. The results indicate that corruption has a positive effect on public investment while it has a negative effect on private investment. The positive association between public investment and corruption supports the view that corrupt bureaucrats seek to increase capital expenditure (over maintenance expenditures) to maximize private gains (rent-seeking). In contrast, the results confirm that corruption discourages private investment, suggesting that corruption increases the costs of doing business while raising uncertainty over expected returns to capital. The results support the view that corruption hampers growth and call for institutional reforms to improve the quality of governance as a prerequisite for achieving investment-led growth. JEL Categories: |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2008-08&r=mac |
| By: | Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Makoto Yano (Kyoto University - Kyoto University) |
| Abstract: | This paper investigates the interlinkage in the business cycles based on sunspot fluctuations of large-country economies in a free-trade equilibrium. We consider a two-country, two-good, two-factor general equilibrium model with Cobb-Douglas<br />technologies, sector-specific externalities and linear preferences. We also assume constant social returns in the investment good sector but decreasing social returns in the consumption good sector. We first identify the determinants of each country's accumulation pattern in autarky equilibrium, and second we show that some country's sunspot fluctuations may spread throughout the world once trade opens even if the other country has determinacy under autarky. We thus prove that under free-trade, globalization and market integration may have destabilizing effects on a country's competitive equilibrium. Finally, we characterize a configuration in which opening to international trade improves the stationary welfare at the world level but deteriorates the stationary welfare of the country which imports investment goods and exports consumption goods. We thus show that in opposition to the standard belief, international trade may not be beneficial to all trading partners in the long run. Moreover, we prove that for some country, international trade may have contrasted consequences as it may at the same time improve the stationary welfare and have a destabilizing effect. |
| Keywords: | Two-country general equilibrium model, free-trade, local indeterminacy, sunspot fluctuations, capital intensities, decreasing social retur |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281377_v1&r=mac |
| By: | Pillai N., Vijayamohanan |
| Abstract: | This brief note was prepared for the State Planning Board of Kerala in India in response to a question on how to double Kerala’s net state domestic product in three years and on its implications for investment and its financing. We show that this ambition lies in the realm of impossibles. |
| Keywords: | Kerala; State income; Growth; Investment; Financing |
| JEL: | E0 E6 |
| Date: | 2008–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8876&r=mac |
| By: | Marco Hoeberichts; Maarten van Rooij; Arjen Siegmann |
| Abstract: | This paper uses a large dataset, covering more than 70% of the Dutch housing market, to analyze the relationship between market thinness, price setting behavior and time to sell. Our findings confirm the typical result that overpricing increases the time on market. In addition, we find evidence of quicker list price reductions suggesting that overpricing is part of a strategy to search for the opportunity of high revenues and to learn about the market. Moreover, we are able to confirm the theory put forward by Lazear (1986) on the relation between atypical goods and the speed of price adjustments. Sellers of atypical houses are more uncertain about the price buyers want to pay and take time to learn about the market, thereby increasing the expected time on market and the time to price revisions. Market liquidity has a positive, i.e. shortening, effect on the time to sale and leads to quicker price revisions due to the increased opportunities for learning. |
| Keywords: | market liquidity; pricing strategies; marketing time; overpricing; housing |
| JEL: | R31 D83 D12 C41 E30 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:176&r=mac |