nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒06‒13
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Effects of Anticipated Future Change in the Monetary Policy Regime By Juraj Antal; Frantisek Brazdik
  2. Some New Insights into Currency Boards: Evidence from Bulgaria By Alexandru Minea; Christophe Rault
  3. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis J. Snower
  4. On the (ir)relevance of direct supply-side effects of monetary policy By Vasco Gabriel; Paul Levine; Christopher Spencer; Bo Yang
  5. Taylor-type rules versus optimal policy in a Markov-switching economy¤ By Fernando Alexandre; Pedro Bação; Vasco Gabriel
  6. Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy By KOBAYASHI Keiichiro; NUTAHARA Kengo
  7. Long Memory and Non-Linearities in International Inflation By Giovanni Caggiano; Efrem Castelnuovo
  8. Oil Price Shocks, Macroeconomics Stability and Welfare in a Small Open Economy By Deren Unalmis, Ibrahim Unalmis and Derya Filiz Unsal
  9. Why and How to Assess Inflation Target Fulfilment By Jan Filacek
  10. Inflation Persistence in New EU Member States: Is It Different Than in the Euro Area Members? By Michal Franta; Branislav Saxa; Katerina Smidkova
  11. Modeling the Phillips curve with unobserved components By Harvey, A.
  12. Identification of New Keynesian Phillips Curves from a Global Perspective. By Dees, S.; Pesaran, M.H.; Smith, L.V.; Smith, R.P.
  13. Testing the New Keynesian Model on U.S. and Euro Area Data By Juselius, Mikael
  14. Further Theoretical and Empirical Evidence on Money to Growth Relation By Alexandru Minea; Christophe Rault; Patrick Villieu
  15. How forward-looking is the Fed? Direct estimates from a `Calvo-type' rule By Vasco Gabriel; Paul Levine; Christopher Spencer
  16. Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic By Oxana Babetskaia-Kukharchuk
  17. A Statistical Comparison of Alternative Identification Schemes for Monetary Policy Shocks By Markku Lanne; Helmut Luetkepohl
  18. Should we care for structural breaks when assessing fiscal sustainability? By António Afonso; Christophe Rault
  19. Market Liquidity, Asset Prices and Welfare By Jennifer Huang; Jiang Wang
  20. Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis By Inês Drumond
  21. Incomes Policies, Expectations and the NAIRU By Wolfgang Pollan
  22. An Empirical Study of the Relationship between Macroeconomic Variables and Stock Price: A Study on Dhaka Stock Exchange (DSE) By Md. Mohiuddin, Md. Didarul Alam and Abdullah Ibneyy Shahid
  23. The zero growth model with expected inflation: further insights. A consistent and inflation neutral formulation for the cost of equity By Ignacio Velez-Pareja
  24. The Macroeconomic Implications of Rising Wage Inequality in the United States By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  25. The Young, the Old, and the Restless: Demographics and Business Cycle Volatility By Nir Jaimovich; Henry E. Siu
  26. A Decomposition of Austria's General Government Budget into Structural and Cyclical Components By Serguei Kaniovski; Hans Pitlik; Sandra Steindl; Thomas Url
  27. Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP? By Edgar L. Feige; Ivica Urban
  28. Models of Including Financially Inactive Population into the Financial System By Matić, Branko; Serdarušić, Hrvoje
  29. Promoting clean technologies: The energy market structure crucially matters By Théophile T. Azomahou; Raouf Boucekkine; Phu Nguyen-Van
  30. Extracting the Cyclical Component in Hours Worked: a Bayesian Approach By Bernardi, Mauro; Della Corte, Giuseppe; Proietti, Tommaso
  31. Extracting the Cyclical Component in Hours Worked: a Bayesian Approach By Bernardi, Mauro; Della Corte, Giuseppe; Proietti, Tommaso
  32. Why Disagreement May Not Matter (much) for Asset Prices By Paul Söderlind
  33. Structural breaks and Purchasing Power Parity in the CEE and Post-War former Yugoslav States By Robert J. Sonora; Josip Tica
  34. Asymptotic Maturity Behavior of the Term Structure By Klaas Schulze
  35. The Impact of Competition on Macroeconomic Performance By Karl Aiginger
  36. "Human Capital as an Asset Mix and Optimal Life-Cycle Portfolio: An Analytical Solution" By Takao Kobayashi; Risa Sai; Kazuya Shibata
  37. Cognitive Constraints and Reversibility of International Economic Institutions. The Case of the European Monetary System By Maurizio Mistri
  38. Constant-Quality House Price Indexes for Switzerland By Steven C. BOURASSA; Martin HOESLI; Donato SCOGNAMIGLIO; Philippe SORMANI
  39. Why Does Unemployment Hurt the Employed? : Evidence from the Life Satisfaction Gap between the Public and Private Sectors By Simon Luechinger; Stephan Meier; Alois Stutzer
  40. Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device By Brown, Martin; Falk, Armin; Fehr, Ernst
  41. Datapedia: a Yellow Brick Roadmap By Freeman, Alan
  42. Competition, Human Capital and Income Inequality with Limited Commitment By Ramon Marimon; Vincenzo Quadrini
  44. Wealth, Industry and the Transition to Entrepreneurship By Berna Demiralp; Johanna Francis

  1. By: Juraj Antal; Frantisek Brazdik
    Abstract: In this paper, we investigate the effects of an anticipated future change in monetary policy regime in small open economies targeting either inflation or the exchange rate. The announcement of a future change in the monetary policy regime triggers an immediate change in the behavior of households and firms. As a result the economy starts to behave differently even though the current monetary policy rule remains the same for the whole period before the monetary policy regime change. Thus, the behavior of economic agents over the transitory period to the new monetary policy rule depends not only on the current monetary policy rule in this transitory period, but also on the anticipated future monetary policy regime. Given a common future monetary policy regime, the behavior of inflation and exchange rate targeting economies converges after the announcement.
    Keywords: Macroeconomics, new Keynesian DSGE models, small open economy,monetary policy rules, regime change.
    JEL: E17 E31 E52 E58 E61 F02 F41
    Date: 2007–12
  2. By: Alexandru Minea; Christophe Rault
    Abstract: The presence of a Currency Board (CB) monetary system in Bulgaria is a key factor in assessing monetary policy transmission, since a CB implies no monetary autonomy. Using the SVAR technique according to the statistical properties of macroeconomic time series, we propose evidence sustaining the endogeneity of main Bulgarian monetary aggregates to shocks on the ECB interest rate. These results shed a new perspective over CB functioning.
    Keywords: Currency Board, monetary policy, SVAR, Bulgaria.
    JEL: E42 E52
    Date: 2008–01–01
  3. By: Marika Karanassou (Queen Mary, University of London); Hector Sala (Universitat Autonoma de Barcelona); Dennis J. Snower (Kiel Institute for the World Economy)
    Abstract: The conventional wisdom that inflation and unemployment are unrelated in the long-run implies the compartmentalisation of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve (NPC), we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation-unemployment tradeoff in the long-run. We thus argue that a holistic framework, like the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions (VARs)
    Keywords: Natural rate of unemployment; new Phillips Curve; frictional growth; inflation-unemployment tradeoff; inflation dynamics; unemployment dynamics; impulse response function
    JEL: E24 E31
    Date: 2008–05
  4. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey); Bo Yang (University of Surrey)
    Abstract: The relevance of direct supply-side effects of monetary policy in a New Keynesian DSGE model is studied. We extend a model with several nominal and real frictions by introducing a cost channel of monetary transmission and allowing for non-separability of money and consumption in the utility of the representative household. These fea- tures have important theoretical consequences for the output-inflation trade-off and indeterminacy of interest rate rules. The empirical evidence for these effects are then examined using a Bayesian maximum likelihood framework complemented with GMM single-equation estimation. Both estimation strategies point to weak evidence for the cost channel and non-separable utility.
    Keywords: New Keynesian model, Bayesian maximum likelihood estimation, GMM, non-separable utility, cost channel.
    JEL: E42 E52 C11
    Date: 2008–06
  5. By: Fernando Alexandre (University of Minho); Pedro Bação (University of Coimbra); Vasco Gabriel (University of Surrey)
    Abstract: We analyse the e®ect 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 ¯nancial 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: 2008–06
  6. By: KOBAYASHI Keiichiro; NUTAHARA Kengo
    Abstract: A news-driven business cycle is a business cycle in which positive news about the future causes a current boom defined as simultaneous increases in consumption, labor, investment, and output. Standard real business cycle models do not generate it. In this paper, we find that a fairly popular market friction, sticky prices, can be a source of a news-driven business cycle and that it can be generated due to news about future technology growth, technology level, and expansionary monetary policy shock. The key mechanism is that markups vary through nominal rigidities when the news arrives.
    Date: 2008–06
  7. By: Giovanni Caggiano (University of Padua); Efrem Castelnuovo (University of Padua)
    Abstract: This paper investigates inflation dynamics in a panel of 20 OECD economies using an approach based on the sample autocorrelation function (ACF). We find that inflation is characterized by long-lasting fluctuations, which are similar across countries and that eventually revert to a potentially time-varying mean. The cyclical and persistent behavior of inflation does not belong to the class of linear autoregressive processes but rather to a more general class of nonlinear and long memory models. Recent theoretical contributions on heterogeneity in price setting and aggregation offer a rationale to our results. Finally, we draw the monetary policy implications of our findings.
    Keywords: AutoCorrelation Function, long-memory, inflation persistence, inflation targeting, heavy tails.
    JEL: E52 E58 C22
    Date: 2008–05
  8. By: Deren Unalmis, Ibrahim Unalmis and Derya Filiz Unsal
    Abstract: Since the beginning of 2000s the world economy has witnessed a sub-stantial increase in oil prices, which is seen to be an important source of economic fluctuations, causing high inflation, unemployment and low or negative growth rates. Recent experience, however, has not validated this view. Despite rising oil prices, world output growth has been strong, and although inflation has recently been increasing, it is relatively much lower compared with the 1970s. This paper focuses on the causes of oil price increases and their macroeconomic effects. Different from most of the recent literature on the subject, which understands the price of oil to be an exogenous process, we model the price of oil endogenously within a dynamic stochastic general equilibrium (DSGE) framework. Specifically, using a new Keynesian small open economy model, we analyse the effects of an increase in the price of oil caused by an oil supply shock and an oil demand shock. Our results indicate that the effects of an oil demand shock and an oil supply shock on the small open economy are quite different. In addition, we investigate the sensitivity of the general equilibrium outcomes to the degrees of oil dependence and openness, as well as the strength of the response of monetary policy authority to the inflation. Finally, we evaluate the welfare implications of alternative monetary policy regimes.
    Keywords: Oil price, small open economy, demand and supply shocks
    JEL: C68 E12 F41 F42
    Date: 2008–05
  9. By: Jan Filacek
    Abstract: The ex post analysis of inflation target fulfilment plays an important role in an inflation targeting framework. The major benefits of ex post analysis are threefold. First, it might improve the forecast accuracy. Second, it helps central bank staff and board members to understand the capabilities and limitations of the forecasts used in their decision-making. Third, it enhances monetary policy transparency and credibility. The primary aim of this paper is to propose a methodological framework for inflation target fulfilment assessment based on partial simulations, as applied in the Czech National Bank. In order to demonstrate the applicability of this framework we analyse the performance of the Czech National Bank between 2002 and 2006. We show that a large part of the inflation target misses in this period can be assigned to bias in the variables describing external developments.
    Keywords: Central bank, inflation target, monetary policy performance.
    JEL: E47 E58
    Date: 2007–12
  10. By: Michal Franta; Branislav Saxa; Katerina Smidkova
    Abstract: Is inflation persistence in the new EU Member States (NMS) comparable to that in the euro area countries? We argue that persistence may not be as different between the two country groups as one might expect. We confirm that one should work carefully with the usual estimation methods when analyzing the NMS, given the scope of the convergence process they went through. We show that due to frequent breaks in inflation time series in the NMS, parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. Employing a time-varying mean leads to the reversal of this result and suggests similar or lower inflation persistence for the NMS compared to euro area countries. Structural measures show that backward-looking behavior may be a more important component in explaining inflation dynamics in the NMS than in the euro area countries.
    Keywords: Inflation persistence, new hybrid Phillips curve, new member states, timevarying mean.
    JEL: E31 C22 C11 C32
    Date: 2007–12
  11. By: Harvey, A.
    Abstract: The relationship between in.ation and the output gap can be modeled simply and effectively by including an unobserved random walk component in the model. The dynamic properties match the stylized facts and the random walk component satisfies the properties normally required for core in.ation. The model may be generalized to as to include a term for the expectation of next period's output, but it is shown that this is difficult to distinguish from the original specification. The model is fited as a single equation and as part of a bivariate model that includes an equation for GDP. Fitting the bivariate model highlights some new aspects of unobserved components modeling. Single equation and bivariate models tell a similar story: an output gap two per cent above trend is associated with an annual inflation rate that is one percent above core inflation.
    Keywords: Cycle; hybrid new Keynesian Phillips curve; inflation gap; Kalman filter, output gap.
    Date: 2008–01
  12. By: Dees, S.; Pesaran, M.H.; Smith, L.V.; Smith, R.P.
    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.
    Keywords: Global VAR (GVAR), identification, New Keynesian Phillips Curve, Trend-Cycle decomposition.
    JEL: C32 E17 F37 F42
    Date: 2008–01
  13. By: Juselius, Mikael
    Abstract: I apply the Johansen and Swensen (1999, 2004) method of testing exact rational expectations within the cointegrated VAR (Vector Auto-Regressive) model, to testing the New Keynesian (NK) model. This method permits the testing of rational expectation systems, while allowing for non-stationary data. The NK-model is tested on quarterly U.S. and Euro area time series data. I find that the restrictions implied by the core equations of the NK-model are rejected regardless of sample periods or measures of real marginal costs. I also provide a tentative explanation of the results favored by previous researches.
    Keywords: New Keynesian Phillips curve, cointegration, vector autoregressive model
    JEL: C32 C52 E31 E52
    Date: 2008
  14. By: Alexandru Minea; Christophe Rault; Patrick Villieu
    Abstract: This paper proposes a theoretical growth model where seigniorage can be used to finance productive public spending, and show the existence of nonlinear effects between seigniorage and economic growth. Empirical evidence based on panel regression techniques provides some support for these nonlinear effects on a sample of OECD countries over the 1978-2005 period.
    Keywords: economic growth, nonlinear effects of monetary policy
    JEL: E52 E62 H54
    Date: 2008–02–01
  15. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey)
    Abstract: We estimate an alternative type of monetary policy rule, termed Calvo rule, according to which the central bank is assumed to target a discounted in?nite sum of future expected in?ation. Compared to conventional in?ation forecast-based rules, which are typically of the Taylor-type with discrete forward looking horizons, this class of rule is less prone to the problem of indeterminacy. Parameter estimates obtained from GMM estimation provide support for Calvo-type rules, suggesting that the Federal Reserve targeted a mean forward horizon of between 4 and 8 quarters.
    Keywords: Calvo-type interest rules; In?ation Forecast Based rules; GMM; Indeterminacy.
    JEL: C22 E58
    Date: 2008–06
  16. By: Oxana Babetskaia-Kukharchuk
    Abstract: This paper aims at estimating the exchange rate pass-through (ERPT) for the Czech Republic. The existing empirical literature does not come to a consensus about the degree of pass-through to Czech inflation. Since there is no unique approach regarding how to measure ERPT, we use various specifications found in the pass-through literature for the Czech Republic. In addition, we estimate the pass-through along the distribution chain in the spirit of McCarthy (2007). We try to explore the properties of exchange rate shock transmission into Czech consumer prices by comparing impulse responses among 11 specifications estimated on data transformed in monthly differences and in annual rates. Equilibrium pass-through is estimated with the help of the VEC model. In addition, we try to account for possible variation in time. The simplest approach is a re-estimation of VAR models on two sub-periods. Our second strategy is the estimation of the error correction equation with the Kalman filter. Finally, we explore how the pass-through differs between tradable (3 sub-groups) and non-tradable goods. We find that the speed of exchange rate shock transmission to all prices is quite high. However, in absolute terms, ERPT does not exceed 25 – 30%.
    Keywords: Exchange rate pass-through, inflation, Kalman filter, VAR, VECM.
    JEL: E31 E52 E58 F31
    Date: 2007–12
  17. By: Markku Lanne; Helmut Luetkepohl
    Abstract: Different identification schemes for monetary policy shocks have been proposed in the literature. They typically specify just-identifying restrictions in a standard structural vector autoregressive (SVAR) framework. Thus, in this framework the different schemes cannot be checked against the data with statistical tests. We consider different approaches how to use the data properties to augment the standard SVAR setup for identifying the shocks. Thereby it becomes possible to test models which are just identified in a standard setting. For monthly US data it is found that a model where monetary shocks are induced via the federal funds rate is the only one which cannot be rejected when the data properties are used for identification.
    Keywords: Mixed normal distribution, structural vector autoregressive model, vector autoregressive process
    JEL: C32
    Date: 2008
  18. By: António Afonso; Christophe Rault
    Abstract: We apply recent panel cointegration methods to a structural equation between government expenditure and revenue. Allowing for multiple endogenous breaks and after computing appropriate bootstrap critical values, we conclude for fiscal sustainability in the overall EU15 panel.
    Keywords: fiscal sustainability, EU, panel cointegration.
    JEL: C23 E62 H62
    Date: 2008–11–01
  19. By: Jennifer Huang; Jiang Wang
    Abstract: This paper presents an equilibrium model for the demand and supply of liquidity and its impact on asset prices and welfare. We show that when constant market presence is costly, purely idiosyncratic shocks lead to endogenous demand of liquidity and large price deviations from fundamentals. Moreover, market forces fail to lead to efficient supply of liquidity, which calls for potential policy interventions. However, we demonstrate that different policy tools can yield different efficiency consequences. For example, lowering the cost of supplying liquidity on the spot (e.g., through direct injection of liquidity or relaxation of ex post margin constraints) can decrease welfare while forcing more liquidity supply (e.g., through coordination of market participants) can improve welfare.
    JEL: E44 E58 G12 G18
    Date: 2008–06
  20. By: Inês Drumond (CEMPRE, Faculdade de Economia, Universidade do Porto)
    Abstract: In order to survey the mechanisms through which the introduction of Basel II bank capital requirements is likely to accentuate the procyclical tendencies of banking, this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the Basel Accords. We conclude that, although the theoretical models that revisit the bank capital channel under the new Accord generally support the Basel II procyclicality hypothesis, this issue is still subject to some debate. In particular, the magnitude of the procyclical effects under Basel II should essentially depend on (i) the composition of banks' asset portfolios, (ii) the approach adopted by banks to compute their minimum capital requirements, (iii) the nature of the rating system used by banks, (iv) the view adopted concerning how credit risk evolves through time, (v) the capital buffers over the regulatory minimum held by the banking institutions, (vi) the improvements in credit risk management, and (vii) the supervisor and market intervention under Basel II.
    Keywords: Bank Capital Channel, Basel Accords, Business Cycles, Procyclicality
    JEL: E44 G28
    Date: 2008–06
  21. By: Wolfgang Pollan (WIFO)
    Abstract: Since the 19960s, several countries have adopted incomes policies in various forms to control inflation that had been interpreted as the result of a distributional struggle between business and labour unions. Recent writings on the NAIRU, however, ignore past policy interventions in the wage and price setting system, in the formation and propagation of inflation expectations, in particular. Some of the problems inherent in such an approach are illustrated in this paper by applying the standard tools of NAIRU analysis to the Austrian economy, an economy that has been subject to a variety of policy measures.
    Keywords: NAIRU, incomes policies, expectations, Lucas critique
    Date: 2008–03–31
  22. By: Md. Mohiuddin, Md. Didarul Alam and Abdullah Ibneyy Shahid (IBA, University of Dhaka, Bangladesh; Independent University, Bangladesh; IBA, University of Dhaka, Bangladesh)
    Abstract: Literature strongly supports vibration of the stock price as a consequence of various macroeconomic factors (Darrat, 1990; Fama & Schwert, 1977; Jaffe & Mandelker, 1976; Nelson, 1976; Pearce & Roley, 1985; Ripley, 1973). This study has investigated the explanatory power of various macro-factors such as inflation rate, exchange rate, interest rate, money supply and production index on the variability of the stock price in Bangladesh. Multiple regression analysis has been conducted to asses the relationship between the stated macro economic factors with stock price. All share price index of the Dhaka Stock Exchange has been used as a proxy for stock price, the dependent variable of the study. No significant relationship has been found between the stock price and any of the macroeconomic factors. The study bodes well for advanced empirical models with additional macroeconomic variables.
    Date: 2008–06
  23. By: Ignacio Velez-Pareja
    Abstract: The Constant Growth Model attributed to Gordon (the Gordon Model) is one of the most known and popular models in Corporate Finance. In this work we show that even with adjustments in the calculation of the proper Weighted Average Cost of Capital, WACC, in order to grant that the model with zero real growth and inflation is inflation neutral it has some inconsistencies. We develop a formulation for Ke, the cost of levered equity that is consistent and is inflation neutral. We identify problems of consistency and non inflation neutrality when using the Weighted Average Cost of Capital, WACC.
    Date: 2008–06–04
  24. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: In recent decades, the US wage structure has been transformed by a rising college premium, a narrowing gender gap, and increasing persistent and transitory residual wage dispersion. This paper explores the implications of these changes for cross-sectional inequality in hours worked, earnings and consumption, and for welfare. The framework for the analysis is an incomplete-markets overlapping-generations model in which individuals choose education and form households, and households choose consumption and intra-family time allocation. An explicit production technology underlies equilibrium prices for labor inputs differentiated by gender and education. The model is parameterized using micro data from the PSID, the CPS and the CEX. With the changing wage structure as the only primitive force, the model can account for the key trends in cross-sectional US data. We also assess the role played by education, labor supply, and saving in providing insurance against shocks, and in exploiting opportunities presented by changes in the relative prices of different types of labor.
    JEL: E21 I21 I31 J2 J31
    Date: 2008–06
  25. By: Nir Jaimovich; Henry E. Siu
    Abstract: We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding timing and nature differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for approximately one-fifth to one-third of this moderation.
    JEL: E0 E3
    Date: 2008–06
  26. By: Serguei Kaniovski (WIFO); Hans Pitlik (WIFO); Sandra Steindl (WIFO); Thomas Url (WIFO)
    Abstract: The paper describes a model for the computation of trend output and the structural budget deficit in Austria. The calculation of trend output is based on a production function approach within a small macroeconomic model of the Austrian economy. A decomposition of public budgets into cyclical and structural components shows responsiveness to business cycle variations, and allows a better assessment of the sustainability of the budget balance. The model will be used in future forecasting rounds and links macroeconomic and budgetary variables of the WIFO Economic Outlook to estimates for trend output and the structural budget deficit. Until now, such decomposition has not been part of the regular WIFO forecast.
    Keywords: Austria, WIFO forecast, WIFO Economic Outlook, trend output, structual budget balance
    Date: 2008–04–11
  27. By: Edgar L. Feige; Ivica Urban
    Abstract: This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in varying degrees now include non-transparent imputations for the “nonobserved economy”) as well as the macro model estimates of the unrecorded economy.
    Keywords: Underground, unrecorded, unobserved, non-observed, NOE, hidden, informal, shadow, GDP, national accounts, transition economies.
    JEL: E26 E01 O17 P24 H26 O11
  28. By: Matić, Branko; Serdarušić, Hrvoje
    Abstract: Raising money and directing it into savings is the most important passive task in banking. Restrictive monetary policy makes it increasingly difficult for banking institutions to take loans, thus they turn to the general population as a money source. Their interest is partly served through inclusion of financially inactive population. As the new legislation will correct the current illogical situation (some deposit institutions have not been under control of the central bank), this will eliminate the unfair competition which is at the moment existing in the banking system. At the same time, the operation of a new form of non-profit deposit institutions, i.e. credit unions, will be regulated. With solidarity and common interest as the basic tenets of their operation they can be attractive to this particular segment of population. The paper explores and proposes some possible models and ways of including the financially inferior population into the financial system.
    Keywords: financial system; financially inactive population; money source; solidarity; common interest; credit union
    JEL: E2 E5 G24 E4 G21
    Date: 2008
  29. By: Théophile T. Azomahou (UNU-MERIT, Maastricht University, The Netherlands); Raouf Boucekkine (UCLouvain, Belgium; and University of Glasgow, UK); Phu Nguyen-Van (THEMA-CNRS, Université de Cergy-Pontoise, France)
    Abstract: We develop a general equilibrium vintage capital model with embodied energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. It is shown that the impact of investment subsidies heavily depends on the structure of the energy market, the mechanism explaining this outcome relying on the tight relationship between the lifetime of capital goods and energy prices via the scrapping conditions inherent to vintage models. In particular, under a free entry structure for the energy sector, investment subsidies boost investment, while the opposite result emerges under natural monopoly if increasing returns in the energy sector are not strong enough.
    Keywords: Energy-saving technological progress; vintage capital; energy market; natural monopoly; investment subsidies
    JEL: E22 O40 Q40
    Date: 2008
  30. By: Bernardi, Mauro; Della Corte, Giuseppe; Proietti, Tommaso
    Abstract: The series on average hours worked in the manufacturing sector is a key leading indicator of the U.S. business cycle. The paper deals with robust estimation of the cyclical component for the seasonally adjusted time series. This is achieved by an unobserved components model featuring an irregular component that is represented by a Gaussian mixture with two components. The mixture aims at capturing the kurtosis which characterizes the data. After presenting a Gibbs sampling scheme, we illustrate that the Gaussian mixture model provides a satisfactory representation of the data, allowing for the robust estimation of the cyclical component of per capita hours worked. Another important piece of evidence is that the outlying observations are not scattered randomly throughout the sample, but have a distinctive seasonal pattern. Therefore, seasonal adjustment plays a role. We ¯nally show that, if a °exible seasonal model is adopted for the unadjusted series, the level of outlier contamination is drastically reduced.
    Keywords: Gaussian Mixtures; Robust signal extraction; State Space Models; Bayesian model selection; Seasonality
    JEL: E32 C52 C22 C11
    Date: 2008–05
  31. By: Bernardi, Mauro; Della Corte, Giuseppe; Proietti, Tommaso
    Abstract: The series on average hours worked in the manufacturing sector is a key leading indicator of the U.S. business cycle. The paper deals with robust estimation of the cyclical component for the seasonally adjusted time series. This is achieved by an unobserved components model featuring an irregular component that is represented by a Gaussian mixture with two components. The mixture aims at capturing the kurtosis which characterizes the data. After presenting a Gibbs sampling scheme, we illustrate that the Gaussian mixture model provides a satisfactory representation of the data, allowing for the robust estimation of the cyclical component of per capita hours worked. Another important piece of evidence is that the outlying observations are not scattered randomly throughout the sample, but have a distinctive seasonal pattern. Therefore, seasonal adjustment plays a role. We ¯nally show that, if a °exible seasonal model is adopted for the unadjusted series, the level of outlier contamination is drastically reduced.
    Keywords: Gaussian Mixtures, Robust signal extraction, State Space Models, Bayesian model selection, Seasonality
    JEL: E32 C52 C22 C11
    Date: 2008–05
  32. By: Paul Söderlind
    Abstract: A simple consumption-based two-period model is used to study the (theoretical) effects of disagreement on asset prices. Analytical and numerical results show that individual uncertainty has a much larger effect on risk premia than disagreement if (i) the risk aversion is reasonably high and (ii) individual uncertainty is not much smaller than disagreement. Evidence from survey data on beliefs about output growth suggests that the latter is more than satisfied.
    Keywords: riskfree rate, implied volatility, Survey of Professional Forecasters
    JEL: C42 G12 E44
    Date: 2008–05
  33. By: Robert J. Sonora (Department of Economics, School of Business Administration, Fort Lewis College); Josip Tica (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we investigate purchasing power parity in the CEE and post-War former-Yugoslav states during EU integration process 1994-2006. This work stems from longer term tests of real exchange rate convergence in the former Yugoslavia. This period is of interest on two fronts: First, it investigates real exchange dynamics in the aftermath of war financed in part through seignorage; and second, we investigate the level of economic integration with the European Union following the break up of the former Yugoslavia. Given the short run nature of the available data we use panel unit root tests with and without structural breaks. Preliminary results suggest that real exchange rates between the former Yugoslav states and Germany are stationary when breaks are accounted for. Given the size of nominal shocks in the region, particularly in the early 1990s, preliminary results indicate that convergence to the long run equilibrium is relatively quick.
    Keywords: purchasing power parity, Economic Integration, panel unit root tests
    JEL: E31 F22
    Date: 2008–06–05
  34. By: Klaas Schulze
    Abstract: Pricing and hedging of long-term interest rate sensitive products require to extrapolate the term structure beyond observable maturities. For the resulting limiting term structure we show two results by postulating no arbitrage in a bond market with infinitely increasing maturities: long zero-bond yields and long forward rates (i) are monotonically increasing and (ii) equal their minimal future value. Both results constrain the asymptotic maturity behavior of stochastic yield curves. They are fairly general and extend beyond semimartingale modeling. Hence our framework embeds arbitrage-free term structure models and imposes restrictions on their specification.
    Keywords: bond markets, yield curve, long forward rates, no arbitrage, asymptotic maturity
    JEL: G10 G12 E43
    Date: 2008–06
  35. By: Karl Aiginger (WIFO)
    Abstract: This paper investigates the impact of the toughness of competition on the macroeconomic performance of countries. The relation between competition and innovation has been investigated intensely in industrial economics. It started with Schumpeter's hypotheses that monopoly profits were necessary for innovation, leading then to U-curve relationships where innovation was the highest for medium-range of competition, but lower for very tough competition as well as for a very lax competitive regime. Empirical studies on the growth differences between countries increasingly stress – apart from the usual suspects like investment, R&D, human capital – the role of institutions. They include indicators on regulation, government size, corruption and rule of law, but usually not the degree of competition. Conventional growth theory did not model the impact of competition, but assumed perfect competition. In New Growth Theory, economic growth depends on purposeful and maximising innovation activities, where market structure plays an important role. But this did not result in the inclusion of competition variables into empirical growth equations. We have attempted to bridge this gap a bit by relating 13 indicators on the toughness of competition to macroeconomic performance. We then added these competition indicators to an equation relating macro performance to the standard explanatory variables for economic growth (like investment and R&D). The results indicate that competition plus innovation is a good recipe at the macro level, too, probably with similar tensions and non-linearity as at the company level.
    Keywords: Competition Macroeconomic Performance Innovation
    Date: 2008–05–20
  36. By: Takao Kobayashi (Faculty of Economics, University of Tokyo); Risa Sai (Graduate School of Economics, University of Tokyo); Kazuya Shibata (Nomura Asset Management Co., Ltd.)
    Abstract: This study examines life-cycle optimal consumption and asset allocation in the presence of human capital. Labor income seems like a "money market mutual fund" whose balance in one or two years is predictable but a wide dispersion results after many years, reflecting fluctuations in economic conditions. We use the Martingale method to derive an analytical solution, finding that Merton's well-known " constant-mix strategy" is still true after incorporating human capital from the perspective of "total wealth" management. Moreover, the proportion in risky assets implicit in the agent's human capital is the main factor determining the optimal investment strategy. The numerical examples suggest that young investors should short stocks because their human capital has large market exposure. As they age, however, their human capital becomes "bond-like", and thus they have to hold stocks to achieve optimal overall risk exposure.
    Date: 2008–06
  37. By: Maurizio Mistri (University of Padua)
    Abstract: This paper builds on the case study of the birth and death of the fixed exchange rate system in Western Europe, prior to the launch of the Euro. The analysis of this case aims to highlight how "new" international economic institutions may suffer the processes of "preference reversals" and thereby implode. De facto, the paper focuses on the cognitive factors that are deemed to have played an important role in determining the originating decision-making processes in favour of a system of fixed exchange rates and, then, in determining the abandonment of that system. After briefly explaining events such as the "currency snake" and the "European Monetary System" (EMS), the paper highlights how processes of this nature are conditional on the extent of the limits of rationality of the decision-making agents, with the consequence of producing cognitive imbalances. These imbalances are determined by the "fuzziness" with which agents evaluate not only opposing objectives, in particular those of employment and the balance of payments, but especially objectives achievable in an intertemporal dimension (Walliser, 2008: ch. 4). In fact, we illustrate how the actual inflationary differentials between the countries concerned determine the imbalances in the balances of payments. We also highlight how the policies to bring inflation under control can determine changes in the electorate in the preferences defined in the area of economic policies. The collapse of the monetary snake and the European Monetary System is representative of such a change in preferences. The conceptual framework of analysis used is that of temporary equilibria.
    Date: 2008–05
  38. By: Steven C. BOURASSA (University of Louisville, CEREBEM, BEM Management School); Martin HOESLI (University of Geneva, University of Aberdeen, CEREBEM, BEM Management School and Swiss Finance Institute); Donato SCOGNAMIGLIO (IAZI / CIFI); Philippe SORMANI (IAZI / CIFI)
    Abstract: The measurement of house price movements is a vital topic from both academic and practical perspectives and hence has been the focus of much research. There is almost unanimous consensus in the literature that house price indexes should control for the quality of properties; the most widely used methods to attain this aim are the hedonic and repeat sales approaches. The objective of this paper is to compare the Swiss house prices indexes published by the Swiss National Bank (SNB), which are constructed using medians of list prices as published in newspapers and on the internet, to hedonic indexes based on sale prices for the period 1985 to 2006. We find that the list price indexes exhibit quite a different price path than the hedonic indexes during the period. In particular, they appear to overstate price changes in housing markets. We attribute this, at least in part, to changes over time in the composition of the sample of properties on the market.
    Keywords: house price indexes, hedonic method, Switzerland
    JEL: E31 R31
    Date: 2008–05
  39. By: Simon Luechinger; Stephan Meier; Alois Stutzer
    Abstract: High rates of unemployment entail substantial costs to the working population in terms of reduced subjective well-being. This paper studies the importance of individual economic security, in particular, job security, in workers' well-being by exploiting sector-specific institutional differences in the exposure to economic shocks. Public servants have stricter dismissal protection and face a lower risk of their organization's bankruptcy than do private sector employees. The empirical results for individual panel data for Germany and repeated cross-sectional data for the United States and the European Union show that the sensitivity of subjective well-being to fluctuations in unemployment rates is much lower in the public sector than in the private. This suggests that increased economic insecurity constitutes an important welfare loss associated with high general unemployment.
    Keywords: Unemployment, life satisfaction, job security, public sector
    JEL: E24 I31 J30 J45 J64
    Date: 2008
  40. By: Brown, Martin (Swiss National Bank); Falk, Armin (University of Bonn); Fehr, Ernst (University of Zurich)
    Abstract: When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is no third-party enforceable. But can implicit agreements - or relational contracts - also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance.
    Keywords: Relational Contracts; Involuntary Unemployment
    JEL: C90 D82 E24 J30 J41
    Date: 2008–02–01
  41. By: Freeman, Alan
    Abstract: This note lays out a roadmap to Datapedia: the goal is to share numbers with the same power and ease that the Wiki has delivered for documents. This would transform the quality and usability of economic data. The goal is a system which, by analogy with Wikipedia can establish a world resource for reliable data. The paper discusses a process by which data providers and users can evolve a new set os systems for exchanging, describing and interacting with data to bring this about. The proposal centres on the metadata – additional descriptive data – that is associated with numeric data, and suggests how, in two cases – World GDP and Creative Industry Employment – data could be mapped in such a way that viable Datawiki platforms can be built. The proposal also allows existing communities of users to start reshaping the way they exchange and handle data, to permit, and also to improve existing standards for collaborative use of data. The first step would be Datawiki: an opensource system for recording revisions, changes and sources of data, allowing users to compare different revisions and versions of data with each other. It would be a set of protocols, and simple web tools, to help data researchers pool, compare, scrutinise, and revise datasets from multiple sources. The first step towards Datawiki is Wikidata: rethinking the way that data itself is transmitted between people that collaborate on it a platform-independent standard for exchanging specifically numeric data. I show that the ubiquitous standard for exchanging data – the spreadsheet – is not up to the task of serving as a platform for Datawiki, and assess how alternatives can be developed.
    Keywords: Creative Industries; Economic statistics; Datapedia; Wikipedia; Wiki; data, wikipedia, creative industries, macroeconomics
    JEL: Z1 E01 C8
    Date: 2008–06–08
  42. By: Ramon Marimon; Vincenzo Quadrini
    Abstract: We develop a dynamic general equilibrium model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up, affect the incentive to accumulate human capital. We show that a lack of contract enforceability amplifies the effect of barriers to competition on human capital accumulation. High barriers reduce the incentive to accumulate human capital by lowering the outside value of ‘skilled workers’, while low barriers can result in over-accumulation of human capital. This over-accumulation can be socially optimal if there are positive knowledge spillovers. A calibration exercise shows that this mechanism can account for significant cross-country income inequality.
    Keywords: Limited commitment, limited enforcement, human capital accumulation, income inequality, innovation, barriers to competition.
    JEL: D99 E20 J24 O15 O34 O43
    Date: 2008
  43. By: Guglielmo Maria CAPORALE,; Christophe Rault; Robert SOVA; Ana Maria SOVA
    Abstract: The expansion of regionalism has spawned an extensive theoretical literature analyzing the effects of Free Trade Agreements (FTAs) on trade flows. In this paper we focus on FTAs (also called European agreements) between the European Union (EU-15) and the Central and Eastern European countries (CEEC-4, i.e. Bulgaria, Hungary, Poland and Romania) and model their effects on trade flows by treating the agreement variable as endogenous. Our theoretical framework is the gravity model, and the econometric method used to isolate and eliminate the potential endogeneity bias of the agreement variable is the fixed effect vector decomposition (FEVD) technique.
    Keywords: Regionalisation, European integration, Panel data methods.
    JEL: E61 F13 F15 C25
    Date: 2008–03–01
  44. By: Berna Demiralp (Old Dominion University, Department of Economics); Johanna Francis (Fordham University, Department of Economics)
    Abstract: Although the debate about the effect of wealth on entrepreneurship is now almost two decades old, there is little consensus among researchers about the significance of wealth as a determinant for self-employment. We re-visit the relationship between wealth and entrepreneurship using data from the National Longitudinal Survey of Youth. Like Hurst and Lusardi (2004), our results suggest the relationship between wealth and the probability of entering entrepreneurship is nonlinear. However, unlike Hurst and Lusardi, we find the probability of entrepreneurship increases at an increasing rate with wealth, starting at lower quantiles of the wealth distribution. We also observe that the aggregate relationship masks differences among entrepreneurs with respect to their industry. While high capital requirement industries and professional services display a convex relationship between wealth and the probability of self-employment, low capital requirement industries display a concave relationship. Since we find a positive relationship between wealth and the probability of entering entrepreneurship at lower quantiles of the wealth distribution, it is critical to check whether this relationship is caused by wealth endogeneity. In order to account for the possible endogeneity of wealth we instrument for wealth using changes in housing equity and the value of unexpected inheritances. The results of instrumental variable estimation reveal that there is no significant relationship between wealth and entering entrepreneurship for the full sample as well as for each of the three industries.
    Keywords: Entrepreneur, wealth, industry, liquidity constraints
    JEL: E21 G11 J24
    Date: 2008
  45. By: Krishna Chaitanya,; Emilia Vazquez Rozas
    Abstract: Emerging economies viz., Brazil, China, India, Mexico and South Africa have seen a tremendous increase in the FDI inflows in the last one decade. Amongst all, the FDI inflows of China witnessed sharp rise from 1992. As on 2006, China stood as the world’s second largest recipient of FDI inflows (AT Kearney Report, 2006), leaving behind many emerging economies in the race of attracting FDI inflows.
    Keywords: FDI inflows, Emerging economies, China & Cointegration.
    JEL: F21 O57 E44 C22
    Date: 2008–12–01

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