nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒06‒21
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Government Spending and Unemployment By Ludger Linnemann; Andreas Schabert
  2. Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model By Ruediger Bachmann; Ricardo J. Caballero; Eduardo Engel
  3. Technical Appendix to "Fiscal and Monetary Policy under Sectorial Heterogeneity" By Berriel, Tiago; Sinigaglia, Daniel
  4. Globalization Effect on Inflation and Domestic Monetary Policy By Adamcik, Santiago
  5. Monetary Transmission and the Yield Curve in a Small Open Economy By Mariano Kulish; Daniel Rees
  6. On the Periodicity of Inventories By Katsuyuki Shibayama
  7. Fiscal and Monetary Anchors for Price Stability: Evidence from Sub-Saharan Africa By Alfredo Baldini; Marcos Poplawski Ribeiro
  8. How Important are Financial Frictions in the U.S. and the Euro Area? By Queijo von Heideken, Virginia
  9. Inflation, Nominal Portfolios, and Wealth Redistribution in Canada By Césaire Meh; Yaz Terajima
  10. Understanding Output and Price Dynamics in Japan: Why Have Japan's Price Movements Been Relatively Stable Since the 1990s? By Masahiko Shibamoto; Ryuzo Miyao
  11. Optimal Fiscal and Monetary Policy Without Commitment By Stefan Niemann; Paul Pichler; Gerhard Sorger
  12. External Shocks and Business Cycle Fluctuations in Mexico: How Important are U.S. Factors? By Sebastian Sosa
  13. Aid volatility, monetary policy rules and the capital account in African economies By Christopher Adam; Stephen O'Connell; Edward Buffie
  14. Resurrecting Equilibria Through Cycles By Richard C. Barnett; Joydeep Bhattacharya; Helle Bunzel
  15. Inventory Cycles By Katsuyuki Shibayama
  16. Do trade and financial linkages foster business cycle synchronization in a small economy? By Alicia García-Herrero; Juan M. Ruiz
  17. Divisia Second Moments: An Application of Stochastic Index Number Theory By Barnett, William A.; Jones, Barry E.; Nesmith, Travis D.
  18. Initial Expectations in New Keynesian Models with Learning By James Murray
  19. In Search of a Theory of Debt Management By Faraglia, Elisa; Marcet, Albert; Scott, Andrew
  20. Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities By Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma
  21. Monetary Systems in Developing Countries: An Unorthodox View By Cordeiro, Jose Luis
  22. Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus By Mario Catalán; Jaime Guajardo; Alexander W. Hoffmaister
  23. The Decline of the Exchange Rate Pass-Through in Brazil: Explaining the ‘Fear of Floating’ By Carlos Eduardo Schönerward da Silva; Matias Vernengo
  24. Composition of public expenditure, effective demand, distribution and growth By Commendatore, Pasquale; Panico, Carlo; Pinto, Antonio
  25. A Real Model of Transitional Growth and Competitiveness in China By Céline Rochon; Geneviève Verdier; Leslie Lipschitz
  26. Analysing Convergence in Europe Using a Non-linear Single Factor Model By Ulrich Fritsche; Vladimir Kuzin
  27. Extending an SVAR Model of the Australian Economy By Mardi Dungey; Adrian Pagan
  28. Wealth and the Capitalist Spirit By Johanna Francis
  29. Decade of dissent: explaining the dissent voting behavior of Bank of England MPC members By Harris, Mark; Spencer, Christopher
  30. Foreign Prices Shocks in a Small Open Economy By Marias Halldor Gestsson
  31. The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe By Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang
  32. Estimating yield curves from swap, BUBOR and FRA data By Zoltán Reppa
  33. Status quo on fiscal decentralisation in Mongolia By Ariunaa Lkhagvadorj
  34. Rejuveniles and Growth By Richard C. Barnett; Joydeep Bhattacharya
  35. International Price Stability, Full Employment and Global Balances: The Case for a Commodity Reserve Currency By Leanne Ussher
  36. An eclectic third generation model of financial and exchange rate crises By Joaquin Novella Izquierdo; Joan Ripoll i Alcon
  37. The Procyclical Effects of Basel II By Repullo, Rafael; Suarez, Javier
  38. Imperfect Common Knolwedge and Allocation of Attention By Melosi, Leonardo
  39. Welfare Gains of Aid Indexation in Small Open Economies By Anubha Dhasmana
  40. Choosing to keep up with the Joneses By Richard Barnett; Joydeep Bhattacharya; Helle Bunzel
  41. Central Bank Independence and Transparency: Evolution and Effectiveness By Christopher W. Crowe; Ellen E. Meade
  42. Progressive Taxation, Wealth Distribution, and Macroeconomic Stability By Kazuo Mino; Yasuhiro Nakamoto
  43. A Note on the Diachronic Behaviour of the OECD Forecasts for Greece By Dikaios Tserkezos; George Xanthos; Eva Pitikaki
  44. The Mathematization of Macroeconomics: A Recursive Revolution By K. Vela Velupillai
  45. Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey By Thomas Lux
  46. Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility By Charles S. Bos
  47. The Socio-Economic Distribution of AIDS Incidence and Output By Pedro de Araujo
  48. Innovation driven sectoral shocks and aggregate city cycles By Andrea R. Lamorgese
  49. Hysteresis in Unemployment:Evidence from Latin America By Matias Mednik; Cesar M. Rodriguez; Inder J. Ruprah
  50. The effect of investment tax credit: Evidence from an atypical programme in Italy By Raffaello Bronzini; Guido de Blasio; Guido Pellegrini; Alessandro Scognamiglio
  51. Does the Chinese Banking System Promote the Growth of Firms? By Panicaos Demetriades; Jun Du; Sourafel Girma; Chenggang Xu

  1. By: Ludger Linnemann (University of Bonn); Andreas Schabert (University of Dortmund)
    Abstract: We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.
    Keywords: Optimal fiscal policy; government spending; labor market frictions; unemployment; stabilization policy
    JEL: E62 E32
    Date: 2008–03–06
  2. By: Ruediger Bachmann (Yale University); Ricardo J. Caballero (MIT); Eduardo Engel (Cowles Foundation, Yale University)
    Abstract: The sensitivity of U.S. aggregate investment to shocks is procyclical: the initial response increases by approximately 50% from the trough to the peak of the business cycle. This feature of the data follows naturally froma DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis.
    Keywords: Ss model, RBC model, Time-varying impulse response function, History dependence, Conditional heteroscedasticity, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs
    JEL: E10 E22 E30 E32 E62
    Date: 2008–06
  3. By: Berriel, Tiago; Sinigaglia, Daniel
    Abstract: This is the complete technical appendix to "Optimal Fiscal and Monetary Policy under Sectorial Heterogeneity".
    JEL: E62 E52
    Date: 2008–04–24
  4. By: Adamcik, Santiago
    Abstract: This paper discusses that many of the exaggerated claims that globalization has been an important element in the reduction of the inflation in the recent years do not come true. The globalization has, however, the potential to contribute to the stabilization of economies and this has been crucial element in promoting the growth of economies. The paper, therefore, analyzes four issues on the impact of the globalization upon the mechanisms of monetary transmission and arrives at the following findings. ( 1 ) The globalization did not reduce the sensibility of inflation to the domestic production gaps and in consequence to the effectiveness of the monetary policy,. ( 2 ) The gaps in the product of external economies do not play a more important role than in other times,.( 3 ) The domestic monetary policy maintains still the control on the domestic interest rates and that way pursuing the stabilization of inflation and the product,.( 4 ) The globalization affects, by means of different forms, the mechanisms of monetary transmission
    Keywords: Globalizacion; Inflacion; Politica Monetaria
    JEL: E58 E31 E42 G15 E44
    Date: 2008–03–13
  5. By: Mariano Kulish (Reserve Bank of Australia); Daniel Rees (Reserve Bank of Australia)
    Abstract: Long-term nominal interest rates in a number of inflation-targeting small open economies have tended to be highly correlated with those of the United States. This observation has recently lent support to the view that the long end of the yield curve is determined abroad. We set up and estimate a micro-founded two-block small open economy model to study the co-movement of long-term nominal interest rates of different currencies. The expectations hypothesis together with uncovered interest rate parity, which both hold in our model, can account for much of the co-movement of interest rates observed in the data.
    Keywords: term structure of interest rates; yield curve; small open economy; DSGE model; transmission mechanism
    JEL: E43 E52 E58 F41
    Date: 2008–06
  6. By: Katsuyuki Shibayama
    Abstract: This article studies inventories and monetary policy by estimating VAR models. The complex roots detected in our estimation generate cycles of around 55 to 70 months, which are quite close to actual business cycle lengths. This implies that production and inventories follow damped oscillations (stable sine curves), implying that a boom is the seed of the following recession, and vice versa. Interestingly, the peaks and troughs of policy interest rate precedes those of production in the U.S. (i.e., forward-looking monetary policy), but not in Japan. The central banks in both countries react sharply to demand shocks, but not to supply shocks, because booms after positive demand shocks last longer as .rms replenish reduced inventories, while booms after positive supply shocks are short-lived as the initial accumulation of inventories suppresses production in subsequent periods.
    Keywords: inventories; inventory cycle; business cycle; monetary policy; damped oscillations; phase shift; spectrum
    JEL: E32 E58 C32
    Date: 2008–05
  7. By: Alfredo Baldini; Marcos Poplawski Ribeiro
    Abstract: The paper presents a model of fiscal dominance with borrowing constraints, and provides evidence for a large number of sub-Saharan African countries on the relative importance of fiscal and monetary determinants of inflation. Based on the dynamic response of inflation to different shocks, including nominal public debt, results show that a number of SSA countries were characterized throughout the period 1980-2005 either by chronic fiscally dominant regimes, with weak or no response of primary surpluses to public debt; or by a consistent adoption of a monetary dominant regime. However, a number of countries were also characterized by lack of a clear monetary and fiscal policy regime. The study also finds that changes in nominal public debt affect price variability via aggregate demand effects, suggesting that fiscal outcomes could be a direct source of inflation variability, as predicted by the fiscal theory of the price level.
    Keywords: Working Paper , Sub-Saharan Africa ,
    Date: 2008–05–13
  8. By: Queijo von Heideken, Virginia (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper aims to evaluate if frictions in credit markets are important for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.
    Keywords: Financial frictions; DSGE models; Bayesian estimation
    JEL: C11 C15 E32 E40 E50 G10
    Date: 2008–05–01
  9. By: Césaire Meh; Yaz Terajima
    Abstract: There is currently a policy debate on potential refinements to monetary policy regimes in countries with low and stable inflation such as the U.S. and Canada. For example, in Canada, a systematic review of the current inflation targeting framework is underway. An issue that has generally received relatively less attention in this debate is the redistributional effects of inflation. This omission is likely to be important since the welfare costs of inflation depend not only on aggregate effects but also on redistributional consequences. The goal of this paper is to contribute to this policy debate by assessing the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities.We find that the redistributional effects of inflation are sizeable even for low and moderate inflation episodes. The main winners are young middle-class households with substantial amounts of mortgage debt. Besides young households, inflation also represents a windfall gain for the government because of its long-term debt. Old households, rich households, and the middle-aged middle-class lose from inflation, largely due to their sizeable holdings of bonds and non-indexed defined benefit pension assets.
    Keywords: Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices
    JEL: D31 D58 E31 E50
    Date: 2008
  10. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration, Kobe University); Ryuzo Miyao (Research Institute for Economics & Business Administration, Kobe University)
    Abstract: Since the beginning of the 1990s, Japanese inflation has been relatively stable with slight declines, while output has remained volatile with a prolonged stagnation. This paper attempts to explore possible explanations for these macroeconomic facts based on the aggregate demand and supply framework. Specifically, applying a vector autoregressive framework that allows for correlations between structural disturbances, it examines two broad questions in a unified way: (i) whether the slope of the short-run aggregate supply curve became significantly flattened and/or (ii) whether structural demand and supply shocks are more strongly positive correlated. Our results suggest that positive correlation between structural demand and supply shocks has become stronger since the 1990s, while there is less evidence that the short-run aggregate supply curve has been flattened. We argue that shifts in aggregate demand and supply curves in the same direction lead to larger, permanent effects on output and to limited effects on prices in Japan.
    Keywords: Japanese business cycle fluctuations, aggregate demand and supply model, correlation between demand and supply shocks
    JEL: C32 E3
    Date: 2008–05
  11. By: Stefan Niemann; Paul Pichler; Gerhard Sorger
    Abstract: This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerges as the optimal policy only if markets are perfectly competitive. Second, once nominal rigidities are introduced, the Friedman rule ceases to be optimal, inflation rates are low and stable, and tax rates are relatively volatile. Finally, optimal time-consistent policy under sticky prices does not generate the near-random walk behavior of taxes and real debt that can be observed under optimal policy in the Ramsey problem. A common reason for these results is that the discretionary government, in an effort to asymptotically eliminate its time-consistency problem, accumulates a large net asset position such that it can finance its expenditures via the associated interest earnings.
    Date: 2008–06–16
  12. By: Sebastian Sosa
    Abstract: This paper examines the relative importance of external shocks as sources of business cycle fluctuations in Mexico, and identifies the dynamic responses of domestic output to foreign disturbances. Using a VAR model with block exogeneity restrictions, it finds that U.S. shocks explain a large share of Mexico's macroeconomic fluctuations after NAFTA. This partly reflects greater trade integration-but also Mexico's "Great Moderation," as the country escaped its former pattern of macro-financial crises. In this period, Mexico's output fluctuations have been closely synchronized with the U.S. cycle, with a large and rapid impact of U.S. shocks on Mexican growth.
    Keywords: Working Paper , Mexico , Business cycles , External shocks , United States , Economic models ,
    Date: 2008–04–28
  13. By: Christopher Adam (University of Oxford); Stephen O'Connell (Swarthmore College); Edward Buffie (Indiana University)
    Abstract: We examine the properties of simple quantity-based monetary policy rules of the kind widely used in low-income African economies. Using a DSGE model and focusing our attention on responses to positive aid shocks, we suggest that policy rules involving substantial reserve accumulation in the face of aid surges serve to ease macroeconomic adjustment to shocks, particularly when a portion of aid is used to support fiscal adjustment. These rules are robust to assumptions about the degree of integration of the domestic public debt market with world capital markets. Although an open capital account facilitates smoother adjustment to temporary aid surges when an aid inflow is fully spent, it exacerbates the adjustment problem when aid is accompanied by fiscal adjustment and hence reinforces the case for a managed float in such circumstances.
    Keywords: Monetary policy, Africa, Aid volatility, foreign capital flows, stochastic simulation models
    Date: 2008–06
  14. By: Richard C. Barnett; Joydeep Bhattacharya; Helle Bunzel (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: In an overlapping generations model, momentary equilibria are defined as points that lie on the intergenerational offer curve, i.e., they satisfy agents’ optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. The literature has always ruled out such paths. This paper studies a pure-exchange monetary overlapping generations economy in which real balances cycle forever between momentary equilibrium points. The novelty is to show that segments of the offer curve that have been previously ignored, can in fact be used to produce asymptotically valid cyclical paths. Indeed, a cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid.
    Keywords: overlapping generations models, monetary equilibria, cycles, minimum consumption requirements
    JEL: E31 E42 E63
    Date: 2007–09–19
  15. By: Katsuyuki Shibayama
    Abstract: This paper investigates a rational dynamic stochastic general equilibrium model with a stockout constraint and a production chain. Our model shows that both stockout avoidance and cost shock mechanisms replicate stylised inventory facts -- production is more volatile than sales and inventory investment is procyclical. In addition, production smoothing also works at very high frequencies. Note that the cost shock and production smoothing mechanisms are naturally embedded in our micro-founded general equilibrium framework. Moreover, as a by-product, the production chain causes the slow adjustment of inventories in aggregate. Consequently, our model generates (a) high labour volatility and (b) low correlation between labour productivity and output; the standard RBC cannot produce these two empirical findings. Finally, our model yields inventory cycles.
    Keywords: inventories; inventory cycles; stockout constraint; production chain; over-damped oscillations; dyanamic stochastic general equilibrium model
    JEL: E32 C68
    Date: 2008–02
  16. By: Alicia García-Herrero (BBVA); Juan M. Ruiz (Banco de España)
    Abstract: We estimate a system of equations to analyze whether bilateral trade and financial linkages influence business cycle synchronization directly and/or indirectly. Our paper builds upon the existing literature by using bilateral trade and financial flows for a small, open economy (Spain) as benchmark for the results, instead of the US as generally done in the literature. We find that both the similarity of productive structure and trade links promote the synchronization of cycles. However, bilateral financial links are inversely related to the co movement of output. This might point to financial integration allowing an easiertransfer of resources between two economies, which could enable their decoupling, as predicted by a standard model of international business cycles. Both the effects of trade and financial links on output synchronization are statistically significant and economically relevant.
    Keywords: business cycle synchronization, trade linkages, financial linkages, productive structure, integration
    JEL: E32 F41 F12 E44
    Date: 2008–06
  17. By: Barnett, William A.; Jones, Barry E.; Nesmith, Travis D.
    Abstract: W. A. Barnett originated the Divisia monetary aggregates, using Diewert's results on superlative index numbers and Barnett's derivation of the user cost of monetary asset services. The resulting Divisia index can be interpreted as a first moment aggregating over growth rates with expenditure shares serving as probabilities. But Theil showed that there are analogous higher order Divisia moments providing distributional information. In this paper we use the Divisia second moments to investigate distributional information in the monetary aggregate growth rates and to measure aggregation error in the Divisia first moments.
    Keywords: Divisia monetary aggregates; Divisia second moments; monetary aggregation; monetary policy; distribution effects
    JEL: E51 E52 E01 E4 G0 E41 C1
    Date: 2008–06–12
  18. By: James Murray (Indiana University Bloomington)
    Abstract: This paper examines how the estimation results for a standard New Keynesian model with constant gain least squares learning is sensitive to the stance taken on agents beliefs at the beginning of the sample. The New Keynesian model is estimated under rational expectations and under learning with three different frameworks for how expectations are set at the beginning of the sample. The results show that initial beliefs can have an impact on the predictions of an estimated model; in fact previous literature has exposed this sensitivity to explain the changing volatilities of output and inflation in the post-war United States. The results indicate statistical evidence for adaptive learning, however the rational expectations framework performs at least as well as the learning frameworks, if not better, in in-sample and out-of-sample forecast error criteria. Moreover, learning is not found to better explain time varying macroeconomic volatility any better than rational expectations. Finally, impulse response functions from the estimated models show that the dynamics following a structural shock can depend crucially on how expectations are initialized and what information agents are assumed to have.
    Keywords: Learning, expectations, New Keynesian model, maximum likelihood
    JEL: C13 E31 E50
    Date: 2008–06
  19. By: Faraglia, Elisa; Marcet, Albert; Scott, Andrew
    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 positions but at the cost of introducing extreme volatility in asset holdings. Across 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: 2008–06
  20. By: Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma
    Abstract: This paper investigates the empirical evidence on exchange rate pass through (ERPT) into CPI inflation for a set of emerging and developed countries. We argue that, theoretically, ERPT may be nonlinear in contrast to standard linear estimates in the literature. We use smooth transition models to investigate several possible sources of these nonlinearities. The results suggest that, although the sources of nonlinearities vary considerably across countries, they appear to be important. We find that for four countries ERPT responds nonlinearly to inflation and for three of them it responds nonlinearly to the output gap. We also find an asymmetric response of ERPT with respect to the magnitude of exchange rate changes for only two out of six countries. Finally, for some emerging markets, ERPT seems to be affected nonlinearly by measures of macroeconomic instability.
    Keywords: Exchange rate pass-through; smooth transition regression models
    JEL: E31 E52 F41
    Date: 2008–01
  21. By: Cordeiro, Jose Luis
    Abstract: This paper analyzes some recent theoretical and practical evidence in terms of economic results of different exchange rate systems. It begins with a historical review and a summary of fixed versus flexible exchange rate systems. Then it compares the experiences of recent currency unions, mostly unilateral, and their relative economic performance during the past currency crises in Latin America, East Asia and Eastern Europe. A set of issues is discussed in order to weigh the overall costs and benefits for several economies. These issues include exchange rates, GDP performance, inflation rates and foreign reserves. The case of Argentina is also considered separately, comparing mostly seigniorage costs and interest-rate savings. The benefits and costs of the producers (central banks/governments) and the consumers (citizens) of money are discussed separately. Free banking is also considered in a fast-changing world where there will probably be fewer but better currencies. Not just the euro is a reality now, but maybe the "amero" and the "worldo" or the "mondo" very soon.
    Keywords: Exchange rates, Monetary policy, Monetary union, Dollarization, Euroization, Developing countries, Foreign exchange, Finance, International finance, Money
    JEL: E42 E52 F02 F30
    Date: 2008–05
  22. By: Mario Catalán; Jaime Guajardo; Alexander W. Hoffmaister
    Abstract: How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.
    Date: 2008–04–24
  23. By: Carlos Eduardo Schönerward da Silva; Matias Vernengo
    Abstract: This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies on earlier time periods, and remains low. Whereas pass-through effects where high and close to 1 in the high-inflation period, they seem to have fallen to around 0.2 after the Real Plan stabilization, a number that is similar to the Import Substitution Industrialization (ISI) period of the 1950s and 1960s. Conventional results suggests that low and stable inflation environments lead to low levels of exchange rate pass-through and thus contribute to weakening the ‘fear of floating’ phenomenon experienced by some developing countries. In spite of lower pass-through effects the Brazilian Central Bank has maintained high interest rates in order to control the exchange rate. This paper suggests that ‘fear of inflation’ provides justification for the central bank’s persistent ‘fear of floating.’
    Keywords: Pass-Through, Inflation, Brazil
    JEL: E58 F41 O54
    Date: 2008–11
  24. By: Commendatore, Pasquale; Panico, Carlo; Pinto, Antonio
    Abstract: We introduce public expenditure (PE) in a general post Keynesian framework characterized by a nonlinear investment function. Our aims are: 1) to provide a systematic analysis of the impact of PE (‘productive’ or ‘non productive’) and of the Government sector size on economic growth, allowing effective demand to play a crucial role. Our work fills a lacuna in the post Keynesian literature given that scant attention has been devoted to this topic. In our paper, ‘Productive’ PE affects the (fixed) coefficients of production similarly to Barro (1990); 2) to compare and contrast two different interpretations which assign a different meaning to the autonomous component of the investment function, corresponding to long run demand growth expectations: the Kaleckian interpretation assumes exogenous long run expectations; in the Classical or Harrodian interpretation, long-run expectations are linked to the ‘warranted rate of growth’; 3) to reproduce a variety of complex phenomena (multiple equilibria, hysteresis, low growth traps, regular and irregular growth cycles), by introducing a simple nonlinearity in the investment function in the spirit of Kalecki’s (1937) investment theory and Kaldor’s (1940) trade cycle model. A plethora of results emerge from our simple framework concerning comparative statics and dynamicbehaviour.
    JEL: E62 E12 C61
    Date: 2007–11
  25. By: Céline Rochon; Geneviève Verdier; Leslie Lipschitz
    Abstract: We present a stylized real model of the Chinese economy with the objective of explaining two features: (1) domestic production is highly competitive in the sense that an accumulation of capital that raises the marginal product of labor elicits increases in employment and output rather than only in wages; and (2) even though the domestic saving rate is high, foreign direct investment is also substantial. We explain these features in terms of a conventional neoclassical growth model-with no monetary or nominal exchange rate policy-by including two aspects of the economy explicitly in the model: (1) low production wages are sustained by a large reserve army of rural labor which drives internal migration, and (2) domestic capital is distinct from importable capital and complementary with it in production. The results suggest that underlying real phenomena are important in explaining recent history; while nominal renmimbi appreciation may dampen price and wage increases, it would probably not change the real factors that have sustained rapid growth.
    Keywords: Working Paper , China, People's Republic of , Economic growth , Competition , Foreign investment , Investment , Savings , Labor supply , Wages , Prices , Exchange rates ,
    Date: 2008–04–25
  26. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Vladimir Kuzin (German Institute for Economic Research (DIW) Berlin)
    Abstract: We investigate convergence in European price level, unit labor cost, income, and productivity data over the period of 1960-2006 using the non-linear time-varying coefficients factor model proposed by Phillips and Sul (2007). This approach is extremely flexible on order to model a large number of transition paths to convergence. We find regional clusters in consumer price level data. GDP deflator data and unit labor cost data are far less clustered than CPI data. Income per capita data indicate the existence of three convergence clubs without strong regional linkages; Italy and Germany are not converging to any of those clubs. Total factor productivity data indicate the existence of a small club including fast-growing countries and a club consisting of all other countries.
    Keywords: Price level, Income, Productivity, Convergence, Factor Model, European Monetary Union
    JEL: E31 O47 C32 C33 E37
    Date: 2008–06
  27. By: Mardi Dungey; Adrian Pagan
    Abstract: Dungey and Pagan (2000) present an SVAR model of the Australian economy which models macro-economic outcomes as transitory deviations from a deterministic trend. In this paper we extend that model in two directions. Firstly, we relate it to an emerging literature on DSGE modelling of small open economies. Secondly, we allow for both transitory and permanent components in the series and show how this modification has an impact upon the design of macroeconomic models.
    Date: 2008–01–10
  28. By: Johanna Francis (Fordham University, Department of Economics)
    Abstract: The wealth distribution in the U.S. is more unequal than either the income or earnings distribution, a fact current models of saving behavior have difficulty explaining. Using MaxWeber’s (1905) idea that individuals may have a ‘capitalist spirit’, I construct and simulate a model where individuals accumulate wealth for its own sake rather than as deferred consumption. Including capitalist-spirit preferences in a simple life cycle model, with no other modifications, generates a skewness of wealth consistent with that observed in the U.S. economy. Furthermore, capitalist-spirit preferences provide a way to generate decreasing risk aversion with increases in wealth without resorting to idiosyncratic rates of time preference.
    Keywords: capitalist spirit, life cycle, wealth
    JEL: D31 E21 J23
    Date: 2008
  29. By: Harris, Mark; Spencer, Christopher
    Abstract: We examine the dissent voting record of the Bank of England Monetary Policy Committee (MPC) in its first decade. Probit estimates indicate the impact of career experience on dissent voting is negligible, whereas the impact of forecast inflation is pronounced. In addition to finding a role for dynamics, we also find a role for unobserved heterogeneity in the form of member-specific fixed-effects, suggesting previous literature characterizing voting behavior as largely determined by whether members are appointed from within or outside the ranks of Bank of England staff (internal and external members respectively) is overly simplistic.
    Keywords: Bank of England; Monetary Policy Committee; career background effects; dissent voting; unobserved heterogeneity
    JEL: D7 E5 C35
    Date: 2008–06
  30. By: Marias Halldor Gestsson (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Countries specialize in producing goods that they have comparative advantages in producing. This results in a country exporting some goods while it imports other. Hence, there is a reason to expect that changes in the prices of these goods have consid- erable economic e¤ect and that demand management can be used to improve welfare following such changes. This paper analyses this using a New Open Economy Macro (NOEM) model of a small open economy. Among others, the results indicate that, in a small open economy, a terms of trade appreciation results in increased consumption, labor use and output on impact while consumption increases but labor use and output decrease in future time periods. The results also indicate that the vulnerability of an economy towards such shocks is negatively related to its size. Finally, the results indicate that there exists a welfare improving demand management policy following a terms of trade shock.
    Keywords: Open Economy Macroeconomics, New Open Economy Macro Models, small open economy, tradeables,exportables, importables, terms of trade, demand management, stabilization
    JEL: E63 F41
    Date: 2007–06–01
  31. By: Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang
    Abstract: This paper assesses São Tomé and Príncipe's monetary and exchange rate arrangements in light of the country's monetary history and the relevant experience of comparable countries in Africa. The study highlights several structural characteristics of São Tomé and Príncipe including its very small size, high degree of openness, extensive use of foreign currencies, and inflexible product and factor markets in the consideration of an appropriate monetary and exchange regime. Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float. The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency. It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement.
    Keywords: Working Paper , Exchange rate regimes , São Tomé and Príncipe , Currencies , Monetary systems , Debt management , Fiscal management , Small states ,
    Date: 2008–05–05
  32. By: Zoltán Reppa (Magyar Nemzeti Bank)
    Abstract: In this paper we estimate yield curves from Hungarian interest rate swap and money market data. Following general practice, we experiment with several models-differing in the functional form and objective function-and chose the model which performs best according to standard evaluation criteria. We find that the methods perform equally well in terms of residuals and out-of-sample fit; however, the smoothing spline method stands out when we consider the ability to fit the short end of the maturity spectrum, stability of estimation and plausibility of the estimated curves.
    Keywords: yield curve, interest rate swaps.
    JEL: E43 G12
    Date: 2008
  33. By: Ariunaa Lkhagvadorj
    Date: 2007–08
  34. By: Richard C. Barnett; Joydeep Bhattacharya (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Rejuveniles are "people who cultivate tastes and mind-sets tradi- tionally associated with those younger than themselves." (Noxon, 2006) In this paper, we study a standard AK growth model of overlapping generations populated by rejuve- niles. For our purposes, rejuveniles are old agents who derive utility from "keeping up" their consumption with that of the current young. We find that such cross-generational keeping up is capable of generating interesting equilibrium growth dynamics, including growth cycles. No such growth dynamics is possible either in the baseline model, one where no such generational consumption externality exists, or for almost any other form of keeping up. Steady-state growth in a world with rejuveniles may be higher than that obtained in the baseline model
    Keywords: Growth cycles, keeping up preferences, consumption externality
    JEL: E13 E32
    Date: 2007–09–19
  35. By: Leanne Ussher (Department of Economics and BBA, Queens College of the City University of New York)
    Abstract: Despite globalization, liberalized trade and growing global income, billions of people are underemployed and condemned to life-long poverty. Over two thirds of the world’s poor reside in rural regions. Inequality in living standards between developed and developing regions remains a major challenge. Rising inequality has been tied to a declining terms of trade against commodities and towards manufactured goods. The recent increase in commodity prices has aided growth in developing countries, but it has also triggered renewed concern over inflation and access to key commodities. Standard responses to inflation are tighter monetary policy in the industrialized world, and devalued currencies with price controls in developing countries. Such policies will continue to aggravate global imbalances, and stymie long term investment in commodity production. Nicholas Kaldor in 1964 suggested a bold new international monetary system to equilibrate growth between agriculture and industry, and remove bottlenecks to industrialization. Specifically he proposed the creation of a ‘sound money’ international reserve backed by a basket of stored commodities, tying reserve liquidity to international world trade. His proposed commodity reserve currency would not only balance economic progress between regions, but also mitigate global imbalances. This paper argues that such an ambitious global macro proposal could be usefully studied to provide insights into current policy debates on the Millennium Development Goals, a new international monetary order, new global partnerships in resource security, and ways to stabilizing cost-push inflation.
    Keywords: price stability, commodity reserve currency, commodity prices, international inflation
    Date: 2007–04
  36. By: Joaquin Novella Izquierdo; Joan Ripoll i Alcon (Universitat de Barcelona)
    Abstract: This paper presents an eclectic model that systematizes the dynamics of self-fulfilling crises, using the main aspects of the three typologies of third generation models, to describe the stylized facts that hasten the withdrawal of a pegged exchange rate system. The most striking contributions are the implications for economic policy as well the vanishing role of exchange rate as an instrument of macroeconomic adjustment, when balance-sheet effects are a real possibility.
    Keywords: speculative attack, financial liberalization, financial panic, financial and exchange rate crisis
    JEL: F41 F43 E44 F31 F32 F34 F36 E52
    Date: 2008
  37. By: Repullo, Rafael; Suarez, Javier
    Abstract: We analyze the cyclical effects of moving from risk-insensitive (Basel I) to risk-sensitive (Basel II) capital requirements in the context of a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that the new regulation changes the behavior of these buffers from countercyclical to procyclical. Yet, the higher buffers maintained in expansions are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level behind Basel II can reduce its procyclical effects without compromising banks' long-run solvency.
    Keywords: banking regulation; Basel II; business cycles; capital requirements; credit crunch; loan defaults; relationship banking
    JEL: E43 G21 G28
    Date: 2008–06
  38. By: Melosi, Leonardo
    Abstract: This paper estimates a model with imperfect common knowledge in the sense of Woodford (2003) through Bayesian methods. First, we want to learn from the likelihood the values of parameters which are both difficult to be calibrated and crucial for the implications of this type of models. Second, we wish to empirically assess the relevance of the mechanism of imperfect common knowledge as a source of price stickiness. Third, we address the question of how firms allocate their attention between the state of technology and that of monetary policy.
    Keywords: Imperfect Information; Forecasting the Forecast of Others; Rational Inattention; Calvo Pricing; Likelihood-Based Inference.
    JEL: C32 E32 D82
    Date: 2008–05–05
  39. By: Anubha Dhasmana
    Abstract: Foreign aid flows to poor, aid-dependent economies are highly volatile and pro-cyclical. Shortfalls in aid coincide with shortfalls in GDP and government revenues. This increases the consumption volatility in aid dependent countries, thereby causing substantial welfare losses. This paper finds that indexing aid flows to exogenous shocks like a change in the terms of trade can significantly improve the welfare of aid-dependent country by lowering its output and consumption volatility. Compared to the benchmark specification with stochastic aid flows, indexation of aid flows to terms of trade shocks can reduce the cost of business cycle fluctuations in the recipient country by four percent of permanent consumption. Moreover, use of indexed aid can allow donors to reduce the aid flows by three percent without lowering the level of welfare in the recipient country.
    Keywords: Working Paper , Aid flows , Indexation , Low-income developing countries , Business cycles , Development assistance , Consumption , Terms of trade , Small states ,
    Date: 2008–04–28
  40. By: Richard Barnett; Joydeep Bhattacharya; Helle Bunzel (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Does a rise in income inequality induce people to work harder to stay in the rat race (“keep up with the Joneses”) or to simply drop out? We investigate this issue in a simple new framework in which heterogeneous ability agents get extra utility if their consumption keeps up with the economy’s average. The novelty is that agents are allowed to choose whether they want to stay in or drop out of the rat race. We show that sufficiently high ability agents choose to keep up with the Joneses and they enjoy higher consumption but lower leisure than those who don’t. When income inequality rises in a mean-preserving manner, average leisure in the economy may fall. Our analysis touches on the question, why are Americans working so much compared to the Europeans? We posit that higher income inequality in the US, by inducing more people to join the rat race there, may be partly responsible for the transatlantic leisure divide.
    Keywords: keeping up with the Joneses, consumption externalities, leisure
    JEL: E2 J22
    Date: 2008–01–10
  41. By: Christopher W. Crowe; Ellen E. Meade
    Abstract: This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. Increases in CBI have tended to occur in more democratic countries and in countries with high levels of past inflation. More independent central banks in turn tend to be more transparent, while transparency is also positively correlated with measures of national institutional quality. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank.
    Date: 2008–05–08
  42. By: Kazuo Mino (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Graduate School of Economics, Osaka University)
    Abstract: Using the standard neoclassical growth model with two types of agents, we examine how the presence of heterogenous agents affects the stabilization role of progressive income taxation. We first show that if the marginal tax payment of each agent increases with her relative income, the steady state satisfies local saddlepoint stability so that the equilibrium is determinate. However, unlike the representative agent models with progressive taxation, our model with heterogeneous agents may have the possibility of equilibrium indeterminacy. The indeterminacy conditions depend not only on the property of tax functions but also on production and preference structures.
    Keywords: heterogeneous agents, progressive taxation, wealth distribution, aggregate stability
    JEL: E52 O42
    Date: 2008–05
  43. By: Dikaios Tserkezos (Department of Economics, University of Crete, Greece); George Xanthos (Technical Institute of Crete); Eva Pitikaki (Greek Econometric Institute - University of Crete)
    Abstract: In this short paper a Gamma distributed lags model is used to study the diachronic responses between the actual data and the forecasts supplied by OECD the last 27 years for the case of the Greek Economy. According to our results we verified the potentials of the OECD to improve its forecasts as the size of the foreseeable period decreases. Irrespective of how good are the OECD’s forecasts, there is certainly much room for further improvement.
    Keywords: OECD Forecasting Accuracy, Greek Economy, Gamma Distributed Lags Model
    JEL: E17 E37 F17 F47
    Date: 2008
  44. By: K. Vela Velupillai
    Abstract: Frank Ramsey's classic framing of the dynamics of optimal savings, [51] as one to be solved as a problem in the calculus of variations and Ragnar Frisch's imaginative invoking of a felicitous Wicksellian metaphor to provide the impulse-propagation dichotomy, in a stochastic dynamic framework, for the tackling the problem of business cycles [17], have come to be considered the twin fountainheads of the mathematization of macroeconomics in its dynamic modes - at least in one dominant tradition. The intertemporal optimization framework of a rational agent, viewed as a signal processor, facing the impulses that are propagated through the mechanisms of a real economy, provide the underpinnings of the stochastic dynamic general equilibrium (SDGE) model that has become the benchmark and frontier of current macroeconomics. In this paper, on the 80th anniversary of Ramsey's classic and the 75th anniversary of Frisch's Cassel Festschrift contribution, an attempt is made to characterize the mathematization of macroeconomics in terms of the frontier dominance of recursive methods. There are, of course, other - probably more enlightened - ways to tell this fascinating story. However, although my preferred method would have been to tell it as an evolutionary development, since I am not sure that where we are represents progress, from where we were, say 60 years ago, I have chosen refuge in some Whig fantasies.
    Keywords: Macrodynamics, Mathematical Economics, Dynamic Economics, Computational Economics.
    JEL: B16 B22 B23 C60
    Date: 2008
  45. By: Thomas Lux
    Abstract: This paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions. We study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem. The aggregate dynamics of the individuals' decisions can be analyzed via the stochastic process governing the ensemble average of choices. Numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics. This approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization. Our application to a well-known business climate index provides strong indication of social interaction as an important element in respondents' assessment of the business climate
    Keywords: business climate, business cycle forecasts, opinion formation, social interactions
    JEL: C42 D84 E37
    Date: 2008–06
  46. By: Charles S. Bos (VU University Amsterdam)
    Abstract: When analysing the volatility related to high frequency financial data, mostly non-parametric approaches based on realised or bipower variation are applied. This article instead starts from a continuous time diffusion model and derives a parametric analog at high frequency for it, allowing simultaneously for microstructure effects, jumps, missing observations and stochastic volatility. Estimation of the model delivers measures of daily variation outperforming their non-parametric counterparts. Both with simulated and actual exchange rate data, the feasibility of this novel approach is shown. The parametric setting is used to estimate the intra-day trend in the Euro/U.S. Dollar exchange rate.
    Keywords: High frequency; integrated variation; intra-day; jump diffusions; microstructure noise; stochastic volatility; exchange rates
    JEL: C11 C14 D53 E44
    Date: 2008–01–22
  47. By: Pedro de Araujo (Indiana University Bloomington)
    Abstract: This paper investigates the effect of HIV/AIDS on steady state output in an overlapping generations economy calibrated to resemble sub-Sahara Africa. I use skill heterogeneity as a proxy for socioeconomic status and test scenarios where the AIDS epidemic affects skills differently. The results indicate that the effects of the epidemic are sensitive to the distribution of the disease across skills. In general, the effect is much greater as the epidemic mainly affects skilled workers. Output is found to be below a no-AIDS output in a range between 3% (10%), when only unskilled workers are affected, and 10% (28%), when only skilled workers affected, whenever the overall infection rate is 7% (20%). When investigating the hypothesis that AIDS affects skilled workers more severely than unskilled at the beginning of the epidemic, with the effect switching as the epidemic becomes more mature, the findings are that the economy can be 8% smaller along the transition path. In all scenarios where the epidemic is temporary, it would take 4 to 5 generations or about 90 years for sub-Saharan Africa to recover.
    Keywords: HIV/AIDS, capital-skill complementarity, heterogeneity, and sub-Sahara Africa
    JEL: E20
    Date: 2008–06
  48. By: Andrea R. Lamorgese (Bank of Italy, Department for Structural Economic Analysis)
    Abstract: This paper formalizes one mechanism through which diversification in the production of research & development across firms located in a city dampens volatility in the local labor market, improves the incentives to perform research & development and smooths the aggregate business cycle fluctuations of a city. This is done by adapting the standard multi-sector quality ladder model (Grossman and Helpman 1991) in order to allow for heterogeneity across firms, thus taking into account knowledge spillovers across heterogenous sectors, knowledge accumulation, pecuniary externalities and segmented labor markets. As a result, according to the local degree of diversification in research & development, sectoral technological shocks have an influence on the current choice of research & development and the location of production, and in turn on local business cycles and the life cycle of the city: diversification in research & development allows innovations in different sectors of the city to arrive at different points in time, thus avoiding to put pressure on the local labor markets and keeping wage discipline. This permits firms located in the city to perform enough research & development and possibly beat outside competition in discovering and manufacturing new products, thus growing -at the aggregate city level-through less volatile cycles.
    Keywords: quality ladder with heterogeneity across firms, labor pooling economies, knowledge spillovers, diversification, schumpeterian growth in the city
    JEL: I31 I32 D63 D31 E32 O31 R23
    Date: 2008–04
  49. By: Matias Mednik (Columbia University - School of International and Public Affairs.); Cesar M. Rodriguez (Office of Evaluation and Oversight at the Interamerican Development Bank.); Inder J. Ruprah (Office of Evaluation and Oversight at the Interamerican Development Bank.)
    Abstract: This paper tests the hysteresis hypothesis in unemployment for 13 Latin American countries covering the period 1980-2005. The tests exploit the time series and the cross sectional variation of the series, and allows for cross section dependence and a different number of endogenously determined structural breakpoints. The findings give support to the hysteric dynamic hypothesis for the majority of the countries analyzed. The implications of the results have ramifications regarding macro-stabilization, structural reform, and the design of social safety protection.
    Keywords: Unemployment hysteresis, unit root test, panel unit root test, cross-section dependence.
    JEL: C22 C23 E24 J24 J60
    Date: 2008–03
  50. By: Raffaello Bronzini (Bank of Italy, Economic Research Department); Guido de Blasio (Bank of Italy, Economic Research Department); Guido Pellegrini (University of Bologna); Alessandro Scognamiglio (Bank of Italy, Catanzaro Branch, Economic Research Unit)
    Abstract: This paper examines how business investment responds to investment tax credit, as enacted by ItalyÂ’s Law 388/2000. To assess whether the programme made investments possible that otherwise would not have been made, it exploits some features of the tax credit scheme, such as the fact that some Italian regions are not deemed eligible or that the amount of the bonus differs across eligible regions. Although the programme was fiscally unsustainable, and was therefore downsized well ahead of the expiry date, our findings suggest that it has been effective in stimulating investment.
    Keywords: investment incentives, state aid
    JEL: E22 H25
    Date: 2008–04
  51. By: Panicaos Demetriades (University of Leicester); Jun Du (Aston University); Sourafel Girma (University of Nottingham); Chenggang Xu (London School of Economics)
    Abstract: Using a large panel dataset of Chinese manufacturing enterprises during 1999-2005, which accounts for over 90% of China’s industrial output, and robust econometric procedures we show that the Chinese banking system has helped to support the growth of both firm value added and TFP. We find that access to bank loans is positively correlated with future value added and TFP growth. We also find that firms with access to bank loans tend to grow faster in regions with greater banking sector development. While the effects of bank loans on firm growth are more pronounced in the case of purely private-owned and foreign firms, they are positive and statistically significant even in the case of state-owned and collectively-owned firms. We show that excluding loss-making firms from the sample does not change the qualitative nature of our results.
    Keywords: Chinese banking system development, value added and TFP growth, panel dataset
    JEL: E44 O53
    Date: 2008–02

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