nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒06‒27
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary policy, asset prices and model uncertainty. By Meixing DAI; Eleftherios SPYROMITROS
  2. Fiscal, Monetary, and Financial Interactions in Dynamic General Equilibrium By Strulik, Holger
  3. Globalization Effect on both Inflation and Domestic Monetary Policy By Adamcik, Santiago
  4. Does Government Spending Optimally Crowd in Private Consumption? By Michal Horvath
  5. Inflation dynamics in a small open-economy model under inflation targeting: some evidence from Chile By Marco Del Negro; Frank Schorfheide
  6. Inflation Risk Premia and Survey Evidence on Macroeconomic Uncertainty By Paul Söderlind
  7. On the Welfare Cost of Inflation and the Recent Behavior of Money Demand By Peter N. Ireland
  8. Monetary and Fiscal Policy Interaction: What is the Role of the Transaction Cost of the Tax System in Stabilisation Policies? By Panagiotis Chronis; Aspassia Strantzalou
  9. An Affine Factor Model of the Greek Term Structure By Hiona Balfoussia
  10. Globalisation, domestic inflation and the global output gaps: evidence from the Euro era By Alessandro Calza
  11. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model By Malin Adolfson; Stefan Laseen; Jesper Linde; Lars E.O. Svensson
  12. Time-Varying Effects of Oil Supply Shocks on the US Economy By C. BAUMEISTER; G. PEERSMAN
  13. "Habit Formation and the Present-Value Model of the Current Account: Yet Another Suspect" By Takashi Kano
  14. The external finance premium and the macroeconomy: US post-WWII evidence By Ferre De Graeve
  15. China in the world economy: Dynamic correlation analysis of business cycles By Fidrmuc, Jarko; Korhonen, Iikka; Bátorová, Ivana
  16. Resuscitating the credit cycle By Patrick A. Pintus; Yi Wen
  18. Banking Globalization, Monetary Transmission, and the Lending Channel By Nicola Cetorelli; Linda S. Goldberg
  19. Searching for the Natural Rate of Unemployment in a Large Relative Price Shocks' Economy: the Brazilian Case By Tito Nícias Teixeira da Silva Filho
  20. Implementing monetary policy in the 2000s: operating procedures in Asia and beyond By Corrinne Ho
  21. Testing for conditional heteroscedasticity in the components of inflation By Carmen Broto; Esther Ruiz
  22. Real Exchange Rate Dynamics under Staggered Loan Contracts By Ippei Fujiwara; Yuki Teranishi
  23. Explaining output volatility: The case of taxation By Olaf Posch
  24. International Bank Portfolios: Short- and Long-Run Responses to the Business Cycle By Sven Blank; Claudia M. Buch
  25. Defying the 'Juncker Curse’: Can Reformist Governments Be Re-elected? By Biroli, Pietro; Buti, Marco; Turrini, Alessandro Antonio; Van Den Noord, Paul
  26. Long memory modelling of inflation with stochastic variance and structural breaks By Charles S. Bos; Siem Jan Koopman; Marius Ooms
  27. Non-linear DSGE Models, The Central Difference Kalman Filter, and The Mean Shifted Particle Filter By Martin Møller Andreasen
  28. Financially Constrained Fluctuations in an Evolving Network Economy By Domenico Delli Gatti; Mauro Gallegati; Bruce C. Greenwald; Alberto Russo; Joseph E. Stiglitz
  29. The duration of economic expansions and recessions: More than duration dependence By Vítor Castro
  30. Interest Rate Forecasts: A Pathology By Wen Bin Lim; Charles Goodhart
  31. The Effect of Aspirations, Habits, and Social Security on the Distribution of Wealth. By Jordi Caballé; Ana I. Moro Egido
  32. On the Investment Sensitivity of Debt under Uncertainty By Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
  33. Liquidity and leverage By Tobias Adrian; Hyun Song Shin
  34. Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income By Jang-Ting Guo; Kevin J. Lansing
  35. Capital Formation in Machinery in Latin America, 1890-1930 By Xavier Tafunell
  36. Structural estimation of jump-diffusion processes in macroeconomics By Olaf Posch
  37. Habit Formation, Surplus Consumption and Return Predictability: International Evidence By Tom Engsted; Stuart Hyde; Stig V. Møller
  38. The Dutch tax-benefit system and life-cycle employment: Outcomes and reform options By Ekkehard Ernst; Timo Teuber
  39. Macroeconomic Determinants of Stock Market Returns, Volatility and Volatility Risk-Premia By Valentina Corradi; Antonio Mele; Walter Distaso
  40. Nature or Nurture? Learning and the Geography of Female Labor Force Participation By Alessandra Fogli; Laura Veldkamp
  41. Crashes and Recoveries in Illiquid Markets By Ricardo Lagos; Guillaume Rocheteau; Pierre-Olivier Weill
  42. Can Education Save Europe From High Unemployment? By Nicole Walter; Runli Xie
  43. How to Maximize the Likelihood Function for a DSGE Model By Martin Møller Andreasen
  44. Ensuring the Validity of the Micro Foundation in DSGE Models By Martin Møller Andreasen

  1. By: Meixing DAI; Eleftherios SPYROMITROS
    Abstract: Using a macroeconomic model with asset prices, we analyze how optimal monetary policy, and macroeconomic dynamics and performance are affected by the central bank’s desire to be robust against model misspecifications. Considering the worst-case model, we show that an increase in the central bank’s preference for robustness requires a more aggressive reaction of the optimal nominal interest rate with respect to expected inflation and inflation shocks. According to the value of structural parameters, the economic equilibrium can be stable or saddle-point stable. In both cases, the speed of dynamic convergence is smaller under robust control compared to a benchmark case without it. Finally, an increase in the preference for robustness reinforces the reaction of current and expected future inflation, asset prices and output-gap to inflation shocks. However, the preference for robustness has no effect on the reaction of asset prices to the shocks affecting goods demand and financial markets.
    Keywords: Monetary policy, asset prices, model uncertainty, macro-financial stability.
    JEL: E44 E52 E58
    Date: 2008
  2. By: Strulik, Holger
    Abstract: This paper proposes a model that links households and firms, as usual, by markets for factors and goods and, additionally, by a banking sector that channels households' funds to firms and eliminates idiosyncratic risk. In equilibrium, agency costs and tax benefits of corporate debt are equalizing each other, which renders an institutionally based explanation of financial structure. Adjustment of corporate finance adds to the ordinary savings channel of fiscal and monetary policy. Taking real and financial interactions into account, the model predicts a somewhat lower impact of fiscal policy on macroeconomic aggregates as commonly assessed and a much stronger impact of monetary policy. This amplification is caused by the banking sector's translation of borrowing rates into lending rates and vice versa.
    Keywords: Fiscal Policy, Monetary Policy, Corporate Finance, Agency Costs, Banking, Economic Growth, Business Cycles.
    JEL: E44 E52 E62 O16
    Date: 2008–06
  3. 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 ) Globalization did not reduce the sensibility of inflation to the domestic production gaps and in consequence to the effectiveness of the monetary policy,. ( 2 ) Gaps in the product of external economies do not play a more important role than in other times,.( 3 ) Domestic monetary policy maintains still the control on the domestic interest rates and that way pursuing the stabilization of inflation and the product,.( 4 ) Globalization affects, by means of different forms, the mechanisms of monetary transmission
    Keywords: Globalizacion; Inflacion; Politica Monetaria
    JEL: E58 E31 E42 G15 E44
    Date: 2008–02–09
  4. By: Michal Horvath
    Abstract: We analyze if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidity-constrained agents and non-separable preferences. Our results provide little evidence in support of a crowd-in effect under ‘timelessly optimal’ policy.
    Keywords: Consumption, Government Spending, Optimal Monetary and Fiscal Policy, Non-Separable Preferences, Non-Ricardian Agents.
    JEL: E21 E52 E61 E63
    Date: 2008–05
  5. By: Marco Del Negro; Frank Schorfheide
    Abstract: This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Galí and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the dynamic response of inflation to domestic and external shocks, and the change in these dynamics under different policy parameters. We use the DSGE-VAR methodology from our earlier work (2007) to assess the robustness of the conclusion to the presence of model misspecification.
    Keywords: Stochastic analysis ; Time-series analysis ; Econometric models ; Banks and banking, Central ; Monetary policy
    Date: 2008
  6. By: Paul Söderlind
    Abstract: Nominal and real U.S. interest rates (1997-2007) are combined with inflation expectations from the Survey of Professional Forecasters to calculate time series of "inflation risk premia." It is shown that survey data on inflation and output growth uncertainty, as well as a proxy for liquidity premia can explain a large amount of the variation in these risk premia.
    Keywords: break-even inflation; liquidity premium, Survey of Professional Forecasters
    JEL: E27 E47
    Date: 2008–06
  7. By: Peter N. Ireland
    Abstract: Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.
    JEL: E31 E41 E52
    Date: 2008–06
  8. By: Panagiotis Chronis (Bank of Greece); Aspassia Strantzalou (Ministry of Employment and Social Protection, Greece)
    Abstract: In the theory of monetary and fiscal policy interaction, the assumption of Ricardian households isolates the determinants of fiscal policy instrument from the price stabilization policies carried out by the central bank. One of the main implications of the above mentioned Ricardian assumption is that the fiscal policy does not have any distortionary effect for the economy, i.e. it does not affect the behaviour of the households, supporting that way the fiscal policy’s neutrality. The argument for this view comes if one assumes that fiscal policy has a distortionary effect on the behaviour of the agents. We relax the above non distortionary assumption by assuming that the imposition of the taxes is consistent with a transaction cost of the tax system that underlies the state - tax payer interaction. In this way we develop a channel through which the stability of prices carried out by the independent central bank is, within optimality, also a function of the fiscal policy determinants (the transaction cost, the tax rates and the debt level). The analysis is carried out in a framework of a monetary union, with two different countries. Within this framework, the effectiveness of a numerical fiscal rule is also examined.
    Keywords: Monetary and fiscal policy interactions; Transaction cost of the tax system; Probability of re-election; Stability and growth pact
    JEL: E52 E58 E62 E63 H60
    Date: 2008–05
  9. By: Hiona Balfoussia (Bank of Greece)
    Abstract: This paper aims to contribute to our understanding of the dynamics driving the Greek term structure of nominal interest rates and to explore their possible macro- economic determinants. A canonical, Vasicek-type latent affine factor model of the Greek term structure is estimated on data spanning the period March 1999 to February 2007. This framework allows us to directly examine the impact of the extracted factors on the shape of the yield curve over time and on the associated price and amount of risk in the term structure. In line with the related literature, three latent factors, i.e. a "level" factor, a "slope" factor and a "curvature" factor, appear to capture most of the time variation in the Greek nominal term structure of interest rates and to drive its dynamics. The evolution of these factors over time is examined on the basis of business cycle theory and related to macroeconomic fundamentals of the Greek economy.
    Keywords: Term structure; Affine factors; Stochastic discount factor; Kalman filter
    JEL: E43 E44 G1
    Date: 2008–05
  10. By: Alessandro Calza
    Abstract: This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the "global output gap hypothesis") holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area.
    Keywords: Globalization ; Inflation (Finance) ; Monetary policy - Europe ; International trade - Europe
    Date: 2008
  11. By: Malin Adolfson; Stefan Laseen; Jesper Linde; Lars E.O. Svensson
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.
    JEL: E52 E58 F41
    Date: 2008–06
    Abstract: Using a Time-Varying Parameters Bayesian Vector Autoregression model, we investigate how the dynamic effects of oil supply shocks on the US economy have changed over time. In contrast to previous studies, we identify oil supply shocks with sign restrictions which are derived from a simple supply and demand model of the global oil market. First, we find a remarkable structural change in the oil market itself, i.e. a typical oil supply shock is characterized by a much smaller impact on world oil production and a greater effect on the real price of crude oil over time. A steepening of the oil demand curve is the only possible explanation for this stylized fact. Accordingly, similar physical disturbances in oil production now have a significantly higher leverage effect on oil prices resulting in a stronger impact on real GDP and consumer prices. Second, we document that the contribution of oil supply shocks to fluctuations in the real price of oil has decreased considerably over time, implying that current oil price fluctuations are more demand driven. Third, oil supply disturbances seem to have played a significant but non-exclusive role in the 1974/75 and early 1990s recessions but were of minor importance in the 1980/81 and millennium slowdowns. Finally, while oil supply shocks explain little of the "Great Inflation", their relative importance for CPI inflation variability has somewhat increased over time.
    Keywords: Oil prices, vector auto regressions, time-varying coefficients
    JEL: E31 E32 Q43
    Date: 2008–04
  13. By: Takashi Kano (University of Tokyo)
    Abstract: A recent paper claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations.
    Date: 2008–06
  14. By: Ferre De Graeve
    Abstract: The central variable of theories of financial frictions--the external finance premium--is unobservable. This paper distils the external finance premium from a DSGE model estimated on U.S. macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate--based solely on nonfinancial macroeconomic data--picks up over 70 percent of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected.
    Keywords: Financial markets ; Corporate bonds ; Corporations - Finance
    Date: 2008
  15. By: Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT); Bátorová, Ivana (BOFIT)
    Abstract: We analyze the business cycles in China and in selected OECD countries between 1992 and 2006 using dynamic correlations. Nearly all OECD countries showpositive correlations of the very hort-run developments which may correspond to intensive supplier linkages. However, dynamic correlations at the business cycle frequencies are negative. Countries facing a comparably longer history of intensive trading links tend to show slightly higher correlations of business cycles with China. Even though trade and financial flows do not really increase correlations of business cycles between China and OECD countries, they lower the degree of business cycle synchronization within the OECD area.
    Keywords: business cycles; synchronization; trade; FDI; dynamic correlation
    JEL: E32 F15 F41
    Date: 2008–06–17
  16. By: Patrick A. Pintus; Yi Wen
    Abstract: This paper resuscitates the credit-cycle theory of Kiyotaki and Moore (1997) in a two-agent RBC model with conventional preferences and standard neoclassical technologies. It is shown that small transitory shocks to credit demand (or supply) can generate large, highly persistent, dampened cycles in aggregate output. Key to our results is the interaction between credit constraints and habit formation. Credit constraints based on collateralized assets mainly amplify the impact of shocks while habit formation in consumption demand mainly propagates it. Hump-shaped boom-bust cycles do not arise in the model under standard parameter values if either one of the two elements is missing.
    Keywords: Credit
    Date: 2008
  17. By: Prasanna Gai; Kamakshya Trivedi
    Abstract: This note presents a simple model that nests the “excess liquidity” and “savings glut” hypotheses of the debate on the recent asset price boom. It clarifies the notion of investors’ ‘search for yield’ and shows how financial frictions influence asset price dynamics.
    JEL: G15 E44 E58
    Date: 2008–02
  18. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: The globalization of banking in the United States is influencing the monetary transmission mechanism both domestically and in foreign markets. Using quarterly information from all U.S. banks filing call reports between 1980 and 2005, we find evidence for the lending channel for monetary policy in large banks, but only those banks that are domestically-oriented and without international operations. We show that the large globally-oriented banks rely on internal capital markets with their foreign affiliates to help smooth domestic liquidity shocks. We also show that the existence of such internal capital markets contributes to an international propagation of domestic liquidity shocks to lending by affiliated banks abroad. While these results imply a substantially more active lending channel than documented in the seminal work of Kashyap and Stein (2000), the lending channel within the United States is declining in strength as banking becomes more globalized.
    JEL: E5 F3 G20 G3
    Date: 2008–06
  19. By: Tito Nícias Teixeira da Silva Filho
    Abstract: This paper contributes to fill the large existing gap in the literature on the Brazilian natural rate of unemployment. It reveals not only that the correlation between inflation and unemployment has changed radically since the stabilisation of the economy but, more surprisingly, that it has become positive in the recent past. In other words, there has apparently been no trade-off between inflation and unemployment. However, this fact is due to – and highlights – the paramount importance of supply shocks in recent inflation dynamics in Brazil. The paper then shows that the exchange rate has been the major source of shocks to inflation, even though it is not enough to explain the magnitude and persistence of those shocks. Part of the answer comes from the large and wide effects produced by privatisation on the price dynamics in Brazil. The evidence presented here suggests that the Brazilian natural rate of unemployment has been constant since 1996. Despite the high degree of uncertainty involved in natural rate estimations, point estimates seem to lie somewhere between the 7.4%–8.5% range. The paper also sheds light on why real interest rates have been so high for extended periods of time in Brazil, a feature that has puzzled many economists. Finally, it calls to attention that one important core inflation measure in Brazil has not been able to capture underlying inflation properly and, therefore, has to be used with caution.
    Date: 2008–05
  20. By: Corrinne Ho
    Abstract: Just as monetary policy at the strategic level has undergone significant changes over the years, so has its day-to-day implementation. This paper documents the key features of 17 central banks' monetary operating frameworks as of early 2007 and discusses their major developments over the preceding decade. It finds that while some common themes and practices can be identified, there is no unique "best" way to implement monetary policy. Moreover, central banks everywhere - even in industrial economies - have continued to refine their operating frameworks and procedures and to innovate where necessary, responding to changing needs in changing times.
    Keywords: monetary policy implementation, operating procedures, policy rate, operating target, reserve requirements, standing facilities, discretionary operations, Asia-Pacific
    Date: 2008–06
  21. By: Carmen Broto (Banco de España); Esther Ruiz (Universidad Carlos III de Madrid)
    Abstract: In this paper we propose a model for monthly inflation with stochastic trend, seasonal and transitory components with QGARCH disturbances. This model distinguishes whether the long-run or short-run components are heteroscedastic. Furthermore, the uncertainty associated with these components may increase with the level of inflation as postulated by Friedman. We propose to use the differences between the autocorrelations of squares and the squared autocorrelations of the auxiliary residuals to identify heteroscedastic components. We show that conditional heteroscedasticity truly present in the data can be rejected when looking at the correlations of standardized residuals while the autocorrelations of auxiliary residuals have more power to detect conditional heteroscedasticity. Furthermore, the proposed statistics can help to decide which component is heteroscedastic. Their finite sample performance is compared with that of a Lagrange Multiplier test by means of Monte Carlo experiments. Finally, we use auxiliary residuals to detect conditional heteroscedasticity in monthly inflation series of eight OECD countries.
    Keywords: Leverage effect, QGARCH, seasonality, structural time series models, unobserved component
    JEL: C22 C52 E31
    Date: 2008–06
  22. By: Ippei Fujiwara (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara; Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates international staggered loan contracts as a simple form of the financial market imperfections. Recent empirical studies show that such staggered loan contracts are prevalent in the US, UK, and Japan and direct shocks to the bank lending interest rate (risk premium shocks) are major drivers of business cycle dynamics. Simulation results only with such a financial market friction and a risk premium shock can generate persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to reproduce in standard NOEM models. This implies that these financial market developments can possibly be a major source of real exchange rate fluctuations.
    Keywords: Financial Market Imperfections, Real Exchange Rates, Staggered Loan Contracts
    JEL: F31 E41
    Date: 2008–06
  23. By: Olaf Posch (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: This paper studies the effects of taxation on output volatility in OECD countries to shed light on the sources of observed heterogeneity over time and across countries. To this end, we derive tax effects on macro aggregates in a stochastic neoclassical model. As a result, taxes are shown to affect the second moment of output growth rates without (long-run) effects on the first moment. Taking the model to the data, we exploit observed heterogeneity patterns to estimate effects of tax rates on macro volatility using panel estimation, explicitly modeling the unobserved variance process. We find a strong empirical link between effective tax rates and output volatility, with some evidence of a cointegrating relationship. In accordance with theory, taxes on labor income and corporate income empirically are found to be negatively related to volatility of macro aggregates whereas the capital tax ratio has positive effects.
    Keywords: Macroeconomic volatility, Tax effects, Big moderation
    JEL: E32 E62
    Date: 2008–01–18
  24. By: Sven Blank; Claudia M. Buch
    Abstract: International bank portfolios constitute a large component of international country portfolios. Yet, their response to macroeconomic conditions and their impact on the international transmission of business cycles developments remains largely unexplored. We use a novel dataset on banks’ international portfolios to answer three questions. First, what are the long-run determinants of banks’ international portfolios? Second, how do banks’ international portfolios adjust to short-run macroeconomic developments? Third, does the speed of adjustment change with the degree of financial integration? We provide evidence of significant long-run cointegration relationships between cross-border assets and liabilities of banks and key macroeconomic variables. Both, the long-run determinants of banks’ international portfolios as well as the short-run dynamics show a significant degree of heterogeneity across countries and, to some extent, over time. Gravitytype variables help explaining differences in the speed of adjustment to new equilibria.
    Keywords: international bank portfolios, macroeconomic developments, transmission channels
    JEL: F32 F42 F34
    Date: 2007–03
  25. By: Biroli, Pietro; Buti, Marco; Turrini, Alessandro Antonio; Van Den Noord, Paul
    Abstract: European policy makers, notably in the euro area, seem to take for granted that the electorate will punish them for bold reform in product and labour markets. This may explain why progress in the euro area has been comparatively limited. This paper posits and, using a dataset for 21 OECD countries, shows that this fear of electoral backlashes is unfounded, provided that financial markets work well. The mechanisms involved are relatively straightforward: well functioning financial markets "bring forward" future yields of structural reform to the present, thus permitting to overcome possible short-run costs. As a result, the electorate tend to reward, not punish, reformist governments. This has important implications for the design of structural reform packages, with financial market reforms being an essential ingredient beside product and labour market reforms.
    Keywords: Economic and Monetary Union; electoral cycle; financial markets; structural reforms
    JEL: E61 H30 H60 H70
    Date: 2008–06
  26. By: Charles S. Bos; Siem Jan Koopman; Marius Ooms (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: We investigate changes in the time series characteristics of postwar U.S. inflation. In a model-based analysis the conditional mean of inflation is specified by a long memory autoregressive fractionally integrated moving average process and the conditional variance is modelled by a stochastic volatility process. We develop a Monte Carlo maximum likelihood method to obtain efficient estimates of the parameters using a monthly dataset of core inflation for which we consider different subsamples of varying size. Based on the new modelling framework and the associated estimation technique, we find remarkable changes in the variance, in the order of integration, in the short memory characteristics and in the volatility of volatility.
    Keywords: Time varying parameters, Importance sampling, Monte Carlo simulation, Stochastic Volatility, Fractional Integration
    JEL: C15 C32 C51 E23 E31
    Date: 2007–12–21
  27. By: Martin Møller Andreasen (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: This paper shows how non-linear DSGE models with potential non-normal shocks can be estimated by Quasi-Maximum Likelihood based on the Central Difference Kalman Filter (CDKF). The advantage of this estimator is that evaluating the quasi log-likelihood function only takes a fraction of a second. The second contribution of this paper is to derive a new particle filter which we term the Mean Shifted Particle Filter (MSPFb). We show that the MSPFb outperforms the standard Particle Filter by delivering more precise state estimates, and in general the MSPFb has lower Monte Carlo variation in the reported log-likelihood function.
    Keywords: Multivariate Stirling interpolation, Particle filtering, Non-linear DSGE models, Non-normal shocks, Quasi-maximum likelihood
    JEL: C13 C15 E10 E32
    Date: 2008–06–20
  28. By: Domenico Delli Gatti; Mauro Gallegati; Bruce C. Greenwald; Alberto Russo; Joseph E. Stiglitz
    Abstract: We explore the properties of a credit network characterized by inside credit - i.e. credit relationships connecting downstream (D) and upstream (U) firms - and outside credit - i.e. credit relationships connecting firms and banks. The structure of the network changes over time due to the preferred-partner choice rule: each agent chooses the partner who charges the lowest price. The net worth of D firms turns out to be the driver of fluctuations. U production, in fact, is determined by demand of intermediate inputs on the part of D firms and production of the latter is financially constrained, i.e. determined by the availability of internal finance proxied by net worth. The output of simulations shows that at the macroeconomic level a business cycle can develop as a consequence of the complex interaction of the agents' financial conditions. We can also reproduce the main stylized facts of firms' demography, i.e. the power law distribution of firms' size and the Laplace distribution of firms' growth rates.
    JEL: E3
    Date: 2008–06
  29. By: Vítor Castro (Universidade do Minho - NIPE)
    Abstract: One widespread idea in the business cycles literature is taht the older is an expansion or contraction, the more likely it is to end. This paper tries to provide further empirical support for this idea of positive duration dependence and, at the same time, control for the effects of other factors like leading indicators, the duration of the previous phase, investment, price of oil and external influences on the duration of expansions and contractions. This study employs a discrete-time duration model to analyse the impact of those variables on the likelihood of an expansion and contraction ending for a group of industrial countries over the last fifty years. The evidence provided in this paper suggests that the duration of expansions and contractions is not only dependent on their actual age: the duration of expansions is also positively dependent on the behaviour of the variables in the OECD composite leading indicator and on private investment, and negatively affected by the price of oil and by the occurence of a peak in the US business cycle; the duration of a contraction is negatively affected by its actual age and by the duration of the previous expansion.
    Keywords: Business cycles; Expansions; Contractions; Duration dependence; Duration models
    JEL: C41 E32
    Date: 2008
  30. By: Wen Bin Lim; Charles Goodhart
    Abstract: This is the first of three prospective papers examining how well forecasters can predict the future time path of short-term interest rates. Most prior work has been done using US data; in this exercise we use forecasts made for New Zealand (NZ) by the Reserve Bank of New Zealand (RBNZ), and those derived from money market yield curves in the UK. In this first exercise we broadly replicate recent US findings for NZ and UK, to show that such forecasts in NZ and UK have been excellent for the immediate forthcoming quarter, reasonable for the next quarter and useless thereafter. Moreover, when ex post errors are assessed depending on whether interest rates have been upwards, or downwards, trending, they are shown to have been biased and, apparently, inefficient. In the second paper we shall examine whether (NZ and UK) forecasts for inflation exhibit the same syndromes, and whether errors in inflation forecasts can help to explain errors in interest rate forecasts. In the third paper we shall set out an hypothesis to explain those findings, and examine whether the apparent ex post forecast inefficiencies may still be consistent with ex ante forecastefficiency. Even if the forecasts may be ex ante efficient, their negligible ex post forecasting ability suggests that, beyond a six months’ horizon from the forecast date, they would be better replaced by a simple ‘no-change thereafter’ assumption.
    Date: 2008–06
  31. By: Jordi Caballé (Unitat de Fonaments de l’Anàlisi Economica and CODE, Universitat Autònoma de Barcelona.); Ana I. Moro Egido (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: In this paper, we analyze how the introduction of habits and aspirations affects the distribution of wealth when individuals’ labor productivity is subject to idiosyncratic shocks and bequests arise from a joy-of-giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally and this transmission, together with the contemporaneous income shocks, determines the stationary distribution of wealth. We show that the introduction of aspirations increases both the intragenerational variability of wealth and the corresponding degree of intergenerational mobility. The opposite result holds when habits are introduced. Finally, we discuss how aspirations and habits interact with the redistributive features of an unfunded social security system.
    Keywords: Aspirations, Habits, Wealth Distribution, Social Security.
    JEL: D31 E21 E62
    Date: 2008–06–09
  32. By: Christopher F. Baum (Boston College; DIW Berlin); Mustafa Caglayan (University of Sheffield); Oleksandr Talavera (Aberdeen Business School, Robert Gordon University)
    Abstract: We investigate the impact of debt on a panel of U.S. manufacturing firms' capital investment behavior as the underlying firm-specific and macroeconomic uncertainty changes. Our estimates show that the influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty.
    Keywords: capital investment, leverage, uncertainty
    JEL: E22 G31 D81
    Date: 2008–06–21
  33. By: Tobias Adrian; Hyun Song Shin
    Abstract: In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, prompting financial intermediaries to adjust the size of their balance sheets. We present evidence that marked-to-market leverage is strongly procyclical and argue that such behavior has aggregate consequences. Changes in dealer repurchase agreements (repos) -the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index (VIX). Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.>
    Keywords: Business cycles ; Financial markets ; Financial institutions ; Repurchase agreements
    Date: 2008
  34. By: Jang-Ting Guo; Kevin J. Lansing
    Abstract: This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector neoclassical growth model. Our analysis employs a “normalized” version of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that labor’s share of income becomes procyclical as the elasticity of substitution increases above unity, whereas labor’s share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity.
    Keywords: Capital ; Labor supply
    Date: 2008
  35. By: Xavier Tafunell
    Abstract: Investment in machinery is a key aspect in the analysis of long-term economic growth during the era of the spread of industrialisation. But, historiography has only revealed what the pace of capital accumulation was in a few Latin American economies. This article offers continuous (annual) and consistent series on the magnitude of this investment in all of the Latin American countries for the period at the height of the first globalisation, 1890-1930. The paper gives special attention to comparative analysis, showing the differences that exist at the heart of the Latin American community, in the levels of capital formation in machinery as well as in the national development of this over time. The differences in the levels appear very indicative of the unequal degree of development reached by these economies. This article puts to test the hypothesis of intraregional divergence, obtaining the tentative result that there was divergence until 1913, but that there was convergence from 1914-1930.
    Keywords: Capital equipment, Latin American industrialization, Investment in machinery, Convergence
    JEL: N16 E22 O54 E32
    Date: 2008–06
  36. By: Olaf Posch (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Understanding the process of economic growth involves comparing competing theoretical models and evaluating their empirical relevance. Our approach is to take the neoclassical stochastic growth model directly to the data and make inferences about the model parameters of interest. In this paper, output follows a jump-diffusion process. By imposing parameter restrictions we derive two solutions in explicit form. Based on them, we obtain transition densities in closed form and employ maximum likelihood techniques to estimate the model parameters. In extensive Monte Carlo simulations we demonstrate that population parameters of the underlying data generating process can be recovered. We find empirical evidence for jumps in monthly and quarterly data on industrial production for the UK, the US, Germany, and the euro area (Euro12).
    Keywords: Jump-diffusion estimation, Stochastic growth, Closed form solutions
    JEL: C13 E32 O40
    Date: 2007–09–14
  37. By: Tom Engsted; Stuart Hyde; Stig V. Møller (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: On an international post World War II dataset, we use an iterated GMM pro- cedure to estimate and test the Campbell-Cochrane (1999) habit formation model. In addition, we analyze the predictive power of the surplus consumption ratio for future asset returns. We find that, although there are important cross-country differences, for the majority of countries in our sample the model gets empirical support in a variety of diffrent dimensions, including reasonable estimates of risk- free rates, and the model dominates the time-separable power utility model in terms of pricing errors. Further, for the majority of countries the surplus consumption ratio captures time-variation in expected returns. Together with the price-dividend ratio, the surplus consumption ratio contains significant information about future stock returns, also during the 1990s. Finally, in most countries the surplus con- sumption ratio is also a powerful predictor of future bond returns.
    Keywords: Habit formation, Campbell-Cochrane model, surplus consumption ratio, GMM estimation, pricing errors, return predictability
    JEL: E21 G12 G15
    Date: 2007–10–30
  38. By: Ekkehard Ernst; Timo Teuber
    Abstract: An overlapping-generations model with search unemployment is calibrated for the Netherlands to assess the impact of tax-benefit reforms on labour supply. Several reforms are analysed, in particular the introduction of a flat tax and pension reforms. The model demonstrates the potential of these reforms to raise labour supply. In particular, pension reforms, such as lowering replacement rates for pensioners, help to boost participation rates of older workers. On the other hand, a flat tax would promote longer working hours across the board, thereby rising labour supply. However, the introduction of a flat tax is a costly measure and would increase the primary general government deficit by close to 2% of GDP. Simultaneous measures to lower the structural unemployment rate would not only help to avoid adverse effects of such a tax reform on the fiscal balance but would strengthen further the positive effects of a flat tax on working hours. <P>Le système des impôts et des transferts sociaux néerlandais et l’emploi pendant le cycle de vie : Résultats et options de réformes <BR>Un modèle à générations imbriquées avec chômage d’équilibre est calibré pour les Pays-Bas afin d’évaluer l’impact des réformes du système d’imposition et de transferts sociaux sur l’offre du travail. Plusieurs réformes sont analysées, en particulier l’introduction d’un impôt à taux unique et des réformes du système des retraites. Le modèle montre le potentiel de ces réformes pour augmenter l’offre du travail. En particulier, les réformes du système des retraites visant à diminuer le taux de remplacement des retraites permettent d’augmenter l’offre du travail des seniors. De l’autre côté, un impôt à taux unique permettrait d’augmenter le nombre d’heures travaillées par personne, ce qui augmenterait l’offre du travail. Néanmoins, introduire un tel impôt est une mesure couteuse et augmenterait le déficit primaire de près de 2% du PIB. Des mesures simultanées de réduire le taux de chômage structurel permettraient de contrebalancer des effets adverses d’une telle réforme des impôts sur le solde budgétaire et augmenterait en même temps son effet positif sur le nombre d’heures travaillées.
    Keywords: tax reform, Netherlands, Pays-Bas, pension reform, réforme du système de retraite, overlapping generation model, modèle à générations imbriquées, dynamic tax-benefit policies, equilibrium unemployment, labour market search frictions, politiques fiscales dynamiques, chômage d’équilibre, frictions d’appariement du marché du travail, réformes du système des impôts
    JEL: D91 E24 J26 J64
    Date: 2008–06–19
  39. By: Valentina Corradi; Antonio Mele; Walter Distaso
    Abstract: This paper introduces a no-arbitrage framework to assess how macroeconomic factors help explain the risk-premium agents require to bear the risk of .uctuations in stock market volatility. We develop a model in which return volatility and volatility risk-premia are stochastic and derive no-arbitrage conditions linking volatility to macroeconomic factors. We estimate the model using data related to variance swaps, which are contracts with payo¤s indexed to nonparametric measures of realized volatility. We .nd that volatility risk-premia are strongly countercyclical, even more so than standard measures of return volatility.
    Date: 2008–06
  40. By: Alessandra Fogli; Laura Veldkamp
    Abstract: One of the most dramatic economic transformations of the past century has been the entry of women into the labor force. While many theories explain why this change took place, we investigate the process of transition itself. We argue that local information transmission generates changes in participation that are geographically heterogeneous, locally correlated and smooth in the aggregate, just like those observed in our data. In our model, women learn about the effects of maternal employment on children by observing nearby employed women. When few women participate in the labor force, data is scarce and participation rises slowly. As information accumulates in some regions, the effects of maternal employment become less uncertain, and more women in that region participate. Learning accelerates, labor force participation rises faster, and regional participation rates diverge. Eventually, information diffuses throughout the economy, beliefs converge to the truth, participation flattens out and regions become more similar again. To investigate the empirical relevance of our theory, we use a new county-level data set to compare our calibrated model to the time-series and geographic patterns of participation.
    JEL: E2 J16 N32 R1
    Date: 2008–06
  41. By: Ricardo Lagos; Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity, persistence) under which dealers provide liquidity to investors following the crash. We also characterize the conditions under which dealers incentives to provide liquidity are consistent with market efficiency.
    JEL: C78 D83 E44 G1
    Date: 2008–06
  42. By: Nicole Walter; Runli Xie
    Abstract: Empirical observations show that education helps to protect against labor market risks. This is twofold: The higher educated face a higher expected wage income and a lower probability of being unemployed. Although this relationship has been analyzed in the literature broadly, several questions remain to be tackled. This paper contributes to the existing literature by looking at the above mentioned phenomena from a purely theoretic perspective and in a European context. We set up a model with search-and-matching frictions, collective bargaining and monopolistic competition in the product market. Workers are heterogeneous in their human capital level. It is shown that higher human capital increases the wage rate and reduces unemployment risks, which is consistent with empirical observations for European countries.
    Keywords: human capital, search frictions, collective bargaining, monopolistic competition
    JEL: E24 J24 J52
    Date: 2008–06
  43. By: Martin Møller Andreasen (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: This paper extends two optimization routines to deal with objective functions for DSGE models. The optimization routines are i) a version of Simulated Annealing developed by Corana, Marchesi & Ridella (1987), and ii) the evolutionary algorithm CMA-ES developed by Hansen, Müller & Koumoutsakos (2003). Following these extensions, we examine the ability of the two routines to maximize the likelihood function for a sequence of test economies. Our results show that the CMA- ES routine clearly outperforms Simulated Annealing in its ability to find the global optimum and in efficiency. With 10 unknown structural parameters in the likelihood function, the CMA-ES routine finds the global optimum in 95% of our test economies compared to 89% for Simulated Annealing. When the number of unknown structural parameters in the likelihood function increases to 20 and 35, then the CMA-ES routine finds the global optimum in 85% and 71% of our test economies, respectively. The corresponding numbers for Simulated Annealing are 70% and 0%.
    Keywords: CMA-ES optimization routine, Multimodel objective function, Nelder-Mead simplex routine, Non-convex search space, Resampling, Simulated Annealing
    JEL: C61 C88 E30
    Date: 2008–06–19
  44. By: Martin Møller Andreasen (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: The presence of i) stochastic trends, ii) deterministic trends, and/or iii) stochastic volatil- ity in DSGE models may imply that the agents' objective functions attain infinite values. We say that such models do not have a valid micro foundation. The paper derives sufficient condi- tions which ensure that the objective functions of the households and the firms are finite even when various trends and stochastic volatility are included in a standard DSGE model. Based on these conditions we test the validity of the micro foundation in six DSGE models from the literature. The models of Justiniano & Primiceri (American Economic Review, forth- coming) and Fernández-Villaverde & Rubio-Ramírez (Review of Economic Studies, 2007) do not satisfy these sufficient conditions, or any other known set of conditions ensuring finite values for the objective functions. Thus, the validity of the micro foundation in these models remains to be established.
    Keywords: Deterministic trends, DSGE models, Error distributions, Moment generating functions, Stochastic trends, Stochastic volatility, Unit-roots
    JEL: E10 E30
    Date: 2008–05–26

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