nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒07‒05
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Central Bank Transparency By Eijffinger, Sylvester C W; Hoogduin, Lex; van der Cruijsen, Carin A B
  2. An Estimated New Keynesian Model for Israel By Argov, Eyal; Elkayam, David
  3. Signal Extraction and Hyperinflations with a Responsive Monetary Policy By Judit Temesvary
  4. Estimation of weights for the Monetary Conditions Index in Poland By Andrzej Toroj
  5. Technology and non-technology shocks in a two-sector economy. By Francesco Busato; Alessandro Girardi; Amedeo Argentiero
  6. What Do Reaction Functions Tell Us About Central Bank Preferences? By Steffen Elstner; Amer Tabakovic
  7. The Political Economics Side of the J-Curve By António Caleiro
  8. Disinflation and the NAIRU in a New-Keynesian New-Growth Model By Rannenberg, Ansgar
  9. The Quantity Theory of Money in Historical Perspective By Michael Graff
  10. Does immigration affect the Phillips curve? Some evidence for Spain By Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno
  11. Openness, Bureaucratic Corruption and Public Policy in an Endogenous Growth Model By Rangan Gupta; Emmanuel Ziramba
  12. A Dynamic Factor Model for Forecasting Macroeconomic Variables in South Africa By Rangan Gupta; Alain Kabundi
  13. Money and Nominal Bonds By Marchesiani, Alessandro; Senesi, Pietro
  14. Schumpeterian Foundations of Real Business Cycles By Nuno Barrau, Galo
  15. Menu Costs and Inflation Asymmetries Some Micro Data Evidence By Peter Karadi; Adam Reiff
  16. Governing the Governors: A Clinical Study of Central Banks By Frisell, Lars; Roszbach, Kasper F.; Spagnolo, Giancarlo
  17. Do macroeconomic variables play any role in the stock market movement in Ghana? By Adam, Anokye M.; Tweneboah , George
  18. House Prices and Economic Risks - Are Irish Households Rational? By Dirk G. Baur and Conor McKeating
  19. Restaurant Prices and the Minimum Wage By Fougère, Denis; Gautier, Erwan; Le Bihan, Hervé
  20. Executive Compensation and Stock Options: An Inconvenient Truth By Danthine, Jean-Pierre; Donaldson, John B
  21. Macroeconomics and ARCH By James D. Hamilton
  22. Do macroeconomic variables play any role in the stock market movement in Ghana? By Adam, Anokye M.; Tweneboah , George
  23. Predicting Downturns in the US Housing Market: A Bayesian Approach By Rangan Gupta; Sonali Das
  24. Costly Tax Enforcement and Financial Repression: A Reconsideration Using an Endogenous Growth Model By Rangan Gupta; Emmanuel Ziramba
  25. The Inconsistency Puzzle Resolved: an Omitted Variable By Arefiev, Nikolay
  26. Milan’s Cycle as an Accurate Leading Indicator for the Italian Business Cycle By Matteo Pelagatti; Valeria Negri
  27. Executive Compensation and Macroeconomic Fluctuations By Oxelheim, Lars; Wihlborg, Clas; Zhang, Jianhoa
  28. Forecasting Macroeconomic Variables Using Large Datasets: Dynamic Factor Model versus Large-Scale BVARs By Rangan Gupta; Alain Kabundi
  29. Uses of National Accounts; History, International Standardization and Applications in the Netherlands By Bos, Frits
  30. Treasury V Dodgers. A Tale of Fiscal Consolidation and Tax Evasion By Maurizio Bovi; Peter Claeys
  31. On Choosing an Exchange Rate Regimes in Emerging Economies By Adamcik, Santiago
  32. Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008 By Stephen G. Cecchetti
  33. Macroeconomic imbalances, socio-political instability and public provision: effects on private investment By Constantina Kottaridi; Monica Escaleras
  34. Age, Luck, and Inheritance By Jess Benhabib; Shenghao Zhu
  35. Intensified Regulatory Scrutiny and Bank Distress in New York City During the Great Depression By Gary Richardson; Patrick Van Horn
  36. Tax Evasion and Growth: a Banking Approach By Max Gillman; Michal Kejak
  37. Finance and Growth: When Does Credit Really Matter? By Coricelli, Fabrizio; Roland, Isabelle
  38. Monetization of Public Goods Provision: A possible solution for the free-rider problem By KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki
  39. The Bahaviour of the Saving Rate in the Neoclassical Optimal Growth Model By Anastastia Litina; Theodore Palivos
  40. Short-term forecasting of GDP using large monthly datasets – A pseudo real-time forecast evaluation exercise By K. Barhoumi; S. Benk; R. Cristadoro; A. Den Reijer; A. Jakaitiene; P. Jelonek; A. Rua; K. Ruth; C. Van Nieuwenhuyze; G. Rünstler
  41. Misalignment in the Growth-Maximizing Tax Rate under Alternative Assumptions of Tax Evasion By Rangan Gupta; Emmanuel Ziramba
  42. A Study of Residential Housing Demand in India By Bandyopadhyay, Arindam; Kuvalekar, S V; Basu, Sanjay; Baid, Shilpa; Saha, Asish
  43. Interrelationships of the hidden economy and some visible segments of the labour market By Maria Lacko
  44. Essays on Learning and Macroeconomics By Guillermo Ordonez
  45. Costly Tax Enforcement and Financial Repression By Rangan Gupta; Emmanuel Ziramba

  1. By: Eijffinger, Sylvester C W; Hoogduin, Lex; van der Cruijsen, Carin A B
    Abstract: Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banks that would benefit from further transparency increases, some might already have reached the limit.
    Keywords: central bank transparency; inflation persistence; monetary policy
    JEL: E31 E52 E58
    Date: 2008–06
  2. By: Argov, Eyal; Elkayam, David
    Abstract: We formulate and estimate a small New Keynesian model for the Israeli economy. Our goal is to construct a small but still realistic model that can be used to support the inflation targeting process. The model contains three structural equations: An open economy Phillips curve for CPI inflation (excluding the housing component), an aggregate demand curve for the output gap and an interest parity condition for the nominal exchange rate. The model is closed with an interest rate reaction function (Taylor-type rule) and an ad hoc equation for the housing component of the CPI, which is dominated by exchange rate changes. In the specification of the model we had to pay special attention to the crucial role of the exchange rate in the transmission of monetary policy in Israel, which has a direct effect on almost 60 percent of the CPI. The model is estimated by the GMM method, using quarterly data for the period 1992:I to 2005:IV. In the estimation of the structural equations we tried to remain as close as possible to the theoretical formulation by restricting the dynamics to one lag at most. We use the model to characterize an "optimal" simple interest rate rule. We find that the monetary authority should respond to an hybrid backward-forward looking rate of inflation and does not benefit from direct reaction to exchange rate measures.
    JEL: E0 E4 E3
    Date: 2007–12
  3. By: Judit Temesvary (Department of Economics, Cornell University, Ithaca)
    Abstract: This paper develops a multi-period extension of the Lucas (1972) overlapping generations "island" model with endogenous monetary policy (based on the minimization of a loss function over inflation and output deviations) and stochastic realization of the "allocation" of the young people across the two islands. These allocation realizations are interpreted as output shocks (since only the young people produce). The paper examines two cases: the certainty case when the exact monetary policy is known to the young, and uncertainty case where the young receive only a mixed signal of the output shock and the monetary policy weights through the price (the signal extraction problem). In the certainty case, the neutrality result holds. In the uncertainty case, even monetary shocks have real effects as a result of the signal extraction problem. After characterizing the resulting price function by its constant elasticity to the signal, we derive values of this elasticity and the monetary policy weights such that hyperinflations will develop. We find that for certain weights, hyperinflations can develop even when the price function is concave in the signal. Finally, we formulate a particular convex case of the price function (making distributional assumptions) to analyze the price and monetary policy examples and statics as functions of the weights on the inflation and output deviation terms.
    Keywords: Rational expectations, Neutrality of Money, Signal Extraction Problem, Loss function, Hyperinflations, High inflations
    JEL: E3 E4 E5
    Date: 2007–10
  4. By: Andrzej Toroj (Warsaw School of Economics, National Bank of Poland)
    Abstract: In this paper, we follow the econometric approach to assess relative importance of real interest rate and real exchange rate for the monetary conditions in Poland, quantified as weights for Monetary Conditions Index (MCI). We consider both single- and multiple-equation specifications proposed in the literature with an application to Poland. Although MCI is nowadays broadly considered a rather obsolete indicator in monetary policy conduct, we argue that the econometric framework used for this purpose could be a good departure point when modelling monetary adjustments in a monetary union, provided correct dynamic specification of the models.
    Keywords: Monetary Conditions Index, MCI-ratio, IS curve, Phillips curve, VAR.
    JEL: C22 C32 E52 E59
    Date: 2008–06–23
  5. By: Francesco Busato (University of Naples Parthenope and University of Aarhus, School of Economics and Managements); Alessandro Girardi (ISAE - Institute for Studies and Economic Analyses and University of Rome Tor Vergata); Amedeo Argentiero (University of Rome Tor Vergata)
    Abstract: This paper presents an empirically testable two-sector dynamic general equilibrium model for the United States economy that admits technology and non-technology shocks. Long-run identification restrictions further distinguish the impact of each shocks over the originating sector (i.e. as a sector-specific shock), and over other sectors different from the originating one (i.e. as a crosssector shock), also exploring the shocks transmission mechanism across sectors. There are three main results. First, business cycles are mainly generated, in each sector, by technology shocks (primarily described by sector-specific shocks), but they are transmitted across sectors along the sectors’ demand side, i.e. passing through non-technology shocks. Second, technology and nontechnology shocks almost equally share the responsibility of fluctuations in the aggregate manufacturing sector. Third, the aggregate dynamics is driven by the relatively larger sector which is the non-durable good one.
    Keywords: Long-run restrictions, sector-specific shocks, cross sector shocks, real business cycle, United States economy.
    JEL: E2 E3 E32
    Date: 2008–04
  6. By: Steffen Elstner; Amer Tabakovic
    Abstract: Since Taylor’s 1993 paper researchers have devoted a lot effort to estimation of monetary policy rules. Taylor showed that a simple central bank reaction function, with the interest rate as monetary policy instrument and inflation and output gap as explanatory variables, mimics the Fed funds rate pretty well during the period from 1987 to 1992. Often, the Taylor rule coefficients are interpreted as if they reflect central bank’s preferences. However, this may be misleading. In this paper we show that Taylor rule coefficients are complicated terms consisting of preference parameters as well as parameters given by the structure of the economy. We illustrate our conclusion that Taylor rule coefficients cannot be interpreted as reflecting central bank preferences by estimating standard forward-looking Taylor rules for the Bundesbank, the Fed and UK and confront these with our results obtained by a multi-equation GMM approach in order to detect central bank preferences.
    Keywords: technology spillovers; trade; investment; panel cointegration
    Date: 2008–03
  7. By: António Caleiro (Department of Economics, University of Évora)
    Abstract: About twenty years ago, an article by van der Ploeg analysed the implications of the J-curve effect for the political business cycle in a small open economy [van der Ploeg (1989c)]. It was then shown that a sudden jump on the exchange rates in the election day should be observed if the government, in order to maximise its popularity, explores a J-curve effect. As a way of celebrating this work, that should have been more influential, it is presented in the paper a simulation study, which confirms that exchange rate overvaluation result a la van der Ploeg.
    Keywords: Exchange rates, J-Curve, Partisan Business Cycles, Political Business
    JEL: E31 E32 F31
    Date: 2008
  8. By: Rannenberg, Ansgar
    Abstract: Unemployment in the big continental European economies like France and Germany has been substantially increasing since the mid 1970s. So far it has been difficult to empirically explain the increase in unemployment in these countries via changes in supposedly employment unfriendly institutions like the generosity and duration of unemployment benefits. At the same time, there is some evidence produced by Ball (1996, 1999) saying that tight monetary policy during the disinflations of the 1980s caused a subsequent increase in the NAIRU, and that there is a relationship between the increase in the NAIRU and the size of the disinflation during that period across advanced OECD economies. There is also mounting evidence suggesting a role of the slowdown in productivity growth, e.g. Nickell et al. (2005), IMF (2003), Blanchard and Wolfers (2000). This paper introduces endogenous growth into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to a cost push shock lasting for 1 quarter, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disinflation by following a standard interest feedback rule calibrated to an estimate of a Bundesbank reaction function. About 40 quarters after the shock has vanished, unemployment is still about 1.7 percentage points above its steady state, while annual productivity growth has decreased. Over a similar horizon, a higher weight on the output gap increases employment (i.e. reduces the fall in employment below its steady state). Thus the model generates an increase in unemployment following a disinflation without relying on a change to labour market structure. We are also able to coarsely reproduce cross country differences in unemployment. A higher disinflation generated by a larger cost push shock causes a stronger persistent increase in unemployment, the correlation noted by Ball. For a given cost push shock, a policy rule estimated for the Bundesbank produces stronger persistent increase in unemployment than a policy rule estimated for the Federal Reserve. Testable differences in real wage rigidity between continental Europe and the United States, namely the presence of the labour share in the wage setting function for Europe with a negative coefficient but it's absence in the U.S. also imply different unemployment outcomes following a cost push shock: If the real wage does not depend on the labour share, the persistent increase in unemployment is about one percentage point smaller than in it's presence. To the extent that the wage setting structure is due to labour market rigidities, "Shocks and Institutions" jointly determine the unemployment outcome, as suggested by Blanchard and Wolfers (2000). We also perform a comparison of the second moments of key variables of the model with German data for a period ranging from 1970 to 1990. We find that it matches the data better than a model without endogenous growth but with otherwise identical features. This is particularly true for the persistence in employment as measured by first and higher order autocorrelation coefficients.
    Keywords: Monetary Policy; Monetary Econmics; Unemployment; NAIRU; Natural Rate of Unemployment;
    JEL: O42 E0 E30 J01
    Date: 2008–06–08
  9. By: Michael Graff (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: The paper reconstructs the origins of the quantity theory of money and its applications. Against the background of the history of money, it is shown that the theory was flexible enough to adapt to institutional change and thus succeeded in maintaining its relevance. To this day, it is useful as an analytical framework. Although, due to Goodhart's Law, it now has only limited potential to guide monetary policy and was consequently abandoned by most central banks, an empirical analysis drawing on a panel data set covering more than hundred countries from 1991 to the present confirms that the theory still holds: a positive correlation between the excess growth rate of the stock of money and the rate of inflation cannot be rejected. Yet, while the correlation holds for the whole sample, proportionality is driven by a small number of influential observations with very high inflation
    Keywords: Quantity theory of money, demand for money, monetary targeting
    JEL: B10 E41 E58
    Date: 2008–04
  10. By: Samuel Bentolila (CEMFI); Juan J. Dolado (Universidad Carlos III de Madrid); Juan F. Jimeno (Banco de España)
    Abstract: The Phillips curve has flattened in Spain over 1995-2006: unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives' and immigrants' labor supply or bargaining power differ. Estimation of the curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration.
    Keywords: Phillips curve, immigration
    JEL: E31 J64
    Date: 2008–06
  11. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: In this paper, we develop a dynamic general equilibrium overlapping generations monetary endogenous growth model of a financially repressed small open economy characterized by bureaucratic corruption, and, in turn, analyze optimal policy decisions of the government following an increase in the degree of corruption. Unlike as suggested in the empirical literature, we find that increases in the degree of corruption should ideally result in a fall in seigniorage, as an optimal response of the benevolent government. In addition, higher degrees of corruption should also be accompanied with lower levels of financial repression.
    Keywords: Bureaucratic Corruption, Macroeconomic Policy, Openness
    JEL: D73 E63 F43
    Date: 2008–06
  12. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper uses the Dynamic Factor Model (DFM) framework, which accommodates a large cross-section of macroeconomic time series for forecasting the per capita growth rate, inflation, and the nominal shortterm interest rate for the South African economy. The DFM used in this study contains 267 quarterly series observed over the period 1980Q1-2006Q4. The results, based on the RMSEs of one- to four-quartersahead out of sample forecasts over 2001Q1 to 2006Q4, indicate the DFM outperforms the NKDSGE in forecasting per capita growth, inflation and the nominal short-term interest rate. Moreover, the DFM performs no worse compared to the VARs, both classical and Bayesian, indicating the blessing of dimensionality.
    Keywords: Dynamic Factor Model, VAR, BVAR, NKDSGE Model, Forecast Accuracy
    JEL: C11 C13 C33 C53
    Date: 2008–06
  13. By: Marchesiani, Alessandro; Senesi, Pietro
    Abstract: This paper studies an economy with trading frictions, ex post heterogeneity and nominal bonds in a model à la Lagos and Wright (2005). It is shown that a strictly positive interest rate is a sufficient condition for the allocation with nominal bonds to be welfare improving. This result comes from the protection against the inflation tax.
    Keywords: money; search; nominal bonds and taxation
    JEL: H20 E40 H63
    Date: 2007–11–22
  14. By: Nuno Barrau, Galo
    Abstract: In this paper I propose a dynamic stochastic general quilibrium model that includes many of Schumpeter’s ideas about growth and business cycles. In this model, technology advances are due to the introduction of vertical innovations by entrepreneurs who are funded by banks. The model is solved and estimated by bayesian methods for the U.S. economy to compute the value of some of its structural parameters. Results show that the presented innovation mechanism is roughly equivalent in terms of volatilies, correlations and impulse responses to the technology shocks in real business cycle models. Notwithstanding, the model differs from traditional RBC models as it incorporates technology catch-up features that affect the convergence to the steady-state.
    JEL: E27 C50 O40
    Date: 2008–06–20
  15. By: Peter Karadi (New York University); Adam Reiff (Central Bank of Hungary)
    Abstract: The paper explains the observed asymmetric inflation response to value-added tax (VAT) changes in Hungary by calibrating a standard sectoral menu cost model on a new micro-level CPI data set. The model is able to reproduce important moments of the data, and finds that the asymmetry can be explained by the interaction of menu costs, (sectoral) trend inflation and forward-looking firms, thereby it provides direct evidence to the argument of Ball and Mankiw (1994).
    Keywords: Menu Cost, Inflation Asymmetry, Sectoral Heterogeneity, Value-Added Tax
    JEL: E30
    Date: 2007–10
  16. By: Frisell, Lars; Roszbach, Kasper F.; Spagnolo, Giancarlo
    Abstract: Recent research on central bank governance has focused mainly on their monetary policy task. As the sub-prime loan market turmoil reminded us - central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their soundness and stability. In this paper we study the specific corporate governance structures of a number of central banks in light of their complex role of inflation guardians, bankers’ banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review their current institutional arrangements, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information; and we contrast them with the structures suggested in the corporate and public governance literatures, where present. Our analysis highlights a striking variety in central bank governance structures and a number of specific issues that appear unsatisfactorily addressed by existing research, including the incentive structure for governor and board members, the balance between central banks’ multiple objectives, and the need for term limits or post-employment restrictions.
    Keywords: accountability; bank regulation; board structure; central bank independence; central banks; cooling-off periods; governance; governor remuneration; regulatory capture; term limits
    JEL: E58 G18 G34 G38
    Date: 2008–06
  17. By: Adam, Anokye M.; Tweneboah , George
    Abstract: This study examines the impact of macroeconomic variables on stock prices. We use the Databank stock index to represent the stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), (d)Average crude oil prices , and (e) the exchange rate as macroeconomic variables. We analyse quarterly data for the above variables from 1991.1 to 2007.4. employing cointegration test, vector error correction models (VECM). These tests examine both long-run and short-run dynamic relationships between the stock market index and the economic variables. The paper established that there is cointegration between macroeconomic variable and Stock prices in Ghana indicating long run relationship. The VECM analyses shows that the lagged values of interest rate and inflation has a significant influence on the stock market. The inward foreign direct investments, the oil prices , and the exchange rate demonstrate weak influence on price changes. In terms of policy implication, the establishment of lead lag relation indicate that the DSI is not informational efficient with respect to interest rate, inflation inward FDI, Exchange rate and world Oil prices.
    Keywords: Stock Index; Stock duration; Cointegration; Efficient Market Hypothesis; Total derivative
    JEL: C32 C50 G10
    Date: 2008
  18. By: Dirk G. Baur and Conor McKeating
    Abstract: This study analyzes the evolution of house prices in Ireland and investigates the question of whether Irish households are overexposed to certain economic risks rendering the decision to buy a house too risky and hence irrational. We use a simple theoretical framework to demonstrate the investment options of a typical household and derive the risk factors associated with the purchase of a house with respect to other types of investment. Irish households hold the majority of their investments in property, specifically in their own houses. The empirical results illustrate that this wealth is exposed to inflation, interest rate changes and the business cycle. This exposure, while not problematic in times of low interest rates, moderate inflation and economic expansion, amplifies the risk to the value of households’ investments if inflation increases, interest rates rise or the economy is in recession. We argue that the adoption of the euro has increased this risk because interest rates are exogenous to the Irish economy which could lead to a situation of deteriorating economic conditions and rising interest rates. Our findings indicate that Irish households potentially underestimate the risk of buying a house. Viewing the purchase of a house as a risky investment could help reduce private debt in the future.
    Date: 2008–06–06
  19. By: Fougère, Denis; Gautier, Erwan; Le Bihan, Hervé
    Abstract: We examine the effect of the minimum wage on restaurant prices. For that purpose, we estimate a price rigidity model by exploiting a unique dataset of individual price quotes used to calculate the Consumer Price Index in France. We find a positive and significant impact of the minimum wage on prices. We obtain that the effect of the minimum wage on prices is very protracted. The aggregate impact estimated with our model takes more than a year to fully pass through to retail prices.
    Keywords: Inflation; Minimum wage; Price stickiness; Restaurant prices
    JEL: D43 E31 L11
    Date: 2008–06
  20. By: Danthine, Jean-Pierre; Donaldson, John B
    Abstract: We reexamine the issue of executive compensation within a general equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compensation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-profile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which a convex contract alone can induce the manager to adopt near-optimal investment and hiring decisions. To ask this question is essentially to ask if such contracts can effectively align the stochastic discount factor of the manager with that of the shareholder-workers. We detail exact circumstances under which this alignment is possible and when it is not.
    Keywords: business cycles; convex contracts; corporate governance; executive compensation; optimal contracting; stock options
    JEL: E32 E44
    Date: 2008–06
  21. By: James D. Hamilton
    Abstract: Although ARCH-related models have proven quite popular in finance, they are less frequently used in macroeconomic applications. In part this may be because macroeconomists are usually more concerned about characterizing the conditional mean rather than the conditional variance of a time series. This paper argues that even if one's interest is in the conditional mean, correctly modeling the conditional variance can still be quite important, for two reasons. First, OLS standard errors can be quite misleading, with a "spurious regression" possibility in which a true null hypothesis is asymptotically rejected with probability one. Second, the inference about the conditional mean can be inappropriately influenced by outliers and high-variance episodes if one has not incorporated the conditional variance directly into the estimation of the mean, and infinite relative efficiency gains may be possible. The practical relevance of these concerns is illustrated with two empirical examples from the macroeconomics literature, the first looking at market expectations of future changes in Federal Reserve policy, and the second looking at changes over time in the Fed's adherence to a Taylor Rule.
    JEL: E52
    Date: 2008–06
  22. By: Adam, Anokye M.; Tweneboah , George
    Abstract: This study examines the impact of macroeconomic variables on stock prices. We use the Databank stock index to represent the stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), (d)Average crude oil prices , and (e) the exchange rate as macroeconomic variables. We analyse quarterly data for the above variables from 1991.1 to 2007.4. employing cointegration test, vector error correction models (VECM). These tests examine both long-run and short-run dynamic relationships between the stock market index and the economic variables. The paper established that there is cointegration between macroeconomic variable and Stock prices in Ghana indicating long run relationship. The VECM analyses shows that the lagged values of interest rate and inflation has a significant influence on the stock market. The inward foreign direct investments, the oil prices , and the exchange rate demonstrate weak influence on price changes. In terms of policy implication, the establishment of lead lag relation indicate that the DSI is not informational efficient with respect to interest rate, inflation inward FDI, Exchange rate and world Oil prices.
    Keywords: Stock Market; Cointegration; Toatl derivative; Stock duration; partial differentiation
    JEL: C32 C50 G10
    Date: 2008
  23. By: Rangan Gupta (Department of Economics, University of Pretoria); Sonali Das (LQM, CSIR, Pretoria)
    Abstract: This paper estimates Bayesian Vector Autoregressive (BVAR) models, both spatial and non-spatial (univariate and multivariate), for the twenty largest states of the US economy, using quarterly data over the period 1976:Q1 to 1994:Q4; and then forecasts one-to-four quarters ahead real house price growth over the out-of-sample horizon of 1995:Q1 to 2006:Q4. The forecasts are then evaluated by comparing them with the ones generated from an unrestricted classical Vector Autoregressive (VAR) model and the corresponding univariate variant the same. Finally, the models that produce the minimum average Root Mean Square Errors (RMSEs), are used to predict the downturns in the real house price growth over the recent period of 2007:Q1 to 2008:Q1. The results show that the BVARs, in whatever form they might be, are the best performing models in 19 of the 20 states. Moreover, these models do a fair job in predicting the downturn in 18 of the 19 states, however, they always under-predict the size of the decline in the real house price growth rate – an indication of the need to incorporate the role of fundamentals in the models.
    Keywords: BVAR Model; BVAR Forecasts; Forecast Accuracy; SBVAR Model; SBVAR Forecasts; VAR Model; VAR Forecasts
    JEL: E17 E27 E37 E47
    Date: 2008–06
  24. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a monetary endogenous growth overlapping generations model characterized by financial repression, purposeful government expenditures and costly tax enforcement, we analyze whether financial repression can be explained by the cost involved in raising taxes. Note financial repression is modeled via ``high" obligatory reserve requirements that banks in the economy need to hold. We show that higher costs of tax collection produces a monotonic increase in reserve requirements. Moreover, the government tends to rely more on indirect taxation, compared to direct taxation, as costs of tax collection increases.
    Keywords: Costly tax Enforcement, Financial Repression, Endogenous Growth, Overlapping Generations Model
    JEL: E62 H21 O41
    Date: 2008–06
  25. By: Arefiev, Nikolay
    Abstract: We find that the contemporary version of the dynamic Ramsey problem omits one important variable that we take into consideration in this paper. The effect of introducing of this variable into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only a policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.
    Keywords: Inconsistency; Equilibrium policy; Optimal taxation
    JEL: E62 H21 E61
    Date: 2008
  26. By: Matteo Pelagatti; Valeria Negri
    Abstract: A coincident business cycle indicator for the Milan area is built on the basis of a monthly industrial survey carried out by Assolombarda, the largest territorial entrepreneurial association in Italy. The indicator is extracted from three time series concerning the production level and the internal and foreign order book as declared by some 250 Assolombarda associates. This indicator is potentially very valuable in itself, being Milan one of the most dynamic economic systems in Italy and Europe, but it becomes much more interesting when compared to the Italian business cycle as extracted form the Italian industrial production index. Indeed, notwithstanding the deep differences in the nature of the data, the indicator for Milan has an extremely high coherence with the Italian cycle and the former leads the latter by approximately 4-5 months. Furthermore there is a direct relation between the amplitude of the cycle and the leading time of the Milan indicator.
    Keywords: Leading indicator, unobserved components model, structural time series model, local business survey
    JEL: C22 C32 C53 E32 L60
    Date: 2008–05
  27. By: Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Wihlborg, Clas (Chapman University and Copenhagen Business School); Zhang, Jianhoa (University of Göteborg)
    Abstract: Macroeconomic fluctuations affect corporations’ performance through demand and cost conditions. Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences if management is unable to forecast macroeconomic fluctuations or unable to adjust operations in response to changes in macroeconomic conditions. In this paper we analyze the impact of macroeconomic, industry and firm-specific factors on salaries and bonus of CEOs in 131 Swedish corporations during the period 2001–2006. A distinction is made between anticipated and unanticipated macroeconomic fluctuations. The macroeconomic influences on performance and compensation can be expected to vary from firm to firm in terms of magnitude of effects, as well as in terms of relevant macroeconomic variables. The estimates obtained in this paper refer to the average impact across the sample of firms. We find that the average Swedish CEOs’ compensation is explained to a substantial extent by macroeconomic factors; less so by unanticipated factors alone.
    Keywords: Executive Compensation; Macroeconomic Factors; Cash Compensation
    JEL: L14 L16 M14 M21 M52
    Date: 2008–04–21
  28. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper uses two-types of large-scale models, namely the Dynamic Factor Model (DFM) and Bayesian Vector Autoregressive (BVAR) Models based on alternative hyperparameters specifying the prior, which accommodates 267 macroeconomic time series, to forecast key macroeconomic variables of a small open economy. Using South Africa as a case study and per capita growth rate, inflation rate, and the short-term nominal interest rate as our variables of interest, we estimate the two-types of models over the period 1980Q1 to 2006Q4, and forecast one- to four-quarters-ahead over the 24-quarters out-of-sample horizon of 2001Q1 to 2006Q4. The forecast performances of the two large-scale models are compared with each other, and also with an unrestricted three-variable Vector Autoregressive (VAR) and BVAR models, with identical hyperparameter values as the large-scale BVARs. The results, based on the average Root Mean Squared Errors (RMSEs), indicate that the large-scale models are better-suited for forecasting the three macroeconomic variables of our choice, and amongst the two types of large-scale models, the DFM holds the edge.
    Keywords: Dynamic Factor Model, BVAR, Forecast Accuracy
    JEL: C11 C13 C33 C53
    Date: 2008–06
  29. By: Bos, Frits
    Abstract: The national accounts is commonly known by its key-aggregates (e.g. GDP and saving) and their role in public debate and decision-making. However, the national accounts plays many different roles for many different uses. This paper provides an overview of the development of these roles and uses since the seventeenth century. Three periods are distinguished: the early estimates (1660-1930), revolutionary decades (1930-1950) and the era of the international guidelines (1950-present). The paper discusses these roles and uses also much more in detail for one country: the Netherlands, a country which played an important role in modern national accounting and where expert data users, like the CPB, SCP and the Dutch central bank, have developed several interesting applications of the national accounts.
    Keywords: Uses of the national accounts; history of national accounting; history of taxation; economic growth; Dutch national accounts; relevance and reliability of the national accounts; Petty; King; Vauban; Quesnay; Keynes; Clark; Kuznets; Leontief; Tinbergen; Hicks; van Cleeff; Stone; Meade; guidelines on national accounting; European unification; macro-economic modeling and forecasting; CPB; SCP; Dutch central bank; fiscal policy; productivity analysis; performance management; national accounts and welfare; measurement in economics
    JEL: B0 C82 E01
    Date: 2008
  30. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses); Peter Claeys (Universitat de Barcelona - Facultat de Ciències Econòmiques i Empresarials)
    Abstract: The government influences the equilibrium size of hidden activity. Higher taxes give an incentive to evade. The provision of public services, social transfers and public employment may have offsetting effects on the underground economy. The budget constraint makes the relation between the shadow economy, taxes and spending inherently dynamic. A lack of time series data has prohibited the analyisis of these feedback effects. We take advantage of a unique dataset on the Italian underground economy. We find that over the period 1980-2004 the underground economy reacts to changes in government spending as well as to variations in the tax burden.
    Keywords: fiscal policy, policy rules, taxes, debt, shadow economy, Italy.
    Date: 2008–02
  31. By: Adamcik, Santiago
    Abstract: This paper discusses that a lot of the debate on selecting an exchange rate regime misses the time. It begins explaining the standard theory of choice between exchange rate regimes, and then explores the fragilities in this theory, specifically when this is applied to emerging economies. Next presents a extent of institutional characteristics that might have influence upon a country to choose either fixed or floating rates , and then turns to the converse question of whether the selection of exchange rate regime may make for the development of some helpful institutional traits. The conclusion is that the election of exchange rate regime is likely to be of second order significance to the development of good fiscal, financial, and monetary institutions in causing macroeconomic achievement in emerging market. A greater dedication in strong institution's development instead of focalizing in the exchange rate regimes could make economies healthier and less propense to the crises, as was observed of late years.
    Keywords: Regimenes de Tipo de Cambio; Economias Emergentes; Inflacion;Currency Board; Soft Pegs; Hard Pegs
    JEL: F4 F3 E5 E4
    Date: 2008–01
  32. By: Stephen G. Cecchetti
    Abstract: Realizing that their traditional instruments were inadequate for responding to the crisis that began on 9 August 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes directed at ensuring that liquidity would be distributed to those institutions that needed it most. Conceptually, this meant America's central bankers shifted from focusing solely on the size of their balance sheet, which they use to keep the overnight interbank lending rate close to their chosen target, to manipulating the composition of their assets as well. In this paper, I examine the Federal Reserve's conventional and unconventional responses to the financial crisis of 2007-2008.
    JEL: E5
    Date: 2008–06
  33. By: Constantina Kottaridi; Monica Escaleras
    Abstract: Most studies on private investment focus either in the macroeconomic conditions or political conditions to explain private investment patterns. We go a step further and examine empirically the joint effect of macroeconomic imbalances, sociopolitical instability and public provision on private investment using data from 50 developing countries between 1970 and 2000. Our results show that real exchange rate uncertainty and socio-political instability jointly have a negative impact on private investment. Further, our results establish a detrimental effect of public provision when measured as public investment, but a beneficial effect when measured by infrastructure availability. Interesting policy implications stemming from the analysis regard the implementation of macro policies serving to limit excess volatility in relative prices, institutional reforms that lessen social tensions and provision of adequate amount and quality of public infrastructure to enable investment undertaking by lowering investors’ costs.
    Keywords: Private investment, real exchange rate, socio-political instability, public provision
    Date: 2008
  34. By: Jess Benhabib; Shenghao Zhu
    Abstract: We present a mechanism to analytically generate a double Pareto distribution of wealth in a continuous time OLG model with optimizing agents who have bequest motives, are subject to stochastic returns on capital and have uncertain lifespans. We disentangle, roughly, the contribution of inheritance, age and stochastic rates of capital return to wealth inequality, in particular to the Gini coefficient. We investigate the role of the fiscal and redistributive policies for wealth inequality and social welfare.
    JEL: E21 E25
    Date: 2008–06
  35. By: Gary Richardson; Patrick Van Horn
    Abstract: New data reveals that bank distress peaked in New York City, at the center of the United States money market, in July and August 1931, when the banking crisis peaked in Germany and before Britain abandoned the gold standard. This paper tests competing theories about the causes of New York's banking crisis. The cause appears to have been intensified regulatory scrutiny, which was a delayed reaction to the failure of the Bank of United States, rather than the exposure of money-center banks to events overseas.
    JEL: E42 G21 N1 N12
    Date: 2008–06
  36. By: Max Gillman (Cardiff University); Michal Kejak (The Center for Economic Research and Graduate Education of Charles University (CERGE EI))
    Abstract: The paper formalizes the relation between flat taxes and growth when there is a competitive equilibrium tax evasion. A decentralized tax evasion service is supplied by the banking sector. The bank production function follows the financial intermediation microfoundation approach, with deposits as an input. Across a class of endogenous growth models, tax evasion decreases the effective tax rate, and thereby lessens the negative effect of taxes on growth. And as the tax rate rises, tax evasion causes the growth rate to fall by less. Underlying the results is a fiscal principle whereby tax evasion creates, or magnifies, a rising demand price sensitivity to higher tax rates.
    Keywords: Tax evasion, financial intermediation, endogenous growth, and flat taxes.
    JEL: E13 E62 H26 O41
    Date: 2008–06
  37. By: Coricelli, Fabrizio; Roland, Isabelle
    Abstract: The paper provides a simple theory and empirical evidence on the asymmetric effect of credit markets on output decline and output growth. When credit markets are underdeveloped and enterprise activity is financed outside the banking sector, exogenous shocks may induce a break-up of both credit and production chains, leading to sudden and sharp collapses in output. The development of a banking sector can reduce the probability of such collapses. Using industry-level data across a large cross-section of countries, the empirical analysis suggests that credit markets play a more important role in softening output declines than in fostering growth or recovery. These results suggest that credit markets are one of the main suspects for explaining why the magnitude of output declines tends to be larger in emerging markets than in advanced market economies.
    Keywords: credit and output; Emerging Economies; sharp recessions
    JEL: E44 O43
    Date: 2008–06
  38. By: KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki
    Abstract: We consider a new method of public goods provision: monetization. The government makes a particular public good the specie of money and commits itself to buy the public good at a predetermined nominal price and adjust money supply so that the ratio between the public good reserve and money supply equals a predetermined reserve ratio. In a two-country model, in which one country issues international currency and the other issues domestic currency, we show that if the government that issues the international currency adopts a monetization policy, it can attain both the optimal level of public goods provision and equal cost sharing for the public goods provision between the two countries by choosing the nominal price of the public good and the reserve ratio appropriately. In this case, the international free-rider problem is completely resolved.
    Date: 2008–06
  39. By: Anastastia Litina (Department of Economics, University of Macedonia); Theodore Palivos (Department of Economics, University of Macedonia)
    Abstract: This paper characterizes analytically the saving rate in the Ramsey-Cass-Koopmans model with a general production function when there exists both exogenous and endogenous growth. It points out conditions involving the share of capital and the elasticities of factor and intertemporal substitution under which the saving rate path to its steady-state value exhibits overshooting, undershooting, or is monotonic. Simulations illustrate these interesting dynamics. The paper also identifies the general class of production functions that render the saving rate constant along the entire transition path and hence make the Ramsey-Cass-Koopmans model isomorphic to that of Solow-Swan.
    Keywords: The Ramsey-Cass-Koopmans model; Saving rate; Elasticities of Substitution
    JEL: E20 O41 O10
    Date: 2008–06
  40. By: K. Barhoumi; S. Benk; R. Cristadoro; A. Den Reijer; A. Jakaitiene; P. Jelonek; A. Rua; K. Ruth; C. Van Nieuwenhuyze; G. Rünstler (ECB, DG Research)
    Abstract: This paper evaluates different models for the short-term forecasting of real GDP growth in ten selected European countries and the euro area as a whole. Purely quarterly models are compared with models designed to exploit early releases of monthly indicators for the nowcast and forecast of quarterly GDP growth. Amongst the latter, we consider small bridge equations and forecast equations in which the bridging between monthly and quarterly data is achieved through a regression on factors extracted from large monthly datasets. The forecasting exercise is performed in a simulated real-time context, which takes account of publication lags in the individual series. In general, we find that models that exploit monthly information outperform models that use purely quarterly data and, amongst the former, factor models perform best.
    Keywords: Bridge models, Dynamic factor models, real-time data flow
    JEL: E37 C53
    Date: 2008–06
  41. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a general equilibrium endogenous growth model based on an overlapping generations framework, and characterized by tax evasion and productive public expenditure, we analyze the relationship between growth-maximizing tax rates and alternative assumptions about the nature of tax evasion. We show that if the government treats tax evasion as exogenous, when it is determined endogenously, it ends up choosing a growth-maximizing tax rate that is higher than it should ideally be. The paper, thus, highlights a possible misalignment in the growth-maximizing tax rate in the event of a failure on part of the government to realize the behavioral nature of tax evasion.
    Keywords: Endogenous Growth, Optimal Tax Rate, Overlapping Generations Model, Tax Evasion
    JEL: E6 E62 E26
    Date: 2008–06
  42. By: Bandyopadhyay, Arindam; Kuvalekar, S V; Basu, Sanjay; Baid, Shilpa; Saha, Asish
    Abstract: The empirical research on housing market in India is scarce due to the paucity of information. The monograph on “A Study of Residential Housing Demand in India” is the outcome of a Study conducted by the National Institute of Bank Management (NIBM) for National Housing Bank (NHB) and partially addresses advice of Reserve Bank of India to NHB on studying the housing and real estate sector. This study provides exhaustive empirical research and detailed analysis (both micro and macro level) of current status and future growth potential of housing industry in India, its back-ward and forward linkages, financing structure and nature of underlying risk in the housing market in India.
    Keywords: Housing Demand Estimation; Micro & Macro Analysis; Default Risk; Financial Institutions
    JEL: G2 P25 G32 E6 R21 G21
    Date: 2008–04–01
  43. By: Maria Lacko (Institute of Economics Hungarian Academy of Sciences)
    Abstract: Since there are no broadly accepted macro-level estimations for the size of the hidden economy, the interrelationships of the hidden economy with different segments of the labor market have to be approached in a number of different ways. In our cross-country analysis, in parts 2 and 3 we use indirect estimations of the hidden economy and show that the size of the hidden economy and the size of self-employment can be explained by similar explanatory variables, tax rates and corruption being prominent among them. In part 4 we set up and quantify a model to analyze the interrelationships among the hidden economy and the pools of self-employed and non-employed people. For this model we use a specific direct indicator of the hidden economy, the concealed consumption share which is derived from the notion of the non-observed economy used by statistical agencies. We show that the size of this part of the hidden economy is determined by the tax rate related to the consumption and the level of corruption. We also demonstrate that the concealed consumption share plays an important role in the determination of the size of various segments of the labor market, while the developments of these segments also have their impact on this specific part of the hidden economy.
    Keywords: Hidden economy, labor market, taxation, corruption
    JEL: H26 D73 J2 E26
    Date: 2007–11
  44. By: Guillermo Ordonez
    Date: 2008–06–28
  45. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a simple pure-exchange overlapping generations model characterized by financial repression, purposeful government expenditures and cost of tax collection, we analyze whether financial repression can be explained by the cost of raising taxes. Note, following the trend in the current literature, financial repression has been modeled via obligatory reserve requirements that banks in the economy need to hold. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements, what are critical, in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government. So cost of tax enforcement is necessary but not a sufficient condition for producing financial repression as a welfare optimizing outcome.
    Keywords: Pure Exchange Overlapping Generations Model, Costly Tax Enforcement, Financial Repression
    JEL: E62 H21 O41
    Date: 2008–06

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