nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒07‒20
58 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Countercyclical Taxation and Price Dispersion By Eric Mayer; Oliver Grimm
  2. Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets By Nicoletta Batini; Paul Levine; Joseph Pearlman
  3. A persistence-weighted measure of core inflation in the euro area By Laurent Bilke; Livio Stracca
  4. Technology shocks, structural breaks and the effects on the business cycle By Vincenzo Atella; Marco Centoni; Gianluca Cubadda
  5. The Causal Relationship between Inflation and Inflation Expectations in the United Kingdom By Kelly, Roger
  6. A Macroeconomic Foundation for the Nelson and Siegel Class of Yield Curve Models By Leo Krippner
  7. Commitment policy and optimal positive long-run inflation By Pontiggia, Dario
  8. Informal central bank independence: an analysis for three European countries By David Cobham; Stefania Cosci; Fabrizio Mattesini
  10. The Optimal Monetary Instrument for Prudential Purposes By C.A.E. Goodhart; P. Sunirand; D.P. Tsomocos
  11. Common Shocks, Common Dynamics, and the International Business Cycle By Marco Centoni; Gianluca Cubadda; Alain Hecq
  12. Lifecycle Dynamics of Income Uncertainty and Consumption By James Feigenbaum; Geng Li
  13. Is Volatility Good for Growth? Evidence from the G7 By Elena Andreou; Alessandra Pelloni; Marianne Sensier
  15. Time Aggregation, Long-Run Money Demand and the Welfare Cost of Inflation By Rangan Gupta; Josine Uwilingiye
  16. Global liquidity glut or global savings glut? A structural VAR approach By Thierry Bracke; Michael Fidora
  17. Private and public consumption and counter-cyclical fiscal policy By Marattin, Luigi
  18. The Effectiveness of Monetary Policy Reconsidered By John Weeks
  19. Liquidity and Asset Prices By Raphael A. Espinoza; Dimitrios P. Tsomocos
  20. Wage growth dispersion across the euro area countries - some stylised facts By Malin Andersson; Arne Gieseck; Beatrice Pierluigi; Nick Vidalis
  21. On the amplification role of collateral constraints By Mendicino, Caterina
  22. Monetary Policy Implementation and the Federal Funds Rate By Nautz, Dieter; Schmidt, Sandra
  23. The Role of Media for Consumers' Inflation Expectation Formation By Michael J. Lamla; Sarah M. Lein
  24. Friedman's Nobel Lecture reconsidered By James Forder
  25. A Reassessment of Japan's Monetary Policy during the Great Depression: The Constraints and Remedies By Masato Shizume
  26. Long-Term Growth and Short-Term Volatility: The Labour Market Nexus By Barbara Annicchiarico; Luisa Corrado; Alessandra Pelloni
  27. The Optimal Choice of a Monetary Policy Instrument By Andrew Atkeson; Vyjayanthi Chari; Patrick Kehoe
  28. Does money matter in the IS curve? The case of the UK By Barry E. Jones; Livio Stracca
  31. Input Substitution, Export Pricing, and Exchange Rate Policy By Kang Shi; Juanyi Xu
  32. Facing up a sudden stop of capital flows: Policy lessons from the 90's peruvian experience By Paul Castillo; Daniel Barco
  33. Inflation and the Measurement of Saving and Housing Affordability By Andrew Coleman
  34. Indicators and Tests of Fiscal Sustainability: An Integrated Approach By Giancarlo Marini; Alessandro Piergallini
  35. Bond risk premia, macroeconomic fundamentals and the exchange rate By Taboga, Marco; Pericoli, Marcello
  36. Golden Rule of Public Finance: A Panacea? By M Ismihan; G Ozkan
  37. The Relative Size of New Zealand Exchange Rate and Interest Rate Responses to News By Andrew Coleman; Özer Karagedikli
  38. A Nonparametric Characterization of Income Uncertainty over the Lifecycle By James Feigenbaum; Geng Li
  39. An Approximate Consumption Function By Mario Padula
  40. The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations By Takashi Kamihigashi
  41. Expansionary Fiscal Consolidations: New Evidence from Turkey By Fatih Ozatay
  42. Public Debt Management & Fiscal Sustainability in Italy By Angela I. Uwakwe
  43. The US dollar and the Euro: The Deus Ex-Machina By Lorca-Susino, Maria
  44. Managing Capital Flows: Experiences from Central and Eastern By von Hagen, Jurgen; Siedschlag, Iulia
  45. 3-step analysis of public finances sustainability - the case of the European Union By António Afonso; Christophe Rault
  46. Communicating with many Tongues: The Impact of FOMC Members’ Speeches on U.S. Financial Markets’ Returns and Volatility By Bernd Hayo; Ali M. Kutan; Matthias Neuenkirch
  47. Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey By Lux, Thomas
  48. Wage, price and unemployment dynamics in the Spanish transition to EMU membership By Javier Ordoñez; Katarina Juselius
  49. Endogenuous Cycles and rent seeking By Vadim Khramov
  50. Is the Impact of Labour Taxes on Unemployment asymmetric? By T. BERGER; G. EVERAERT
  51. Market conditions, default risk and credit spreads By Tang, Dragon Yongjun; Yan, Hong
  52. Regional unemployment forecasts with spatial interdependencies By Schanne, Norbert; Wapler, Rüdiger; Weyh, Antje
  53. Consumer Price Index. Does the Price Collection Frequency Matter? Some Monte Carlo Results. By Dikaios Tserkezos
  54. A multiobjective approach using consistent rate curves to the calibration of a Gaussian Heath-Jarrow-Morton model By Antonio Falcó; Juan Nave; Lluís Navarro
  55. Evaluating Foreign Exchange Market Intervention: Self-selection, Counterfactuals and Average Treatment Effects By Rasmus Fatum; Michael M. Hutchison
  56. Life-Cycle Portfolio Choice: The Role of Heterogeneity and Under-diversification By Claudio Campanale
  57. Working Paper 04-08 - Estimating private health expenditures within a dynamic consumption allocation model By Peter Willemé

  1. By: Eric Mayer (University of Würzburg, Department of Economics, Würzburg, Germany); Oliver Grimm (Center of Economic Research at ETH Zurich)
    Abstract: In this paper, we explore the benefits from a supply-side oriented fiscal tax policy within the framework of a New Keynesian DSGE model. We show that countercyclical tax rules, which are contingent on the observed welfare gap or alternatively on the markup shock and levied on value added, reduce remarkably the inverse impact of cost push shocks. We state that the tax rule establishes a path for the evolution of marginal cost at the firm level that largely prevents built up of price dispersion. We highlight that this tax policy is also effective under a balancedbudget regime. Hence, fiscal policy can disencumber monetary policy in the light of cost push shocks.
    Keywords: Countercyclical fiscal policy, welfare costs, nominal rigidities
    JEL: E32 E61 E62
    Date: 2008–06
  2. By: Nicoletta Batini (International Monetary Fund); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University)
    Abstract: We build a small open-economy model with partial dollarization–households hold wealth in domestic currency and a foreign currency as in Felices and Tuesta (2006). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response under com-mitment and discretion and assess the optimal degree of exchange rate stabilization inthis set up, drawing policy implications for countries that target inflation in economies of this kind.
    Keywords: dollarized economies, optimal monetary policy, managed exchange rates, inflation-forecast-based rules
    JEL: E52 E37 E58
    Date: 2008–02
  3. By: Laurent Bilke (Lehman Brothers, 25 Bank Street, London E14 5LE, United Kingdom.); Livio Stracca (Counsel to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We propose a new core inflation measure for the Euro area which places the emphasis on the more lasting, i.e. persistent, price developments at a disaggregated level. The importance of each component of the HICP is reweighted according to its relative persistence, as measured by the sum of the autoregressive coefficients or by an indicator of mean reversion. Unlike headline inflation, our baseline core inflation measure is highly correlated with ECB monetary policy decisions, which could mean that it contains ex ante (pre monetary policy) information on inflationary pressure. JEL Classification: E31.
    Keywords: Core inflation, inflation persistence.
    Date: 2008–06
  4. By: Vincenzo Atella (CEIS & Dipartimento SEFEMEQ - Università di Roma "Tor Vergata"); Marco Centoni (Dipartimento SEGES - Università del Molise); Gianluca Cubadda (Dipartimento SEFEMEQ - Università di Roma "Tor Vergata")
    Abstract: This paper contributes to the literature on the role of technology shocks as source of the business cycle in two ways. First, we document that time-series of US productivity and hours are apparently affected by a structural break in the late 60’s, which is likely due to a major change in the monetary policy. Second, we show that the importance of demand shocks over the business cycle has sharply increased after the break.
    Keywords: Business cycle, technology shocks, structural breaks
    JEL: C32 E32
    Date: 2007–10–17
  5. By: Kelly, Roger (Monetary Policy Committee Unit, Bank of England)
    Abstract: Two major events have affected the monetary regime in the United Kingdom in recent years, namely the introduction of inflation targeting, and the granting of operational independence to the Bank of England. In this paper we examine what impact, if any, these events have had on inflation expectations. A series of Granger causality tests are used in order to examine the causal relationship between a measure of prices and inflation expectations. We find evidence that the introduction of inflation targeting caused both the general public and professionals to anchor their expectations, rather than basing them on current RPI inflation.
    Keywords: inflation; expectations
    JEL: D84 E31 E58
    Date: 2008–07
  6. By: Leo Krippner (AMP)
    Abstract: Yield curve models of the Nelson and Siegel (1987) class have proven themselves popular empirical tools in finance and economics, but they lack a formal theoretical justification. Hence, this article uses a multifactor version of the Cox, Ingersoll and Ross (1985a) continuous-time general-equilibrium economy to derive a macroeconomic foundation for a theoretically-consistent version of the Nelson and Siegel class of yield curve models. It is established that the level and shape of the yield curve as represented by NS models may be explained succinctly in terms of expectations of inflation and real output growth within an underlying economic model. This theoretically-rigorous yet parsimonious and intuitive framework is applicable as a macro-finance tool, and the application in this article provides a ready interpretation of a series of empirical results from the macro-finance literature that relate the level and slope of the yield curve to output growth and inflation.
    Keywords: yield curve; term structure of interest rates; macro-finance; Nelson and Siegel model; Heath-Jarrow-Morton framework
    JEL: E43 E31 E32
    Date: 2008–06–01
  7. By: Pontiggia, Dario
    Abstract: This paper studies different types of commitment policy in an economy where the deterministic steady state is inefficient. We show how a policy suggested by the approach of policy design entails positive long-run inflation, even in the purely forward-looking canonical New Keynesian model. The long-run inflation target is robust to inflation persistence due to backward-looking rule-of-thumb behaviour by price setters. The optimal long-run inflation target is positive in all but one of the six theoretical cases studied. We evaluate policies on the basis of both the deterministic equilibrium and the stochastic equilibrium and present robustness analysis in terms of two structural parameters.
    Keywords: Optimal monetary policy; inflation persistence; policy rules; timeless perspective
    JEL: E5 E3
    Date: 2008–06–30
  8. By: David Cobham (Heriot-Watt University, Edimburgh); Stefania Cosci (LUMSA, Rome); Fabrizio Mattesini (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: Changes in formal and informal central bank independence (CBI) in France, Italy and the UK in the period from the mid-1970s to the 1990s are examined; the major changes occurred in the 1990s, after the disinflations of the 1980s. Broad trends in the informal independence of central banks, defined as the ability to pursue price stability regardless of the government’s preferences, are identified on the basis of a monetary policy narrative and an analysis of a set of qualitative determinants of informal independence. The most important determinants are the social/political acceptance that monetary policy is the sphere of the central bank, the existence of antiinflationary commitments in the form of intermediate targets for monetary policy, the degree of social consensus on the means and ends of macroeconomic policy, and the relative technical expertise of the central bank. These broad trends help to explain some of the inflation experience of the 1980s and 1990s which cannot be understood in terms of changes to formal CBI.
    Keywords: Monetary policy, central bank independence, inflation
    JEL: E42 E58
    Date: 2008–07–14
  9. By: Rochelle M. Edge; Thomas Laubach; John C. Williams
    Abstract: This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model’s dynamics, utility-based welfare criterion, and the “natural” rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first-best.
    JEL: E5
    Date: 3008–05
  10. By: C.A.E. Goodhart; P. Sunirand; D.P. Tsomocos
    Abstract: The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.
    Keywords: interest rates, monetary base, bank capital, financial stability, monetary policy
    JEL: D58 E44 G28
    Date: 2008
  11. By: Marco Centoni (Dipartimento SEGES - Università del Molise); Gianluca Cubadda (Dipartimento SEFEMEQ - Università di Roma "Tor Vergata"); Alain Hecq (University of Maastricht)
    Abstract: This paper proposes an econometric framework to assess the importance of common shocks and common transmission mechanisms in generating international business cycles. Then we show how to decompose the cyclical effects of permanent-transitory shocks into those due to their domestic and those due to foreign components. Our empirical analysis reveals that the business cycles of the US, Japan, Canada are clearly dominated by their domestic components. The Euro area is more sensitive to foreign shocks compared to the other three countries of our analysis.
    Keywords: International business cycles; Permanent-transitory decomposition; Serial correlation common features; Frequency domain analysis.
    JEL: C32 E32
    Date: 2008–07–07
  12. By: James Feigenbaum; Geng Li
    Abstract: . . .
    JEL: E21 E24 D91
    Date: 2008–07
  13. By: Elena Andreou (University of Cyprus); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Marianne Sensier (University of Manchester)
    Abstract: We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7.
    Keywords: growth uncertainty, learning-by-doing, monetary uncertainty, multivariate GARCH-in-mean, nominal rigidity.
    JEL: C32 E32 O42
    Date: 2008–07–14
  14. By: Richard Dennis
    Abstract: The Calvo pricing model that lies at the heart of many New Keynesian business cycle models has been roundly criticized for being inconsistent both with time series data on inflation and with micro-data on the frequency of price changes. In this paper I develop a new pricing model whose structure can be interpreted in terms of menu costs and infor- mation gathering/processing costs, that usefully addresses both criticisms. The resulting Phillips curve encompasses the partial-indexation model, the full-indexation model, and the Calvo model, and can speak to micro-data in ways that these models cannot. Taking the Phillips curve to the data, I ?nd that the share of ?rms that change prices each quar- ter is about 60 percent and, reflecting the importance of information gathering/processing costs, that most ?rms that change prices use indexation. Exploiting an isomorphism result, I show that these values are consistent with estimates implied by the partial-indexation model.
    JEL: C11 C52 E31 E52
    Date: 2008–04
  15. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: Two recent studies have found markedly different measures of the welfare cost of inflation in South Africa, obtained through the estimation of long-run money demand relationships using cointegration and long-horizon approaches. Realizing that the monetary aggregate and the interest rate variables are available at higher frequencies than the measure of income and that long-run properties of data are unaffected under alternative methods of time aggregation, we test for the robustness of the two estimation procedures under temporal aggregation and systematic sampling. Our results indicate that the long-horizon method is more robust to alternative methods of time aggregation, and, given this the welfare cost of inflation in South Africa for an inflation target band of 3 percent to 6 percent lies between 0.15 percent and 0.41 percent.
    Keywords: Cointegration, Long-Horizon Regression, Money Demand, Time Aggregation, Welfare Cost of Inflation.
    JEL: C15 C32 C43 E31 E41 E52
    Date: 2008–07
  16. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Since the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy - (i) monetary shocks (“excess liquidity” hypothesis), (ii) preference shocks (“savings glut” hypothesis), and (iii) investment shocks (“investment drought” hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that havings shocks and investment shocks explain less of the variation. Hence, a “liquidity glut” may have been a more important driver of real and financial imbalances in the US and emerging Asia than a “savings glut”. JEL Classification: E2, F32, F41, G15.
    Keywords: Global imbalances, global liquidity, savings glut, investment drought, current account, structural VARs.
    Date: 2008–06
  17. By: Marattin, Luigi
    Abstract: This paper bulds a closed-economy NK-DSGE model with no capital, in which consumers value both private and public consumption and fiscal policy is determined by a feedback rule responding to output gap. We analyse how different degrees of substitutatibility/complementarity between private and public consumption and a pro/counter-cyclical stance of fiscal policy affect equilbrium determinacy and the response of the economy to a wide range of shocks. Results show that determinacy is ensured by counter-cyclical fiscal policy under complementarity; increasing substitutability also pro-cyclical stance becomes stable. Differences can be observed also in response to shocks.
    JEL: E62 H40 E63
    Date: 2007–05
  18. By: John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London)
    Abstract: This paper inspects the standard policy rule that under a flexible exchange rate regime with perfectly elastic capital flows monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the domestic price level effect of devaluation be ignored. The price level effect is noted in some textbooks, but not analysed. When it is subjected to a rigorous analysis, the interaction between exchange rate changes and domestic price level changes render the standard statement false. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Monetary policy will be more effective than fiscal policy if and only if the sum of the trade elasticities exceeds the import share. Inspection of data from developing countries indicates a low effectiveness of monetary policy under flexible exchange rates. In the more general case of less than perfectly elastic capital flows, the conditions for monetary policy to be more effective than fiscal policy are even more restrictive. Use of empirical evidence on trade shares and interest rate differentials suggest that for most countries fiscal policy would prove more effective than monetary policy under a flexible exchange rate regime. In any case, the general theoretical assertion that monetary policy is more effective is incorrect. The results sustain the standard Keynesian conclusion that fiscal policy is more effective, whether the exchange rate is fixed or flexible. (...)
    Keywords: The Effectiveness of Monetary Policy Reconsidered
    Date: 2008–06
  19. By: Raphael A. Espinoza; Dimitrios P. Tsomocos
    Abstract: We show in an exchange economy with liquidity constraints that the volume of trade and asset prices depend on both the supply of liquidity by the Central Bank and on the liquidity of assets and commodities. As a result, monetary aggregates are informative for the assessment of economic developments and the conduct of monetary policy. We also show that the positive correlation between state prices and the future spot rate generates a risk-premium in the term structure of interest rates, even in absence of aggregate uncertainty. These results do not obtain in representative agent models but hold in any monetary economy with heterogeneous agents and short-term liquidity effects, where monetary costs act as transaction costs and the quantity theory of money is verified.
    Keywords: liquidity; cash-in-advance constraints; term structure of interest rates
    JEL: E43 G12
    Date: 2008
  20. By: Malin Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arne Gieseck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nick Vidalis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study presents some stylised facts on wage growth differentials across the euro area countries in the years before and in the first eight years after the introduction of Economic and Monetary Union (EMU) in 1999. The study shows that wage growth dispersion, i.e. the degree of difference in wage growth at a given point in time, has been on a clear downward trend since the early 1980s. However, wage growth dispersion across the euro area countries still appears to be higher than the degree of wage growth dispersion within West Germany, the United States, Italy and Spain. Differences in wage growth rates between individual euro area countries and the euro area in the years before and in the first eight years after the introduction of EMU appear to be positively related to the respective differences between their Harmonised Index of Consumer Prices (HICP) inflation and average HICP inflation in the euro area. Conversely, relative wage growth differentials across euro area countries have been somewhat unrelated to relative productivity growth differentials. Some countries combine positive wage growth differentials and negative productivity growth differentials vis-à-vis the euro area average over an extended period – and hence positive unit labour cost growth differentials. These countries run the risk of accumulating competitiveness losses and it is therefore a challenge to ensure that the necessary adjustment mechanisms operate fully, in the sense that wage developments are sufficiently flexible and reflect productivity developments. Wage growth persistence within individual euro area countries – largely reflecting inflation persistence and certain institutional factors – might also have contributed somewhat to wage growth differentials across the euro area countries. Moreover, wage level convergence has also played a role in explaining wage growth patterns in the 1980s and the 1990s. However, since 1999, the link between the initial compensation level and the subsequent growth rate of compensation per employee appears barely significant. The study also shows a limited co-movement of wage growth across countries, even in the context of a high degree of business cycle synchronisation seen in the last few years. This suggests that the impact on wage growth of country-specific developments across euro area countries has been larger than the impact of common cyclical developments and external shocks. This could reflect the normal and desirable working of adjustment mechanisms, which – in an optimally functioning currency union with synchronised business cycles – would take place via price and cost and wage developments. On the other hand, structural impediments, for example a relatively low degree of openness in domestically-oriented sectors in some countries, might prevent a stronger link between the degree of synchronisation of wage growth rates and business cycles. JEL Classification: E24, E31, C10.
    Keywords: Cross-country wage dispersion, wage and productivity levels across countries and sectors.
    Date: 2008–07
  21. By: Mendicino, Caterina
    Abstract: Following the seminal contribution of Kiyotaki and Moore (1997), the role of collateral constraints for business cycle fluctuations has been highlighted by several authors and collateralized debt is becoming a popular feature of business cycle models. In contrast, Kocherlakota (2000) and Cordoba and Ripoll (2004) demonstrate that collateral constraints per se are unable to propagate and amplify exogenous shocks, unless unorthodox assumptions on preferences and production technologies are made. The aim of this paper is to examine the contribution of costly debt enforcement procedures in the amplification of business cycle fluctuations through collateral constraints. We show that for realistic degrees of inefficiency, collateral constraints can significantly amplify the effects of productivity shocks on output even under standard assumptions on preferences and technology.
    Keywords: business cycle; debt enforcement procedures; credit frictions.
    JEL: E32 E30 E21
    Date: 2008–01
  22. By: Nautz, Dieter; Schmidt, Sandra
    Abstract: This paper investigates how the implementation of monetary policy affects the dynamics and the volatility of the federal funds rate. Since the early 1980s, the most important changes in the Fed’s conduct of monetary policy refer to the role of the federal funds rate target and the reserve requirement system. We show that the improved communication and transparency regarding the federal funds rate target has significantly increased the Fed’s influence on the federal funds rate since 1994. By contrast, the declining role of required reserves in the U.S. has contributed to higher federal funds rate volatility. Our results suggest that the planned introduction of remunerated reserves will further enhance the controllability of the federal funds rate.
    Keywords: Dynamics and Volatility of the Federal Funds Rate, Monetary Policy Implementation, Central Bank Communication, Reserve Requirements
    JEL: C22 E43 E52
    Date: 2008
  23. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sarah M. Lein (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyzes the impact of the media on consumers' inflation expectations. We distinguish two channels through which media can influence expectations. First, the intensity of news coverage on inflation plays a role (volume channel). Second, the content of these reports matters (tone channel). Employing a unique data set capturing media reports on inflation in Germany comprising 01/1998-12/2006 we are able to discriminate between these two effects. We find that the volume effect generally improves the accuracy of consumer forecasts while the tone channel induces a media bias.
    Keywords: Monetary policy, expectation formation, media coverage, media bias
    JEL: E52 D83
    Date: 2008–06
  24. By: James Forder
    Abstract: In his Nobel lecture, Friedman built on his earlier argument for a 'natural rate of unemployment' by painting a picture of an economics profession which, as a result of foolish mistakes, had accepted the Phillips curve as offering a lasting trade-off between inflation and unemployment and were thereby led to advocate a policy of inflation. It is argued here that in fact the orthodox economists of the time did not accept Phillips' analysis; almost no one made the mistakes in question; and very few advocated inflation on bases vulnerable to Friedman's theoretical critique. The Phillips curve was put to various uses, but advocating inflation was hardly amongst them. It is suggested that one lasting result of the uncritical acceptance of Friedman's history is to limit what appears to be within the reasonable range of views about macroeconomic policy.
    Keywords: Phillips Curve, Inflation, Friedman
    JEL: B22 B31 E12
    Date: 2008
  25. By: Masato Shizume (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: Temin [1989] and Eichengreen [1992] argue that monetary policy played a key role in each country's economic performance during the Great Depression, and that some European policymakers hesitated to pursue an expansionary monetary policy even after departing from gold. Why did these policymakers not pursue the opportunities they were able to pursue to the fullest extent? This study explores this issue by looking at the case of Japan, focusing on the constraints it faced and the remedies available to it as a small, open economy. This study explores the relationship between interest rates in Japan and in the major international financial centers, using a new series of representative long-term interest rates and narratives. This study reveals that Japan imposed a restrictive monetary policy on itself even after departing from the gold standard. Japan did so because it needed to maintain its ties both with its trading partners and with the international financial markets.
    JEL: E42 N15
    Date: 2007–10
  26. By: Barbara Annicchiarico; Luisa Corrado; Alessandra Pelloni
    Abstract: We study the relationship between growth and variability in a DSGE model with nominal rigidities and growth driven by learning-by-doing. We show that this relationship may be positive or negative depending on the impulse source of fluctuations A key role is also played by the Frisch elasticity of labour supply and by institutional features of the labour market. Our general findings are that monetary shocks volatility will generally have a negative effect on growth, while the opposite tends to be true for fiscal and productivity shocks. These findings are somehow consistent with the existing empirical evidence: data show, in fact, a somewhat ambiguous relationship between output growth and real variability, but a generally negative relationship between output growth and nominal variability.
    Keywords: Growth; Volatility; Monetary and Real Shocks; Labour Supply Elasticity; Second-Order Approximation Methods.
    JEL: O42 E30 C63
    Date: 2008–07
  27. By: Andrew Atkeson; Vyjayanthi Chari; Patrick Kehoe
    Abstract: Monetary policy instruments di¤er in tightness. how closely they are linked to in.a- tion. and transparency. how easily they can be monitored. Tightness is always desirable, while transparency is desirable only if policymakers cannot commit to future policies. We show that because interest rates can be made endogenously tight they have a natural advantage over both money growth and exchange rates. We also show that interest rates and exchange rates, because they are prices, are more transparent than money growth and thus have a natural advantage over money growth. Our model provides some insights into why developed economies tend to use inter- est rates as their primary policy instrument and why less-developed economies, in which interest rates are not available as an instrument, tend to use exchange rates.
    Date: 2007–11
  28. By: Barry E. Jones (Department of Economics, Binghamton University, PO Box 6000 Binghamton, NY 13902, USA.); Livio Stracca (Counsel to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Narrow and broad money measures (including Divisia aggregates) have been found to have explanatory power for UK output in backward-looking specifications of the IS curve. In this paper, we explore whether or not real balances enter into a forward-looking IS curve for the UK, building on the theoretical framework of Ireland (2004). To do this, we test for additive separability between consumption and money over a sizeable part of the post-ERM period using non-parametric methods. If consumption and money are not additively separable, then real money balances enter into the forward-looking IS curve (the converse does not hold, however). A main finding is that the UK data seem to be broadly consistent with additive separability for the the more recent period from 1999 to 2007. JEL Classification: C14, C43, C63, E21, E41.
    Keywords: Additive Separability, IS Curve, Non-Parametric Tests, Measurement Error, Divisia Monetary Aggregates.
    Date: 2008–06
  29. By: Michael Geiger
    Abstract: China’s monetary policy applies to two sets of monetary policy instruments: (i) instruments of the Central Bank (CB), the People’s Bank of China (PBC); and (ii) non-Central Bank (NCB) policy instruments. Additionally, the PBC’s instruments include: (i) price-based indirect; and (ii) quantity-based direct instruments. The simultaneous usage of these instruments leads to various distortions that ultimately prevent the interest rate channel of monetary transmission from functioning. Moreover, the strong influence of quantity-based direct instruments and non-central bank policy instruments bring into question the approach of indirect monetary policy in general.
    Date: 2008
  30. By: Athanasios Orphanides; John C. Williams
    Abstract: This paper examines the robustness characteristics of optimal control policies derived un- der the assumption of rational expectations to alternative models of expectations. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We find that the optimal control policy derived under the assumption of rational expectations can perform poorly when expectations deviate modestly from rational expectations. We then show that the optimal control policy can be made more robust by deemphasizing the stabilization of real economic activity and interest rates relative to infla- tion in the central bank loss function. That is, robustness to learning provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to empirically plausible parame- terizations of the learning models and perform about as well or better than optimal control policies.
    JEL: E52
    Date: 2008–04
  31. By: Kang Shi (The Chinese University of Hong Kong, Hong Kong Institute for Monetary Research); Juanyi Xu (Hong Kong University of Science and Technology, Simon Fraser University, Hong Kong Institute for Monetary Research)
    Abstract: This paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market economies. We argue that weak input substitution between local labor and import intermediates in traded goods production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle. In the presence of these two trade features, the adjustment role of the exchange rate is inhibited, so even a flexible exchange rate cannot stabilize the real economy in face of external shocks. Instead, due to the high exchange rate pass-through, exchange rate changes will lead to instability in both inflation and production cost. As a result, a fixed exchange rate may dominate a monetary policy rule with high exchange rate flexibility in terms of welfare. In a sense, our finding provides a rationale for the "fear of floating" phenomenon in these economies. That is, "fear of floating" may be central banks' rational reaction when these economies are constrained by the trade features mentioned above.
    Keywords: Input Substitution, Export Pricing, Exchange Rate Flexibility, Welfare
    JEL: F3 F4
    Date: 2008–10
  32. By: Paul Castillo (Banco Central de Reserva del Perú); Daniel Barco (Banco Central de Reserva del Perú)
    Abstract: This paper assesses the policies implemented in the Peruvian economy in response to the sudden stop of capital flows of the end of the nineties. The Peruvian experience during this episode is an interesting case-study because it offers an example of a highly dollarized economy where a sudden stop of capital flows neither had dramatic negative effects on the banking system nor generated an abrupt fall on output. We argue that the large pool of international reserves, the investments on the tradable sector before 1997 and the performance of the fiscal policy during and before the period of financial distress were fundamental to this outcome. We further extract policy lessons and discuss the strengths and the weakness of the Peruvian economy to this type of shocks nowadays.
    Keywords: Sudden Stops, Peru, International Reserves, and Policy Responses
    JEL: E44 E58 F32 F34
    Date: 2008–01
  33. By: Andrew Coleman (Motu Economic and Public Policy Research)
    Abstract: This paper analyses the effect of inflation on the measurement of saving and housing affordability in New Zealand. When the inflation rate is positive, the income and saving of lenders is overstated and the saving of borrowers is understated because a portion of the interest earnings on capital are not true earnings but merely compensation for inflation. Because New Zealand has a large international debt position, this distortion means aggregate saving is understated, possibly by 2 percent of gross domestic product per year. In addition, a standard measure of the cost of financing the purchase of a house is overstated by approximately fifty percent, as a large part of mortgage payments are actually saving. Nevertheless, at the end of 2007 the cost of financing house purchase in New Zealand was at a cyclical high, approximately 40 percent higher than its average level since 1990.
    Keywords: inflation, real interest rates, housing affordability
    JEL: E01 E40
    Date: 2008–06
  34. By: Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Alessandro Piergallini (Faculty of Economics, University of Roma "Tor Vergata")
    Abstract: This paper shows that indicators and tests of government solvency should not be used alternatively. We present a simple and intuitive procedure to integrate simultaneously the results from the two approaches to fiscal sustainability. An application to U.S. post-World War II data demonstrates the empirical relevance of the proposed strategy. Our results suggest that U.S. fiscal policy is on a sustainable path, since the warning predictions of tax gap indicators merely reflect cyclical factors.
    Keywords: Fiscal Sustainability; Fiscal Indicators; Tests of Government Solvency
    JEL: C12 C22 E60 H60
    Date: 2008–07–11
  35. By: Taboga, Marco; Pericoli, Marcello
    Abstract: We introduce a two-country no-arbitrage term-structure model to analyse the joint dynamics of bond yields, macroeconomic variables and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries and how the exchange rate is influenced by the interactions between macroeconomic variables and time-varying bond risk premia. Estimating the model with US and German data, we obtain an excellent fit of the yield curves and we are able to account for up to 75 per cent of the variability of the exchange rate. We find that time-varying risk premia play a non-negligible role in exchange rate fluctuations, due to the fact that a currency tends to appreciate when risk premia on long-term bonds denominated in that currency rise. A number of other novel empirical findings emerge.
    Keywords: Bond risk premia;exchange rate;no-arbitrage
    JEL: E43 C01
    Date: 2008–06
  36. By: M Ismihan; G Ozkan
    Abstract: This paper shows that adopting a golden rule does not guarantee that public investment will improve economic outcomes. Our results suggest that only when the rate of return on public capital is greater than the cost of public borrowing, expandingpublic investment is beneficial. Otherwise, both macroeconomic stability and debt sustainability are compromised. As such, we argue that policy-makers should prioritise the productivity of public investment rather than its level.
    Keywords: Public investment; public debt; golden rule.
    JEL: E62 H50 H63
    Date: 2008–07
  37. By: Andrew Coleman (Motu Economic and Public Policy Research); Özer Karagedikli (Bank of England)
    Abstract: This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered.
    Keywords: New Zealand, interest rates, exchange rates, news
    Date: 2008–06
  38. By: James Feigenbaum; Geng Li
    Abstract: . . .
    JEL: D12 D91 E24
    Date: 2008–07
  39. By: Mario Padula (Università di Venezia, and CSEF)
    Abstract: This paper proposes an approximation to the consumption function in the buffer-stock model. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.
    Keywords: Buffer stock model of saving; Computational methods; Approximation methods and estimation
    JEL: C63 D12 E21
    Date: 2008–07–01
  40. By: Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles may affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.
    Keywords: Spirit of capitalism, stock market bubbles, output fluctuations, wealth in utility, sunspot equilibria
    JEL: E20 E32
    Date: 2007–07
  41. By: Fatih Ozatay
    Date: 2008–07
  42. By: Angela I. Uwakwe (;Cardiff University; UK)
    Abstract: This paper examines the government finances for Italy to determine if they satisfy the Inter-temporal Budget Constraint (IBC) especially since post-Maastricht. Italy met the convergence criteria in order to be accepted as an EMU country. Arghyrou and Luintel (2005) examine the finances of Italy up to the pre-Maastricht convergence period and find that the finances of Italy showed weak form sustainability demonstrating a Maastricht effect. Standard assumptions have been that Italy’s true position of un-sustainability would be inherent post-Maastricht. This paper examines this issue and finds: (i) that the debt to GDP series shows that the finances of Italy are un-sustainable; (ii) however the government revenue and expenditure show weak form sustainability. This paper also finds a downward trend of the government debt to GDP ratio and a convergence of the government revenue and expenditure in recent times. This implies that the finances of Italy satisfy the IBC and indeed continue to maintain the result of weak sustainability even post-Maastricht.
    Date: 2008–06
  43. By: Lorca-Susino, Maria
    Abstract: Until the 19th and mid-20th centuries, economic theory explained that the economic status of a country was represented by the strength of its currency.2 This strength is measured by the exchange rate of one currency vis-á-vis another currency, a “zero-sum” game in which one currency gains what the other loses. In fact, during the 19th century, the strength of the Pound Sterling facilitated Britain’s global hegemonic political and economic power known as the Pax Britanica. During the 20th century, the strength of the US dollar represented both the economic and political hegemony of the US around the world known as the Pax Americana. Nowadays, the weakness of the US dollar is making specialists wonder if we are witnessing the end of Pax Americana and the beginning of something else, possibly a Pax Europea, led by the strength of the euro. This is the argument surrounding the current behaviour of the US$-€ exchange rate and its effect on the economic performance of these two economic blocs. While the current exchange rate between the US dollar and the euro has been considered a blessing for the US, it has become a matter of concern for most Eurozone countries. In fact, we are witnessing an unprecedented scenario where the country with a weak currency is actually pleased and the group of countries with a strong currency is worried. The strength of the euro is becoming irritating for the Eurozone and, nevertheless, the weakness of the US dollar is also pushing it to the brink of losing its status as a global currency. This exchange rate debate is accompanied by another debate concerning how the latest monetary policy actions taken by the US and Eurozone monetary authorities3, aimed at solving current economic imbalances, are affecting the US$-€ exchange rate. Scholars, economists, and politicians argue that these monetary policies seem unable to solve today’s economic problems in the EU as well as in the Eurozone, but are having a tremendous impact on the US$-€ exchange rate. This paper will explain in layman’s terms the relationship (or lack thereof) between two of today’s most important economic issues: the US dollar and euro exchange rate, and the monetary policy behind it.
    Keywords: US dolla; euro; Monetary Policy; INTOR
    JEL: E5 A10
    Date: 2008–04
  44. By: von Hagen, Jurgen; Siedschlag, Iulia (Economic and Social Research Institute (ESRI))
    Abstract: The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies.
    JEL: E44 F36 F41
    Date: 2008–04
  45. By: António Afonso (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christophe Rault (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France; IZA, Germany; and William Davidson Institute at the University of Michigan, Ann Arbor, Michigan, 48109, USA.)
    Abstract: We use a 3-step analysis to assess the sustainability of public finances in the EU27. Firstly, we perform the SURADF specific panel unit root test to investigate the meanreverting behaviour of general government expenditure and revenue ratios. Secondly, we apply the bootstrap panel cointegration techniques that account for the time series and cross-sectional dependencies of the regression error. Thirdly, we check for a structural long-run equation between general government expenditures and revenues via SUR analysis. While results imply that public finances were not unsustainable for the EU panel, fiscal sustainability is an issue in most countries, with a below unit estimated coefficient of expenditure in the cointegration relation with revenue as the dependent variable. JEL Classification: C23, E62, H62.
    Keywords: Fiscal sustainability, EU, panel cointegration.
    Date: 2008–06
  46. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Ali M. Kutan (Southern Illinois University Edwardsville and the William Davidson Institute, Michigan); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: We study the effects of FOMC communication, in particular speeches, on U.S financial markets returns and volatility over the period from 1998 to 2006. Using a GARCH model we empirically analyze the respective and combined influence of speeches, post-meeting statements, monetary policy reports, and testimonies. Firstly, we show that the impact on both returns and volatility is larger if the communication channel is more formal. Secondly, the communications of the Board of Governors (BOG) generally have a larger influence than those of the regional presidents. Thirdly, this tendency also holds when comparing the chairman’s and vice chairman’s impact with that of an “ordinary” BOG member, as well as when splitting the group of regional presidents into “voters” and “non-voters”. However, in the light of a number of unexpected signs of variables and their lack of statistical significance we conclude that Fed speeches by themselves may not be necessarily important events for financial markets. News agencies appear to perform the role of a filter for financial markets, with headlines sometimes substantially deviating from the underlying central bank speeches.
    Keywords: Central bank communication, central bank speeches, financial markets, monetary policy
    JEL: E52 G14
    Date: 2008
  47. By: Lux, Thomas
    Abstract: This paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions. We study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem. The aggregate dynamics of the individuals' decisions can be analyzed via the stochastic process governing the ensemble average of choices. Numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics. This approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization. Our application to a well-known business climate index provides strong indication of social interaction as an important element in respondents' assessment of the business climate.
    Keywords: business climate, business cycle forecasts, opinion formation, social interactions
    JEL: C42 D84 E37
    Date: 2008
  48. By: Javier Ordoñez (Universitat Jaume I); Katarina Juselius (University of Copenhagen)
    Abstract: This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed light on the impact of the European economic integration process on Spanish labour market and the convergence to a European level of prosperity. We find some important lessons to be learnt from the Spanish experience that should be relevant for the new member states. First, high competitiveness in the tradable sector seems crucial for the real and nominal convergence to be successful. The increase in consumption wages and consumer prices as a result of the Balassa-Samuelson effect should not be allowed to exceed the improvement in productivity. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. Third, there does not seem to be a short-cut to a European level of standard of living: the path to sustainable prosperity seems to follow the path of productivity improvement. Forth, excessive real wage increases seem to lead to increasing unemployment, slowdown in productivity growth, higher interest rates, and loss of competitiveness. On the other hand, the access to the European market and the possibility of increased export demand is likely to speed up the convergence process as long as competitiveness is not eroded by excess wage increases. El presente trabajo analiza la dinámica de los salarios, precios y desempleo habida en España durante las últimas dos décadas. El objetivo es mejorar nuestra compresión sobre el impacto que el proceso de integración europeo pudo tener sobre el mercado de trabajo español y el proceso de convergencia hacia un nivel de prosperidad similar al europeo. Nuestros resultados apuntan a que de la experiencia española se podrían extraer conclusiones de interés para los países recientemente incorporados. En primer lugar, una elevada competencia en el sector de los bienes comercializables aparece como necesaria para que se produzca la convergencia tanto nominal comercial. El incremento en los salarios y los precios como resultado del efecto Balassa-Samuelson no deberían exceder los incrementos en productividad. En segundo lugar, antes de fijar los tipos de cambio es necesario que éste se encuentre en un nivel sostenible (competitivo) de capacidad de compra. En tercer lugar, no parece existir un "atajo" para alcanzar un nivel de vida similar a la media europea: el camino hacia una prosperidad sostenible sigue la senda del crecimiento de la productividad. En cuarto lugar, demandas salariales excesivas conllevan un incremento del empleo, una caída en el crecimiento de la productividad, tipos de interés más elevados y pérdida de competitividad. Por otro lado, el acceso a los mercados europeos y la posibilidad de aumentar las exportaciones favorece la convergencia a menos que la competitividad no se vea erosionada por demandas salariales excesivas.
    Keywords: efecto Balassa-Samuelson, convergencia real y nominal, dinámica del desempleo, paridad del poder de compra, VAR cointegrado. Balassa-Samuelson effect, nominal and real convergence, unemployment, dynamics, purchasing power parity, cointegrated VAR.
    JEL: C32 E24
    Date: 2008–05
  49. By: Vadim Khramov (Department of Economics Higher School of Eeconomics, Centre for Advanced Studies, Moscow, Russia)
    Abstract: This paper is an attempt to reconsider one of the fundamental results of endogenous cycle theory, which was reached in the paper by Farmer and Guo (1994), by introducing more realistic assumptions about profit allocation in the economy. The hypothesis that profit enters the household’s budget through a separate channel is replaced by the hypothesis that economic profit turns into factor payments as a result of rent seeking. We believe that when economic profit occurs in the economy, a sector of agents which spend resources on capturing it appears, and this is the process referred to as rent seeking mechanism in our model. This assumption changes the agents’ inter-temporal optimization problem, such that conditions for endogenous cycles to occur change depending on the persistency of return to rent seeking. In this paper it is shown that even under large returns to scale in the production sector and a rather low depreciation rate of efforts in the rent seeking sector endogenous cycles do not occur.
    Keywords: indeterminacy, sunspots, rent seeking, endogenous cycles
    JEL: E00 E25 C62 C68
    Date: 2007–11
    Abstract: This paper tests whether the impact of labour taxes on unemployment is symmetric with respect to increases and decreases in labour taxes. Using a panel of 16 OECD countries over the period 1970-2005, we estimate a panel unobserved component model to account for the fact that unemployment rates and labour taxes are non-stationary but not co integrated. We find a positive impact of tax increases in European and Nordic countries but no effect of decreasing labour taxes on the rate of unemployment. For Anglo-Saxon countries, no impact of labour taxes on unemployment is found.
    Keywords: unemployment, labour taxes, asymmetry, unobserved component model
    JEL: C15 C33 E24
    Date: 2008–07
  51. By: Tang, Dragon Yongjun; Yan, Hong
    Abstract: This study empirically examine the impact of market conditions on credit spreads as motivated by recently developed structural credit risk models. Using credit default swap (CDS) spreads, we find that, in the time series, average credit spreads are decreasing in GDP growth rate, but increasing in GDP growth volatility. We document that credit spreads are lower when investor sentiment is high and when the systematic jump risk is low. In the cross section, we confirm that firm-level cash flow volatility raises credit spreads. More importantly, we demonstrate that the impact of market conditions on credit spreads is substantially affected by firm heterogeneity. During economic expansions, ceteris paribus, firms with high cash flow betas have lower credit spreads than those with low cash flow betas. This relation disappears during economic recessions, consistent with theoretical predictions. In diesem Arbeitspapier untersuchen wir empirisch, wie die gesamtwirtschaftlichen Bedingungen die Renditeabstände von Unternehmensanleihen, die mit einem Ausfallrisiko behaftet sind, beeinflussen. Dabei verwenden wir Spreads von Kreditausfallswaps (Credit Default Swap, CDS) als Näherungswert für Kreditspreads und stellen fest, dass die durchschnittlichen Kreditspreads im Zeitverlauf bei wirtschaftlicher Expansion niedriger und bei wirtschaftlicher Rezession höher sind. Wenn das Wirtschaftswachstum volatiler ist, führt dies ebenfalls zu höheren Kreditspreads. Wir stellen fest, dass Kreditspreads bei positiver Anlegerstimmung und geringem Risiko eines marktweiten Sprungs niedriger ausfallen. Firmenübergreifend stellen wir fest, dass ein auf Unternehmensebene volatiler Cashflow zu einer Erhöhung der Kreditspreads führt. Was noch entscheidender ist, wir zeigen, dass in Zeiten wirtschaftlicher Expansion – bei ansonsten gleichen Bedingungen – Unternehmen, deren Cashflow stark mit dem gesamtwirtschaftlichen Wachstum korreliert, geringere Kreditspreads aufweisen als solche mit einer schwachen Cashflow-Korrelation. Im Einklang mit den theoretischen Voraussagen verschwindet dieser Zusammenhang in Zeiten wirtschaftlicher Rezession.
    Keywords: Credit Risk, Credit Default Swaps, Credit Spreads, Market Conditions
    JEL: E43 E44 G12 G13
    Date: 2008
  52. By: Schanne, Norbert (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Wapler, Rüdiger (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weyh, Antje (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "We forecast unemployment for the 176 German labour-market districts on a monthly basis. Because of their small size, strong spatial interdependencies exist between these regional units. To account for these as well as for the heterogeneity in the regional development over time, we apply different versions of an univariate spatial GVAR model. When comparing the forecast precision with univariate time-series methods, we find that the spatial model does indeed perform better or at least as well. Hence, the GVAR model provides an alternative or complementary approach to commonly used methods in regional forecasting which do not consider regional interdependencies." (author's abstract, IAB-Doku) ((en))
    JEL: C31 C53 E24 O18
    Date: 2008–07–10
  53. By: Dikaios Tserkezos (Department of Economics, University of Crete, Greece)
    Abstract: In this paper, we examine the effects of data collection frequency on the computation of the Consumer Price Index (CPI). Using stochastic simulation techniques, we conclude that the frequency of data collection has a considerable effect on CPI values. Our findings confirm the need for high levels of data collection frequency for the purpose of computing the CPI and, in general, for the more effective monitoring of developments in the cost of living, as this is approached on the basis of Consumer Price Index values.
    Keywords: Frequency of Data Collection, Consumer Price Index, Stochastic Simulation.
    JEL: C81 C82 E30
    Date: 2008–06–03
  54. By: Antonio Falcó (Universidad CEU Cardenal Herrera); Juan Nave (Universidad de Castilla-La Mancha); Lluís Navarro (Universidad CEU Cardenal Herrera)
    Abstract: In this paper we propose an alternate calibration algorithm, by using a consistent family of yield curves, that fits a Gaussian Heath-Jarrow-Morton model jointly to the implied volatilities of caps and zero-coupon bond prices. The algorithm is capable for finding several Pareto optimal points as is expected for a general nonlinear multicriteria optimization problem. The calibration approach is evaluated in terms of in-sample data fitting as well as stability of parameter estimates. Furthermore, the efficiency is tested against a non-consistent traditional method by using simulated and US market data.
    Keywords: HJM models, consistent forward rate curves, multiobjective calibration
    JEL: E43 C13
    Date: 2008–04
  55. By: Rasmus Fatum (University of Alberta); Michael M. Hutchison (University of California, Santa Cruz, Hong Kong Institute for Monetary Research)
    Abstract: Estimating the effect of official foreign exchange market intervention is complicated by the fact that intervention at any point entails a self-selection choice made by the authorities and that no counterfactual is observed. To address these issues, we estimate the counterfactual exchange rate movement in the absence of intervention by introducing the method of propensity score matching to estimate the average treatment effect (ATE) of intervention. To derive the propensity scores we introduce a new intervention reaction function that includes the difference between market expectations and official announcements of macroeconomic developments that can influence the decision to intervene. We estimate the ATE for daily official intervention in Japan over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period and ineffective (or possibly counterproductive) during 2003 and 2004. These results hold up to a variety of robustness tests. Only sporadic and relatively infrequent intervention appears to be effective.
    Keywords: Foreign Exchange Intervention, Bank of Japan, Self-Selection, Matching Methods
    JEL: E58 F31 G15
    Date: 2008–02
  56. By: Claudio Campanale (Universidad de Alicante)
    Abstract: The empirical work on household portfolio choice documents two facts. One, the stock market participation rate is low and hump-shaped over the life-cycle, two, the conditional share of stocks is also low but does not appear to change much during the life-cycle. In contrast the standard life-cycle portfolio choice model predicts high and monotonically increasing participation rates and conditional stock shares that are low and exhibit dramatic changes with age. In this paper I consider a number of extensions to this basic framework. I find that a small per period participation cost is needed to generate a hump shaped life-cycle profile of participation rates. Under a realistic calibration the quantitative effect is minor. Progressive social security and the assumption that the risk of stock portfolios is declining in household wealth as a consequence of better diversification opportunities 'an assumption that has some empirical support' though provide substantial amplification and significantly improve the ability of the model to match the data. Under-diversification also reduces the average portfolio share of stocks conditional on participation and, together with the intergenerational transmission of wealth makes it insensitive to age, consistent with the empirical evidence.
    Keywords: Portfolio choice, life-cycle, bequests, diversification, social security.
    Date: 2008–03
  57. By: Peter Willemé
    Abstract: This paper presents a model of Belgian household consumption, with a focus on private health expenditures. To do so, we have formulated and estimated an extension of the classic Almost Ideal Demand System. The original model has been modified by introducing a dynamic adjustment mechanism and by the inclusion of demographic variables. These were expected to capture shifts in consumption patterns related to the changing age composition of the population. The results confirm the expected effects: the ageing of the population is likely to increase the share of private health expenditures (and consumer durables) in the household budget over the coming decades.
    JEL: C8 E24 J23
    Date: 2008–02–18
  58. By: André Nassif
    Abstract: Efforts towards economic development in Brazil and India share some common aspects. From the beginning of the 1950s to the end of the 1980s, both countries adopted import substitution policies including high tariffs and non-tariff barriers. Since the beginning of the 1990s, liberalizing economic reforms have been implemented by the respective Governments. If we compare the reach of the Brazilian reform to that of India, one could easily conclude that the former was more extensive and profound than the latter; and in conventional indicators of innovative effort such as research and development expenditures, education coverage, average years of education and literacy rate, Brazil’s results are a little bit better than those of India. However, since the beginning of the 1980s, India has been showing better general economic performance than Brazil. This paper argues and gives some empirical evidence to show that India’s performance is explained by its institutional capacity for coordinating conventional macroeconomic policies with other policies related to its National Innovation System.
    Date: 2007

This nep-mac issue is ©2008 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.