nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒07‒30
fifty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Trend inflation as a workers disciplining device in a general equilibrium model By Di Bartolomeo Giovanni; Acocella Nicola; Patrizio Tirelli
  2. From the Great Inflation to the Great Moderation: Assessing the Roles of Firm-Specific Labor, Sticky Prices and Labor Supply Shocks By Maher Khaznaji; Louis Phaneuf
  3. Expectations, Learning and Business Cycle Fluctuations By Stefano Eusepi; Bruce Preston
  5. How Has the Euro Changed the Monetary Transmission? By Jean Boivin; Marc P. Giannoni; Benoît Mojon
  6. A Structural VAR Approach to Core Inflation in Canada By Sylvain Martel
  8. What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model By Dong He; Laurent Pauwels
  9. The Usefulness of Output Gaps for Policy Analysis By Isabell Koske; Nigel Pain
  10. Has globalisation changed the Phillips curve? Firm-level evidence on the effect of activity on prices By Eugenio Gaiotti
  11. Forecasting inflation and tracking monetary policy in the euro area: does national information help? By Riccardo Cristadoro; Fabrizio Venditti; Giuseppe Saporito
  12. Seigniorage-maximizing inflation By Tatiana Damjanovic; Charles Nolan
  13. Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt By Stehn, Sven Jari; Vines, David
  14. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O
  15. Phillips Curve and the natural rate of unemployment. A simple approach to Peru. (1993 - 2006) By Salazar, Eduardo
  16. Inflation Targeting Is a Success, So Far: 100 Years of Evidence from Swedish Wage Contracts By Fregert, Klas; Jonung, Lars
  17. International Liquidity, Financial Constraints and Private Investment in an Emerging Market Economy By Guncvadi, Oner
  18. Assessing Inflation Persistence: Micro Evidence on an Inflation Targeting Economy By Jan Babecky; Fabrizio Coricelli; Roman Horvath
  19. Excess liquidity and monetary policy effectiveness: The case of CEMAC countries By KAMGNA, Severin Yves; Ndambendia, Houdou
  20. Procyclical Fiscal Policy in Developing Countries: Truth or Fiction? By Ethan Ilzetzki; Carlos A. Vegh
  21. Cyclical asymmetry in fiscal variables By Fabrizio Balassone; Maura Francese; Stefania Zotteri
  23. Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set By Menzie D. Chinn; Michael J. Moore
  24. Interest Rate Rules with Heterogeneous Expectations By Anufriev, M.; Assenza, T.; Hommes, C.H.; Massaro, D.
  25. Endogenous information, menu costs and inflation persistence By Yuriy Gorodnichenko
  26. The term structure and the expectations hypothesis: a threshold model By Modena, Matteo
  27. Effect of Dolarization on Macroeconomic Performance and Money-Price Relationship in Ecuador By Bedri Kamil Onur Tas; Selahattin Togay
  28. Relative Price Variability and the Philips Curve: Evidence from Turkey By A. Nazif Catik; Christopher Martin; A. Özlem Önder
  29. Optimal HP filtering for South Africa By Leon du Toit
  30. How do Fiscal and Technology Shocks affect Real Exchange Rates? New Evidence for the United States By Zeno Enders; Gernot J. Müller; Almut Scholl
  31. Executive Compensation and Stock Options: An Inconvenient Truth By Jean-Pierre Danthine; John B. Donaldson
  32. A "Double Coincidence" Search Model of Money By Niola Amendola
  33. Nelson-Plosser revisited: the ACF approach By Karim M. Abadir; Gabriel Talmain; Giovanni Caggiano
  34. The duration of economic expansions and recessions : More than duration dependence By Castro, Vítor
  35. Liquidity and financial cycles By Tobias Adrian; Hyun Song Shin
  36. A disequilibrium growth cycle model with differential savings By Serena Sordi
  37. MACRO AND FINANCIAL MARKETS: The memory of an elephant? By Karim M. Abadir; Gabriel Talmain
  38. The Composition of Government Spending and the Real Exchange Rate By Galstyan, Vahagn A.; Lane, Philip R.
  39. Oil Futures Prices in a Production Economy With Investment Constraints By Leonid Kogan; Dmitry Livdan; Amir Yaron
  40. Frequency of Price Adjustment and Pass-through By Gita Gopinath; Oleg Itskhoki
  41. Do Financial Factors Affect the Capital-Labour Ratio? Evidence form UK FIrm-Level Data By Marina-Eliza Spaliara
  42. Ambiguous Money Distribution And The Price Stickiness Phenomenon: A Rationale From An Ambiguous Rational Expectations Approach By Marcello Basili; Stefano Dalle Mura
  43. Sovereign bond market integration: the euro, trading platforms and globalization By Schulz, Alexander; Wolff, Guntram B.
  44. The Reaction of Asset Prices to Macroeconomic Announcements in New EU Markets: Evidence from Intraday Data By Jan Hanousek; Evzen Kocenda; Ali M. Kutan
  45. Output growth volatility and remittances By Matteo Bugamelli; Francesco Paternò
  46. Hunting the Unobservables for Optimal Social Security: A General Equilibrium Approach By Caliendo, Frank N.; Gahramanov, Emin
  47. Centralized Wage Determination and Regional Unemployment Differences: The Case of Italy By Caponi, Vincenzo
  48. The Banking Sector and the Great Depression in Bulgaria, 1924 - 1938: Interlocking and Financial Sector Profitability By Kiril Danailov Kossev
  49. On the measurement of growth By Babutsidze, Zakaria
  50. Countries of a Feather flock together By Charles van Marrewijk; Gus Garita
  51. A Nonlinear Cobweb Model of Agricultural Commodity Price Fluctuations By Sophie Mitra; Jean-Marc Boussard
  52. The Rhythm of the Deal: Negotiation as a Dance By Erik H. Schlie; Mark A. Young

  1. By: Di Bartolomeo Giovanni; Acocella Nicola; Patrizio Tirelli
    Abstract: In New Keynesian models nominal rigidities determine socially inefficient outcomes. Our paper reverses this view: properly designed monetary policies may take advantage of predetermined nominal wages to discipline monopolistic wage setters. This, in turn, requires accepting a non-zero inflation rate. Discretionary monetary policy is effective when wage setters are non atomistic. Inflation targeting has real effects irrespective of the degree of labor market centralization.
    Keywords: Inflation bias, discretionary monetary policy, non-zero inflation targeting, unemployment, strategic wage setter, labor unions
    JEL: E52 E58 J51 E24
    Date: 2008–06
  2. By: Maher Khaznaji; Louis Phaneuf
    Abstract: We develop and estimate a dynamic stochastic general equilibrium model that features sticky prices, a variable elasticity of demand facing firms and firm-specific labor. While reconciling to a good extent the micro and macro evidence on the behavior of prices, the model offers an accurate account of the dramatic increase in macroeconomic stability from the Great Inflation (1948:1-1979:II) to the Great Moderation (1984:I-2006:II). Reminiscent of the evidence in Shapiro and Watson (1988), the paper shows that labor-supply shocks are the key source of the reduction in the volatility of output growth, followed by investment-specific shocks. However, changes in the behavior of the private sector, a less accommodative monetary policy and smaller shocks explain almost evenly the large decline of the variability in inflation.
    Keywords: Great moderation, firm-specific labor, variable demand elasticity, nominal price rigidity
    JEL: E31 E32
    Date: 2008
  3. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions.
    JEL: D83 D84 E32
    Date: 2008–07
  4. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure. Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours. Persistence in these series is captured, unlike in standard models. Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment. An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions.
    JEL: E32 D83 D84
    Date: 2008–07
  5. By: Jean Boivin; Marc P. Giannoni; Benoît Mojon
    Abstract: This paper characterizes the transmission mechanism of monetary shocks across countries of the euro area, documents how this mechanism has changed with the introduction of the euro, and explores some potential explanations. The factor-augmented VAR (FAVAR) framework used is sufficiently rich to jointly model the euro area dynamics while permitting the transmission of shocks to be different across countries. We find important heterogeneity across countries in the effect of monetary shocks before the launch of the euro. In particular, we find that German interest-rate shocks triggered stronger responses of interest rates and consumption in some countries such as Italy and Spain than in Germany itself. According to our estimates, the creation of the euro has contributed 1) to a greater homogeneity of the transmission mechanism across countries, and 2) to an overall reduction in the effects of monetary shocks. Using a structural open-economy model, we argue that the combination of a change in the policy reaction function -- mainly toward a more aggressive response to inflation and output -- and the elimination of an exchange-rate risk can explain the evolution of the monetary transmission mechanism observed empirically.
    JEL: C3 D2 E31 E4 E5 F4
    Date: 2008–07
  6. By: Sylvain Martel
    Abstract: The author constructs a measure of core inflation using a structural vector autoregression containing oil-price growth, output growth, and inflation. This "macro-founded" measure of inflation forecasts total inflation at least as well as other, atheoretical measures.
    Keywords: Inflation and prices
    JEL: E31 C53
    Date: 2008
  7. By: Jan Libich; Petr Stehlik
    Abstract: The paper analyzes the interactions between monetary and fiscal policies. Its emphasis is on a monetary union; one in which (some of) the governments are excessively ambitious. In contrast to conventional games, our novel game theoretic framework allows for stochastic timing of policy actions. The fact that moves occur with some ex-ante probability distribution (rather than certainty every period) enables us to model various degrees of fiscal rigidity and indiscipline that are heterogeneous across the member countries. We examine a number of specifications in discrete and continuous time, such as the widely-used Calvo (1983) timing, as well as a fully general probability distribution of the timing of policy actions. We derive the necessary and sufficient degree of monetary commitment that eliminates socially inferior (subgame perfect Nash) equilibria. This degree is shown to be increasing in (i) the degree of fiscal rigidity of each member country, (ii) their relative economic size, (iii) the structure of the economy (that determines eg inflation and output variability costs), and (iv) the degree of the central banker's impatience. Interestingly, such a strong monetary commitment - interpretable as a sufficiently explicit numerical inflation target - does not only ensure high credibility of the central bank, but it also indirectly "disciplines" the fiscal policymaker(s). As such, it leads to an improvement in monetary-fiscal policy cooperation and outcomes of both policies. We conclude by calibrating the model with European Monetary Union data. This exercise aims at providing some quantitative predictions regarding the required explicitness of the European Central Bank's commitment to an inflation target.
    JEL: E42 E61 C70 C72
    Date: 2008–07
  8. By: Dong He (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority)
    Abstract: In this paper, we model the policy stance of the People¡¦s Bank of China (PBoC) as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBoC. In a second step, we estimate how much of the variation in the PBoC's implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets figured significantly in PBoC's policy changes, but not output gaps.
    Keywords: Monetary policy, People's Bank of China, qualitative response models, large factor models
    JEL: E52 E58 C25 C32
    Date: 2008–06
  9. By: Isabell Koske; Nigel Pain
    Abstract: Measures of the gap between actual and potential activity are used frequently as indicators of the economic cycle and play a vital role in the conduct of monetary and fiscal policy. Given that output and unemployment gap estimates are often subject to considerable revision over time, this paper investigates the uncertainty surrounding projections and early outturn estimates of such gaps and evaluates their usefulness for policy making in real time. Current-year projections and initial outturn estimates of the gaps both appear to provide a reasonably good picture of the business cycle over the period studied, but one-year-ahead projections perform rather poorly. Projections made at cyclical turning points are subject to greater revision than those made at other times. Revisions to output gaps appear to stem primarily from revisions to actual rather than potential GDP. Empirical results show that output gaps remain a significant influence on inflation, but their influence is now weaker than in the past, and the usefulness of output gap estimates for real-time inflation projections is limited. Revisions to real-time output gaps also generate revisions to real-time estimates of the fiscal stance, although typically these are relatively moderate. Despite the uncertainty attached to gap estimates, they remain useful for policymakers, helping to situate current economic developments. <P>L’utilité de l’écart de production pour l’analyse de politique macroéconomique <BR>Les estimations de l’écart entre l’activité courante et potentielle sont fréquemment utilisées comme indicateurs du cycle économique et jouent un rôle crucial dans la conduite des politiques monétaire et budgétaire. Étant donné, qu’au fil du temps les estimations des écarts de croissance et de chômage sont souvent révisées, ce papier évalue l’incertitude qui entoure les prévisions ainsi que les premières estimations de ces écarts pour l’année écoulée et analyse leur utilité pour les décisions de politique économique en temps réel. Les prévisions pour l’année en cours et les premières estimations pour l’année écoulée des écarts donnent une image assez représentative du cycle sur la période étudiée tandis que les prévisions à un an sont plutôt médiocres. Les prévisions qui sont faites lors d’un retournement de cycle sont sujettes á de plus fortes révisions que celles réalisées á d’autres périodes. Les révisions des écarts de production viennent d’abord des révisions du PIB courant plutôt que du potentiel. Les résultats empiriques montrent que les écarts de production continuent d’influer sur l’inflation même si leur effet est moindre que par le passé et que ’ utilité des estimations des écarts de production pour les prévisions de l’inflation en cours est limitée. Les révisions des écarts de production courants génèrent aussi des révisions des estimations de la situation fiscale courante, même si ceux-ci sont relativement modérés. Malgré l’incertitude liée aux estimations des écarts de croissance, ces dernières demeurent utiles pour les décideurs politiques dans la mesure où elles les aident à évaluer la situation économique courante.
    Keywords: incertitude, Uncertainty, output gap, inflation forecasting, cyclically-adjusted budget balance, prévision d’inflation, solde budgétaire ajusté du cycle, écart de production
    JEL: E31 E32 E52 E62
    Date: 2008–07
  10. By: Eugenio Gaiotti (Bank of Italy, Economic Outlook and Monetary Policy Department)
    Abstract: The flattening of the Phillips curve observed in the industrial countries has been attributed to globalisation, while the traditional explanation centres on monetary policy credibility. The empirical literature is not conclusive, since macroeconomic data are affected by substantial identification problems. This paper argues that recourse to micro data is needed to identify structural changes in the slope of the Phillips curve. Taking advantage of a unique dataset including about 2,000 Italian firms, the paper tests whether a change in the link between capacity utilisation and prices is confirmed at company level, after controlling for inflation expectations, and whether it is concentrated among those firms that are more exposed to globalisation on either the product or the labour market. The answer is negative in all cases. The results do not support the view that the flattening of the Phillips curve is due to globalisation.
    Keywords: Phillips curve, globalisation, inflation, monetary policy
    JEL: E31 E52 E58
    Date: 2008–06
  11. By: Riccardo Cristadoro (Bank of Italy, Economic Research Department); Fabrizio Venditti (Bank of Italy, Economic Research Department); Giuseppe Saporito (Bank of Italy, Cagliari)
    Abstract: The ECB objective of price stability is given a quantitative content as a year-on-year growth rate in the euro area HICP close but below 2% over the medium term. While this objective is referred to area-wide price developments, in anticipating monetary policy moves, market analysts pay considerable attention to national data. In this paper we use the Generalized Dynamic Factor Model to derive a set of core inflation indicators that, combining national with area-wide data, allow us to answer two related questions: whether country-specific data are actually relevant to the future path of area-wide inflation once the information contained in area-wide data has been exploited, and whether it is useful, in order to track ECB monetary policy decisions, to factor in national and not only area-wide statistics. In both cases, our findings suggest that, when area-wide information is properly taken into account, there is little to be gained by considering national idiosyncratic developments.
    Keywords: Forecast, Dynamic factor model, inflation, monetary policy
    JEL: C25 E37 E52
    Date: 2008–06
  12. By: Tatiana Damjanovic; Charles Nolan
    Abstract: What is the seigniorage-maximizing level of inflation? Four models formulae for the seigniorage maximizing inflation rate (SMIR) are compared. Two sticky-price models arrive at very different quantitative recommendations although both predict somewhat lower SMIRs than Cagan’s formula and a variant of a .ex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labour market: The Calvo model implies that inflation and output are negatively related and that output is falling in price stickiness whilst the Rotemberg cost-of-price-adjustment model implies exactly the opposite. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the USA and the UK may be quite close to the SMIR.
    Keywords: Price stickiness; Revenue maximizing inflation; Inflation tax; Seigniorage; price dispersion.
    JEL: E4 E52 E61 E63
    Date: 2008–07
  13. By: Stehn, Sven Jari; Vines, David
    Abstract: We analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while fiscal leadership reinstates the cooperative outcome under discretion. Second, we show that this familiar result breaks down when lump-sum taxes are unavailable. With government debt, the Nash equilibrium still entails too much public spending but leads to lower interest rates than the cooperative policy, because debt has to be adjusted back to its pre-shock level to ensure time consistency. A setup of fiscal leadership does not avoid this socially costly outcome. Imposing a debt penalty onto the myopic government under either Nash or fiscal leadership raises welfare substantially, while appointing a conservative central bank is less effective.
    Keywords: Non-cooperative games; Optimal Fiscal Policy; Optimal Monetary Policy; Policy Myopia; Stabilisation Bias
    JEL: E52 E60 E61 E63
    Date: 2008–07
  14. By: Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.
    Keywords: Instrument rules; Open-economy DSGE models; Optimal monetary policy; Optimal policy projections
    JEL: E52 E58
    Date: 2008–07
  15. By: Salazar, Eduardo
    Abstract: This work tries to explain, by means of Phillips's curve (in a simple model), the relation that exists between inflation and rate of unemployment in the period from 1993 to 2006, in addition estimates the natural rate of unemployment for the above mentioned period, here evidence appears in favour of the fulfillment of Phillips's curve, one finds a negative relation between rate of unemployment and variation of the rate of inflation, that is to say that to major rates of unemployment there is a decrease in the rate of inflation. Also one thinks that the rate of national unemployment is below the natural rate of unemployment, this result shows some evidence in favour of which there could be inflationary pressures.
    Keywords: Inflación; Tasa de desempleo; Curva de Phillips; Tasa natural de desempleo
    JEL: E24 E31 C22
    Date: 2008–01
  16. By: Fregert, Klas; Jonung, Lars
    Abstract: Inflation targeting was adopted by several countries, including Sweden, in the 1990s. We evaluate the Swedish inflation targeting regime since 1995 using a novel approach based on a unique data set on the characteristics of collective wage agreements between 1908 and 2008. First, we establish that the length of wage contracts decreases in response to an increase in “macroeconomic uncertainty” across policy regimes. Second, using contract length as the assessment criteria for regime performance, we find that the inflation targeting regime of 1995–2008 stands out as an exceptionally stable policy regime as judged by the willingness of wage contract-makers to repeatedly commit to three-year non-indexed wage agreements. In addition, inflation targeting gained instant credibility in the sense that the labor market organizations entered long-term wage agreements at the same time as this new regime was announced. Inflation targeting has thus reduced macroeconomic uncertainty compared to previous regimes adopted in Sweden during the 20th century. Our approach to evaluate inflation targeting is different from the traditional one commonly based on cross-section samples comparing inflation outcomes. Instead we focus on the actual decisions of private-sector wage setters under different monetary regimes. Judging from their behavior across a century of observations, inflation targeting in Sweden is a success – at least so far.
    Keywords: Inflation targeting, policy regime, contract length, wage indexation, Lucas critique, Sweden, credibility
    JEL: E30 E42 E65
    Date: 2008
  17. By: Guncvadi, Oner
    Abstract: This article examines whether or not the recent surge in the availability of international liquidity helps Turkey revive private investment expenditure. Unlike previous studies, this paper indicates that an increased availability of financial resources after 2002 played a detrimental role in the recent recovery of private investment in Turkey.
    Keywords: Private investment; financial constraints; international liquidity; Turkey
    JEL: E62 E22 E44
    Date: 2008–06–15
  18. By: Jan Babecky; Fabrizio Coricelli; Roman Horvath
    Abstract: The paper provides an empirical analysis of inflation persistence in an inflation targeting country, the Czech Republic, using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence.
    Keywords: Inflation dynamics, persistence, inflation targeting.
    JEL: D40 E31
    Date: 2008–06
  19. By: KAMGNA, Severin Yves; Ndambendia, Houdou
    Abstract: The excess of banks liquidity in the CEMAC zone, following the banking restructuring, brought the monetary authorities to undertake a certain number of reforms. The object of this article is, besides the determination of the explanatory factors of the excess of banks liquidity, to appreciate the efficiency of the transmission mechanisms of the monetary policy. It is evident from results of the evaluation that this phenomenon depends strongly on the economic and financial structures of every CEMAC’s country. To the level of the zone, only the credit to the private sector could reduce the liquidity in excess. In the same way, this situation reduces the efficiency of the monetary channel. This inefficiency of the monetary channel explains itself by the weak adjustment of the rate of the inter-bank market following an expansive monetary policy. These results confirms the necessity for the monetary authorities to implement actions aiming to increase the offer of credit to the private sector.
    Keywords: surliquidité; politique monétaire; réserves bancaires; liquidité bancaire; stérilisation.
    JEL: E58 E52 E50
    Date: 2008–06–30
  20. By: Ethan Ilzetzki; Carlos A. Vegh
    Abstract: A large empirical literature has found that fiscal policy in developing countries is procyclical, in contrast to high-income countries where it is countercyclical. The idea that fiscal policy in developing countries is procyclical has all but reached the status of conventional wisdom. This has sparked a growing theoretical literature that attempts to explain such a puzzle. Some authors, however, have suggested that procyclical fiscal policy could be more fiction than truth since, by and large, the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of fiscal policy. To settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find overwhelming evidence to support the idea that procyclical fiscal policy in developing countries is in fact truth and not fiction. We also find evidence that fiscal policy is expansionary -- a channel disregarded by the existing literature -- lending empirical support to the notion that when "it rains, it pours."
    JEL: E62 F41
    Date: 2008–07
  21. By: Fabrizio Balassone (Bank of Italy, Economic Research Department); Maura Francese (Bank of Italy, Economic Research Department); Stefania Zotteri (Bank of Italy, Economic Research Department)
    Abstract: In a stylised framework of fiscal policy determination that considers both structural targets and cyclical factors, we find significant cyclical asymmetry in the behaviour of fiscal variables in a sample of fourteen EU countries from 1970 to 2004, with budgetary balances (both overall and primary) deteriorating in contractions but not improving correspondingly in expansions. Analysis of budget components reveals that the asymmetry is due to expenditure, in particular transfers in cash. We find no evidence that the fiscal rules introduced in 1992 with the Treaty of Maastricht affected the cyclical behaviour of the variables examined. Numerical simulations show that cyclical asymmetry inflated average deficit levels, contributing significantly to the accumulation of debt.
    Keywords: fiscal stabilisation, government expenditure, government debt, fiscal rules
    JEL: E62 H6
    Date: 2008–06
  22. By: Athina Zervoyianni (University of Patras, Greece and The Rimini Centre for Economic Analysis)
    Abstract: This paper explores the relation between trade flows and cross-country symmetry of supply and demand shocks using data from the EU27 countries. Increased bilateral trade intensity is found to have a positive impact on the correlation of both demand and supply shocks. Intra-industry trade is found to be positively linked to correlations of supply-side shocks but negatively linked to correlation of demand shocks. Our results thus provide support for the argument that aggregate demand spill-overs and intra-industry trade, rather than specialization, dominate in the process through which trade flows affect the cross-country transmission of shocks in Europe. At the same time, our estimates suggest that monetary-policy convergence in Europe (the circulation of the euro), while having increased symmetry of supply-side shocks, has had no direct favourable impact on symmetry of demand shocks. By contrast, the process of fiscal-policy convergence is found to have resulted in more correlated demand shocks across the EU member states. Classification-JEL: F4, F15, E32
    Keywords: convergence of shocks; trade flows; European integration; cyclical macroeconomic fluctuations
    Date: 2008–01
  23. By: Menzie D. Chinn; Michael J. Moore
    Abstract: We propose an exchange rate model which is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. It argues that the failure of the monetary model is principally due to private preference shocks which render the demand for money unstable. These shocks to liquidity preference are revealed through order flow. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on inter-dealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or "hybrid", model exhibits out of sample forecasting improvement over the basic macroeconomic and random walk specifications.
    JEL: D82 F31 F41 F47
    Date: 2008–07
  24. By: Anufriev, M. (Universiteit van Amsterdam); Assenza, T. (Universiteit van Amsterdam); Hommes, C.H. (Universiteit van Amsterdam); Massaro, D. (Universiteit van Amsterdam)
    Abstract: Recent macroeconomic literature stressed the importance of expectations heterogeneity in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate the dynamical consequences of alternative interest rate rules when agents have heterogeneous expectations and update their beliefs over time along the lines of Brock and Hommes (1997). We find that the outcome of different monetary policies in terms of stability crucially depends on the ecology of forecasting rules and on the intensity of choice among different predictors. We also show that, when agents have heterogeneous expectations, an interest rate rule that obeys the Taylor principle does not always lead the system to converge to the rational expectations equilibrium but multiple equilibria may persist.
    Date: 2008
  25. By: Yuriy Gorodnichenko
    Abstract: This paper develops a model where firms make state-dependent decisions on both pricing and acquisition of information. It is shown that when information is not perfect, menu costs combined with the aggregate price level serving as an endogenous public signal generate rigidity in price setting even when there is no real rigidity. Specifically, firms reveal their information to other firms by changing their prices. Because the cost of changing price is borne by a firm but the benefit from better information goes to other firms, firms have an incentive to postpone price changes until more information is revealed by other firms via the price level. The information externality and menu costs reinforce each other in delaying price adjustment. As a result, the response of inflation to nominal shocks is both sluggish and hump-shaped. The model can also qualitatively capture a number of stylized facts about price setting at the micro level and inflation at the macro level.
    JEL: D82 D83 E31 E52
    Date: 2008–07
  26. By: Modena, Matteo
    Abstract: The expectations hypothesis implies that rational investors can predict future changes in interest rates by simply observing the yield spread. According to Mishkin (1990) the expectations theory can also be reformulated in terms of the ability of the spread to predict future inflation. Unfortunately, although appealing, the theory has found little empirical support. Time-varying term premia and changing risk perception have been advocated to rationalize the aforementioned weak empirical evidence. In this work we suggest that the time-varying nature of term premia makes single-equation models inappropriate to analyse the informative content of the term structure. In particular, when the deviations between the expected and the actual spread are large, which occurs in times of soaring term premia volatility, linear models fail to support the expectations theory. Within a threshold model for term premia, we provide evidence that the yield spread contains valuable information to predict future interest rates changes once the risk-averse attitude of economic agents is appropriately considered. Empirical results show that the predictive ability of the yield spread is contingent on the level of uncertainty as captured by the size of monetary policy surprise.
    Keywords: Expectations Hypothesis; Term Premia; Threshold Models
    JEL: E43 G12 C30
    Date: 2008–07–15
  27. By: Bedri Kamil Onur Tas; Selahattin Togay
    Date: 2008–07
  28. By: A. Nazif Catik (Department of Economics, Ege University); Christopher Martin (Department of Economics and Finance, Brunel University); A. Özlem Önder (Department of Economics, Ege University)
    Abstract: We argue that relative price changes are a key component of the Phillips curve relationship between inflation and output. Building on work by Ball and Mankiw, we propose including measures of the variances and skewness of relative price adjustment in an otherwise standard model of the Phillips curve. We examine the case of Turkey, where distribution of price changes is especially skewed and where the existence of a Phillips curve has been questioned. We have two main findings: (i) inclusion of measures of the distribution of relative price changes improves our understanding of the Phillips curve trade-off; (ii) there is no evidence of such a trade-off if these measures are not included.
    Keywords: Inflation, Philips Curve, Cross-Sectional Moments of Inflation, Relative Price Variability.
    JEL: C51 C52 E52 E58
    Date: 2008–07
  29. By: Leon du Toit (Department of Economics, Stellenbosch University)
    Abstract: Among the various methods used to identify the business cycle from aggregate data, the Hodrick-Prescott filter has become an industry standard – it ‘identifies’ the business cycle by removing low-frequency information, thereby smoothing the data. Since the filter’s inception in 1980, the value of the smoothing constant for quarterly data has been set at a ‘default’ of 1600, following the suggestion of Hodrick and Prescott (1980). This paper argues that this ‘default value’ is inappropriate due to its ad hoc nature and problematic underlying assumptions. Instead this paper uses the method of optimal filtering, developed by Pedersen (1998, 2001, and 2002), to determine the optimal value of the smoothing constant for South Africa. The optimal smoothing constant is that value which least distorts the frequency information of the time series. The result depends on both the censoring rule for the duration of the business cycles and the structure of the economy. The paper raises a number of important issues concerning the practical use of the HP filter, and provides an easily replicable method in the form of MATLAB code.
    Keywords: Hodrick-Prescott filter, Spectral analysis, Ideal filtering, Optimal filtering, Distortionary filtering, Business cycles, MATLAB
    JEL: C22 E32
    Date: 2008
  30. By: Zeno Enders (University of Bonn, Bonn Graduate School of Economics); Gernot J. Müller (Goethe University Frankfurt); Almut Scholl (Goethe University Frankfurt)
    Abstract: Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identi¬fication, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade – whose responses are left unrestricted – depreciate in response to expansionary govern¬ment spending shocks and appreciate in response to positive technology shocks.
    Keywords: Real Exchange Rate, Terms of Trade, International Transmission Mechanism, Government Spending Shocks, Technology Shocks, VAR, Sign Restrictions
    JEL: F41 F42 E32
    Date: 2008–07–18
  31. By: Jean-Pierre Danthine (Swiss Finance Institute, University of Lausanne and CEPR); John B. Donaldson (Columbia University)
    Abstract: We reexamine the issue of executive compensation within a gen- eral equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compen- sation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-proffile 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: corporate governance, optimal contracting, business cycles
    JEL: E32 E44
    Date: 2008–06
  32. By: Niola Amendola (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share.
    Keywords: Money, Search, Double Coincidence, Bargaining
    JEL: D E
    Date: 2008–07–18
  33. By: Karim M. Abadir (Imperial College London, London, UK and The Rimini Centre for Economic Analysis, Italy); Gabriel Talmain (University of Glasgow, Glasgow, UK); Giovanni Caggiano (University of Padua, Italy)
    Abstract: We detect a new stylized fact about the common dynamics of macroeconomic and financial aggregates. The rate of decay of the memory of these series is depicted by their Auto-Correlation Functions (ACFs). They all share a common four-parameter functional form that we derive from the dynamics of an RBC model with heterogeneous firms. We find that, not only does our formula fit the data better than the ACFs that arise from autoregressive models, but it also yields the correct shape of the ACF. This can help policymakers understand better the lags with which an economy evolves, and the onset of its turning points. Classification-JEL: JEL E32, E52, E63
    Date: 2008–01
  34. By: Castro, Vítor (University of Warwick, University of Coimbra and NIPE)
    Abstract: One widespread idea in the business cycles literature is that the older is an expansion or contraction, the more likely it is to end. This paper tries to provide further empirical support for this idea of positive duration dependence and, at the same time, control for the effects of other factors like leading indicators, the duration of the previous phase, investment, price of oil and external influences on the duration of expansions and contractions. This study employs for the first time a discrete-time duration model to analyse the impact of those variables on the likelihood of an expansion and contraction ending for a group of industrial countries over the last fifty years. The evidence provided in this paper suggests that the duration of expansions and contractions is not only dependent on their actual age: the duration of expansions is also positively dependent on the behaviour of the variables in the OECD composite leading indicator and on private investment, and negatively affected by the price of oil and by the occurrence of a peak in the US business cycle ; the duration of a contraction is negatively affected by its actual age and by the duration of the previous expansion.
    Keywords: Business cycles ; Expansions ; Contractions ; Duration dependence ; Duration models
    JEL: C41 E32
    Date: 2008
  35. By: Tobias Adrian; Hyun Song Shin
    Abstract: In a financial system where balance sheets are continuously marked to market, asset price changes show up immediately in changes in net worth, and elicit responses from financial intermediaries, who adjust the size of their balance sheets. We document evidence that marked to market leverage is strongly procyclical. Such behaviour has aggregate consequences. Changes in aggregate balance sheets for intermediaries forecast changes in risk appetite in financial markets, as measured by the innovations in the VIX index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.
    Keywords: financial cycle, financial intermediation, leverage, liquidity
    Date: 2008–07
  36. By: Serena Sordi
    Abstract: This paper extends Goodwin’s growth cycle model by assuming both differential savings propensities and disequilibrium in the goods market. It is shown that both modifications entail an increase in the dimensionality of the dynamical system of the model. By applying the existence part of the Hopf bifurcation theorem, the possibility of persistent and bounded cyclical paths for the resulting 4-dimensional dynamical system is then established. With the help of numerical simulation some evidence is finally given that the limit cycle emerging from the Hopf bifurcation is stable.
    Keywords: growth cycle, differential savings, limit cycle, disequilibrium models.
    JEL: C61 E10 E32
    Date: 2008–06
  37. By: Karim M. Abadir (Imperial College London, London, UK and The Rimini Centre for Economic Analysis, Italy); Gabriel Talmain (University of Glasgow, Glasgow, UK)
    Abstract: Macroeconomic and aggregate financial series share an unconventional type of nonlinear dynamics. Existing techniques (like co-integration) model these dynamics incompletely, hence generating seemingly paradoxical results. To avoid this, we provide a methodology to disentangle the long-run relation between variables from their own dynamics, and illustrate with two applications. First, in the forward-premium puzzle, adding a component quantifying the persistent nonlinear dynamics of exchange rates yields substantial predictability and makes the forward-premium term insignificant. Second, S&P 500 grows in a pattern of momentum followed by reversal, forming long cycles around a trend given by GDP, a stable non-breaking relation since WWII. Classification-JEL:
    Date: 2008–01
  38. By: Galstyan, Vahagn A.; Lane, Philip R.
    Abstract: We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.
    Keywords: government consumption; government investment; real exchange rate
    JEL: E62 F31 F41
    Date: 2008–07
  39. By: Leonid Kogan; Dmitry Livdan; Amir Yaron
    Abstract: We document a new stylized fact regarding the term-structure of futures volatility. We show that the relationship between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a "V-shape". This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying supply-elasticity. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints affect firms' investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the supply-elasticity of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply-elasticity results in time-varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the aforementioned "V-shape" relationship between the volatility of futures prices and the slope of the term-structure.
    Date: 2008–04
  40. By: Gita Gopinath; Oleg Itskhoki
    Abstract: A common finding across empirical studies of price adjustment is that there is large heterogeneity in the frequency of price adjustment. However, there is little evidence of how distant prices are from the desired flexible price. Without this evidence, it is difficult to discern what the frequency measure implies for the transmission of shocks or to understand why some firms adjust more frequently than others. We exploit the open economy environment, which provides a well-identified and sizeable cost shock namely the exchange rate shock to shed light on these questions. First, we empirically document that high frequency adjusters have a long-run pass-through that is at least twice as high as low frequency adjusters in the data. Next, we show theoretically that long-run pass-through is determined by the same primitives that shape the curvature of the profit function and, hence, also affect frequency. In an environment with variable mark-ups or variable marginal costs, theory predicts a positive relation between frequency and pass-through, as documented in the data. Consequently, estimates of long-run pass-through shed light on the determinants of the duration of prices. The standard workhorse model with constant elasticity of demand and Calvo or state dependent pricing generates long-run pass-through that is uncorrelated with frequency, contrary to the data. Lastly, we calibrate a dynamic menu-cost model and show that variable mark-ups chosen to match the variation in pass-through in the data can generate substantial variation in price duration, equivalent to one third of the observed variation in the data.
    JEL: E3 E31 F41
    Date: 2008–07
  41. By: Marina-Eliza Spaliara (Dept of Economics, Loughborough University)
    Abstract: This paper investigates the nexus between financial factors and the capital-labour ratio using a rich firm-level data set. It is common in the literature to examine the impact of financial constraints on hiring and firing decisions separately from their impact on decisions related to investment in physical capital. We argue that as long as firms use both inputs in production and there is some substitutability between them, the two decisions need to be jointly analyzed. When we differentiate across firms that are more or less financially constrained, we find that the former group exhibits higher sensitivi¬ties of the capital-labour ratio to firm-specific characteristics, compared to the latter.
    Keywords: Financial constraints, Firm-specific characteristics, Capital-Labour ratio.
    JEL: E22 D92 E44
    Date: 2008–04
  42. By: Marcello Basili; Stefano Dalle Mura
    Abstract: This paper shows that ambiguity – as opposed to risk – may lead to sticky prices even with fully rational agents. Attitude towards ambiguity is assumed, as supported by theoretical literature and experimental evidence, to be asymmetric in the form of ambiguity aversion towards uncertain gains and ambiguity seeking towards losses. In this setting that price stickiness follows a change in the money supply level that does not alter the distribution of money constitutes a self fulfilling expectations equilibrium. That is the average (expected) result, but other interesting cases can occur (price overshooting and an inverse relationship between prices economic activity). Money neutrality remains true in the long run. The main result is carried out in a model where ambiguity concerns firms’ ignorance about the relationship between the stock of money and money distribution.
    Keywords: ambiguity, multiple priors, price stickiness.
    JEL: D81 E52 O42
    Date: 2008–07
  43. By: Schulz, Alexander; Wolff, Guntram B.
    Abstract: We disentangle different driving factors of sovereign bond market integration by studying yield co-movements of EMU countries, the UK, the US and 16 German Länder in the last 15 years. At a low frequency of weeks, bond market integration has increased gradually in the course of the last 15 years in EMU countries, as well as the UK, the US and the German Länder. The euro, as well as increasing international capital flows, appear to drive low frequency integration. In contrast, yield adjustments to changes of the German benchmark bond at high frequencies, i.e., 2 days, remain relatively low until October 2000, when a sharp increase in integration can be observed in all samples. The increase in high frequency integration can be attributed to electronic trading platforms becoming functional. The change-over from national currencies to the euro can not explain the dramatic increase in high frequency integration.
    Keywords: sovereign bond market, bond market integration, EMU, electronic trading
    JEL: E42 E44 F33 F37 G15
    Date: 2008
  44. By: Jan Hanousek; Evzen Kocenda; Ali M. Kutan
    Abstract: We estimate the impact of macroeconomic news on composite stock returns in three emerging European Union financial markets (the Budapest BUX, Prague PX-50, and Warsaw WIG-20), using intraday data and macroeconomic announcements. Our contribution is twofold. We employ a larger set of macroeconomic data releases than used in previous studies and also use intraday data, an excess impact approach, and foreign news to provide more reliable inferences. Composite stock returns are computed based on five-minute intervals (ticks) and macroeconomic news are measured based on the deviations of the actual announcement values from their expectations. Overall, we find that all three new EU stock markets are subject to significant spillovers directly via the composite index returns from the EU, the U.S. and neighboring markets; Budapest exhibits the strongest spillover effect, followed by Warsaw and Prague. The Czech and Hungarian markets are also subject to spillovers indirectly through the transmission of macroeconomic news. The impact of EU-wide announcements is evidenced more in the case of Hungary, while the Czech market is more impacted by U.S. news. The Polish market is marginally affected by EU news. In addition, after decomposing pooled announcements, we show that the impact of multiple announcements is stronger than that of single news. Our results suggest that the impact of foreign macroeconomic announcements goes beyond the impact of the foreign stock markets on Central and Eastern European indices. We also discuss the implications of the findings for financial stability in the three emerging European markets.
    Keywords: Stock markets, intraday data, macroeconomic announcements, European Union, volatility, excess impact of news.
    JEL: C52 F36 G15 P59
    Date: 2008–03
  45. By: Matteo Bugamelli (Bank of Italy, Economic Research Department); Francesco Paternò (Bank of Italy, Economic Research Department)
    Abstract: Since output growth volatility has negative effects on growth, poverty and welfare, especially in poorer countries, it is crucial to identify the country-specific factors that affect it. The empirical literature has focused mostly on financial development, policy distortions and globalization variables. Among the latter, attention has been directed in particular to trade and financial openness. We contribute to this literature by adding what we see as the missing globalization variable, the one related to the increasingly important phenomenon of international migrations, namely emigrants' remittances. Remittances can help reduce output growth volatility thanks to their considerable magnitude, stability and low pro-cyclicality. Applying an empirical framework taken from the existing literature to a sample of about 60 emerging and developing economies over the period 1980-2003, we provide robust evidence that remittances are negatively correlated to output growth volatility. Instrumental variable estimation supports our intuition about the direction of causality.
    Keywords: output growth volatility, workersÂ’ remittances, compensation of employees, financial development, trade and financial openness
    JEL: E32 F22 J61 O1
    Date: 2008–06
  46. By: Caliendo, Frank N.; Gahramanov, Emin
    Abstract: We study the optimal size of a pay-as-you-go social security program for an economy composed of both permanent-income and hand-to-mouth consumers. While previous work on this topic is framed within a two-period partial equilibrium setup, we study this issue in a life-cycle general equilibrium model. Because this type of welfare analysis depends critically on unobservable preference parameters, we methodically consider all parameterizations of the unobservables that are both feasible and reasonable- all parameterizations that can mimic key features of macro data (feasible) while still being consistent with micro evidence and convention (reasonable). The baseline model predicts that the optimal tax rate is between 6 percent and 15 percent of wage income.
    JEL: E62 D50 E21
    Date: 2008–07–04
  47. By: Caponi, Vincenzo (Ryerson University)
    Abstract: This paper addresses the problem of the dualism of the Italian economy, particularly of its labor market. Although the Italian labor market is considered to be the most highly regulated among OECD countries, the unemployment rate in the North, which represents two thirds of the whole economy, is one of the lowest in Europe. In contrast, the South faces an unemployment rate between two to five times higher than the North. GDP per capita is also twice in the North than in the South, while nominal wages do not differ substantially across regions. Finally internal migration is the lowest among European countries since the middle seventies. This paper argues that the uniform wage is the result of the centralized wage setting carried on by unions, and that the absence of migration is the result of the proactive role of the government, which in the seventies stopped the mass internal migration from the South to the North and since then is acting to prevent the reappearance of such phenomenon. Uniform wage across regions, the active role of the government to prevent internal mass migration and a structural productivity divide between North and South are the institutional features that, within a general equilibrium matching model, explain the high unemployment rate in the South and, perhaps more interestingly, the low unemployment rate accompanied by low wages in the North even when compared to other western European countries.
    Keywords: Italy, European unemployment, internal migration, regional unemployment
    JEL: E24 J51 J60
    Date: 2008–07
  48. By: Kiril Danailov Kossev (Oxford University)
    Abstract: The economic narratives of Southeast Europe during the first part of the 20th century are currently being re-written. A story of failed industrialisation and delayed modernisation during the Interwar period has dominated since the pioneering work of Gerschenkron, but not enough aggregate data are available to see this as the only interpretation. In particular, virtually nothing is known about the financial system. This paper has two aims. First, it looks at the banking sector in Bulgaria in 1924- 1938. We provide new data for the 1920s rise and the 1930s decline of the Bulgarian banking sector and we evaluate its potential contribution to Bulgarian economic growth. In the second part, we discuss different explanations for the widespread collapse of commercial banks after the onset of the Great Depression. Relying on a new data set for over 100 Bulgarian commercial banks, we show that traditional explanations for the collapse of European commercial banks in the 1930s (based on the default of risky loans and falling asset prices due to deflation) need to be complemented by the pernicious effects of widespread insider lending in the Bulgarian case. We conclude that insider lending was the single most important factor behind the demise of the private banking system after the onset of the Depression.
    Keywords: Bulgarian economic development; Banking and finance; Great Depression; Insider lending
    JEL: E44 G21 G14 N24
    Date: 2008–06
  49. By: Babutsidze, Zakaria
    Abstract: The current short note suggests an alternative measure for economic growth, which is based on consumer welfare instead of per capita income. It suggests that this measure can be better applied to economies with certain characteristics.
    Keywords: economic growth
    JEL: E10 E20
    Date: 2008–07–18
  50. By: Charles van Marrewijk (Erasmus University Rotterdam, and IHS); Gus Garita (Erasmus University Rotterdam)
    Abstract: We analyze the economic forces underlying cross-border Mergers and Acquistions (M&As) using a large bilateral panel data set. The frequent occurrence of "zero" observations provides essential information on the structure of M&A flows, which we model empirically using a two-stage procedure. At the fist stage, an observation is either classified in the Passive Group (always zero) or in the (potentially) Active Group using a logit model. At the second stage, the size of M&A flows in the Active Group is modeled using a gravity-type negative binomial model. We find that: (i) market size (GDP) of both acquirer and target is more important for trade flows than for cross-border M&As, (ii) market development (per capita GDP) is more important for cross-border M&As than for trade flows, (iii) for M&As, the target’s market, both in size and development, is more important than the acquirer’s market, and (iv) the impact of distance is larger on trade flows than for M&As. Financial openness is a prerequisite for becoming active in M&As and positively influences the size of M&A flows. Our estimates on the direction, size, and significance of the main variables are robust for alternative specifications, incorporating lagged stock market value, black market premium, real interest rates, transparency, and exchange rate variability. Finally, we provide additional support and extend the recent results of Blonigen et al. (2007) on outside-market potential and of Bergstrand and Egger (2007) on Rest of World GDP.
    Keywords: capital flows; cross-border mergers & acquisitions; foreign direct investment; financial openness
    JEL: E2 E6 F4 G15 G34
    Date: 2008–07–14
  51. By: Sophie Mitra (Fordham University, Department of Economics); Jean-Marc Boussard (Institut National de Recherche en Agronomie (INRA))
    Abstract: Recent developments in world food markets stress the importance of identifying the sources of food price volatility. This paper develops a nonlinear Cobweb model with endogenous volatility which accounts for several characteristics of agricultural commodity markets (seasonality, storage) and leads to price series with positive skewness and autocorrelation, as in actual commodity prices. Practical consequences may imply a rethinking of the current methods of world food market regulation.
    Keywords: Agricultural prices, nonlinear Cobweb model, endogenous fluctuations, storage
    JEL: Q11 E39 D84
    Date: 2008
  52. By: Erik H. Schlie (ESMT European School of Management and Technology); Mark A. Young (Rational Games, Inc.)
    Abstract: In all the literature on the theory and practice of negotiation, the governing metaphor remains consistently one of war or fighting. This is true not only for tactical schools of power-based negotiation, but even for more constructive, interest-based approaches. Our language is infused with talk of tactics, flanks, concessions, gaining ground and winning. This article explores the possible consequences of abandoning this picture in favor of the far too little explored metaphor of the dance. We will see that both the content and the process of negotiation can change dramatically once when we think of bargaining as an aesthetic activity which provides intrinsic joy as well as extrinsic benefits. In such a dance, there is plenty of room for competition as well as cooperation, as movements can be spirited and confrontational as well as smooth and harmonious. We identify many forms of dance in negotiation, and explore three: the dance of positioning, where passions and presentations interact proudly; the dance of empathy, when the partners come to better understand each other; and then the dance of concessions, where the deal is struck and the music comes to an end. Finally, we will try to show how the dance can be employed pedagogically, in teaching and training negotiation and mediation. In particular, the Brazilian dance of capoeira illustrates holistically and experientially how movement and rhythm can be interpreted both as fight and as a dance and how we can come to see a process as both aesthetic and purposeful at the same time. First feeling, then thinking and finally speaking, we can use this medium to explore the dynamics of confrontation and cooperation in a negotiation setting.
    Keywords: Negotiation, dance, concessions, bargaining
    JEL: E32 R10
    Date: 2008–06–12

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