nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒08‒06
sixty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Irrational “War on Inflation”: Why Inflation Targeting is Both Socially Unacceptable and Economically Untenable By Graeme Snooks
  2. Comparing Constraints to Economic Stabilization in Macedonia and Slovakia: Macro Estimates with Micro Narratives By Melecky, Martin; Najdov, Evgenij
  3. Inflation Targeting and Communication: Should the Public Read Inflation Reports or Tea Leaves? By Ales Bulir; Katerina Smidkova; Viktor Kotlan; David Navratil
  4. Inflation Targeting and Monetary Policy Activism By Toshitaka Sekine; Yuki Teranishi
  5. The Information Content of Money in Forecasting Euro Area Inflation By Helge Berger; Emil Stavrev
  6. Global inflation By Matteo Ciccarelli; Benoît Mojon
  7. Welfare-Based Optimal Monetary Policy in a Two-Sector Small Open Economy By Yuliya Rychalovska
  8. Price Stability and the ECB'S monetary policy strategy By Christian Bordes; Laurent Clerc
  9. Anticipation and Real Business Cycles By David R.F. Love; Jean-Francois Lamarche
  10. The ECB’s Monetary Analysis Revisited By Helge Berger; Emil Stavrev; Thomas Harjes
  11. On the Amplification Role of Collateral Constraints By Caterina Mendicino
  12. Investigating Inflation Dynamics in Sudan By Kenji Moriyama
  13. Forecasting inflation and tracking monetary policy in the euro area - does national information help? By Riccardo Cristadoro; Fabrizio Venditti; Giuseppe Saporito
  14. The Effect of the Great Moderation on the U.S. Business Cycle in a Time-varying Multivariate Trend-cycle Model By Drew Creal; Siem Jan Koopman; Eric Zivot
  15. Sectoral Co-Movement, Monetary-Policy Shock, and Input-Output Structure By Nao Sudo
  16. Imperfect knowledge and the pitfalls of optimal control monetary policy By Athanasios Orphanides; John C. Williams
  17. Unemployment Insurance in a Sticky-Price Model with Worker Moral Hazard. By Gregory E. Givens
  18. Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach By Ippei Fujiwara; Yasuo Hirose; Mototsugu Shintani
  19. Globalisation and the euro area - simulation based analysis using the New Area Wide Model By Pascal Jacquinot; Roland Straub
  20. The Friedman's and Mishkin's Hypotheses (Re)Considered By Christian Bordes; Samuel Maveyraud
  21. Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt By Sven Jari Stehn; David Vines
  22. The impact of structural breaks on the stability of the out-of-sample predictive content of financial variables for Canada’s real GDP growth: An encompassing approach By Akhter Faroque; William Veloce; Jean-Francois Lamarche
  23. Monetary policy in a forward-looking input-output economy By Brad E. Strum
  24. Disinflation and the NAIRU in a New-Keynesian New-Growth Model By Rannenberg, Ansgar
  25. Housing Wealth Isn't Wealth By Willem H. Buiter
  26. Resolving a Large Contingent Fiscal Liability: Eastern Europe Experience By Mark J Flanagan
  28. Credit Matters: Empirical Evidence on U.S. Macro-Financial Linkages By Ola Melander; Tamim Bayoumi
  29. Global Business Cycles: Convergence or Decoupling? By M. Ayhan Kose; Christopher Otrok; Eswar Prasad
  30. On Policy Interactions Among Nations: When Do Cooperation and Commitment Matter? By Leopold von Thadden; Hubert Kempf
  31. Central Bank Financial Strength and Policy Performance: An Econometric Evaluation By Ulrich H. Klueh; Peter Stella
  32. Testing Hyperinflation Theories Using the Inflation Tax Curve: A Case Study By Fernando de Holanda Barbosa; Tito Nícias Teixeira da Silva Filho
  33. A Global Realignment by 2020: U.S. Decline, Emerging Economies Rise By Francis Cripps; Terry McKinley
  34. Inflation targeting in emerging economies: Panel evidence By Bystedt, Brianne; Brito, Ricardo D.
  35. Causal Effects of Monetary Shocks: Semiparametric Conditional Independence Tests with a Multinomial Propensity Score By Angrist, Joshua; Kuersteiner, Guido M.
  36. Estimating Output Gap for Pakistan Economy:Structural and Statistical Approaches By S. Adnan H. A. S., Bukhari; Safdar Ullah, Khan
  37. The Gulf Cooperation Council countries – economic structures, recent developments and role in the global economy By Michael Sturm; Jan Strasky; Petra Adolf; Dominik Peschel
  38. A Note on Social Security and Public Debt By Luciano Greco
  39. A Framework for Developing Secondary Markets for Government Securities By Zsófia Ãrvai; Geoffrey Heenan
  40. Labor Supply: Are the Income and Substitution Effects Both Large or Both Small? By Miles S. Kimball; Matthew D. Shapiro
  41. Institutions, Competition, and Capital Market Integration in Japan By Kris James Mitchener; Mari Ohnuki
  42. Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro Levels By Steven J. Davis; James A. Kahn
  43. Exchange Rate Movements and Monetary Policy In Brazil: Econometric and Simulation Evidence By Furlani, Luiz Gustavo C.; Portugal, Marcelo Savino; Laurini, Márcio Poletti
  44. Simulating the impact of inflation on the progressivity of personal income tax in Brazil By Horacio Levy; José Ricardo Nogueira; Rozane Bezerra de Siqueira; Herwig Immervoll; Cathal O’Donoghue
  45. The U.S. foreclosure crisis: a two-pronged assault on the U.S. economy By Tatom, John
  46. Institutional causes of macroeconomic volatility By Levon Barseghyan; Riccardo DiCecio
  47. 3-Step Analysis of Public Finances Sustainability: the Case of the European Union By António Afonso; Christophe Rault
  48. Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy By Hrishikesh D. Vinod
  49. East German Unemployment: The Myth of the Irrelevant Labor Market By Christian Merkl; Dennis Snower
  50. Banking globalization, monetary transmission, and the lending channel By Nicola Cetorelli; Linda S. Goldberg
  51. A Good Time to Stay Out? Strikes and the Business Cycle By Devereux, Paul; Hart, Robert A.
  52. Aggregate and Household Demand for Money: Evidence from Public Opinion Survey on Household Financial Assets and Liabilities By Hiroshi Fujiki; Cheng Hsiao
  53. The effect of the Term Auction Facility on the London Inter-Bank Offered Rate By James McAndrews; Asani Sarkar; Zhenyu Wang
  54. The Investment Function: Determinants Of Demand For Investment Goods By John J. Heim
  55. Medium-Term Budgetary Frameworks - Lessons for Austria from International Experience By Erik J. Lundbäck
  56. Towards a Fiscal Illusion Index By Mourão, Paulo
  57. Fiscal Policy and Economic Development By Peter Rangazas; Alex Mourmouras
  58. The Relative Income Hypothesis By Francisco Alvarez-Cuadrado; Ngo Van Long
  59. Macroeconomic Consequences of International Commodity Price Shocks By Claudia S. Gómez-López; Luis A.Puch
  60. The Economic Growth Impact of Hurricanes: Evidence from US Coastal Counties By Strobl, Eric
  61. Regional Price Differences in Urban China 1986-2001: Estimation and Implication By Gong, Cathy Honge; Meng, Xin
  62. The Labor Market Impact of Immigration in Western Germany in the 1990’s By Gianmarco I. P. Ottaviano; Francesco D’Amuri; Giovanni Peri
  63. The Limits to Dollarization in Ecuador: Lessons from Argentina By Mathew Bradbury; Matías Vernengo
  64. Foreign Direct Investment, Macroeconomic Instability And Economic Growth in MENA Countries By Monnet Gbakou; Mustapha Sadni Jallab; René Sandretto

  1. By: Graeme Snooks
    Keywords: inflation targeting, war on inflation, social consequences, monetary policy, reserve bank, growth-inflation curve
    Date: 2008–03
  2. By: Melecky, Martin; Najdov, Evgenij
    Abstract: This paper re-emphasizes the link from structural policies to enhanced macroeconomic stabilization using a small structural model estimated on quarterly data for Macedonia and Slovakia over 1995-2007. The success of macroeconomic stabilization, typically in hands of monetary policy, is not only determined by a suitable choice of the nominal anchor, which shapes the reaction function of monetary policy, but also the constraints within which the monetary policy strives to achieve its objectives. The key attributes of the constraints to macroeconomic stabilization are economic rigidities and structural shocks. By benchmarking the estimated economic rigidities and structural shocks faced by Macedonia to those faced by Slovakia, we find that Macedonia has relatively weaker transmission mechanisms of monetary policy, higher output rigidity, a lower exchange rate pass-through, and faces larger external shocks. For Macedonia, these relatively higher constraints on monetary policy together with the chosen exchange rate anchor result in higher output and inflation volatility relative to Slovakia. Hence, it appears that small open economies with stronger economic rigidities should apply monetary policy regimes that allow for more flexible adjustments in external relative prices to enhance their macroeconomic stability.
    JEL: E30 E58
    Date: 2008–07
  3. By: Ales Bulir; Katerina Smidkova; Viktor Kotlan; David Navratil
    Abstract: Inflation-targeting central banks have a respectable track record at explaining their policy actions and corresponding inflation outturns. Using a simple forward-looking policy rule and an assessment of inflation reports, we provide a new methodology for the empirical evaluation of consistency in central bank communication. We find that the three communication tools—inflation targets, inflation forecasts, and verbal assessments of inflation factors contained in quarterly inflation reports—provided a consistent message in five out of six observations in our 2000–05 sample of Chile, the Czech Republic, Hungary, Poland, Thailand, and Sweden.
    Keywords: Emerging markets, forecasting, inflation targeting, monetary policy, transparency.
    JEL: E31 E43 E47 E58
    Date: 2007–12
  4. By: Toshitaka Sekine (Associate Monetary Affairs Department, Bank of Japan (E-mail: toshitaka.sekine; Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: We estimate monetary policy activism, defined as responsiveness of the policy interest rate to inflation, among five inflation-targeting countries (the UK, Canada, Sweden, Australia and New Zealand) plus the G3 (the US, Japan and Germany) by applying a time- varying parameter with a stochastic-volatility model. We find that activism of inflation-targeting countries tends to have increased before (not after) the adoption of the inflation-targeting policy framework and that these countries have experienced a decline in activism in recent years, albeit to different degrees. We further explore this result in terms of the constraint of an inflation target range by developing a formal theoretical model in a New Keynesian framework.
    Keywords: Inflation-targeting Policy, Monetary Policy Activism, New Keynesian Model, Markov chain Monte Carlo, Time-varying Parameter with Stochastic Volatility Model
    JEL: C11 E52 E58
    Date: 2008–07
  5. By: Helge Berger; Emil Stavrev
    Abstract: This paper contributes to the debate on the role of money in monetary policy by analyzing the information content of money in forecasting euro-area inflation. We compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using Bayesian and other estimation techniques. We find that money contains relevant information for inflation in some model classes. Money-based New Keynesian DSGE models and VARs incorporating money perform better than their cashless counterparts. But there are also indications that the contribution of money has its limits. The marginal contribution of money to forecasting accuracy is often small, money adds little to dynamic factor models, and it worsens forecasting accuracy of partial equilibrium models. Finally, non-monetary models dominate monetary models in an all-out horserace.
    Keywords: Working Paper , Euro Area , Money , Inflation , Forecasting models , Monetary policy , Economic models ,
    Date: 2008–07–09
  6. By: Matteo Ciccarelli; Benoît Mojon
    Abstract: This paper shows that inflation in industrialized countries is largely a global phenomenon. First, the inflation rates of 22 OECD countries have a common factor that alone accounts for nearly 70 percent of their variance. This large variance share that is associated with Global Inflation is not only due to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, we show that, in conformity to the prediction of New Keynesian open economy models, there is little spillover of inflationay shocks across countries. The comovement of inflation comes largely from common shocks. Global Inflation is a function of real developments at short horizons and monetary developments at longer horizons. Third, there is a robust "error correction mechanism" that brings national inflation rates back to Global Inflation. A simple model that accounts for this feature consistently beats the previous benchmarks used to forecast inflation 4 to 8 quarters ahead across samples and countries.
    Date: 2008
  7. By: Yuliya Rychalovska
    Abstract: The paper analyzes the stabilization objectives of optimal monetary policy and the trade-offs facing the central bank in a two-sector small open economy model obtained as a limiting case of a two-country DSGE framework. We introduce a more complicated economic structure, namely, multiple domestic sectors combined with a variety of exogenous shocks. In addition, our model includes a more general specication of consumers’ preferences than has been considered in the literature so far. As a result, we are able to uncover additional welfare effects specic to the open multi-sectoral economy and make a methodological contribution by deriving a utility-based welfare measure and the optimal reaction function of the central bank. We show that the optimal targeting rule is represented by a complex expression that prescribes the response to the appropriate measure of domestic inflation, sectoral output gaps, as well as to the relevant relative prices. We demonstrate that our model generates an endogenous conflict between the objectives of domestic inflation and real exchange rate stabilization in addition to the inflation-output gap policy trade-off common in the literature. Furthermore, we experiment with alternative simple rules and analyze their ability to replicate the optimal solution.
    Keywords: DSGE models, non-traded goods, optimal monetary policy, welfare.
    JEL: E52 E58 E61 F41
    Date: 2007–12
  8. By: Christian Bordes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Laurent Clerc (Direction de la Recherche - Banque De France - Banque de France)
    Abstract: This paper focuses on the price stability objective within the framework of the single monetary policy strategy. It starts by reviewing what this objective, which is common to all central banks, means. Second, this paper focuses exclusively on the anchoring of short- to medium-term inflation expectations (Part 2). Several measures show that this anchoring is effective. A 'two-pillar' small structural macro-economic model framework is used to analyze the impact that this anchoring of expectations has on the determination of the short- to medium-term inflation rate. From this point of view, observed inflation in the euro area seems to be in line with the theory and the ECB's action seems to be very effective. Third, we focus on the other aspect of monetary stability: the degree of price-level uncertainty and the anchoring of inflation expectations in the medium to long term. Even though this assessment is more difficult than it is in the short to medium term, since we only have a track record covering 6 years, various indicators from the theoretical analysis paint a fairly reassuring picture of the effectiveness of the device used by the ECB.
    Keywords: European Central Bank • Inflation • Monetary policy
    Date: 2007–03–20
  9. By: David R.F. Love (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University)
    Abstract: Standard real business cycle (RBC) theory assumes that changes in economic conditions are unanticipated. We argue that upcoming changes are often well anticipated. Employing the RBC methodology to evaluate models when changes in economic conditions are fully anticipated provides evidence on the relevance of this alternative. We find that anticipation effects i) reduce the exogenous volatility required for the models to explain output folatility, ii) improves or leaves unchanged, the model predictions for the data moments studied and, iii) can go some way to providing realistic internal propagation mechanisms within theoretical frameworks.
    Keywords: Anticipation, Real Business Cycles, Impulse Responses
    JEL: E10 E30 E37
    Date: 2004–09
  10. By: Helge Berger; Emil Stavrev; Thomas Harjes
    Abstract: Monetary aggregates continue to play an important role in the ECB's policy strategy. This paper revisits the case for money, surveying the ongoing theoretical and empirical debate. The key conclusion is that an exclusive focus on non-monetary factors alone may leave the ECB with an incomplete picture of the economy. However, treating monetary factors as a separate matter is a second-best solution. Instead, a general-equilibrium inspired analytical framework that merges the economic and monetary "pillars" of the ECB's policy strategy appears the most promising way forward. The role played by monetary aggregates in such unified framework may be rather limited. However, an integrated framework would facilitate the presentation of policy decisions by providing a clearer narrative of the relative role of money in the interaction with other economic and financial sector variables, including asset prices, and their impact on consumer prices.
    Keywords: European Central Bank , Monetary policy , Central bank policy , Economic models , Asset prices , Consumer prices , Financial sector , Money ,
    Date: 2008–07–10
  11. By: Caterina Mendicino
    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 fluctuations and cycles; Credit and credit aggregates
    JEL: E20 E3 E32
    Date: 2008
  12. By: Kenji Moriyama
    Abstract: This paper investigates inflation dynamics in Sudan using three different approaches: the single equation model, the structural vector-auto regression model and a vector error correction model. This is the first study in a low-income and a post-conflict country that uses these three separate techniques to understand inflation dynamics. The use of these approaches is particularly useful to check the robustness of the estimated parameters in the model for a country with limited data coverage and possible structural breaks. The estimated results suggest that money supply growth and nominal exchange rate changes affect inflation with 18-24 months time lag.
    Keywords: Sudan , Inflation , Money supply , Real effective exchange rates , Monetary policy , Economic models ,
    Date: 2008–07–28
  13. By: Riccardo Cristadoro (Banca d’Italia, Research Department, via Nazionale 91, I – 00184 Rome, Italy.); Fabrizio Venditti (Banca d’Italia, Research Department, via Nazionale 91, I – 00184 Rome, Italy.); Giuseppe Saporito (Banca d’Italia, Research Department, via Nazionale 91, I – 00184 Rome, Italy.)
    Abstract: The ECB objective is set in terms of year on year growth rate of the Euro area HICP. Nonetheless, a good deal of attention is given to national data by market analysts when they try to anticipate monetary policy moves. In this paper we use the Generalized Dynamic Factor model to develop a set of core inflation indicators that, combining national data with area wide information, allow us to answer two related questions. The first is whether country specific data actually bear any relevance for the future path of area wide price growth, over and above that already contained in area wide data. The second is whether in order to track ECB monetary policy decisions it is useful to take into account national information and not only area wide statistics. In both cases our findings point to the conclusion that, once area wide information is properly taken into account, there is little to be gained from considering national idiosyncratic developments. JEL Classification: C25, E37, E52.
    Keywords: Forecasting, dynamic factor model, inflation, Taylor rule, monetary policy.
    Date: 2008–06
  14. By: Drew Creal (VU University Amsterdam); Siem Jan Koopman (VU University Amsterdam); Eric Zivot (University of Washington)
    Abstract: In this paper we investigate whether the dynamic properties of the U.S. business cycle have changed in the last fifty years. For this purpose we develop a flexible business cycle indicator that is constructed from a moderate set of macroeconomic time series. The coincident economic indicator is based on a multivariate trend-cycle decomposition model that accounts for time variation in macroeconomic volatility, known as the great moderation. In particular, we consider an unobserved components time series model with a common cycle that is shared across different time series but adjusted for phase shift and amplitude. The extracted cycle can be interpreted as the result of a model-based bandpass filter and is designed to emphasize the business cycle frequencies that are of interest to applied researchers and policymakers. Stochastic volatility processes and mixture distributions for the irregular components and the common cycle disturbances enable us to account for all the heteroskedasticity present in the data. The empirical results are based on a Bayesian analysis and show that time-varying volatility is only present in the a selection of idiosyncratic components while the coefficients driving the dynamic properties of the business cycle indicator have been stable over time in the last fifty years.
    Keywords: Bandpass filter; Markov chain Monte Carlo; Stochastic volatility; Trend-cycle decomposition; Unobserved components time series model
    JEL: C11 C32 E32
    Date: 2008–07–17
  15. By: Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The co-movement of output across the sector producing non- durables (that is, non-durable goods and services) and the sector producing durables is well-established in the monetary business-cycle literature. However, standard sticky-price models that incorporate sectoral heterogeneity in price stickiness (that is, sticky non-durables prices and flexible durables prices) cannot generate this feature. We argue that an input-output structure provides a solution to this problem. Here we develop a two-sector model with an input-output structure, which is calibrated to the U.S. economy. In the model, each sector's output affects those of the others by acting as an intermediate input This connection between the sectors provides a channel through which sectoral co-movement is induced.
    Keywords: Monetary Policy, Input-Output Matrix, Durables, Non-durables
    JEL: E5 E6
    Date: 2008–07
  16. By: Athanasios Orphanides; John C. Williams
    Abstract: This paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations formation and uncertainty about the natural rates of interest and unemployment. 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 also allow for central bank uncertainty regarding the natural rates of interest and unemployment. We find that the optimal control policy derived under the assumption of perfect knowledge about the structure of the economy can perform poorly when knowledge is imperfect. These problems are exacerbated by natural rate uncertainty, even when the central bank's estimates of natural rates are efficient. We show that the optimal control approach can be made more robust to the presence of imperfect knowledge by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to the presence of imperfect knowledge about the economy 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 the alternative models of learning that we study and natural rate uncertainty and outperform the optimal control policy and generally perform as well as the robust optimal control policy that places less weight on stabilizing economic activity and interest rates.
    Keywords: Rational expectations (Economic theory) ; Monetary policy ; Econometric models
    Date: 2008
  17. By: Gregory E. Givens
    Abstract: This paper studies the role of unemployment insurance in a sticky-price model that features an efficiency-wage view of the labor market based on unobservable effort. The risk-sharing mechanism central to the model permits, but does not force, agents to be fully insured. Structural parameters are estimated using a maximum-likelihood procedure on US data. Formal hypothesis tests reveal that the data favor a model in which agents only partially insure each other against employment risk. The results also show that limited risk sharing helps the model capture many salient properties of the business cycle that a restricted version with full insurance fails to explain.
    Keywords: Unemployment, Partial Insurance, Efficiency Wages, Sticky Prices.
    JEL: E31 E32 E52
    Date: 2008–07
  18. By: Ippei Fujiwara (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yasuo Hirose (Economist, International Department, Bank of Japan (E-mail:; Mototsugu Shintani (Associate Professor, Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:,
    Abstract: We examine whether the news shocks, as explored in Beaudry and Portier (2004), can be a major source of aggregate fluctuations. For this purpose, we extend a dynamic stochastic general equilibrium model, a la Christiano, Eichenbaum, and Evans (2005), by allowing news shocks on the total factor productivity and estimate the model using Bayesian methods. Estimation results on the Japanese and U.S. economies show that (1) the news shocks play an important role in business cycles; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks.
    Keywords: Demand for Money, Aggregation, Heterogeneity
    JEL: E41 C43
    Date: 2008–07
  19. By: Pascal Jacquinot (Directorate General Research, Econometric Modelling, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (Directorate General International and European Relations, International Policy Analysis, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we utilise the multi-country version of the NAWM to analyse the impact of globalisation on euro area macroeconomic aggregates. We provide alternative modelbased definitions of globalisation associated with an increase in potential output in emerging Asia and its impact on total factor productivity in the euro area, and a shift in international specialisation patterns leading to changes in relative demand and import substitutions. The results indicate that globalisation has a positive impact on output, consumption, investment and real labour income in the long-run. This impact is driven by the improvement in the terms of trade and associated positive wealth effects, as well as by spillovers of higher potential output in emerging Asia on euro area total factor productivity. Additionally, we provide evidence that structural reforms in goods and labour markets would amplify the benefits associated with globalisation. JEL Classification: E32, E62.
    Keywords: DSGE modelling, globalisation, euro area.
    Date: 2008–06
  20. By: Christian Bordes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Samuel Maveyraud (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - CNRS : UMR5113 - Université Montesquieu - Bordeaux IV)
    Abstract: This paper o¤ers to investigate both the Friedman's and Mishkin's hypotheses on the consequences of inflation on output growth. To this end, we first base these hypotheses in a unified framework. Second, in an empirical work based on OECD countries, we distinguish between short-medium and long run and between headline and core inflation. We get two main results. First, nominal uncertainty and inflation are positively linked. Second, headline inflation negatively Granger causes out- put gap (US, Japan, France) but has no effect on potential output growth (US excepted) whereas core inflation impacts potential output growth (UK, Germany) but not output gap (US excepted).
    Keywords: Inflation, uncertainty, output growth, GARCH, CF filter
    Date: 2008–06
  21. By: Sven Jari Stehn; David Vines
    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: Central banks , Monetary authorities , Intergovernmental fiscal relations , Government expenditures , Fiscal policy , Stabilization measures ,
    Date: 2008–07–21
  22. By: Akhter Faroque (Department of Economics, Laurentian University); William Veloce (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University)
    Abstract: This paper investigates the timing, frequency and the impact of structural breaks on the stability of the predictive content of a large number of financial variables for Canada’s output growth. The forecasts are evaluated over two identified out-of-sample regimes using both the equal accuracy and encompassing tests. The results have enabled us to classify all variables into four useful groups. Two of Canada’s term spreads near the short-end of the yield curve belong to the group that exhibits strong and stable predictive content at long horizons that are most relevant to monetary policy providing an indication that the Bank of Canada should not discard these spreads from its list of closely watched information variable.
    Keywords: Forecasts, Structural Breaks
    JEL: C52 C53 E44
    Date: 2008–04
  23. By: Brad E. Strum
    Abstract: This paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a New Keynesian model. Both optimal policy under commitment and discretionary policy, which is the minimization of a simple loss function, are studied. Consumer utility losses under alternative simple loss functions are compared, including their robustness to model and shock misperceptions, and parameter uncertainty. Targeting inflation in both consumer and intermediate goods performs better than targeting a single price index; price-level targeting of both consumer and intermediate goods prices performs significantly better. Moreover, targeting prices in both sectors yields superior robustness properties.
    Date: 2008
  24. By: Rannenberg, Ansgar
    Abstract: Unemployment in the big continental European economies like France and Germany has been substantially increasing since the mid 1970s. So far it has been difficult to empirically explain the increase in unemployment in these countries via changes in supposedly employment unfriendly institutions like the generosity and duration of unemployment benefits. At the same time, there is some evidence produced by Ball (1996, 1999) saying that tight monetary policy during the disinflations of the 1980s caused a subsequent increase in the NAIRU, and that there is a relationship between the increase in the NAIRU and the size of the disinflation during that period across advanced OECD economies. There is also mounting evidence suggesting a role of the slowdown in productivity growth, e.g. Nickell et al. (2005), IMF (2003), Blanchard and Wolfers (2000). This paper introduces endogenous growth into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to a cost push shock lasting for 1 quarter, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disinflation by following a standard interest feedback rule calibrated to an estimate of a Bundesbank reaction function. About 40 quarters after the shock has vanished, unemployment is still about 1.7 percentage points above its steady state, while annual productivity growth has decreased. Over a similar horizon, a higher weight on the output gap increases employment (i.e. reduces the fall in employment below its steady state). Thus the model generates an increase in unemployment following a disinflation without relying on a change to labour market structure. We are also able to coarsely reproduce cross country differences in unemployment. A higher disinflation generated by a larger cost push shock causes a stronger persistent increase in unemployment, the correlation noted by Ball. For a given cost push shock, a policy rule estimated for the Bundesbank produces stronger persistent increase in unemployment than a policy rule estimated for the Federal Reserve. Testable differences in real wage rigidity between continental Europe and the United States, namely, as pointed out by Blanchard and Katz (1999), the presence of the labour share in the wage setting function for Europe with a negative coefficient but it's absence in the U.S. also imply different unemployment outcomes following a cost push shock: If the real wage does not depend on the labour share, the persistent increase in unemployment is about one percentage point smaller than in it's presence. To the extent that the wage setting structure is due to labour market rigidities, "Shocks and Institutions" jointly determine the unemployment outcome, as suggested by Blanchard and Wolfers (2000). The calibration of unobservable model parameters is guided by a comparison of second moments of key variables of the model with western German data. The endogenous growth model matches the moments better than a model without endogenous growth but otherwise identical features. This is particularly true for the persistence in employment as measured by first and higher order autocorrelation coefficients.
    Keywords: Monetary Policy; Endogenous Growth; NAIRU; Disinflation; Unemployment Persistence
    JEL: N1 J6 J01
    Date: 2008–06–26
  25. By: Willem H. Buiter
    Abstract: A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing and those short housing and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run.
    JEL: E2 E21 E22 E3 E32 E37 G1
    Date: 2008–07
  26. By: Mark J Flanagan
    Abstract: On occasion, a government may find itself confronted with a need to address a large contingent or off balance sheet fiscal liability. Implementing a settlement raises issues of fiscal sustainability and macroeconomic stability. This paper surveys the key design issues, and draws lessons from recent Eastern European experience. It then considers in more detail the particular case of Ukraine, and how it might approach its own large contingent liability-the so-called lost savings-which at end-2007 amounted to as much as 18 percent of GDP.
    Keywords: Eastern Europe , Balance of payments deficits , Budget deficits , Fiscal sustainability , Debt management , Fiscal stability , Ukraine ,
    Date: 2008–07–02
  27. By: Reza Siregar; Siwei Goo
    Abstract: The chief objective of our paper is to highlight basic features of the IT policies adopted by Indonesia and Thailand, and to evaluate their overall performances. These economies have seen their inflation rates to decline during the post-IT period, and pass-through rates for both tradable and non-tradable prices in the two emerging markets have also declined. More importantly, no trade-offs between output growth and inflation have been reported. The implementations of the IT policy in these two Southeast Asian economies have however largely been “flexible” rather than “strict”, seeking the balance between minimizing output gap and achieving price stability.
    JEL: E52 E58 F31 F33
    Date: 2008–07
  28. By: Ola Melander; Tamim Bayoumi
    Abstract: This paper develops a framework for analyzing macro-financial linkages in the United States. We estimate the effects of a negative shock to banks' capital/assetratio on lending standards, which in turn affect consumer credit, mortgages, and corporate loans, and the corresponding components of private spending (consumption, residential investment and business investment). In addition, our empirical model allows for feedback from spending and income to bank capital adequacy and credit. Hence, we trace the full credit cycle. An exogenous fall in the bank capital/asset ratio by one percentage point reduces real GDP by some 1½ percent through its effects on credit availability, while an exogenous fall in demand of 1 percent of GDP is gradually magnified to around 2 percent through financial feedback effects.
    Keywords: United States , Credit , External shocks , Capital markets , Asset ratio , Consumer credit , Corporate sector , Loans , Gross domestic product ,
    Date: 2008–07–10
  29. By: M. Ayhan Kose; Christopher Otrok; Eswar Prasad
    Abstract: This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups-industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates-output, consumption, and investment-into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries; (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries; (iii) country factors, which are common across all aggregates in a given country; and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.
    Date: 2008–07–25
  30. By: Leopold von Thadden (European Central Bank); Hubert Kempf (Paris School of Economics and Université Paris-1 Panthéon-Sorbonne)
    Abstract: This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, in linear-quadratic models with multiple policymakers commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is sufficiently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations.
    Keywords: Monetary Policy, Fiscal Regimes
    JEL: E52 E63
    Date: 2008–03
  31. By: Ulrich H. Klueh; Peter Stella
    Abstract: The financial health of central banks and its relation to policy outcomes has recently been recognized as an important policy issue. While case study evidence clearly indicates that weak central bank finances can hamper effective policy implementation, the question of whether central bank financial strength influences policy performance remains controversial. This is due, in part, to a lack of econometric evidence. The paper presents a first step toward filling this gap, by providing a quantitative evaluation of the relationship between measures of central bank financial strength and policy performance, in particular inflation. The paper's major finding is that there indeed is a negative relationship between central bank financial strength and inflation outcomes. This relationship appears to be robust to the choice of alternative country samples, control variables, estimation strategies, and conceptualizations of central bank financial strength.
    Date: 2008–07–18
  32. By: Fernando de Holanda Barbosa; Tito Nícias Teixeira da Silva Filho
    Abstract: This paper tests hyperinflation theories using the inflation tax curve. This curve is estimated directly instead of the usual approach which is a by-product of demand for money empirical estimates. The inflation tax functional form encompasses several specifications as particular cases and allows to test whether or not money is inelastic. This strategy is applied to the Brazilian annual data covering almost half a century. The money inelasticity hypothesis is rejected. Thus, both the bubble and the strict hyperinflation hypotheses are rejected. The weak hyperinflation hypothesis is not rejected and the Brazilian economy could have been in the 'wrong' side of the Laffer curve for some time during hyperinflation. This outcome, contrary to conventional wisdom, is predicted by the weak hypothesis.
    Date: 2008–07
  33. By: Francis Cripps (Alphametrics Co.); Terry McKinley (International Poverty Centre)
    Abstract: In IPC?s One Pager #62, we projected until 2015 the impact on the global economy of rising oil prices, a falling dollar and a U.S. recession, and then the additional effect of the monetary and fiscal stimulus that the U.S. Government implemented in response to the crisis. In the process, we discovered that the long-term prospects of the U.S. economy were projected to worsen after 2015. (...)
    Keywords: A Global Realignment by 2020: U.S. Decline, Emerging Economies Rise
    Date: 2008–07
  34. By: Bystedt, Brianne; Brito, Ricardo D.
    Date: 2008–10
  35. By: Angrist, Joshua (MIT); Kuersteiner, Guido M. (University of California, Davis)
    Abstract: Macroeconomists have long been concerned with the causal effects of monetary policy. When the identification of causal effects is based on a selection-on-observables assumption, non-causality amounts to the conditional independence of outcomes and policy changes. This paper develops a semiparametric test for conditional independence in time series models linking a multinomial policy variable with unobserved potential outcomes. Our approach to conditional independence testing is motivated by earlier parametric tests, as in Romer and Romer (1989, 1994, 2004). The procedure developed here is semiparametric in the sense that we model the process determining the distribution of treatment – the policy propensity score – but leave the model for outcomes unspecified. A conceptual innovation is that we adapt the cross-sectional potential outcomes framework to a time series setting. This leads to a generalized definition of Sims (1980) causality. A technical contribution is the development of root-T consistent distribution-free inference methods for full conditional independence testing, appropriate for dependent data and allowing for first-step estimation of the propensity score.
    Keywords: monetary policy, propensity score, multinomial treatments, causality
    JEL: E52 C22 C31
    Date: 2008–07
  36. By: S. Adnan H. A. S., Bukhari; Safdar Ullah, Khan
    Abstract: The objective of this study is to estimate potential output vis-à-vis output gap for Pakistan’s economy. This paper reviews six commonly used techniques to estimate potential output and from that the output gap. The results suggest that while measures of output gap are not identical they nonetheless do show some degree of association among each other. Therefore, a composite output gap is calculated for 1950 to 2007. The composite output gap depicts that Pakistan economy has been observing a cyclical episode of periods of excess supply followed by excess demand in the period of analysis. Furthermore, evidence suggests that Pakistan economy is currently experiencing rising demand pressures since FY05. These demand pressures show a high degree of correlation with the rising inflation as shown in the temporal correlation between inflation and composite of output gap measures.
    Keywords: gross domestic product; potential output; output gap
    JEL: C53 C22 E37
    Date: 2008–04–06
  37. By: Michael Sturm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jan Strasky (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Petra Adolf (Deutsche Bundesbank, Wilhelmp-Epstein-Strasse 14, 60431 Frankfurt am Main.); Dominik Peschel (Deutsche Bundesbank, Wilhelmp-Epstein-Strasse 14, 60431 Frankfurt am Main.)
    Abstract: In the wake of high and rising oil prices since 2003, the member states of the Gulf Cooperation Council (GCC) have seen dynamic economic development, enhancing their role in the global economy as investors and trade partners. Real GDP growth has been buoyant, with non-oil activity expanding faster than oil GDP. Macroeconomic developments have also been characterised by large fiscal and current account surpluses as a result of rising oil revenues, notwithstanding fiscal expansion and rapid import growth. The most significant macroeconomic challenge faced by GCC countries is rising inflation in an environment in which the contribution of monetary policy to containing inflationary pressure is constrained by the exchange rate regimes. The overall favourable macroeconomic backdrop of recent years has provided GCC countries with an opportunity to tackle long-standing structural challenges, such as the diversification of oil-centred economies and reform of the labour markets. In a global context, apart from developing into a pole of global economic growth, GCC countries – together with other oil-exporting countries – have become a major net supplier of capital in global markets, second only to East Asia. As a result, they have become part of the international policy debate on global imbalances. Furthermore, GCC countries are home to some of the world’s largest sovereign wealth funds, which raises several financial stability issues. Their role as trade partners has also increased, with the European Union being the only major region in the world maintaining a significant surplus in bilateral trade with the GCC. GCC countries are also key players in global energy markets in terms of production, exports and the availability of spare capacity. Their role is likely to become even more pivotal in the future as they command vast oil and gas reserves and benefit from relatively low costs in exploiting oil reserves. JEL Classification: F40, F30, F14, E60, N15, O53, Q40.
    Keywords: Gulf Cooperation Council, global imbalances, sovereign wealth funds, financial stability, oil markets.
    Date: 2008–07
  38. By: Luciano Greco (University of Padua)
    Abstract: In a simple stochastic overlapping generation model, individuals work when young and retire when old, generations’ productivity is affected by a serially uncorrelated random shock, and fiat money and nominal public debt are the only storable assets. In this setting, we show that social security programs featured by a constant contribution rate and budget-balance in each period, as common in the literature, are Pareto-dominated by programs allowing for budget unbalance, compensated by variations of the outstanding nominal public debt.
    Keywords: Intergenerational risk sharing, social security, public debt, inflation
    JEL: E24 E63 H55 H63
    Date: 2008–07
  39. By: Zsófia Ãrvai; Geoffrey Heenan
    Abstract: This paper consolidates previous work on the development of secondary markets for government securities, and focuses on the sequencing of measures necessary for their development. Six main lessons are identified: (i) a commitment to achieving and maintaining a stable macroeconomic environment, especially prudent fiscal policy, should underpin market development; (ii) a sound and transparent public debt management strategy supports secondary market activity; (iii) a deep and diverse investor base is required; (iv) poor market infrastructure leads to high transaction costs, slow order execution, and excessive operational risk, which all inhibit trading; (v) secondary market growth is facilitated by effective monetary policy implementation; and (vi) reforms should be sequenced to ensure even development of all the structures supporting the secondary market.
    Keywords: Securities markets , Government finance statistics , Capital markets , Public debt , Monetary policy , Fiscal policy ,
    Date: 2008–07–18
  40. By: Miles S. Kimball; Matthew D. Shapiro
    Abstract: Labor supply is unresponsive to permanent changes in wage rates. Thus, income and substitution effects cancel, but are they both close to zero or both large? This paper develops a theory of labor supply where income and substitution effects cancel, taking into account optimization over time, fixed costs of going to work, and interactions of labor supply decisions within the household. The paper then applies this theory to survey evidence on the response of labor supply to a large wealth shock. The evidence implies that the constant marginal utility of wealth (Frisch) elasticity of labor supply is about one.
    JEL: C42 E24 J22
    Date: 2008–07
  41. By: Kris James Mitchener (Assistant Department of Economics, Santa Clara University (; Mari Ohnuki (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Using a newly-constructed panel data set which includes annual estimates of lending rates for 47 Japanese prefectures, we analyze why interest rates converged over the period 1884-1925. We find evidence that technological innovations and institutional changes played an important role in creating a national capital market in Japan. In particular, the diffusion in the use of the telegraph, the growth in commercial branch banking networks, and the development of Bank of Japanfs branches reduced interest-rate differentials. Bank regulation appears to have played little role in impeding financial market integration.
    Keywords: Monetary Policy, Input-Output Matrix, Durables, Non-durables
    JEL: E5 E6
    Date: 2008–07
  42. By: Steven J. Davis; James A. Kahn
    Abstract: We review evidence on the Great Moderation together with evidence about volatility trends at the micro level to develop a potential explanation for the decline in aggregate volatility since the 1980s and its consequences. The key elements are declines in firm-level volatility and aggregate volatility - most dramatically in the durable goods sector - but with no decline in household consumption volatility and individual earnings uncertainty. Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services. We provide evidence that better inventory control made a substantial contribution to declines in firm-level and aggregate volatility. Consistent with this view, if we look past the turbulent 1970s and early 1980s, much of the moderation reflects a decline in high-frequency (short-term) fluctuations. While these developments represent efficiency gains,they do not imply (nor is there evidence for) a reduction in economic uncertainty faced by individuals and households.>
    Keywords: Business cycles ; Consumption (Economics) ; Durable goods, Consumer ; Service industries ; Households - Economic aspects
    Date: 2008
  43. By: Furlani, Luiz Gustavo C.; Portugal, Marcelo Savino; Laurini, Márcio Poletti
    Date: 2008–10
  44. By: Horacio Levy (ISER University of Essex, Colchester and ECV, Vienna); José Ricardo Nogueira (Universidade Federal de Pernambuco, Recife); Rozane Bezerra de Siqueira (Universidade Federal de Pernambuco, Recife); Herwig Immervoll (OECD, Paris, ECV, Vienna, ISER University of Essex, Colchester and IZA, Bonn); Cathal O’Donoghue (National University of Ireland, Galway and IZA, Bonn)
    Abstract: Income tax reform proposals in Brazil have focused almost exclusively on changes in rates, aiming at increasing its progressivity. One important aspect that has been overlooked is the fact that, in the absence of a mechanism that adjusts the tax rules to price movements, the effects of inflation on the level and distribution of the income tax burden can be substantial, even in periods of low inflation (“bracket creep”, fiscal drag). Moreover, how inflation affects the progressivity of the income tax depends on the specifics of the tax structure. Making use of a tax-benefit microsimulation model for Brazil (BRAHMS), we simulate different scenarios regarding the level of inflation and the adjustment of the income tax rules in order to assess the potential revenue and distributive effects of inflation on the income tax in Brazil. Our findings suggest that the Brazilian income tax is quite sensitive to fiscal drag. If the income tax is not adjusted for inflation, progressivity would decrease but redistribution would increase due to a larger tax burden. However, as income tax revenue and redistribution are quite low, even after relatively high levels of inflation, the tax burden and income inequality would not substantially change.
    Keywords: income tax, inflation, Brazil, fiscal drag
    Date: 2008–03
  45. By: Tatom, John
    Abstract: The U.S. mortgage loan foreclosure crisis has been called “the worst financial crisis since the great depression.” There are two distinct channels of influence of the subprime problem. The first is the rise in foreclosures that affects homeowners and the real estate industry most directly. The second channel is financial, flowing from the effects on lenders’ financial viability and on financial markets. The timing of developments in these two channels will determine how fast markets work through these problems and restore stability and growth to the nation’s housing and financial markets. The problem is rooted in the housing market, and this market is likely to be very slow to adjust. It takes time for good mortgages to go bad and to then move through to the end of the foreclosure process. While financial markets work much more quickly, they will be held hostage to the unfolding effects of the foreclosures in the housing markets and among lenders. Mortgage loan related losses will continue along with foreclosures over the next year or so and these losses will plague firms even if they have already taken adequate write-downs on their asset values. Complicating the picture is the response of the Federal Reserve, which has reacted chaotically by creating new lending programs that have transformed its credit supply from government securities to private financial institutions, and in the process, violated the first rule of central banking to lend liberally in a liquidity crisis. This failure, compounded by providing a backstop to questionable securities, has slowed market adjustment and risks lengthening and deepening the financial crisis. This paper reviews the emergence of the foreclosure crisis and its real impacts in the economy, the financial market effects of the surge in mortgage foreclosures, the monetary policy response to the problem, and provides an assessment of the outlook for the crisis.
    Keywords: Mortgage foreclosure; credit crunch; credit channel; subprime lending
    JEL: E50 E44 G21
    Date: 2008–07–31
  46. By: Levon Barseghyan; Riccardo DiCecio
    Abstract: In this paper we investigate the relation between the quality of institutions and macroeconomic volatility. Using instrumental variable regressions, we show that higher barriers to entry lead to higher volatility. In particular, a one standard deviation increase in entry costs increases the standard deviation of output growth by roughly 40% of its average value in our sample. To the contrary, property rights protection has no statistically significant effect on volatility.
    Keywords: Economic development ; Macroeconomics - Econometric models
    Date: 2008
  47. By: António Afonso; Christophe Rault
    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.
    Keywords: fiscal sustainability; EU; panel cointegration.
    JEL: C23 E62 H62
    Date: 2008–06
  48. By: Hrishikesh D. Vinod (Fordham University, Department of Economics)
    Abstract: Consumer theory still maximizes utility subject to a budget constraint, when in fact 2008 data show that consumer debt is 130% of disposable income. Granger-causality tests confirm Consumption precedence over income. We discuss several features of newer US data, such as the ability to start /stop part-time /full time work /school, allowing families a greater control on the timing and level of income. Hence, our Wiener-Hopf-Whittle model uses ‘target-seeking’ optimization, while our two-equation system makes both consumption and income endogenous, similar to quantities and prices in a demand system. The new model provides estimates of shadow prices of income level and adjustment costs, and is shown to help resolve five old ‘puzzles’ from the consumer theory literature.
    Keywords: Stochastic dynamic optimum, Target seeking, VAR, Wiener-Hopf-Whittle, Causality testing
    JEL: E21 E63
    Date: 2008
  49. By: Christian Merkl; Dennis Snower
    Abstract: This paper indicates that East Germany’s unemployment originates primarily in the labor market, caused by the fast wage adjustment after German reunification. We model the resulting labor market traps in a search and matching framework, show that they are difficult to overcome, and provide empirical evidence. We argue that under these circumstances, demand-side policies are effective mainly when they increase the economy’s overall productivity and thereby help overcome the labor market traps
    Keywords: unemployment, labor market trap, East Germany
    JEL: E24 J30 J64 P20
    Date: 2008–07
  50. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: This paper revisits the hypothesis that changes in inventory management were an important contributor to volatility reductions during the Great Moderation. It documents how changes in inventory behavior contributed to the stabilization of the U.S. economy within the durable goods sector, in particular, and develops a model of inventory behavior that is consistent with the key facts about volatility decline in that sector. The model is calibrated to evidence from survey data showing that lead times for materials orders in manufacturing shrank after the early 1980s. Simulations of the model show large reductions in the volatility of output growth and more modest reductions in the volatility of sales growth. In addition, the model addresses concerns raised by a number of researchers who criticize the inventory literature's focus on finished goods inventories, given that stocks of works-in-process and materials are actually larger and more volatile that those of finished goods. The model adapts the stockout-avoidance concept to a production-to-order setting and shows that much of the intuition and results regarding production volatility still apply.
    Keywords: Banks and banking, International ; International economic integration ; Monetary policy ; Capital market ; Globalization
    Date: 2008
  51. By: Devereux, Paul (University College Dublin); Hart, Robert A. (University of Stirling)
    Abstract: In this paper, we compile a unique historical dataset that records strike activity in the British engineering industry from 1920 to 1970. These data have the advantage of containing a fairly homogenous set of companies and workers, covering a long period with varying labour market conditions, including information that enables the addition of union and company fixed effects, and providing geographical detail that allows a district-level analysis that controls for year and seasonal effects. We study the cyclicality of strike durations, strike incidence, and strike outcomes and distinguish between pay and non-pay strikes. Like the previous literature, we find evidence that strikes over pay have countercyclical durations. However, in the post-war period, the magnitude of this effect is much reduced when union and firm fixed effects are included. These findings suggest that it is important when studying strike durations to take account of differences in the composition of companies and unions that are involved in strikes at different points of the business cycle. We also find that strike outcomes tend to be more favourable to unions when the national unemployment rate is lower.
    Keywords: incidence, duration, cyclicality, strikes, outcome
    JEL: E32 J31
    Date: 2008–07
  52. By: Hiroshi Fujiki (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Cheng Hsiao (International Department, Bank of Japan (E-mail:
    Abstract: We use data from Public Opinion Surveys on Household Financial Assets and Liabilities from 1991 to 2002 to investigate the issues of unobserved heterogeneity among cross-sectional units and stability of Japanese aggregate money demand function. Conditions that permit individual data and aggregate data to be modeled under one consistent format are given. Alternative definitions of money are explored through year-by-year cross-sectional estimates of Fujiki-Mulligan (1996) household money demand model. We find that using M3 appears to be broadly consistent with time series estimates using the aggregates constructed from the micro data. The results appear to support the existence of a stable money demand function for Japan. The estimated income elasticity for M3 is about 0.68 and five year bond interest rate elasticity is about -0.124.
    Keywords: Demand for Money, Aggregation, Heterogeneity
    JEL: E41 C43
    Date: 2008–07
  53. By: James McAndrews; Asani Sarkar; Zhenyu Wang
    Abstract: This paper examines the effects of the Federal Reserve's Term Auction Facility (TAF) on the London Inter-Bank Offered Rate (LIBOR). The particular question investigated is whether the announcements and operations of the TAF are associated with downward shifts of the LIBOR; such an association would provide one indication of the efficacy of the TAF in mitigating liquidity problems in the interbank funding market. The empirical results suggest that the TAF has helped to ease strains in this market.
    Keywords: Federal Reserve System ; Interbank market ; Financial markets ; Bank liquidity
    Date: 2008
  54. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: This paper seeks to identify the major factors that affect the demand for investment goods in the United States. A review of Keynes’ theoretical literature on investment and previous empirical studies identified eight possible variables for testing. The testing procedure was stepwise linear regression. Hypothesized determinants of investment were added one by one to a regression equation to measure their ability to explain variance, and to test for the stability of their regression coefficients. Single stage or two stage least squares regression was used, as appropriate. The following, in order of importance, were found to be significant determinants of investment demand during the1960 – 2000 period: 1) crowd out problems caused by government deficits, 2) available depreciation allowances, 3) rates of growth of the economy, 4) changes in the prime interest rate, 5) growth in stock values, 6) exchange rate changes and 7) company profitability. The results explained 90% of the variation in investment demand. Regressions missing important explanatory variables had regression coefficients that varied widely with even small changes to the model. More complete models had more stable coefficients.
    JEL: E20 E22 E23 C22 C51
    Date: 2008–07
  55. By: Erik J. Lundbäck
    Abstract: The Austrian government is about to introduce a new fiscal management framework. The first step is to introduce a medium-term budgetary framework, including an expenditure rule. The paper focuses on this first step. The purpose is to describe and evaluate the Austrian model in light of other countries' experiences with their frameworks. An attempt is made to identify features that have proven to be effective elsewhere and that can be applied to the Austrian case. The paper also identifies potential challenges and possible trade-offs when implementing the framework.
    Keywords: Austria , Fiscal policy , Fiscal management , National budgets , Government expenditures ,
    Date: 2008–07–02
  56. By: Mourão, Paulo
    Abstract: This paper presents an index of Fiscal Illusion for 68 democratic countries from 1960 to 2006. The studied Fiscal Illusion is the one related to a wrong perception of the budget aggregates according to the voters and taxpayers’ perspectives. In the construction of the index, methodological issues were carefully taken into account. The results obtained reveal that fiscal illusion varies greatly around the world. Countries such as Mali, Pakistan, Russia and Sri Lanka have the highest average values over the time period considered; while Austria, Luxembourg, Netherlands and New Zealand have the lowest. Regarding the time dimension, between 1980 and 1995 there was a significant decrease in the average value of the index across countries, suggesting a reduction in the adoption of fiscal illusion measures during this period. After 1995, the index remained stable in most of the countries.
    Keywords: Fiscal Illusion; Indexes/Indicators; Democracy
    JEL: E62 H11 C82 H30
    Date: 2007–11
  57. By: Peter Rangazas; Alex Mourmouras
    Abstract: This paper offers possible explanations for three generally observed facts about fiscal policy and development: (F1) The relative size of government increases as an economy develops, (F2) The rise in government and taxation are associated with rising or constant economic growth rates, and (F3) Today's developing countries have larger government sectors than did today's developed countries at similar stages of development. The explanations for these facts are based on the structural transformation from traditional (mostly agricultural) to modern (industrial and post-industrial) production, rising public infrastructure investment, and less representative governments in many of today's developing economies.
    Keywords: Working Paper , Fiscal policy , Development , Developed countries , Developing countries , Government finance statistics , Taxation ,
    Date: 2008–06–25
  58. By: Francisco Alvarez-Cuadrado; Ngo Van Long
    Abstract: We propose an overlapping generations economy where households care about relative consumption, the difference between their consumption and the consumption of their reference group. An individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; hence the paper offers a permanent income version of the Duesenberry's relative income hypothesis. Across households the saving ratio increases with income while aggregate saving is independent of the income distribution. Positional concerns lead agents to over-consume, over-work and under-save. We propose a simple tax schedule that induces the competitive economy to achieve the efficient allocation. <P>Nous proposons une économie caractérisée par des générations imbriquées et des ménages qui accordent une importance à la consommation relative, soit la différence entre leur consommation et celle de leur groupe de référence. Les habitudes de consommation d’un individu sont dictées par la comparaison du revenu qu’il gagnera au cours de sa vie avec celui de son groupe de référence. Le document offre ainsi une version de l’hypothèse du revenu relatif avancée par Duesenberry qui tient compte du revenu permanent. Dans l’ensemble des ménages, le ratio d’épargne augmente en fonction du revenu, mais l’épargne globale est indépendante de la répartition du revenu. Les préoccupations des agents concernant leur position incitent ces derniers à consommer et à travailler de façon excessive et à épargner insuffisamment. Nous proposons un programme d’imposition qui encourage l’économie concurrentielle à atteindre une répartition efficiente.
    Keywords: relative consumption; relative income hypothesis; permanent income hypothesis, consommation relative, hypothèse du revenu relatif, hypothèse du revenu permanent
    JEL: D62 E21 H21
    Date: 2008–07–01
  59. By: Claudia S. Gómez-López; Luis A.Puch
    Abstract: Chile and Mexico, two Latin American countries that shared similar economic conditions in early’ 80s are studied in order to shed light about the role commodities play. In a general equilibrium growth accounting framework over the period 1980-2000 we show that Adjusted Total Factor Productivity net of oil and copper, has correspondingly decreased and increased less than TFP, suggesting that commodities are a relevant growth factor. Previous works have shown that Chile recovered more quickly than Mexico did. However, when commodity price changes are taken into account, we show that copper and oil have played a major role in the depressions and recoveries for both economies. We propose a neoclassical growth model where we distinguish between the role of commodities and the rest of the economy. The results complement the findings in Bergoeing et al.(2002).
    Date: 2008–07
  60. By: Strobl, Eric (Ecole Polytechnique, Paris)
    Abstract: We estimate the impact of hurricane strikes on local economic growth rates and how this is reflected in more aggregate growth patterns. To this end we assemble a panel data set of US coastal counties’ growth rates and construct a hurricane destruction index that is based on a monetary loss equation, local wind speed estimates derived from a physical wind field model, and local exposure characteristics. Our econometric results suggest that in response to a hurricane strike a county’s annual economic growth rate will initially fall by 0.8, but then partially recover by 0.2 percentage points. While the pattern is qualitatively similar at the state level, the net effect over the long term is negligible. Hurricane strikes do not appear to be economically important enough to be reflected in national economic growth rates.
    Keywords: US coastal counties, economic growth, hurricanes
    JEL: E0
    Date: 2008–07
  61. By: Gong, Cathy Honge (Australian National University); Meng, Xin (Australian National University)
    Abstract: Despite the intensive efforts made by economists to examine regional income inequality in China, limited attention has been paid to disentangle the contribution of regional price differentials. This paper examines regional price differential in urban China over the period 1986 to 2001. Spatial Price Index (SPI) is normally calculated using the Basket Cost Method, which defines a national basket and measures price variation of this common basket across different regions. The weakness of this method is that it arbitrarily assumes consumers’ preferences and has a strong reliance on good regional level price data, which are often not available. This paper adopts the Engel’s curve approach to estimate a Spatial Price Index for different provinces. The SPI obtained from the Engel’s curve approach indicates larger regional price variations than those obtained from the Basket Cost method. Further, regional price variations in urban China increased significantly during the late 1980s to early 1990s, stabilized at a relatively high level during the mid to end 1990s. Adjusting for the regional price variations our finding suggests that regional income inequality increased the most between the late 1980s and early 1990s, and stabilized in the mid 1990s, which contradicts previous findings using unadjusted income.
    Keywords: spatial price index, Engel’s curve, income inequality, China
    JEL: C43 E31 P36 D12
    Date: 2008–07
  62. By: Gianmarco I. P. Ottaviano (University of Bologna); Francesco D’Amuri (Bank of Italy, ISER, University of Essex and FEEM); Giovanni Peri (University of California, Davis and NBER)
    Abstract: We adopt a general equilibrium approach in order to measure the effects of recent immigration on the Western German labor market, looking at both wage and employment effects. Using the Regional File of the IAB Employment Subsample for the period 1987-2001, we find that the substantial immigration of the 1990’s had no adverse effects on native wages and employment levels. It had instead adverse employment and wage effects on previous waves of immigrants. This stems from the fact that, after controlling for education and experience levels, native and migrant workers appear to be imperfect substitutes whereas new and old immigrants exhibit perfect substitutability. Our analysis suggests that if the German labor market were as ‘flexible’ as the UK labor market, it would be more efficient in dealing with the effects of immigration.
    Keywords: Immigration, Skill Complementarities, Employment, Wages
    JEL: E24 F22 J61 J31
    Date: 2008–02
  63. By: Mathew Bradbury; Matías Vernengo
    Abstract: The paper sheds light on the apparent success of dollarization in Ecuador. The experience of Argentina with convertibility is used to anchor the analysis. Two key factors are seen to play the most important role; first, the behavior of the real exchange rate and second, the source of external resources. The papers explains that exogenous determinants of the real exchange rate- productivity growth, the value of the dollar, commodity prices- have tended to behave very differently over the respective life spans of the Argentine and Ecuadorian monetary regimes. Trends in these exogenous variables have favored positive trends in the Ecuadorian current account. However, as the paper shows, the critical element informing the sustainability of the currency remains the source of external funds. Whereas in Argentina the IMF and international capital flows were central in propping up the flawed regime, the fate of Ecuadorian experiment relies heavily on a surprising factor, remittances. Reliance on remittance income is seen as a stop gap that cannot secure sustainability of the monetary system and implies longer run consequences for lost development potential.
    Keywords: Dollarization, Balance of Payments, Debt Sustainability
    JEL: E52 F24 F31 O54
    Date: 2008–12
  64. By: Monnet Gbakou (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Mustapha Sadni Jallab (UNECA - United Nations Economic Commission for Africa - United Nations); René Sandretto (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper aims at analyzing the possible influence of foreign direct investment (FDI) on economic growth in the particular case of Middle East and North African countries (MENA). During the last years, the relation between FDI and growth in LDCs has been discussed extensively in the economic literature. However, the view that FDI stimulates economic growth does not receive an unanimous support. In order to access empirically this relation in MENA countries, we use a dynamic panel procedure with observations per country over the period 1970-2005. To improve efficiency, we use the standard “difference” and “system” GMM and 2SLS estimators. Our findings show that there is no independent impact of FDI on economic growth. The growth-effect of FDI does not also depend on degree of openness to trade and income per capita. But, the positive impact of FDI on economic growth depends on macroeconomic stability: there is a threshold effect of annual percentage change of consumer prices.
    Keywords: Foreign Direct Investment ; macroeconomic stability ; economic growth ; Middle East and North Africa ; two-stage least squares ; generalized moments methods
    Date: 2008

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