nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒08‒14
25 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 Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella
  2. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis Snower
  3. Comprehensive macro-model for the U.S. economy By Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
  4. The Natural Rate Hypothesis and Real Determinacy By Alexander Meyer-Gohde
  5. Endogenous Money - On Banking Behaviour in New and Post Keynesian Models By Co-Pierre Georg; Markus Pasche
  6. Fiscal policy in real time By Jacopo Cimadomo
  7. Determinacy of Interest Rate Rules with Bond Transaction Services in a Cashless Economy By Marzo, Massimiliano; Zagaglia, Paolo
  8. Yield Curve Factors, Term Structure Volatility, and Bond Risk Premia By Nikolaus Hautsch; Yangguoyi Ou
  9. Financial globalization and monetary policy discipline By Mark M. Spiegel
  10. Oil Price Shocks, Macroeconomic Stability and Welfare in a Small Open Economy By Deren Unalmis; Ibrahim Unalmis; Derya Filiz Unsal
  11. Is inflation an international phenomenon? By Christopher J. Neely; David E. Rapach
  12. Expectations, Communication and Monetary Policy in Turkey By Soner Baþkaya; Hakan Kara; Defne Mutluer
  13. The Optimal Monetary Instrument for Prudential Purposes By Charles Goodhart; Dimitrios Tsomocos; Pojanart Sunirand
  14. Setting up a modern macroeconomic framework in Brazil, 1993-2004 By Rogério L. F. Werneck
  15. Some preliminary evidence on the globalization-inflation nexus By Sophie Guilloux; Enisse Kharroubi
  16. Regional Inflation Persistence: Evidence from Italy By Andrea Vaona; Guido Ascari
  17. The cost of capital in markets with opaque intermediaries and the risk-structure of interest rates By Mierzejewski, Fernando
  18. The real exchange rate in sticky price models: does investment matter? By Enrique Martinez-Garcia; Jens Søndergaard
  19. New actions on the housing and financial crises—do no harm? By Tatom, John A.
  20. Investment and the exchange rate: Short run and long run aggregate and sector-level estimates By Landon, Stuart; Smith, Constance
  21. Monetary and financial integration in the EMU: Push or pull? By Mark M. Spiegel
  22. Versión real y versión monetaria de una economía de mercado artesanal By Fabrice Tricou
  23. Solow Residuals without Capital Stocks By Michael C. Burda; Battista Severgnini
  24. Measuring the Dynamic Cost of Living Index from Consumption Data By Aoki, Shuhei; Kitahara, Minoru
  25. The Future of the Renminbi and Its Impact on the Hong Kong Dollar By Yue, Eddie; He, Dong

  1. By: Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella
    Abstract: ient 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 in- flation rate. Discretionary monetary policy is e¤ective when wage setters are non atomistic. In?ation targeting has real e¤ects irrespective of the degree of labor market centralization.
    Keywords: inflation bias, discretionary monetary policy, non-zero inflation targeting, unemployment, strategic wage setters
    JEL: E52 E58 J51 E24
    Date: 2008–07
  2. By: Marika Karanassou; Hector Sala; Dennis Snower
    Abstract: The conventional wisdom that inflation and unemployment are unrelated in the long-run implies the compartmentalisation of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve (NPC), we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation-unemployment tradeoff in the long-run. We thus argue that a holistic framework, like the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions (VARs)
    Keywords: Natural rate of unemployment, new Phillips Curve, frictional growth, inflationunemployment, tradeoff, inflation dynamics, unemployment dynamics, impulse response function
    JEL: E24 E31
    Date: 2008–07
  3. By: Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
    Abstract: We present a comprehensive macroeconomic model for the U.S. There exist strict long-term relations between real GDP, price inflation, labor force participation, productivity, and unemployment. The evolution of real GDP depends only on exogenous demographic forces. Other macro-variables follow up the real GDP. The links between the variables have been valid during the last several decades. All relations were (successfully) tested for cointegration. Statistical estimates are also presented. The relationships allow a reliable prediction of the macroeconomic state at very large (more than 9 years) time horizons.
    Keywords: US economy; macroeconomic model; real GDP; inflation; unemployment; labor force; productivity; demography
    JEL: E2 D3 J1 J2 E3
    Date: 2008–08–03
  4. By: Alexander Meyer-Gohde
    Abstract: The uniqueness of bounded local equilibria under interest rate rules is analyzed in a model with sticky information `a la Mankiw and Reis (2002). The main results are tighter bounds on monetary policy than in sticky-price models, irrelevance of the degree of output-gap targeting for determinacy, independence of determinacy regions from parameters outside the interest-rate rule, and equivalence between real determinacy in models satisfying the natural rate hypothesis and nominal determinacy in the associated full-information, flex-price equivalent. The analysis follows from boundedness considerations on the nonautonomous recursion that describe the MA(¥) representation of variables’ reaction to endogenous fluctuations.
    Keywords: Nonautonomous difference equations; Indeterminacy; Taylor rule; Sticky information; Sticky prices
    JEL: C62 E31 E52 E58 E61
    Date: 2008–07
  5. By: Co-Pierre Georg (Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät); Markus Pasche (Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät)
    Abstract: In New Keynesian as well as in Post Keynesian macroeconomic models, money supply is assumed to be endogenous. The reasons for the endogeneity and the role of the financial sector in the supply process, however, are seen very different. In this paper we explicitly derive the behaviour of the banking sector regarding the supply of loans and the demand for reserves from portfolio and liquidity considerations. As a result, the money multiplier as well as the money base are endogenously determined. Although the microeconomics of the bank behaviour is quite simple, credit and money as well as bonds demand depend on policy variables in a non-linear and non-monotonous way.
    Keywords: endogenous money, loans market, bonds market, central banking
    JEL: E51 E44 B22
    Date: 2008–08–12
  6. By: Jacopo Cimadomo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper argues that any assessment on the intentional stance of fiscal policy should be based upon all the information available to policymakers at the time of fiscal planning. In particular, real-time data on the discretionary fiscal policy "instrument", the structural primary balance, should be used in the estimation of fiscal policy reaction functions. In fact, the ex-post realization of discretionary fiscal measures may end up to be drastically different from what was planned by fiscal authorities in the budget law. When fiscal policy rules are estimated on real-time data, our results indicate that OECD countries often planned a counter-cyclical fiscal stance, especially during economic expansions, whereas conventional findings based on revised data point towards pro-cyclicality. This finding calls into question the effectiveness of discretionary fiscal policies to fine tune the business cycle, as (pro-cyclical) actual outcomes tend to deviate from (counter-cyclical) fiscal plans. Furthermore, we test whether threshold effects might be at play in the reaction of fiscal policy to the economic cycle and to public debt accumulation. It emerges that the intended cyclical behavior of fiscal policy is characterized by two regimes, and that the switch between them is likely to occur when output is close to its equilibrium level. On the other hand, the use of revised data does not allow to identify any threshold effect. JEL Classification: C23, E30, E62, H30, H60.
    Keywords: Fiscal policy, real-time data, revision errors, endogenous threshold models.
    Date: 2008–07
  7. By: Marzo, Massimiliano (Universita di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless variant of their model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed.
    Keywords: Monetary Policy; Fiscal Policy; Government Bonds; Determinacy
    JEL: C68 E52
    Date: 2008–08–11
  8. By: Nikolaus Hautsch; Yangguoyi Ou
    Abstract: We introduce a Nelson-Siegel type interest rate term structure model with the underlying yield factors following autoregressive processes revealing time-varying stochastic volatility. The factor volatilities capture risk inherent to the term struc- ture and are associated with the time-varying uncertainty of the yield curve’s level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the yield factors and factor volatilities follow highly persistent processes. Using the extracted factors to explain one-year-ahead bond excess returns we observe that the slope and cur- vature yield factors contain the same explanatory power as the return-forecasting factor recently proposed by Cochrane and Piazzesi (2005). Moreover, we identify slope and curvature risk as important additional determinants of future excess returns. Finally, we illustrate that the yield and volatility factors are closely con- nected to variables reflecting macroeconomic activity, inflation, monetary policy and employment growth. It is shown that the extracted yield curve components have long-term prediction power for macroeconomic fundamentals.
    Keywords: Term Structure Modelling; Yield Curve Risk; Stochastic Volatility; Factor Models; Macroeconomic Fundamentals
    JEL: C5 E4 G1
    Date: 2008–07
  9. By: Mark M. Spiegel
    Abstract: The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences.
    Keywords: Monetary policy ; Inflation (Finance) ; Globalization
    Date: 2008
  10. By: Deren Unalmis; Ibrahim Unalmis; Derya Filiz Unsal
    Date: 2008
  11. By: Christopher J. Neely; David E. Rapach
    Abstract: Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes inflation for 65 countries into world, regional, and idiosyncratic components. The world component accounts for 34% of inflation variability on average across countries, although the importance of this global factor differs substantially across countries. Variables that reflect policy as well as economic and financial development strongly explain the cross-section variation in the relative importance of global influences. A parsimonious model of time variation in the factor loadings shows that most countries became more sensitive to international inflation influences over 1951 2006. In addition, European-specific influences became more important over time for countries participating in European economic and monetary integration.
    Keywords: Inflation (Finance)
    Date: 2008
  12. By: Soner Baþkaya; Hakan Kara; Defne Mutluer
    Date: 2008
  13. By: Charles Goodhart; Dimitrios Tsomocos; Pojanart Sunirand
    Abstract: The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.
    Date: 2008–08
  14. By: Rogério L. F. Werneck (Department of Economics, PUC-Rio)
    Date: 2008–06
  15. By: Sophie Guilloux; Enisse Kharroubi
    Abstract: The aim of this paper is to evaluate the impact of globalization, if any, on inflation and the inflation process. We estimate standard Phillips curve equations on a panel of OECD countries over the last 25 years. While recent papers have concluded that globalization has had no significant impact, this paper highlights that trying to capture globalization effects through simple measures of import prices and/or imports to GDP ratios can be misleading. To do so, we try to extend the analysis following two different avenues. We first separate between commodity and non-commodity imports and show that the impact on inflation of commodity import price inflation is qualitatively different from the impact of noncommodity import price inflation, the former depending on the volume of commodity imports while the latter being independent of the volume of non-commodity imports. This first piece of evidence highlights the role of contestability and the insufficiency of trade volume statistics to properly describe the impact of globalization. This leads us to adopt a more systematic approach to capture the contents and not only the volume of trade. Focusing on the role of intra-industry trade, we provide preliminary evidence that this variable can account (i) for the low pass-through of import price to consumer price and (ii) for the flattening of the Phillips curve, i.e. the lower sensitivity of inflation to changes in output gap. We hence conclude that different facets of globalization, especially changes in the nature of goods traded, can be an important channel through which globalization affects the inflation process.
    Keywords: Globalization ; Inflation (Finance) ; Time-series analysis ; International trade
    Date: 2008
  16. By: Andrea Vaona (Facoltà di Economia, Università di Lugano, Svizzera); Guido Ascari (Dipartimento di Economia e Metodi Quantitativi, Facoltà di Economia, Università di Pavia, Italia)
    Abstract: Regional patterns of inflation persistence have received attention only at a very coarse level of territorial disaggregation, that of EMU member states. However economic disparities within EMU member states are an equally important policy issue. This paper considers a country with a large regional divide, i.e., Italy, at a fine level of territorial disaggregation (NUTS3). Our results show that economically backward regions display greater inflation persistence. Moreover, we show that higher persistence is linked to a lower degree of competitiveness in the retail sector.
    Keywords: inflation persistence, retail sector, regions.
    JEL: E0 E30 R0 R10
    Date: 2007–07–28
  17. By: Mierzejewski, Fernando
    Abstract: The demand for cash balances of financial intermediaries that establish contractual liabilities with credit-sensitive customers is characterised. As stated by Merton, the success of the business activities of such firms crucially depends on their credit quality, and hence, they are obliged to rely on deposit insurance and capital cushions in order to assure that their promised payments are free of default. Unlike the Merton’s approach, the optimal guaranteeing contract is formulated in actuarial terms in this paper, because in this way the model can be extended to consider the situation of firms that can only hedge up to a limited extent. Within this framework, the equilibrium in the market determines the rate at which a unit of capital is exchange by a unit of risk, or, in other words, it determines the market price of risk. Episodes of liquidity crises are meaningful in this theoretical setting.
    Keywords: The cost of capital; Liquidity preference; Monetary equilibrium; Financial instability; Liquidity crises
    JEL: G14 G15 E44 E41
    Date: 2008–07–31
  18. By: Enrique Martinez-Garcia; Jens Søndergaard
    Abstract: This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that the CKM (2002) persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilization and investment adjustment costs (see, e.g., Christiano, et al., 2005). In summary, the PPP puzzle is still very much alive and well.
    Keywords: Globalization ; Foreign exchange ; International finance ; Forecasting ; Mathematical models
    Date: 2008
  19. By: Tatom, John A.
    Abstract: On July 27, 2008, the U.S. Senate passed and sent on to the president the “Housing and Economic Recovery Act of 2008,” reportedly the most important hosing bill since the Great Depression. The bill was originally aimed at addressing the foreclosure crisis which began in late 2006 and became especially apparent in the financial crisis that emerged in August 2007. Its passage was accelerated by the near or real failures of Fannie Mae and Freddie Mac, the nation’s two largest government sponsored enterprises (GSEs), who play a central role in the functioning of the nation’s housing, mortgage and financial markets. It is unlikely that the new steps will have much effect on the foreclosure crisis or short-term economic performance, but they create serious uncertainty over the future of the GSEs, federal finance and the status and role of the U.S. financial markets. It is likely, however, that the new arrangements for Fannie Mae and Freddie Mac will not remain static for more than a few months and that newly authorized steps for the new regulator of the GSEs are likely to ramp up the discussion and need for regulation soon.
    Keywords: U.S. Housing Bill; GSE reform; foreclosure crisis; financial regulation
    JEL: E62 E44 G28
    Date: 2008–07–31
  20. By: Landon, Stuart; Smith, Constance
    Abstract: Aggregate and sector-level investment equations that incorporate the exchange rate are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to have a significant negative effect on aggregate investment in both the short run and the long run. This effect is negative in all sectors in the short run, is significant in six of nine sectors, and is particularly persistent in service sectors, sectors that do not generally benefit directly from an expansion of demand following a currency depreciation. Movements in another explanatory variable, the real wage, have an insignificant impact on investment in the short run in most sectors, but a rise in the real wage has a significant negative long run effect on aggregate investment and on investment in six of nine sectors. A simulation shows that movements in the real exchange rate and the real wage can explain a large proportion of cross-country differences in investment.
    Keywords: investment; exchange rate
    JEL: E22 F3
    Date: 2007–08
  21. By: Mark M. Spiegel
    Abstract: A number of studies have recently noted that monetary integration in the European Monetary Union (EMU) has been accompanied by increased financial integration. This paper examines the channels through which monetary union increased financial integration, using international panel data on bilateral international commercial bank claims from 1998-2006. I decompose the relative increase in bilateral commercial bank claims among union members following monetary integration into three possible channels: A "borrower effect," as a country's EMU membership may leave its borrowers more creditworthy in the eyes of foreign lenders; a "creditor effect," as membership in a monetary union may increase the attractiveness of a nation's commercial banks as intermediaries, perhaps through increased scale economies enjoyed by commercial banks themselves or through an improved regulatory environment after the advent of monetary union; and a "pairwise effect," as joint membership in a monetary union increases the quality of intermediation between borrowers and creditors when both are in the same union. This pairwise effect could be attributed to mitigated currency risk stemming from monetary integration, but may also indicate that monetary union integration increases borrowing capacity. I decompose the data into a series of difference-in-differences specifications to isolate these three channels and find that the pairwise effect is the primary source of increased financial integration. This result is robust to a number of sensitivity exercises used to address concerns frequently associated with difference-in-differences specifications, such as serial correlation and issues associated with the timing of the intervention.
    Keywords: Banks and banking - Europe ; Euro ; European Monetary System (Organization)
    Date: 2008
  22. By: Fabrice Tricou
    Abstract: Resumen: La economía artesanal representa específicamente la división social del trabajo porque trata de una economía de intercambio entre productores independientes; ella integra la producción (a diferencia de la economía de intercambio puro) pero descarta la división técnica del trabajo (a diferencia de la economía capitalista). Este texto presenta un modelo real y un modelo monetario de una economía artesanal en la cual cada productor especialista-consumidor generalista, pretende maximizar su utilidad. Mientras que en el primer modelo se dibuja una "economía del mercado general" asociada a los precios relativos de equilibrio, el segundo modelo monetario resume una "economía de los mercados particulares" conectada a precios absolutos de desequilibrio.
    Date: 2008–06–30
  23. By: Michael C. Burda; Battista Severgnini
    Abstract: For more than fifty years, the Solow decomposition (Solow 1957) has served as the standard measurement of total factor productivity (TFP) growth in economics and management, yet little is known about its precision, especially when the capital stock is poorly measured. Using synthetic data generated from a prototypical stochastic growth model, we explore the quantitative extent of capital measurement error when the initial condition is unknown to the analyst and when capacity utilization and depreciation are endogenous. We propose two alternative measurements which eliminate capital stocks from the decomposition and significantly outperform the conventional Solow residual, reducing the root mean squared error in simulated data by as much as two-thirds. This improvement is inversely related to the sample size as well as proximity to the steady state. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.
    Keywords: Total factor productivity, Solow residual, generalized differences, measurement error, Malmquist index
    JEL: D24 E01 E22 O33 O47
    Date: 2008–08
  24. By: Aoki, Shuhei; Kitahara, Minoru
    Abstract: In the U.S., the objective of consumer price index (CPI) measurement is to measure the cost of living. However, the current CPI or, in other words, cost of living index (COLI) measures the cost of living in a static optimization problem. This paper proposes a new method to construct a dynamic cost of living index (DCOLI). Our method offers several advantages compared to other dynamic cost of living indices proposed in the literature. First, our measure is based on total wealth. Previous indices limited attention to financial wealth. Second, we consider an Epstein-Zin preference structure. Most previous literature has used log preferences. We derive formulas that relate our DCOLI to the COLI and derive conditions under which the two coincide. We also produce empirical measures of our DCOLI. We find that under standard assumptions on preferences, the volatility of our DCOLI is about the same as that of the COLI. In certain periods, e.g., 1977–1983, our measure differs sharply from the COLI.
    Keywords: dynamic cost of living index; cost of life; CPI
    JEL: C43 E31 D91
    Date: 2008–08–02
  25. By: Yue, Eddie; He, Dong
    Abstract: This article outlines our thoughts on the following three issues. First, will the renminbi become an international currency in the foreseeable future? Second, what does the international use of the renminbi mean for Hong Kong? Third, should the Hong Kong dollar exchange rate be repegged to the renminbi? We argue that the renminbi is likely to become a major international currency in the future, but the process will most likely be a gradual one, reflecting the particular approach that the authorities in the Mainland have taken to capital account liberalization. We also argue that Hong Kong is well positioned to benefit from the process of the renminbi becoming an international currency. At the same time, we continue to believe in the appropriateness of the link of the Hong Kong dollar exchange rate to the U.S. dollar.
    JEL: E58 F36
    Date: 2008–08

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