nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒08‒21
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Unrestrained Credit In A Credit Economy, The Credit Cycle, And Fiat Money Defy Monetarism In The Attempt to Control Price Level Changes By Salvary, Stanley C. W.
  2. What's News in Business Cycles By Stephanie Schmitt-Grohe; Martin Uribe
  3. The Phillips Curve and the Italian Lira, 1861-1998 By Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci
  4. Monetary Transmission in an Emerging Targeter: The Case of Brazil By A. R. Pagan; Luis Catão; Douglas Laxton
  5. Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework By Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
  6. What horizon for targeting inflation? By Q. Farooq Akram.
  7. Monetary stabilisation in a currency union of small open economies By Marcelo Sánchez
  8. Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation By Wei Dong
  9. Efficient Search on the Job and the Business Cycle By Guido Menzio; Shouyong Shi
  10. Efficient Search on the Job and the Business Cycle By Guido Menzio; Shouyong Shi
  11. Daily Monetary Policy Shocks and the Delayed Response of New Home Sales By James D. Hamilton
  12. Global Food Crisis & Inflationary Pressures: Short and Medium to Long Term Policy Options By Abbas, Syed Kanwar
  13. Inflation, Investment and Growth: a Banking Approach By Gillman, Max; Kejak, Michal
  14. The Macroeconomic Implications of a Key Currency By Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
  15. What Can Taylor Rules Say About Monetary Policy in Latin America? By Carvalho, Alexandre; Moura, Marcelo L.
  17. Understanding the Inflationary Process in the GCC Region: The Case of Saudi Arabia and Kuwait By Maher Hasan; Hesham Alogeel
  18. Owner-Occupied Housing Costs and Bias in the Irish Consumer Price Index By Colm McCarthy
  19. Tariff Policy, Increasing Returns and Endogenous Fluctuations By Chen, Yan; Zhang, Yan
  20. Federal Reserve Information during the Great Moderation By Antonello D’Agostino; Karl Whelan
  21. Financial Stability, the Trilemma, and International Reserves By Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
  22. Monetary Policy by Committee:Consensus, Chairman Dominance or Simple Majority? By RIBONI, Alessandro; RUGE-MURCIA, Francisco J.
  23. Government spending volatility and the size of nations By Davide Furceri; Marcos Poplawski Ribeiro
  24. What's a Recession, Anyway? By Edward E. Leamer
  25. Modeling the Long Run: Valuation in Dynamic Stochastic Economies By Lars Peter Hansen
  26. Efficiency Improvement from Restricting the Liquidity of Nominal Bonds By Shouyong Shi
  27. Interaction between Housing Prices and Household Borrowing in Finland By Elias Oikarinen
  28. Os efeitos do câmbio no crescimento da economia brasileira By Luciano Nakabashi; Marcelo Luiz Curado; João Basílio Pereima Neto
  29. Good Policies or Good Fortune: What Drives the Compression in Emerging Market Spreads? By Philipp Maier; Garima Vasishtha
  30. Capital Taxation and Rent Seeking By Arefiev, Nikolay; Baron, Tatyana
  31. Flow on conjunctural information and forecast of euro area economic activity By Katja Drechsel; Laurent Maurin
  32. An Equilibrium Theory of Learning, Search and Wages By Francisco M. Gonzalez; Shouyong Shi
  33. The Irish Economy half a Century ago By Cormac Ó Gráda
  34. Harvests, prices and population in early modern Sweden By Edvinsson, Rodney
  35. Minimum wages, wage dispersion and unemployment : a review on new search models By Garloff, Alfred
  36. Reflexiones sobre el crecimiento de largo plazo del sector agrícola en Colombia By Jorge Tovar; Eduardo Uribe
  37. An Economic Model of the Planning Fallacy By Markus K. Brunnermeier; Filippos Papakonstantinou; Jonathan A. Parker

  1. By: Salvary, Stanley C. W.
    Abstract: Monetarists maintain that changes in the price level are attributable to the level of the money supply. Hence, price stability has been the rationale for the money supply rule derived from the Quantity Theory of Money. Consequently, to curb inflation, the general price level index is the lever for periodic adjustments of the short-term interest rate. Nevertheless, monetary control is ineffective due the fact that: (1) with the collapse of the gold standard during the 1930s and the removal of the final link to a commodity - gold (an exogenous variable with a variable nominal value), fiat money (an endogenous variable with an invariable nominal value) emerged unchallenged; (2) the realignment of relative prices - the perennial cause of changes in the general level of prices - cannot be abated since it is the effective mechanism for the efficient functioning of the economic system; and (3) unrestrained consumer credit - driven by unbridled aggressive business policies and producing documented credit cycles with periods of credit expansion and credit saturation - has severely amplified the impact of price level changes. This paper examines the issue of price level changes within the context of money (types and functions), economic systems (barter, monetary, and credit), aggressive business practices, unrestrained consumer credit, and credit cycles.
    Keywords: fiscal policy; inflation; credit cycles; credit economy; monetarism; aggressive business practices; commodity money; exchange ratios; crisis of doubt; fiat money; interest rate policy; unrestrained consumer credit; purchasing power; realignment of relative prices.
    JEL: E31 E00 E3
    Date: 2008–08–12
  2. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these shocks is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations. This result is robust to estimating a variant of the model featuring a parametric wealth elasticity of labor supply.
    JEL: C11 C51 E13 E32
    Date: 2008–08
  3. By: Alessandra Del Boca (University of Brescia); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Franco Spinelli (University of Brescia); Carmine Trecroci (University of Brescia)
    Abstract: We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to the entry of Italy in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate the extent to which nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off relying partly on sub-sample estimates and partly on time-varying parameters estimated with the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply.
    Keywords: inflation, Phillips curve, Italian lira
    JEL: E31 E32 E5 N10
    Date: 2008–07
  4. By: A. R. Pagan; Luis Catão; Douglas Laxton
    Abstract: This paper lays out a structural model that incorporates key features of monetary transmission in typical emerging-market economies, including a bank-credit channel and the role of external debt accumulation on country risk premia and exchange rate dynamics. We use an SVAR representation of the model to study the monetary transmission in Brazil. We find that interest rate changes have swifter effects on output and inflation compared to advanced economies and that exchange rate dynamics plays a key role in this connection. Importantly, the response of inflation to monetary policy shocks has grown stronger and the output-inflation tradeoff improved since the introduction of inflation targeting.
    Keywords: Brazil , Monetary policy , Inflation targeting , Emerging markets , Bank credit , Interest rates , Developed countries , Economic models , Disinflation ,
    Date: 2008–08–05
  5. By: Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
    Abstract: Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modeled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behavior in the more complete Banks and Bonds model. We do this by comparing the models' second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.
    JEL: E40 E50
    Date: 2008–08
  6. By: Q. Farooq Akram. (Norges Bank (Central Bank of Norway))
    Abstract: We investigate optimal horizons for targeting inflation in response to different shocks and their properties under alternative preferences of an inflation-targeting central bank. Our analysis is based on a well specified macroeconometric model of Norway, but we examine how alternative specifications of its key equations would affect our results. We find that the optimal horizon is highly shock-specific, precluding general conclusions for demand and supply shocks. An extension of the horizon with concern for output and/or interest rate fluctuations beyond some shock-specific level proves counterproductive. The size of a given shock does not affect the horizon unless the central bank cares about interest rate volatility, while its sign does not matter unless the model is non-linear. The optimal horizon in response to a combination of shocks cannot be derived from those for each of the shocks, as different shocks may amplify or modify the effects of each other. In this case, however, sources of shocks as well as their sizes and signs become relevant, leading to complex dynamics of inflation and output. Successful inflation targeting in such cases may require a complex interest rate response. The optimal horizon generally increases with the degree of persistence in a shock and decreases with the strength of stabilisation mechanisms in the model.
    Keywords: Monetary policy, Inflation targeting, Horizon
    JEL: C53 E31 E52
    Date: 2008–01–24
  7. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: This paper studies stabilisation policies in a multi-country currency union of small open economies. It abstracts from key factors favouring currency union formation, such as reduced transaction costs and enhanced credibility, which are exogenous to the factors studied here. Demand-side shocks hamper monetary union stabilisation unless members face identical output-inflation tradeoffs and their business cycles are perfectly synchronised. Under supply shocks, welfare implications from joining a currency union are less clear cut. In particular, when these shocks are common across participating countries a tradeoff arises whereby the latter bene?t if they are relatively open but are at a disadvantage in case they are of small size. Monetary-?scal interaction leads to a free rider problem, with area-wide supply shocks eliciting higher interest rate variability. Compared with the case of real wage rigidity, increased real wage ?exibility mitigates the free rider problem. Higher trade union decentralisation overall favours a currency union. The present multi-country currency union setup should not be seen as an attempt at settling the sharp differences that exist in the literature. Our model could be modi?ed in order to derive results that are valid in more realistic environments. These include the analysis of public debt considerations in the case of ?scal policies, and both institutional and (further) macroeconomic aspects in the area of wage determination. JEL Classification: E52, E58, F33, F42, E63.
    Keywords: Monetary union, stabilisation, welfare, small open economies, fi?scal policy, wage setting.
    Date: 2008–08
  8. By: Wei Dong
    Abstract: This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand and the United Kingdom. We develop and estimate a structural general equilibrium two-sector model with sticky prices and wages and limited exchange rate pass-through. Different specifications for the monetary policy rule and the real exchange rate process are examined. The results indicate that the Reserve Bank of Australia, the Bank of Canada and the Bank of England paid close attention to real exchange rate movements, whereas the Reserve Bank of New Zealand did not seem to incorporate exchange rate movements explicitly into their policy rule. With a higher degree of intrinsic inflation persistence, the central bank of New Zealand seems less concerned about future inflation pressure induced by current exchange rate movements. In addition, the structure of the shocks driving inflation and output variations in New Zealand is such that it may be sufficient for the Reserve Bank of New Zealand to only respond to exchange rate movements indirectly through stabilizing inflation and output.
    Keywords: Exchange rates; Monetary policy framework; International topics
    JEL: F3 F4
    Date: 2008
  9. By: Guido Menzio (Department of Economics, University of Pennsylvania); Shouyong Shi (Department of Economics, University of Toronto)
    Abstract: We build a directed search model of the labor market in which workers’ transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states does not affect the agents’ values and strategies. Because of this property, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies.
    Keywords: Directed Search, On the Job Search, Business Cycles
    JEL: E24 E32 J64
    Date: 2008–08–11
  10. By: Guido Menzio; Shouyong Shi
    Abstract: We build a directed search model of the labor market in which workers' transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states does not affect the agents' values and strategies. Because of this property, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies.
    Keywords: Directed search; On the Job Search; Business Cycles
    JEL: E24 E32 J64
    Date: 2008–08–12
  11. By: James D. Hamilton
    Abstract: This paper offers an explication of the hump-shaped response of real economic activity to changes in monetary policy, focusing on the particular channel operating through new home sales. I suggest that the conventional notion of a monetary policy shock as a surprise change in the fed funds rate is misspecified. The primary news for market participants is not what the Fed just did, but is instead new information about what the Fed is going to do in the near future. Revisions in these anticipations show up instantaneously in long-term mortgage rates. Although mortgage rates respond well before the Fed actually changes its target rate, home sales do not respond until much later. The paper attributes this delay to cross-sectional heterogeneity in search times. This framework offers a description of the lags in the effects of monetary policy that is both more detailed, allowing us in principle to measure the consequences at the daily frequency, and more believable than traditional measures.
    JEL: E44 E52
    Date: 2008–08
  12. By: Abbas, Syed Kanwar
    Abstract: The present paper is an initiative to pin down major factors behind exorbitant inflationary pressures in the global economy. The paper mentions that among other factors productivity shocks, external shocks, inflationary expectations and conversion of food crops into fuel generation are the major drivers of inflation (especially food inflation) in the present inflationary era. An attempt is also made to offer some short and medium to long term policy recommendations in this regard. Especially, the acquisition of internal growth momentum is emphasized to absorb the severity of imported inflation in the global economy as well as in Pakistan’s economic scenario. Last but not the least, the paper highlights that inflationary pressures are more sensitive to the productivity shocks than the impact of monetary policy operations in the short run and therefore, supply side measures along with monetary policy operations are important to control inflationary stance in the emerging economies including Pakistan.
    JEL: E31 E6
    Date: 2008–07
  13. By: Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: Investment and growth are found empirically to be negatively affected by inflation. Yet evidence also supports a positive Tobin effect whereby greater capital intensities and lower real interest rates result. The negative investment and positive capital intensity effects appear hard to reconcile. We present a model with both effects by requiring investment to be exchanged for, rather than frictionlessly being acquired, so that an inflation tax lowers investment but still induces a reallocation of factor inputs from labor towards capital. Thereby the economy captures the investment, Tobin and growth effects simultaneously.
    Keywords: Inflation; investment; growth; Tobin
    JEL: C23 E44 O16 O42
    Date: 2008–08
  14. By: Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido
    Abstract: What are the macroeconomic consequences of the dominant role of the dollar in the international monetary system? Here, we present a calibrated two country model in which exports are invoiced in the key currency, and government bonds denominated in the key currency are held internationally to facilitate trade. Domestic government bonds and money are held in each country to facilitate domestic transactions. Our model generates deviations from uncovered interest parity that are as volatile as some empirical estimates, but much too small by others. Our model also speaks to some other empirical anomalies, such as the Backus - Smith puzzle. Shocks affecting asset supplies -- such as bond financed tax cuts, and open market operations -- have large effects in our model because they generate non-Ricardian changes in household wealth. Generally, shocks emanating from the key currency country do more to destabilize the world economy than equal sized shocks coming from the other country. Similarly, monetary and fiscal policy innovations in the key currency country are more potent than those in the other country. On the other hand, the key currency country is more vulnerable to financial market turbulence, such as a sell off of key currency bonds, which can lower consumption dramatically.
    JEL: F3 F4 F41
    Date: 2008–08
  15. By: Carvalho, Alexandre; Moura, Marcelo L.
    Date: 2008–10
  16. By: Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: The Phillips curve has flattened in Spain over 1995-2006: unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives’ and immigrants’ labor supply or bargaining power differ. Estimation of the curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration.
    Keywords: Phillips curve, immigration.
    JEL: E31 J64
    Date: 2007–12
  17. By: Maher Hasan; Hesham Alogeel
    Abstract: This paper investigates the factors that affect inflation in the GCC region by examining the inflationary processes in Saudi Arabia and Kuwait. The paper utilizes a model that accounts for foreign factors affecting inflation, such as trading partners' inflation and exchange rate pass-through effect, as well as domestic influences. The analysis concludes that, in the long run, higher inflation in trading partners' countries is the main driving force for inflation in the two countries, with significant but lower contributions from the exchange rate pass-through effect and oil prices. Demand and money supply shocks affect inflation in the short run.
    Keywords: Inflation , Saudi Arabia , Kuwait , Money supply , Exchange rate stability , Bilateral trade , Cooperation Council for the Arab States of the Gulf ,
    Date: 2008–08–06
  18. By: Colm McCarthy (University College of Dublin)
    Abstract: The treatment of owner-occupied housing costs is a recurring problem in the construction of consumer price indices, and there are competing methodologies. In the most widely-used Irish index, the Payments Approach, which attaches a weight to a term involving historical house prices and an interest rate, is used to measure these costs. It is argued that this has resulted in a substantial over-statement of inflation in recent quarters, and that the over-statement will continue for some time. The Irish version of Eurostat’s Harmonised Index of Consumer Prices, recently running well below the CPI, is a more reliable guide. Few national statistical offices use the Payments Approach, and it is argued that the procedure used in Ireland should be reviewed.
    Keywords: Consumer Price Index; Cost of Living Index; Payments Approach; Owner-Occupied Housing
    JEL: C43 C82 D12 E31
    Date: 2007–06–20
  19. By: Chen, Yan; Zhang, Yan
    Abstract: We investigate the quantitative implications of government tariff policy in a discrete-time one-sector small open economy RBC model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits local indeterminacy, we show that the introduction of a constant tariff or subsidy (imposed on the imported factor (say. energy)) can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 15-cycles, quasiperiodic orbits and chaos. We show that it can be misleading to use local steady-state analysis to detect the presence of multiple equilibria in this class of models. For a plausible range of tariff rates, the local analysis shows that the log-linearized dynamical system is saddle-point stable, suggesting a unique equilibrium. However, the true nonlinear model exhibits global indeterminacy. Overall, our results highlight the importance to use a model's nonlinear equilibrium conditions to fully examine global dynamics.
    Keywords: Tariff Policy; Business Cycles; Global Indeterminacy;Sunspots; Nonlinear Dynamics; Chaos.
    JEL: E32 Q43
    Date: 2008–08–14
  20. By: Antonello D’Agostino (Central Bank); Karl Whelan (University College Dublin)
    Abstract: Using data from the period 1970-1991, Romer and Romer (2000) showed that Federal Reserve forecasts of inflation and output were superior to those provided by commercial forecasters. In this paper, we show that this superior forecasting performance deterio- rated after 1991. Over the decade 1992-2001, the superior forecast accuracy of the Fed held only over a very short time horizon and was limited to its forecasts of inflation. In addition, the performance of both the Fed and the commercial forecasters in pre- dicting inflation and output, relative to that of “naive” benchmark models, dropped remarkably during this period.
    Date: 2007–12–22
  21. By: Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
    Abstract: The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.
    JEL: E44 E58 F21 F31 F36 F41 N10 O24
    Date: 2008–08
  22. By: RIBONI, Alessandro; RUGE-MURCIA, Francisco J.
    Abstract: This paper studies the theoretical and empirical implications of monetary policy making by committee under three different voting protocols. The protocols are a consensus model, where super-majority is required for a policy change; an agenda-setting model, where the chairman controls the agenda; and a simple majority model, where policy is determined by the median member. These protocols give preeminence to different aspects of the actual decision making process and capture the observed heterogeneity in formal procedures across central banks. The models are estimated by Maximum Likehood using interest rate decisions by the committees of five central banks, namely the Bank of Canada, the Bank of England, the European Central Bank, the Swedish Riksbank, and the U.S. Federal Reserve. For all central banks, results indicate that the consensus model is statically superior to the alternative models. This suggests that despite institutionnal differences, committees share unwritten rules and informal procedures that deliver observationally equivalent policy decisions.
    Keywords: Committees, voting models, status-quo bias, median voter
    JEL: D7 E5
    Date: 2008
  23. By: Davide Furceri (European Central Bank and University of Palermo. European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Marcos Poplawski Ribeiro (CEPII and University of Amsterdam. CEPII - Centre d’etudes prospectives et d’informations internationales, 9, rue Gerges Pitard - 75740, Paris, France.)
    Abstract: This paper provides empirical evidence showing that smaller countries tend to have more volatile government spending for a sample of 160 countries from 1960 to 2000. We argue that the larger size of a country decreases the volatility of government spending because it acts as an insurance against idiosyncratic shocks, and it leads to increasing returns to scale due to the higher ability of the government to spread its cost of financing over a larger pool of taxpayers. The results are robust to different time and country samples, different econometric techniques and to several sets of control variables. The analysis also evinces that country size is negatively related to the discretionary part of government spending and to the volatilities of most of the government spending items. JEL Classification: E62, H10.
    Keywords: Fiscal Policy, government size, fiscal volatility, country size.
    Date: 2008–08
  24. By: Edward E. Leamer
    Abstract: Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.
    JEL: E3 E32 E37
    Date: 2008–08
  25. By: Lars Peter Hansen
    Abstract: I explore the equilibrium value implications of economic models that incorporate reactions to a stochastic environment. I propose a dynamic value decomposition (DVD) designed to distinguish components of an underlying economic model that influence values over long horizons from components that impact only the short run. To quantify the role of parameter sensitivity and to impute long-term risk prices, I develop an associated perturbation technique. Finally, I use DVD methods to study formally some example economies and to speculate about others. A DVD is enabled by constructing operators indexed by the elapsed time between the date of pricing and the date of the future payoff (i.e. the future realization of a consumption claim). Thus formulated, methods from applied mathematics permit me to characterize valuation behavior as the time between price determination and payoff realization becomes large. An outcome of this analysis is the construction of a multiplicative martingale component of a process that is used to represent valuation in a dynamic economy with stochastic growth. I contrast the differences in the applicability between this multiplicative martingale method and an additive martingale method familiar from time series analysis that is used to identify shocks with long-run economic consequences.
    JEL: C0 E44 G1
    Date: 2008–08
  26. By: Shouyong Shi
    Abstract: This paper addresses why it is beneficial for a society to restrict the use of nominal bonds as a means of payment for goods. The model has a centralized asset market and a decentralized goods market. Individuals face matching shocks that affect the marginal utility of consumption, but they cannot insure, borrow or trade assets against such risks. The government imposes a legal restriction to prohibit nominal bonds from being used as a means of payment in a subset of trades. I show that this partial legal restriction can improve the society's welfare. In contrast to the literature, the efficiency role of the restriction exists in the steady state and it does not require the households to be able to trade assets after receiving the shocks. Moreover, even when lump-sum taxes are available, the efficiency role continues to exist under a condition that induces optimal money growth to be above the Friedman rule.
    Keywords: Nominal Bonds; Money; Efficiency; Return dominance
    JEL: E40
    Date: 2008–08–12
  27. By: Elias Oikarinen
    Abstract: ABSTRACT : Housing prices and household borrowing are expected to be tightly connected to each other. Better availability of credit eases liquidity constraints of households, which is likely to lead to higher demand for housing. On the other hand, housing prices may significantly influence household borrowing through various wealth effects. Employing time series econometrics this study shows that since the financial liberalization in the late 1980s there has been a significant two-way interaction between housing prices and housing loan stock in Finland. Before the financial deregulation the interaction was substantially weaker. Furthermore, housing appreciation has a notable positive impact on the amount of consumption loans withdrawn by households. It appears that there is no similar relationship between stock price movements and household borrowing. Understanding the two-way interaction between housing prices and credit is of importance, since the interdependence is likely to augment boom-bust cycles in the economy and increase the fragility of the financial sector.
    Keywords: lending, borrowing, housing, stocks, dynamics
    JEL: E41 E51 R21
    Date: 2008–08–13
  28. By: Luciano Nakabashi (Department of Economics, Universidade Federal do Paraná); Marcelo Luiz Curado (Department of Economics, Universidade Federal do Paraná); João Basílio Pereima Neto (Department of Economics, Universidade Federal do Paraná)
    Abstract: Although the improvement accomplished in the external accounts and the Brazilian economic growth in recent years, it would be incorrect to conclude that the external restriction is not important to determine the economic growth rate in longer periods of time. The maintenance of the Brazilian exchange rate overvaluation for a considerable period of time is leading to a weakening of other external indicators in a way that it is going to damage its own economic growth. That is, the policy makers need to be aware of the fact that the economic growth current path is not sustainable in the medium term. Therefore, the present article explores the consequences of this process on some important variables that can affect the Brazilian economic dynamism in longer periods of time.
    Keywords: external restriction; economic growth; exchange rate
    JEL: E58 E65 F43 O24 O54
    Date: 2008
  29. By: Philipp Maier; Garima Vasishtha
    Abstract: Since 2002, spreads on emerging market sovereign debt have fallen to historical lows. Given the close links between sovereign spreads, capital flows to emerging markets, and economic growth, understanding the factors driving these spreads is very important. We address this issue in two stages. First, we use factor analysis to study the extent to which emerging market bond spreads are driven by global factors, as opposed to country-specific macroeconomic fundamentals. Using data on different U.S. asset classes, we identify a common factor, linked to global financial conditions. Second, we use this common factor in a panel estimation framework to analyze the degree to which the fall in spreads is driven by better macroeconomic policies. Our results show that the common factor is not responsible for the reduction in spreads. Instead, emerging markets have benefited considerably from better macroeconomic policies, including lower inflation and lower debt. Therefore, a reversal of the benign global conditions need not necessarily have a substantial negative impact on financing conditions for emerging markets.
    Keywords: Development economics; Financial stability; International topics
    JEL: E43 F34 G12 G15
    Date: 2008
  30. By: Arefiev, Nikolay; Baron, Tatyana
    Abstract: We find the optimal capital income tax rate in an imperfectly competitive economy, where some part of recourses is devoted to rent-seeking activity. Optimal tax offsets the difference between marginal social and marginal private return to capital, which is a result of rent seeking, and the difference between the before tax interest rate and the marginal productivity of capital, which arises from imperfect competition. Optimal capital income tax rate depends neither on other tax rates nor on overall tax burden. Numerically it is close to zero.
    Keywords: Capital taxation, rent seeking, imperfect competition
    JEL: E62 H21
    Date: 2006–12–11
  31. By: Katja Drechsel (University of Osnabrück, International Economic Policy, Rolandstrasse 8, D-49069 Osnabrück, Germany); Laurent Maurin (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: Euro area GDP and components are nowcast and forecast one quarter ahead. Based on a dataset of 163 series comprising the relevant monthly indicators, simple bridge equations with one explanatory variable are estimated for each. The individual forecasts generated by each equation are then pooled, using six weighting schemes including Bayesian ones. To take into consideration the release calendar of each indicator, six forecasts are compiled independently during the quarter, each based on different information sets - different indicators, different individual equations and finally different weights to aggregate information. The information content of the various blocks of information at different points in time for each GDP component is then discussed. It appears that taking into account the information flow results in significant changes in the weight allocated to each block of information, especially when the first month of hard data becomes available. This conclusion, reached for all the components and most of the weighting scheme, supports and extends the findings of Giannone, Reichlin and Small (2006) and Banbura and Ruenstler (2007). An out-of-sample forecast comparison exercise is also carried out for each component and GDP directly. The forecast performance is found to vary widely across components. Two weighting schemes are found to outperform the equal weighting scheme in almost all cases. One-quarter ahead, the direct forecast of GDP is found to outperform the bottom-up approach. However, the nowcast resulting in the lowest forecast errors is derived from the bottom-up approach. JEL Classification: C22, C53, E17.
    Keywords: Large dataset, forecast pooling, weighting scheme, GDP components, out-ofsample forecast performance, bottom-up vs. direct forecast.
    Date: 2008–08
  32. By: Francisco M. Gonzalez; Shouyong Shi
    Abstract: We construct an equilibrium theory of learning from search in the labor market, which addresses the search behavior of workers, the creation of jobs, and the wage distribution as functions of unemployment duration. In the model, each worker has incomplete information about his job-finding ability and learns about it from his search outcomes. The theory formalizes a notion akin to that of discouragement: over the unemployment spell, unemployed workers update their beliefs about their job-finding abilities downward and reduce their desired wages. One contribution of the paper is to integrate learning from search into an equilibrium framework. We show that the equilibrium exhibits wage dispersion among homogeneous workers, and that workers with longer unemployment spells have lower permanent incomes. Another contribution is to apply lattice-theoretic techniques to analyze learning from experience, which is useful because learning generates convex value functions and, in principle, multiple solutions to a worker's optimization problem.
    Keywords: Learning; Wages; Unemployment; Directed search; Supermodularity.
    JEL: E24 D83 J64
    Date: 2008–08–12
  33. By: Cormac Ó Gráda (University College of Dublin)
    Date: 2008–08–14
  34. By: Edvinsson, Rodney (Dept. of Economic History, Stockholm University)
    Abstract: Today, one of the greatest challenges facing macroeconomic history is to quantify economic growth in the early modern period. This paper presents and discusses a series of total and per capita harvest production in Sweden within present borders for the period 1665-1820. The series is based on three main indices: grain prices, subjective harvest assessments and tithes. To calculate per capita production the size of population must be known. In this paper, population growth in Sweden during the 17th century is revised downwards compared to recent studies. The basic finding is that per capita harvests stagnated during the studied period. The annual fluctuations were substantial. Another finding is that, in the short-run, grain prices were more affected by domestic harvests than foreign prices.
    Keywords: economic history; agriculture; price history; GDP; early modern period; historical demography; Sweden
    JEL: E30 J11 N13 N53 Q11
    Date: 2008–08–11
  35. By: Garloff, Alfred (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This paper analyses theoretical effects of minimum wages on employment and the wage distribution under a frictional setting. I review new developments in search theory and discuss the influence of minimum wages on wages and employment under each setting. Thereby, a major theoretical focus of the paper is the integration of heterogeneity on both sides of the market in equilibrium search models. In the homogeneous case minimum wages do not affect employment, while in the heterogenous case theoretical results are mixed. There is no unique connection between unemployment and minimum wages, and the effect can be positive, zero or negative. However, the most advanced models, integrating heterogeneity on both sides of the market, seem to support the hypothesis that an increase in the minimum wage generally leads to an increase in unemployment as well." (author's abstract, IAB-Doku) ((en))
    JEL: E24 J21 J31 J64
    Date: 2008–08–12
  36. By: Jorge Tovar; Eduardo Uribe
    Abstract: Este trabajo explora la evolución estructural del PIB agropecuario en Colombia desde finales de los sesenta hasta el 2007. Como fuentes de crecimiento se tienen en cuenta la productividad y las áreas cosechadas. Se encuentra que en los últimos 16 años el área cosechada ha disminuido alrededor de un 25%, mientras que la productividad se ha mantenido generalmente estancada. Se concluye que el sector agrícola, debido a diferentes medidas de protección y soporte sectorial, a lo largo de décadas, no ha logrado integrarse plenamente a un mercado competitivo. Además, se presenta un ejercicio comparativo con Chile, México y Brasil. Éste sugiere que la manera más eficiente para incorporar el sector agrícola a la dinámica del resto de la economía es mediante la provisión de incentivos económicos que induzcan a mejoras efectivas de productividad. La revisión de la información sobre inversión, tanto doméstica como extranjera, sugiere que en Colombia esta no ha sido suficiente para impulsar cambios estructurales en el sector.
    Date: 2008–07–10
  37. By: Markus K. Brunnermeier; Filippos Papakonstantinou; Jonathan A. Parker
    Abstract: People tend to underestimate the work involved in completing tasks and consequently finish tasks later than expected or do an inordinate amount of work right before projects are due. We present a theory in which people underpredict and procrastinate because the ex-ante utility benefits of anticipating that a task will be easy to complete outweigh the average ex-post costs of poor planning. We show that, given a commitment device, people self-impose deadlines that are binding but require less smoothing of work than those chosen by a person with objective beliefs. We test our theory using extant experimental evidence on differences in expectations and behavior. We find that reported beliefs and behavior generally respond as our theory predicts. For example, monetary incentives for accurate prediction ameliorate the planning fallacy while incentives for rapid completion aggravate it.
    JEL: D10 D80 E21
    Date: 2008–08

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