nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒08‒31
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. On the Need for a New Approach to Analyzing Monetary Policy By Andrew Atkeson; Patrick J. Kehoe
  2. New issues in Indian macro policy. By Shah, Ajay
  3. The Impact of ECB Monetary Policy Decisions and Communication on the Yield Curve By Claus Brand; Daniel Buncic; Jarkko Turunen
  4. Resurrecting the Participation Margin By Monique Ebell
  5. Euro area money demand and international portfolio allocation - a contribution to assessing risks to price stability By Roberto A. De Santis; Carlo A. Favero; Barbara Roffia
  6. The financial storms in Vietnam’s transition economy: A reasoning on the 1991-2008 period By André Farber; Nguyen Huu Tu; Tran Tri Dung; Quan-Hoang Vuong
  7. Monetary Policy Rules and Indeterminacy By Vadim Khramov; Kirill Sosunov
  8. The Zero Interest Rate Policy By Tomohiro Sugo; Yuki Teranishi
  9. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  10. Wage Setting Patterns and Monetary Policy: International Evidence By Giovanni Olivei; Silvana Tenreyro
  11. Transmission of business cycle shocks between the US and the euro area. By Martin Schneider; Gerhard Fenz
  12. Monetary Policy, Beliefs, Unemployment and Inflation; Evidence from the UK By S.G.B. Henry
  13. The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? By Stephen G. Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
  14. Inventory-Theoretic Model of Money Demand, Multiple Goods, and Price Dynamics By Hirokazu Ishise; Nao Sudo
  15. Price-Level versus Inflation Targeting with Financial Market Imperfections By Francisco Covas; Yahong Zhang
  16. Are Bygones not Bygones? Modeling Price Level Targeting with an Escape Clause and Lessons from the Gold Standard By Paul R. Masson; Malik D. Shukayev
  17. Multivariate structural time series models with dual cycles : implications for measurement of output gap and potential growth By Philippe Moës
  18. Learning from Prices: Public Communication and Welfare By Manuel Amador; Pierre-Olivier Weill
  19. Is the Great Moderation Ending? UK and US Evidence By Giorgio Canarella; WenShwo Fang; Stephen M. Miller; Stephen K. Pollard
  20. Monetary Pressures and Inflation Dynamics in Turkey: Evidence from P-Star Model By K. Azim Ozdemir; Mesut SaygÝlÝ
  21. Lines of monetary transmission optimization under conditions of transition economy By Lepushynskyy, Volodymyr
  22. Money Demand Stability and Inflation: Prediction in the Four Largest EMU Countries By Abelardo Salazar Neaves; Oliver Hossfeld; Jan Hagen; Kai Carstensen
  23. Theoretical and empirical shortcomings of the Kaleckian investment function By Peter Skott
  24. Optimality criteria of hybrid inflation-price level targeting By Bokor, László
  25. Monitoring business cycles with structural changes By Chauvet, Marcelle; Potter, Simon
  26. Financial uncertainty and business investment By Engelbert Stockhammer; Lucas Grafl
  27. Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter? By Ortiz, Alberto; Pablo, Ottonello; Sturzenegger, Federico; Talvi, Ernesto
  28. Growth, instability and cycles: Harrodian and Kaleckian models of accumulation and income distribution By Peter Skott
  29. Evaluating the German (New Keynesian) Phillips Curve By Rolf Scheufele
  30. Eurosystem Communication and Financial Market Expectations By Patrick Luennemann and Dirk Mevis Author-Email1: Author-Email2:
  31. Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s By Monique Ebell; Albrecht Ritschl
  32. How hard can it be? Inflation control around the world By Thórarinn G. Pétursson
  33. Fiscal policy economic reforms. By Reddy, Y.V.
  34. Managing capital flows: The case of India. By Shah, Ajay; Patnaik, Ila
  35. Financial Accelerator Mechanism in a Small Open By Martha R. López; Juan D. Prada; Norberto Rodríguez Niño
  36. Great moderation at the firm level? Unconditional versus conditional output volatility By Buch, Claudia M.; Döpke, Jörg; Stahn, Kerstin
  37. Frontiers in Monetary Theory and Policy: Summary of the 2008 International Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan By Ippei Fujiwara; Kazuo Fukuda; Ichiro Muto; Yosuke Shigemi; Wataru Takahashi
  38. Productivity, Preferences and UIP Deviations in an Open Economy Business Cycle Model By Jagjit S. Chadha
  39. Das makroökonometrische Modell des IWH: Eine angebotsseitige Betrachtung By Rolf Scheufele
  40. A Mean-Variance Explanation of FDI Flows to Developing Countries By Eva Rytter Sunesen
  41. Nonlinear Difference Equations, Bifurcations and Chaos: An Introduction By Jean-Michel Grandmont
  42. Geographic Deregulation and Commercial Bank Performance in US State Banking Markets By YongDong Zou; Stephen M. Miller; Bernard Malamud
  43. An approximate consumption function By Mario Padula
  45. The Euro Changeover in the Slovak Republic: Implications for Inflation and Interest Rates By Felix Hüfner; Isabell Koske
  46. Combining Forecast Densities from VARs with Uncertain Instabilities By James Mitchell; Jore, A. S., Vahey, S. P.
  47. Macroeconomic Volatility and Stock Market Volatility, Worldwide By Francis X. Diebold; Kamil Yilmaz
  48. The Macro Management of Commodity Booms: Africa and Latin America's Response to Asian Demand By Rolando Avendaño; Helmut Reisen; Javier Santiso
  49. Deciding on Monetary Integration: An Operational Approach By Powell, Andrew; Sturzenegger, Federico
  50. The State of Macro By Olivier J. Blanchard
  51. Product Market Deregulation and the U.S. Employment Miracle By Monique Ebell; Christian Haefke
  52. The Distribution of Congressional Spending During the American Revolution, 1775-1780: The Problem of Geographic Balance By Farley Grubb
  53. Can Central Bank Interventions Affect the Exchange Rate Volatility? Multivariate GARCH Approach Using Constrained Nonlinear Programming By Tolga Caskurlu; Mustafa C. Pinar; Aslihan Salih; Ferhan Salman
  54. A New Perspective on the Relationship Between House Prices and Income By Quan Gan; Robert J. Hill
  55. Stochastic Optimization in Econometric Models – A Comparison of GA, SA and RSG By Agapie, Adriana
  56. Robust Equilibrium Yield Curves By Isaac Kleshchelski; Nicolas Vincent
  57. On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity By Fehr, Ernst; Brown, Martin; Zehnder, Christian
  58. Macroeconomic Volatility and Stock Market Volatility, World-Wide By Francis X. Diebold; Kamil Yilmaz
  59. Dating and forecasting turning points by Bayesian clustering with dynamic structure: A suggestion with an application to Austrian data. By Sylvia Kaufmann
  60. Private Money as a Competing Medium of Exchange By Mark Pingle; Sankar Mukhopadhyay
  61. Experience vs. Obsolescence: A Vintage-Human-Capital Model By Kredler, Matthias
  62. International Portfolio Inflows to GCC Markets. Are There any General Patterns? By Balli, Faruk; Osman, Mohammad; Louis, Rosmy J.
  63. Política monetaria para la coyuntura y el mediano plazo: Observaciones y Conjeturas By Carlos Esteban Posada; Luis Eduardo Arango
  64. Stress Testing Linkages between Banks in the Netherlands By van Lelyveld, Iman; Liedorp, Franka; Pröpper, Marc
  65. Is the Washington Consensus Dead? Growth, Openness, and the Great Liberalization, 1970s-2000s By Antoni Estevadeordal; Alan M. Taylor
  66. Early warnings of infation in India. By Bhattacharya, Rudrani; Patnaik, Ila; Shah, Ajay
  67. Evaluating communication strategies for public agencies: transparency, opacity, and secrecy By Axel Lindner
  68. Choice and Allocation of a Risky Asset through Markets and Prices. By Leonard J. Mirman; Marc Santugini
  69. Modeling the evolution of age-dependent Gini coefficient for personal incomes in the U.S. between 1967 and 2005 By Kitov, Ivan

  1. By: Andrew Atkeson; Patrick J. Kehoe
    Abstract: We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate in this data. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank's policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk which threaten to push inflation off target. This model, while an improvement on standard models, is considered just a starting point for their revision. It leads to critical questions that researchers need to answer as they continue to revise their approach to monetary policy analysis.
    JEL: E5 E52 E58 E6
    Date: 2008–08
  2. By: Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: Macroeconomic policy thinking in India has been rooted in an environment with five key parameters: agricultural shocks rather than a conventional business cycle, a closed economy, deeply distortionary tax policy coupled with a fiscal crisis, financial markets that lacked speculative price discovery, and a monetary policy shaped by deficit financing. This environment has been completely altered through India's integration into the world economy, the rise of one financial market (the equity market), the reduced importance of the monsoon, the rise of conventional business cycle dynamics, a partial abatement of the fiscal crisis and a monetary policy environment with loss of autonomy owing to exchange rate pegging. These changes call for a rethink of the macroeconomic policy framework. The agenda of assuring fiscal stability needs to be seen to its conclusion. Monetary policy and fiscal policy need to be converted into tools for macroeconomic stabilisation.
    Keywords: Macroeconomics
    Date: 2008–05
  3. By: Claus Brand (European Central Bank); Daniel Buncic (School of Economics, University of New South Wales); Jarkko Turunen (European Central Bank)
    Abstract: We use intraday changes in money market rates to construct indicators of news about monetary policy stemming separately from policy decisions and from official communication of the ECB, and study their impact on the yield curve. We show that communication may lead to substantial revisions in expectations of monetary policy and, at the same time, exert a significant impact on interest rates at longer maturities. Thereby, the maturity response pattern to communication is hump-shaped, while that to policy decisions is downward sloping.
    Keywords: money market rates; yield curve; ECB; central bank communication
    JEL: E43 E58
    Date: 2008–08
  4. By: Monique Ebell
    Abstract: This paper considers a real business cycle model with search frictions in the labor market andlabor supply which is elastic along the extensive (participation) margin. Previous authorshave found that such models generate counterfactually procyclical unemployment and apositively-sloped Beveridge curve. This paper presents a calibrated model which does indeedgenerate countercyclical unemployment and a negatively-sloped Beveridge curve despite thepresence of a participation margin.
    Keywords: Unemployment, Business Cycles, Labor Force Participation
    JEL: E24 E32 J21 J64
    Date: 2008–06
  5. By: Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Carlo A. Favero (IGIER – Università Commerciale Luigi Bocconi, Via Salasco 5, 20136 Milan, Italy.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: The long-run relationship between money and prices in the euro area embedded in traditional money demand models with income and interest rates broke down after 2001. We develop a money demand model where investors hold a diversi?fied portfolio with money, domestic and foreign stocks and long-term bonds in which, in addition to the classical wealth effect, also a size and an international portfolio allocation effects arise. The estimated model identifi?es three cointegrating vectors stable over the sample 1980-2007 - a long-run money demand, which depends on income and all risky assets' returns, and two equilibria for the euro area and the US fi?nancial markets. Steady state equilibrium of nominal M3 growth is estimated to be about 7% in 2007 with large standard errors mainly due to uncertainty in asset prices. The gap between actual euro area M3 growth and model-based ?fitted or predicted values helps forecast euro area inflation. JEL Classification: E41, E44, E52, G11, G15.
    Keywords: Euro area money demand, inflation forecasts, monetary policy, portfolio allocation.
    Date: 2008–08
  6. By: André Farber (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Nguyen Huu Tu (The Bureau of the Central Committee of the Communist Party of Vietnam); Tran Tri Dung (InvestVietnam Corp., Vietnam); Quan-Hoang Vuong (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: This study focuses on those substantial changes that characterize the shift of Vietnam’s macroeconomic structures and evolution of micro-structural interaction over an important period of 1991-2008. The results show that these events are completely distinct in terms of (i) Economic nature; (ii) Scale and depth of changes; (iii) Start and end results; and, (iv) Requirement for macroeconomic decisions. The study rejected a suspicion of similarity between the contagion of the Asian financial crisis in 1997-98 and economic chaos in the first half of 2008 (starting from late 2007). The depth, economic settings of, and interconnection between macro choices and micro decisions have all grown up significantly, partly due to a much deeper level of integration of Vietnam into the world’s economy. On the one hand, this phenomenon gives rise to efficiency of macro level policies because the consideration of micro-structural factors within the framework has definitely become increasingly critical. On the other and, this is a unique opportunity for the macroeconomic mechanism of Vietnam to improve vastly, given the context in which the national economy entered an everchanging period under pressures of globalization and re-integration. The authors hope to also open up paths for further empirical verifications and to stress on the fact that macro policies will have, from now on, to be decided in line with changing micro-settings, which specify a market economy and decide the degree of success of any macroeconomic choices.
    Keywords: Financial system; inflation; economic growth; interest rate; exchange rate; FDI; FPI; banking sector; stock markets; monetary and fiscal policy; Vietnam.
    JEL: G10 G18 E22 E31 E44
    Date: 2008–08
  7. By: Vadim Khramov (Department of Economics at Higher School of Eeconomics and Centre for Advanced Studies, Moscow, Russia); Kirill Sosunov (State University – Higher School of Economics)
    Abstract: In recent papers it is shown that in the presence of price stickiness, investment and capital accumulation activity, active monetary policy (MP) rules can lead to indeterminacy under various assumptions about the structure of the model. We analyze the conditions for real indeterminacy to occur in the model with capital accumulation. The key assumption is that we add response to output to the monetary policy rule. In our paper we show that adding Current or Expected Output to MP rule substantially changes the conditions for real indeterminacy to occur. In contrast to some existing research we show that under current-looking with respect to output MP rules indeterminacy is almost impossible; under forward-looking with respect to output MP rules indeterminacy is almost impossible under active MP rules and very likely to occur under passive MP rules. We also show that stability conditions are almost not sensitive to changes in capital share in output and aggregate markup. We provide the nominal determinacy analysis and show that active and forward-looking MP rules with respect to output give better results in stabilizing the economy.
    Keywords: Indeterminacy, Monetary Policy Rules, Capital Accumulation Activity
    JEL: E52 E31 E22
    Date: 2008–07
  8. By: Tomohiro Sugo (Research and Statistics Department, Bank of Japan (E-mail: tomohiro.sugou; Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: This paper derives a generalized optimal interest rate rule that is optimal even under a zero lower bound on nominal interest rates in an otherwise basic New Keynesian model with inflation inertia. Using this optimal rule, we investigate optimal entrance and exit strategies of the zero interest rate policy (ZIP) under the realistic model with inflation inertia and a variety of shocks. The simulation results reveal that the shapes of the entrance and exit strategies in a ZIP change considerably according to the forward- or backward-lookingness of the economy and the size of the shocks. In particular, for large shocks that result in long ZIP periods, the time to the start (end) of the ZIP period is earlier (later) in an economy with inflation inertia than in a purely forward-looking economy. However, these outcomes are surprisingly converse to small shocks that result in short ZIP periods.
    Keywords: Zero Interest Rate Policy, Optimal Interest Rate Rule
    JEL: E52 E58
    Date: 2008–08
  9. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of the simple sum monetary aggregates and the Divisia monetary aggregate indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although traditional comparisons of the series sometimes suggest that simple sum and Divisia monetary aggregates share similar dynamics, there are important differences during certain periods, such as around turning points. These differences cannot be evaluated by their average behavior. We use a factor model with regime switching. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each individual series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors reveal where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginnings and ends of economic recessions, and during some high interest rate phases. We note the policy relevance of the inferences. Indeed, as Belongia (1996) has observed in this regard, "measurement matters."
    Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; state space; Markov switching; monetary policy; index number theory; factor models
    JEL: E58 E52 E40
    Date: 2007–07
  10. By: Giovanni Olivei; Silvana Tenreyro
    Abstract: Systematic differences in the timing of wage setting decisions among industrialized countriesprovide an ideal framework to study the importance of wage rigidity in the transmission ofmonetary policy. The Japanese Shunto presents the most well-known case of bunching inwage setting decisions: From February to May, most firms set wages that remain in placeuntil the following year; wage rigidity, thus, is relatively higher immediately after the Shunto.Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of thecalendar year. In contrast, wage agreements in Germany are well-spread within the year,implying a relatively uniform degree of rigidity. We exploit variation in the timing of wagesettingdecisions within the year in Japan, the United States, Germany, the United Kingdom,and France to investigate the effects of monetary policy under different degrees of effectivewage rigidity. Our findings lend support to the long-held, though scarcely tested, view thatwage-rigidity plays a key role in the transmission of monetary policy.
    Keywords: monetary policy, wage rigidity, seasonality
    JEL: E1 E52 E58 E32 E31
    Date: 2008–06
  11. By: Martin Schneider (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,); Gerhard Fenz (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: We analyze the transmission of structural shocks between the US and the euro area within a two-country VAR framework. For that purpose, we simultaneously identify cost-push, demand and monetary policy shocks for both countries using sign restrictions. Our results show that domestic shocks explain the largest share of the forecast error variances for GDP, consumer prices and the interest rate in both countries in the short run, whilst spillovers from the other country and global factors gain importance in the medium run. The strength of the shock transmission between the two countries is quite symmetric. Our approach to the identification of structural shocks allows us to construct confidence bands that account both for estimation and identification uncertainty. We find impulse responses to domestic shocks to be significant while spillovers across countries are insignificant.
    Keywords: VAR, shock transmission, sign restrictions, Metropolis-Hastings, confidence intervals, bootstrap.
    JEL: C32 E37 E40
    Date: 2008–07–21
  12. By: S.G.B. Henry
    Abstract: Recent applied macroeconomic research has been concerned with the effects of both labour market reforms and the delegation of monetary policy to an inflation-averse central bank as ways of improving inflation and unemployment outcomes. The experience of the UK over the recent past following the introduction of changes to the labour market in the 1980s and of inflation targeting and instrument independence for the Bank of England in the 1990s, has often been held up as illustrations of the beneficial effects of regime changes of this sort. Others have contradicted these views, including those who have drawn attention to the weakness in the empirical evidence favouring effects from labour market reforms, and others who argue that a combination of beneficial international events and monetary policy mistakes have played an important part in the U.K.’s recent successes. We review the case for regime change from either of these sources; labour market and monetary, in an application to the U.K using an model which integrates both. The results indicate two things; the importance of allowing for the openness of the UK economy in “behavioural” econometric models of the natural rate, and the importance of allowing for policy “mistakes”. Based on our analysis, we conclude that recent changes in UK monetary policy or the labour market institutions seem unlikely to have made an important contribution to the improvements in UK economic performance. Effects originating overseas appear to play an important role in unemployment changes in the U.K. Policy mistakes appear to have had important effects on inflation over the last two decades, and a proper allowance for these is needed before any firm judgements of the benefits of monetary policy delegation can be reached.
    Date: 2008–01
  13. By: Stephen G. Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
    Abstract: The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period’s expectation of future inflation. Most empirical estimates of the NKPC, typically based on Generalized Method of Moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this paper examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying-coefficient (TVC) estimation, a procedure that allows us to directly confront specification biases and spurious relationships. Using three separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.
    Keywords: New Keynesian Phillips Curve; time-varying coefficients; spurious relationships
    JEL: C51 E31
    Date: 2008–08
  14. By: Hirokazu Ishise (Department of Economics, Boston University (E-mail:; Nao Sudo (Corresponding author, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Despite the theoretical prediction based on sticky-price models, it is empirically suggested that the tie between the frequencies of price adjustment across goods and the relative price responses of goods (price index of specific goods over non-durable aggregate price index) to a monetary policy change is limited.We offer an alternative view of the price dynamics of goods. We develop a multi-sector extension of an inventory-theoretic model of money demand (segmented market model). In our model, the diversity in the characteristics of goods, that is, durability, luxuriousness and cash intensity (the portion of the payment that is paid by cash in the purchase of goods), yields the dispersion of relative prices responses to a monetary policy shock, across goods. The model implies that the relative prices of durables, luxuries and less cash-intensive goods tend to decline in a monetary contraction. We test the empirical plausibility of our model, using two approaches: a measure of monetary policy shock developed by Romer and Romer (2004), and a factor-augmented VAR used in Bernanke et al. (2005). In both econometric methodologies, we find that the data are consistent with our model, in terms of durability and luxuriousness.
    Keywords: Baumol-Tobin model, Durable; Luxury, Credit goods, Monetary policy
    JEL: E5 E6
    Date: 2008–08
  15. By: Francisco Covas; Yahong Zhang
    Abstract: This paper compares price-level-path targeting (PT) with inflation targeting (IT) in a sticky-price, dynamic, general equilibrium model augmented with imperfections in both the debt and equity markets. Using a Bayesian approach, we estimate this model for the Canadian economy. We show that the model with both debt and equity market imperfections fits the data better and use it to compare PT versus the estimated current IT regime. We find that in general PT outperforms the current IT regime. However, the gain is lower when financial market imperfections are taken into account.
    Keywords: Monetary policy framework; Inflation targets; Economic models
    JEL: E40 E50
    Date: 2008
  16. By: Paul R. Masson; Malik D. Shukayev
    Abstract: Like the gold standard, price level targeting (PT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I, resumption in the 1920s (for some countries at a different parity), and final abandonment is reviewed. It suggests that PT would likely operate with an escape clause that allowed rebasing of the price target in the face of large output declines. Using a calibrated general equilibrium model, we show that such an escape clause can produce multiple equilibria. For some parameterizations, there is a low credibility equilibrium (with high expectation of a reset) associated with high output volatility and frequent resets. These problems reduce the expectational advantage of PT over inflation targeting.
    Keywords: Credibility; Monetary policy framework
    JEL: E31 E52
    Date: 2008
  17. By: Philippe Moës (National Bank of Belgium, Research Department)
    Abstract: Structural time series models applied to the factor inputs of a production function often lead to small output gaps and consequently to erratic measures of potential growth. We introduce a dual cycle model which is an extension to the multivariate trend plus cycle model with phase shifts à la Rünstler. The dual cycle model is a combination of two types of models: the trend plus cycle model and the cyclical trend model, where the cycle appears in the growth rate of a variable. This property enables hysteresis to be taken into account. Hysteresis is likely to show up in unemployment but it can also affect the capital stock due to the existence of long investment cycles. In the proposed model, hysteresis may affect all the factor inputs of the production function and phase shifts are extended to the dual cycles. Genuine measures of potential growth can be computed that are hysteresis-free and less prone to volatility. A complementary measure of the output gap that takes hysteresis into account can be derived
    Keywords: Output gap, potential growth, hysteresis, structural time series models
    JEL: C32 E32
    Date: 2008–08
  18. By: Manuel Amador; Pierre-Olivier Weill
    Abstract: We study the effect of releasing public information about productivity or monetary shocks when agents learn from nominal prices. While public releases have the benefit of providing new information, they can have the cost of reducing the informational efficiency of the price system. We show that, when agents have private information about monetary shocks, the cost can dominate, in that public releases increase uncertainty about fundamentals. In some cases, public releases can create or eliminate multiple equilibria. Our results are robust to adding velocity shocks, imperfectly observable prices, large idiosyncratic shocks, and introducing a bond market.
    JEL: D83 E40 E58 E61
    Date: 2008–08
  19. By: Giorgio Canarella (California State University, Los Angeles, and University of Nevada, Las Vegas); WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, las Vegas); Stephen K. Pollard (California State University, Los Angeles)
    Abstract: The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories -- good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist . energy-price and housing-price shocks
    Keywords: Great Moderation, Regime switching, SWARCH
    JEL: C32 E32 O40
    Date: 2008–08
  20. By: K. Azim Ozdemir; Mesut SaygÝlÝ
    Date: 2008
  21. By: Lepushynskyy, Volodymyr
    Abstract: An essential condition of the effectiveness of price-stability-based monetary regime is availability of an efficient mechanism for transmission of monetary policy impulses to the real sector of economy. Characteristic of the economy of Ukraine, the same as many other transition economies is the existence of institutional and structural factors that reduce the effectiveness of monetary transmission mechanism. This paper discusses the above mentioned factors and measures aimed to strengthen the efficiency of transmission mechanism of monetary policy.
    Keywords: monetary policy; monetary transmission mechanism; transition economy
    JEL: E5
    Date: 2008–05
  22. By: Abelardo Salazar Neaves; Oliver Hossfeld; Jan Hagen; Kai Carstensen
    Abstract: In this paper we analyze the money demand functions of the four largest EMU countries and of the four-country (EMU-4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU-4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU-4 and country-specific measures of money overhang. We find that the EMU-4 overhang measure strongly correlates with the countryspecific measures, particularly since the start of EMU, and is useful to predict country-specific inflation. However, it generally does not encompass country-specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator fort he disaggregate level
    Keywords: Money demand, stability, money overhang, inflation forecast
    JEL: E41 E52
    Date: 2008–07
  23. By: Peter Skott (University of Massachusetts, Amherst)
    Abstract: The specification of the accumulation function is critical for the properties and implications of structuralist and post-Keynesian models. A large Kaleckian literat- ure assumes that investment is relatively insensitive to variations in the utilization rate of capital, and this extension of a standard short-run "Keynesian stability con- dition" to the long run has been defended by Lavoie and Dutt, among others. This paper examines the theoretical and empirical arguments for and against a Kaleckian specification. JEL Categories: E12, E32
    Keywords: Kalecki, Harrod, investment function, stability, post keynesian theory, utilization rate, excess capacity
    Date: 2008–08
  24. By: Bokor, László
    Abstract: This paper provides a comprehensive analysis of the relative performance of inflation targeting, price level targeting, and hybrid targeting of them in a simple three-period steady state to steady state economy facing transmission lag, and derives optimal policies implementing commitment solution under all set of hybrid expectations, social preference, and cost-push shock persistence. The main intention of the examination is to reveal the nature of the interrelations between economic and policy parameters.
    Keywords: inflation targeting; price level targeting; hybrid targeting; optimal policy
    JEL: E58 E52 E50
    Date: 2007–09
  25. By: Chauvet, Marcelle; Potter, Simon
    Abstract: This paper examines the predictive content of coincident variables for monitoring U.S. recessions in the presence of instabilities. We propose several specifications of a probit model for classifying phases of the business cycle. We find strong evidence in favor of the ones that allow for the possibility that the economy has experienced recurrent breaks. The recession probabilities of these models provide a clearer classification of the business cycle into expansion and recession periods, and superior performance in the ability to correctly call recessions and to avoid false recession signals. Overall, the sensitivity, specificity, and accuracy of these models are far superior as well as their ability to timely signal recessions. The results indicate the importance of considering recurrent breaks for monitoring business cycles.
    Keywords: Recession; Instability; Bayesian Methods; Probit model; Breaks.
    JEL: E32 C35 C11
    Date: 2007–12–31
  26. By: Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.); Lucas Grafl (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: The paper seeks to contribute to the empirical analysis of financial uncertainty and investment from a Post Keynesian perspective. The paper uses the volatility of the exchange rate, the volatility of the stock market index, and the real gold price as indicators for financial uncertainty. An increase in the volatility of a variable is a sufficient, but not a necessary condition for an increase in uncertainty (regarding this variable). The effects of changes in uncertainty on investment are investigated econometrically for the USA, the UK, the Netherlands, Germany, and France. Financial uncertainty has significant negative effects in the USA and the Netherlands.
    JEL: E12 E20 E22 E25 E61
    Date: 2008–08
  27. By: Ortiz, Alberto (Boston U); Pablo, Ottonello (Ceres); Sturzenegger, Federico (Harvard University and Universidad Torcuato Di Tella); Talvi, Ernesto (Ceres)
    Abstract: In this paper we ask whether tighter monetary and fiscal policies are the right way to face a sudden stop (a sudden curtailment in capital flows) in a typical emerging economy. We develop exogenous measures of fiscal and monetary policy response and conclude that tighter policies are associated to larger falls in output. The conclusion of the analysis is not so much that macro policies should be relaxed upon a crisis, but that countries should prepare themselves by creating the conditions to be able to act countercyclically upon such events. This entails among other things reducing balance sheet mismatches or strenghtening fiscal results during expansions.
    Date: 2007–11
  28. By: Peter Skott (University of Massachusetts, Amherst)
    Abstract: This paper compares Kaleckian and Harrodian models of accumulation. The sim- plicity of the canonical Kaleckian model is appealing but more complex Harrodian specifications are preferable from a behavioral perspective. The local instability of Harrodian-inspired specifications, moreover, offers a unified understanding of both trend and cycles. JEL Categories: E12, E32, O41
    Keywords: Kalecki, Harrod, Kaldor, Robinson, Steindl, investment function, sta- bility, growth cycle, reserve army, multiple equilibria.
    Date: 2008–08
  29. By: Rolf Scheufele
    Abstract: This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of firms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a fixed firm-specific capital stock. A GMM estimation strategy is employed as well as an identification robust method that is based upon the Anderson-Rubin statistic. We find out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that firms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where firms never re-optimize prices. This analysis also offers some explanations why previous results for the German NKPC based on GMM differ considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspecifications may be left undetected by conventional J tests. Taken together, this analysis points out the need for identification robust methods to get reliable estimates for the NKPC.
    Keywords: Inflation dynamics; Phillips Curve; Weak Instruments; Optimal Instruments
    JEL: E31 C13 C52
    Date: 2008–08
  30. By: Patrick Luennemann and Dirk Mevis Author-Email1: Author-Email2:
    Abstract: This paper studies the impact of Eurosystem Governing Council communication on financial markets? interest rate expectations based on evidence from bond markets, futures markets and options markets. First,we find that the level, the dispersion and the asymmetry of interest rate expectations are affected on Council meeting days. However, such effects may be relatively short-lived. Moreover, we find that interest rate expectations tend to become less volatile during the black out period. Second, monetary policy meetings tend to affect interest rate expectations much more strongly than data releases. Third, whereas the impact of monetary policy decisions seems to be particularly concentrated and strong around horizons of 2 years, the effect of euro area data releases on rate expectations seem to unfold in a more evenly distributed manner at longer horizons as well. Fourth, keywords may foster the (very) short-run predictability of the Eurosystem monetary policy. However, keywords do not seem to have a systematic impact on interest rate expectations over longer horizons.
    Date: 2008–03
  31. By: Monique Ebell; Albrecht Ritschl
    Abstract: We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into theGreat Depression after 1929 in a unified framework. The model combines monopolistic productmarket competition with search frictions in the labor market, allowing for both individual andcollective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility ofthis period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly powerin the economy. A shift from individual to collective bargaining presents as a recession, involvingdeclines in output and asset values, and increases in unemployment and real wages. The pro-unionprovisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I,leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Courtdecisions in late 1921 induced a shift back to individual bargaining, leading the economy out of therecession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hooveradministrations enabled a major rise in corporate profits and stock market valuations throughout the1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms toadopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributingsubstantially to the stock market crash. We model the onset of the Great Depression as an equilibriumswitch from individual wage bargaining to (actual or mimicked) collective wage bargaining. Thegeneral equilibrium effects of this regime change are consistent with large decreases in output,employment, and stock prices and moderate increases in real wages.
    Keywords: Trade unions, collective bargaining, Great Depression
    JEL: E24 E27 J51 J64 N12 N22
    Date: 2008–06
  32. By: Thórarinn G. Pétursson
    Abstract: During the last two decades, the level and variability of inflation has declined across the world. Some countries have, however, had more success in controlling inflation than others, and the fact is that these countries are usually the same countries that have been more successful over longer periods. The focus of this paper is to try to understand what factors explain this difference in inflation performance and, in particular, why inflation turns out to be more volatile in very small, open economies and in emerging and developing countries than in the large and more developed ones. Using a country sample of 42 of the most developed countries in the world spanning the period 1985-2005, the results suggest three main explanations: the volatility of currency risk premiums, the degree of exchange rate pass-through to inflation, and the size of monetary policy shocks. These three variables explain about three-quarters of the cross-country variation in inflation volatility. The results are found to be robust to changes in the country sample and to different estimation methods. In particular, they do not seem to arise because of reverse causality due to possible endogeneity of the explanatory variables.
    Date: 2008–08
  33. By: Reddy, Y.V. (National Institute of Public Finance and Policy)
    Abstract: Given a parctitioner's perspective of fiscal policy and economic reforms based on his working experience from different Indian and International government institutions.
    Keywords: Fiscal Policy ; Economic Reforms
    Date: 2008–06
  34. By: Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: From the early 1990s, India embarked on easing capital controls. Liberalization emphasised openness towards equity flows, both FDI and portfolio flows. In particular, there are few barriers in the face of portfolio equity flows. In recent years, a massive increase in the value of foreign ownership of Indian equities has come about, largely reflecting improvements in the size, liquidity and corporate governance of Indian firms. While the system of capital controls appears formidable, the de facto openness on the ground is greater than is apparent, particularly because of the substantial enlargement of the current account. These changes to capital account openness were not accompanied by commensurate monetary policy reform. The monetary policy regime has consisted essentially of a pegged exchange rate to the US dollar throughout. Increasing openness on the capital account, coupled with exchange rate pegging, has led to a substantial loss of monetary policy autonomy. The logical way forward now consists of bringing the de jure capital controls uptodate with the de facto convertibility, and embarking on reforms of the monetary policy framework so as to shift the focus of monetary policy away from the exchange rate to domestic inflation.
    Keywords: International investment ; Long term capital movements ; International lending and debt problems ; Monetary sysytems
    JEL: F21 F34 E42
    Date: 2008–05
  35. By: Martha R. López; Juan D. Prada; Norberto Rodríguez Niño
    Abstract: Using Bayesian estimation techniques, we estimate a small open economy DSGE model with credit-market imperfections for the Colombian economy. Us- ing the estimated model we investigate what are the sources of business cycle °uctuations. We show that balance-sheet e®ects play an important role in ex- plaining recent Colombian business cycles. We then perform a counterfactual exercise that shows that ¯xed exchange rate regime could have exacerbated the ¯nancial distress in the economy between 1998-1999.
    Date: 2008–08–18
  36. By: Buch, Claudia M.; Döpke, Jörg; Stahn, Kerstin
    Abstract: Aggregated output in industrialized countries has become less volatile over the past decades. Whether this “Great Moderation” can be found in firm level data as well remains disputed. We study the evolution of firm level output volatility using a balanced panel dataset on German firms that covers 35 years (1971-2005) and about 1,500 firms per year. In contrast to earlier work using firm level data, we use the multifactor residual model proposed by Pesaran (2006) to isolate the idiosyncratic component of firms’ real sales growth from macroeconomic developments. Our paper has three main findings. First, time trends in unconditional firm level and aggregated output volatility in Germany are similar. There has been a long-run downward trend, which was interrupted by the unification period. Second, the conditional, idiosyncratic firm level volatility does not exhibit a downward trend. If anything idiosyncratic volatility has been on a slow trend rise. Third, we find evidence of a positive link between growth and volatility at the firm level.
    Keywords: firm level volatility, Great Moderation, multifactor residual model
    JEL: D21 E32
    Date: 2008
  37. By: Ippei Fujiwara (Director and Deputy Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kazuo Fukuda (General Manager, Sendai Branch, Bank of Japan (E-mail:; Ichiro Muto (Deputy Director, Global Economic Research Section, International Department, Bank of Japan (E-mail:; Yosuke Shigemi (Director and Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Wataru Takahashi (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Date: 2008–08
  38. By: Jagjit S. Chadha
    Abstract: We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.
    Keywords: current account dynamics; real exchange rates; incomplete markets; financial frictions
    JEL: E32 F32 F41
    Date: 2008–08
  39. By: Rolf Scheufele
    Abstract: This paper describes the IWH macroeconometric model, a quarterly structural model for the German Economy. It focuses on the specification and estimation on supply-side aspects of the model. This approach guarantees a theoretical derived long-run model equilibrium. It combines short-run forecasting requirements with a long-run theoretical foundation. For some macroeconomic aggregates short- and long-run effects of supply- and demand shocks are illustrated. Additionally, effects of external shocks are investigated through model simulations to illustrate aggregate model characteristics.
    Keywords: Macroeconometric model; German economy; Policy simulations
    JEL: C3 C51 E17
    Date: 2008–08
  40. By: Eva Rytter Sunesen (Department of Economics, University of Copenhagen)
    Abstract: An important feature of the world economy is the close global and regional integration due to strong trade and investment relations among countries. The high degree of integration between countries is likely to give rise to business cycle synchronisation in which case shocks will spillover from one country to another. This will have implications for the way investors evaluate the return and risk of investing abroad. This paper utilises a simple mean-variance optimisation framework where global and regonal factors capture the interdependence between countries. The model implies that FDI is driven by the risk-adjusted rate of return as well as global and regional spillovers. The preditions of the model are con…rmed in a sample of 60 countries over the period 1970-2000.
    Keywords: foreign direct investment, risk, portfolio, business cycles
    JEL: F21 G11 R11 E32
    Date: 2008–08
  41. By: Jean-Michel Grandmont (Department of Economics, University Of Venice Cà Foscari)
    Abstract: The aim of these lecture notes is to present a few mathematical facts about the bifurcations of nonlinear difference equations, in a concise and simple form that might be useable by economic theorists.
    Keywords: Nonlinear dynamics, Bifurcations, Chaos, Business cycles
    JEL: C02 C61 E32
    Date: 2008
  42. By: YongDong Zou (Sany Group); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Bernard Malamud (University of Nevada, Las Vegas)
    Abstract: This paper examines the effects of geographical deregulation on commercial bank performance across states. We reach some general conclusions. First, the process of deregulation on an intrastate and interstate basis generally improves bank profitability and performance. Second, the macroeconomic variables -- the unemployment rate and real personal income per capita -- and the average interest rate affect bank performance as much, or more, than the process of deregulation. Finally, while deregulation toward full interstate banking and branching may produce more efficient banks and a healthier banking system, we find mixed results on this issue.
    Keywords: commercial banks, geographic deregulation, bank performance
    JEL: E5 G2
    Date: 2008–08
  43. By: Mario Padula (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper proposes an approximation to the consumption function in the buffer-stock model. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.
    Keywords: Buffer stock model of saving, Computational methods, Approximation methods and estimation
    JEL: C63 D12 E21
    Date: 2008
  44. By: Ali Al-Eyd; Ray Barrell; E. Philip Davis
    Abstract: Recently there has been growing interest in examining the potential short-term link between survey-based confidence indicators and real economic activity, notably for macroeconomic policy making. This paper builds on previous studies to establish whether there is a short-term predictive relationship between measures of consumer confidence and actual consumption, which could be used for forecasting, in a range of major industrial countries. It then extends such previous analyses by assessing whether this relation has changed over time, and whether we can attribute any time-varying relation to structural developments in the economy, such as financial deepening and the increasing role of house prices in determination of consumption.
    Date: 2008–02
  45. By: Felix Hüfner; Isabell Koske
    Abstract: In January 2009, the Slovak Republic will adopt the euro and become the 16th member of the euro area. This paper investigates the implications of euro adoption in the Slovak Republic for inflation and interest rates with an attempt to quantify their likely size as well as their consequences for the general public. The empirical analysis – which makes use of the experience of the first-wave euro area countries – suggests that the cash changeover will most likely be associated with a moderate increase in consumer prices, estimated at around 0.3%. Policy measures to reduce this effect include public information campaigns, the conversion of publicly administered prices with the exact conversion rate and the reduction of administrative obstacles to increase supply. The minor purchasing power losses associated with this price increase will not be evenly distributed across the population with higher income households and families with children expected to be harder hit than others. Even though the exchange rate vis-à-vis the euro area will be irrevocably fixed, past appreciations of the koruna are still likely to pass-through to some downward pressure on consumer prices, with the cumulative effect estimated to amount to around 1.5% up to mid-2009. In the longer run, the Balassa-Samuelson effect and other factors affecting catch-up economies may raise the Slovak inflation rate above the euro area level. As capital markets have already fully priced in euro membership, no immediate effect on short- and long-term interest rates in the wholesale markets is to be expected for January 2009. In the longer run, euro adoption can be expected to foster financial integration, thereby leading to a convergence of Slovak retail interest rates towards euro area levels. This reduction in retail interest rates will benefit the general public with mortgage borrowers likely to reap the largest benefits. A potential risk of low real interest rates is the emergence of a boom-bust cycle; prudent fiscal policy and further structural reforms, including enhanced competition, would help to counter any such developments. <P>L’adoption de l’euro par la République slovaque : les implications pour l’inflation et les taux d’intérêt <BR>En janvier 2009, la République slovaque adoptera l'euro et deviendra le 16ème membre de la zone euro. Ce document examine les implications de l'adoption de l'euro dans la République slovaque pour l'inflation et les taux d'intérêt avec une tentative d'évaluer quantitativement leur taille probable aussi bien que leurs conséquences pour la population. L'analyse empirique – qui se sert de l'expérience des pays de la zone euro de la première vague – suggère que le changement des liquidités soit très probablement associé à une augmentation modérée des prix à la consommation, estimée à peu près à 0.3 %. Les mesures politiques pour réduire cet effet incluent des campagnes publiques d'information, la conversion des prix publiquement administrés avec le taux de conversion exact et la réduction d'obstacles administratifs pour augmenter l’offre. Les pertes de pouvoir d'achat mineures associées à cette augmentation des prix ne seront pas également distribuées à travers la population; les ménages aux revenus plus élevés et les familles avec des enfants pourraient être frappés plus durement que les autres. Bien que le taux de change vis-à-vis de la zone euro soit irrévocablement fixé, les appréciations passées de la couronne slovaque pourraient encore se répercuter sur les prix à la consommation; l'effet cumulatif des effets retardés est évalué à environ 1½ pour cent jusqu'au milieu de 2009. À plus long terme, l'effet Balassa-Samuelson et d'autres facteurs affectant des économies en rattrapage peuvent accroître l'inflation slovaque au-dessus du niveau de la zone euro. Comme les marchés financiers ont déjà entièrement tenu compte de l'adhésion de l'euro, aucun effet immédiat sur les taux d'intérêt de grande clientèle à court terme ou à long terme n’est attendu pour janvier 2009. À plus long terme, on peut s'attendre à ce que l'adoption de l'euro favorise l'intégration financière, menant ainsi à une convergence des taux d'intérêt aux particuliers vers les niveaux de la zone euro. Cette réduction de taux d'intérêt aux particuliers profitera au grand public avec des emprunteurs hypothécaires récoltant probablement les plus grands avantages. Un risque potentiel lié aux taux d'intérêt réels bas est l'apparition d’une phase d’essor suivie d’une récession ; une politique fiscale prudente et des nouvelles réformes structurelles, y compris l’amélioration de la compétitivité, aideraient à résister à de tels développements.
    Keywords: Slovak Republic, République slovaque, inflation, inflation, interest rate, taux d'intérêt, euro changeover, adoption de l’euro
    JEL: E31 E43 F36
    Date: 2008–08–12
  46. By: James Mitchell; Jore, A. S., Vahey, S. P.
    Abstract: Clark and McCracken (2008) argue that combining real-time point forecasts from VARs of output, prices and interest rates improves point forecast accuracy in the presence of uncertain model instabilities. In this paper, we generalize their approach to consider forecast density combinations and evaluations. Whereas Clark and Mc-Cracken (2008) show that the point forecast errors from particular equal-weight pair wise averages are typically comparable or better than benchmark univariate time series models, we show that neither approach produces accurate real-time forecast densities for recent US data. If greater weight is given to models that allow for the shifts in volatilities associated with the Great Moderation, predictive density accuracy improves substantially.
    Date: 2008–01
  47. By: Francis X. Diebold; Kamil Yilmaz
    Abstract: Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets covering approximately forty countries. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets.
    JEL: E0 G1
    Date: 2008–08
  48. By: Rolando Avendaño; Helmut Reisen; Javier Santiso
    Abstract: Strong growth in China and India has led to improvements in raw-material exporting countries' terms of trade and attracted complementary finance. The long-term challenge for these countries, where institutions are often fragile, is to avoid the so-called “resource curse”. This paper aims to provide a comparative perspective between policy choices in commodity-exporting countries, contrasting the experiences of Africa and Latin America. First, it highlights global macroeconomic links between the Asian Drivers (China and India) and these regions. Second, it discusses optimal policy responses from a macroeconomic and institutional perspective. Third, it presents empirical evidence on macroeconomic, particularly fiscal responses to Dutch disease and the specialisation effects caused by Asian Drivers' demand and assesses the benefits and challenges offered by the Asian Drivers from a macro perspective for both Africa and Latin America. <BR>La forte croissance enregistrée par la Chine et l'Inde a permis aux pays exportateurs de matières premières d'améliorer substantiellement leurs termes de l'échange et d'enregistrer des afflux de capitaux conséquents. A long terme, le défi pour ces pays, aux institutions souvent fragiles, sera d'éviter de tomber dans la trappe de la malédiction des matières premières. Le travail ici présenté se propose d'analyser de manière comparée les réponses en matière de politiques économiques de la part des pays qui bénéficient de cette nouvelle manne, en contrastant en particulier les expériences africaines et latino-américaines. On souligne en premier lieu les liens macro-économiques entre les locomotives asiatiques (Chine et Inde) et ces deux régions. Ensuite, on discute les réponses économiques optimales face à ce choc de demande positif. Enfin, on présente les résultats empiriques et, en particulier, les réponses macroéconomiques en matière budgétaire et commerciale des pays bénéficiaires puis on évalue les bénéfices et les défis aussi bien pour l'Afrique que pour l'Amérique latine.
    Keywords: Latin America, Amérique latine, dutch disease, Africa, Afrique, commodity booms, Asian drivers, boom des matières premières, locomotives asiatiques, maladie hollandaise
    JEL: E62 F00 O11 O57
    Date: 2008–08
  49. By: Powell, Andrew (Inter-American Development Bank and Universidad Torcuato Di Tella); Sturzenegger, Federico (Harvard U and Universidad Torcuato Di Tella)
    Abstract: We develop a simple, n-country model to consider the costs and benefits of joining a monetary union. Our factor-OCA framework encompasses different approaches and allows us to consider the optimal composition of a monetary union for all the potential members. We illustrate the model in practice with various simulations and we develop two empirical applications based on expanding EMU and on whether there would be a benefit to deepening Nafta to be a monetary union. While some commentators have called for a one-world currency, we find full monetary integration has costs for some countries and benefits for others, perhaps explaining why this remains a controversial issue.
    Date: 2007–09
  50. By: Olivier J. Blanchard
    Abstract: For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism and herding. None of this deadly however. The state of macro is good. The first section sets the stage with a brief review of the past. The second argues that there has been broad convergence in vision, and the third reviews the specifics. The fourth focuses on convergence in methodology. The last looks at current challenges.
    JEL: E0 E2 E3 E4 E50
    Date: 2008–08
  51. By: Monique Ebell; Christian Haefke
    Abstract: We consider the dynamic relationship between product market entry regulation andequilibrium unemployment. The main theoretical contribution is combining a job matchingmodel with monopolistic competition in the goods market and individual bargaining. Wecalibrate the model to US data and perform a policy experiment to assess whether thedecrease in trend unemployment during the 1980's and 1990's could be attributed to productmarket deregulation. Under a traditional calibration, our results suggest that a decrease of lessthan two-tenths of a percentage point of unemployment rates can be attributed to productmarket deregulation, a surprisingly small amount. Under a small surplus calibration,however, product market deregulation can account for the entire decline in US trendunemployment over the 1980's and 1990's.
    Keywords: Product market competition, barriers to entry, wage bargaining
    JEL: E24 J63 L16 O00
    Date: 2008–06
  52. By: Farley Grubb
    Abstract: Resources to fight the War for Independence from Great Britain (1775-1783) were to be provided to the U.S. Congress by the individual states based on each state's population share in the united colonies. Congressional spending, however, largely flowed to where the theater of war was located. Thus a geographic imbalance in revenue and spending arose. Because much of the spending was through issuing paper money, geographic variation in inflation as well as in general economic activity resulted. This in turn affected the relative strength of each state's attachment to the union with ramifications on maintaining political unity.
    JEL: E62 H60 H77 N11 N41
    Date: 2008–08
  53. By: Tolga Caskurlu; Mustafa C. Pinar; Aslihan Salih; Ferhan Salman
    Date: 2008
  54. By: Quan Gan (School of Economics, University of New South Wales); Robert J. Hill (School of Economics, University of New South Wales)
    Abstract: We show that a strong linear relationship exists between income and house price quantiles in Sydney (Australia), Houston, and the state of Texas. This suggests that the house price distribution is closely approximated by the income distribution after a location-scale transformation. The slope of the line changes over time in response to changes in the mortgage market. We argue that this finding is consistent with a simple variant on the permanent income hypothesis. We then explore some of the implications with regard to the evolution of house prices, price-to-income ratios, the efficiency of the housing market, the construction and interpretation of hedonic price indexes for housing, and for public policy.
    Keywords: Real Estate; Permanent income; Mortgage market; Housing bubble; Hedonic index
    JEL: C43 E01 E31 G12 R31
    Date: 2008–08
  55. By: Agapie, Adriana
    Abstract: This paper shows that, in case of an econometric model with a high sensitivity to data, using stochastic optimization algorithms is better than using classical gradient techniques. In addition, we showed that the Repetitive Stochastic Guesstimation (RSG) algorithm –invented by Charemza-is closer to Simulated Annealing (SA) than to Genetic Algorithms (GAs), so we produced hybrids between RSG and SA to study their joint behavior. The evaluation of all algorithms involved was performed on a short form of the Romanian macro model, derived from Dobrescu (1996). The subject of optimization was the model’s solution, as function of the initial values (in the first stage) and of the objective functions (in the second stage). We proved that a priori information help “elitist “ algorithms (like RSG and SA) to obtain best results; on the other hand, when one has equal believe concerning the choice among different objective functions, GA gives a straight answer. Analyzing the average related bias of the model’s solution proved the efficiency of the stochastic optimization methods presented.
    Keywords: underground economy, Laffer curve, informal activity, fiscal policy, transitionmacroeconomic model, stochastic optimization, evolutionary algorithms, Repetitive Stochastic Guesstimation
    JEL: E17 C15 C65
    Date: 2008–08
  56. By: Isaac Kleshchelski; Nicolas Vincent (IEA, HEC Montréal)
    Abstract: This paper studies the quantitative implications of the interaction between robust control and stochastic volatility for key asset pricing phenomena. We present an equilibrium term structure model with a representative agent and an output growth process that is conditionally heteroskedastic. The agent does not know the true model of the economy and chooses optimal policies that are robust to model misspecification. The choice of robust policies greatly amplifies the effect of conditional heteroskedasticity in consumption growth, improving the model’s ability to explain asset prices. In a robust control framework, stochastic volatility in consumption growth generates both a state-dependent market price of model uncertainty and a stochastic market price of risk. We estimate the model using data from the bond and equity markets, as well as consumption data. We show that the model is consistent with key empirical regularities that characterize the bond and equity markets. We also characterize empirically the set of models the robust representative agent entertains, and show that this set is ?small?. That is, it is statistically difficult to distinguish between models in this set.
    Keywords: Yield curves, Market price of Uncertainty, Robust control.
    JEL: D81 E43 G11 G12
    Date: 2007–11
  57. By: Fehr, Ernst (University of Zurich); Brown, Martin (Swiss National Bank); Zehnder, Christian (University of Zurich)
    Abstract: We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.
    Keywords: wage rigidity, price rigidity, relational contracts, reciprocity, reputation
    JEL: D82 J3 J41 E24 C9
    Date: 2008–08
  58. By: Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Kamil Yilmaz (Department of Economics, Koc University)
    Abstract: Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets covering approximately forty countries. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets.
    Keywords: Financial market, equity market, asset return, risk, variance, asset pricing
    JEL: G1 E0
    Date: 2008–08–06
  59. By: Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: The information contained in a large panel data set is used to date historical turning points of the Austrian business cycle and to forecast future ones. We estimate groups of series with similar time series dynamics and link the groups with a dynamic structure. The dynamic structure identifies a group of leading and a group of coincident series. Robust results across data vintages are obtained when series specific information is incorporated in the design of the prior group probability distribution. The results are consistent with common expectations, in particular the group of leading series includes Austrian confidence indicators and survey data, German survey indicators, some trade data, and, interestingly, the Austrian and the German stock market indices. The forecast evaluation confirms that the Markov switching panel with dynamic structure performs well when compared to other specifications.
    Keywords: Bayesian clustering, parameter heterogeneity, latent dynamic structure, Markov switching, panel data, turning points.
    JEL: C23 E32
    Date: 2008–06–19
  60. By: Mark Pingle (Department of Economics, University of Nevada, Reno); Sankar Mukhopadhyay (Department of Economics, University of Nevada, Reno)
    Abstract: Using a relatively mild restriction on the beliefs of the MMEU-apreference functional, in which the decision maker’s degree of ambiguity and degree of pessimism are each parameterized, we present a rather general theory of religious choice in the decision theory tradition, one that can resolve dilemmas, address the many Gods objection, and address the inherent ambiguity. Using comparative static analysis, we are able to show how changes in either the degree of ambiguity or the degree of pessimism can lead a decision maker to “convert” from one religion to another. We illustrate the theory of religious choice using an example where the decision maker perceives three possible religious alternatives.
    Keywords: Private money; Speculative demand; Search theory; Medium of exchange
    JEL: E41 E42 E51
    Date: 2008–08
  61. By: Kredler, Matthias
    Abstract: I combine an infinite-horizon version of Ben-Porath’s (1967) model of human-capital accumulation with a vintage structure as in Chari & Hopenhayn (1991). Different skill levelsinside a vintage are complementary in production. Vintage-specific human capital is accumulated based on workers’ optimal strategies and is lost when the technology is phased out by an endogenous firm decision. I establish equivalence between competitive equilibrium and a planner’s problem. It is shown that returns to skill are highest in young vintages. Accelerated technological change shortens the life cycle of a technology and speeds up obsolescence; the premium on tenure rises because more workers are concentrated in young technologies with high skill premia. A calibration exercise comparing two steady states shows that the model quantitatively accounts for the changes in the experience premium, earnings dispersion and earnings turbulence in German data.
    Keywords: Vintage human capital; age-earnings profiles; partial differential equations
    JEL: E24 C63 J01
    Date: 2008–07–28
  62. By: Balli, Faruk; Osman, Mohammad; Louis, Rosmy J.
    Abstract: In this paper, we document the main factors underlying the foreign portfolio inflows to Gulf Corporation Council countries (hereafter GCC) by employing a recently published database of cross-country portfolio holdings by the International Monetary Fund. We find that bilateral factors such as trade volume and debt to GDP ratio between the source and GCC (host) countries play a truly significant role in determining the volume of cross border portfolio inflows to GCC markets. Particularly, there is a strong correlation between trade volume and the volume of portfolio inflows. This connection becomes even stronger over time. Moreover, GCC members’ stable fiscal position (lower debt to GDP ratio) is practically one of the important determinants of the volume of portfolio inflows to GCC markets. Specifically, for the international bond holders, the foremost motivation for investing cross borders is the absence of default risk and the higher return in comparison to other countries. We have also found that the extent of openness in capital account transactions and the income level of source country are additional factors that help to explain the volume of foreign portfolio inflows to GCC members. Last but not least, although there is a remarkable increase in the volume of the international portfolio inflows to GCC countries, there also exists a “GCC bias”, a huge share of the portfolio inflows to GCC markets is coming from the GCC countries. This bias is the notable consequence of the high level financial and economic integration that characterizes the GCC countries as they are heading towards a monetary union. A similar bias occurs in European Union markets as well.
    Keywords: Capital Market Integration; GCC Portfolio Bias; Economic Integration; Bilateral Linkage
    JEL: F15 E44 F41 F36
    Date: 2008–07–06
  63. By: Carlos Esteban Posada; Luis Eduardo Arango
    Abstract: Recientemente se han escuchado voces que se pronuncian en uno y otro sentido en relación con las acciones que debería adoptar la autoridad monetaria de Colombia en esta coyuntura, dados los eventos ocurridos. Este documento tiene como propósito interpretar algunos hechos y concluir que, en cumplimiento de su mandato, la acción que debe adoptar la Junta del Banco de la República es subir la tasa de interés de política hasta que las expectativas de inflación se alineen con la meta en el plazo relevante.
    Date: 2008–08–20
  64. By: van Lelyveld, Iman; Liedorp, Franka; Pröpper, Marc
    Abstract: Assessing the stability of the financial sector is becoming more common in many countries. This paper presents two useful approaches, applied to the Netherlands. First we discuss the results of a contagion analysis of the Dutch interbank market. We use various ways to measure linkages between banks and find that the interbank market is fairly robust. We then turn to a network analysis of payment flows between Dutch banks. This analysis provides us with a better understanding of the network structure in this type of market. We specifically look at the effect of the recent turmoil on the payment network and find no significant changes.
    Keywords: interbank; payment; systemic risk; financial stability; network; topology
    JEL: G1 G2 E5
    Date: 2008–08–04
  65. By: Antoni Estevadeordal; Alan M. Taylor
    Abstract: According to the Washington Consensus, developing countries? growth would benefit from a reduction in tariffs and other barriers to trade. But a backlash against this view now suggests that trade policies have little or no impact on growth. If "getting policies right" is wrong or infeasible, this leaves only the more tenuous objective of "getting institutions right" (Easterly 2005, Rodrik 2006). However, the empirical basis for judging recent trade reforms is weak. Econometrics are mostly ad hoc; results are typically not judged against models; trade policies are poorly measured (or not measured at all, as when trade volumes are spuriously used); and the most influential studies in the literature are based on pre-1990 experience (which predates the "Great Liberalization" in developing countries which followed the GATT Uruguay Round). We address all of these concerns -- by using a model-based analysis which highlights tariffs on capital and intermediate goods; by compiling new disaggregated tariff measures to empirically test the model; and by employing a treatment-and-control empirical analysis of pre- versus post-1990 performance of liberalizing and nonliberalizing countries. We find evidence that a specific treatment, liberalizing tariffs on imported capital and intermediate goods, did lead to faster GDP growth, and by a margin consistent with theory (about 1 percentage point per annum). Endogeneity problems are considered and other observations are consistent with the proposed mechanism: changes to other tariffs, e.g. on consumption goods, though collinear with general tariffs reforms, are more weakly correlated with growth outcomes; and the treatment and control groups display different behavior of investment prices and quantities, and capital flows.
    JEL: E65 F10 F13 F43 F53 N10 N70 O40
    Date: 2008–08
  66. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: In India, year-on-year percentage changes of price indexes are widely used as the measure of ination. In terms of monthly data, each ob- servation of a one-year change in ination is the sum of twelve one- month changes. This suggests that better information about ination- ary pressures can be obtained using point-on-point monthly changes. This requires seasonal adjustment. We apply standard seasonal ad- justment procedures in order to obtain a point-on-point seasonally adjusted monthly time-series of ination in India. In three interesting high ination episodes { 1994-95, 2007 and 2008 - we nd that this data yields a faster and better understanding of inationary pressures.
    Date: 2008–08
  67. By: Axel Lindner
    Abstract: This paper analyses in a simple global games framework welfare effects stemming from different communication strategies of public agencies if strategies of agents are complementary to each other: communication can either be fully transparent, or the agency opaquely publishes only its overall assessment of the economy, or it keeps information completely secret. It is shown that private agents put more weight to their private information in the transparent case than in case of opacity. Thus, in many cases, the appropriate measure against overreliance on public information is giving more details to the public instead of denying access to public information.
    Keywords: transparency; private information; common knowledge
    JEL: D83 E58
    Date: 2008–08
  68. By: Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal)
    Abstract: We study the choice and allocation of a risky asset through markets and prices. This is done by an entrepreneur who faces uncertainty in the real sector. The entrepreneur has access to the financial sector, and may share risk with the investors by issuing shares of a risky asset. Here, the risky asset is equivalent to the distribution of the real profit derived from the choice of output, which integrates the real and financial sectors. The entrepreneur decides the level of output as well as the level of ownership. We present two sets of results. First, there exists a unique equilibrium in which risk is always shared among the entrepreneur and investors. Moreover, financial access enables the entrepreneur to undertake a riskier project without bearing as much risk. Specifically, the entrepreneur’s participation in the financial market affects the distribution of real profit i.e., the choice of the risky asset, by increasing the level of output, which increases the variance of real profit. At the same time, risk sharing decreases the variance of the entrepreneur’s share of real profit. Second, the effects of risk in the economy and agents’ risk aversions on the equilibrium price of the risky asset, as well as the firm’s optimal policies is studied.
    Date: 2008–07
  69. By: Kitov, Ivan
    Abstract: This study validates the microeconomic model defining the evolution of personal incomes in the U.S. Because of a large portion of population not reporting any income, any comprehensive modeling of the overall personal income distribution (PID) is complicated. Age-dependent PIDs allow overcoming this shortcoming since the portion of population without income is very low (<4 %) for ages over 45 years. It is demonstrated that the evolution of Gini coefficient, for the years with a good PID resolution, can be accurately (<0.005) predicted. As the overall PIDs, the empirical age-dependent (density) PIDs collapse to practically one curve when normalized to cumulative growth in personal income and total population in given age groups for the period between 1967 and 2005. This allows exact prediction of Gini coefficient and other measures of inequality, which are defined by PID. Therefore, these measures of income inequality are only of secondary importance In all age groups, the model predicts slightly decreasing Gini coefficients between 1977 and 2005. The overall G is approximately constant, however. The Pareto law index, k, undergoes significant changes over age: increases from the youngest age to approximately 67 years of age, and then drops. This index defines the roll-off at the highest incomes.
    Keywords: Gini coefficient; personal income distribution; age; mean income; microeconomic modelling; USA; real GDP; macroeconomics
    JEL: D31 E17 J1 O12
    Date: 2008–08–20

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