nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒09‒13
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Indeterminate Equilibria in New Keynesian DSGE Model: An Application to the US Great Moderation By Erdemlioglu, Deniz M; Xiao, Wei
  2. Learning and Macroeconomics By George W. Evans; Seppo Honkapohja
  3. The Relativity Theory Revisited: Is Publishing Interest Rate Forecasts Really so Valuable? By Brzoza-Brzezina, Michal; Kot, Adam
  5. Are Central Banks following a linear or nonlinear (augmented) Taylor rule? By Vítor Castro
  6. Comparing constraints to economic stabilization in Macedonia and Slovakia: macro estimates with micro narratives By Melecky, Martin; Najdov, Evgenij
  7. Speed Limit Policies versus Inflation Targeting: A Free Lunch? By Hatcher, Michael C.
  8. Does Monetary Policy React to Asset Prices? Some International Evidence By Francesco FURLANETTO
  9. New Keynesian Models: Not Yet Useful for Policy Analysis By V.V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
  10. The Formation of Inflation Perceptions – Some Empirical Facts for European Countries By Sarah M. Lein; Thomas Maag
  11. International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview. By William Barnett; Marcelle Chauvet
  12. Fluctuations in the Foreign Exchange Market: How Important are Monetary Policy Shocks? By Hafedh Bouakez; Michel Normandin
  13. Money Velocity and Asset Prices in the Euro Area By Christian Dreger; Jürgen Wolters
  14. Intertemporal adjustment and fiscal policy under a fixed exchange rate regime By Aloy, Marcel; Moreno-Dodson, Blanca; Nancy, Gilles
  15. Have Long-term Financial Trends Changed the Transmission of Monetary Policy? By Boris Cournède; Rudiger Ahrend; Robert Price
  16. On the Evolution of Monetary Policy By Gary Koop; Roberto Leon-Gonzalez; Rodney W. Strachan
  17. Business Volatility, Job Destruction, and Unemployment By Steven J. Davis; R. Jason Faberman; John Haltiwanger; Ron Jarmin; Javier Miranda
  18. Minsky’s Upward Instability: the Not-Too-Keynesian Optimism of a Financial Cassandra By Elisabetta De Antoni
  19. The use of staff policy recommendations in central banks By Attila Csajbók
  20. "Macroeconomics Meets Hyman P. Minsky The Financial Theory of Investment" By L. Randall Wray; Eric Tymoigne
  21. Human capital risk in life-cycle economies By Singh, Aarti
  22. "Keynes's Approach to Full Employment Aggregate or Targeted Demand?" By Pavlina R. Tcherneva
  23. Smooth Regimes, Macroeconomic Variables, and Bagging for the Short-Term Interest Rate Process By Francesco Audrino; Marcelo C. Medeiros
  24. Fiscal Adjustment in Southern Europe: the Limits of EMU Conditionality. By Spyros Blavoukos; George Pagoulatos
  25. Inter-relationship between Economic Growth, Savings and Inflation in Asia By Dholakia Ravindra H.
  26. Real exchange rates, saving and growth : is there a link ? By Montiel, Peter J.; Serven, Luis
  27. External and Budget Deficits in Developing Countries By Foued Chihi; Michel Normandin
  28. The Impact of Macroeconomic Uncertainty on Firms' Changes in Financial Leverage By Christopher F. Baum; Atreya Chakraborty; Boyan Liu
  29. Anticipated Tax Reforms and Temporary Tax Cuts: A General Equilibrium Analysis By Strulik, Holger; Trimborn, Timo
  30. Dynamic probabilities of restrictions in state space models: An application to the Phillips curve By Gary Koop; Roberto Leon-Gonzalez; Rodney W. Strachan
  31. The Dynamics of Inequality and Social Security in General Equilibrium By Song, Zheng
  32. Aggregate Shocks vs Reallocation Shocks: an Appraisal of the Applied Literature By Giovanni Gallipoli; Gianluigi Pelloni
  33. Calibrating the Equity Premium under Habit Formation and Catching up with the Joneses By LU, Zhentong
  34. Econometric Analysis of Irreversible Investment with Financial Constraints: Comparison of Parametric and Semiparametric Estimations By ASANO Hirokatsu
  35. Infrastructure and development : a critical appraisal of the macro level literature By Straub, Stephane
  36. Cyclical movements in unemployment and informality in developing countries By Bosch, Mariano; Maloney, William
  37. On the Stability of Domestic Financial Market Linkages in the Presence of time-varying Volatility By Thomas J. Flavin; Ekaterini Panopoulou; Deren Unalmis
  38. International Stock Return Predictability Under Model Uncertainty By Schrimpf, Andreas

  1. By: Erdemlioglu, Deniz M; Xiao, Wei
    Abstract: This paper tests “Bad Policy” Hypothesis which refers to the Great Moderation in the US. We examine this hypothesis by simulating model based impulse response functions for the both pre-Volcker period and post 1982 period. Deriving and simulating standard New Keynesian DSGE Model explicitly, we find that while post 1982 policy i.e. active policy, is consistent with the unique stable equilibrium characteristics; pre-Volcker or passive monetary policy generates equilibrium indeterminacy. Moreover, our simulated-impulse response functions show that the response of inflation and the output gap in post 82 period is weaker than the macroeconomic responses of the pre-Volcker period.
    Keywords: The Great Moderation; Indeterminacy; Determinate Equilibrium; New Keynesian DSGE Model; Monetary Policy; Sunspot shocks.
    JEL: E0 E32 E52
    Date: 2008–05–15
  2. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge)
    Abstract: Expectations play a central role in modern macroeconomic theories. The econometric learning approach models economic agents as forming expectations by estimating and updating forecasting models in real time. The learning approach provides a stability test for rational expectations and a selection criterion in models with multiple equilibria. In addition, learning provides new dynamics if older data is discounted, models are misspecified or agents choose between competing models. This paper describes the E-stability principle and the stochastic approximation tools used to assess equilibria under learning. Applications of learning to a number of areas are reviewed, including the design of monetary and fiscal policy, business cycles, self-fulfilling prophecies, hyperinflation, liquidity traps, and asset prices.
    Keywords: E-stability, least-squares, stochastic approximation, persistent learning dynamics, business cycles, monetary policy, asset prices, sunspots.
    JEL: E32 D83 D84 C62
    Date: 2008–07–11
  3. By: Brzoza-Brzezina, Michal; Kot, Adam
    Abstract: In a New Keynesian model with asymmetric information we show that publication of macroeconomic projections and of the future interest rate path by the central bank can improve macroeconomic outcomes. However, the gains from publishing interest rate paths are small relative to those from publishing macroeconomic projections. Given that most inflation targeting central banks are already publishing macroeconomic projections this means that most gains from increasing transparency in this area may already have been reaped. This, together with the potential costs, may explain the relative reluctance of central banks to publish interest rate paths.
    Keywords: interest rate path; monetary policy; adaptive learning
    JEL: E43 E58 E52
    Date: 2008–07–20
  4. By: Iris Claus; Brandon Sloan
    Abstract: To help maintain price stability in New Zealand a countercyclical use of the goods and services tax (GST) has been proposed. This paper argues that a variable GST rate is unlikely to be a useful stabilisation tool for monetary policy. It first discusses some of the problems that would arise with the implementation of a variable GST rate. It then develops a stylised model of the New Zealand economy to assess the effects of using a variable GST rate as a monetary policy tool relative to the conventional instrument, an interest rate. The results show that a variable GST rate would be less effective in dampening business cycles than an interest rate. It would lead to larger adjustments in the policy instrument and fluctuations in the real economy and inflation. Moreover, a variable GST rate would produce greater welfare losses from monetary policy than an interest rate tool.
    JEL: E32 E52
    Date: 2008–09
  5. By: Vítor Castro (Universidade do Minho - NIPE)
    Abstract: The Taylor rule establishes a simple linear relation between the interest rate, inflation and output gap. However, this relation may not be so simple. To get a deeper understanding of central banks' behaviour, this paper asks whether central banks are indeed following a linear Taylor rule or, instead, a nonlinear rule. At the same time, it also analyses whether that rule can be augmented with a financial conditions index containing information from some asset prices and financial variables. A forward-looking monetary policy reaction function is employed in the estimation of the linear and nonlinear models. A smooth transition model is used to estimate the nonlinear rule. The results indicate that the European Central Bank and the Bank of England tend to follow a nonlinear Taylor rule, but not the Federal Reserve of the United States. In particularm those two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, our evidence suggests that the European Central Bank is targeting financial conditions, contrary to the other two central banks. This lack of attention to the financial conditions might have made the United States and the United Kingdom more vulnerable to the recent credit crunch than the Eurozone.
    Keywords: Taylor rule; ECB monetary policy; Financial Conditions Index; Nonlinearity; Smooth transition regression models.
    JEL: E43 E44 E52 E58
    Date: 2008
  6. By: Melecky, Martin; Najdov, Evgenij
    Abstract: This paper re-emphasizes the link from structural policies to enhanced macroeconomic stabilization using a small structural model estimated on quarterly data for Macedonia and Slovakia over 1995-2007. The success of macroeconomic stabilization, typically in the hands of monetary policy, is not only determined by a suitable choice of the nominal anchor, which shapes the reaction function of monetary policy, but also the constraints within which the monetary policy strives to achieve its objectives. The key attributes of the constraints to macroeconomic stabilization are economic rigidities and structural shocks. By benchmarking the estimated economic rigidities and structural shocks faced by Macedonia to those faced by Slovakia, the authors find that Macedonia has relatively weaker transmission mechanisms of monetary policy, higher output rigidity, and a lower exchange rate pass-through, and faces larger external shocks. For Macedonia, these relatively higher constraints on monetary policy together with the chosen exchange rate anchor result in greater output and inflation volatility relative to Slovakia. Hence, it appears that small, open economies with stronger economic rigidities should apply monetary policy regimes that allow for more flexible adjustments in external relative prices to enhance their macroeconomic stability.
    Keywords: Currencies and Exchange Rates,Economic Theory&Research,Debt Markets,Economic Stabilization,Emerging Markets
    Date: 2008–08–01
  7. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: Inflation targeting is currently popular with central banks. Is this popularity justified? I investigate this question by comparing a speed limit policy and inflation targeting with a Lucas-type Phillips curve capturing output gap persistence. If the output gap is at least moderately persistent, a speed limit policy can: (1) partly eliminate the state-contingent inflation bias, and (2) reduce inflation variability at no output gap variability cost.
    Keywords: inflation targeting; speed limit policy; inflation bias; discretion; stabilisation
    JEL: E50 E52 E58
    Date: 2008–09
  8. By: Francesco FURLANETTO
    Abstract: This paper attempts to measure the reaction of monetary policy to the stock market. We apply the procedure of Rigobon and Sack (2003) to identify and estimate a VAR in the presence of heteroskedasticity. This procedure fully takes into account the endogeneity of interest rates and stock returns that is ignored in the traditional VAR literature. We find a positive and significant reaction in the US and the UK. However, since the end of the 1990s, in a period of large stock market fluctuations, this reaction declines in the US and disappears in the UK. In Japan and the EU, we do not find any reaction. We provide evidence that the lower response to stock prices in the last part of the sample in the US is compensated by a higher response to real estate prices.
    Keywords: monetary policy; stock market; identifcation; VAR; heteroskedasticity
    JEL: E44 E52 E58
    Date: 2008–02
  9. By: V.V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
    Abstract: Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.
    JEL: E32 E58
    Date: 2008–09
  10. By: Sarah M. Lein (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Thomas Maag (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper presents some empirical facts on the dynamics of perceived inflation rates for EU countries. First, we find that perceptions are inefficient and highly heteroge- neous, yet contemporaneously related to the actual rate of inflation. Second, similar to studies on inflation expectations, we estimate how often European consumers up- date their inflation perceptions employing Carroll's (2003) epidemiological model. The advantage of employing perceived instead of expected inflation is that the value of the newest information can exactly be measured: the actual rate of inflation. Our findings indicate that the stickiness of perceptions is generally higher than the stick- iness of expectations. Unlike studies using expectations, however, we cannot confirm that a constant fraction of the population updates information every month. Also observed heterogeneity of perceptions is much higher than implied by the epidemio- logical model.
    Keywords: perceived inflation, sticky information, inattention, expectation formation
    JEL: E31 E50 D83
    Date: 2008–09
  11. By: William Barnett (Department of Economics, The University of Kansas); Marcelle Chauvet (University of California at Riverside)
    Abstract: This paper comprises a survey of a half century of research on international monetary aggregate data. We argue that since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” and have produced decades of misunderstandings in international monetary economics research and policy. While better data, based correctly on index number theory and aggregation theory, now exist, the official central bank data most commonly used have not improved in most parts of the world. While aggregation theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. No other area of economics has been so seriously damaged by data unrelated to valid index number and aggregation theory. In this paper we chronologically review the past research in this area and connect the data errors with the resulting policy and inference errors. Future research on monetary aggregation and policy can most advantageously focus on extensions to exchange rate risk and its implications for multilateral aggregation over monetary asset portfolios containing assets denominated in more than one currency. The relevant theory for multilateral aggregation with exchange rate risk has been derived by Barnett (2007) and Barnett and Wu (2005).
    Keywords: Measurement error, monetary aggregation, Divisia index, aggregation, monetary policy, index number theory, exchange rate risk, multilateral aggregation, open economy monetary economics.
    JEL: E40 E52 E58 C43
    Date: 2008–09
  12. By: Hafedh Bouakez; Michel Normandin
    Abstract: We study the effects of U.S. monetary policy shocks on the bilateral exchange rate between the U.S. and each of the G7 countries. We also estimate deviations from uncovered interest rate parity and exchange rate pass-through conditional on these shocks. The analysis is based on a structural vector autoregression in which monetary policy shocks are identified through the conditional heteroscedasticity of the structural disturbances. Unlike earlier work in this area, our empirical methodology avoids making arbitrary assumptions about the relevant policy indicator or transmission mechanism in order to achieve identification. At the same time, it allows us to assess the implications of imposing invalid identifying restrictions. Our results indicate that the nominal exchange rate exhibits delayed overshooting in response to a monetary expansion, depreciating for roughly ten months before starting to appreciate. The shock also leads to large and persistent departures from uncovered interest rate parity, and to a prolonged period of incomplete pass-through. Variance-decomposition results indicate that monetary policy shocks account for a non-trivial proportion of exchange rate fluctuations.
    Keywords: Conditions heteroscedasticity, delayed overshooting, exchange rate pass-through, identification, structural vector autoregression, uncovered interest rate parity
    JEL: C32 E52 F31 F41
    Date: 2008
  13. By: Christian Dreger; Jürgen Wolters
    Abstract: Monetary growth in the euro area has exceeded its target since several years. At the same time, the money demand function seems to be increasingly unstable if more recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In fact, a rise in the income elasticity after 2001 can be observed, and may reflect the exclusion of real and financial wealth in conventional specifications of money demand. This presumption is explored by means of a cointegration analysis. To separate income from wealth effects, the specification in terms of money velocity is preferred. Evidence for the presence of wealth in the long run relationship is provided. In particular, both stock and house prices have exerted a negative impact on velocity after 2001 and lead to almost identical equilibrium errors. The extended error correction model is stable over the entire sample period and survive a battery of specification tests.
    Keywords: Cointegration analysis, error correction, money demand, financial wealth, monetary policy
    JEL: C22 C52 E41
    Date: 2008
  14. By: Aloy, Marcel; Moreno-Dodson, Blanca; Nancy, Gilles
    Abstract: The paper presents a dynamic model for small to medium open economies operating under a fixed exchange rate regime. The model provides a partial explanation of the channels through which fiscal and monetary policy affects the real exchange rate. An empirical investigation is conducted for the case of Argentina during the currency board period of 1991-2001. Empirical estimates show that fiscal policy may indeed be an efficient instrument for promoting macroeconomic stability insofar as it encourages convergence toward long-run equilibrium and alters the long-term balance between exports and consumption, both private and public. The simulation applied to Argentina shows that if the share of public spending in the economy is higher than the share of imports, an increase in the tax rate will stimulate capital stock slightly, at least in the short term, and depreciate the real effective exchange rate. In the long run, the fiscal policy affects the value of the real exchange rate and consequently external competitiveness.
    Keywords: Currencies and Exchange Rates,Economic Stabilization,Debt Markets,Economic Theory&Research,Emerging Markets
    Date: 2008–04–01
  15. By: Boris Cournède; Rudiger Ahrend; Robert Price
    Abstract: This paper addresses the question of whether and how long-term financial trends may have modified the transmission mechanism from monetary policy decisions to economic activity. The focus is on longterm changes, abstracting from the disruptions created by the 2007-08 financial turmoil which are temporarily affecting the transmission mechanism. The first series of findings is that a number of factors have worked to strengthen the transmission of monetary policy, including more competitive financial markets, higher household indebtedness, greater diversity in the supply of financial products, greater financial integration and more responsive asset pricing mechanisms. However, other factors appear to have simultaneously gone in the direction of weakening transmission of domestic policy, including greater external financial influences, lower exchange-rate pass-through and a broad-based shift towards fixed-rate assets and liabilities. On balance, monetary policy appears to remain a powerful tool for guiding aggregate demand, but a number of changes that have worked to support the strength of transmission have also increased risks to financial stability. <P>Les tendances de fond des marchés financiers ont-elles modifié la transmission <BR>Cette étude aborde la question de savoir dans quelle mesure les tendances de fond des marchés financiers ont pu modifier la transmission de la politique monétaire. L’accent est porté sur les changements de long-terme en faisant abstraction des modifications temporaires du mécanisme de transmission qui résultent des troubles financiers observés en 2007-08. Une première série de résultats indique que plusieurs facteurs ont joué dans le sens de renforcer la transmission de la politique monétaire. Ces facteurs incluent l’intensification de la concurrence sur les marchés financiers, l’accroissement de l’endettement des ménages, la diversification de l’offre de produits financiers et la plus grande réactivité des prix des actifs. Cependant, d’autres facteurs ont agi de manière concomitante dans le sens de réduire la puissance du mécanisme de transmission de la politique monétaire intérieure. Ces facteurs incluent l’accroissement des influences financières extérieures, la plus faible transmission des mouvements de change et le plus grand recours aux emprunts et titres à taux fixe. Au final, il apparaît que la politique monétaire demeure un outil puissant d’orientation de la demande agrégée, mais une partie des changements qui ont préservé la force du mécanisme de transmission se sont effectués au prix de risques accrus pour la stabilité financière.
    Keywords: financial markets, marchés financiers, financial development, développement financier, réglementation, house prices, regulation, monetary policy, politique monétaire, asset prices, prix des actifs, interest rate, taux d'intérêt, financial innovation, innovation financière, transmission, transmission
    JEL: E40 E43 E44 E50 E52 E58
    Date: 2008–09–05
  16. By: Gary Koop (University of Strathclyde, UK and The RImini Centre for Economic Analisys, Italy); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Japan and The RImini Centre for Economic Analisys - Italy); Rodney W. Strachan (University of Queensland, Australia and The RImini Centre for Economic Analisys - Italy)
    Abstract: This paper investigates the evolution of monetary policy in the U.S. using a standard set of macroeconomic variables. Many recent papers have addressed the issue of whether the monetary transmission mechanism has changed (e.g. due to the Fed taking a more aggressive stance against ination) or whether apparent changes are simply due to changes in the volatility of exogenous shocks. A subsidiary question is whether any such changes have been gradual or abrupt. In this paper, we shed light on these issues using a mixture innovation model which extends the class of time varying Vector Autoregressive models with stochastic volatility which have been used in the past. The advantage of our extension is that it allows us to estimate whether, where, when and how parameter change is occurring (as opposed to assuming a particular form of parameter change). Our empirical results strongly indicate that the transmission mechanism, the volatility of exogenous shocks and the correlations between exogenous shocks are all changing (albeit at different times and to di¤erent extents) Furthermore, evolution of parameters is gradual.
    Keywords: structural VAR, monetary policy, Bayesian, mixture innovation model, time varying parameter model
    JEL: C11 C32 E52
    Date: 2008–01
  17. By: Steven J. Davis; R. Jason Faberman; John Haltiwanger; Ron Jarmin; Javier Miranda
    Abstract: Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in the job destruction rate and the volatility of firm-level employment growth rates. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of unemployment. According to these models, a lower intensity of idiosyncratic shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate the importance of this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove big declines in the incidence and rate of unemployment. This evidence implies that the unemployment rate has become much less sensitive to cyclical movements in the job-finding rate.
    JEL: E24 E32 J60
    Date: 2008–09
  18. By: Elisabetta De Antoni
    Abstract: According to this work, the ‘financial instability hypothesis’ is not an interpretation of The General Theory as Minsky (1975, 1986) thought. Keynes and Minsky undoubtedly have much in common. Specifically, both of them recognize the limits of individual and collective rationality. Minsky, however, introduced an upward instability that seems totally foreign to The General Theory. Living in different historical periods, the two authors focused on different realities. Keynes looked at a depressed economy that, as a consequence of its low profit expectations, is dominated by the downswings (by the excess of saving over investment). Minsky looked at a vibrant economy that, as a consequence of its high profit expectations, is dominated by the upswings (by the excess of investment over saving). As a consequence, while a stagnant economy à la Keynes tends to chronic underinvestment and to high and long-lasting unemployment, a vibrant economy à la Minsky is naturally inclined to over-investment and over-indebtedness. In the last decades, useful examples might be the European economy on the one hand and the U.S.A. and U.K. economies on the other. Under this perspective, Minsky might be considered as an author who has extended the economics of Keynes to a vibrant economy, making it more general and modern. The recent sub prime crisis confirms the validity of Minsky’s insights.
    Keywords: Minsky, bounded rationality, business cycles, financial instability
    JEL: B22 E12 E32 G11
    Date: 2008
  19. By: Attila Csajbók (Magyar Nemzeti Bank)
    Abstract: The focus of this paper is on the use of staff policy recommendations in central banks. Based on the responses to a recent survey conducted by the Bank of International Settlements, the paper tries to answer two questions. (1) How (to what extent) do central bank decision-makers make use of staff views regarding the appropriate policy? (2) What institutional features determine the extent to which staff policy views are utilised by decision-makers? The ‘weight’ with which staff policy views are taken into account is proxied by how explicitly they are presented to the policy board. Based on the survey responses about how staff policy views are presented, a Staff Recommendation Explicitness Index (SREI) is constructed for each central bank surveyed. SREI is then regressed on a number of candidate explanatory variables. The results suggest that the use of staff policy views, proxied by SREI, is negatively related to the size of the policy committee. Furthermore, the use of staff policy views seems more pronounced if the committee is consensus-seeker and if the monetary regime is inflation targeting. Tentative explanations are offered for each of these findings.
    Keywords: monetary policy, central bank staff, committee, decision-making.
    JEL: D71 E58
    Date: 2008
  20. By: L. Randall Wray; Eric Tymoigne
    Abstract: Expanding on an approach developed by financial economist Hyman Minsky, the authors of this new working paper present an alternative to the standard "efficient markets hypothesis"--the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike. Coauthors L. Randall Wray and Eric Tymoigne argue that the current financial crisis, which began with the collapse of the U.S. subprime mortgage market in 2007, provides a compelling reason to show how Minsky's approach offers us a solid grounding in the workings of financial capitalism. They examine Minsky's extension to Keynes's investment theory of the business cycle, which allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility--what is well known as his financial instability hypothesis. They then update Minsky's approach to finance with a more detailed examination of asset pricing and the evolution of the banking sector, and conclude with a brief review of the insights that such an approach can provide for analysis of the current global financial crisis.
    Date: 2008–09
  21. By: Singh, Aarti
    Abstract: I study the effect of market incompleteness on the aggregate economy in a model where agents face idiosyncratic, uninsurable human capital investment risk. The environment is a general equilibrium lifecycle model with a version of a Ben-Porath (1967) human capital accumulation technology, modified to incorporate risk. A CARA-normal specification keeps endogenous decisions independent of individual shock realizations. I study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk. Specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital. In the case of career risk, however, only the mean return is increasing in the decision to invest in human capital. With career risk only, stationary equilibria resemble those studied by Aiyagari (1994), and one concludes that the impact of uninsurable idiosyncratic risk is relatively small. With a significant amount of specialization risk however, stationary equilibria are severely distorted relative to a complete markets benchmark. One aspect of this distortion is that human capital is only about 57 percent as large as its complete markets counterpart. This suggests that the two types of risk have very different and quantitatively significant general equilibrium implications. Keywords: Human capital risk, life-cycle, incomplete markets.
    JEL: E24 E21 E20
    Date: 2008–03
  22. By: Pavlina R. Tcherneva
    Abstract: This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to "close the demand gap," are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an "on the spot" approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.
    Date: 2008–08
  23. By: Francesco Audrino; Marcelo C. Medeiros
    Abstract: In this paper we propose a smooth transition tree model for both the conditional mean and the conditional variance of the short-term interest rate process. Our model incorporates the interpretability of regression trees and the flexibility of smooth transition models to describe regime switches in the short-term interest rate series. The estimation of such models is addressed and the asymptotic properties of the quasi-maximum likelihood estimator are derived. Model specification is also discussed. When the model is applied to the US short-term interest rate we find (1) leading indicators for inflation and real activity are the most relevant predictors in characterizing the multiple regimes' structure; (2) the optimal model has three limiting regimes, with significantly different local conditional mean and variance dynamics. Moreover, we provide empirical evidence of the strong power of the model in forecasting the first two conditional moments of the short rate process, in particular when it is used in connection with bootstrap aggregating (bagging).
    Keywords: Short-term interest rate, Regression tree, Smooth transition, Conditional variance, Bagging, Asymptotic theory
    JEL: C13 C22 C51 C53
    Date: 2008–08
  24. By: Spyros Blavoukos; George Pagoulatos
    Abstract: The EMU fiscal adjustment paths of the four Southern Europe members (Italy, Spain, Greece, and Portugal – SE-4) vary along two dimensions: a) cross-temporal (pre- and post-EMU accession) and b) cross-country. We account for the cross-temporal variation by distinguishing between the ‘hard’ and ‘softer’ EMU conditionality of the pre- and post-accession stage. External constraints in the form of the Maastricht eligibility criteria constituted a significant common ‘push’ factor in the fiscal stabilization process of EMU candidate countries throughout the 1990s. However, their potent does not necessarily lead to fiscal sustainability as demonstrated by the postaccession budgetary outlook of the SE-4. We account for the crosscountry variation by introducing additional ‘pull’ factors related to the reform content, context and capability (such as unemployment, the level of social concertation, and government effectiveness). Only in cases where such factors were at work did governments engage in structural reforms to consolidate public finances instead of the less controversial path of macroeconomic policy reform.
    Keywords: EMU, Southern Europe, Stability and Growth Pact, conditionality, fiscal policy.
    Date: 2008–03
  25. By: Dholakia Ravindra H.
    Abstract: The present study examines the inter- relationship between economic growth, saving rate and inflation for south-east and south Asia in a simultaneous equation framework using two stage least squares with panel data. The relationship between saving rate and growth has been found to be bi-directional and positive. Inflation has a highly significant negative effect on growth but positive effect on saving rate. Inflation is not affected by growth but is largely determined by its past values, and saving rate is not affected by interest rate. These findings for countries in Asia with widely divergent values of aggregates are very relevant for development policies and strategies.
    Keywords: Growth; Savings; Inflation; Asia; Simultaneity; Fixed-Effect
    JEL: C33
    Date: 2008–07–15
  26. By: Montiel, Peter J.; Serven, Luis
    Abstract: The view that policies directed at the real exchange rate can have an important effect on economic growth has been gaining adherents in recent years. Unlike the traditional"misalignment"view that temporary departures of the real exchange rate from its equilibrium level harm growth by distorting a key relative price in the economy, the recent literature stresses the growth effects of the equilibrium real exchange rate itself, with the claim being that a depreciated equilibrium real exchange rate promotes economic growth. While there is no consensus on the precise channels through which this effect is generated, an increasingly common view in policy circles points to saving as the channel of transmission, with the claim that a depreciated real exchange rate raises the domestic saving rate -- which in turn stimulates growth by increasing the rate of capital accumulation. This paper offers a preliminary exploration of this claim. Drawing from standard analytical models, stylized facts on saving and real exchange rates, and existing empirical research on saving determinants, the paper assesses the link between the real exchange rate and saving. Overall, the conclusion is that saving is unlikely to provide the mechanism through which the real exchange rate affects growth.
    Keywords: Macroeconomic Management,Economic Stabilization,Debt Markets,Emerging Markets,Currencies and Exchange Rates
    Date: 2008–05–01
  27. By: Foued Chihi; Michel Normandin
    Abstract: This paper documents and explains the positive comovement between external and budget deficits for several developing countries. First, the covariance estimated from post-1960 time-series data is numerically positive for each of the 24 countries and statistically significant for almost all cases. This is consistent with previous findings obtained from panel regressions. Second, the empirical covariance is close to that predicted from a tractable small open economy, overlapping generation model with heterogeneous goods. Also, the predicted covariance is induced by shocks which are closely related to internal conditions such as domestic resources and fiscal policies, and to a much lesser extent to external conditions such as the world interest rate, real exchange rate, and terms of trade. This structural analysis explaining the joint behavior of external and budget deficits sharply contrasts with earlier reduced-form studies characterizing the individual behavior of either the external deficit or budget deficit.
    Keywords: Covariance decomposition, dynamic responses, internal and external conditions, restricted vector autoregression, small open economy, overlapping generation model with heterogeneous goods
    JEL: E62 F32 F41
    Date: 2008
  28. By: Christopher F. Baum (Boston College; DIW Berlin); Atreya Chakraborty (University of Massachusetts-Boston); Boyan Liu
    Abstract: We investigate the relationship between a firm’s measures of corporate governance, macroeconomic uncertainty and changes in leverage. Recent research highlights the role of governance in financing decisions. Previous research also indicates that macroeconomic uncertainty affects a firm’s ability to borrow. In this paper we investigate how both these channels of influence affects firms' financing decisions. Our findings show that macroeconomic uncertainty has an important role to play, both by itself and in interaction with a measure of corporate governance.
    Keywords: macroeconomic uncertainty, corporate governance, leverage
    JEL: D81 G32 G34
    Date: 2008–08–18
  29. By: Strulik, Holger; Trimborn, Timo
    Abstract: Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain from announcement of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that adjustment dynamics of important variables like firm value, dividend payout, and investment differs qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis which facilitates explanation and interpretation of the produced results.
    Keywords: tax reform, anticipation effects, investment, economic growth, welfare, corporate finance, capital taxation
    JEL: H20 H30 E62 O40
    Date: 2008–08
  30. By: Gary Koop (University of Strathclyde, UK and The RImini Centre for Economic Analisys, Italy); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Japan and The RImini Centre for Economic Analisys - Italy); Rodney W. Strachan (University of Queensland, Australia and The RImini Centre for Economic Analisys - Italy)
    Abstract: Empirical macroeconomists are increasingly using models (e.g. regressions or Vector Autoregressions) where the parameters vary over time. State space methods are frequently used to specify the evolution of parameters in such models. In any application, there are typically restrictions on the parameters that a researcher might be interested in. This motivates the question of how to calculate the probability that a restriction holds at a point in time without assuming the restriction holds at all (or any other) points in time. This paper develops methods to answer this question. In particular, the principle of the Savage-Dickey density ratio is used to obtain the time-varying posterior probabilities of restrictions. We use our methods in a macroeconomic application involving the Phillips curve. Macroeconomists are interested in whether the long-run Phillips curve is vertical. This is a restriction for which we can calculate the posterior probability using our methods. Using U.S. data, the probability that this restriction holds tends to be fairly high, but decreases slightly over time (apart from a slight peak in the late 1970s). We also calculate the probability that another restriction, that the NAIRU is not identied, holds. The probability that it holds uctuates over time with most evidence in favor of the restriction occurring after 1990.
    Keywords: Bayesian, state space model, Savage-Dickey density ratio, time varying parameter model.
    JEL: C11 C32 E52
    Date: 2008–01
  31. By: Song, Zheng
    Abstract: This paper analyzes the dynamic politico-economic equilibrium of a model where repeated voting on social security and the evolution of household characteristics in general equilibrium are mutually affected over time. In particular, we incorporate within-cohort heterogeneity in a two-period Overlapping-Generation model to capture the intra-generational redistributive effect of social security transfers. Political decision-making is represented by a probabilistic voting à la Lindbeck and Weibull (1987). We analytically characterize the Markov perfect equilibrium, in which social security tax rates are shown to be increasing in wealth inequality. The dynamic interaction between inequality and social security leads to growing social security programs. We also perform some normative analysis, showing that the politico-economic equilibrium outcomes are fundamentally different from the Ramsey allocation.
    JEL: E62 H21 H55 E21
    Date: 2008–04–08
  32. By: Giovanni Gallipoli (University of British Columbia, Canada and The Rimini Centre for Economic Analysis, Italy); Gianluigi Pelloni (University of Bologna, Italy and The Rimini Centre for Economic Analisys - Italy)
    Abstract: This paper critically appraises the di erent approaches that have characterized the literature on the macroeconomic e ects of job reallocations from Lilien's seminal work to recent developments rooted in structural general equilibrium models, nonlinear econometric techniques and the concepts of job creation and destruction. Despite a ourishing of empirical analysis no unifying theoretical framework has obtained consensus in the scienti c debate. We face a corpus of research which is heterogeneous in variables' selection and experimental design. This widespread heterogeneity makes the evaluation of results a daunting task. Reliability of outcomes becomes almost impossible to assess when, even within models of the same generation, the lack of a rigorous theoretical background hinders well de ned experimental design and makes comparisons di cult. The strong pace at which the empirical literature on the macroeconomic e ects of job reallocations has been growing in recent years suggests that a general assessment of the state of the art is valuable and maybe indispensable. As a guiding principle for our excursion we track down the methodological development of the proposed solutions to the crucial problem of observational equivalence. We do not linger on speci c econometric methods nor on strictly theoretical issues not relevant to our main purpose. We draw the conclusion that the asymmetric and non-directional nature of allocative shocks, which holds the key to the solution of the problem, is better captured by multivariate, non-linear, dynamic econometric models and numerical simulation techniques. Davis and Haltiwanger's perspective on job creation and destruction seems to us of paramount importance for future research because of its potential to encompass a wealth of micro-level data sets within a rigorous analytical framework.
    Keywords: Sectoral shifts, methodology, measurement, assessment
    JEL: E30 C10 J21
    Date: 2008–01
  33. By: LU, Zhentong
    Abstract: In this paper, I follow Mehra and Prescott's calibration procedure to simulate the equity premium under habit formation and "catching up with the Joneses". The experiment results shows that the model used in this paper can well fit the realistic economy given certain parameter values and the Equity Premium Puzzle is resolved in this sense. The calibration result also reveals that it is "catching up with the Joneses" but not habit formation which makes contribution to the resolving of the puzzle.
    JEL: C82 E44
    Date: 2008–09–05
  34. By: ASANO Hirokatsu
    Abstract: This analysis investigates irreversible investment with financial constraints by parametric and semiparametric estimations. The analysis examines four U.S. industries, employing a sample selection model as it develops its econometric model in accordance with real options theory. The analysis finds that liquidity positively affects capital investment, which is compatible with the theory. In addition, while investment is insensitive to sales revenue and operating costs, capital stock negatively affects investment. The analysis also finds that the sample selection bias is large and that a biased OLS estimator underestimates the coefficients of interest. The analysisf model selection is inconclusive.
    Date: 2008–08
  35. By: Straub, Stephane
    Abstract: This survey reviews the existing macro-level empirical literature on the link between infrastructure and development outcomes in a critical light. After providing a general framework that casts the relevant terms of the controversy on the real effect of infrastructure on growth in the context of an aggregate production function, it signals what are the relevant empirical questions to be addressed. This guides the systematic review of a number of empirical studies and the discussion of the main econometric challenges to the identification of the effect of infrastructure on output and productivity. Finally, building on related research, in particular in contract theory and political economy, the paper spells out several promising research avenues.
    Keywords: Transport Economics Policy&Planning,Banks&Banking Reform,Economic Theory&Research,Political Economy,Non Bank Financial Institutions
    Date: 2008–04–01
  36. By: Bosch, Mariano; Maloney, William
    Abstract: This paper analyzes the cyclical properties of worker flows in Brazil and Mexico, two important developing countries with large unregulated or “informal” sectors. It generates three stylized facts that are critical to the accurate modeling of the sector and which suggest the need to rethink the approaches to date. First, the unemployment rate is countercyclical essentially because job separations of informal workers increase dramatically in recessions. Second, the share of formal employment is countercyclical because of the difficulty of finding formal jobs from inactivity, unemployment and other informal jobs during recessions rather than because of increased separation from formal jobs. Third, flows from formality into informality are not countercyclical, but, if anything, pro-cyclical. Together, these challenge the conventional wisdom that has guided the modeling the sector that informal workers are primarily those rationed out of the formal labor market. They also offer a new synthesis of the mechanics of the cyclical adjustment process. Finally, the paper offers estimates of the moments of worker flows series that are needed for calibration.
    Keywords: Labor Markets,Labor Policies,Population Policies,,Labor Standards
    Date: 2008–06–01
  37. By: Thomas J. Flavin; Ekaterini Panopoulou; Deren Unalmis
    Date: 2008
  38. By: Schrimpf, Andreas
    Abstract: This paper examines return predictability when the investor is uncertain about the right state variables. A novel feature of the model averaging approach used in this paper is to account for finite-sample bias of the coefficients in the predictive regressions. Drawing on an extensive international dataset, we find that interest-rate related variables are usually among the most prominent predictive variables, whereas valuation ratios perform rather poorly. Yet, predictability of market excess returns weakens substantially, once model uncertainty is accounted for. We document notable dierences in the degree of in-sample and out-of-sample predictability across different stock markets. Overall, these findings suggests that return predictability is not a uniform and a universal feature across international capital markets.
    Keywords: Stock Return Predictability, Bayesian Model Averaging, Model Uncertainty, International Stock Markets
    JEL: E44 G12 G14 G15
    Date: 2008

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