nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒09‒20
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Estimating regime-switching Taylor rules with trend inflation By Castelnuovo , Efrem; Greco , Luciano; Raggi, Davide
  2. Short-term interest rate futures as monetary policy forecasts By Giuseppe Ferrero; Andrea Nobili
  3. The conduct of global monetary policy and domestic stability By Blake, Andrew P; Markovic, Bojan
  4. Durable Goods, Inter-Sectoral Linkages and Monetary Policy By Hafedh Bouakez; Emanuela Cardia; Francisco J. Ruge-Murcia
  5. Resuscitating the wage channel in models with unemployment fluctuations By Kai Christoffel; Keith Kuester
  6. Central Bank Learning and Monetary Policy By Mewael F. Tesfaselassie
  7. A Proof of Determinacy in the New-Keynesian Sticky Wages and Prices Model By Franke, Reiner; Flaschel, Peter
  8. Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK By Jerome Creel; Paul Hubert
  9. Monetary Policy Effects: New Evidence from the Italian Flow of Funds By Riccardo Bonci; Francesco Columba
  10. Money as Friction: Conceptual dissonance in Woodford's Interest and Prices By Colin Rogers
  11. Investigating the structural stability of the Phillips curve relationship By Groen, Jan J J; Mumtaz, Haroon
  12. Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models By Rangan Gupta; Alain Kabundi
  13. Macroeconomic Effects of Terrorist Shocks in Israel By Denis Larocque; Geneviève Lincourt; Michel Normandin
  14. Do Frictionless Models of Money and the Price level Make sense? By Colin Rogers
  15. International Financial Remoteness and Macroeconomic Volatility By Andrew K. Rose; Mark M. Spiegel
  16. Money laundering in a two sector model: using theory for measurement By Amedeo Argentiero; Michele Bagella; Francesco Busato
  17. The principle of effective demand and the state of post Keynesian monetary economics By Colin Rogers
  18. How informative are macroeconomic risk forecasts? An examination of the Bank of England’s inflation forecasts By Knüppel, Malte; Schultefrankenfeld, Guido
  19. Estimating the Speed of Convergence in the Neoclassical Growth Model: An MLE Estimation of Structural Parameters Using the Stochastic Neoclassical Growth Model, Time-Series Data, and the Kalman Filter By Daniel G. Swaine
  20. Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model By Olivier Coibion; Yuriy Gorodnichenko
  21. Why Tax Capital? By Junsang Lee; Yili Chien
  22. Phillips Curve Inflation Forecasts By James H. Stock; Mark W. Watson
  23. The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence By Macallan, Clare; Millard, Stephen; Parker, Miles
  24. Modelling and forecasting the yield curve under model uncertainty By Paola Donati; Francesco Donati
  25. Price Adjustment to News with Uncertain Precision By Nikolaus Hautsch; Dieter Hess; Christoph Müller
  26. Cyclical Government Spending, Income Inequality and Welfare in Small Open Economies By G. C. Lim; Paul D. McNelis
  27. The Effects of Labor Market Conditions on Working Time: the US-EU Experience By Claudio Michelacci; Josep Pijoan-Mas
  28. Exploring agent-based methods for the analysis of payment systems: a crisis model for StarLogo TNG By Luca Arciero; Claudia Biancotti; Leandro DÂ’Aurizio; Claudio Impenna
  29. Firm Collateral and the Cyclicality of Knowledge Intensity By Martinsson, Gustav
  30. Exploiting Non-Linearities in GDP Growth for Forecasting and Anticipating Regime Changes By David N. DeJong; Hariharan Dharmarajan; Roman Liesenfeld; Jean-Francois Richard
  31. The Labor Market Impact of Immigration in Western Germany in the 1990's By Francesco D'Amuri; Gianmarco I. P. Ottaviano; Giovanni Peri
  32. Wage Posting Without Full Commitment By Jacob Wong; Matthew Doyle
  33. The Classical Econometric Model By D.S.G. Pollock
  34. Comparing Seasonal Forecasts of Industrial Production By Keith Blackburn; Kyriakos C. Neanidis; M. Emranul Haque
  35. Productivity Dispersion across Plants, Emission Abatement, and Environmental Policy By Li, Zhe
  36. Aging and Job Security By Yu-Fu Chen; Gylfi Zoega
  37. Political Risk, Economic Integration, and the Foreign Direct Investment Decision By Yu-Fu Chen; Michael Funke
  38. Policy Options for the Payout Phase By Pablo Antolin
  39. Wage Formation between Newly Hired Workers and Employers: Survey Evidence By Robert E. Hall; Alan B. Krueger
  40. The Strategic Euro Laggards By Martin Gregor
  41. Quels enseignements en matière de gouvernance de l’échec des négociations du cycle de Doha ? By Mehdi Abbas
  42. On Myopia as Rationale for Social Security By Andersen, Torben M; Bhattacharya, Joydeep
  43. Comparison of Policy Functions from the Optimal Learning and Adaptive Control Frameworks By Hans M. Amman; David A. Kendrick
  44. The Effects of Reforming the Chinese Dual-Track Price System By John Bennett; Huw Dixon; Helen X.Y. Hu
  45. Learning About Learning in Dynamic Economic Models By David A. Kendrick; Hans M. Amman; Marco P. Tucci

  1. By: Castelnuovo , Efrem (University of Padua and Bank of Finland Research); Greco , Luciano (University of Padua); Raggi, Davide (University of Bologna)
    Abstract: This paper estimates regime-switching monetary policy rules featuring trend inflation using post-WWII US data. We find evidence in favour of regime shifts and time-variation of the inflation target. We also find a drop in the inflation gap persistence when entering the Great Moderation sample. Estimated Taylor rule parameters and regimes are robust across different monetary policy models. We propose an ‘internal consistency’ test to discriminate among our estimated rules. Such a test relies upon a feedback mechanism running from the monetary policy stance to the inflation gap. Our results support the stochastic autoregressive process as the most consistent model for trend inflation, above all when conditioning to the post-1985 subsample.
    Keywords: active and passive Taylor rules; trend inflation; inflation gap persistence; Markov-switching models
    JEL: E52 E61 E62
    Date: 2008–09–10
  2. By: Giuseppe Ferrero (Bank of Italy, Economics and International Relations); Andrea Nobili (Bank of Italy, Economics and International Relations)
    Abstract: The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are correlated with the business cycle (negatively) only in the United States.
    Keywords: futures rates, monetary policy, risk-premium
    JEL: E43 E44 E52
    Date: 2008–06
  3. By: Blake, Andrew P (Bank of England); Markovic, Bojan (Bank of England)
    Abstract: The purpose of this paper is to examine how important an improvement in global monetary policy might be for the macroeconomic performance of a small open economy such as the United Kingdom. Our paper contributes to the literature by proposing a new methodology to treat indeterminate solutions (the most-robust solution), and by analysing a policy improvement within a three-country framework. Both contributions yield a rich set of theoretical and policy implications. We find that the performance of the domestic macroeconomy depends crucially on domestic monetary policy, but there remains significant potential for monetary policy abroad to improve the stability of inflation and output in a small open economy. Importantly, how much of this potential spillover from policy abroad crystallises is still endogenous to the conduct of domestic policy. We also show that an improvement in policy abroad may not reduce domestic volatility when domestic policy is the only poor policy globally. In such a case domestic volatility can even become worse. Our paper also yields interesting results related to the impact of a policy improvement abroad on inflation persistence in the domestic economy and her exposure to foreign shocks.
    Keywords: Indeterminacy; stochastic volatility; Taylor rule; international spillovers; Great Inflation.
    JEL: C62 D84 E30 E58 E61 F41 F42
    Date: 2008–08
  4. By: Hafedh Bouakez; Emanuela Cardia; Francisco J. Ruge-Murcia
    Abstract: Barsky, House and Kimball (2007) show that introducing durable goods into a sticky-price model leads to negative sectoral comovement of production following a monetary policy shock and, under certain conditions, to aggregate neutrality. These results appear to undermine sticky-price models. In this paper, we show that these results are not robust to two prominent and realistic features of the data, namely input-output interactions and limited mobility of productive inputs. When extended to allow for both features, the sticky-price model with durable goods delivers implications in line with VAR evidence on the effects of monetary policy shocks.
    Keywords: Durability, input-output interactions, roundabout production, sectoral comovement, monetary policy
    JEL: E21 E23 E31 E52
    Date: 2008
  5. By: Kai Christoffel (DG-Research, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany); Keith Kuester (Monetary Policy Strategy Division, European Central Bank, Kaiserstraße 29, 60311 Frankfurt am Main, Germany.)
    Abstract: All else equal, higher wages translate into higher inflation. More rigid wages imply a weaker response of inflation to shocks. This view of the wage channel is deeply entrenched in central banks’ views and models of their economies. In this paper, we present a model with equilibrium unemployment which has three distinctive properties. First, using a search and matching model with right-to-manage wage bargaining, a proper wage channel obtains. Second, accounting for fixed costs associated with maintaining an existing job greatly magnifies profit fluctuations for any given degree of wage fluctuations, which allows the model to reproduce the fluctuations of unemployment over the business cycle. And third, the model implies a reasonable elasticity of steady state unemployment with respect to changes in benefits. The calibration of the model implies low profits, but does not require a small gap between the value of working and the value of unemployment for the worker. JEL Classification: E31, E32, E24, J64.
    Keywords: Bargaining, Unemployment, Business Cycle, Real Rigidities.
    Date: 2008–08
  6. By: Mewael F. Tesfaselassie
    Abstract: We analyze optimal monetary policy when a central bank has to learn about an unknown coefficient that determines the effect of surprise inflation on aggregate demand. We derive the optimal policy under active learning and compare it to two limiting cases---certainty equivalence policy and cautionary policy, in which learning takes place passively. Our novel result is that the two passive learning policies represent an upper and lower bound for the active learning policy, irrespective of the state of the economy
    Keywords: parameter uncertainty; learning; monetary policy
    JEL: C02 E52
    Date: 2008–08
  7. By: Franke, Reiner; Flaschel, Peter
    Abstract: The paper is concerned with determinacy in a version of the New-Keynesian model that integrates imperfect competition and nominal price and wage setting on goods and labour markets. The model is reformulated with an explicit period of arbitrary length and shown to remain well-defined as the period shrinks to zero. The 4×4 constituent matrix of the model’s continuous-time counterpart is mathematically tractable and its determinacy results carry over to the period model at least if the period is sufficiently short. This being understood, it is proved that determinacy is (essentially) ensured if an extended Taylor principle requirement is met.
    Keywords: Determinacy, New-Keynesian wage and price Phillips curves, variable period length, continuous-time limit, Taylor principle
    JEL: E31 E32 E52
    Date: 2008
  8. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques)
    Abstract: Since 1990, a growing number of countries have adopted inflation targeting (IT) around the world. Empirical evidence on its advantages has been mixed so far, and most assessments have been based on a control group methodology. In this paper, using a MSVAR technique, we assess the adoption of IT in three industrialised countries over time; in addition, we compare their outcomes with a non-IT country, the US. Results are manifold. First, an inflation targeting regime exists, although it does not constitute a change in monetary policy reaction. Second, this conclusion is robust on a subsample excluding the periods of high inflation and early sharp disinflation. Third, the sacrifice ratio of higher output volatility generally attributed to inflation stabilisation policies is not sensitive to the adoption of inflation targeting. Fourth, this framework is shown to be conducive to higher monetary policy leeway.
    Keywords: Inflation targeting; MSVAR; Counterfactuals.
    JEL: E52 E58
    Date: 2008
  9. By: Riccardo Bonci (Bank of Italy, Economic and Financial Statistics Department); Francesco Columba (Bank of Italy, Economic Outlook and Monetary Policy Department)
    Abstract: We obtain new evidence on the transmission of monetary policy to the economy by analyzing the effects of restrictive monetary policy shocks on Italian flows of funds over the period 1980-2002. Firms reduce their issuance of debt and their acquisitions of financial assets, so there is no evidence of strong financial frictions. Households increase short-term liabilities and diminish purchases of liquid assets and shares in the first quarter following a shock. The public sector increases net borrowing during the first two years. Financial corporations decrease their borrowing for three quarters, while the foreign sector increases borrowed funds. The results shed new light on the role played by the financial decisions of the various economic sectors in the transmission of monetary policy.
    Keywords: flow of funds, monetary policy, VAR
    JEL: E32 E52
    Date: 2008–06
  10. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: In Interest and Prices Woodford employs a frictionless model to derive nominal interest rate rules that can be applied by central banks to achieve price level stability. But frictionless models are Walrasian general equilibrium models that preclude any role for money. Furthermore frictionless model have no role for nominal values or the price level and therefore no role for a central bank. Consequently, conceptual anomalies arise in Woodford's attempt to analyse questions of monetary theory and policy that are precluded by construction in frictionless models. In some states of the model money is converted into a ‘friction', contra economic theory.
    Keywords: Frictionless models; time-0 auction; ‘monetary frictions'
    JEL: B E40 E42 E50
    Date: 2008–09
  11. By: Groen, Jan J J (Federal Reserve Bank of New York); Mumtaz, Haroon (Bank of England)
    Abstract: The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper we attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, we follow a two-step estimation strategy. First, we model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model. We then impose the cross-equation restrictions of a Calvo pricing-based NKPC under non-zero steady-state inflation and estimate the structural parameters by minimising for each inflation state the distance between the restricted and unrestricted vector autoregressive parameters. The structural estimation results indicate that for all the economies there is evidence for a structurally invariant NKPC, albeit with a significant backward-looking component.
    Keywords: New Keynesian Phillips Curve; trend inflation; Markov-switching VAR; minimum distance estimation.
    Date: 2008–05
  12. By: Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    Abstract: This paper compares the forecasting ability of five alternative models in predicting four key macroeconomic variables, namely, per capita growth rate, the Consumer Price Index (CPI) inflation, the money market rate, and the growth rate of the nominal effective exchange rate for the South African economy. Unlike the theoretical Small Open Economy New Keynesian Dynamic Stochastic General Equilibrium (SOENKDSGE), the unrestricted VAR, and the small-scale Bayesian Vector Autoregressive (BVAR) models, which are estimated based on four variables, the Dynamic Factor Model (DFM) and the large-scale BVAR models use information from a data-rich environment containing 266 macroeconomic time series observed over the period of 1983:01 to 2002:04. The results, based on Root Mean Square Errors (RMSEs), for one- to four-quarters-ahead out-of-sample forecasts over the horizon of 2003:01 to 2006:04, show that, except for the one-quarter-ahead forecast of the growth rate of the of nominal effective exchange rate, large-scale BVARs outperform the other four models consistently and, generally, significantly.
    Keywords: Small Open Economy New Keynesian Dynamic Stochastic Model, Dynamic Factor Model, VAR, BVAR, Forecast Accuracy
    JEL: C11 C13 C33 C53
    Date: 2008–09
  13. By: Denis Larocque; Geneviève Lincourt; Michel Normandin
    Abstract: This paper estimates a structural vector autoregression model to assess the dynamic effects of terrorism on output and prices in Israel over the post-1985 period. Long-run restrictions are used to obtain an interpretation of the effects of terrorism in terms of aggregate demand and supply curves. The empirical responses of output and prices suggest that the immediate effects of terrorism are similar to those associated with a negative demand shock. Such leftward shift of the aggregate demand curve is consistent with the adverse effects of terrorism on most components of aggregate expenditure, which have been documented in previous studies. In contrast, the long-term consequences of terrorism are similar to those related to a negative supply shock. Such leftward shift of the long-run aggregate supply curve suggests the potential existence of adverse effects of terrorism on the determinants of potential output, which have not been considered so far.
    Keywords: Goods market, output, price, and terrorist indices, structural vector autoregressions, long-run identifying restrictions, dynamic responses and variance decompositions
    JEL: C32 E31 E32
    Date: 2008
  14. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: No. As well-specified Walrasian general equilibrium systems, frictionless models are isomorphic with the Arrow-Debreu (A-D) world. It is well known that the A-D world has no role for money, credit or banks. Grafting a role for money onto a frictionless model by appending a quantity equation or cash-in-advance constraint makes the error of converting money into a friction. Furthermore, as frictionless models have no use for money or nominal values it makes no sense to use them to adjudicate between theories of the price level or to claim that they provide the theoretical foundations for monetary policy.
    Keywords: Frictionless models; `monetary frictions'; nominal and numeraire prices; theories of the price level.
    JEL: B40 E40 E42 E50
    Date: 2008–09
  15. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for political institutions, trade, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.
    JEL: E32 F32
    Date: 2008–09
  16. By: Amedeo Argentiero (Faculty of Economics, University of Rome "Tor Vergata"); Michele Bagella (Faculty of Economics, University of Rome "Tor Vergata"); Francesco Busato (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper implements a methodology that exploits firms and households’ optimality conditions to measure money laundering for the Italian economy. This approach, first implemented by Ingram, Kocherlakota, and Savin (1997) to the household production sector, and by Busato, Chiarini and Di Maro (2006) for measuring the underground economy, allows to generate high frequency series for the money laundering using a theoretical two-sector dynamic general equilibrium model calibrated over the sample 1981:01-2001:04. The analysis of the generated series suggests two main results. First, money laundering accounts for approximately 12 percent of aggregate GDP; second, money laundering is more volatile than aggregate GDP, and it is negatively correlated with it.
    Keywords: E26,E32,K40
    JEL: E26 E32 K40
    Date: 2008–09–09
  17. By: Colin Rogers (School of Economics, University of Adelaide)
    Date: 2008–09
  18. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: Macroeconomic risk assessments play an important role in the forecasts of many institutions. However, to the best of our knowledge their performance has not been investigated yet. In this work, we study the Bank of England’s risk forecasts for inflation. We find that these forecasts do not contain the intended information. Rather, they either have no information content, or even an adverse information content. Our results imply that under mean squared error loss, it is better to use the Bank of England’s mode forecasts than the Bank of England’s mean forecasts.
    Keywords: Forecast evaluation, risk forecasts, Bank of England inflation forecasts
    JEL: C12 C53 E37
    Date: 2008
  19. By: Daniel G. Swaine (Department of Economics, College of the Holy Cross)
    Abstract: An important question is whether underdeveloped countries will converge to the per-capita income level of developed countries. Economists have used the disequilibrium adjustment property of growth models to justify the view that convergence should occur. Unfortunately, the empirical literature does not obey the "Lucas" admonition of estimating the structural parameters of a growth model that has the conditional convergence property and then computing the speed of convergence implied by the estimated structural parameters. In this paper, we use U.S. time-series data to estimate the structural parameters of a stochastic neoclassical growth model and compute the speed of conditional convergence in the non-stochastic model from the structural parameter estimates. We follow an approach used to econometrically estimate business cycle models via maximum likelihood. We obtain a speed of conditional convergence of 12.8 percent per-year for logarithmic consumer preferences and find that the data rejects the hypothesis of the 2 percent per-year speed of conditional convergence obtained in the empirical literature.
    Keywords: Convergence, Transitional Dynamics, Economic Growth, Economic Development, Real Business Cycle Models, Stochastic Growth Models, Time-Series Analysis
    JEL: C30 C32 E E32 O10 O11 O40 O41
    Date: 2008–09
  20. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 95% of firms in the model, with the two receiving approximately equal shares. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.
    JEL: E3 E5
    Date: 2008–09
  21. By: Junsang Lee; Yili Chien
    Abstract: We study optimal capital income taxation with a Ramsey problem and relate this optimal taxation problem to the question that has been asked in the asset pricing literature, which is why the risk free interest rate is too low. We show that the Ramsey planner chooses the optimal level of capital stock to be one that satisfies the modified golden rule in the steady state under some conditions. The conditions include suffcient government tax instruments and ability to issue bonds. We argue that the optimal capital level is different from that chosen in a competitive equilibrium unless the competitive equilibrium risk free interest rate is same as the time discount rate in the steady state. This difference in the choice of capital motivates imposing a positive capital income tax (or subsidy) on households to induce them to invest at the socially optimal amount. As examples, we investigate optimal capital taxation in a decentralized economy with limited commitment and one with private information. However, the result still holds in various types of economies with risk free interest rate that is too low.
    JEL: D86 E23 E44 E62
    Date: 2008–06
  22. By: James H. Stock; Mark W. Watson
    Abstract: This paper surveys the literature since 1993 on pseudo out-of-sample evaluation of inflation forecasts in the United States and conducts an extensive empirical analysis that recapitulates and clarifies this literature using a consistent data set and methodology. The literature review and empirical results are gloomy and indicate that Phillips curve forecasts (broadly interpreted as forecasts using an activity variable) are better than other multivariate forecasts, but their performance is episodic, sometimes better than and sometimes worse than a good (not naïve) univariate benchmark. We provide some preliminary evidence characterizing successful forecasting episodes.
    JEL: C53 E37
    Date: 2008–09
  23. By: Macallan, Clare (Bank of England); Millard, Stephen (Bank of England); Parker, Miles (Bank of England)
    Abstract: In this paper, we assess the cyclicality of mark-ups and profit margins within the United Kingdom, at both the aggregate and industry level. We find that the private sector labour share moves countercyclically, suggesting that the aggregate mark-up moves procyclically. This result survives when we consider more sophisticated measures of the mark-up. And this result is also supported by industry-level data. We find that the aggregate market sector profit share moves procyclically and that the cyclical behaviour of profit margins is largely homogenous across industries. Nevertheless, there is some evidence that margins moved against the cycle in the late 1990s, starting to fall in 1997, whereas GDP growth did not peak until 2000. In tandem with these cyclical movements, we also find that the market sector profit share has trended upwards since 1970, in contrast to the aggregate mark-up, which fell over the same period.
    Keywords: Mark-ups; profit margins.
    JEL: E31 L11
    Date: 2008–08
  24. By: Paola Donati (DG-Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Donati (Politecnico of Torino, Department of Control and Computer Engineering, Corso Duca degli Abruzzi 24, I-10129 Torino, Italy.)
    Abstract: This paper proposes a procedure to investigate the nature and persistence of the forces governing the yield curve and to use the extracted information for forecasting purposes. The latent factors of a model of the Nelson-Siegel type are directly linked to the maturity of the yields through the explicit description of the cross-sectional dynamics of the interest rates. The intertemporal dynamics of the factors is then modeled as driven by long-run forces giving rise to enduring effects, and by medium- and short-run forces producing transitory effects. These forces are reconstructed in real time with a dynamic filter whose embedded feedback control recursively corrects for model uncertainty, including additive and parameter uncertainty and possible equation misspecifications and approximations. This correction sensibly enhances the robustness of the estimates and the accuracy of the out-of-sample forecasts, both at short and long forecast horizons. JEL Classification: G1, E4, C5.
    Keywords: Yield curve, Model uncertainty, Frequency decomposition, Monetary policy.
    Date: 2008–08
  25. By: Nikolaus Hautsch (Humboldt-Universität zu Berlin); Dieter Hess (University of Cologne); Christoph Müller (University of Cologne)
    Abstract: Bayesian learning provides the core concept of processing noisy information. In standard Bayesian frameworks, assessing the price impact of information requires perfect knowledge of news’ precision. In practice, however, precision is rarely disclosed. Therefore, we extend standard Bayesian learning, suggesting traders infer news’ precision from magnitudes of surprises and from external sources. We show that interactions of the different precision signals may result in highly nonlinear price responses. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and show that the effects are statistically and economically significant.
    Keywords: prediction Bayesian learning; macroeconomic announcements; information quality; precision signals
    JEL: E44 G14
    Date: 2008–06
  26. By: G. C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Paul D. McNelis (Department of Finance, Graduate School of Business Administration, Fordham University)
    Abstract: This paper compares the effects of pro and counter-cyclical government spending on income inequality and welfare in a small open economy. We examine the consequences of alternative government spending rules following shocks to productivity, domestic interest rates, terms of trade and export demand. The simulated results show that the type of spending rule makes negligible difference to welfare, in the face of domestic or external shocks. However, pro-cyclical government spending reduces income inequality by more than counter-cyclical spending behavior across different shocks and alternative relative labour intensities.Length: 35 pages
    Date: 2008–09
  27. By: Claudio Michelacci (CEMFI and CEPR, Spain and The Rimini Centre for Economic Analysis, Italy); Josep Pijoan-Mas (CEMFI and CEPR, Spain)
    Abstract: We consider a labor market search model where, by working longer hours, individuals acquire greater skills and thereby obtain better jobs. We show that job inequality, which leads to within-skill wage differences, gives incentives to work longer hours. By contrast, a higher probability of losing jobs, a longer duration of unemployment, and in general a less tight labor market discourage working time. We show that the different evolution of labor market conditions in the US and in Continental Europe over the last three decades can quantitatively explain the diverging evolution of the number of hours worked per employee across the two sides of the Atlantic. It can also explain why the fraction of prime age male workers working very long hours has increased substantially in the US, after reverting a trend of secular decline.
    Keywords: working hours, wage inequality, unemployment, search, human capital filtering
    JEL: G31 J31 E24
    Date: 2008–01
  28. By: Luca Arciero (Bank of Italy); Claudia Biancotti (Bank of Italy); Leandro DÂ’Aurizio (Bank of Italy); Claudio Impenna (Bank of Italy)
    Keywords: agent-based modeling, payment systems, RTGS, liquidity, crisis simulation Abstract: This paper presents an exploratory agent-based model of a real time gross settlement (RTGS) payment system. Banks are represented as agents who exchange payment requests, which are settled according to a set of simple rules. The model features the main elements of a real-life system, including a central bank acting as liquidity provider, and a simplified money market. A simulation exercise using synthetic data of BI-REL (the Italian RTGS) predicts the macroscopic impact of a disruptive event on the flow of interbank payments. The main advantage of agent - based modeling is that we can dynamically see what happens to the major variables involved. In our reduced-scale system, three hypothetical distinct phases emerge after the disruptive event: 1) a liquidity sink effect is generated and the participants’ liquidity expectations turn out to be excessive; 2) an illusory thickening of the money market follows, along with increased payment delays; and, finally 3) defaulted obligations dramatically rise. The banks cannot staunch the losses accruing on defaults, even after they become fully aware of the critical event, and a scenario emerges in which it might be necessary for the central bank to step in as liquidity provider. The methodology presented differs from traditional payment systems simulations featuring deterministic streams of payments dealt with in a centralized manner with static behavior on the part of banks. The paper is within a recent stream of empirical research that attempts to model RTGS with agent – based techniques.
    JEL: C63 E47 G21
    Date: 2008–08
  29. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The Schumpeterian view on Business cycles treats recessions as a cleansing mechanism and a state where firms can regroup and innovate. Firms need to access finance externally in order to compensate declining cash flow in recessions. Due to financial frictions, the literature proposes that firms need to post collateral in order to mitigate problems of information asymmetries. In this paper I view knowledge within a firm as a prerequisite for it to be innovative. Combining financial frictions and firm knowledge intensity the overall hypothesis of this paper is: Firms which have collateral can retain its knowledge intensity when cash flow declines. This enables firms with collateral to benefit from recessions like Schumpeter proposed. In this paper I explore the impact of firm collateral on the cyclicality of knowledge intensity. This is conducted through using firm level data on 14,500 Swedish manufacturing firms over the period 1997-2004. The main results are: (i) the knowledge intensity of a firm without collateral is pro-cyclical. I.e. its share of highly educated employees is positively correlated with sales variation; (ii) on the other hand, the knowledge intensity of firms with collateral is counter-cyclical. Through retaining their knowledge intensity even as sales drops firms with collateral can benefit from recessions as Schumpeter proposed.
    Keywords: incomplete markets; asymmetric information; business fluctuations; business cycles; corporate finance; innovation
    JEL: D52 D82 E32 O16 O31
    Date: 2008–09–09
  30. By: David N. DeJong; Hariharan Dharmarajan; Roman Liesenfeld; Jean-Francois Richard
    Abstract: . . .
    Date: 2008–09
  31. By: Francesco D'Amuri (Bank of Italy, Economics and International Relations and ISER, University of Essex); Gianmarco I. P. Ottaviano (University of Bologna, Department of Economics and CEPR); Giovanni Peri (University of California, Davis and NBER)
    Abstract: We adopt a general equilibrium approach in order to measure the effects of recent immigration on the Western German labor market, looking at both wage and employment effects. Using the Regional File of the IAB Employment Subsample for the period 1987- 2001, we find that the substantial immigration of the 1990's had no adverse effects on native wages and employment levels. It had instead adverse employment and wage effects on previous waves of immigrants. This stems from the fact that, after controlling for education and experience levels, native and migrant workers appear to be imperfect substitutes whereas new and old immigrants exhibit perfect substitutability. Our analysis suggests that if the German labor market were as “flexible” as the UK labor market, it would be more effcient in dealing with the effects of immigration.
    Keywords: Immigration, Skill Complementarities, Employment, Wages.
    JEL: E24 F22 J61 J31
    Date: 2008–08
  32. By: Jacob Wong (School of Economics, University of Adelaide); Matthew Doyle
    Abstract: Wage posting models of job search typically assume that firms can commit to paying workers the posted wage. This paper investigates the consequences of relaxing this assumption. Under ``downward'' commitment, ¯rms can commit only to paying at least their advertised wage. We show that wage posting is always an equilibrium, although in special cases other equilibria can exist. Surprisingly, the wage posting equilibrium in our economy is identical to the equilibrium when firms can commit to paying exactly their posted wage. When firms cannot even commit to paying at least their advertised wage, equilibrium exhibits job auctions with wage dispersion which generally is not constrained efficient.
    JEL: E24 J64
    Date: 2008–09
  33. By: D.S.G. Pollock
    Abstract: A compendium is presented of the various approaches that may be taken in deriving the estimators of the simultaneous-equations econometric model according to the principle of maximum likelihood. The structural equations of the model have the character both of a regression equation and of an errors-in-variables equation. This partly accounts for way in which the various approaches that have been followed appear to differ widely. In the process of achieving a synthesis of the methods of estimation, some elements that have been missing from the theory are supplied.
    Date: 2008–09
  34. By: Keith Blackburn; Kyriakos C. Neanidis; M. Emranul Haque
    Abstract: This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public ?nance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which fi?nancial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government's reliance on seigniorage ?nance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government's budget constraint, we ?find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.
    Date: 2008
  35. By: Li, Zhe
    Abstract: Empirical studies suggest systematic relationships between plant’s productivity and plant’s emissions and emission-abatement costs. This paper demonstrates that productivity dispersion across plants is an important factor that influences the transmission of environmental policy. Within a general equilibrium framework, I model heterogeneous polluting plants by allowing them to be differing in productivity and to choose optimally a discrete emission-reduction technology taking into account both the costs of reducing emissions and the competition in the goods market. An emission-reduction policy affects the distribution of plants with the advanced abatement technology and relocates resources and market shares across plants. As a result, the aggregate effects of an environmental policy depend on the degree of productivity dispersion. Using Canadian data, I show quantitatively that the aggregate effects of an environmental policy significantly affected by the degree of productivity dispersion both in the transition periods and in the long-run steady-state equilibrium.
    JEL: Q52 E00 Q58
    Date: 2008–09–14
  36. By: Yu-Fu Chen; Gylfi Zoega
    Abstract: We model a firm’s choice as to the age composition of dismissed workers for different assumptions about the level of firing costs. We find that when the cost of firing is independent of age, a higher level of firing costs will induce firms to fire their younger workers while lower costs induce them to fire the older ones. A corresponding effect is not found in the age dimension of the hiring decision. It follows that job protection favours more senior workers even when the cost of firing is independent of age and seniority.
    Keywords: Age-structure, tenure, firing decisions, real options
    JEL: E32 J23 J24 J54
    Date: 2007–12
  37. By: Yu-Fu Chen; Michael Funke
    Abstract: In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.
    Keywords: Political Risk; Real Options; Investment; Foreign Direct Investment
    JEL: D81 D92 E22 F21
    Date: 2007–12
  38. By: Pablo Antolin
    Abstract: This paper assesses how countries‘ pension arrangements and regulation shape the appropriate structure and flexibility of retirement payout options. The paper aims at providing a guide to policy makers on how to address the diverse questions posed when designing the payout phase or promoting DC pension arrangements, as well as encouraging a market for annuities. The paper addresses questions concerning the type of retirement payout options for accumulated assets in DC plans a country should allow, which entities should provide annuities, and the type of annuity products that could be allowed. The main recommendation is for policy makers to consider mandating deferred life annuities that start paying at very old ages (e.g. at age 85) and allow for the remaining assets accumulated in DC accounts to be allocated as programmed withdrawals (preferably with flexibility to face contingencies). <P>Options s’offrant aux pouvoirs publics pour la phase de versement des pensions <BR>Ce document examine comment les dispositions et réglementations prises par les pays en matière de pensions influent sur la structure et la flexibilité des options qui s‘offrent en phase de versement, une fois la retraite venue. Il vise à servir de guide pour les responsables publics en leur montrant comment aborder les diverses questions qui se posent au moment de fixer les modalités de la phase de versement, ou pour promouvoir des dispositifs de pension à cotisations définies, et aussi encourager un marché de rentes. Le document examine les options qui peuvent s‘envisager en phase de versement des avoirs accumulés sur les plans à cotisations définies, quelles entités devraient être habilitées à servir des rentes et le type de produits de rente qui peut être autorisé. La principale recommandation à l‘intention des responsables publics est d‘imposer des rentes viagères différées qui ne commenceront d‘être servies qu‘à un âge très avancé (par exemple à partir de 85 ans) et de prévoir que le solde des actifs accumulés sur les comptes à cotisations définies pourra être perçu sous la forme de retraits programmés (de préférence avec une marge de flexibilité pour faire face à des imprévus).
    Keywords: rente viagère, risque de longévité, Annuities, annuity markets, longevity risk, marches des rentes viagères, annuity providers, deferred life annuities, insurance companies, lump-sums, programmed withdrawal, retirement income, compagnie d’assurances, pourvoyeurs des rentes viagères, rentes viagères diffères, retrait programme, revenue des retraites, versement unique
    JEL: D11 D14 D91 E21 G11 G38 J14 J26
    Date: 2008–09
  39. By: Robert E. Hall; Alan B. Krueger
    Abstract: Some workers bargain with prospective employers before accepting a job. Others could bargain, but find it undesirable, because their right to bargain has induced a sufficiently favorable offer, which they accept. Yet others perceive that they cannot bargain over pay; they regard the posted wage as a take-it-or-leave-it opportunity. Theories of wage formation point to substantial differences in labor-market equilibrium between bargained and posted wages. The fraction of workers hired away from existing jobs is another key determinant of equilibrium, because a worker with an existing job has a better outside option in bargaining than does an unemployed worker. Our survey measures the incidences of wage posting, bargaining, and on-the-job search. We find that about a third of workers had precise information about pay when they first met with their employers, a sign of wage posting. We find that another third bargained over pay before accepting their current jobs. And about 40 percent of workers could have remained on their earlier jobs at the time they accepted their current jobs.
    JEL: E24 J3 J64
    Date: 2008–09
  40. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: A government applying for a club membership may strategically delay entry to cope with the hold-up problem introduced by anticipatory investments of the private sector. In equilibrium of a two-period incomplete information game, we find that a pro-entry government may strategically delay to imitate an anti-entry government and thereby affect expectations of the private sector. The delay is more likely if the government has a good electoral prospect, is internationally weak, and is not considered to be too keen on entry. The model is related to the case of the Czech Republic where the government recently softened commitment in the euro adoption strategy.
    Keywords: EMU, club enlargement, international unions, bargaining
    JEL: D74 E42 F31 F50
    Date: 2008–09
  41. By: Mehdi Abbas (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Cette note revient sur les problèmes rencontrés par le cycle de Doha sur le développement suite à la réunion de juillet 2008 à Genève. Cette réunion n’a pas permis de débloquer la négociation. Après avoir rappeler l’état de la négociation, la note aborde les conséquences en matière de gouvernance à la fois du système commercial multilatéral et de l’OMC de ce nouvel échec. Elle se termine par une réflexion sur une issue possible.
    Keywords: Organisation Mondiale du Commerce ; multilatéralisme ; commerce international ; négociation ; Agenda pour le Développement ; gouvernance
    Date: 2008–08
  42. By: Andersen, Torben M; Bhattacharya, Joydeep
    Abstract: This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go social security in dynamically efficient economies. Contrary to received wisdom, if the real interest rate is exogenously fixed, enough myopia may justify public pensions but never alongside positive private savings. With sufficient myopia, co-existence of positive optimal pensions and positive private saving is possible if the real interest rate on saving evolves endogenously, as in a model with a neoclassical technology.
    Keywords: myopia, pensions, social security, dynamic efficiency
    JEL: E0
    Date: 2008–09–10
  43. By: Hans M. Amman; David A. Kendrick
    Abstract: In this paper we turn our attention to comparing the policy function obtained by Beck and Wieland (2002) to the one obtained with adaptive control methods. It is an integral part of the optimal learning method used by Beck and Wieland to obtain a policy function that provides the optimal control as a feedback function of the state of the system. However, computing this function is not necessary when doing Monte Carlo experiments with adaptive control methods. Therefore, we have modified our software in order to obtain the policy function for comparison to the BW results.
    Keywords: Active learning, dual control, optimal experimentation, stochastic optimization, time-varying parameters, numerical experiments
    JEL: C63 E61
    Date: 2008–08
  44. By: John Bennett; Huw Dixon; Helen X.Y. Hu
    Abstract: We formulate a microeconomic model of the dual-track price system for Households and use it to analyze 'transitional policy' reforms, which we characterize as a rise in plan-track price and a reduction in the plan-track quantity. Each of these reforms has a negative effect on market price, but a positive effect on the weighted average price (CPI). When households are homogeneous, transitional policy reform reduces welfare (if profits are not fully distributed). Under fairly mild assumptions, if households are heterogeneous and resale of goods can occur, transitional policy reform creates losers (state employees) as well as winners (non-state employees).
    Date: 2008–07
  45. By: David A. Kendrick; Hans M. Amman; Marco P. Tucci
    Abstract: This chapter of the Handbook of Computational Economics is mostly about research on active learning and is confined to discussion of learning in dynamic models in which the systems equations are linear, the criterion function is quadratic and the additive noise terms are Gaussian. Though there is much work on learning in more general systems, it is useful here to focus on models with these specifications since more general systems can be approximated in this way and since much of the early work on learning has been done with these quadratic-linear-gaussian systems. We begin with what has been learned about learning in dynamic economic models in the last few decades. Then we progress to a discussion of what we hope to learn in the future from a new project that is just getting underway. However before doing either of these it is useful to provide a short description of the mathematical framework that will be used in the chapter.
    Keywords: Active learning, dual control, optimal experimentation, stochastic optimization, time-varying parameters, forward looking variables, numerical experiments.
    JEL: C63 E61
    Date: 2008–08

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