nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒09‒29
73 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Inflation Target Transparency and the Macroeconomy By Melecky, Martin; Rodrıguez Palenzuela, Diego; Soderstrom, Ulf
  2. The Welfare Implications of Fiscal Dominance By Carlos De Resende; Nooman Rebei
  3. Aggregate and Welfare Effects of Redistribution of Wealth Under Inflation and Price-Level Targeting By Césaire A. Meh; José-Victor Rios-Rull; Yaz Terajima
  4. The great inflation: did the shadow know better? By William Poole; Robert H. Rasche; David C. Wheelock
  5. A Microfounded Mechanism of Observed Substantial Inflation Persistence By Harashima, Taiji
  6. Growth Expectation By Ippei Fujiwara
  7. Labor market reform and price stability: an application to the Euro Area By Carlos Thomas; Francesco Zanetti
  8. Real-time Prediction with UK Monetary Aggregates in the Presence of Model Uncertainty By Anthony Garratt; Gary Koop; Emi Mise; Shaun Vahey
  9. Stabilizing expectations under monetary and fiscal policy coordination By Stefano Eusepi; Bruce Preston
  10. Central bank transparency and nonlinear learning dynamics By Stefano Eusepi
  11. Testing for stationarity of inflation in Central and Eastern European Countries By Juan Carlos Cuestas; Barry Harrison
  12. Sticky information Phillips curves: European evidence By Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jiri Slacalek
  13. Financial Intermediation and Monetary Policy in a Small Open Economy By Juan David Prada Sarmiento
  14. Macroeconomic Uncertainty and Performance in Asian Countries By Don Bredin; John Elder; Stilianos Fountas
  15. Macroeconomic Determinants of the Term Structure of Corporate Spreads By Jun Yang
  16. Testing the Effectiveness of Monetary Policy in Malaysia Using Alternative Monetary Aggregation By Leong, Choi-Meng; Puah, Chin-Hong; Abu Mansor, Shazali; Evan, Lau
  17. Lumpy Labor Adjustment as a Propagation Mechanism of Business Cycles By Fang Yao
  18. Free Banking, the Real-Balance Effect, and Walras´ Law By van den Hauwe, Ludwig
  19. Towards a monetary policy evaluation framework. By Stéphane Adjemian; Matthieu Darracq Pariès; Stéphane Moyen
  20. Learning, adaptive expectations, and technology shocks By Kevin X.D. Huang; Zheng Liu; Tao Zha
  21. Globalization, Transparency and Economic Growth: The Vulnerability of Chinese Firms to Macroeconomic Shocks By Oxelheim, Lars
  22. Disagreement and Biases in Inflation Expectations By Carlos Capistrán; Allan Timmermann
  23. Measuring the Welfare Cost of Inflation in South Africa: A Reconsideration By Rangan Gupta; Josine Uwilingiye
  24. Oil price shocks: Demand vs Supply in a two-country model By Alessia Campolmi
  25. Growth Oriented Macroeconomic Policies for Small Islands Economies: Lessons from Singapore By Chowdhury, Anis
  26. Should quarterly government finance statistics be used for fiscal surveillance in Europe? By Javier J. Pérez; Diego J. Pedregal
  27. The Influence of the Business Cycle on Mortality By Wolfgang H. Reichmuth; Samad Sarferaz
  28. Explaining the Joint Behavior of Employment, Unemployment and Nonparticipation By Moon, Weh-Sol
  29. The relative size of New Zealand exchange rate and interest rate responses to news By Andrew Coleman; Özer Karagedikli
  30. Stabilizing Inflation under Heterogeneity: a welfare-based measure on what to target By Sinigaglia, Daniel
  31. Government Consumption Volatility and Country Size By Davide Furceri; Marcos Poplawski Ribeiro
  32. Is real GDP per capita a stationary process? Smooth transitions, nonlinear trends and unit toot testing By Juan Carlos Cuestas; Dean Garratt
  33. Real-Time Measurement of Business Conditions By S. Boragan Aruoba; Francis X. Diebold; Chiara Scotti
  34. Towards a monetary policy evaluation framework. By Carmen Martinez-Carrascal; Annalisa Ferrando
  35. Fiscal policies, the current account and Ricardian equivalence. By Christiane Nickel; Isabel Vansteenkiste
  36. Intermediated Quantities and Returns By Rajnish Mehra; Facundo Piguillem; Edward C. Prescott
  37. Keynes, Keynesians and contemporary monetary theory and policy: an assessment By Colin Rogers
  38. Using The Artificial Neural Network (ANN) to Assess Bank Credit Risk: A Case Study of Indonesia By Maximilian J. B. Hall; Dadang Muljawan; Suprayogi; Lolita Moorena
  39. Inflation and Financial Development: Evidence from Brazil By Bittencourt, Manoel
  40. Sequential bargaining in a new-Keynesian model with frictional unemployment and staggered wage negotiation By Gregory de Walque; Olivier Pierrard; Henri Sneessens; Raf Wouters
  41. The Resolution of Macroeconomic Uncertainty: Evidence from Survey Forecast By Andrew J. Patton; Allan Timmermann
  42. Employment, productivity, output growth in emerging countries. Evidence from Romania By Bocean, Claudiu George; Sitnikov, Cataliana Soriana; Meghisan, Madalina Georgeta
  43. Empirical Testing of the Lucas Critique for the U.S. Economy, 1986 – 2005 By Dahiya, Dhruv
  44. Indian Economic Growth: Lessons for the Emerging Economies By Chakraborty, Suparna
  45. Should Dynamic Scoring be done with Heterogeneous Agent-Based Models? Challenging the Conventional Wisdom By M Saifur Rahman
  46. 3-Step Analysis of Public Finances Sustainability: the Case of the European Union* By António Afonso; Christophe Rault
  47. Banking with Contingent Contracts, Macroeconomic Risks, and Banking Crises By Hans Gersbach
  48. A Model of Capital and Crises By Zhiguo He; Arvind Krishnamurthy
  49. China in the World Economy: Dynamic Correlation Analysis of Business Cycles By Fidrmuc, Jarko; Batorova, Ivana
  50. An application of index numbers theory to interest rates. By Javier Huerga
  51. Design Limits and Dynamic Policy Analysis By William A. Brock; Steven N. Durlauf; Giacomo Rondina
  52. The impact of financial position on investment: an analysis for non-financial corporations in the euro area By Carmen Martínez-Carrascal; Annalisa Ferrando
  53. Currency Demand Modeling In Estimating The Underground Economy: A Critique on ‘Excess Sensitivity’ Method and Support for VAR Framework By Jerry Marmen Simanjuntak
  54. Variable Search Intensity in an Economy with Coordination Unemployment By Kaas, Leo
  55. Labor supply response in macroeconomic models: Assessing the empirical validity of the intertemporal labor supply response from a stochastic overlapping generations model with incomplete markets By Contreras, Juan; Sinclair, Sven
  56. Understanding international prices: customers as capital By Lukasz A. Drozd; Jaromir B. Nosal
  57. An Experimental Component Index for the CPI: From Annual Computer Data to Monthly Data on Other Goods By Timothy Erickson; Ariel Pakes
  58. Tax Treatment of Owner Occupied Housing and Wealth Inequality By Sang-Wook Stanley Cho; Johanna Francis
  59. Evidence on the Insurance Effect of Marginal Income Taxes By Charles Grant; Christos Koulovatianos; Alexander Michaelides; Mario Padula
  60. Demographic Uncertainty and Welfare in a Life-cycle Model under Alternative Public Pension Systems By M Saifur Rahman
  61. Non-smooth Dynamics and Multiple Equilibria in a Cournot-Ramsey Model with Endogenous Markups By Brito, Paulo; Costa, Luís F.; Dixon, Huw
  62. The sub-prime crisis, the credit squeeze and Northern Rock: The lessons to be learnt By Maximilian J. B. Hall
  63. Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis By Brown, J. David; Earle, John S.
  64. Escaping the Unemployment Trap: The Case of East Germany By Merkl, Christian; Snower, Dennis J.
  65. Asymmetries in the sport-forward G10 exchange rates: an answer to an old puzzle? By George Christodoulakis; Emmanuel Mamatzakis
  66. The Impact of Trust on Reforms By Heinemann, Friedrich; Tanz, Benjamin
  67. Tax Competition – Areas of Display and Romanian Effects By Mitu, Narcis-Eduard
  68. Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States By Koskela, Erkki; Poutvaara, Panu
  69. The Panic of 2007 By Gary B. Gorton
  70. A Three-Sector Model of Structural Transformation and Economic Development By Bah, El-hadj M.
  71. The Global Impact of Chinese Growth By Ippei Fujiwara; Keisuke Otsu; Masashi Saito
  72. Nonlinearities and the order of integration of oil prices By Juan Carlos Cuestas; Paulo Jose Regis
  73. Finance-specific Factors as Drivers of Cross-border Investment – An OLI Perspective By Forssbaeck, Jens; Oxelheim, Lars

  1. By: Melecky, Martin; Rodrıguez Palenzuela, Diego; Soderstrom, Ulf
    Abstract: We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target.
    Keywords: Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning.
    JEL: E32 E58 E52
    Date: 2008
  2. By: Carlos De Resende; Nooman Rebei
    Abstract: This paper studies the interdependence between fiscal and monetary policy in a DSGE model with sticky prices and non-zero trend inflation. We characterize the fiscal and monetary policies by a rule whereby a given fraction k of the government debt must be backed by the discounted value of current and future primary surpluses. The remaining fraction of debt is backed by seigniorage revenues. When k = 1, there is no fiscal dominance, since the fiscal authority backs all debt and accommodates (independent) monetary policy, by adjusting current or future primary surpluses to satisfy the government’s intertemporal budget constraint. If k = 0, all debt is backed by the monetary authority and there is complete fiscal dominance. A continuum of possibilities lies between these two polar cases. We numerically show that: 1) the degree of fiscal dominance, as measured by (1 - k), is positively related to trend inflation, and 2) when prices are sticky, k has significant effects on the business cycle dynamics. The model is estimated using Bayesian techniques. Estimates of k imply a high degree of fiscal dominance in both Mexico and South Korea, but almost no fiscal dominance in Canada and the U.S. The country-specific estimates of the structural parameters are used in a second-order approximation of the equilibrium around the deterministic steady-state to evaluate the welfare costs of fiscal dominance. Results suggest significant welfare losses for countries with high degrees of fiscal dominance.
    Keywords: Economic models; Fiscal policy; Inflation: costs and benefits; Monetary policy framework
    JEL: E31 E42 E50 E63
    Date: 2008
  3. By: Césaire A. Meh; José-Victor Rios-Rull; Yaz Terajima
    Abstract: Since the work of Doepke and Schneider (2006a) and Meh and Terajima (2008), we know that inflation causes major redistribution of wealth - between households and the government, between nationals and foreigners, and between households within the same country. Two types of monetary policy, inflation targeting (IT) and price level targeting (PT), have very different implications for the price level path subsequent to a price-level shock, and consequently, have different redistributional properties which is what we explore in this paper. For Canada, we show that the magnitude of redistributions of an unexpected 1% price-level increase under IT is about three times larger than under PT. Households' and foreigners' wealth losses from a price level increase is matched by the gains of the government. Even though this redistribution is zero-sum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Finally, the direction of the change in the weighted welfare of households depends on the fiscal policy.
    Keywords: Economic models; Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices
    JEL: D31 E21 E31 E44 E52 E63
    Date: 2008
  4. By: William Poole; Robert H. Rasche; David C. Wheelock
    Abstract: The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee's policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy, and favored gradual adjustment of monetary growth to a rate consistent with price stability. The paper evaluates the Shadow's policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth, and with less variability in output and inflation, than a one-time reduction in monetary growth. We conclude that the Shadow articulated a sensible policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era.
    Keywords: Inflation (Finance) ; Monetary policy
    Date: 2008
  5. By: Harashima, Taiji
    Abstract: Recently, it has been argued that trend inflation may be the solution to the puzzle of inflation persistence in the New Keynesian Phillips curve (NKPC). However, incorporating trend inflation into the NKPC raises another serious problem—it lacks a microfoundation. The paper presents a microfoundation for trend inflation, which indicates that trend inflation is a natural consequence of simultaneous optimization by the government and households. A purely forward-looking model is constructed based on the microfoundation presented. The model enables a unified explanation for various types of inflation. It also indicates that, if inflation is assumed to follow an autoregressive process without considering trend inflation, many measures of inflation persistence will spuriously indicate that inflation is intrinsically substantially persistent and has a backward-looking property.
    Keywords: Inflation persistence; The New Keynesian Phillips curve; Central bank independence; Trend inflation; The fiscal theory of the price level
    JEL: E58 E31 E63
    Date: 2008–09–21
  6. By: Ippei Fujiwara (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: For a long time, changes in expectations about the future have been thought to be significant sources of economic fluctuations, as argued by Pigou (1926). Although creating such an expectation-driven cycle (the Pigou cycle) in equilibrium business cycle models was considered to be a difficult challenge, as pointed out by Barro and King (1984), recently, several researchers have succeeded in producing the Pigou cycle by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Seminal research by Christiano, Ilut, Motto and Rostagno (2007) explains the gstock market boom-bust cycles,h characterized by increases in consumption, labor inputs, investment and the stock prices relating to high expected future technology levels, by introducing investment growth adjustment costs, habit formation in consumption, sticky prices and an inflation-targeting central bank. We, however, show that such a cycle is difficult to generate based on ggrowth expectation,h which reflect expectations of higher productivity growth rates. Thus, Barro and King's (1984) prediction still applies.
    Keywords: Expectations, Equilibrium Business Cycle, Technological Progress
    JEL: C52 D58 E32
    Date: 2008–09
  7. By: Carlos Thomas (Banco de España); Francesco Zanetti (Bank of England)
    Abstract: This paper studies the effect of labor market reform, in the form of reductions in firing costs and unemployment benefits, on inflation volatility. With this purpose, we build a New Keynesian model with search and matching frictions in the labor market, and estimate it using Euro Area data. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find however that neither policy is likely to have an important effect on inflation volatility, due to the small impact of changes in the volatility of the labor market on inflation dynamics.
    Keywords: Labor market policies, Search and matching frictions, New Keynesian model
    JEL: E31 E32 J64
    Date: 2008–09
  8. By: Anthony Garratt; Gary Koop; Emi Mise; Shaun Vahey (Reserve Bank of New Zealand)
    Abstract: A popular account for the demise of the UK’s monetary targeting regime in the 1980s blames the fluctuating predictive relationships between broad money and inflation and real output growth. Yet ex post policy analysis based on heavily-revised data suggests no fluctuations in the predictive content of money. In this paper, we investigate the predictive relationships for inflation and output growth using both real-time and heavily-revised data. We consider a large set of recursively estimated Vector Autoregressive (VAR) and Vector Error Correction models (VECM). These models differ in terms of lag length and the number of cointegrating relationships. We use Bayesian model averaging (BMA) to demonstrate that real-time monetary policymakers faced considerable model uncertainty. The in-sample predictive content of money fluctuated during the 1980s as a result of data revisions in the presence of model uncertainty. This feature is only apparent with real-time data as heavily-revised data obscure these fluctuations. Out of sample predictive evaluations rarely suggest that money matters for either inflation or real output. We conclude that both data revisions and model uncertainty contributed to the demise of the UK’s monetary targeting regime. Classification-C11, C32, C53, E51, E52
    Date: 2008–08
  9. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper analyzes how the formation of expectations constrains monetary and fiscal policy design. Economic agents have imperfect knowledge about the economic environment and the policy regime in place. Households and firms learn about the policy regime using historical data. Regime uncertainty substantially narrows, relative to a rational expectations analysis of the model, the menu of policies consistent with expectations stabilization. When agents are learning about the policy regime, there is greater need for policy coordination: the specific choice of monetary policy limits the set of fiscal policies consistent with macroeconomic stability - and simple Taylor-type rules frequently lead to expectations-driven instability. In contrast, non-Ricardian fiscal policies combined with an interest rate peg promote stability. Resolving uncertainty about the prevailing monetary policy regime improves stabilization policy, enlarging the menu of policy options consistent with stability. However, there are limitsto the benefits of communicating the monetary policy regime: the more heavily indebted the economy, the greater is the likelihood of expectations-driven instability. More generally, regardless of agents' knowledge of the policy regime, when expectations are anchored in the long term, short-term dynamics display greater volatility than under rational expectations.
    Keywords: Fiscal policy ; Monetary policy ; Rational expectations (Economic theory) ; Taylor's rule ; Economic stabilization ; Financial stability
    Date: 2008
  10. By: Stefano Eusepi
    Abstract: Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive inflation. More generally, initial beliefs that are arbitrarily close to the inflation target equilibrium can result in complex economic dynamics, resulting in welfare-reducing fluctuations. On the contrary, central bank communication of policy rules helps stabilize expectations around the inflation target equilibrium.
    Keywords: Banks and banking, Central ; Monetary policy ; Inflation (Finance) ; Inflation targeting ; Disclosure of information
    Date: 2008
  11. By: Juan Carlos Cuestas; Barry Harrison
    Abstract: In this paper we provide an insight into the inflation dynamics in a panel of Central and Eastern European countries. These countries are selected because of their increasing importance in the EU and their likely increased future importance in monetary policy decisions inside the euro area. By means of unit root testing and allowing for the possibility of a smooth asymmetric adjustment to equilibrium, we show that inflation rates in more than half of the countries investigated are stationary processes. Our results imply evidence against the persistence hypothesis for them.
    Keywords: Inflation persistence, Unit roots, Nonlinearities
    JEL: C22 E31 E32
    Date: 2008–09
  12. By: Jörg Döpke (University of Applied Sciences, Department Economics, Geusaer Strasse, 06217 Merseburg, Germany.); Jonas Dovern (Kiel Institute for the World Economy (IfW Kiel), Düsternbrooker Weg 120, 24105 Kiel, Germany.); Ulrich Fritsche (University Hamburg, Department of Economics and Politics and DIW Berlin, Von-Melle-Park 9, 20146 Hamburg, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months. JEL Classification: D84, E31.
    Keywords: Inflation expectations, sticky information, Phillips curve, inflation persistence.
    Date: 2008–09
  13. By: Juan David Prada Sarmiento
    Abstract: This paper analyses the role of a costly financial system in the transmission of monetary policy. The new-keynesian model for a small open economy is extended with a simple financial system based in Hamann and Oviedo (2006). The presence of the financial intermediation naturally allows the introduction of standard policy instruments: the repo interest rate and the compulsory requirement of reserves. The model is calibrated to match key steady-state ratios of Colombia and is used to evaluate the alternative policy instruments. The financial system plays an important role in the transmission mechanism of the monetary policy, and determines the final effects on aggregated demand and inflation rates of exogenous modifications of the policy instruments. The monetary policy conducted through the repo interest rate has the standard effects predicted by the new-keynesian framework. But changes in the compulsory reserve requirement rate may generate, under different scenarios, totally different reactions on economic activity, and little quantitative effects on inflation rates and aggregate demand. Therefore this last policy instrument appears to be uneffective and unreliable.
    Date: 2008–09–22
  14. By: Don Bredin (University College Dubmlin); John Elder (North Dakota State University); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: We use a very general bivariate GARCH-M model and quarterly data for five Asian countries to test for the impact of real and nominal macroeconomic uncertainty on in°ation and output growth. We conclude the following. First, in the majority of countries uncertainty regarding the output growth rate is related negatively to the average growth rate. Second, contrary to expectations, infation uncertainty in most cases does not harm the output growth perfor- mance of an economy. Third, in°ation and output uncertainty have a mixed effect on inflation. Consistent results are found using the VAR-GARCH-M approach to investigate the dynamic relationship between in°ation and output growth using impulse response functions. This evidence implies that macroeconomic uncertainty may even improve macroeconomic performance, i.e., raise output growth and reduce inflation. Our empirical results highlight important differences with those for industrialized countries.
    Keywords: Inflation, Output growth, Uncertainty, GARCH models
    JEL: C22 C51 C52 E0
    Date: 2008–09
  15. By: Jun Yang
    Abstract: We investigate the macroeconomic determinants of corporate spreads using a no-arbitrage technique. Structural shocks are identified by a New-Keynesian model. Treasury bonds are priced in an affine model with time-varying risk premia. Corporate bonds are priced in a reduced-form credit risk model where default risk depends on macroeconomic state variables. Using U.S. data, we find that the monetary policy shock contributes to more than 50% the corporate spread variations at different forecasting horizons. Its contribution, in general, declines with credit classes. In contrast, the aggregate supply and demand shocks contribute more to the spread variations in low credit classes than in high credit classes. In addition, they in general contribute more for longer forecasting horizons.
    Keywords: Debt management; Financial markets; Interest rates
    JEL: E43 E44 G12
    Date: 2008
  16. By: Leong, Choi-Meng; Puah, Chin-Hong; Abu Mansor, Shazali; Evan, Lau
    Abstract: The capability of monetary aggregates to generate stable link with fundamental economic indicators verifies the effectiveness of monetary targeting. However, traditional monetary aggregates have become flawed when financial reforms take place. As official monetary aggregates fail to maintain stable link with crucial economic indicators in Malaysia, monetary targeting has been substituted by interest rate targeting. Therefore, Divisia monetary aggregates, which are considered more superior than the simple sum counterparts are used in the investigation for the case of Malaysia. The findings imply that Divisia M2 money demand is stable and is capable to generate appropriate coefficients with correct signs for the variables included. Thus, Divisia money has shed new light on the usefulness of monetary targeting in formulating monetary policy in Malaysia.
    Keywords: Divisia money; Money demand; Error-correction model
    JEL: C43 C22 E41
    Date: 2008–06
  17. By: Fang Yao
    Abstract: I explore the aggregate effects of micro lumpy labor adjustment in a prototypical RBC model, which embeds a stochastic labor duration mechanism in the spirit of Calvo(1983), and it extends this approach by introducing a Weibull-distributed labor adjustment process to capture the increasing hazard function corroborated by the micro data. My principal findings are: The aggregate labor demand equation derived from the baseline Calvostyle model corresponds to the same reduced form as the quadratic-adjustment-cost model and deep parameters have a one-to-one mapping. However, this result does not hold in general. When introducing the Weibull labor adjustment, the aggregate dynamics vary with the extent of increasing hazard function, e.g., the volatility of aggregate labor is increasing, but the persistence is decreasing in degree of the increasing hazard of the labor adjustment.
    Keywords: business cycles; heterogeneous labor rigidity; increasing hazard function; Weibull distribution
    JEL: E32 E24 C68
    Date: 2008–08
  18. By: van den Hauwe, Ludwig
    Abstract: The author of this article draws special attention to two particular claims of the free bankers concerning the supposed working characteristics of a fractional-reserve free banking system which may strike the reader as questionable. The first of these relates to the alleged absence of a real-balance effect under free banking. The second relates to the free bankers´ reference to Walras´ Law as providing a rationale for the free banking system´s “offsetting” actions when confronted with changes in the public´ s demand to hold bank liabilities. This rationale is defective since it is based on an erroneous interpretation of Walras´ Law. The author´s conclusion does not imply that it is not at all possible, from a rational viewpoint, to make a plausible case for this variant of free banking, only that the argument should be freed from certain questionable tenets.
    Keywords: E0; E32; E42; E5; E51; E52
    JEL: E32 E42 E31 E51 E52 E50 E00
    Date: 2008–09–17
  19. By: Stéphane Adjemian (Université du Maine, GAINS & CEPREMAP. Contact address: Facultéde Droit et de Sciences Économiques, 72085 LE MANS Cedex 9, France.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Advances in the development of Dynamic Stochastic General Equilibrium (DSGE) models towards medium-scale structural frameworks with satisfying data coherence have considerably enhanced the range of analytical tools well-suited for monetary policy evaluation. The present paper intends to make a step forward in this direction: using US data over the Volker-Greenspan sample, we perform a DGSE-VAR estimation of a medium-scale DSGE model very close to Smets and Wouters [2007] specification, where monetary policy is set according to a Ramsey-planner decision problem. Those results are then contrasted with the DSGE-VAR estimation of the same model featuring a Taylortype interest rate rule. Our results show in particular that the restrictions imposed by the welfare-maximizing Ramsey policy deteriorates the empirical performance with respect to a Taylor rule specification. However, it turns out that, along selected conditional dimensions, and notably for productivity shocks, the Ramsey policy and the estimated Taylor rule deliver similar economic propagation. JEL Classification: E4, E5, F4.
    Keywords: DSGE models, Optimal monetary policy, Bayesian estimation.
    Date: 2008–09
  20. By: Kevin X.D. Huang; Zheng Liu; Tao Zha
    Abstract: This study explores the macroeconomic implications of adaptive expectations in a standard real business cycle model. When rational expectations are replaced by adaptive expectations, we show that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium for all admissible parameters, but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003). As a result, adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labor market dynamics.
    Keywords: Macroeconomics
    Date: 2008
  21. By: Oxelheim, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: The process of globalization encompasses economic and financial integration. Abolition of capital controls and dismantling of barriers of different kinds are important ingredients of the process that will entirely change the exposure of previously sheltered companies to shocks on the global economic arena. Lessons learned by policy-makers in already globalized countries are that market participants should be prepared to meet the new exposure to fluctuating exchange rates, interest rates and inflation rates. China has recently adopted International Financial Reporting Standards (IFRS) in her efforts to improve the quality of information available for risk management and for pricing of risk. This paper claims that further improvements are needed and presents a new framework for how to understand and measure the impact of different scenarios on corporate performance. It also elaborates on how to communicate the macroeconomic effects to external stakeholders of the firm in a way that fosters further economic growth in China.
    Keywords: International Financial Reporting Standards; Transparency; Economic Growth; Macroeconomic Impact; Globalization
    JEL: E22 E32 E44 F15 F23 F37 G18 G32 L25 M21
    Date: 2008–09–24
  22. By: Carlos Capistrán; Allan Timmermann (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters’ costs of over- and under-predicting inflation. Our model implies (i) biased forecasts; (ii) positive serial correlation in forecast errors; (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate; and (iv) predictability of forecast errors at different horizons by means of the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982.
    Keywords: asymmetric loss, real-time data, survey expectations
    JEL: C53 C82 E31 E37
    Date: 2008–09–19
  23. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: In this paper, using the Fisher and Seater (1993) long-horizon approach, we estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for South Africa over the period of 1965:02 to 2007:01, and, in turn, use the obtained estimates of the interest elasticity and the semi-elasticity to derive the welfare cost estimates of inflation, using both Bailey’s (1956) consumer surplus approach, as well, as Lucas’s (2000) compensating variation approach. When, the results are compared to welfare cost estimates obtained recently by Gupta and Uwilingiye (2008), using the same data set, but based on Johansen’s (1991, 1995) cointegration technique, the values are less by more than half in size than those obtained in the latter study, with the same being utmost ranging between 0.16 percent to 0.36 percent of GDP for the target-band of 3 percent to 6 percent of inflation. The paper, thus, highlights the fact that welfare cost estimates of inflation are sensitive to the methodology used to estimate the long-run equilibrium money demand relationships.
    Keywords: Long Horizon Regression, Money Demand, Welfare Cost of Inflation
    JEL: E31 E41 E52
    Date: 2008–06
  24. By: Alessia Campolmi (Central European University, Magyar Nemzeti Bank)
    Abstract: From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973. At the same time, the behaviour of real GDP growth, Consumer Price inflation (CPI inflation), GDP Deflator inflation, real wages and wage inflation in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? Within a two-country framework where oil is used in production, two kinds of shocks are analyzed: (a) a reduction in oil supply, (b) a persistent increase in foreign productivity (as proxy for the experience of China in the last years). It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s.
    Keywords: oil price, open economy, demand and supply shocks.
    JEL: E12 F41
    Date: 2008
  25. By: Chowdhury, Anis
    Abstract: Most small island economies or ?microstates? have distinctly different characteristics from larger developing economies. They are more open and vulnerable to external and environmental shocks, resulting in high output volatility. Most of them also suffer from locational disadvantages. Although a few small island economies have succeeded in generating sustained rapid growth and reducing poverty, most have dismal growth performance, resulting in high unemployment and poverty. Although macroeconomic policies play an important role in growth and poverty reduction, there has been very little work on the issue for small island economies or microstates. Most work follows the conventional framework and finds no or very little effectiveness of macroeconomic policies in stabilization. They also concentrate on short-run macroeconomic management with a focus almost entirely on either price stability or external balance. The presumption is that price stability and external balance are prerequisite for sustained rapid growth. This paper aims to provide a critical survey of the extant literature on macroeconomic policies for small island economies in light of the available evidence on their growth performance. Given the high output volatility and its impact on poverty, this paper will argue for a balance between price and output stabilization goals of macroeconomic policy mix. Drawing on the highly successful experience of Singapore, it will also outline a framework for growth promoting, pro-poor macroeconomic policies for small island economies/microstates.
    Keywords: Caribbean, Pacific Islands, fiscal policy, small open economies
    Date: 2008
  26. By: Javier J. Pérez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Diego J. Pedregal (Universidad de Castilla-la-Mancha, Real Casa de La Misericordia, Calle Altagracia, 50, 13003 Ciadad Real, Spain.)
    Abstract: We use a newly available dataset of euro area quarterly national accounts fiscal data and construct multivariate, state-space mixed-frequencies models for the government deficit, revenue and expenditure in order to assess its information content and its potential use for fiscal forecasting and monitoring purposes. The models are estimated with annual and quarterly national accounts fiscal data, but also incorporate monthly information taken from the cash accounts of the governments. The results show the usefulness of our approach for real-time fiscal policy surveillance in Europe, given the current policy framework in which the relevant official figures are expressed in annual terms. JEL Classification: C53, E6, H6.
    Keywords: Fiscal policies, Mixed frequency data, Forecasting, Unobserved Components Models, State Space, Kalman Filter.
    Date: 2008–09
  27. By: Wolfgang H. Reichmuth; Samad Sarferaz
    Abstract: We analyze the impact of short-run economic fluctuations on age-specific mortality using Bayesian time series econometrics and contribute to the debate on the procyclicality of mortality. For the first time, we examine the differing consequences of economic changes for all individual age classes. We employ a recently developed model to set up structural VARs of a latent mortality variable and of unemployment and GDP growth as main business cycle indicators. We find that young adults noticeably differ from the rest of the population. They exhibit increased mortality in a recession, whereas most of the other age classes between childhood and old age react with lower mortality to increased unemployment or decreased GDP growth. In order to avoid that opposed effects may cancel each other, our findings suggest to differentiate closely between particular age classes, especially in the age range of young adults. The results for the U.S. in the period 1956–2004 are confirmed by an international comparison with France and Japan. Long- term changes in the relationship between macroeconomic conditions and mortality are investigated with data since 1933.
    Keywords: Age-specific Mortality, Business Cycle, Unemployment, Bayesian Econometrics, Health, Epidemiology
    JEL: C11 C32 E32 I10 J10
    Date: 2008–09
  28. By: Moon, Weh-Sol
    Abstract: This paper argues that existing matching models with unemployment as an active search and nonparticipation as an inactive search predict counterfactual results: the unemployment rate is at most two times as volatile as the employmentpopulation ratio; only 20 percent of the actual volatility of the unemployment rate is accounted for; and the labor market variables are perfectly correlated with each other. This paper proposes a modified matching model in which workers are classified after matches take place. The modified model generates the direct transition from nonparticipation to employment with no assumption that nonparticipation is an inactive search and without adjusting the time period of the model. The model also explains the important cyclical features of the U.S. labor market.
    Keywords: Search and Matching; Business Cycles; Unemployment; Labor Force Participation
    JEL: E32 E24 J64
    Date: 2008–02
  29. By: Andrew Coleman; Özer Karagedikli (Reserve Bank of New Zealand)
    Abstract: This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered. Classification-E50, J61, R21, R23
    Date: 2008–09
  30. By: Sinigaglia, Daniel
    Abstract: What measure of inflation a Central Bank should respond to? This paper characterizes the optimal targeting index in a multisectorial economy with Calvo-pricing, defined as a composition of sectorial inflations that maximizes a selected welfare criterion. This is a purely quadratic approximation to the representative agent's utility in an environment of distorted steady state and sectorial heterogeneity of price stickiness. The Central Bank is modeled as following a historical Taylor Rule. For most parameter values, weights of sectorial inflations are increasing functions of the degrees of nominal rigidity and productivity volatility and decreasing functions of sectorial wage markup volatilities, resembling most of the conclusions from related literature. Bayesian estimation for the structural model using sectorial quantum and price indexes for Personal Consumption Expenditure (PCE) provides the parameter values that allow constructing the optimal index for the US economy. The result points out towards a price index with similar properties than the PCE, with more weight on services and less weight of inflation from durable goods. I find no evidence that a core index based on the exclusion of food and energy goods is welfare improving.
    Keywords: Inflation Targeting; Heterogeneity of price stickiness; Optimal inflation measure
    JEL: E52
    Date: 2008–09–16
  31. By: Davide Furceri; Marcos Poplawski Ribeiro
    Abstract: This paper provides empirical evidence showing that smaller countries tend to have more volatile government consumption for a sample of 160 countries from 1960 to 2000. The analysis also shows that country size is negatively related to the discretionary part of government consumption and to the volatilities of most of government consumption items. The results are robust to different time and country samples, different econometric techniques and to several sets of control variables.
    Keywords: Fiscal policy; government size; fiscal volatility; country size
    JEL: E62 H10
    Date: 2008–09
  32. By: Juan Carlos Cuestas; Dean Garratt
    Abstract: The aim of this paper is to provide additional evidence about the order of integration of constant price GDP per capita in a selection of countries. It does so by taking into account the possibility of non-linear deterministic trends and of asymmetric adjustment towards equilibrium. We find evidence of a global stationary ESTAR process around a nonlinear deterministic trend in almost half of the selected countries. These results show that nonlinearities affect real GDP series. By neglecting them, one can draw misleading conclusions from unit root tests. Specifically, the paper questions the so-called stylised fact of a near unit root which has so in°uenced macroeconomic thought over the past two decades.
    Keywords: Real GDP per capita, Unit root tests, Persistence, Nonlinearities, Smooth transitions
    JEL: C22 E31 E32
    Date: 2008–07
  33. By: S. Boragan Aruoba; Francis X. Diebold; Chiara Scotti
    Abstract: We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate the framework in a prototype empirical example and a simulation study calibrated to the example.
    JEL: C01 C22 E32 E37
    Date: 2008–09
  34. By: Carmen Martinez-Carrascal (Servicio de Estudios, Banco de España, Alcalá, 50, 28014 Madrid, Spain.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the impact that firms' financial position has on investment decisions using panel data from a large sample of non-financial corporations (around 120,000 firms)in six euro area countries (Belgium, Germany, France, Italy, the Netherlands and Spain). The results indicate that financial position is important to explain capital expenditures, as financial pressure appears relevant in explaining investment dynamics when it is proxied by cash flow, indebtedness and debt burden. The results also show differences in the sensitivity of investment rates to changes in financial pressure across countries, which appears to be especially large in the Netherlands and Italy and relatively small in Germany. JEL Classification: C33, E22, G32, J23.
    Keywords: Financial pressure, fixed investment, balance sheet channel, panel data.
    Date: 2008–09
  35. By: Christiane Nickel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the empirical relationship between fiscal policy and the current account of the balance of payments and considers how Ricardian equivalence changes this relationship. To do so, we estimate a dynamic panel threshold model for 22 industrialised countries in which the relationship between the current account and the government balance is allowed to alter according to the government debt to GDP ratio. The results show that for countries with debt to GDP ratios up to 90% the relationship between the government balance and the current account is positive, i.e. an increase in the fiscal deficit leads to a higher current account deficit. For very high debt countries this relationship however turns negative but insignificant, suggesting that a rise in the fiscal deficit does not result in a rise in the current account deficit. Implicitly this result suggests that households in very hight debt countries tend to become Ricardian. Estimating the same model for the 11 largest euro area countries shows that the reationship between the govnerment balance and the current account turns statistically insignificant when the debt to GDP ratio exceeds 80%. JEL Classification: F32, E62, F41.
    Keywords: Fiscal policy, current account, panel threshold model.
    Date: 2008–09
  36. By: Rajnish Mehra; Facundo Piguillem; Edward C. Prescott
    Abstract: The difference between average borrowing and lending rates in the United States is over 2 percent. In spite of this large difference, there is over 1.7 times GNP in 2007 of intermediated borrowing and lending between households. In this paper a model is developed consistent with these facts. The only difference within an age cohort is preferences for bequests. Individuals with little or no bequest motive are lenders, while individuals with strong bequest motive are borrowers and owners of productive capital. Given no aggregate uncertainty, the return on equity is the same as the household borrowing rate. The government can borrow at the household lending rate, so there is a 2 percent equity premium in our world with no aggregate uncertainty. We examine the distribution and life cycle patterns of asset holding and consumption and find there is large dispersion in asset holdings and little in consumption.
    JEL: E2 E44 E6 G1 G11 G12 G23
    Date: 2008–09
  37. By: Colin Rogers (School of Economics, University of Adelaide)
    Abstract: There has been no Keynesian Revolution in economic theory but there has been an unacknowledged Keynes's Revolution in economic policy. Keynes's theoretical revolution rested on the adoption of monetary analysis and the application of the principle of effective demand to demonstrate the existence of multiple long-period equilibria. Keynes's policies –creating a role for `Big Government' and the ‘Big Bank'- follow from his theory and have changed the structure of the laissez faire economy. Many Keynesians fail to acknowledge either of these issues and continue the classical tradition of real analysis and the assumption of unique long-period equilibrium. Real analysis, as a special case of Keynes's monetary analysis, provides a distorted perspective of the responsibilities of monetary policy which largely accounts for the increasing fragility and volatility exhibited by financial markets over the past two decades.
    Date: 2008–09
  38. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University); Dadang Muljawan (Central Bank of Indonesia); Suprayogi (Industrial Engineering Program, Bandung Institute of Technology, Indonesia); Lolita Moorena (Central Bank of Indonesia Internship program, Bandung Institute of Technology, Indonesia)
    Abstract: Ever since the Asian Financial Crisis, concerns have risen over whether policy-makers have sufficient tools to maintain financial stability. The ability to predict financial disturbances enables the authorities to take precautionary action to minimize their impact. In this context, the authorities may use any financial indicators which may accurately predict shifts in the quality of bank exposures. This paper uses key macro-economic variables (i.e. GDP growth, the inflation rate, stock prices, the exchange rates, and money in circulation) to predict the default rate of the Indonesian Islamic banks’ exposures. The default rates are forecasted using the Artificial Neural Network (ANN) methodology, which incorporates the Bayesian Regularization technique. From the sensitivity analysis, it is shown that stock prices could be used as a leading indicator of future problem.
    Keywords: default risk, artificial neural network, Bayesian regularization, transition matrix.
    JEL: E25 G32 C63 E27 C11
    Date: 2008–07
  39. By: Bittencourt, Manoel
    Abstract: We examine the impact of inflation on financial development in Brazil and the data available permit us to cover the period between 1985 and 2002. The results ? based initially on time-series and then on panel time-series data and analysis, and robust for different estimators and financial development measures ? suggest that inflation presented deleterious effects on financial development at the time. The main implication of the results is that poor macroeconomic performance has detrimental effects to financial development, a variable that is important for affecting, for example, economic growth and income inequality. Therefore, low and stable inflation, and all that it encompasses, is a necessary first step to achieve a deeper and more active financial sector with all its attached benefits.
    Keywords: financial development, inflation, Brazil
    Date: 2008
  40. By: Gregory de Walque; Olivier Pierrard; Henri Sneessens; Raf Wouters
    Abstract: We build a model with frictional unemployment and staggered wage bargaining and we assume that hours worked are negotiated every period. We analyze the role of workers? bargaining power in the hours negotiation on unemployment volatility and inflation persistence. The closer to zero is this parameter, (i ) the more firms adjust on the intensive margin, reducing employment volatility, (ii ) the lower the effective workers? bargaining power for wages and (iii ) the more important is the hourly wage in the marginal cost determination. Combining staggered wage bargaining with some degree of workers? bargaining power in the hours negotiation, we produce realistic labor market statistics together with inflation persistence.
    Date: 2008–07
  41. By: Andrew J. Patton; Allan Timmermann (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: We develop an unobserved components approach to study surveys of forecasts containing multiple forecast horizons. Under the assumption that forecasters optimally update their beliefs about past, current and future state variables as new information arrives, we use our model to extract information on the degree of predictability of the state variable and the importance of measurement errors on that variable. Empirical estimates of the model are obtained using survey forecasts of annual GDP growth and inflation in the US with forecast horizons ranging from 1 to 24 months. The model is found to closely match the joint realization of forecast errors at different horizons and is used to demonstrate how uncertainty about macroeconomic variables is resolved.
    Keywords: Fixed-event forecasts, multiple forecast horizons, Kalman filtering, survey data
    Date: 2008–09–19
  42. By: Bocean, Claudiu George; Sitnikov, Cataliana Soriana; Meghisan, Madalina Georgeta
    Abstract: This paper clarifies the links between employment, productivity and output growth and traces prospects for the Romanian economy. Because it always remains true, the “fundamental identity” which relates employment to output and labor productivity is the starting point for this paper. We checked the indirect correlation between employment and GDP growth in Romania. Using the historical trends we extrapolated data to 2015. We think that a low unemployment rate and rapid productivity growth are the hallmarks of a successful emerging economy and thus top priorities of economic policy.
    Keywords: Employment; productivity; output growth
    JEL: O47 E27 E24
    Date: 2008–08–23
  43. By: Dahiya, Dhruv
    Abstract: Lucas critique suggests parameter instability in usual policy multiplier based models, where the multipliers are estimated by running a regression of output on the relevant/hypothesized policy variables. I aim to test this implication for the U.S. economy using a simple aggregate demand and supply model, with rational expectations as the mechanism of expectation formation, given a money supply specification. The relevant data set (for inferential purposes) is quarterly, 1986:1 – 2005:4, with the exact model specification chosen from Heijdra and Ploeg.
    JEL: E00 E60
    Date: 2008–01–01
  44. By: Chakraborty, Suparna
    Abstract: Can we use neoclassical growth model to single out the important transmission channels through which external factors or ?primitives? affected the Indian economy and caused the remarkable growth of the period 1982?2002? In this paper, we answer the question by applying the new technique of business cycle accounting to the Indian economy. Our results show us that the primary conduit of policies that brought about significant growth in India was productivity that registered an unprecedented increase particularly in the 1990s. Our results further indicate that changes in labour market frictions and investment market frictions did not play a significant role, though increased government consumption aided growth by propping up demand. In addition, we examine the effective tax rates in India and find that while investment taxes barely fluctuated, income tax rates were increasing throughout. We suspect other positive developments in the Indian economy overwhelmed the negative effect of increasing labour income taxes on growth. Our result suggests that any emerging country that aims to replicate the Indian experience would do well to formulate policies that target productivity, a lesson that seems consistent with the Japanese experience since the Second World War.
    Keywords: business cycle accounting, India, growth, wedges, neoclassical growth, taxes
    Date: 2008
  45. By: M Saifur Rahman (Indiana University Bloomington)
    Abstract: Traditionally, Dynamic Scoring calculations experiments are carried out using representative agent based macroeconomic models. Existing literature does not provide any objection to this approach. In this paper, I develop a heterogeneous agent model similar to the Saver-Spenders model of Mankiw (2000). But spenders in my model are merely credit constrained and not rule-of-thumb consumers. Both groups are intertemporal optimizers because of the existence of Internal Habit Persistence. Transition path of most of the macro and fiscal variables for various tax cuts under alternative financing scheme shows pattern which are significantly different and sometimes contrasting to the representative agent model. Dynamic scoring calculations reveal a downward bias of the representative agent model. Underestimation of the dynamic response could be as large as 45%. Finally, steady state results indicate smaller impact of contractionary policies on major fiscal variables such as net tax revenue and tax base. Over all, the paper argues that the need to use heterogeneous agent based model in dynamic fiscal calculations is not only desirable, but also essential.
    JEL: E62 H2 H3 H6
    Date: 2008–09
  46. By: António Afonso (BCE - Banque Centrale Européenne - BCE); Christophe Rault (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)
    Abstract: We use a 3-step analysis to assess the sustainability of public finances in the EU27. Firstly, we perform the SURADF specific panel unit root test to investigate the meanreverting behaviour of general government expenditures and revenues ratios. Secondly, we apply the bootstrap panel cointegration techniques that account for the time series and cross-sectional dependencies of the regression error. Thirdly, we check for a structural long-run equation between general government expenditures and revenues via SUR analysis. While results imply that public finances were not unsustainable for the EU panel, fiscal sustainability is an issue in most countries, with a below unit estimated coefficient of expenditure in the cointegration relation.
    Keywords: fiscal sustainability, EU, panel cointegration.
    Date: 2008–05–01
  47. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the banking sector and banking crises are avoided. In contrast, when banks are bailed out, depositors receive non-contingent contracts with high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, the present generation overinvests, and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.
    Keywords: Financial intermediation, macroeconomic risks, state contingent contracts, banking regulation
    JEL: D41 E4 G2
    Date: 2008–08
  48. By: Zhiguo He; Arvind Krishnamurthy
    Abstract: We develop a model in which the capital of the intermediary sector plays a critical role in determining asset prices. The model is cast within a dynamic general equilibrium economy, and the role for intermediation is derived endogenously based on optimal contracting considerations. Low intermediary capital reduces the risk-bearing capacity of the marginal investor. We show how this force helps to explain patterns during financial crises. The model replicates the observed rise during crises in Sharpe ratios, conditional volatility, correlation in price movements of assets held by the intermediary sector, and fall in riskless interest rates. In a dynamic context, we show that aversion to drops in intermediary capital can generate a two-factor asset pricing model with a role for both a market factor and a liquidity factor.
    JEL: E44 G12 G18 G2
    Date: 2008–09
  49. By: Fidrmuc, Jarko; Batorova, Ivana
    Abstract: We analyse the business cycles in China and in selected OECD countries between 1992 and 2006. We show that, although negative correlation dominates for nearly all countries, we can also see large differences for various frequencies of cyclical developments. On the one hand, nearly all OECD countries show positive correlations of the very short-run developments that may correspond to intensive supplier linkages. On the other hand, business cycle frequencies (cycles with periods between 1.5 and 8 years) are typically negative. Nevertheless, countries facing a comparably longer history of intensive trading links tend to show also slightly higher correlations of business cycles with China.
    Keywords: business cycles, synchronisation, trade, FDI, dynamic correlation
    Date: 2008
  50. By: Javier Huerga (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper uses index number theory to disentangle changes in aggregate retail interest rates due to changes in individual component rates (“interest rate effect”) from those caused by changes in the weights of each component (“weight effect”), on the basis of the “difference” index numbers recently revisited by Diewert (2005). The paper, first discusses the optimal calculation of a binary index using axiomatic index number theory; on that basis, chain and direct indices are established; finally, the selected decomposition and indices are applied to monthly data on euro area interest rates on loans and deposits (MIR) for the period January 2003 – January 2008. It is concluded that relevant weight effects at euro area level are limited to a few indicators and periods of MIR, and that that the indices on interest rates can be a suitable tool in the analysis of variations in aggregate interest rates. JEL Classification: C43 - Index Numbers and Aggregation, E43 - Determination of Interest Rates, Term Structure of Interest Rates.
    Keywords: Index numbers, interest rates, Euro area.
    Date: 2008–09
  51. By: William A. Brock; Steven N. Durlauf; Giacomo Rondina
    Abstract: This paper characterizes the frequency domain properties of feedback control rules in linear systems in order to better understand how different rules affect outcomes frequency by frequency. We are especially concerned in understanding how reductions of variance at some frequencies induce increases in variance at others. Tradeoffs of this type are known in the control literature as design limits. Design limits are important in understanding the full range of effects of stabilization policies. We extend existing results to account for discrete time bivariate systems with rational expectations. Application is made to the evaluation of monetary policy rules.
    JEL: C6 E52
    Date: 2008–09
  52. By: Carmen Martínez-Carrascal (Banco de España); Annalisa Ferrando (European Central Bank)
    Abstract: This paper analyses the impact that firms' financial position has on investment decisions using panel data from a large sample of non-financial corporations (around 120,000 firms) in six euro area countries (Belgium, Germany, France, Italy, the Netherlands and Spain). The results indicate that financial position is important to explain capital expenditures, as financial pressure appears relevant in explaining investment dynamics when it is proxied by cash flow, indebtedness and debt burden. The results also show differences in the sensitivity of investment rates to changes in financial pressure across countries, which appears to be especially large in the Netherlands and Italy and relatively small in Germany.
    Keywords: financial pressure, fixed investment, balance sheet channel, panel data
    JEL: C33 E22 G32 J23
    Date: 2008–09
  53. By: Jerry Marmen Simanjuntak (College of Business and Economics The Australian National University, Australia & ABFI Institute PERBANAS, Jakarta, Indonesia)
    Abstract: The ‘excess sensitivity’ as the method of estimating the underground economy by using currency modeling is found to be unreliable. In general, there are two major weaknesses in the method. First, the key assumption, in assuming the equality of velocity of money between the official economy and the underground economy, is very unrealistic. Second, the method is found to be non robust due to the unit measurement and scale change. More specifically, the application of the excess sensitivity method using the single-step error correction model (ECM) in Bajada’s paper is very weak because there is no cointegration analysis as the prerequisite of ECM modeling. In conclusion, the possibility of using a currency demand approach in estimating the size of the underground economy is still unclear like ‘black box’, and in particular, the excess sensitivity method should be thoroughly revised.
    Keywords: underground economy, currency demand, econometric models
    JEL: C51 E26 E41
    Date: 2008–09
  54. By: Kaas, Leo (University of Konstanz)
    Abstract: This paper analyzes an urn-ball matching model in which workers decide how intensively they sample job openings and apply at a stochastic number of suitable vacancies. Equilibrium is not constrained efficient; entry is excessive and search intensity can be too high or too low. Moreover, an inefficient discouraged-worker effect among homogenous workers emerges under adverse labor market conditions. Unlike existing coordination-friction economies with fixed search intensity, the model can account for the empirical relation between the job-finding rate and the vacancy-unemployment ratio, provided that search costs are small and that search intensity is sufficiently procyclical.
    Keywords: matching function, coordination frictions, unemployment
    JEL: E24 J63 J64
    Date: 2008–09
  55. By: Contreras, Juan; Sinclair, Sven
    Abstract: We evaluate the labor supply response in a stochastic overlapping generations model with incomplete markets and a non separable utility function in labor and consumption. Using a simulated panel from the model, we calculate the labor supply response to anticipated changes in wages (holding the marginal utility of wealth constant-that is, the Frisch elasticity) and to unanticipated change in wages (which describes the effect of uncertainty in labor supply responses). The model's Frisch elasticity estimate is 0.33, which is slightly higher than the empirical estimates in the earlier literature but somewhat lower than more recent estimates. The paper also shows that the borrowing constraints in the model reduce substantially the estimates of the Frisch elasticity. The labor supply response to an unanticipated change in wages is small because of large wealth effects. Having all the variables required and no measurement error, we calculate the omitted variable bias of not controlling for the level and variance (risk) of the unexpected changes in wages. Omitting both variables biases the estimates of the Frisch elasticity downward by a factor of 8; omitting measures of wage risk alone biases it by a factor of 1.4
    Keywords: labor supply; intertemporal substitution; Frisch elasticity; stochastic GE models
    JEL: D91 J22 D58
    Date: 2008–09–17
  56. By: Lukasz A. Drozd; Jaromir B. Nosal
    Abstract: This paper develops a theory of pricing-to-market driven by marketing and bargaining frictions. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. In our model, producers search and form long-lasting relations with their customers, and marketing helps overcome the search frictions involved in forming such matches. In the context of international business cycle patterns, the model accounts for observations that are puzzles for a large class of theories: (i) pricing-to-market, (ii) positive correlation of aggregate real export and import prices, (iii) excess volatility of the real exchange rate over the terms of trade, and (iv) low short-run and high long-run price elasticity of international trade flows. The behavior of quantities is shown to be on par with standard international business cycle theories that, in contrast to our model, assume low intrinsic elasticity of substitution between domestic and foreign goods.
    Keywords: Business cycles ; Prices ; International business enterprises
    Date: 2008
  57. By: Timothy Erickson; Ariel Pakes
    Abstract: Until recently the Consumer Price Index consisted solely of "matched model" component indexes. The latter are constructed by BLS personnel who visit stores and compare prices of goods with the same set of characteristics over successive periods. This procedure is subject to a selection bias. Goods that were not on the shelves in the second period were discarded and hence never contributed price comparisons. The discarded goods were disproportionately goods which were being obsoleted and had falling prices. Pakes (2003) provided an analytic framework for analyzing this selection effect and showed both that it could be partially corrected using a particular hedonic technique and that the correction for his personal computer example was substantial. The BLS staff has recently increased the rate at which they incorporate techniques to correct for selection effects in their component indexes. However recent work shows very little difference between hedonic and matched model indices for non computer components of the CPI. This paper explores why. We look carefully at the data on the component index for TVs and show that differences between the TV and computer markets imply that to obtain an effective selection correction we need to use a more general hedonic procedure than has been used to date. The computer market is special in having well defined cardinal measures of the major product characteristics. In markets where such measures are absent we may need to allow for selection on unmeasured, as well as measured, characteristics. We develop a hedonic selection correction that accounts for unmeasured characteristics, apply it to TVs, and show that it yields a much larger selection correction than the standard hedonic. In particular we find that matched model techniques underestimate the rate of price decline by over 20%.
    JEL: E31 L11 L16
    Date: 2008–09
  58. By: Sang-Wook Stanley Cho (University of New South Wales, School of Economics); Johanna Francis (Fordham University, Department of Economics)
    Abstract: In the U.S., mortgage interest deductibility provides a financial incentive for home ownership over renting as well as an incentive to “over-consume” housing since houses are not fungible. Home-ownership is also often promoted as a safe means of wealth creation. We construct and calibrate a quantitative general equilibrium lifecycle model with homeownership and mortgage decisions to investigate the degree to which the wealth inequality in the United States is driven by the home mortgage interest deduction and the untaxed nature of imputed rents from owner-occupied housing. As the tax treatment of housing will disproportionately create tax savings for the top deciles of the income distribution, we quantify how the tax deductibility contributes to the heavily skewed distribution of wealth in the United States using data from the Survey of Consumer Finances. Although the tax treatment of owner occupied housing alone is unlikely to produce the extreme wealth concentration at the far right tail of the distribution, we argue that it is re-enforced by a bequest motive. We find that removing mortgage interest deductibility and taxing imputed rents reduces the Gini coefficient by 0.04 points, caused by a re-allocation of wealth from the top 10 percentiles to the bottom 50 percentiles of the wealth distribution.
    Keywords: Mortgage interest deductibility, housing, wealth, inequality
    JEL: E21
    Date: 2008
  59. By: Charles Grant (University of Reading); Christos Koulovatianos (Goethe University Frankfurt, University of Vienna); Alexander Michaelides (London School of Economics); Mario Padula (University Ca' Foscari of Venice)
    Abstract: Marginal income taxes may have an insurance effect by decreasing the effective fluctuations of after-tax individual income. By compressing the idiosyncratic component o personal income fluctuations, higher marginal taxes should be negatively correlated with the dispersion of consumption across households, a necessary implication of an insurance effect of taxation. Our study empirically examines this negative correlation, exploiting the ample variation of state taxes across US states. We show that taxes are negatively correlated with the consumption dispersion of the within-state distribution of non-durable consumption and that this correlation is robust.
    Keywords: Undiversifiable Earnings Risk, Consumption Insurance, Tax Distortions
    JEL: E21 H20 H31
    Date: 2008–02–01
  60. By: M Saifur Rahman (Indiana University Bloomington)
    Abstract: In this paper, I analyze consumption, aggregate savings, output and welfare implications of five different social security arrangements whenever there is demographic uncertainty. Following Bohn (2002), I analyze the effect of an uncertain population growth in an extended version of a modified Life-cycle model developed by Gertler (1999). Population growth dampens savings and output under all arrangements. Pay-as-you-go-Defined Benefit system appears to fare better than all other alternatives, falling short of the private annuity market with no pension system. But social security in general increases social welfare, with Fully Funded systems faring the best. Thus there appears to be a clear trade-off between growth and social welfare. The social security system also reduces the volatility of the economy.
    Date: 2008–09
  61. By: Brito, Paulo; Costa, Luís F.; Dixon, Huw (Cardiff Business School)
    Abstract: We develop a simple Ramsey model with numerous Cournotian industries where entry generates an endogenous markup. The model produces two different regimes: a monopoly and an oligopoly one. We provide a rigorous study of non-smooth dynamics and we also analyse the global dynamics of the model, demonstrating the model exhibits robust heteroclinic orbits, either of the smooth or the non-smooth type. Similar economies may be in any of these regimes and they may change regime along its convergence path. Fixed costs and elasticities of demand, play a crucial role and changing their values may alter the dynamics in a radical way, either by inducing a discontinuous transition or a discontinuous hysteresis.
    Keywords: endogenous mark-ups; non-smooth dynamics; discontinuous induced bifurcations; heteroclinic orbits
    JEL: C62 D43 E32
    Date: 2008–09
  62. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University)
    Abstract: On 14 September 2007, after failing to find a 'White Knight' to take over its business, Northern Rock bank turned to the Bank of England ('the Bank') for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully-blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank's branches but only served to heighten the sense of panic in policymaking circles. Following the Government's failed attempt to find an appropriate private sector buyer, the bank was then nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events which precipitated the bank's illiquidity. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which allowed the Northern Rock spectacle to occur. None of the interested parties – the Bank, the Financial Services Authority (FSA) and the Treasury – emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. Some reform recommendations are also provided for good measure, particularly in the area of formal deposit protection.
    Keywords: UK banks, banking regulation and supervision, central banking, deposit protection.
    JEL: E53 E58 G21 G28
    Date: 2008–08
  63. By: Brown, J. David (Heriot-Watt University, Edinburgh); Earle, John S. (Upjohn Institute for Employment Research)
    Abstract: We analyze comprehensive manufacturing firm data to measure the contribution of inter-firm employment reallocation to aggregate productivity growth during the socialist and reform periods in six transition economies. Modifying a standard decomposition technique to better reflect the role of firm entry, we find that reallocation rates and productivity contributions are very low under socialism. After reforms, they rise dramatically, and productivity contributions greatly exceed those observed in market economies. Early in transition, faster reform is associated with larger contributions from reallocation, but later, and on average over the whole transition, this relationship is reversed. Though reallocation rates are larger in faster reforming economies, higher productivity dispersion in slower reformers creates much higher productivity gains for a given volume of reallocation. The results imply that reallocation should be viewed as necessary regular maintenance for a well-functioning economy, and particularly large productivity contributions tend to reflect previous neglect more than current virtue.
    Keywords: productivity, reallocation, industry dynamics, creative destruction, reform, transition, Georgia, Hungary, Lithuania, Romania, Russia, Ukraine
    JEL: E32 O47 P23
    Date: 2008–09
  64. By: Merkl, Christian (Kiel Institute for the World Economy); Snower, Dennis J. (Kiel Institute for the World Economy)
    Abstract: This paper addresses the question of why high unemployment rates tend to persist even after their proximate causes have been reversed (e.g., after wages relative to productivity have fallen). We suggest that the longer people are unemployed, the greater is their cumulative likelihood of falling into a low-productivity "trap," through the attrition of skills and work habits. We develop a model along these lines, which allows us to bridge the gap between high macroeconomic employment persistence versus relatively high microeconomic labor market flow numbers. We calibrate the model for East Germany and examine the effectiveness of three employment policies in this context: (i) a weakening of workers’ position in wage negotiations due to a drop in the replacement rate or firing costs, leading to a fall in wages, (ii) hiring subsidies, and (iii) training subsidies. We show that the employment effects of these policies depend crucially on whether low-productivity traps are present.
    Keywords: labor market, labor market trap, East Germany
    JEL: E24 J30 J31 J64
    Date: 2008–09
  65. By: George Christodoulakis (Manchester Business School, University of Manchester); Emmanuel Mamatzakis (Department of Economics, University of Macedonia)
    Abstract: This paper provides evidence on the existence of asymmetries in the underlying loss preferences for the difference between the spot and forward nominal exchange rate. We find that, in the context of both linear and non-linear loss functions, the underlying loss preferences for monthly data are predominantly asymmetric, whilst for weekly exchange rates asymmetry tends to weaken. In a second stage we run cross section regressions to examine what variables drive this asymmetry. Interestingly, besides some macroeconomic variables, such as the growth rate and price changes, political and security risk assert some significant impact on asymmetry.
    Keywords: Asymmetric preferences, Spot-forward exchange rates, GMM estimation, Lin-Lin.
    JEL: C53 E27 E37
    Date: 2008–09
  66. By: Heinemann, Friedrich; Tanz, Benjamin
    Abstract: In a constantly changing economic environment a country's ability to undertake institutional reforms is crucial to maintain economic growth and to promote the welfare of its citizens. A wide range of determinants for institutional reforms have been identified. However, the impact of trust on reforms has so far never been addressed. We provide theoretical arguments why trust should influence institutional changes and test the relationship empirically. We find a significant positive relation between trust and reforms with regard to government size, the legal system, and deregulation of private businesses and the labor market. The results in other policy fields are ambiguous.
    Keywords: Trust, Economic Freedom, Policy Reforms
    JEL: E60 H11
    Date: 2008
  67. By: Mitu, Narcis-Eduard
    Abstract: In the past, governments had more freedom in setting their taxes as the barriers to free movement of capital and people were high. The gradual process of globalization is lowering these barriers and results in rising capital flows and greater manpower mobility. Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources. With tax competition in the era of globalization politicians have to keep tax rates “reasonable” to dissuade workers and investors from moving to a lower tax environment. Most countries started to reform their tax policies to improve their competitiveness. However, the tax burden is just one part of a complex formula describing national competitiveness. The other criteria like total manpower cost, labor market flexibility, education levels, political stability, legal system stability and efficiency are also important.
    Keywords: Tax competition; Positive effects; Negative effects; Flat tax
    JEL: E62 F22 E60
    Date: 2008–09–23
  68. By: Koskela, Erkki (University of Helsinki); Poutvaara, Panu (University of Helsinki)
    Abstract: In European Welfare States, unskilled workers are typically unionized, while the wage formation of skilled workers is more competitive. To focus on this aspect, we analyze how flexible international outsourcing and labour taxation affect wage formation, employment and welfare in dual domestic labour markets. Higher productivity of outsourcing, lower cost of outsourcing and lower factor price of outsourcing increase wage dispersion between the skilled and unskilled workers. Increasing wage tax progression of unskilled workers decreases the wage rate and increases the labour demand of unskilled workers. It decreases the welfare of unskilled workers and increases both the welfare of skilled workers and the profit of firms.
    Keywords: flexible outsourcing, dual labour market, impacts of labour taxation, welfare state
    JEL: E24 H22 J21 J31 J51
    Date: 2008–09
  69. By: Gary B. Gorton
    Abstract: How did problems with subprime mortgages result in a systemic crisis, a panic? The ongoing Panic of 2007 is due to a loss of information about the location and size of risks of loss due to default on a number of interlinked securities, special purpose vehicles, and derivatives, all related to subprime mortgages. Subprime mortgages are a financial innovation designed to provide home ownership opportunities to riskier borrowers. Addressing their risk required a particular design feature, linked to house price appreciation. Subprime mortgages were then financed via securitization, which in turn has a unique design reflecting the subprime mortgage design. Subprime securitization tranches were often sold to CDOs, which were, in turn, often purchased by market value off-balance sheet vehicles. Additional subprime risk was created (though not on net) with derivatives. When the housing price bubble burst, this chain of securities, derivatives, and off-balance sheet vehicles could not be penetrated by most investors to determine the location and size of the risks. The introduction of the ABX indices, synthetics related to portfolios of subprime bonds, in 2006 created common knowledge about the effects of these risks by providing centralized prices and a mechanism for shorting. I describe the relevant securities, derivatives, and vehicles and provide some very simple, stylized, examples to show: (1) how asymmetric information between the sell-side and the buy-side was created via complexity; (2) how the chain of interlinked securities was sensitive to house prices; (3) how the risk was spread in an opaque way; and (4) how the ABX indices allowed information to be aggregated and revealed. I argue that these details are at the heart of the answer to the question of the origin of the Panic of 2007.
    JEL: E1 E32 G2
    Date: 2008–09
  70. By: Bah, El-hadj M.
    Abstract: Growth accounting exercises point to aggregate TFP dierences as the dominant source of the large cross-country income dierences. In this paper, I ask which sectors account for the aggregate TFP gap between rich and poor countries. Data limitations for developing countries have led researchers to use indirect methods for estimating sectoral TFPs. This paper proposes a new approach for estimating sectoral TFP using panel data on sectoral employment shares and GDP per capita. The approach builds a model of structural transformation and uses it to infer sectoral TFP time series consistent with the reallocation of labor between sectors and GDP per capita growth of a set of developing countries over a 40-year period. I nd that relative to the US, developing countries are the least productive in agriculture, followed by services and then manufacturing. While these ndings are consistent with empirical studies, they dier from ndings in the growth literature.
    Keywords: Productivity; Sectoral TFP; Structural Transformation; Eco- nomic growth; Economic Development
    JEL: O41 O47 E10 O14
    Date: 2007–11
  71. By: Ippei Fujiwara (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Keisuke Otsu (Assistant Professor, Sophia University, Faculty of Liberal Arts and formerly, Economist, Institute for Monetary and Economic Studies (E-mail:; Masashi Saito (Economist, Research and Statistics Department, Bank of Japan (E-mail:
    Abstract: Three decades have passed since China dramatically opened up to the global market and began to catch up rapidly with leading economies. In this paper we discuss the effects of Chinafs opening-up and rapid growth on the welfare of both China and the rest of the world (ROW). We find that the opening-up per se is welfare improving for China but has had little impact on the ROW given a balanced trade constraint. The opening-up of China is beneficial to the ROW if it leads to significant productivity growth in China. Also, Chinafs balanced trade policy after the opening-up has helped the ROW rather than China.
    Keywords: Productivity, Terms of Trade, Growth, Open Economy
    JEL: E13 F41 O47
    Date: 2008–09
  72. By: Juan Carlos Cuestas; Paulo Jose Regis
    Abstract: Unit root tests are the starting point of most empirical time series research. This paper analyses the order of integration of oil prices taking into account the possibilities of nonlinearities in the deterministic components. Using an aggregate index for the price of oil, and applying Bierens (1997) unit root tests, we find that the hypothesis of a unit root process is rejected in favour of nonlinear trend stationarity of the price of crude oil. On the contrary, preliminary analysis using Ng and Perron (2001) and Kapetanios, Shin and Snell's (2003) tests, fail to reject the hypothesis of a unit root.
    Keywords: Unit roots, Nonlinearities, Oil price
    JEL: C22 E39 Q43
    Date: 2008–09
  73. By: Forssbaeck, Jens (Lund Institute of Economic Research); Oxelheim, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper we empirically test the role of firm-specific financial characteristics as drivers of international investment and production. We hypothesize that financial strength generates advantages that can be exploited through cross-border investment activity. The hypothesis is tested in a series of binary-response models, using a sample of 1379 European non-financial firms’ international acquisitions. Controlling for traditional firm- and target-country-specific FDI determinants within an OLI framework, we find strong evidence that financial factors play a significant role in explaining cross-border investment. We conclude that without explicit consideration of the financial dimension, firms’ FDI decisions cannot be properly understood.
    Keywords: FDI; OLI; Cross-border Acquisitions; Cost of Capital; Financial Strategy; Financial Variables
    JEL: E22 F21 F23 L23
    Date: 2008–09–24

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