nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒10‒13
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Quadratic Labor Adjustment Costs and the New-Keynesian Model By Wolfgang Lechthaler; Dennis Snower
  2. The High Cross-Country Correlations of Prices and Interest Rates By Henriksen, Espen; Kydland, Finn; Sustek, Roman
  3. Inflation-Output Tradeoff as Equilibrium Outcome of Globalization By Alon Binyamini; Assaf Razin
  4. Stabilizing Expectations under Monetary and Fiscal Policy Coordination By Stefano Eusepi; Bruce Preston
  5. Are Central Banks following a linear or nonlinear (augmented) Taylor rule? By Castro, Vítor
  6. Wage Rigidity and Job Creation By Haefke, Christian; Sonntag, Marcus; van Rens, Thijs
  7. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  8. Modeling Volatility Spillovers between the Variabilities of US Ingflation and Output: the UECCC GARCH Model By Christian Conrad; Menelaos Karanasos
  9. Temporary Price Changes and the Real Effects of Monetary Policy By Patrick J. Kehoe; Virgiliu Midrigan
  10. Understanding the Flattening Phillips Curve By Ken Kuttner; Tim Robinson
  11. "What's a Central Bank to Do? Policy Response to the Current Crisis" By L. Randall Wray
  12. An empirical analysis of the money demand function in India By Inoue, Takeshi; Hamori, Shigeyuki
  13. The Intranational Business Cycle: Evidence from Japan By Michael Artis; Toshihiro Okubo
  14. "Inflation Targeting in Brazil" By Philip Arestis; Luiz Fernando de Paula; Fernando Ferrari-Filho
  15. Investigating uncertainty in macroeconomic forecasts by stochastic simulation By Debby Lanser; Henk Kranendonk
  16. The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective By Marika Karanassou; Hector Sala
  17. Explanations of the inconsistencies in survey respondents'forecasts By Clements, Michael P.
  18. The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective By Karanassou, Marika; Sala, Hector
  19. ICT Investment and Productivity: A Provincial Perspective By Andrew Sharpe; Jean-François Arsenault
  20. Prudence and Robustness as Explanations for Precautionary Savings; an Evaluation By Nick Draper
  21. Consumption Externalities and Equilibrium Dynamics with Heterogenous Agents By Kazuo Mino; Yasuhiro Nakamoto
  22. Rounding of probability forecasts : The SPF forecast probabilities of negative output growth By Clements, Michael P.
  23. Evaluating CPB’s published GDP growth forecasts By Adam Elbourne; Henk Kranendonk; Rob Luginbuhl; Bert Smid; Martin Vromans
  24. Accounting for One-off Operations when Assessing Underlying Fiscal Positions By Isabelle Joumard; Makoto Minegishi; Christophe André; Chantal Nicq; Robert Price
  25. La transmisión de los choques a la tasa de cambio sobre la inflación de los bienes importados en presencia de asimetrías By Andrés González; Hernán Rincón; Norberto Rodríguez
  26. Identifying Business Cycle Turning Points with Sequential Monte Carlo Methods By Monica Billio; Roberto Casarin
  27. Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate By Timothy J. Kehoe; Kim J. Ruhl
  28. Identifying Adjustment Costs of Net and Gross Employment Changes By Ejarque, Joao; Nilsen, Øivind Anti
  29. The Risk of Divorce and Household Saving Behavior By Gonzalez, Libertad; Özcan, Berkay
  30. Market Work, Home Work and Taxes: A Cross Country Analysis By Richard Rogerson
  31. Parental Labor Market Success and Children's Education Attainment By Carsten Ochsen
  32. Bridging the Housing Gap in Poland By Rafal Kierzenkowski
  33. Avoiding Anomalies of GDP in Constant Prices by Conversion to Chained Prices: Accentuating Shifts in Philippine Economic Transformation By Dumagan, Jesus C.
  34. Cambodia's Persistent Dollarization: Causes and Policy Options By Menon, Jayant
  36. Analysis of Intergenerational Inequality: the Role of Public Expenditure and Taxation By Emanuele, Canegrati
  37. The Evolution of Education: A Macroeconomic Analysis By Diego Restuccia; Guillaume Vandenbroucke
  38. Are houses overvalued in the Netherlands? By Henk Kranendonk; Johan Verbruggen
  39. New Methodological Developments for the International Comparison Program By Diewert, Erwin
  40. Do Corporate Taxes Reduce Productivity and Investment at the Firm Level?: Cross-country Evidence from the Amadeus Dataset By Cyrille Schwellnus; Jens Arnold
  41. Impacts of Agricultural Trade Liberalization on Poverty: Sensitivity of Results to Factors Mobiliy Among Sectors By Gerard, F.; Piketty, M.G.

  1. By: Wolfgang Lechthaler; Dennis Snower
    Abstract: We build quadratic labor adjustment costs into an otherwise standard New-Keynesian model of the business cycle and show that this is sufficient to increase both, output and inflation persistence
    Keywords: Monetary Persistence, Labor Adjustment Costs
    JEL: E24 E32 E52 J23
    Date: 2008–10
  2. By: Henriksen, Espen; Kydland, Finn; Sustek, Roman
    Abstract: We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.
    Keywords: International business cycles; prices; interest rates.
    JEL: E43 F42 E32 E31
    Date: 2008–09–12
  3. By: Alon Binyamini; Assaf Razin
    Abstract: The paper provides an integrated analysis of globalization effects on the inflation-output tradeoff and monetary policy in the New-Keynesian framework. The prediction of the analysis is threefold. First, labor, goods, and capital mobility flatten the Phillips curve, the tradeoff between inflation and activity. Second, the same globalization forces lead the welfare-based monetary policy to be more aggressive with regard to inflation fluctuations, and at the same time, more benign with respect to the output-gap fluctuations. Third, the equilibrium response of inflation to supply and demand shocks is more moderate, and the response of the output gap to these shocks is more pronounced, when the economy opens up; under such welfare-based monetary policy.
    JEL: E3 E4 E5 F37 F4 F41
    Date: 2008–10
  4. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper analyzes the constraints imposed on monetary and fiscal policy design by expectations formation. 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. 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 limits to 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, even when expectations are anchored in the long term, short-term dynamics display greater volatility than under rational expectations.
    JEL: E52 E62
    Date: 2008–10
  5. By: Castro, Vítor (University of Warwick, University of Coimbra and NIPE)
    Abstract: The Taylor rule establishes a simple linear relation between the interest rate, inflation and output gap. However, this relation may not be so simple. To get a deeper understanding of central banks’ behaviour, this paper asks whether central banks are indeed following a linear Taylor rule or, instead, a nonlinear rule. At the same time, it also analyses whether that rule can be augmented with a financial conditions index containing information from some asset prices and financial variables. A forward-looking monetary policy reaction function is employed in the estimation of the linear and nonlinear models. A smooth transition model is used to estimate the nonlinear rule. The results indicate that the European Central Bank and the Bank of England tend to follow a nonlinear Taylor rule, but not the Federal Reserve of the United States. In particular, those two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, our evidence suggests that the European Central Bank is targeting financial conditions, contrary to the other two central banks. This lack of attention to the financial conditions might have made the United States and the United Kingdom more vulnerable to the recent credit crunch than the Eurozone.
    Keywords: Taylor rule ; ECB monetary policy ; Financial Conditions Index ; Nonlinearity ; Smooth transition regression models
    JEL: E43 E44 E52 E58
    Date: 2008
  6. By: Haefke, Christian (IHS - Institute for Advanced Studies, Vienna); Sonntag, Marcus (University of Bonn); van Rens, Thijs (Universitat Pompeu Fabra)
    Abstract: Standard macroeconomic models underpredict the volatility of unemployment fluctuations. A common solution is to assume wages are rigid. We explore whether this explanation is consistent with the data. We show that the wage of newly hired workers, unlike the aggregate wage, is volatile and responds one-to-one to changes in labor productivity. In order to replicate these findings in a search model, it must be that wages are rigid in ongoing jobs but flexible at the start of new jobs. This form of wage rigidity does not affect job creation and thus cannot explain the unemployment volatility puzzle.
    Keywords: wage rigidity, search and matching model, business cycle
    JEL: E24 E32 J31 J41 J64
    Date: 2008–09
  7. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of the simple sum monetary aggregates and the Divisia monetary aggregate indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although traditional comparisons of the series sometimes suggest that simple sum and Divisia monetary aggregates share similar dynamics, there are important differences during certain periods, such as around turning points. These differences cannot be evaluated by their average behavior. We use a factor model with regime switching. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each individual series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors reveal where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginnings and ends of economic recessions, and during some high interest rate phases. We note the inferences’ policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia (1996) has observed in this regard, “measurement matters.”
    Keywords: Measurement Error, Divisia Index, Aggregation, State Space, Markov Switching, Monetary Policy
    JEL: E51 C30 E4
    Date: 2008–08–06
  8. By: Christian Conrad (University of Heidelberg, Department of Economics); Menelaos Karanasos (Economics and Finance, Brunel University)
    Abstract: This paper employs the unrestricted extended constant conditional correlation GARCH specification proposed in Conrad and Karanasos (2008) to examine the intertemporal relationship between the uncertainties of inflation and output growth in the US. We find that inflation uncertainty effects output variability positively, while output variability has a negative effect on inflation uncertainty.
    Keywords: Bivariate GARCH process, negative volatility feedback, inflation uncertainty, output variability
    JEL: C32 C51 E31
    Date: 2008–09
  9. By: Patrick J. Kehoe; Virgiliu Midrigan
    Abstract: In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes from the data or leave them in and treat them as permanent. We provide a menu cost model that includes motives for both types of price changes. Since this model accounts for the main regularities of price changes, its predictions for the real effects of monetary policy shocks are useful benchmarks against which to judge existing shortcuts. We find that neither shortcut comes close to these benchmarks. For monetary policy analysis, researchers should use a menu cost model like ours or at least a third, theory-based shortcut: set the Calvo model's parameters so that it generates the same real effects from monetary shocks as does the benchmark menu cost model. Following either suggestion will improve monetary policy analysis.
    JEL: E12 E5 E58
    Date: 2008–10
  10. By: Ken Kuttner (Williams College); Tim Robinson (Reserve Bank of Australia)
    Abstract: Policy-makers have recently noted an apparent flattening of the Phillips curve. The implications of such a change include that a positive output gap would be less inflationary, but the cost of reducing inflation, once established, would increase. This paper’s objective is to review the evidence and possible explanations for the flattening of the Phillips curve in the context of new-Keynesian economic theory. Using data for the United States and Australia, we find that the flattening is evident in the baseline ‘structural’ new-Keynesian Phillips curve. We consider a variety of reasons for this structural flattening, such as data problems, globalisation and alternative definitions of marginal cost, none of which is entirely satisfactory.
    Keywords: Phillips curve; inflation
    JEL: E31 E32
    Date: 2008–10
  11. By: L. Randall Wray
    Abstract: As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. Labor markets continue to weaken as firms shed jobs, and state tax revenues have plummeted. In March, the dollar fell to new record lows against the euro and other currencies. Commodities prices have boomed, fueling inflation and adding to consumer distress. What's a central bank to do? So far, the Federal Reserve has met or exceeded the market's anticipations for rate cuts. It has allowed banks to offer securitized mortgages as collateral against borrowed reserves, and opened its discount window to a broad range of financial institutions to guard against future liquidity problems (remember Bear Stearns?). It helped to formulate a rescue plan for Freddie Mac and Fannie Mae, and Chairman Ben Bernanke even supported the fiscal stimulus package that will increase the federal budget deficit—something that is normally anathema to central bankers. Most importantly, Fed officials have consistently argued that, while they are carefully monitoring inflation pressures, they will not reverse monetary easing until the fallout from the subprime crisis is past. Unfortunately, the policy isn't working--the economy continues to weaken, the financial crisis is spreading, and inflation is accelerating. The problem is that policymakers do not recognize the underlying forces driving the crisis, in part because they operate with an incorrect model of how our economy works. This Policy Note summarizes that model, offers an alternative view based on Hyman Minsky's approach, and outlines an alternative framework for policy formation.
    Date: 2008–08
  12. By: Inoue, Takeshi; Hamori, Shigeyuki
    Abstract: This paper empirically analyzes India’s money demand function during the period of 1980 to 2007 using monthly data and the period of 1976 to 2007 using annual data. Cointegration test results indicated that when money supply is represented by M1 and M2, a cointegrating vector is detected among real money balances, interest rates, and output. In contrast, it was found that when money supply is represented by M3, there is no long-run equilibrium relationship in the money demand function. Moreover, when the money demand function was estimated using dynamic OLS, the sign onditions of the coefficients of output and interest rates were found to be consistent with theoretical rationale, and statistical significance was confirmed when money supply was represented by either M1 or M2. Consequently, though India’s central bank presently uses M3 as an indicator of future price movements, it is thought appropriate to focus on M1 or M2, rather than M3, in managing monetary policy.
    Keywords: Cointegration, DOLS, Money, Money demand, Monetary policy, India
    JEL: E41 E51
    Date: 2008–09
  13. By: Michael Artis (Institute for Political and Economic Governance, Manchester University); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper studies the intranational business cycle - that is the set of regional (prefecture) business cycles - in Japan. One reason for choosing to examine the Japanese case is that long time series and relatively detailed data are available. A Hodrick-Prescott filter is applied to identify the cycles in annual data from 1955 to 1995 and bilateral cross-correlation coefficients are calculated for all the pairs of prefectures. Comparisons are made with similar sets of bilateral cross correlation coefficients calculated for the States of the US and for the member countries of a "synthetic Euro Area". The paper then turns to an econometric explanation of the cross-correlation coefficients (using Fisher's z-transform), in a panel data GMM estimation framework. An augmented gravity model provides the basic model for the investigation, whilst the richness of the data base also allows for additional models to be represented.
    Keywords: Intranational business cycle, Hodrick-Prescott filter, Optimal Currency Area, Gravity Model, Market potential, Heckscher Ohlin theorem
    JEL: E32 F41 R11
    Date: 2008–01
  14. By: Philip Arestis; Luiz Fernando de Paula; Fernando Ferrari-Filho
    Abstract: The purpose of this paper is to examine inflation targeting (IT) in emerging countries by concentrating essentially on the case of Brazil. The IT monetary policy regime has been adopted by a significant number of countries. While the focus of this paper is on Brazil, which began inflation targeting in 1999, we also examine the experience of other countries, both for comparative purposes and for evidence of the extent of this "new" economic policy's success. In addition, we compare the experience of Brazil with that of non-IT countries, and ask the question of whether adopting IT makes a difference in the fight against inflation.
    Date: 2008–09
  15. By: Debby Lanser; Henk Kranendonk
    Abstract: Uncertainty is an inherent attribute of any forecast. In this paper, we investigate four sources of uncertainty with CPB’s macroeconomic model SAFFIER: provisional data, exogenous variables, model parameters and residuals of behavioural equations. We apply a Monte Carlo simulation technique to calculate standard errors for the short-term and medium-term horizon for GDP and eight other macroeconomic variables. The results demonstrate that the main contribution to the total variance of a medium-term forecast, emanates from the uncertainty in the exogenous variables. For the short-term forecast both exogenous variables and provisional data are most relevant.
    Keywords: Monte Carlo simulation; Macro economic forecasting; Model uncertainty
    JEL: C15 C53 E20 E27
    Date: 2008–09
  16. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA)
    Abstract: The evolution of Spanish unemployment has been quite idiosyncratic. The full-employment levels of the early seventies were followed by unemployment rates that were the highest within the OECD countries in the aftermath of the oil price shocks. While unemployment was extremely persistent in most of the eighties and nineties, it experienced its sharpest decline in recent years. We investigate the determinants of this unemployment trajectory using the analytical framework of the chain reaction theory (CRT). We show that unemployment may not gravitate towards its natural rate due to <i>frictional growth</i>, a phenomenon that arises from the interplay of lagged adjustment processes and growing exogenous variables in a dynamic system with spillovers. The empirical analysis distinguishes four periods: (i) 1978-1985, (ii) 1986-1990, (iii) 1991-1994, (iv) 1995-2005, and finds that capital accumulation is a crucial driving force of unemployment. Thus, our theoretical and empirical results question the key role of the natural rate in policy making.
    Keywords: Labour market dynamics, Frictional growth, Chain reaction theory, Capital accumulation, Impulse response function
    JEL: E22 E24 J21
    Date: 2008–10
  17. By: Clements, Michael P. (Department of Economics,University of Warwick)
    Abstract: A comparison of the point forecasts and the central tendencies of probability distributions of inflation and output growth of the SPF indicates that the point forecasts are sometimes optimistic relative to the probability distributions. We consider and evaluate a number of possible explanations for this finding, including the degree of uncertainty concerning the future, computational costs, delayed updating, and asymmetric loss. We also consider the relative accuracy of the two sets of forecasts.
    Keywords: Rationality ; point forecasts ; probability distributions
    JEL: C53 E32 E37
    Date: 2008
  18. By: Karanassou, Marika (University of London); Sala, Hector (Universitat Autònoma de Barcelona)
    Abstract: The evolution of Spanish unemployment has been quite idiosyncratic. The full employment levels of the early seventies were followed by unemployment rates that were the highest within the OECD countries in the aftermath of the oil price shocks. While unemployment was extremely persistent in most of the eighties and nineties, it experienced its sharpest decline in recent years. We investigate the determinants of this unemployment trajectory using the analytical framework of the chain reaction theory (CRT). We show that unemployment may not gravitate towards its natural rate due to frictional growth, a phenomenon that arises from the interplay of lagged adjustment processes and growing exogenous variables in a dynamic system with spillovers. The empirical analysis distinguishes four periods: (i) 1978–1985, (ii) 1986–1990, (iii) 1991–1994, (iv) 1995–2005, and finds that capital accumulation is a crucial driving force of unemployment. Thus, our theoretical and empirical results question the key role of the natural rate in policy making.
    Keywords: labour market dynamics, frictional growth, chain reaction theory, capital accumulation, impulse response function
    JEL: E22 E24 J21
    Date: 2008–09
  19. By: Andrew Sharpe; Jean-François Arsenault
    Abstract: In 2008, Statistics Canada, for the first time, made available estimates of information and communication technology (ICT) investment by province. Given the importance of ICT investment for productivity growth, these data are important for the comparative analysis and understanding of productivity growth by province. The objective of this report is to present the basic data on ICT investment and ICT investment per worker in Canada and the ten provinces over the 1981-2007 period. The first part of the report reviews the literature on why ICT investment is important for productivity. The second part examines ICT investment levels and trends by province. The third part decomposes the gap in ICT investment per worker by province, relative to the national average, into three effects: that related to income levels, to the total investment/GDP share, and to the ICT investment/total investment share.
    Keywords: Machinery and equipment investment, information and communications technology, ICT, Investment gap, Business sector, Provincial estimates
    JEL: E22 G11 J21 M00 O47 Z10
    Date: 2008–09
  20. By: Nick Draper
    Abstract: This paper evaluates approximation methods to make manageable the numerical solution of overlapping generation models with aggregate risk. The paper starts with a model in which households maximize expected utility over their life cycle. Instantaneous utility is characterized by constant relative risk aversion. Prudence, a characteristic of the utility function, leads to precautionary saving. The first-order conditions include expectations. One source of uncertainty is not prohibitive for numerical integration of the expectation term. Because of its accuracy numerical integration results are used as a bench mark. Taylor series approximations can lead to the same results dependent on the linearization point. A linear quadratic approximation of the household model is evaluated subsequently. Alternatively, precautionary saving effects can be the result of robust decision making. This approach leads to linear policy functions and gives a rather good approximation of the bench mark model, although not as good as the Taylor series approximation.
    Keywords: Precautionary saving; Robustness; Prudence
    JEL: E21 D81 C61
    Date: 2008–04
  21. By: Kazuo Mino (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Graduate School of Economics, Osaka University)
    Abstract: This paper explores the effect of consumption externalities on equilibrium dynamics of a standard neoclassical growth model in which there are two types of agents. To emphasize the presence of heterogenous agents, we distinguish intergroup consumption externalities from intragroup consumption externalities. We show that if the intragroup externalities dominates the intrergroup external effects, then the steady state equilibrium satisfies saddle-point stability and the equilibrium path of the economy is uniquely determined. In contrast, if the intergroup external effects of consumption are strong enough, the steady-state equilibrium is either unstable or locally indeterminate. Based on the analytical as well as numerical considerations, we give intuitive implications of stability conditions.
    Keywords: Consumption externalities, Equilibrium determinacy, Heterogeneous agents, Progressive taxation
    JEL: E52 O42
    Date: 2008–09
  22. By: Clements, Michael P. (Department of Economics,University of Warwick)
    Abstract: We consider the possibility that respondents to the Survey of Professional Forecasters round their probability forecasts of the event that real output will decline in the future. We make various assumptions about how forecasters round their forecasts, including that individuals have constant patterns of responses across forecasts. Our primary interests are the impact of rounding on assessments of the internal consistency of the probability forecasts of a decline in real output and the histograms for annual real output growth, and on the relationship between the probability forecasts and the point forecasts of quarterly output growth.
    Keywords: Rounding ; probability forecasts ; probability distributions
    JEL: C53 E32 E37
    Date: 2008
  23. By: Adam Elbourne; Henk Kranendonk; Rob Luginbuhl; Bert Smid; Martin Vromans
    Abstract: We compare the accuracy of our published GDP growth forecasts from our large macro model, SAFFIER, to those produced by VAR based models using both classical and Bayesian estimation techniques. We employ a data driven methodology for selecting variables to include in our VAR models and we find that a randomly selected classical VAR model performs worse in most cases than the Bayesian equivalent, which performs worse than our published forecasts in most cases. However, when we pool forecasts across many VARs we can produce more accurate forecasts than we published. A review of the literature suggests that forecast accuracy is likely irrelevant for the non-forecasting activities the model is used for at CPB because they are fundamentally different activities.
    Keywords: SEMs; VAR models; Forecast combination; Bayesian methods; Real time
    JEL: C52 C53 E37
    Date: 2008–10
  24. By: Isabelle Joumard; Makoto Minegishi; Christophe André; Chantal Nicq; Robert Price
    Abstract: Frequent recourse to large one-off operations in a number of OECD countries has undermined the accuracy of cyclically adjusted fiscal balances as a measure of both the sustainability of public finance and the fiscal stance. This paper first provides detailed information on the nature and amount of these one-offs for 9 OECD countries. The paper then presents a new indicator – the “underlying” fiscal balance – which effectively eliminates the impact of one-offs and cyclical developments. One-offs are derived as the deviations from trend in net capital transfers, i.e. from widely available national account data. This approach provides a consistent treatment of one-offs both across countries and over time, avoiding the potential information biases which could result from an individual identification of one-offs. <P>Évaluer les positions budgétaires sous-jacentes en présence de mesures ponctuelles <BR>Le recours fréquent à des mesures ponctuelles dans certains pays de l’OCDE a rendu caduque l’utilisation du solde budgétaire corrigé des variations cycliques pour évaluer tant la soutenabilité des finances publiques que l’impact des politiques budgétaires discrétionnaires sur l’activité économique. Ce document présente des informations détaillées sur la nature et le montant de ces mesures ponctuelles pour 9 pays de l’OCDE. Il propose ensuite un nouvel indicateur – le solde budgétaire sous-jacent – qui corrige le solde budgétaire des effets des mesures ponctuelles et du cycle économique. Les mesures ponctuelles sont assimilées aux écarts à la tendance des transferts en capitaux, séries facilement disponibles dans les comptes nationaux. Cette approche assure un traitement symétrique tant entre les pays qu’au cours du temps, évitant ainsi les biais potentiels qui découleraient d’une identification individuelle des mesures ponctuelles.
    JEL: E62 H30 H60
    Date: 2008–09–30
  25. By: Andrés González; Hernán Rincón; Norberto Rodríguez
    Abstract: En este documento estimamos el grado de transmisión de corto y largo plazo sobre la inflación de los bienes importados de un choque a la tasa de devaluación nominal en presencia de asimetrías. Utilizamos una ecuación estándar de pass-through para modelos con competencia imperfecta, datos trimestrales de Colombia para el período 1985 a 2007 y modelos econométricos lineales y no lineales. Los resultados muestran que la transmisión es menos que proporcional, sin importar el plazo considerado. También se encuentra que el grado y la dinámica de la transmisión son endógenos y asimétricos al signo, tamaño y volatilidad de los tasa de cambio y al estado de la economía. La transmisión es mayor cuando la economía está en auge, es más abierta, las firmas esperan que los movimientos en la tasa de cambio sean permanentes, la tasa de cambio real está depreciada, la tasa de cambio nominal se devalúa y la inflación es mayor.
    Keywords: Transmisión de los choques a la devaluación sobre la inflación (exchange rate pass-through), asimetrías, modelo VAR-lineal, modelo VAR de regresión no lineal de transición suave logística (VAR-LSTR) Classification JEL: F31; E31; E52; C51; C52.
  26. By: Monica Billio; Roberto Casarin
    Abstract: We apply sequential Monte Carlo (SMC) to the detection of turning points in the business cycle and to the evaluation of useful statistics employed in business cycle analysis. The proposed nonlinear filtering method is very useful for sequentially estimating the latent variables and the parameters of nonlinear and non-Gaussian time-series models, such as the Markov-switching (MS) models studied in this work. We show how to combine SMC with Monte Carlo Markov Chain for estimating time series models with MS latent factors. We illustrate the effectiveness of the methodology and measure, in a full Bayesian and realtime context, the ability of a pool of MS models to identify turning points in the European economic activity. We also compare our results with the business cycle datation existing in the literature and provide a sequential evaluation of the forecast accuracy of the competing MS models.
    Date: 2008
  27. By: Timothy J. Kehoe; Kim J. Ruhl
    Abstract: A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994-95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
    JEL: E13 F34 F41
    Date: 2008–10
  28. By: Ejarque, Joao (University of Essex); Nilsen, Øivind Anti (Norwegian School of Economics and Business Administration)
    Abstract: A relatively unexplored question in dynamic labour demand regards the source of adjustment costs, whether they depend on net or gross changes in employment. We estimate a structural model of dynamic labour demand where the firm faces adjustment costs related to gross and net changes in its workforce. We focus on matching quarterly moments of hiring and of net changes in employment from a panel of establishments. The main component of adjustment costs in our panel is quadratic adjustment costs to gross changes in employment. We also estimate that adjustment costs have a large economic cost, roughly cutting the value of our establishments in half.
    Keywords: employment, adjustment costs, establishment level data, structural estimation
    JEL: C33 C41 E24 J23
    Date: 2008–09
  29. By: Gonzalez, Libertad (Universitat Pompeu Fabra); Özcan, Berkay (Yale University)
    Abstract: We analyze the impact of an increase in the risk of divorce on the saving behaviour of married couples. From a theoretical perspective, the expected sign of the effect is ambiguous. We take advantage of the legalization of divorce in Ireland in 1996 as an exogenous increase in the likelihood of marital dissolution. We analyze the saving behaviour over time of couples who were married before the law was passed. We propose a difference-in-differences approach where we use as comparison groups either married couples in other European countries (not affected by the law change), or Irish families who did not experience a significant increase in the expected risk of divorce (such as very religious families, or single individuals). Our results suggest that the increase in the risk of divorce brought about by the law was followed by an increase in the propensity to save of married couples, consistent with a rise in precautionary savings interpretation. An increase in the risk of marital dissolution of about 40 percent led to a 7 to 13 percent rise in the proportion of married couples reporting positive savings.
    Keywords: divorce, saving, marriage, divorce law
    JEL: J12 D10 K36 E21 D91
    Date: 2008–09
  30. By: Richard Rogerson
    Abstract: This paper uses a simple model of labor supply extended to allow for home production to understand the extent to which differences in taxes can account for differences in time allocations between the US and Europe. Once home production is included, the elasticity of substitution between consumption and leisure is almost irrelevant in determining the response of market hours to higher taxes. But to account for observed differences in leisure and time spent in home production, one requires a large elasticity of substitution between consumption and leisure, and a small elasticity of substituion betwen time and goods in home production.
    JEL: E60 H20 J22
    Date: 2008–10
  31. By: Carsten Ochsen (University of Rostock)
    Abstract: This study examines the effects of parental labor market activities on children's education attainment. In contrast to the existing literature we consider parental experiences until the children graduate from school. In addition, the effects of the regional economic environment during teacher's decision about the secondary school track are analyzed. Using data drawn from the German Socio-Economic Panel an ordered probit estimator is used to model children's education attainment. With respect to parental labor market participation we find that father's full-time and mother's part-time employment have significant positive effects on children's education attainment. Furthermore, we obtain evidence that the regional GDP growth rate and the regional unemployment rate when children are 10 years old are significantly related to the education that these children ultimately achieve. Our interpretation is that regional economic conditions affect teachers'recommendations for the secondary school track, which are given during the last year of primary school. The results reveal the less successful parents are on the labor market, the lower the average education level of their children. A second important conclusion is that children who live in regions which experience a poor economic performance over a longer period are, on average, less educated than children who live in more affluent regions.
    Keywords: education attainment, parental labor supply, macroeconomic uncertainty, family structure, intergenerational link
    JEL: I21 J22 E24 J10 J24
    Date: 2008
  32. By: Rafal Kierzenkowski
    Abstract: Despite a high level of homeownership, the housing market in Poland is suffering from an important shortage. The difference between the number households and available dwellings, the number of dwellings per thousand inhabitants, and the availability of basic amenities (especially in rural areas) all indicate that significant improvements are needed to catch up to the most affluent OECD and EU countries. The formal rental segment of the market is also underdeveloped, contributing to low labour mobility and persistent disparities in regional unemployment. Given the social, economic and political dimensions of the problem, various housing policies implemented since the beginning of the transition process have aimed to fill the housing gap, though they have been either narrow in scope or have led to unclear results. However, the housing market has been buoyant in recent years, spurred by rising levels of GDP per capita, lower interest rates and the emergence of a competitive mortgage market. Yet a brisk price appreciation has also occurred at the same time, while households’ exposure to interest- and exchange-rate risks has significantly increased and banks’ funding capabilities have shrunk. Although the market has not been directly affected by the recent global financial turmoil, recent information shows that a turn-around is underway, with prices declining in several major cities as sentiment has plunged. This raises concerns about the capacity of the market to achieve a smooth adjustment in the face of a possible downturn. <P>Combler le déficit de logements en Pologne <BR>Malgré la place importante qu’occupe la propriété, le marché immobilier polonais pâtit d’une importante pénurie de logements. La différence entre le nombre de ménages et le nombre de logements disponibles, la densité de logements par millier d’habitants et l’équipement en éléments de confort de base (en particulier dans les zones rurales) sont autant de facteurs qui témoignent des progrès que la Pologne doit encore accomplir pour se hisser au niveau des pays les plus riches de l’OCDE et de l’Union européenne. Le segment locatif formel est également sous-développé, ce qui contribue à une faible mobilité de la main-d’oeuvre et à la persistance de disparités régionales du chômage. La question du logement ayant une dimension sociale, économique et politique, la plupart des politiques du logement mises en oeuvre depuis le début du processus de transition visaient à combler le déficit de logements, mais avaient une portée insuffisante ou ont eu des résultats mitigés. Il n’en reste pas moins que le marché immobilier a été dynamique ces dernières années, notamment en raison de la hausse du PIB par habitant, de la baisse des taux d’intérêt et de l’apparition d’un marché hypothécaire concurrentiel. Toutefois, dans le même temps, les prix se sont fortement appréciés, tandis que l’exposition des ménages aux risques de taux de change et de taux d’intérêt s’est fortement accrue, ce qui a réduit les capacités de financement des banques. Par ailleurs, bien que le marché polonais n’ait pas été directement touché par les turbulences financières qui ont secoué l’économie mondiale ces derniers temps, de récentes données montrent que le retournement du marché est en cours, les prix ayant baissé dans plusieurs grandes villes à mesure que le climat des affaires se dégradait. Cette situation amène à s’interroger sur la capacité des marchés à réussir un ajustement en douceur en cas de retournement.
    JEL: E22 E51 P33 R21 R31
    Date: 2008–09–29
  33. By: Dumagan, Jesus C.
    Abstract: Changing the base year (1985) of Philippine GDP in constant prices could change the growth rate and the shares of components even when there is no change in the volume of production, implying that the changes in growth rate and shares are anomalous (i.e., no real basis). This possibility weakens GDP in constant prices as basis for valuing our economy’s production and analyzing its growth performance. This paper demonstrates that conversion to chained prices avoids the above anomalies and also shows smaller and shrinking agriculture and industry sectors and enlarging services sector that is now over 50 percent of the Philippine economy than are shown by valuation in constant 1985 prices. In both contributions to level and growth of GDP, chained prices accentuate more than constant 1985 prices the declining importance of agriculture and industry and the rising importance of services in Philippine economic transformation.
    Keywords: real GDP, constant prices, chained prices, Fisher index
    Date: 2008
  34. By: Menon, Jayant (Asian Development Bank)
    Abstract: Cambodia's economic and social achievements over the past ten years have been the most impressive in its history. Nevertheless, Cambodia today is still as dollarized, if not more so, than it was ten years ago. What is this so, and what, if anything, should the Government do? This paper attempts to answer both these questions, by examining the reasons behind the apparent paradox between a decade of economic and political improvements and continued dollarization, and drawing policy implications from it. We advise against pursuing enforced dedollarization, and advocate a policy option that focuses instead on accelerating accommodative reforms, especially in the financial sector and on legal and institutional reforms. We also identify a host of institutional barriers that need to be overcome to prepare the groundwork for a natural process of de-dollarization.
    Keywords: Cambodia; dollarization; exchange rates; currency board; hysteresis
    JEL: E42 E58 F31 F33
    Date: 2008–09–01
  35. By: Salvatore Michele De Marco
    Abstract: Lo scopo principale del presente Quaderno di ricerca e' quello di ritagliare l'esatto posto, per importanza e contenuto, che le teorie del circuito monetario occupano all'interno del pensiero economico. Spesse volte esaltate, nell'illusione di essere giunti davanti a paradigmi di equilibrio economico generale, le innumerevoli critiche a cui prestano sponda li riducono, invece, alla loro esatta natura di concetti solitari sulla circolazione della moneta. Nonostante i limiti, omissioni ed errori, che investono sia l'aspetto metodologico sia l'aspetto materiale, delle teorie del circuito monetario, non possiamo, pero', negare alle teorie in questione un merito, che e' quello di avere levato dall'oblio domande sulla produzione, capitale, credito e moneta, da un lato capaci di gettare in una profonda crisi concettuale la tradizionale macroeconomia universalmente accettata, dall'altro di stimolare la costruzione di paradigmi alternativi. Sulla base della premessa appena effettuata, dunque, dopo aver analizzato le discutibili radici teoriche ed il singolo contenuto delle teorie del circuito monetario, passeremo in rassegna le loro incoerenze logiche, terminando la discussione con l'accenno ad un contributo teorico, il quale, se non puo' essere pensato come appartenente alle teorie del circuito monetario, ha in ogni caso con queste ultime dei punti in comune.
    Keywords: Capitale, Circuito economico, Circuito monetario, Credito, Investimenti, Moneta.
    JEL: B31 E40 E41 E51 G21
    Date: 2008–01
  36. By: Emanuele, Canegrati
    Abstract: In this paper I analyse the impact of public expenditure and income taxation on intergenerational inequality for seventeen countries. Age group Gini index is calculated by using data from the Luxemburg Income Study (LIS). Results are very robust in demonstrating that only income taxation is able to influence the level of intergenerational inequality, since it directly a¤ects the wealth of households. Otherwise, public expenditure seems to have no impact on individuals' welfare, even if we consider public expenditure components which should be tailored for specific cohorts. Different hypotheses on standard errors are considered, in order to detect the presence of one-way or two-way fixed effects.
    Keywords: Age group inequality; Public Expenditure; Income Taxa- tion
    JEL: E62 D63 H24
    Date: 2008–10–06
  37. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? We develop a model of schooling decisions in order to assess the quantitative contribution of technological progress in explaining the evolution of education. We use earnings across educational groups and growth in gross domestic product per worker to restrict technological progress. These restrictions imply substantial skill-biased technical change (SBTC). We find that changes in relative earnings through SBTC can explain the bulk of the increase in educational attainment. In particular, a calibrated version of the model generates an increase in average years of schooling of 48 percent compared to 27 percent in the data. This strong effect of changes in relative earnings on educational attainment is robust to relevant variations in the model and is consistent with empirical estimates of the long-run income elasticity of schooling. We also find that the substantial increase in life expectancy observed during the period contributes little to the change in educational attainment in the model.
    Keywords: educational attainment, schooling, skill-biased technical progress, human capital
    JEL: E1 O3 O4
    Date: 2008–10–05
  38. By: Henk Kranendonk; Johan Verbruggen
    Abstract: The movement of the level of house prices in the Netherlands between 1980 and 2007 is explainable fairly well by fundamental supply and demand factors. Empirical research has shown that the overvaluation of approximately 10% that existed in 2003 shrunk to approximately 0% in 2007. This was not caused by downward correction of house prices, but by the circumstance that the increase of the actual house price between 2003 and 2007 lagged behind the increase of the long-term value of the house price. Therefore, this does not confirm the IMF’s recently published research results, indicating that approximately 30% of the house price increase between 1997 and 2007 cannot be explained by fundamental factors.
    Keywords: House prices; housing market
    JEL: E39 R21 R31
    Date: 2008–04
  39. By: Diewert, Erwin
    Abstract: The paper explains new methodology that was used in the 2005 International Comparison Program (ICP) that compared the relative price levels and GDP levels across 146 countries. In this round of the ICP, the world was divided into 6 regions: OECD, CIS, Africa, South America, Asia Pacific and West Asia. What is new in this round compared to previous rounds of the ICP is that each region was allowed to develop its own product list and collect prices on this list for countries in the region. The regions were then linked using another separate product list and 18 countries across the 6 regions collected prices for products on this list and this information was used to link prices and quantities across the regions. An additional complication was that the final linking of prices and volumes across regions had to respect the regional price and volume measures that were (separately) constructed by the regions. The paper also studies the properties of the Iklé Dikhanov Balk multilateral system of index numbers which was used by Africa.
    Keywords: Index numbers, multilateral comparison methods, GEKS, EKS, Geary-Khamis, Balk, Dikhanov, Iklé, Country Product Dummy (CPD) method, basic headings, St
    JEL: C43 C81 E31 O57
    Date: 2008–09–25
  40. By: Cyrille Schwellnus; Jens Arnold
    Abstract: This paper uses a stratified sample of firms across OECD economies over the period 1996-2004 to analyse the effects of corporate taxes on productivity and investment. Applying a differences-in-differences estimation strategy which exploits differential effects of corporate taxes on firms with different profitability, it is found that corporate taxes have a negative effect on productivity at the firm level. The effect is negative across firms of different size and age classes except for the small and young, which may be attributable to the relatively low profitability of small and young firms. The negative effect of corporate taxes is particularly pronounced for firms that are catching up with the technological frontier. In the investment analysis, the results suggest that corporate taxes reduce investment through an increase in the user cost of capital. This may partly explain the negative productivity effects of corporate taxes if new capital goods embody technological change. <P>Les impôts sur le revenu des sociétés réduisent-ils la productivité et l’investissement des firmes? <BR>Ce papier utilise un échantillon stratifié de firmes issues des pays de l’OCDE sur la période 1996-2004 pour analyser les effets de l’imposition des sociétés sur la productivité et l’investissement. En appliquant une stratégie d’estimation par différences-en-différences qui exploite des effets différentiels de l’imposition sur des firmes avec de différents niveaux de profitabilité, il s’avère que les impôts sur le revenu des sociétés ont un effet négatif sur la productivité des firmes. L’effet est négatif pour les firmes de toutes classes d’emploi et d’âge excepte pour les firmes à la fois petites et jeunes, ce qui peut être attribuable à la profitabilité relativement faible des firmes à la fois petites et jeunes. L’effet négatif de l’imposition est particulièrement fort pour les firmes qui sont en train de s’approcher à la frontière technologique. L’analyse de l’investissement indique que l’imposition des sociétés réduit l’investissement par une augmentation du coût du capital. Ceci expliquerait une partie des effets négatifs sur la productivité si les nouveaux biens de capital incorporent le progrès technologique.
    JEL: D21 D24 E22 E62 H25 H32
    Date: 2008–09–30
  41. By: Gerard, F.; Piketty, M.G.
    Abstract: The purposes of this paper are twofold (i) to evaluate changes in welfare gains and their distribution due to trade liberalization when imperfect labor markets are considered, (ii) to evaluate the impact of the recent reforms of European agricultural policy on the world welfare. The results of two versions of a dynamic world computable genaral equilibrium (CGE) model, usign the GTAP database version 6 are compared. In the first version, a standard world CGE approach is followed by perfect labor mobility across sectors. In the second version we assume that labor shift s freely within the aggregated sectors -agriculture, manufactures, services,- but not across them. After a brief description of the two versions, changes in welfare, represented not only by the world GDP but also by the consumption level of two types of household (middle-low and middle-high) in 7 regions (Brazil, China, India, Least developed countries, European Union, United States, Rest of the World) after partial trade liberalization are presented. Theoretical and political consequences of the results are discussed. ...French Abstract : Cet article a un double objectif (i) évaluer les modifications des gains de la libéralisation lorsque certaines imperfections des marchés du travail sont prises en compte, (ii) quantifier les impacts des réformes récentes de la Politique Agricole Commune. Deux versions d'un modèle mondial d'équilibre général, utilisant la base de données GTAP (version 6), sont utilisées à cet effet : dans la première l'hypothèse standard de mobilité parfaite du travail entre secteurs est adoptée, alors que dans la seconde on suppose que si le travail se déplace librement à l'intérieur de secteurs agrégés (agriculture, manufactures, services), il ne peut passer de l'un à l'autre. Après une brève description des principales caractéristiques des deux versions du modèle, les résultats obtenus dans des scénarii de libéralisation partielle, pour 7 régions du monde (Brésil, Chine, Inde, PMA, UE, USA, RDM) et deux types de ménages (riches et pauvres) sont présentés. Les conséquences théoriques et politiques sont ensuite discutées.
    JEL: D4 D5 E3 Q1
    Date: 2008

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