nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒10‒21
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Price Level Targeting in a Small Open Economy with Financial Frictions: Welfare Analysis By Ali Dib; Caterina Mendicino; Yahong Zhang
  2. Fiscal policy in the macroeconomic policy mix: A Critique of the New Consensus Model and a comparison of macroeconomic policies in France, Germany, the UK and Sweden from a Post-Keynesian perspective By Eckhard Hein; Achim Truger
  3. Should the SARB Have Stayed Time Inconsistent? By Rangan Gupta; Josine Uwilingiye
  4. The Extensive Margin of Trade under Alternative Monetary Policy Regimes By Stéphane Auray; Aurélien Eyquem; Jean-Christophe Poutineau
  5. Macroeconomics without the LM: A Post-Keynesian Perspective By Thomas I. Palley
  6. Adopting Price-Level Targeting under Imperfect Credibility: An Update By Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt
  7. On the Determinacy of New Keynesian Models with Staggered Wage and Price Setting By Peter Flaschel; Reiner Franke; Christian Proano
  8. The Challenges of Monetary Policy in Turkey By Olcay Çulha; Ali Çulha; Rauf Gönenç
  9. Evidence on the effects of inflation on price dispersion under indexation By Juliane Scharff; Sven Schreiber
  10. Lending interest rate pass-through in the euro area. A data-driven tale By Giuseppe Marotta
  11. Policy Preferences for Output Stability before and after Inflation Targeting By Araújo, Eurilton; Pinheiro, Tatiana
  12. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model By Adolfson, Malin; Laseén, Stefan; Lindé, Jesper; Svensson, Lars E.O.
  13. A Critical Note on the Forecast Error Variance Decomposition By Seymen, Atilim
  14. Asymmetric expectation effects of regime shifts in monetary policy By Zheng Liu; Daniel F. Waggoner; Tao Zha
  15. Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy By Andrew T. Levin; J. David López-Salido; Edward Nelson; Tack Yun
  16. Temporary price changes and the real effects of monetary policy By Patrick J. Kehoe; Virgiliu Midrigan
  17. The J2 Status of Chaos in Period Macroeconomic Models By Peter Flaschel; Christian Proano
  18. Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities By Hafedh Bouakez; Nooman Rebei; Désiré Vencatachellum
  19. Testing the FTPL across government tiers. By Peter Claeys; Raúl Ramos; Jordi Suriñach
  20. Inflation Persistence: Is It Similar in the New EU Member States and the Euro Area Members? By Michal Franta; Branislav Saxa; Katerina Smidkova
  21. Asset Price Bubbles and Monetary Policy: Why Central Banks Have Been Wrong and What Should Be Done By Thomas I. Palley
  22. Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis By Martin Boileau; Michel Normandin
  23. A Monthly Volatility Index for the US Economy By Cecilia Frale; David Veredas
  24. Determinacy and Learnability of Monetary Policy Rules in Small Open Economies By Luis Gonzalo Llosa Author-X-Name_First: Luis Gonzalo Author-X-Name_Last: Llosa; Vicente Tuesta Author-X-Name_First: Vicente Author-X-Name_Last: Tuesta
  25. Inflation Range Targets with Hard Edges By Niklas J. Westelius
  26. Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker By Miguel Rueda Author-X-Name_First: Miguel Author-X-Name_Last: Rueda
  27. Revisiting the Comovement Puzzle: the Input-Output Structure as an Additional Solution By Federico di Pace
  28. Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending By Till van Treeck
  29. Fixed Costs and Long-Lived Investments By Christopher L. House
  30. Timeless perspective policymaking: When is discretion superior? By Richard Dennis
  31. Lessons on Reshaping the International Monetary Order - Revisiting J. M. Keynes “Activities 1940-1944” on the Creation of the Bretton Woods Institutions By Piffaretti, Nadia F.
  32. Reformes du marché de travail en Allemagne – aucun effet sur l´emploi et aggravation des déséquilibres en Europe By Camille Logeay; Katja Rietzler
  33. A Model of Costly Capital Reallocation and Aggregate Productivity By Shutao Cao
  34. Which is the growth of long term of the Chilean economy? By Idrovo Aguirre, Byron
  35. Classical identification: A viable road for data to inform structural modeling By Roger Hammersland
  36. Causes of structural unemployment in Finland and Sweden 1990-2004 By Fregert, Klas; Pehkonen, Jaakko
  37. Analyzing Debt Sustainability: Concepts and Tools Applied for Guinea, Rwanda,and Senegal By Gunter, Bernhard; Wodon, Quentin
  38. Vertical specialization and international business cycle synchronization By Costas Arkolakis; Ananth Ramanarayanan
  39. Financialization: What it is and Why it Matters By Thomas I. Palley
  40. Central bank communication and crowding out of private information in an experimental asset market By Menno Middeldorp; Stephanie Rosenkranz
  41. Import Price Dynamics in Major Advanced Economies and Heterogeneity in Exchange Rate Pass-Through By Stephane Dees; Matthias Burgert; Nicolas Parent
  42. The Impact of Structural Pension Reforms on the Macroeconomic Performance: An Empirical Analysis By Angeliki Theophilopoulou
  43. The usury doctrine and urban public finances in late-medieval Flanders (1220 - 1550): rentes (annuities), excise taxes, and income transfers from the poor to the rich By Munro, John H.
  44. Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops By Uluc Aysun; Adam Honig
  45. Credibilidad en la política monetaria: Papel de políticas en la estabilidad del Presidente del Banco Central By Miguel Rueda Author-X-Name_First: Miguel Author-X-Name_Last: Rueda
  46. Consumption in South America: myopia or liquidity constraints? By Paz, Lourenço S.; Gomes, Fábio A. R.
  47. Marriage, Divorce and Interstate Risk Sharing By Halla, Martin; Scharler, Johann
  48. Exchange Rate, Employment and Hours: What Firm-Level Data Say By Pozzolo, Alberto Franco; Nucci, Francesco
  49. Will the TARP Succeed? Lessons From Japan By Takeo Hoshi; Anil K Kashyap
  50. Testing Conditional Dynamics in Asymmetry. A Residual-Based Approach By Philippe Lambert; Sébastien Laurent
  51. Analyzing Debt Sustainability: An Application of SimSIP Debt for Paraguay By Gunter, Bernhard; Wodon, Quentin
  52. Debt Sustainability for Low-Income Countries: A Review of Standard and Alternative Concepts By Cassimon, Denis; Moreno-Dodson, Blanca; Wodon, Quentin
  53. Do Tax Structures Affect Aggregate Economic Growth?: Empirical Evidence from a Panel of OECD Countries By Jens Arnold
  54. Analyzing the Potential Impact of Indirect Tax Reforms on Poverty with Limited Data: Niger By Sehili, Saloua; Wodon, Quentin
  55. Public Finance for Poverty Reduction: An Overview By Moreno-Dodson, Blanca; Wodon, Quentin
  56. Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price By Giri, Rahul

  1. By: Ali Dib; Caterina Mendicino; Yahong Zhang
    Abstract: How important are the benefits of low price-level uncertainty? This paper explores the desirability of price-level path targeting in an estimated DSGE model fit to Canadian data. The policy implications are based on social welfare evaluations. Compared to the historical inflation targeting rule, an optimal price level targeting regime substantially reduces the welfare cost of business cycle fluctuations in terms of steady state consumption. The optimal price-level targeting rule performs also better than the optimal inflation targeting rule in minimizing the distortion generated by the presence of nominal debt contracts. The occurrence of financial shocks, which are among the main sources of business cycle fluctuations in the model, significantly contributes to quantify the welfare gains of price level targeting.
    Keywords: Financial stability; Inflation and prices; Monetary policy framework
    JEL: E31 E32 E52
    Date: 2008
  2. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: The New Consensus approach in macroeconomics is criticised for its exclusive but unwarranted reliance on stabilising monetary policies, for its ill-designed approach to the role of wages and wage policies, and for its complete neglect of fiscal policies. From a Post-Keynesian perspective, it is argued that fiscal policies play an important role for macroeconomic development, albeit the whole macroeconomic policy-mix of monetary, fiscal and wage policies as well as open economy conditions should be considered. Based on this view macroeconomic performance and macroeconomic policies in France, Germany, Sweden and the UK between 1996 and 2005 are analysed, with a special focus on the role of fiscal policies. It is shown that the fiscal policy stance is important for the explanation of different developments in these economies. However, fiscal policies are not the whole story, monetary policies, wage policies and open economy conditions matter as well.
    Keywords: Fiscal policy, macroeconomic policies, New Consensus, Post-Keynesian macroeconomics, France, Germany, UK, Sweden
    JEL: E61 E62 E63 E64 E65
    Date: 2008
  3. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: This paper derives the econometric restrictions imposed by the Barro and Gordon (1983) model of dynamic time inconsistency on a bivariate time-series model of Consumer Price Index (CPI) inflation and real Gross Domestic Product (GDP), and tests these restrictions based on quarterly data for South Africa covering the period of 1960:01 through 1999:04, i.e., for the pre-inflation targeting period. The results show that the data are consistent with the short- and long-run implications of the theory of time-consistent monetary policy. Moreover, when the model is used to forecast one-step-ahead inflation over the period of 2001:01 to 2008:02, i.e., the period covering the starting point of the inflation targeting regime till date we, on average, obtain lower rates of inflation. The result tends to suggest that the South African Reserve Bank (SARB), perhaps needs to manage the inflation targeting framework better than it has done so far.
    Keywords: Dynamic Time Inconsistency; Inflation Targeting; One-Step-Ahead Forecasts
    JEL: E31 E52 E61
    Date: 2008–10
  4. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France); Jean-Christophe Poutineau (CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France)
    Abstract: This paper investigates the impact of alternative monetary policy regimes on the creation of new varieties in open economies. Using a dynamic two-country model incorporating nominal rigidities, international trade and firm entries we compare an independent monetary policy regime to a monetary union regime. We find that a common monetary policy defined by a nominal interest rate rule reactive to inflation increases extensive margin of trade volatility. Simulations based on business cycle frequencies indicate that on average this increase reaches 3%. Although monetary policy interdependence is found to be a key ingredient in generating this effect, we stress that those parameters affecting international trade structures are crucial in determining its magnitude.
    Keywords: Extensive Margin, Variety Effect, Monetary Union, Monetary Policy
    JEL: E51 E58 F36 F41
    Date: 2008
  5. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Romer (2000) provides an alternative model to the AS/AD and IS/LM models that abandons the LM schedule by having the short-term interest rate set by the central bank. His framework acknowledges the critical role of the central bank in determining short-term interest rates, which moves mainstream macroeconomics closer to Post Keynesian monetary theory. The current paper presents a Post Keynesian construction of macroeconomics without an LM schedule. Rather than describing the financial sector in terms of an exogenously determined interest rate set by the central bank, the model unpacks financial markets by fully specifying a banking sector. The key analytic feature of the Post Keynesian approach is to replace the money market with the loan market. That makes transparent the macroeconomic significance of the loan market and bank behavior, and generates an endogenous money supply driven by bank lending. If banks become more optimistic over the
    Keywords: bank lending, credit, endogenous money, loan market.
    JEL: E12 E40
    Date: 2008
  6. By: Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt
    Abstract: This paper measures the welfare gains of switching from inflation-targeting to price-level targeting under imperfect credibility. Vestin (2006) shows that when the monetary authority cannot commit to future policy, price-level targeting yields higher welfare than inflation targeting. We revisit this issue by introducing imperfect credibility, which is modeled as gradual adjustment of the private sector's beliefs about the policy change. We find that gains from switching to price-level targeting are small. A welfare loss occurs, if imperfect credibility is highly persistent.
    Keywords: Credibility; Monetary policy framework
    JEL: E31 E52
    Date: 2008
  7. By: Peter Flaschel (Bielefeld University, Germany); Reiner Franke (Kiel University, Germany); Christian Proano (IMK at the Hans Boeckler Foundation)
    Abstract: This paper shows that an analytical determinacy analysis of the baseline New Keynesian model with both staggered wages and prices developed by Erceg, Henderson and Levin (2000) is possible despite the high dimensional nature of this model. It is possible if the formulation of the model is translated from discrete to continuous time. Our findings corroborates in an analytical manner Galí's (2008) numerical findings regarding the determinacy frontier and the Taylor principle for this model type, where a generalized Taylor rule that employs a weighted combination of wage and price inflation is used as a measure for the inflation gap.
    Keywords: Period models, continuous time, (in)determinacy.
    JEL: E24 E31 E32
    Date: 2008
  8. By: Olcay Çulha; Ali Çulha; Rauf Gönenç
    Abstract: Monetary policy has been one of the main pillars of the post-2001 stabilisation programme. Encouraged by its success, the central bank shifted from implicit to explicit inflation targeting in 2006 and set a medium-term inflation target of 4%, applicable from end 2007. However this objective faced with two important challenges. On the one hand, inflation inertia settled in and non-tradable inflation stagnated at more than 10%, further fuelled by persistent surge in global commodity and energy prices. On the other hand, real interest rates remained high, continuing to fuel strong capital inflows and currency appreciation, and undermining the competitiveness of labour-intensive segments of the economy. Turkey is, therefore, faced with the classic dilemma of successful catching-up economies: Inflation inertia requires a tight policy while competitiveness losses appear to go beyond the absorption and adaptation capacity of large segments of the economy. This chapter argues that resolving this issue requires monetary policy to be supported by broader policies, including proactive competition policy to reduce costs and prices in services, enforcement of a credible multi-yearly spending framework to consolidate confidence in fiscal stability, and employers' and employees' commitment to anchor prices and wages more on the inflation target. Success with such policies would help shift the burden away from the central bank's interest rate as the only available instrument to increase the credibility of the inflation target. <P>Les défis de politique monétaire en Turquie <BR>La politique monétaire est l'un des principaux piliers du programme de stabilisation engagé après 2001. Encouragée par ce succès, la banque centrale est passée en 2006 d'un ciblage implicite de l'inflation à un ciblage explicite, et a fixé un objectif d'inflation à moyen terme de 4%, applicable à compter de la fin de 2007. Toutefois, cet objectif s'est rapidement heurté à deux principaux écueils. D'une part, l'inertie de l'inflation a perduré et l'inflation dans les « non-tradables» a stagné à plus de 10 %. D'autre part, les taux d'intérêt réels sont restés élevés, ce qui a alimenté des entrées massives de capitaux et fait s'apprécier la monnaie, ce qui a pénalisé la compétitivité des segments de l'économie à forte intensité de main-d'œuvre. La Turquie est par conséquent confrontée au dilemme classique que connaissent les économies performantes en phase de rattrapage. L'inertie de l'inflation exige une politique monétaire restrictive, mais les pertes de compétitivité dépassent apparemment les capacités d'absorption et d'adaptation de pans entiers de l'économie. Ce document fait valoir que la politique monétaire doit être étayée par des initiatives menées dans d'autres domaines : incluant la politique de la concurrence proactive visant à réduire les coûts et les prix des services, la mise en œuvre d'un cadre de dépenses pluriannuel crédible afin de raffermir la confiance dans la stabilité budgétaire, et l’adoption par les employeurs et les salariés de l'objectif d'inflation comme point d'ancrage de leurs stratégies en matière de tarification et de salaires. La réussite de ces politiques atténuerait le poids qui s'exerce sur le taux d'intérêt directeur de la banque centrale en tant qu'instrument unique pour asseoir la crédibilité de l'objectif d'inflation.
    Keywords: exchange rates, taux de change, monetary policy, politique monétaire, inflation target, Turkey, Turquie, inflation expectation, anticipation d'inflation
    JEL: E40 E42 E50 E52 E58
    Date: 2008–10–16
  9. By: Juliane Scharff (Halle Institute for Economic Research (IWH)); Sven Schreiber (Goethe University Frankfurt, and Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation,)
    Abstract: Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of non-optimized prices those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative-price variability, RPV). Using US sectoral prices we estimate (a generalized form of) the theoretical relationship between inflation and RPV. We confirm the impact of inflation fluctuations but find hitherto neglected endogeneity biases, and our IV and GMM estimates indicate that average ("trend") inflation is significant for indexation. Lagged inflation is less important.
    Keywords: relative price variability, trend inflation, endogeneity bias
    JEL: E31 C22
    Date: 2008
  10. By: Giuseppe Marotta
    Abstract: The harmonized MIR retail interest rates for the euro area, available as of January 2003, show remarkable differences both in levels and dynamics with the previous unharmonized NRIR rates. This evidence should suggest caution in extrapolating the findings of the NRIR-based literature on the incomplete long-run pass-through of market rates even into the short term business lending rates, the least sticky ones among bank rates. We show that long run pass-throughs for MIR rates of smaller and larger short-term business loans are almost always complete or nearly so in nine of the founding EMU countries and in Greece.
    Keywords: Interest rates; Monetary policy; European Monetary Union (EMU); Taylor principle
    JEL: E43 E52 E58 F36
    Date: 2008–10
  11. By: Araújo, Eurilton; Pinheiro, Tatiana
    Date: 2008–10
  12. By: Adolfson, Malin (Monetary Policy Department, Central Bank of Sweden); Laseén, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Monetary Policy Department, Central Bank of Sweden, Sveriges Riksbank, SE-103 37 Stockholm, Sweden and CEPR); Svensson, Lars E.O. (Central Bank of Sweden, Sveriges Riksbank, SE-103 37 Stockholm, Sweden, Princeton University, CEPR and NBER)
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank’s openeconomy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.
    Keywords: Optimal monetary policy; instrument rules; optimal policy projections; openeconomy DSGE models
    JEL: E52 E58
    Date: 2008–08–01
  13. By: Seymen, Atilim
    Abstract: The paper questions the reasonability of using forecast error variance decompositions for assessing the role of different structural shocks in business cycle fluctuations. It is shown that the forecast error variance decomposition is related to a dubious definition of the business cycle. A historical variance decomposition approach is proposed to overcome the problems related to the forecast error variance decomposition.
    Keywords: Business Cycles, Structural Vector Autoregression Models, Forecast Error Variance Decomposition, Historical Variance Decomposition
    JEL: C32 E32
    Date: 2008
  14. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: This paper addresses two substantive issues: (1) Does the magnitude of the expectation effect of regime switching in monetary policy depend on a particular policy regime? (2) Under which regime is the expectation effect quantitatively important? Using two canonical DSGE models, we show that there exists asymmetry in the expectation effect across regimes. The expectation effect under the dovish policy regime is quantitatively more important than that under the hawkish regime. These results suggest that the possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and on equilibrium dynamics. They offer a theoretical explanation for the empirical possibility that a policy shift from the dovish regime to the hawkish regime may not be the main source of substantial reductions in the volatilities of inflation and output.
    Keywords: Monetary policy
    Date: 2008
  15. By: Andrew T. Levin; J. David López-Salido; Edward Nelson; Tack Yun
    Abstract: Many recent studies in macroeconomics have focused on the estimation of DSGE models using a system of loglinear approximations to the models' nonlinear equilibrium conditions. The term macroeconometric equivalence encapsulates the idea that estimates using aggregate data based on first-order approximations to the equilibrium conditions of a DSGE model will not be able to distinguish between alternative underlying preferences and technologies. The concept of microeconomic dissonance refers to the fact that the underlying microeconomic differences become important when optimal monetary policy is analyzed in a nonlinear setting. The relevance of these concepts is established by analysis of optimal steady-state inflation and optimal policy in the stochastic economy using a small-scale New Keynesian model. Microeconomic and financial datasets are promising tools with which to overcome the equivalence problem.
    Keywords: Monetary policy ; Macroeconomics ; Microeconomics
    Date: 2008
  16. 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 bench-mark menu cost model. Following either suggestion will improve monetary policy analysis.
    Keywords: Keynesian economics ; Prices
    Date: 2008
  17. By: Peter Flaschel (Bielefeld University, Germany); Christian Proano (IMK at the Hans Boeckler Foundation)
    Abstract: We reconsider the issue of the (non-)equivalence of period and continuous time analysis in macroeconomic theory and its implications for the existence of chaotic dynamics in empirical macro. We start from the methodological precept that period and continuous time representations of the same macrostructure should give rise to the same qualitative outcome, i.e. in particular, that the results of period analysis should not depend on the length of the period. A simple example where this is fulfilled is given by the Solow growth model, while all chaotic dynamics in period models of dimension less than 3 are in conflict with this precept. We discuss a recent and typical example from the literature, where chaos results from an asymptotically stable continuous-time macroeconomic model when this is reformulated as a discrete-time model with a long period length.
    Keywords: Period models, continuous time, (non-)equivalence, chaotic dynamics.
    JEL: E24 E31 E32
    Date: 2008
  18. By: Hafedh Bouakez; Nooman Rebei; Désiré Vencatachellum
    Abstract: In many developing and emerging market economies, governments intervene to limit the degree to which oil-price increases are passed through to domestic fuel prices. This paper investigates whether, and to what extent, this intervention is warranted in an oil-importing economy characterized by nominal rigidities in the goods and labor markets. Our results indicate that, to the extent that monetary policy is capable of stabilizing the economy, government intervention in the oil market must be avoided. On the other hand, when complete stabilization is not attainable as a result of sub-optimal monetary policy, the government can improve social welfare by limiting the degree of pass-through of oil prices. We find, however, that the welfare gain from pursuing such a policy is negligible.
    Keywords: Oil prices, pass-through, government, monetary policy, small open economy, welfare
    JEL: E3 E5 F3 F4
    Date: 2008
  19. By: Peter Claeys (Faculty of Economics, University of Barcelona); Raúl Ramos (Faculty of Economics, University of Barcelona); Jordi Suriñach (Faculty of Economics, University of Barcelona)
    Abstract: Control on regional government budgets is important in a monetary union as lower tiers of government have fewer incentives to consolidate debt. According to the Fiscal Theory of the Price Level; unsustainable non-Ricardian fiscal policies eventually force monetary policy to adjust. Hence, uncoordinated and non-regulated regional fiscal policies would therefore threaten price stability for the monetary union as a whole. However, the union central bank is not without defense. A federal government that internalises the spillover effect of non-Ricardian fiscal policies on the price level can offset non-Ricardian regional fiscal policies. A federal government, which taxes and transfers resources between regions, may compensate for unsustainable regional fiscal policies so as to keep fiscal policy Ricardian on aggregate. Following Canzoneri et al. (2001), we test the validity of the Fiscal Theory of the Price Level for both federal and regional governments in Germany. We find evidence of a spillover effect of unsustainable policies on the price level for other Länder. However, the German federal government offsets this effect on the price level by running Ricardian policies. These results have implications for the regulation of fiscal policies in the EMU.
    Keywords: Sustainability, fiscal policy, FTPL, fiscal federalism.
    Date: 2008–10
  20. By: Michal Franta (Czech National Bank; CERGE-EI); Branislav Saxa (Czech National Bank; CERGE-EI); Katerina Smidkova (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: Inflation persistence has been put forward as one of the potential reasons of divergence among euro area members. It has also been proposed that the new EU Member States (NMS) may struggle with even higher persistence due to convergence factors. We argue that persistence may not be as different between the two country groups as one might expect. However, this empirical result can only be obtained if the adequate estimation methods, reflecting the scope of the convergence process the NMS went through, are applied. We emphasize that a time-varying mean models suggest similar or lower inflation persistence for the NMS compared to euro area countries while more traditional parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. This difference is due to frequent breaks in inflation time series in the NMS. Structural persistence measures show that backward-looking behavior may be a more important component in explaining inflation dynamics in the NMS than in the euro area countries.
    Keywords: inflation persistence, new hybrid Phillips curve, new member states, time-varying mean
    JEL: E31 C22 C11 C32
    Date: 2008–10
  21. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Over the last several years debate over monetary policy has focused on two issues, inflation targeting and asset price bubbles. This paper explores the case for explicitly targeting asset price bubbles, a policy that the Federal Reserve Bank has opposed on the grounds that it is both infeasible and undesirable. The paper argues that the Fed is wrong on both counts. Asset price bubbles are identifiable. Bubbles also do significant economic harm through the debt footprint effects they leave behind and through interest rate blunderbuss effects resulting from attempts to mitigate the aggregate demand impact of bubbles. Managing bubbles calls for additional policy instruments. These can be provided a system of asset based reserve requirements (ABRR).
    Date: 2008
  22. By: Martin Boileau; Michel Normandin
    Abstract: We study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post-1975 period. Our structural approach is based on a tractable small open-economy model where a tax cut innovation generates a budget deficit. In turn, the budget deficit affects the external deficit by two distinct channels. The demographic channel works through the overlapping-generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate significant positive comovements between the budget and external deficits. We also find that both the demographic and forecasting channels are important to explain the comovements.
    Keywords: Budget Deficit, External Deficit, Fiscal Policy, Overlapping Generations
    JEL: E62 F32 F41
    Date: 2008
  23. By: Cecilia Frale; David Veredas
    Abstract: We estimate the monthly volatility of the US economy from 1968 to 2006 by extending the coincident index model of Stock and Watson (1991). Our volatility index, which we call VOLINX, has four applications. First, it sheds light on the Great Moderation. VOLINX captures the decrease in the volatility in the mid-80s as well as the different episodes of stress over the sample period. In the 70s and early 80s the stagflation and the two oil crises marked the pace of the volatility whereas 09/11 is the most relevant shock after the moderation. Second, it helps to understand the economic indicators that cause volatility. While the main determinant of the coincident index is industrial production, VOLINX is mainly affected by employment and income. Third, it adapts the confidence bands of the forecasts. In and out-of-sample evaluations show that the confidence bands may differ up to 50% with respect to a model with constant variance. Last, the methodology we use permits us to estimate monthly GDP, which has conditional volatility that is partly explained by VOLINX. These applications can be used by policy makers for monitoring and surveillance of the stress of the economy.
    Keywords: Great Moderation, temporal disaggregation, volatility, dynamic factor models, Kalman filter
    JEL: C32 C51 E32 E37
    Date: 2008
  24. By: Luis Gonzalo Llosa Author-X-Name_First: Luis Gonzalo Author-X-Name_Last: Llosa; Vicente Tuesta Author-X-Name_First: Vicente Author-X-Name_Last: Tuesta
    Abstract: This paper evaluates under which conditions different Taylor-type rules lead to determinacy and expectational stability (E-stability) of rational expectations equilibrium in a simple New Keynesian small open economy model, developed by Gali and Monacelli (2005). In particular, we extend the Bullard and Mitra (2002) results of determinacy and E-stability in a closed economy to this small open economy framework. Our results highlight an important link between the Taylor principle and both determinacy and learnability of equilibrium in small open economies. More importantly, the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways. A key finding is that, contrary to Bullard and Mitra, expectations-based rules that involve the CPI and/or the nominal exchange rate limit the region of E-stability and the Taylor Principle does not guarantee E-stability. We also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability, yet these rules might not be desirable since they promote greater volatility in the economy.
    Date: 2006–12
  25. By: Niklas J. Westelius (Hunter College)
    Abstract: A number of inflation targeting central banks operate under provisions that allow for increased flexibility when faced with large supply shocks. These so-called escape clauses, however, are usually hard to interpret and discretionary in nature. This paper argues that a practical and more viable option is to specify a hard edged target range. Within the range, the central bank enjoys complete independence. Should, however, a large supply shock force inflation outside the range, the government may overrule the bank unless it adjusts its policy to address the government's concerns. Such an arrangement has the advantage of being easily understood and non-discretionary. Furthermore, it is shown that the bandwidth of the target range is inversely related to the degree of flexibility of the inflation targeting regime and thus, provides an easy way for the central bank to communicate its preferences to the public. The paper also discusses various determinants of the optimal design of the target range.
    Keywords: Inflation Range Targeting, Discretion, Escape Clauses
    JEL: E52 E61
    Date: 2008
  26. By: Miguel Rueda Author-X-Name_First: Miguel Author-X-Name_Last: Rueda
    Abstract: This paper studies the relationship between the hazard rate of the exit of a president of a central bank and a measure of credibility in monetary policy. The expected hazard rate of exit is estimated as a function of legal and political variables. The measure of credibility is the expected probability of a disinflation beginning when inflation is rising. For a sample of 22 Latin American and G7 countries, I find a negative relationship between the hazard rate of exit and the measure of credibility. This provides evidence of the expected relationship between independence and credibility not found in previous cross country studies. Using the executive’s party ideology as a measure of aversion to inflation, there was no evidence that this relationship is different for countries where the government is identified as more conservative. However, when a president of the central bank appointed by a conservative government is in office, a rise in the probability of a disinflation beginning when inflation was rising was found. The results show that legal independence after controlling for the hazard rate of the president’s exit is not associated with credibility gains.
    Date: 2008–09
  27. By: Federico di Pace (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We propose an additional solution to the comovement puzzle by developing a two-sector monetary model with housing production and an input-output structure. The model generates comovement between consumption and residential investment for large range of shocks hitting the economy. Consistent with previous work, we find that our model produces highly persistence responses in aggregate consumption, aggregate output and residential investment. We show that the results are highly robust to different policy rule specifications. We find that the lower the labour shares, the higher the relative volatility of residential investment. The model with an IO structure is works under different specifications of the period utility function. We extend the model to allow for wage rigidities and show that our proposed solution can perfectly work alongside previous ones.
    Date: 2008–09
  28. By: Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then propose a synthetic asymmetric error correction model and find evidence that can be interpreted as indicating both long-run loss aversion and short-run liquidity constraints. This result can also be interpreted in the context of the secular decline in the US personal savings rate over the past decades: although wealth declines can have considerable negative consumption effects in the short run, households have apparently been able, in the longer run, to substantially increase consumption expenditure following income and wealth increases, but to keep the necessary reductions in consumer spending, as a consequence of income and wealth declines, within relatively small limits. Yet, given increasing personal indebtedness, this asymmetric consumption pattern may be unsustainable
    Keywords: Asymmetric error correction model, consumer economics, aggregate con-sumption and wealth.
    JEL: C22 D11 D12 E21
    Date: 2008
  29. By: Christopher L. House
    Abstract: Neoclassical investment models predict that firms should make frequent, small adjustments to their capital stocks. Microeconomic evidence, however, shows just the opposite -- firms make infrequent, large adjustments to their capital stocks. In response, researchers have developed models with fixed costs of adjustment to explain the data. While these models generate the observed firm-level investment behavior, it is not clear that the aggregate behavior of these models differs importantly from the aggregate behavior of neoclassical models. This is important since most of our existing understanding of investment is based on models without fixed costs. Moreover, models with fixed costs have non-degenerate, time-varying distributions of capital holdings across firms, making the models extremely difficult to analyze. This paper shows that, for sufficiently long-lived capital, (1) the cross-sectional distribution of capital holdings has virtually no bearing on the equilibrium and (2) the aggregate behavior of the fixed-cost model is virtually identical to that of the neoclassical model. The findings are due to a near infinite elasticity of investment timing for long-lived capital goods -- a feature that fixed-cost models and neoclassical models share. The analysis shows that the so-called "irrelevance results" obtained in recent numerical studies of fixed-cost models are not parametric special cases but instead reflect fundamental properties of long-lived investments.
    JEL: E22 E32
    Date: 2008–10
  30. By: Richard Dennis
    Abstract: In this paper I show that discretionary policymaking can be superior to timeless perspective policymaking and identify model features that make this outcome more likely. Developing a measure of conditional loss that treats the auxiliary state variables that characterize the timeless perspective equilibrium appropriately, I use a New Keynesian DSGE model to show that discretion can dominate timeless perspective policymaking when the Phillips curve is relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal price rigidity. These results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion, paying careful attention to how policy performance is evaluated.
    Keywords: Monetary policy
    Date: 2008
  31. By: Piffaretti, Nadia F.
    Abstract: As we witness profound changes in the global economy, and the raise of a multipolar intergrated global economy, as it appears clear that so-called “Revived Bretton Woods System” as described by in their influential paper by Dooley, Folkerts-Landau and Garber (2003) (in which many countries, particularly in Asia, limit exchange rate fluctuation against the dollar, accumulating as a consequence enormous reserves in dollars) maybe be nothing more than a temporary non sustainable financing of the US structural internal imbalance, it’s worth revisiting the origins of the Bretton Woods Institutions, and pointing out to the relevance for today’s framework of Keynes’ original 1942 plan. In this note we explore the main characteristics of Keynes’ original plans for an international Clearing Union, by revisiting his original writings between 1940-1944, and we briefly outline the relevance of his plan to today’s framework.
    Keywords: International Financial Architecture; Bretton Woods Institutions; Plan Keynes; Money
    JEL: E12 E58 E42 F02 N20 E00 E50 F33
    Date: 2008–10–11
  32. By: Camille Logeay (IMK at the Hans Boeckler Foundation); Katja Rietzler (IMK at the Hans Boeckler Foundation)
    Abstract: In this article an overview of the German macroeconomic performance in the last decade is stressed; extraordinary recovery of the German productivity and successes of the foreign trade face depressed domestic demand and a still worrying situation in the labour market. This article attempts to analyse the causes and consequences of these contradictory developments. Labour markets reforms in particular are focussed on in these lines. A macroeconomic evaluation of their impact on employment and wage developments is done and concludes that structural reforms cannot for themselves create more employment, they only can give a greater latitude for economic policy to boost demand without leaving the sustainable framework.
    Keywords: Germany, business cycle, unemployment, employment, Europe
    JEL: E12 E50
    Date: 2008
  33. By: Shutao Cao
    Abstract: The author studies the effects of capital reallocation (the flow of productive capital across firms and establishments mainly through changes in ownership) on aggregate labour productivity. Capital reallocation is an important activity in the United States: on average, its total value is 3-4 per cent of U.S. GDP. Firms with lower productivity are more likely to be reallocated to (i.e., bought by) more productive firms. Reallocated establishments experience an increase in productivity. The author develops a dynamic model of capital reallocation and compares its predictions with U.S. data. In the model, limited participation in acquisition markets by heterogeneous firms results in an increase in aggregate productivity. With reasonably chosen parameter values, policy experiments show that the increased reallocation of capital and labour contributed as much as a 17 per cent improvement in aggregate labour productivity in the mid-1980s. When a positive total-factor-productivity shock occurs, in steady state the increase in aggregate productivity arises entirely from this shock, and reallocation is unaffected.
    Keywords: Productivity; Economic models
    JEL: E22 L16
    Date: 2008
  34. By: Idrovo Aguirre, Byron
    Abstract: The objective of this study is to estimate the Chilean economy’s growth rate in a context of full employment of the productive resources. As reference, some experts estimate at that the long term growth of the activity has fallen from 5 per cent to a rank between 4.5 per cent and 5 per cent in most recent months. We conclude formally, from the use of univariate time series models –including a deterministic trend (with structural breaks) and a stochastic trend (with and without regime switching), that the long term growth rate would be marginally below that rank (somewhat superior to 4 per cent) and with a moderate adjustment velocity when the activity relays far from the steady state (up to one year).
    Keywords: Economía; Ciclos; Crecimiento; Tendencia; Filtro de Kalman.
    JEL: E32 C22
    Date: 2008–02–14
  35. By: Roger Hammersland (Statistics Norway)
    Abstract: This paper addresses how to enhance the role of data in structural model design by utilizing structural breaks and superfluous information as auxiliary tools of exact identification. To illustrate the procedure and to study the simultaneous interplay between financial variables and the real side of the economy a simultaneous equation model is constructed on Norwegian aggregate data. In this model, while innovations to stock prices and credit do cause short run movements in real activity, such innovations do not precede real economy movements in the long run.
    Keywords: Structural vector Error Correction modeling; Identification; Cointegration; Financial variables and the real economy.
    JEL: C30 C32 C50 C51 C53 C53 E44
    Date: 2008–10
  36. By: Fregert, Klas (Department of Economics, Lund University); Pehkonen, Jaakko (School of Business and Economics)
    Abstract: We describe the size and timing for comprehensive as well as decomposed measures of unemployment. We then test for and confirm a change in the structural rate of unemployment by finding structural breaks in the Okun and Beveridge relations. Finally, we employ existing empirical models to examine the contributions of exogenous factors to the changes in the structural unemployment rate. We present separate estimates for the mid-1990s, late 1990s and early 2000s. They indicate that the structural rate has decreased in both countries, but has not returned to the levels of the 1980s.
    Keywords: Structural unemployment; Okun curve; Beveridge curve; Finland; Sweden;
    JEL: E24 E65 J64
    Date: 2008–09–19
  37. By: Gunter, Bernhard; Wodon, Quentin
    Abstract: A sustainable debt is a precondition for sustainable development. Yet the analysis of a country’s debt sustainability is a complex task given issues related to (1) establishing the actual debt outstanding and future debt-service obligations; (2) defining appropriate sustainability indicators; and (3) projecting future macroeconomic variables like gross domestic product, exports, interest rates, inflation rates, and exchange rates. These projections are crucial because debt sustainability analysis is necessarily forward-looking and highly sensitive to changes in these macroeconomic variables. This paper provides a case study of debt sustainability analysis in three African countries to illustrate the key concepts and complexities involved in such analysis. We begin with an overview of the main debt sustainability indicators as they typically are used in practice. We then provide a brief historical review of previous and current debt relief initiatives and illustrate how they have been applied in each of the three countries. The paper then presents the debt sustainability analyses using a recently developed simulation tool (SimSIP Debt).
    Keywords: Debt sustainability; macroeconomic projections; debt relief
    JEL: E62 F34 H63
    Date: 2008–01
  38. By: Costas Arkolakis; Ananth Ramanarayanan
    Abstract: We explore the impact of vertical specialization--trade in goods across multiple stages of production--on the relationship between trade and international business cycle synchronization. We develop a model in which the degree of vertical specialization is endogenously determined by comparative advantage across heterogeneous goods and varies with trade barriers between countries. We show analytically that fluctuations in measured productivity in our model are not linked across countries through trade, despite the greater transmission of technology shocks implied by higher degrees of vertical specialization. In numerical simulations, we find this transmission is insufficient in generating substantial dependence of business cycle synchronization on trade intensity.
    Keywords: Business cycles ; International trade
    Date: 2008
  39. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Financialization is a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector; (2) transfer income from the real sector to he financial sector; and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession. Financialization operates through three different conduits: changes in the structure and operation of financial markets; changes in the behavior of non-financial corporations, and changes in economic policy. Countering financialization calls for a multi-faceted agenda that (1) restores policy control over financial markets, (2) challenges the neo-liberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.
    Keywords: Financialization, neo-liberal policy, deregulation, debt, financial fragility.
    JEL: E61 E62 E63 E64 E65
    Date: 2008
  40. By: Menno Middeldorp; Stephanie Rosenkranz
    Abstract: Theoretical results from previous work, presented in Kool, Middeldorp and Rosenkranz (2007), suggest that central bank communication crowds out private information acquisition and that this effect can lead to a deterioration of the ability of financial markets to predict future policy interest rates. We examine this result in an experimental asset market that closely follows the theoretical model. Crowding out of information acquisition takes place and, where this crowding out is most rapid, there is deterioration of the market’s predictive ability. This supports the theoretical result that central bank communication can actually make it more difficult for financial markets to predict future policy rates.
    Keywords: Experimental Economics, Private Information Acquisition, Information and Financial Market Efficiency, Central bank transparency and communication
    JEL: C92 D82 E58 G14
    Date: 2008–06
  41. By: Stephane Dees; Matthias Burgert; Nicolas Parent
    Abstract: This paper aims at showing heterogeneity in the degree of exchange rate pass-through to import prices in major advanced economies at three different levels: 1) across destination markets; 2) across types of exporters (distinguishing developed economy from emerging economy exporters); and 3) over time. Based on monthly data over the period 1991–2007, the results show first that large destination markets exhibit the lowest degrees of pass-through. The degree of pass-through for goods imported from emerging economies is also significantly lower than for those from developed economies. Regarding the evolution over time, no clear change in pricing behaviours can be identified and particular events, like large exchange rates depreciations during the Asian crisis, seem to influence the degree of pass-through related to imports from emerging economies.
    Keywords: Exchange rates; Inflation and prices
    JEL: E31 F3 F41
    Date: 2008
  42. By: Angeliki Theophilopoulou (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Whether pension reforms lead to an improvement in macroeconomic performance is a controversial question. Some countries, which have implemented reforms, claim better economic performance while in others a positive result has yet to be seen. This paper explores two aspects of this issue further: Firstly, we provide a comprehensive investigation of the impact of pension reforms on output, capital stock and consumption. Secondly, we attempt to uncover the factors which lead to cross country heterogeneity in the impact of reform. Our results suggest that pension reform led to an improvement in macroeconomic performance. However, there is also evidence to suggest that this improvement was more pronounced in countries with lower public debt, lower age dependency ratio, more developed financial markets and a higher rate of privatisations.
    Date: 2008–09
  43. By: Munro, John H.
    Abstract: The objectives of this study are three-fold. The first is to rebut Charles Kindleberger’s famous dictum that usury ‘belongs less to economic history than to the history of ideas’; and in particular to demonstrate that the resuscitation of the anti-usury campaign from the early 13th century led to a veritable financial revolution in late-medieval French and Flemish towns: one that became the ‘norm’ in modern European states from the 16th century (in England, from 1693): a shift in public borrowing from interest-bearing loans to the sale of annuities, usually called rentes or renten. That anti-usury campaign had two major features: (1) the decrees of the Fourth Lateran Council of 1215, which provided harsh punishments – excommunication -- for both unrepentant usurers and princes who failed to suppress them; and (2) the establishment of the two mendicant preaching orders: the Franciscans (1210) and the Dominicans (1216), whose monks preached hellfire and eternal damnation against all presumed usurers – including, of course, anyone who received any interest on government loans. There is much evidence that from the 1220s, many financiers in many French and Flemish towns, fearing for their immortal souls, preferred to accept far lower returns on buying rentes than the interest they would have earned on loans. These rentes, based on 8th-century Carolingian census contracts, had two basic forms: (1) life-annuities, by which a citizen purchased from the government, with a lump sum of capital, an annual income stream lasting a lifetime, or the lifetime of his wife as well; (2) perpetual annuities, by which the annual income stream was indeed perpetual, or until such time as the government chose to redeem the rentes, at par. Initially, some theologians opposed sales of rentes as subterfuges to cloak evasion of the usury doctrine. But in 1250-1, Pope Innocent IV declared them to be non-usurious contracts, essentially because they were not loans. Subsequent popes in the 15th century confirmed his views and the non-usurious character of rentes, on two conditions: (1) that the buyer of the rente could never demand redemption or repayment, and (2) that the annual annuity payments (and any ultimate redemptions) be in accordance with actual rent contracts: i.e., that the funds be derived from the products of the land. Ecclesiastical authorities soon agreed that taxes on the consumption of the products of the land (and sea) met this test: i.e., taxes on beer and wine (which always accounted for the largest share), bread, textiles, fish, meat, dairy products, etc. The second objective is to measure the importance of 'rentes' in the civic finances of Flemish towns, in terms of both revenues and expenditures: from the annual town accounts Ghent (14th century only), and Aalst (1395-1550), where they had far greater importance. The related third objective is to measure the burden of the excise taxes for master building craftsmen in Aalst, in tables that measure the values of the excise tax revenues expressed in real terms: first, in the equivalent number of ‘baskets of consumables’ (which form of the base of the Consumer Price Index), and second their value in terms of the annual money-wage incomes of master masons (for 210 days). This provides an entirely new look at the late-medieval ‘standard of living’ controversy – with indications that this consumption-tax burden sometimes rose from about 13,200 to almost 30,000 days’ wage income, for a town of perhaps 3600 inhabitants (but obviously less dramatic on a per capita basis). That tax burden rose the most strongly when, by other indications, real wages (RWI = NWI/CPI) were also finally rising; and thus possibly these real wage gains were largely eliminated. That per capita tax burden would have been all the greater if, in the course of the 15th century, Aalst had experienced the same decline as did small towns of Brabant, to the east, on the order of 25%, and some other Flemish towns, in which the population decline varied from 9% to 28 %. In earlier publications I had challenged the widespread view that the era following the Black Death, with a radical change in the land:labour ratio, came to be a ‘Golden Age’ of the artisan and labourer. I contended instead that frequent inflations eroded or eliminated wage gains, and thus that periodic rises in real wages were due essentially to steep deflations combined with pronounced wage-stickiness. As I also calculated, English artisans in the 1340s had earned real wages that were about 50% of the Flemish; but by the 1480s, they had narrowed that gap (with much less inflation) to about 80%. That gap was probably even smaller, until the 1640s, when England’s Parliament finally imposed similar excise taxes on consumption.
    Keywords: usury; canon law; Church Councils; public debts; civic loans; excise taxes; rentes (annuities); warfare; Flanders; Ghent; Aalst; inflation; deflation; real wages; building craftsmen
    JEL: E62 E43 N93 D31 E42 B11 J45 E25 J81 H20 E31 H31 H71 E44 J31 J10 O52
    Date: 2007–08
  44. By: Uluc Aysun (University of Connecticut); Adam Honig (Amherst College)
    Abstract: Emerging market countries that have improved institutions and attained intermediate levels of institutional quality have experienced severe financial crises following capital flow reversals. However, there is also evidence that countries with strong institutions and deep capital markets are less affected by external shocks. We reconcile these two observations using a calibrated DSGE model that extends the financial accelerator framework developed in Bernanke, Gertler, and Gilchrist (1999). The model captures financial market institutional quality with creditors. ability to recover assets from bankrupt firms. Bankruptcy costs affect vulnerability to sudden stops directly but also indirectly by affecting the degree of liability dollarization. Simulations reveal an inverted U-shaped relationship between bankruptcy recovery rates and the output loss following sudden stops. We provide empirical evidence that this non-linear relationship exists.
    Keywords: sudden stops, bankruptcy costs, financial accelerator, liability dollarization.
    JEL: E44 F31 F41
    Date: 2008–10
  45. By: Miguel Rueda Author-X-Name_First: Miguel Author-X-Name_Last: Rueda
    Abstract: Este documento estudia la relación entre el índice de riesgo de salida de un presidente de banco central y una medida de credibilidad en la política monetaria. El índice de riesgo de salida previsto se considera como una función de variables legales y políticas. La medida de credibilidad es la probabilidad prevista de un principio de deflación cuando la inflación está en aumento. En una muestra de 22 países latinoamericanos y del G7, se encuentra una relación negativa entre el índice de riesgo de salida y la medida de credibilidad. Los resultados demuestran que la independencia legal después de controlar el índice de riesgo de la salida del presidente no está asociada a aumentos de credibilidad.
    Date: 2008–09
  46. By: Paz, Lourenço S.; Gomes, Fábio A. R.
    Date: 2008–10
  47. By: Halla, Martin (University of Linz); Scharler, Johann (University of Linz)
    Abstract: In this paper we study the importance of marriage for interstate risk sharing. We find that US states in which married couples account for a higher share of the population are less exposed to state-specific output shocks. Thus, marriages do not just improve the allocation of risk at the individual level, but also have implications for the allocation of risk at the more aggregated state-level. Quantitatively, the impact of marriage on interstate risk sharing varies over divorce regimes.
    Keywords: risk sharing, marriage, divorce, family law
    JEL: J12 E21 K36 G21
    Date: 2008–10
  48. By: Pozzolo, Alberto Franco; Nucci, Francesco
    Abstract: Using a representative panel of manufacturing firms, we estimate the response of job and hours worked to currency swings, showing that it depends primarily on the firm's exposure to foreign sales and its reliance on imported inputs. Further, we show that, for given international orientation, the response to exchange rate fluctuations is magnified when firms exhibit a lower monopoly power and when they face foreign pressure in the domestic market through import penetration. The degree of substitutability between imported and other inputs and the distribution of workers by type introduce additional degrees of specificity in the employment sensitivity to exchange rate swings. Further, wage adjustments are also shown to provide a channel through which firms react to currency shocks. Finally, gross job flows within the firm are found to depend on exchange rate fluctuations, although the effect on job creation is predominant.
    Keywords: Employment, Exchange Rate, Firm's Foreign Exposure
    JEL: E24 F16 F31
    Date: 2008–10–13
  49. By: Takeo Hoshi; Anil K Kashyap
    Abstract: The U.S. government is hiring asset managers to purchase up to $700 billion of toxic real estate securities that are the center of the current credit crisis. Buying up assets, if done properly, might address the collective under-capitalization that is the fundamental problem plaguing the financial system. But, experience with financial crises in other countries suggests that success is by no means guaranteed. Japan was the largest other country where the banks were seriously undercapitalized and where asset purchases were a critical part of the government's response to the problem. The U.S. bailout plan is similar to the Japanese approach in that it does not clearly identify the capital problem as critical and instead proposes using AMCs to remove distressed assets from bank balance sheets. When Japan used AMCs, their effectiveness was limited in part because they did not purchase enough assets. AMCs did not help recapitalization, either, and Japan had to come up with different mechanisms to use public funds for recapitalization. Both these risks are also present for the U.S. plan.
    JEL: E44 G18 G28 G38
    Date: 2008–10
  50. By: Philippe Lambert; Sébastien Laurent
    Abstract: We propose three residual-based tests for conditional dynamic asymmetry. Estimation is performed under the null hypothesis of constant asymmetry of the innovations and, in a second step, the tests are performed either through a parametric model or a nonparametric method (runs). The working distribution is assumed to fall into the class of skewed distributions of Fernandez and Steel (1998) for which asymmetry is measured by the ratio between the probabilities of being larger and smaller than the mode. We derive the asymptotic distribution of the tests that incorporates the uncertainty of the estimated parameters in the first step. A Monte Carlo study shows that neglecting this uncertainty severely biases the tests and an empirical application on a basket of daily returns reveals that financial data often present dynamics in the conditional skewness.
    Keywords: Conditional skewness, asymmetry, residuals
    JEL: C32 G14 E44
    Date: 2008
  51. By: Gunter, Bernhard; Wodon, Quentin
    Abstract: One of the most difficult tasks in preparing a poverty reduction strategy consists in setting priorities for public action, taking into account the cost of social programs and the capacity of the government to pay that cost. The ability to pay for social programs is determined by the resources available to the government through taxation and loans or grants within a debt and fiscal sustainability framework. This paper shows how to conduct debt and fiscal sustainability analysis using SimSIP Debt, a user-friendly Excel-based tool, with an application to Paraguay.
    Keywords: Debt sustainability; fiscal sustainability; Paraguay
    JEL: E62 F34 H63
    Date: 2008–01
  52. By: Cassimon, Denis; Moreno-Dodson, Blanca; Wodon, Quentin
    Abstract: Governments in low-income countries have the difficult task of making wide-ranging decisions about public spending, taxation, and borrowing. Although we can analyze at length how both public spending and taxation can be designed and implemented to contribute to growth and poverty reduction, the biggest challenge that most developing countries face is in determining how much they can borrow without jeopardizing their long-term prospects. The objective of this paper is to introduce the key issues involved in debt sustainability analysis. We review the main approaches developed in the literature, starting from the traditional fiscal and external approaches and covering recent alternative frameworks, such as the debt overhang analysis and the human development approach (especially as it relates to the funding requirements for achieving the Millennium Development Goals).
    Keywords: Debt sustainbility; fiscal sustainability; debt overhang; Millennium Development Goals; human development
    JEL: E62 F34 H63
    Date: 2008–01
  53. By: Jens Arnold
    Abstract: This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are accounted for. The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita. These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth. All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators. <P>La structure fiscale a-t-elle un effet sur la croissance économique ? : Évidences empiriques d’un panel de pays de l’OCDE <BR>Cet article étudie le lien entre la structure de la fiscalité et la croissance économique. L’analyse empirique inclut des indicateurs sur la répartition des taxes dans des équations de croissance pour un panel de 21 pays de l’OCDE, en prenant en compte l’accumulation du capital physique et du capital humain. Les résultats montrent que les impôts sur le revenu sont en général associés avec une croissance plus faible que celle associée aux impôts sur la consommation et sur le patrimoine. Plus précisément, nous établissons un classement des instruments de taxation au regard de leur lien avec la croissance. Les impôts sur le patrimoine, et particulièrement les impôts périodiques sur la propriété immobilière, semblent être les plus favorables à la croissance, suivies immédiatement des impôts sur la consommation. Les impôts sur le revenu des individus semblent être significativement moins favorables, et les impôts sur le revenu des sociétés ont les effets les plus négatifs sur le PIB par tête. Ces résultats suggèrent que les réformes augmentant les impôts sur le patrimoine et la consommation au détriment de ceux sur les entreprises seraient susceptibles d’améliorer les perspectives de croissance économique. L’article trouve également les signes d’une relation négative entre la progressivité des impôts sur le revenu des individus et la croissance. Tous les résultats précédents sont robustes à différentes spécifications, incluant le contrôle des autres déterminants de la croissance économique et l’instrumentation des indicateurs de taxation.
    Keywords: growth, croissance, fiscal policy, politique fiscale
    JEL: E62 H21 O47
    Date: 2008–10–09
  54. By: Sehili, Saloua; Wodon, Quentin
    Abstract: Many countries in sub-Saharan Africa are confronted with the need to raise tax revenues in order to be able to provide a range of services to their populations. Yet taxes and other government revenues as a proportion of GDP are lowest in the poorest countries that need to expand their services the most. In addition, because of high level of informality in their economies, very-low-income countries obtain a large share of tax revenues through consumption taxes which tend to be more regressive than taxes on incomes levied in richer countries. Such a situation poses a difficult dilemma. Very-low-income countries are trying to increase their tax revenues to provide better services to their populations in need, but at the same time a substantial part of the burden of increased taxation may fall on the poor. Furthermore, because the poor in very-low-income countries are often extremely poor, even small increases in the price of the goods they consume related to an increase in tax rates on those goods may have important negative implications for the households’ ability to meet their basic needs. This implies that government must be especially careful when raising taxes in order to provide social services. The type of household survey-based analysis that can be conducted to inform governments in this area is illustrated in this paper with a case study on Niger.
    Keywords: Indirect taxes; social services; poverty; Niger
    JEL: E62 I38 D61
    Date: 2008–01
  55. By: Moreno-Dodson, Blanca; Wodon, Quentin
    Abstract: Governments in low-income countries have the difficult task of making wide-ranging decisions about public spending, taxation, and borrowing with the aim of helping their countries maintain long-term debt sustainability, achieve higher economic growth, and ultimately reduce poverty. Making such decisions is difficult because it involves considering multiple trade-offs. There are at least four reasons why designing and implementing fiscal policies that contribute to growth and poverty reduction are particularly challenging tasks in developing countries. First, private-market failures are widespread and often unpredictable. Second, government and institutional failures also limit the effectiveness of public interventions. Third, raising public revenues is difficult in a context of macroeconomic and growth instability, high debt ratios, weak tax administration, and large informal sectors. Finally, many developing countries lack the data necessary to conduct a thorough analysis of the effect of government policies on the poor segments of the population. Despite those challenges, however, the budget remains one of the most important instruments (together with laws and regulations) that governments have at their disposal to foster poverty reduction. Policy makers in both developing and developed countries, as well as nongovernmental or-ganizations and providers of aid, can benefit from a deeper understanding of how internally or externally financed public funds channeled through the budget can be used more successfully to benefit the poor in a realistic manner. This paper, which serves as an introduction to an edited volume on "Public Finance for Poverty Reduction" starts with a brief discussion of the rationale behind the role of the government in public finance. Then we discuss some of the limitations faced by governments in developing countries. We follow those discussions with an overview of the nature and structure of the material presented in the book and with our thoughts on germane topics yet to be addressed adequately.
    Keywords: Public finance; poverty reduction; taxation; debt sustainability; public expenditure; incidence analysis
    JEL: E62 F34 H2 H63
    Date: 2008–01
  56. By: Giri, Rahul
    Abstract: Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations.
    Keywords: Trade; international trade costs; distribution costs; law of one price; price dispersion
    JEL: F15 E31 F1
    Date: 2008–08–12

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