nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒10‒28
fifty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary policy and commodity price shocks By Silke Tober; Tobias Zimmermann
  2. Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q By Enrique G. Mendoza
  3. Schumpeter Meeting Keynes: A Policy-Friendly Model of Endogenous Growth and Business Cycles By Giovanni Dosi; Giorgio Fagiolo; Andrea Roventini
  4. Inflation Targeting and Communication: It Pays Off to Read Inflation Reports By Katerina Smídková; Viktor Kotlán; David Navrátil; Ales Bulir
  5. Monetary Transmission Mechanism in a Small Open Economy: A Bayesian Structural VAR Approach By Rokon Bhuiyan
  6. Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory? By V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
  7. How does monetary policy respond to exchange rate movements? New international evidence By Hilde C. Bjørnland; Jørn I. Halvorsen
  8. Monetary Unions and External Shocks By Etienne Farvaque; Norimichi Matsueda
  9. The Impact of Monetary Policy on Unemployment Hysteresis By Engelbert Stockhammer; Simon Sturn
  10. The single monetary policy and domestic macro-fundamentals: Evidence from Spain By Arghyrou, Michael G; Gadea, Maria Dolores
  11. How Are Shocks to Trend and Cycle Correlated? A Simple Methodology for Unidentified Unobserved Components Models By Daisuke Nagakura
  12. Empirical assessment of bifurcation regions within new Keynesian models By Barnett, William A.; Duzhak, Evgeniya A.
  13. Macroeconomic Effects of EU Transfers in New Member States By Céline Allard; Nada Choueiri; Susan Schadler; Rachel van Elkan
  14. Tax Reforms and Labour-market Performance: An Evaluation for Spain using REMS By Jose Emilio Boscá; Rafael Domenech; Javier Ferri
  15. Macroeconomic Factors and Stock Market Movement: Evidence from Ghana By Adam, Anokye M.; Tweneboah , George
  16. Inflation Expectation Formation of German Consumers: Rational or Adaptive? By Henry Sabrowski
  17. Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity? By Dixon, Huw; Kara, Engin
  18. The growing evidence of Keynes's methodology advantage and its consequences within the four macro-markets framework By Angel Asensio
  19. Financial Fragility, Heterogeneous Firms and the Cross Section of the Business Cycle By Holly , S.; Santoro, E.
  20. Phillips Curve and the Equilibrium Rate of Unemployment By G. C. Lim; R. Dixon; Sarantis Tsiaplias
  21. Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed By Asaf Bernstein; Eric Hughson; Marc D. Weidenmier
  23. Tax Reforms, "Free Lunches", and "Cheap Lunches" in Open Economies By Giovanni Ganelli; Juha Tervala
  24. Analysing CPI inflation by the fractionally integrated ARFIMA-STVGARCH model By Mustapha Belkhouja; Imene Mootamri; Mohamed Boutahar
  25. Increasing Returns to Scale and Welfare: Ranking the Multiple Deterministic Equilibria By Mauro Bambi; Aurélien Saïdi
  26. "Do the Innovations in a Monetary VAR Have Finite Variances?" By Greg Hannsgen
  27. An Anatomy of Credit Booms: Evidence From Macro Aggregates and Micro Data By Marco Terrones; Enrique G. Mendoza
  28. Rapid Current Account Adjustments: Are Microstates Different? By Patrick A. Imam
  29. Emerging Markets Variance Shocks: Local or International in Origin? By Viviana Fernández; Brian M. Lucey
  30. Future Rent-Seeking and Current Public Savings By Ricardo J. Caballero; Pierre Yared
  31. Public debt and aggregate risk By Audrey Desbonnet; Sumudu Kankanamge
  32. U.S. R&D and Japanese Medium Term Cycles By R.Anton Braun; Toshihiro Okada; Nao Sudo
  34. Information, Liquidity and Asset Prices By Benjamin Lester; Andrew Postlewaite; Randall Wright
  35. Wage-Price Setting in New EU Member States By Manuela Goretti
  36. Domestic Debt Structures in Emerging Markets : New Empirical Evidence By Arnaud Mehl; Julien Reynaud
  37. Does Public Investment Boost Economic Growth? Evidence from An Open-Economy Macro Model for India By Pal, Soubarna
  38. Belastet die Inflation verschiedene Haushaltstypen in Deutschland unterschiedlich stark? By Silke Tober
  39. "Minsky and Economic Policy 'Keynesianism' All Over Again?" By Eric Tymoigne
  40. Unifying time-to-build theory By Mauro Bambi
  41. The vulnerability of enterprise and the operating financial balance By Caruntu, Genu Alexandru; Romanescu, Marcel Laurentiu
  42. Beyond Macroeconomic Stability: The Quest for Industrialization in Uganda By Abebe Aemro Selassie
  43. Are Product and Labour Market Reforms Mutually Reinforcing? By Paul Cavelaars
  44. Timing and Quantity of Consumer Purchases and the Consumer Price Index By Rachel Griffith; Ephraim Leibtag; Andrew Leicester; Aviv Nevo
  45. Do Menu Costs Make Prices Sticky? By Thomas A. Eife
  46. Two to Tangle: Financial Development, Political Instability and Economic Growth in Argentina (1896–2000) By Campos, Nauro F.; Karanasos, Menelaos G.; Tan, Bin
  47. Competition, bargaining power and pricing in two-sided markets By Wilko Bolt; Kimmo Soramäki
  48. FDI and the labor share in developing countries: a theory and some evidence By Decreuse, Bruno; Maarek, Paul
  49. Impact of ICT and Human Skills on the European Financial Intermediation Sector By Erber, Georg; Madlener, Reinhard
  50. Uncertainty, Climate Change and the Global Economy By David von Below; Torsten Persson
  51. Age-structured Human Capital and Spatial Total Factor Productivity Dynamics By Mishra, Tapas; Jumah, Adusei; Parhi, Mamata
  52. The Three Horsemen of Growth: Plague, War and Urbanization in Early Modern Europe By Nico Voigtländer; Joachim Voth
  53. Minimum Funding Ratios for Defined-Benefit Pension Funds By Arjen Siegmann
  54. A note on the model selection risk for ANOVA based adaptive forecasting of the EURIBOR swap term structure. By Oliver Blaskowitz; Helmut Herwartz
  55. Instabilité des marchés et stabilisateurs institutionnelsLa contribution de John Maynard Keynes By Angel Asensio

  1. By: Silke Tober (IMK at the Hans Boeckler Foundation); Tobias Zimmermann (Rhine-Westphalia Insitut for Economic Research (RWI))
    Abstract: This paper analyses the effects of commodity price shocks in a new Keynesian model. The focus is on the central bank's choice of inflation target and the degree of real wage rigidity. It turns out that using core inflation rather than headline inflation is the superior strategy. Targeting expected headline inflation, as practiced by most central banks, is a viable practical alternative to the core inflation target. Simulations illustrate these points. The introduction of real wage rigidity into the model does not change these conclusions. Real wage rigidity does, however, imply second-round effects, making the monetary policy response, the inflation peak and the output drop more pronounced. Although in practice many of the assumptions of the model, such as full information, do not hold, lessons can be drawn for monetary policy. In case of a commodity supply shock, central banks would do well to focus on some measure of core inflation rather than headline inflation so as to reduce the volatility of both inflation and output. A communication strategy that places greater emphasis on underlying and expected inflation could serve to anchor inflation expectations.
    Date: 2008
  2. By: Enrique G. Mendoza
    Abstract: This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin’s Q driven by Irving Fisher’s debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
    JEL: D52 E32 E44 F32 F41
    Date: 2008–10
  3. By: Giovanni Dosi; Giorgio Fagiolo; Andrea Roventini
    Abstract: This paper studies an agent-based model that bridges Keynesian theories of demand generation and Schumpeterian theories of technology-fueled economic growth. We employ the model to investigate the properties of macroeconomic dynamics and the impact of public polices on supply, demand and the "fundamentals" of the economy. We find that the complementarities between factors influencing aggregate demand and drivers of technological change affect both "short-run" fluctuations and long-term growth patterns. From a normative point of view, simulations show a corresponding complementarity between Keynesian and Schumpeterian policies in sustaining long-run growth paths characterized by mild fluctuations and acceptable unemployment levels. The matching or mismatching between innovative exploration of new technologies and the conditions of demand generation appear to suggest the presence of two distinct "regimes" of growth (or absence thereof) characterized by different short-run fluctuations and unemployment levels.
    Keywords: Endogenous Growth; Business Cycles; Growth Policies; Business Cycle Policies; Evolutionary Economics; Agent-Based Computational Economics; Post-Walrasian Economics; Empirical Validation; Monte-Carlo Simulations.
    JEL: E32 E6 O3 O4
    Date: 2008–10–23
  4. By: Katerina Smídková; Viktor Kotlán; David Navrátil; Ales Bulir
    Abstract: Inflation-targeting central banks have a respectable track record at explaining their policy actions and corresponding inflation outturns. Using a simple forward-looking policy rule and an assessment of inflation reports, we provide a new methodology for the empirical evaluation of consistency in central bank communication. We find that the three communication tools-inflation targets, inflation forecasts, and verbal assessments of inflation factors contained in quarterly inflation reports-provided a consistent message in five out of six observations in our 2000-05 sample of Chile, the Czech Republic, Hungary, Poland, Thailand, and Sweden.
    Keywords: Inflation targeting , Central banks , Economic forecasting , Monetary policy , Transparency , Emerging markets , Chile , Czech Republic , Hungary , Poland , Thailand , Sweden ,
    Date: 2008–10–02
  5. By: Rokon Bhuiyan (Queen's University)
    Abstract: This paper develops an open-economy Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight target rate as the policy instrument. I allow the policy variable and the financial variables of the model to interact simultaneously with each other and with a number of other home and foreign variables. When I estimate this over-identified VAR model, I find that the policy shock transmits to real output through both the interest rate and exchange rate channels, and the shock does not induce a departure from uncovered interest rate parity. I also find that the impulse response of the monetary aggregate, M1, does not exactly follow the impulse response of the target rate. Finally, I find that Canadian variables significantly responds to the US federal funds rate shock, and external shocks are an important source of Canadian output fluctuations.
    Keywords: Monetary policy, structural VAR, block exogeneity, impulse response
    JEL: C32 E52 F37
    Date: 2008–10
  6. By: V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
    Abstract: The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test by showing that when applied to data generated from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data necessitate a VAR with a small number of lags and, when demand shocks play a nontrivial role, such a VAR is a poor approximation to the model's infinite order VAR.
    JEL: C32 C51 E13 E2 E3 E32 E37
    Date: 2008–10
  7. By: Hilde C. Bjørnland (Department of Economics, Norwegian School of Management (BI); Jørn I. Halvorsen (Norwegian School of Economics and Business Administration)
    Abstract: This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature.
    Keywords: Exchange rate, monetary policy, SVAR, Bayesian estimation, sign restrictions
    JEL: C32 E52 F31 F41
    Date: 2008–10–22
  8. By: Etienne Farvaque (University of Lille 1); Norimichi Matsueda (Kwansei Gakuin University)
    Abstract: According to Bordo and James [2008, “A long term perspective on the Euro, ” NBER Working Paper, No. 13815], history shows that multinational monetary unions have dissolved mainly under the consequences of external shocks. This paper provides a theoretical model demonstrating their point.
    Keywords: Monetary Union, Optimum Currency Areas, External Shocks.
    JEL: E58 E61 F33
    Date: 2008–10
  9. By: Engelbert Stockhammer (Vienna University of Economics and Business Administration); Simon Sturn (IMK at the Hans Boeckler Foundation)
    Abstract: This paper investigates the hypothesis that the extent to which hysteresis occurs in the aftermath of recessions depends on monetary policy reactions. The degree of hysteresis is explained econometrically by the extent of monetary easing during a recession and by standard variables for labour market institutions in a pooled cross-country analysis using quarterly data. The sample includes 40 recessions in 19 OECD countries for which the required data is available. The time period lasts from 1980 to 2007. The paper builds on Ball (1999) and extends the sample of countries, the time period under investigation and the set of control variables.
    Keywords: monetary policy, NAIRU, structual unemployment, hysteresis, endogenous NAIRU
    JEL: E24 E39 E50
    Date: 2008
  10. By: Arghyrou, Michael G (Cardiff Business School); Gadea, Maria Dolores
    Abstract: We model pre-euro Spanish monetary policy and use our findings to assess the compatibility of the interest rates set by the ECB since 1999 with Spanish macrofundamentals. We find that in the 1990s Spain implemented successfully a monetary strategy tailored to its own domestic fundamentals; and by abolishing it to join the euro she has paid a cost in the form of a sub-optimal monetary policy. Spain.s experience suggests a cautious approach with regards to the timing of further EMU enlargement.
    Keywords: Spain; ECB; monetary policy; domestic fundamentals; compatibility
    JEL: C51 C52 E43 E58 F37
    Date: 2008–10
  11. By: Daisuke Nagakura (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In this paper, we propose a simple methodology for investigating how shocks to trend and cycle are correlated in unidentified unobserved components models, in which the correlation is not identified. The proposed methodology is applied to U.S. and U.K. real GDP data. We find that the correlation parameters are negative for both countries. We also investigate how changing the identification restriction results in different trend and cycle estimates. It is found that estimates of the trend and cycle can vary substantially depending on the identification restrictions imposed.
    Keywords: Business Cycle Analysis, Trend, Cycle, Permanent Component, Transitory Component, Unobserved Components Model
    JEL: C01 E32
    Date: 2008–10
  12. By: Barnett, William A.; Duzhak, Evgeniya A.
    Abstract: As is well known in systems theory, the parameter space of most dynamic models is stratified into subsets, each of which supports a different kind of dynamic solution. Since we do not know the parameters with certainty, knowledge of the location of the bifurcation boundaries is of fundamental importance. Without knowledge of the location of such boundaries, there is no way to know whether the confidence region about the parameters’ point estimates might be crossed by one or more such boundaries. If there are intersections between bifurcation boundaries and a confidence region, the resulting stratification of the confidence region damages inference robustness about dynamics, when such dynamical inferences are produced by the usual simulations at the point estimates only. Recently, interest in policy in some circles has moved to New Keynesian models, which have become common in monetary policy formulations. As a result, we explore bifurcations within the class of New Keynesian models. We study different specifications of monetary policy rules within the New Keynesian functional structure. In initial research in this area, Barnett and Duzhak (2008) found a New Keynesian Hopf bifurcation boundary, with the setting of the policy parameters influencing the existence and location of the bifurcation boundary. Hopf bifurcation is the most commonly encountered type of bifurcation boundary found among economic models, since the existence of a Hopf bifurcation boundary is accompanied by regular oscillations within a neighborhood of the bifurcation boundary. Now, following a more extensive and systematic search of the parameter space, we also find the existence of Period Doubling (flip) bifurcation boundaries in the class of models. Central results in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the considered cases. We also solve numerically for the location and properties of the Period Doubling bifurcation boundaries and their dependence upon policy-rule parameter settings.
    Keywords: Bifurcation; dynamic general equilibrium; Hopf bifurcation; flip bifurcation; period doubling bifurcation; robustness; New Keynesian macroeconometrics; Taylor rule; inflation targeting.
    JEL: C10 E32 C52 C30 E37 E60
    Date: 2008–10–23
  13. By: Céline Allard; Nada Choueiri; Susan Schadler; Rachel van Elkan
    Abstract: Large inflows from the European Union to the New Member States are likely to significantlyimpact macroeconomic outcomes. In this paper, we use the IMF's Global Integrated Monetaryand Fiscal model (GIMF) to analyze the impact of the transfers and show the conditionsunder which they would help speed up convergence. We find that the EU funds need to bedirected predominantly to investment rather than to income support and that to bestaccompany the EU fund inflows, the policy-mix would need to combine counter-cyclicalpolicy with a strong commitment to the existing monetary regime.
    Keywords: European Economic and Monetary Union , Capital flows , Monetary policy , Investment policy , Capital inflows , Economic integration , Exchange rate regimes , Working Paper ,
    Date: 2008–09–18
  14. By: Jose Emilio Boscá (University of Valencia); Rafael Domenech (University of Valencia); Javier Ferri (University of Valencia)
    Abstract: This paper uses REMS, a Rational Expectations Model of the Spanish economy designed by Boscá et al (2007), to analyse the effects of lowering the overall tax wedge to the level prevailing in the US. Our results partially confirm previous findings in the literature: a reduction in the overall tax wedge of 19.5 points, in order to reach the US levels, has a positive effect in the long run, increasing total hours by about 7 per cent and GDP by about 8 percentage points. In terms of GDP per adult, these results account for 1/4 of the gap with respect to the US, but imply a reduction of only one percentage point in the labour productivity gap. The rise in total hours per adult is explained by a similar increase in both hours per employee and the employment rate of about 3.5 percentage points, allowing hours per adult to converge to levels only slightly lower than those in the US.
    Keywords: general equilibrium, tax wedge, tax reforms, fiscal policy, labour market
    JEL: E32 E62
    Date: 2008–10
  15. By: Adam, Anokye M.; Tweneboah , George
    Abstract: This study examines the role of macroeconomic variables on stock prices movement in Ghana. We use the Databank stock index to represent Ghana stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), and (d) the exchange rate as macroeconomic variables. We analyze both long-run and short-run dynamic relationships between the stock market index and the economic variable with quarterly data for the above variables from 1991.1 to 2006.4 using Johansen's multivariate cointegration test and innovation accounting techniques. We established that there is cointegration between macroeconomic variables identified and Stock prices in Ghana indicating long run relationship. Results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) indicate that interest rate and Foreign Direct Investment (FDI) are the key determinants of the share price movements in Ghana.
    Keywords: Cointegration; Innovation Accounting; Foreign Direct Investment (FDI)
    JEL: E44 C22 G10
    Date: 2008–10
  16. By: Henry Sabrowski (Institute of Economics, Leuphana University of Lüneburg)
    Abstract: This paper analyzes the in ation expectation formation empirically for German consumers. The expectation formation process is analyzed for a representative consumer and for dierent demographic groups. The results indicate that German consumers are a relatively homogeneous group. There are nevertheless quantitative dierences among the groups: Inflation expectations and perceived inflation tend to fall with rising income and unemployed individuals are outliers. Rational inflation expectation is not present for any group. Consumer and expert expectations have short and long run relationships. Evidence for a positive constant gain in the adaptive learning algorithm is given for almost all groups.
    Keywords: Inflation expectations; conversion method; survey data; rationality tests
    JEL: C42 D83 D84 E31
    Date: 2008–10–21
  17. By: Dixon, Huw (Cardiff Business School); Kara, Engin
    Abstract: This paper adopts the Impulse-Response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting. We also evaluate how far the theories are consistent with recent evidence on price and wage rigidity. We find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence, but not all the way yet.
    Keywords: DSGE models; inflation; persistence; price-setting
    JEL: E17 E3
    Date: 2008–09
  18. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Recent developments in econometrics and economic theory attest the growing evidence of strong uncertainty. The paper argues that these developments both question seriously the methodological foundations of the mainstream macroeconomics and support Keynes’s powerful concepts and theory. It emphasizes how replacing ‘risk’ with strong uncertainty suffices to transform the standard four-macro-markets system into a shifting demand-driven system, with the result that price rigidity is not to be considered the cause of the effective demand leadership (although, as Keynes pointed out, some rigidity is required to give us some stability in a monetary economy). As it is not based on a restrictive definition of uncertainty, Keynes’s theory is more realistic than the mainstream. It is also more general, for the equilibrium level of employment depends on the views about the future, instead of having a unique ‘natural’ anchor.
    Keywords: General equilibrium, Uncertainty, Post-Keynesian
    Date: 2008–06
  19. By: Holly , S.; Santoro, E.
    Abstract: There is growing evidence that the cross section of the growth rate of firms is subject to systematic distortions at business cycle frequencies. In this paper we briefly review this evidence and then offer a theoretical model that incorporates nonlinearities in the way in which firms respond to aggregate and ideosyncratic shocks. We are able to replicate the most commonly found regularity - skewness in the cross section is counter-cyclical - and show that the strength of this relationship varies with the extent of financial fragility.
    Keywords: Cross Sectional Business Cycle, Financial Fragility, Corporate Growth.
    JEL: E22 E24
    Date: 2008–09
  20. By: G. C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); R. Dixon (Department of Economics, The University of Melbourne); Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: A time-varying Phillips curve was estimated as a means to examine the changing nature of the negative relationship between wage inflation and the unemployment rate in Australia. The implied equilibrium unemployment rate was generated and the analysis showed the important role played by variations in the slope of the Phillips curve (and thus in real wage rigidity) in changing the equilibrium unemployment rate. The deviations of actuals from the estimated equilibrium unemployment rates also performed well as measures of inflationary pressures.
    Date: 2008–10
  21. By: Asaf Bernstein; Eric Hughson; Marc D. Weidenmier
    Abstract: We use the founding of the Federal Reserve as a historical experiment to provide some insight into whether a lender of last resort can stabilize financial markets. Following the Panic of 1907, Congress passed two measures that established a lender of last resort in the United States: (1) the Aldrich-Vreeland Act of 1908 which authorized certain banks to issue emergency currency during a financial crisis and (2) the Federal Reserve Act of 1913 which established a central bank. We employ a new identification strategy to isolate the effects of the introduction of a lender of last resort from other macroeconomic shocks. We compare the standard deviation of stock returns and short-term interest rates over time across the months of September and October, the two months of the year when financial markets were most vulnerable to a crash because of financial stringency from the harvest season, with the rest of the year during the period 1870-1925. Stock volatility in the post-1907 period (June 1908-1925) was more than 40 percent lower in the months of September and October compared to the period (1870- May 1908). We also find that the volatility of the call loan rate declined nearly 70 percent in September and October following the monetary regime change.
    JEL: E4 G1 N11 N12
    Date: 2008–10
  22. By: Melisso Boschi; Alessandro Girardi
    Abstract: This paper quantifies the relative contribution of domestic, regional and international factors to the fluctuation of domestic output in six key Latin American (LA) countries: Argentina, Bolivia, Brazil, Chile, Mexico and Peru. Using quarterly data over the period 1980:1-2003:4, a multi-variate, multicountry time series model was estimated to study the economic interdependence among LA countries and, in addition, between each of them and the three world largest industrial economies: the US, the Euro Area and Japan. Falsifying a common suspicion, it is shown that the proportion of LA countries’ domestic output variability explained by industrial countries’ factors is modest. By contrast, domestic and regional factors account for the main share of output variability at all simulation horizons. The implications for the choice of the exchange rate regime are also discussed.
    JEL: C32 E32 F31 F41
    Date: 2008–10
  23. By: Giovanni Ganelli; Juha Tervala
    Abstract: This paper focuses on the macroeconomic and budgetary impact of tax reforms in a New Keynesian two-country model. Our results show that both income and consumption unilateral tax rate reductions do not constitute a "free lunch", in the sense that they have negative budgetary consequences for the country which implements them. In addition, the degree of self-financing implied by our model is in the 8½-24 percent range. Since the degree of self-financing estimated in previous literature was larger, we conclude that in our model not only the "lunch" is not "free", but is also not that "cheap". A comparison of alternative (income-tax versus consumption-tax based) fiscal stimulus packages shows that consumption tax cuts imply a larger short-run impact on domestic output but the income tax cuts stimulate the domestic economy more in the long run. We also look at the implications of a revenue-neutral tax reform in which consumption taxes are increased to compensate for lower income tax collection.
    Keywords: Tax reforms , Income taxes , Consumption taxes , Tax rates , Budgetary policy , Economic models , Working Paper ,
    Date: 2008–09–30
  24. By: Mustapha Belkhouja (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Imene Mootamri (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Mohamed Boutahar (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: The aim of this paper is to study the dynamic evolution of inflation rate. The model is constructed by extending the ARFIMA-GARCH to ARFIMA with a time varying GARCH model where the transition from one regime to another is evolving smoothly over time. We show by Monte Carlo experiments that the constancy parameter tests perform well. We apply then this new model on eight countries from Europe, Japan and Canada and find that this model is appropriate for six among these countries.
    Keywords: ARFIMA model, Generalised autoregressive conditional heteroscedasticity model, Inflation rate, Long memory process, Nonlinear time series, Time-varying parameter mode
    Date: 2008–10–20
  25. By: Mauro Bambi (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Aurélien Saïdi (Economix, Université Paris X, Nanterre)
    Abstract: We consider a real business cycle model with a productive externality and an aggregate non- convex technology set µa la Benhabib and Farmer embodying capacity utilization, which exhibits indeterminacy of the steady state and multiplicity of deterministic equilibria under plausible values of the increasing returns to scale. The aim of the paper is to rank these different equilibria according to the initial value of consumption using both a linear-quadratic approximation, extensively explained by Benigno and Woodford [2006a, 2006b], and simulation methods. We study the implications of such a ranking in terms of smoothness of the welfare-maximizing trajectory and show that the welfare- maximizing consumption and labor paths are all the smoother since the level of increasing returns is low. At last, we show that this solution provides a good benchmark for judging the desirability of the stabilization policy proposed by Guo and Lansing [1997].
    Keywords: Increasing returns, Local indeterminacy, Welfare analysis, Numerical Methods
    JEL: E32 E4 H61 O42 O47
    Date: 2008–10
  26. By: Greg Hannsgen
    Abstract: Since Christopher Sims's "Macroeconomics and Reality" (1980), macroeconomists have used structural VARs, or vector autoregressions, for policy analysis. Constructing the impulse-response functions and variance decompositions that are central to this literature requires factoring the variance-covariance matrix of innovations from the VAR. This paper presents evidence consistent with the hypothesis that at least some elements of this matrix are infinite for one monetary VAR, as the innovations have stable, non-Gaussian distributions, with characteristic exponents ranging from 1.5504 to 1.7734 according to ML estimates. Hence, Cholesky and other factorizations that would normally be used to identify structural residuals from the VAR are impossible.
    Date: 2008–10
  27. By: Marco Terrones; Enrique G. Mendoza
    Abstract: We study the characteristics of credit booms in emerging and industrial economies. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations and widening external deficits. Micro data show a strong association between credit booms and leverage ratios, firm values, and banking fragility. We also find that credit booms are larger in emerging economies, particularly in the nontradables sector; most emerging markets crises are associated with credit booms; and credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains.
    Keywords: Credit expansion , Business cycles , Emerging markets , Asset prices , Current account deficits , Productivity ,
    Date: 2008–09–30
  28. By: Patrick A. Imam
    Abstract: We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications.
    Keywords: Current account , Current account deficits , Investment , Capital markets , Exports , Imports , External shocks , Monetary policy , Development , Gross domestic product , Real effective exchange rates , Economic models ,
    Date: 2008–10–03
  29. By: Viviana Fernández; Brian M. Lucey
    Abstract: We present a static general equilibrium model of an economy with agents with heterogeneous wealth and endogenous credit constraints created by partial loan recovery rates. Higher loan recovery rates and better bankruptcy protection increase output and credit penetration, while the former raises the average interest rate spread and the latter decreases it. We also study the interaction of credit constraint with differences in wealth distribution across countries. In a closed economy, higher loan recovery rates and better bankruptcy legislation raise the prime interest rate, as well as the interest rate spread. We incorporate a labor market in order to analyze the interaction between increased labor protection and credit restrictions. We find that stronger labor protection leads to lower wages and output. Nevertheless they will be supported by workers in firms with strong balance sheets and opposed by workers and employers in firms with weak balance sheets. JEL Class.: G38, E44, D53.
    Date: 2008
  30. By: Ricardo J. Caballero; Pierre Yared
    Abstract: The conventional wisdom is that politicians' rent-seeking motives increase public debt and deficits. This is because myopic politicians face political risk and prefer to extract political rents as early as possible. An implication of this argument is that governments will under-save during a boom, leaving the economy unprotected in the event of a downturn. This view motivates a number of fiscal rules which are aimed at cutting deficits and constraining borrowing so as to limit the size of this political distortion. In this paper we study the determination of government debt and deficits in a dynamic model of debt which characterizes political distortions. We find that in our model the conventional wisdom always applies in the long run, but only does so in the short run when economic volatility is low. Instead, when economic volatility is high, a rent-seeking government over-saves and over-taxes along the equilibrium path relative to a benevolent government. Paradoxically, the over-saving bias can also be solved in this case by a rule of capping deficits, although the mechanism operates through its effect on expectations of future rent extraction rather than though the contemporary constraint. However, these rules are ineffective in solving the high taxation problem caused by the political friction, which in the short run is more acute in the high income volatility scenario.
    JEL: E6 H2 H6
    Date: 2008–10
  31. By: Audrey Desbonnet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, University of Vienna - University of Vienna); Sumudu Kankanamge (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper assesses the long-run optimal level of public debt in a framework where aggregate fluctuations are taken into account. Households are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against risk. We find that the long-run optimal level of public debt is generally higher in a setting embedding aggregate fluctuations than in a setting without. Aggregate fluctuations modify both the cost and the motive for precautionary saving. Higher levels of public debt, by effectively reducing the cost of precautionary saving, help agents to smooth consumption when they face price and employment fluctuations.
    Keywords: Public debt, aggregate risk, precautionary saving, credit constraints.
    Date: 2008–08
  32. By: R.Anton Braun (Faculty of Economics, University of Tokyo); Toshihiro Okada (School of Economics, Kwansei Gakuin University); Nao Sudo (Institute for Monetary and Economics Studies, Bank of Japan)
    Abstract: Between 1960 and 1990 Japanese labor productivity rose from 27 percent of the U.S. to 87 percent. These productivity gains are associated with large variations in Japanese TFP. We find that movements in Japanese TFP are associated with prior movements in U.S. R&D expenditures. Model simulations that isolate the contribution of U.S. R&D to Japanese TFP reproduce the most important swings in Japanese economic activity between 1960 and 2002.
    Keywords: Medium term cycles, R&D, Technology diffusion
    JEL: E32 O11 O33
    Date: 2008–10
  33. By: Sherrill Shaffer
    Abstract: A structural discounted cash flow (DCF) model shows that the underlying sources of earnings growth generate very different growth paths and equity values than assumed in traditional DCF calculations. Moreover, the structural DCF model can assess the impact of exogenous factors on valuation, uncovering new costs of deflation or high inflation among other results. These findings have important implications for researchers, policy makers, and practitioners.
    JEL: G12 E31 L1
    Date: 2008–10
  34. By: Benjamin Lester (Department of Economics, University of Western Ontario); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Pennsylvania)
    Abstract: We study economies with multiple assets that are valued both for their return and liquidity. Exchange occurs in decentralized markets with frictions making a medium of exchange essential. Some assets are better suited for this role because they are more liquid - more likely to be accepted in trade - even if they have a lower return. The reason assets are more or less likely to be accepted is modeled using informational frictions, or recognizability. While everyone understands e.g. what currency is and what it is worth, some might be less sure about other claims. In our model, agents who do not recognize assets do not accept them in trade. Recognizability is endogenized by letting agents invest in information, potentially generating multiple equilibria with different liquidity. We discuss implications for asset pricing and for monetary policy. In particular, we show explicitly that what may look like a cash-in-advance constraint is not invariant to policy interventions or other changes in the economic environment
    Keywords: Money, Asset Pricing, Liquidity
    JEL: G12 E4
    Date: 2008–10–15
  35. By: Manuela Goretti
    Abstract: This paper analyzes wage- and price-setting relations in new EU member countries. Panel estimates indicate a strong and significant relationship between real wages and labor productivity, as well as evidence of wage pass-through to inflation. Terms of trade shocks do not feed through to real wages. Country-specific wage developments, beyond differences in labor productivity growth, are mostly explained by real wage catch-up from different initial levels and different labor market conditions. Qualitative evidence also suggests that public sector wage demonstration effects and institutional factors may play a role in wage determination.
    Keywords: Wage policy , Pricing policy , European Union , Europe , Public sector wages , Labor markets , Labor productivity , External shocks , Inflation ,
    Date: 2008–10–07
  36. By: Arnaud Mehl (European Central Bank - ECB); Julien Reynaud (European Central Bank - ECB, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper explains why public domestic debt composition in emerging economies can be risky, namely in foreign currency, with a short maturity or indexed. It analyses empirically the determinants of these risk sources separately, developing a new large dataset compiled from national sources for 33 emerging economies over 1994-2006. The paper finds that economic size, the breadth of the domestic investor base, inflation and fiscal soundness are all associated with risky public domestic debt compositions, yet to an extent that varies considerably in terms of magnitude and significance across sources of risk. Only inflation impacts all types of risky debt, underscoring the overarching importance of monetary credibility to make domestic debt compositions in emerging economies safer. Given local bond markets' rapid development, monitoring risky public domestic debt compositions in emerging economies becomes increasingly relevant to global financial stability.
    Keywords: Public domestic debt, composition, risk, emerging economies.
    Date: 2008–10
  37. By: Pal, Soubarna
    Abstract: Using annual data for India for the period 1984-2003 and employing parametric technique (GMM), the present paper jointly determines GDP growth, real exchange rate and net foreign assets in Indian economy. There is evidence that public investment exerts a significant influence on real exchange rate and the growth rate and does so non-linearly. A comparison of the Indian estimates with those available for the UK and the USA economies is also revealing and highlights the role of governance on the effects of public investment.
    Keywords: Public investment; Economic growth; Real exchange rate; Simultaneous model; Generalised method of moments
    Date: 2008–10
  38. By: Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: When the prices of important goods such as energy and food greatly increase, the ques-tion arises whether the impact on the various income groups differs. An analysis of the structure of consumption expenditure of different household groups does not yield significant differences in the effect of the surge in energy and food prices: the household-specific inflation rates are quite similar. It does not follow, however, that households across income groups are affected by the price increase to the same degree: Low-income households are more affected in the sense that they may actually have to con-sume less given their high consumption ratio and lack of wealth.
    Date: 2008
  39. By: Eric Tymoigne
    Abstract: Recently, national newspapers all over the world have suggested that we should reread John Maynard Keynes, and that Hyman P. Minsky provides a valuable framework for understanding the world in which we live. While rereading Keynes and discovering Minsky are noble goals, one should also remember the mistakes that were made in the past. The mainstream interpretation and implementation of Keynes's ideas have been very different from what Keynes proposed, and they have been reduced to simple "fiscal activism." This led to the 1950s and 1960s "Keynesian" era, during which fine-tuning was supposed to be a straightforward way to fix economic problems. We know today that this is not the case: just playing around with taxes and government expenditures will not do. On the contrary, problems may worsen. If one wants to get serious about Keynes and Minsky, one should understand that the theoretical and policy implications are far-reaching. This paper compares and contrasts Minsky's views of the capitalist system to the tenets of the New Consensus, and argues that there never has been any true Keynesian revolution. This is illustrated by studying the Roosevelt and Kennedy/Johnson eras, as well as Keynes's reaction to the former and Minsky's critique of the latter. Overall, it is argued that the theoretical framework and policy prescriptions of Irving Fisher, not Keynes, have been much more consistent with past and current government policies.
    Date: 2008–10
  40. By: Mauro Bambi (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: Several contributions have recently reconsidered the role of the time to build assumption in explaining some relevant stylized facts. In this paper, the similarities and differences which may emerge when the time to build structure of capital is introduced in a continuous or discrete time framework are studied and enlightened. The most striking difference lies in the dimensionality of the two frameworks, which is always finite in discrete but infinite in continuous time. Then, the deterministic version of the traditional time to build model developed by Kydland and Prescott is presented, and it is shown how the typical time to build model setup in continuous time can be obtained. Moreover, the richest dynamics in continuous time is investigated and, more importantly, it is shown that the predictions in terms of capital, output, and consumption behavior are not signi¯cantly di®erent from its discrete version once the economy is calibrated properly.
    Keywords: Discrete and continuous time, time-to-build, mixed functional differential equa- tions.
    JEL: E00 E30 O40
    Date: 2008–10
  41. By: Caruntu, Genu Alexandru; Romanescu, Marcel Laurentiu
    Abstract: In the light of functional analysis, the company is vulnerable if used, for the most time part, to financing through bank loans in the short term. This item is highlighted by the study compared of variation of the operating revolving fund, with the variation of revolving fund need. In the frame of operating balance, it believes that the need for floating capital is the most important indicator whereas place in the record those cyclical needs not covered financial from temporary resources and permanent renewable in the same cycles of operation. Achieving this balance is put into evidence of the 4 levels of functional balance, namely: working capital fund (FRF) or stable level of funding, the need for capital funds for operating (NFRE), on the one hand and the need to revolving fund outside exploitation (NFRAE) on the other hand, and the level of treasury securities.
    Keywords: liquidity; accounting net; treasury; imbalance; balance
    JEL: M1 P43 P42 E44 P34
    Date: 2008–10–10
  42. By: Abebe Aemro Selassie
    Abstract: Uganda has registered one of the most impressive economic turnarounds of recent decades. The amelioration of conflict and wide ranging economic reforms kick-started rapid economic growth that has now been sustained for some 20 years. But there is a strong sense in policy making circles that despite macroeconomic stability and reasonably well functioning markets, economic growth has not translated into significant structural transformation. This paper considers (i) Uganda's record of economic transformation relative to the high growth Asian countries and (ii) the contending explanations as to why more transformation and higher growth has proved elusive.
    Keywords: Financial stability , Uganda , Industrialization , Economic recovery , Economic reforms , Economic growth , Economic policy ,
    Date: 2008–10–01
  43. By: Paul Cavelaars
    Abstract: This paper analyses the relationship between product market competition and labour market institutions in a general equilibrium context. It concludes that an increase in product market competition, enhanced .exibility of labour supply, social security reform and a reduction in union bargaining power are mutually re-inforcing (in terms of their employment impact) in some, but not all cases. This stresses the need for an extremely careful design of such reforms.
    Keywords: labour market regulation; wage bargaining.
    JEL: E24 E52 J50
    Date: 2008–09
  44. By: Rachel Griffith; Ephraim Leibtag; Andrew Leicester; Aviv Nevo
    Abstract: A common approach to measuring price changes is to look at the change of the expenditure needed to purchase a fixed basket of goods. It is well-known that this approach suffers from problems and creates several biases in the measurement of price changes faced by consumers. Substitution and outlet bias, two commonly studied concerns, are both driven by consumer choices of what and where to buy. However, consumers also make other choices, including how much and when to buy. We discuss the implications of consumers' timing and quantity decisions have on standard practices of computing of computing a price index. <br><br>We use household-level data on quantities purchased and prices paid to construct a measure of the savings made by consumers' optimizing behaviour in the purchase of food. In particular, we compare the prices actually paid by the consumers to various alternatives that do not allow for substitution. Our analysis suggests that the average consumer makes significant, and comparable in magnitude, savings from the four dimensions of choice that we study. Furthermore, our data suggests significant heterogeneity in consumer behavior, and that this behavior is correlated with demographics. Our findings suggest that ignoring timing and quantity decisions, when computing a price index, can generate biases on the order of magnitude of substitution and outlet biases.
    JEL: D12 E31 L11 L16
    Date: 2008–10
  45. By: Thomas A. Eife (University of Heidelberg, Department of Economics)
    Abstract: This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.
    Keywords: menu costs, price stickiness
    JEL: E30
    Date: 2008–10
  46. By: Campos, Nauro F. (Brunel University); Karanasos, Menelaos G. (Brunel University); Tan, Bin (Brunel University)
    Abstract: This paper investigates the effects of financial development and political instability on economic growth in a power-ARCH framework with data for Argentina from 1896 to 2000. Our findings suggest that (i) informal or unanticipated political instability (e.g., guerrilla warfare) has a direct negative impact on growth; (ii) formal or anticipated instability (e.g., cabinet changes) has an indirect (through volatility) impact on growth; (iii) the effect of financial development is positive and, surprisingly, not via volatility; (iv) the informal instability effects are much larger in the short- than in the long-run; and (v) the impact of financial development on economic growth is negative in the short- but positive in the long-run.
    Keywords: economic growth, financial development, volatility, political instability, power-ARCH
    JEL: C14 O40 E23 D72
    Date: 2008–10
  47. By: Wilko Bolt; Kimmo Soramäki
    Abstract: We develop a model of two-sided markets that illustrates the role of bargaining power between the two sides of the market. We are interested in the profit maximizing usage fees set by identical duopolistic platforms which engage in homogeneous, Bertrand-type competition. We find that for a sufficiently low marginal cost duopolistic two-sided competition reduces to a “grab-the-dollar” game with two asymmetric (pure) Nash equilibria. These equilibria are characterized by highly skewed prices, in which the side with all the bargaining power pays a minimum price. The other side of the market is used for cross-subsidization and is charged a high price. Compared to the monopoly outcome, competition lowers the total price charged to both sides, although the seller's equilibrium price may exceed the monopoly price. Both platforms enjoy excess profits.Key Words: platform competition, bargaining power, asymmetric equilibria, skewed pricing
    Keywords: platform competition; bargaining power; asymmetric equilibria; skewed pricing
    JEL: E24 E52 J50
    Date: 2008–09
  48. By: Decreuse, Bruno; Maarek, Paul
    Abstract: This paper addresses the impact of FDI on the labor share of income in developing countries. We propose a theory that relies on the impacts of FDI on productive heterogeneity between firms in a frictional labor market. We argue that FDI have two opposite effects on the labor share: a negative force originated by market power and technological advance, and a positive force due to increased labor market competition between firms. Then, we test this theory on aggregate panel data through fixed effects and system-GMM estimations. We find a quantitatively meaningful U- shaped relationship between the labor share in the manufacturing sector and the ratio of FDI stock to GDP. However, most of the countries are stuck in the decreasing part of the curve, which we relate to multinationals' location choices.
    Keywords: FDI; Matching frictions; Firm heterogeneity; Technological advance
    JEL: F16 E25 F21
    Date: 2008–10
  49. By: Erber, Georg (Department of Information Society and Competition, DIW Berlin â German Institute for Economic Research); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: This paper investigates the impact of ICT- and non-ICT capital, and of labour at different skill levels, on productivity and employment in the financial intermediation sector of twelve EU member countries plus the US and Japan. A stochastic possibility frontiers (SPF) approach is applied to assess the relation between the production inputs and to compute both time-varying and average inefficiencies. For the empirical analysis, annual data from 1995 to 2005 are employed that were obtained from recently released data contained in the EU KLEMS database. The results obtained shed some light on the relative impact of ICT- and non-ICT capital and labour inputs, and provide new insights about the structural dynamics between these factor inputs. We find that the financial sectors in the twelve EU member states studied are quite similar in terms of efficiency, and that efficiency and productivity depends much more on human capital than on physical capital. We conclude that learning-by-doing and learning-by-using are more decisive elements in shaping the productivity growth path than ICT investment alone, which can leave managers and employees overwhelmed by the complexity and needs of structural adjustments in the companiesâ organisation.
    Keywords: stochastic production possibility frontiers; ICT; structural dynamics
    JEL: C23 C51 D23 E23 O33 O47 O57
    Date: 2008–09
  50. By: David von Below; Torsten Persson
    Abstract: The paper illustrates how one may assess our comprehensive uncertainty about the various relations in the entire chain from human activity to climate change. Using a modified version of the RICE model of the global economy and climate, we perform Monte Carlo simulations, where full sets of parameters in the model's most important equations are drawn randomly from pre-specified distributions, and present results in the forms of fan charts and histograms. Our results suggest that under a Business-As-Usual scenario, the median increase of global mean temperature in 2105 relative to 1900 will be around 4.5 °C. The 99 percent confidence interval ranges from 3.0 °C to 6.9 °C. Uncertainty about socio-economic drivers of climate change lie behind a non-trivial part of this uncertainty about global warming.
    JEL: E17 O13 Q54
    Date: 2008–10
  51. By: Mishra, Tapas (World Population Program, International Institute for Applied Systems Analysis, Laxenburg, Austria); Jumah, Adusei (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria); Parhi, Mamata (BETA, Louis-Pasteur University, Strasbourg, France)
    Abstract: This paper models total factor productivity (TFP) in space and proposes an empirical model for TFP interdependence across spatial locations. The interdependence is assumed to occur due to age-structured human capital dynamics. A semi-parametric spatial vector autoregressive framework is suggested for modeling spatial TFP dynamics where the role of demographic state and technological change are explicitly incorporated in the model to influence their spatial TFP co-movements. Empirical scrutiny in case of Asian countries suggests that cross-country human capital differences in their accumulation and appropriation pattern significantly influenced TFP volatility interdependence. The finding of complementarity in TFP in spatial locations calls for joint policy program for improving aggregate and individual country welfare.
    Keywords: Total factor productivity, Spatial growth, Non-linearity, Human capital, Age-structure, Semi-parametric VAR
    JEL: C14 C31 E61 N10 O30 O47
    Date: 2008–10
  52. By: Nico Voigtländer; Joachim Voth
    Abstract: How did Europe overtake China? We construct a simple Malthusian model with two sectors, and use it to explain how European per capita incomes and urbanization rates could surge ahead of Chinese ones. That living standards could exceed subsistence levels at all in a Malthusian setting should be surprising. Rising fertility and falling mortality ought to have reversed any gains. We show that productivity growth in Europe can only explain a small fraction of rising living standards. Population dynamics – changes of the birth and death schedules – were far more important drivers of the longrun Malthusian equilibrium. The Black Death raised wages substantially, creating important knock-on effects. Because of Engel’s Law, demand for urban products increased, raising urban wages and attracting migrants from rural areas. European cities were unhealthy, especially compared to Far Eastern ones. Urbanization pushed up aggregate death rates. This effect was reinforced by more frequent wars (fed by city wealth) and disease spread by trade. Thus, higher wages themselves reduced population pressure. Without technological change, our model can account for the sharp rise in European urbanization as well as permanently higher per capita incomes. We complement our calibration exercise with a detailed analysis of intra-European growth in the early modern period. Using a panel of European states in the period 1300-1700, we show that war frequency can explain a good share of the divergent fortunes within Europe.
    Keywords: Malthus to Solow, Long-run Growth, Great Divergence, Epidemics, Demographic Regime
    JEL: E27 N13 N33 O14 O41
    Date: 2008–08
  53. By: Arjen Siegmann
    Abstract: We compute minimum funding ratios for Defined Benefit (DB) plans based on the expected utility that can be achieved in a Defined Contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC-scheme, minimum acceptable funding ratios are between 0.87 and 1.20. If the DC-scheme is constrained to a fixed-contribution setup, minimum funding ratios are between 0.87 and 0.98. Furthermore, the attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, implicit in the DB pension fund, can be large. Given a pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1%-point higher contribution to achieve equal expected utility.
    Keywords: defined-benefit pension fund; individual efficiency; defined-contribution
    JEL: E24 E52 J50
    Date: 2008–09
  54. By: Oliver Blaskowitz; Helmut Herwartz
    Abstract: The paper proposes a data driven adaptive model selection strategy. The selection crite- rion measures economic ex–ante forecasting content by means of trading implied cash flows. Empirical evidence suggests that the proposed strategy is neither exposed to selection bias nor to the risk of choosing excessively poor models from a parameterized class of candidate specifications.
    Keywords: Model selection, Principal components, Factor analysis, Ex–ante forecasting, EURIBOR swap term structure, Trading strategies.
    JEL: C32 C53 E43 G29
    Date: 2008–10
  55. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Les économistes orthodoxes prétendent que la libre concurrence assure le meilleur fonctionnement des économies de marchés. Les désordres récents ne résulteraient donc pas d'une concurrence débridée, mais plutôt du manque de concurrence. Cette position est plus forte qu'il n'y paraît, parce qu'elle repose sur un cadre théorique très élaboré qui ne laisse aucune place aux dysfonctionnements quand la concurrence règne. Mais elle est aussi plus irréaliste que jamais, car elle condamne d'entrée toute immixtion de la puissance publique dans le fonctionnement des marchés, au moment même ou ceux-ci ont perdu tout repère. En fait, nombreux sont ceux qui se référaient hier à l'approche orthodoxe mais soutiennent aujourd'hui l'intervention publique de manière peu cohérente. Il est cependant possible de penser la nécessaire intervention de l'état dans un cadre cohérent. Grâce à la prise en compte des effets de l'incertitude fondamentale, les vertus de la concurrence ont en effet été sérieusement mises en doute dans l'?uvre de Keynes, qui offre par ailleurs l'alternative de loin la plus élaborée pour penser la crise actuelle et tenter d'y remédier.
    Keywords: Equilibre, concurrence, stabilité, stabilisateurs institutionnels
    Date: 2008–10–07

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