nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒11‒11
78 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Liquidity, inflation and asset prices in a time-varying framework for the euro area By Christiane Baumeister; Eveline Durinck; Gert Peersman
  2. Central bank misperceptions and the role of money in interest rate rules By Guenter Beck; Volker Wieland
  3. Inflation Persistence and the Taylor Principle By Murray, Christian; Nikolsko-Rzhevskyy, Alex; Papell, David
  4. Housing market spillovers : evidence from an estimated DSGE model By Matteo Iacoviello; Stefano Neri
  5. Monetary policy and stock market boom-bust cycles By Lawrence Christiano; Cosmin Ilut; Roberto Motto; Massimo Rostagno
  6. Risk premiums and macroeconomic dynamics in a heterogeneous agent model By Ferre De Graeve; Maarten Dossche; Marina Emiris; Henri Sneessens; Raf Wouters
  7. Monetary policy, asset prices and macroeconomic conditions : a panel-VAR study By Katrin Assenmacher-Wesche; Stefan Gerlach
  8. Imperfect information, macroeconomic dynamics and the yield curve : an encompassing macro-finance model By Hans Dewachter
  9. Long-run relationship between inflation and growth in a New Keynesian framework By Arato, Hiroki
  10. Bank Lending, Housing and Spreads By Aqib Aslam; Emiliano Santoro
  11. Monetary Policy Evaluation in Real Time: Forward-Looking Taylor Rules Without Forward-Looking Data By Nikolsko-Rzhevskyy, Alex
  12. Recent Inflationary Trends in World Commodities Markets By Noureddine Krichene
  13. Monetary aggregates and liquidity in a neo-Wicksellian framework By Matthew Canzoneri; Robert Cumby; Behzad Diba; David López-Salido
  14. The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe By Karsten Staehr
  15. Corporate Interest Rates and the Financial Accelerator in the Czech Republic By Fidrmuc , Jarko; Horváth, Roman; Horváthová, Eva
  16. Oil Price Shocks and Stock Market Booms in an Oil Exporting Country By Hilde C. Bjørnland
  17. Optimal Central Bank Transparency By Carin A.B. van der Cruijsen; Sylvester C.W. Eijffinger; Lex H. Hoogduin
  18. Credit Frictions and Optimal Monetary Policy By Vasco Curdia; Michael Woodford
  19. Credit frictions and optimal monetary policy By Vasco Cúrdia; Michael Woodford
  20. (Post) Keynesian alternative to inflation targeting* By Angel Asensio
  21. The Introduction of the Euro in Central and Eastern European Countries - Is it Economically Justifiable? By Tanja Broz
  22. Matching Models Under Scrutiny : Understanding the Shimer Puzzle By Gabriele, CARDULLO
  23. Constraints on the Design and Implementation of Monetary Policy in Oil Economies: The Case of Venezuela By Víctor Olivo; Mercedes da Costa
  24. McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates By Antonio Diez de los Rios
  25. The Stock of Money and Why You Should Care By Kelly, Logan J
  26. Lowering the anchor: how the bank of england's inflation-targeting policies have shaped inflation expectations and perceptions of inflation risk By Meredith J. Beechey
  27. Capital Accumulation, Labour Market Institutions, and Unemployment in the Medium Run By Engelbert Stockhammer; Erik Klär
  28. Modelling the Inflation Process in Nigeria By Olusanya E. Olubusoye; Rasheed Oyaromade
  29. Income Dispersion and Counter-Cyclical Markups By Chris Edmond; Laura Veldkamp
  30. The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries By Gillman, Max; Harris, Mark N.
  31. Taylor Rules and the Euro. By Tanya, Molodtsova; Nikolsko-Rzhevskyy, Alex; Papell, David
  32. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  33. Are Progressive Income Taxes Stabilizing?--A Reply By Chen, Yan; Zhang, Yan
  34. The Quantity Theory of Money is Valid. The New Keynesians are Wrong! By Hillinger, Claude; Süssmuth, Bernd
  35. Distribution, aggregate demand and productivity growth - theory and empirical results for six OECD countries based on a Post-Kaleckian model By Eckhard Hein; Artur Tarassow
  36. Has the Volatility of U.S. Inflation Changed and How? By Grassi, Stefano; Proietti, Tommaso
  37. The growing evidence of Keynes's methodology advantage and its consequences within the four macro-markets framework By Angel Asensio
  38. The Benefits and Costs of Monetary Union in Southern Africa: A Critical Survey of the Literature By George S. Tavlas
  39. Banking and Central Banking in Pre-WWII Grecce: Money and Currency Developments By Sophia Lazaretou
  40. Testing Full Consumption Insurance in the Frequency Domain By Santos Monteiro, Paulo
  41. Productivity, aggregate demand and unemployment fluctuations By Regis Barnichon
  42. Crude Oil Prices: Trends and Forecast By Noureddine Krichene
  43. Challenges to Monetary Policy from Financial Globalization: The Case of India By A. Prasad; Charles Frederick Kramer; Hélène Poirson
  44. The W.A. Lewis legacy of industrialization and Caribbean economic policy By Khemraj, Tarron
  45. Long-run Phillips Curve and Disinfation Dynamics: Calvo vs. Rotemberg Price Setting By Rossi Lorenza; Guido Ascari
  46. Government Size and Output Volatility: Should We Forsake Automatic Stabilization? By Xavier Debrun; Jean Pisani-Ferry; André Sapir
  47. Family Labor Supply and Aggregate Saving By Santos Monteiro, Paulo
  48. Fiscal Positions in Latin America:Have They Really Improved? By Ivanna Vladkova Hollar; Jeromin Zettelmeyer
  49. Real economy causes of the Great Deprivation of early 21st Century By Naqvi, Nadeem
  50. Monetary Policy Objectives and Istruments used by the Privileged National Bank of the Kingdom of Serbia (1884 - 1914) By Milan Sojic; Ljiljana Djurdjevic
  51. Prices and output co-movements : an empirical investigation for the CEECs By Iuliana Matei
  52. RBCs and DSGEs: The Computational Approach to Business Cycle Theory and Evidence By Özer Karagedikli; Troy Matheson; Christie Smith; Shaun Vahey
  53. Financial Development and Volatility of Growth Rates: New Evidence By Kunieda, Takuma
  54. Finance and Growth Cycles By Kunieda, Takuma
  55. Financial Globalization and Inequality By Kunieda, Takuma
  56. Chocs de demande et fluctuations du taux de marge : une évaluation du modèle de collusion implicite By Frédéric DUFOURT
  57. A beta based framework for (lower) bond risk premia. By Stefano Nobili; Gerardo Palazzo
  58. The National Bank of Romania and its Isuue of Banknotes between Necessity and Possibility, 1880 - 1914 By George Virgil Stoenescu; Elisabeta Blejan; Brindusa Costache; Adriana Iarovici Aloman
  59. Nonlinearities in the dynamics of the euro area demand for M1 By Alessandro Calza; Andrea Zaghini
  60. Money-market segmentation in the Euro area: what has changed during the turmoil? By Zagaglia , Paolo
  61. What We’re In For: Projected Economic Impact of the Next Recession By Dean Baker; John Schmitt
  62. Liquidity and productivity shocks: A look at sectoral firm creation By Lenno Uusküla
  63. Impact of IPO Activities on the Hong Kong Dollar Interbank Market By Frank Leung; Philip Ng
  64. Carry Trades and Currency Crashes By Markus K. Brunnermeier; Stefan Nagel; Lasse H. Pedersen
  65. What Drives Hong Kong Dollar Swap Spreads: Credit or Liquidity? By Cho-Hoi Hui; Lillie Lam
  66. Household Saving, Class Identitiy, and Conspicuous Consumption By Jon D. Wisman
  67. Institutions Matter: Financial Supervision Architecture, Central Bank and Path Dependence. General Trends and the South Eastern European Countries By Donato Masciandaro; Marc Quintyn
  68. Wage Formation between Newly Hired Workers and Employers: Survey Evidence By Hall, Robert; Krueger, Alan B.
  69. The Macroeconomics of Financial Integration: A European Perspective By Philip R. Lane
  70. Growing up to Financial Stability By Michael D. Bordo
  71. Offre et demande d’investissement : le rôle des profits By Pierre VILLA
  72. The Venezuelan Economy in the Chávez Years By Mark Weisbrot; Luis Sandoval
  73. Estimating the dynamics of R&D-based growth models By YATSENKO, Yuri; BOUCEKKINE, Raouf; HRITONENKO, Natali
  74. Comentarios sobre las posibilidades de un nuevo programa macroeconómico entre Honduras y el Fondo Monetario Internacional By Sebastian Katz
  75. Forecasting economic activity for Estonia : The application of dynamic principal component analyses By Christian Schulz
  76. Which Bank is the "Central" Bank? An Application of Markov Theory to the Canadian Large Value Transfer System By Morten Bech; James T. E. Chapman; Rod Garratt
  77. Banking in Turkey: History and Evolution By Yuksel Gormez
  78. On the Bilateral Trade Effects of Free Trade Agreements between the EU-15 and the CEEC-4 Countries By Rault, Christophe; Caporale, Guglielmo Maria; Sova, Ana Maria; Sova, Robert

  1. By: Christiane Baumeister (Ghent University); Eveline Durinck (Ghent University); Gert Peersman (Ghent University)
    Abstract: In this paper, we investigate how the dynamic effects of excess liquidity shocks on economic activity, asset prices and inflation differ over time. We show that the impact varies considerably over time, depends on the source of increased liquidity (M1, M3-M1 or credit) and the underlying state of the economy (asset price boom-bust, business cycle, inflation cycle, credit cycle and monetary policy stance).
    Keywords: Liquidity, asset prices, inflation, time-varying coefficients
    JEL: E31 E32 E44 E51 E52
    Date: 2008–10
  2. By: Guenter Beck (Johann Wolfgang Goethe University Frankfurt); Volker Wieland (Johann Wolfgang Goethe University Frankfurt; CEPR)
    Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.
    Keywords: monetary policy under uncertainty, money, output gap uncertainty, quantity theory and Taylor rules
    JEL: E32 E41 E43 E52 E58
    Date: 2008–10
  3. By: Murray, Christian; Nikolsko-Rzhevskyy, Alex; Papell, David
    Abstract: Although the persistence of inflation is a central concern of macroeconomics, there is no consensus regarding whether or not inflation is stationary or has a unit root. We show that, in the context of a “textbook” macroeconomic model, inflation is stationary if and only if the Taylor rule obeys the Taylor principle, so that the real interest rate is increased when inflation rises above the target inflation rate. We estimate Markov switching models for both inflation and real-time forward looking Taylor rules. Inflation appears to have a unit root for most of the 1967 – 1981 period, and is stationary before 1967 and after 1981. We find that the Fed’s response to inflation is also regime dependent, with both the pre and post-Volcker samples containing monetary regimes where the Fed both did and did not follow the Taylor principle. This contrasts to recent research that suggests the Fed’s response to inflation has been time invariant, and that changes in monetary policy only occurred with respect to the output gap.
    Keywords: Taylor rule; real-time data; Great inflation; policy regimes; Markov switching
    JEL: E58
    Date: 2008–03
  4. By: Matteo Iacoviello (Boston College, Department of Economics); Stefano Neri (Banca d'Italia, Research Department)
    Abstract: We study sources and consequences of fluctuations in the housing market. The upward trend in real housing prices of the last 40 years can be explained by slow technological progress in the housing sector. Over the business cycle, housing demand and housing technology shocks explain one-quarter each of the volatility of housing investment and housing prices. Monetary factors explain 20 percent, but they played a bigger role in the housing cycle at the turn of the century. We show that the housing market spillovers are non-negligible, concentrated on consumption rather than business investment, and have become more important over time.
    Keywords: Housing, Wealth E¤ects, Bayesian Estimation, Two-sector Models
    JEL: E32 E44 E47 R21 R31
    Date: 2008–10
  5. By: Lawrence Christiano (Northwestern University, 2003 Sheridan Road, Evanston, IL 60208, USA.); Cosmin Ilut (Northwestern University, 2003 Sheridan Road, Evanston, IL 60208, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to such a news shock, in a standard real business cycle model. However, a monetized version of the model which stresses sticky wages and a Taylorrule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations. JEL Classification: C11, C51, E5, E13, E32.
    Keywords: DSGE Models, Monetary Policy, Asset price boom-busts.
    Date: 2008–10
  6. By: Ferre De Graeve (Federal Reserve Bank of Dallas); Maarten Dossche (National Bank of Belgium, Research Department); Marina Emiris (National Bank of Belgium, Research Department); Henri Sneessens (Catholic University of Louvain-La-Neuve); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in terms of risk aversion. Aggregate productivity and distribution risk are shared among these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. We discuss the implications for the real and nominal component of the risk premium on equity and bonds. We show how these premiums react to changes in the volatility of the shocks, as experienced during the great moderation. We also analyze the effects of changes in monetary policy behavior and the resulting inflation dynamics.
    JEL: E32 E44 G12
    Date: 2008–10
  7. By: Katrin Assenmacher-Wesche (Swiss National Bank, Research Department); Stefan Gerlach (Goethe University Frankfurt, Institute for Monetary and Financial Stability)
    Abstract: This paper studies the relationships between inflation, economic activity, credit, monetary policy, and residential property and equity prices in 17 OECD countries, using quarterly data for 1986-2006. Using a panel VAR, we find plausible and significant responses to a monetary policy shock. Shocks to asset prices have a positive, significant effect on GDP and credit after three to four quarters, whereas prices start to increase much later. We also consider the transmission of US shocks from the US to the other economies. While monetary policy shocks are transmitted internationally, other shocks are not, perhaps because of the form of coefficient restrictions used.
    Keywords: asset prices, credit, monetary policy, panel VAR
    JEL: C23 E52
    Date: 2008–10
  8. By: Hans Dewachter (CES, University of Leuven; Rotterdam School of Management, EUR; CESifo)
    Abstract: In this paper we estimate an encompassing Macro-Finance model allowing for time variation in the equilibrium real rate, mispricing and learning dynamics. The encompassing model specification incorporates (i) a small-scale (semi-) structural New-Keynesian model, (ii) flexible price of risk specifications, (iii) liquidity premiums in the form of (constant) deviations from (Gaussian) no-arbitrage and (iv) learning dynamics. This model is estimated on US data using MCMC techniques. We find that the encompassing model outperforms significantly standard Macro-Finance models in terms of marginal likelihood and BIC. Three findings stand out. First, unlike standard Macro-Finance models, a substantial fraction of the variation in long-term yields is attributed to changes in the perceived equilibrium real rate. Second, statistically and economically significant learning effects, especially for inflation expectations, are found. Finally, historical decompositions show that the model can replicate the US yield curve dynamics over the period 1960-2007.
    Keywords: Imperfect information, New-Keynesian macroeconomic dynamics, equilibrium real rate, affine yield curve models
    JEL: E43 E44 E52
    Date: 2008–10
  9. By: Arato, Hiroki
    Abstract: This paper examines the steady-state growth effect of inflation in an endogenous growth model in which the Calvo-type nominal rigidity with endogenous contract duration and monetary friction via wage-payment-in-advance constraint are assumed. On the balanced-growth path in this model, the marginal growth effect of inflation is weakly negative or even positive at low inflation rates because the effect on average markup offsets the negative marginal growth effect through the monetary friction but the growth effect of inflation is negative and convex at higher inflation rates because the frequency of price adjustment approaches that of the flexible-price economy and the growth effect through the nominal rigidity is dominated by the growth effect through the monetary friction. With a plausible calibration of the structural parameters, this model generates a relationship between inflation and growth that is consistent with empirical evidence, especially in industrial countries.
    Keywords: Inflation and growth; Sticky prices; Endogenous contract duration
    JEL: O42 E31
    Date: 2008–11–05
  10. By: Aqib Aslam (University of Cambridge); Emiliano Santoro (Department of Economics, University of Copenhagen)
    Abstract: The framework presented in this paper takes its cue from recent financial events and attempts to develop a tractable framework for policy analysis of macro-linkages, in particular a first attempt at the integration of an independent profit-maximising banking sector that lends to and borrows from agents in the economy, and through which changes in the monetary policy rate by the central bank are transmitted. The inter-linkages between housing and the role of the banking sector in the transmission of monetary policy is emphasized. Two competing effects are highlighted: (i) a financial accelerator channel, due to the presence of collateralized borrowers, and (ii) a banking attenuator effect, which crucially arises from the spread in interest rates caused by the introduction of monopolistically competitive financial intermediaries. We show how the classical amplification mechanism explored in models of private borrowing between collaterally-constrained 'impatient' households and unconstrained 'patient' households, such as those put forward by Kiyotaki and Moore (1997) and Iacoviello (2005), is counteracted by the banking attenuator effect, given an endogenous steady state spread between loan and savings rates. Attenuation occurs therefore even under the assumption of flexible interest rates. This effect is further magnified when sluggishness in the interest rate-setting mechanism is introduced.
    Keywords: bank lending; housing; liquidity; credit; staggered interest rate-setting; collateral constraints
    JEL: E32 E43 E44 E51 E52 E58
    Date: 2008–05
  11. By: Nikolsko-Rzhevskyy, Alex
    Abstract: There is widespread agreement that monetary policy should be evaluated by using forward-looking Taylor rules estimated with real-time data. For the case of the U.S., this analysis can be performed using Greenbook data, but only through 2002. In countries outside the U.S., central banks do not regularly release their forecasts to the public. I propose a methodology for conducting monetary policy evaluation in real-time when forward-looking real-time data is unavailable. I then implement this methodology and estimate the resultant Taylor rules for the U.S., Canada, the U.K., and Germany. The methodology consists of calibrating models to closely replicate Greenbook forecasts, and then applying them to international real-time datasets. The results show that the U.S. output gap series is well described by quadratic detrending, while Greenbook inflation forecasts can be closely replicated using Bayesian model averaging over Autoregressive Distributed Lag models in inflation and the GDP growth rate. German and U.S. Taylor rules are characterized by inflation coefficients increasing with the forecast horizon and a positive output gap response. The U.K. and Canada interest rate reaction functions achieve maximum inflation response at middle-term horizons of about 1/2 year and the output gap coefficient enters the reaction functions insignificantly. Estimating the U.K. and Canadian Taylor rules as forward-looking is crucial, as backward-looking specifications produce nonsensical estimates. This is not the case for the U.S. and Germany.
    Keywords: real-time data; Taylor rule; monetary rules; inflation forecasts; output gap.
    JEL: C53 E58 E52
    Date: 2008–10–19
  12. By: Noureddine Krichene
    Abstract: Expansionary monetary policies in key industrial countries and sharply depreciating U.S. dollar exchange rate sent commodities prices soaring at unprecedented rates during 2003-2007. Food prices rose to alarming levels threatening malnutrition and food riots. In contrast, consumer price indices, a leading indicator for monetary policy, were showing almost no inflation and posed a price puzzle insofar their evolution was not responsive to record low interest rates, double digit commodities inflation, and sharp exchange rate depreciation. Commodities prices were shown to be driven by one common trend, identified as a monetary shock. Policy makers may have to face a policy dilemma: maintain monetary policy stance with accelerating commodities price inflation, subsequent world recession, and financial disorder; or tighten monetary policy with subsequent world recession followed by recovery and financial and price stability.
    Keywords: Commodity markets , Commodity prices , Inflation , Exchange rate depreciation , Developed countries , Monetary policy , Consumer price indexes , External shocks ,
    Date: 2008–05–22
  13. By: Matthew Canzoneri (Georgetown University); Robert Cumby (Georgetown University); Behzad Diba (Georgetown University); David López-Salido (Federal Reserve Board)
    Abstract: Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modeled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behavior in the more complete Banks and Bonds model. We do this by comparing the models’ second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.
    Date: 2008–10
  14. By: Karsten Staehr
    Abstract: This paper discusses the prospects of the new EU members from Central and Eastern Europe joining the European Economic and Monetary Union in the short and medium term. The countries must attain and sustain inflation rates sufficiently low to abide by the Maastricht inflation criterion, but this is complicated by the process of real convergence exerting upward pressure on the inflation rate. The paper discusses different strategies which the new EU countries can apply. It is argued that no one-size-fits-all policy is available and that some countries might be better off postponing EMU membership in pursuit of other goals. Still, the special circumstances concerning the Central and Eastern European EU countries suggest that the process of admission of new countries to the EMU should be adaptive and pragmatic
    Keywords: Monetary Union, inflation, Maastricht inflation criterion, CEE
    JEL: E31 E61
    Date: 2008–10–30
  15. By: Fidrmuc , Jarko; Horváth, Roman; Horváthová, Eva
    Abstract: We analyze the determinants of the corporate interest rates and the financial accelerator in the Czech Republic. Using a unique panel of 448 Czech firms from 1996 to 2002, we find that selected balance sheet indicators influence significantly the firm-specific interest rates. In particular, debt structure and cash flow have significant effects on interest rates, while indicators on collateral play no significant role. We find evidence that monetary policy has stronger effects on smaller firms than on medium and larger firms. Finally, we find no asymmetric effects in the monetary policy over the business cycle.
    Keywords: Monetary policy transmission; balance sheet channel; financial accelerator; corporate interest rates.
    JEL: E43 E32 G32
    Date: 2008–11–05
  16. By: Hilde C. Bjørnland (Norges Bank (Central Bank of Norway) and Norwegian School of Management (BI))
    Abstract: This paper analyses the effects of oil price shocks on stock returns in Norway, an oil exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model, as stock prices are an important transmission channel of wealth in an oil abundant country. I find that following a 10 percent increase in oil prices, stock returns increase by 2.5 percent, after which the effect eventually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.
    Keywords: VAR, oil price shocks, monetary policy, stock market.
    JEL: C32 E44 E52
    Date: 2008–10–03
  17. By: Carin A.B. van der Cruijsen; Sylvester C.W. Eijffinger; Lex H. Hoogduin
    Abstract: Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to thisoptimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight tothe conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of privatesector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 centralbanks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banksthat would benefit from further transparency increases, some might already have reached the limit.
    Keywords: central bank transparency; monetary policy; inflation persistence.
    JEL: E31 E52 E58
    Date: 2008–07
  18. By: Vasco Curdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule," in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.
    Date: 2008
  19. By: Vasco Cúrdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University)
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule," in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.
    Date: 2008–10
  20. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: While the mainstream policies can not be surpassed in the enchanted ‘optimizable’world, (Post) Keynesians have to resign themselves to manage without magic wand inthe uncertain real world. The paper discusses the monetary rules proposed in the recentPost Keynesian literature. It argues that the long-term interest rate is too imperfectlycontrolled for such rules being feasible. Consequently, the quest for credibility isirrelevant, for it makes not much sense to wonder whether authorities will honour theircommitment on an unfeasible ideal target. The right question is whether authoritiespursue convincing objectives so as to move the conventional expectation of the future(and the related interest rate) towards full employment. It is a matter of confidence.The basic principles involved in such an approach to economic policy are discussed.
    Keywords: Interest rate rule; Inflation targeting, PostKeynesian, Monetary policy
    Date: 2008–04–04
  21. By: Tanja Broz (The Institute of Economics, Zagreb)
    Abstract: This paper aims to analyse the correlation of demand and supply shocks between the EMU and CEECs in order to examine whether there is some degree of business cycle coordination between them. The main objective is to investigate the impact on Croatia and compare it with other CEECs. Croatia is of interest in this paper since there is a lack of empirical studies on this topic which include Croatia in the sample. Information on the correlation of demand and supply shocks between the EMU and CEECs is important if a country wants to introduce the euro since the synchronisation of business cycles and policy coordination will have a significant impact on willingness to enter the monetary union (except if the decision is a political one). Since Croatia has started its path towards the EU, it should be expected that it will introduce the euro, since there is no opt-out clause for new members. In order to gather results, supply and demand shocks are extracted from data using Blanchard and Quah (1989) methodoogy and then the correlations of shocks between the EMU and CEECs are calculated as well as the size of shocks and the speed of adjustments. Results indicate that Croatia is, at the moment, far from being ready for the common monetary policy with the EMU; while other CEE countries such as Slovenia and Latvia, which in fact first applied for the introduction of euro, have the closest correlation of their business cycles with those of the EMU.
    Keywords: supply and demand shocks, European Monetary Union, Central and Eastern European countries
    JEL: E32 E42 F33
    Date: 2008–10
  22. By: Gabriele, CARDULLO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Two papers have recently questioned the quantitative consistency of the search and matching models. Shimer (2005) has argued that a text-book matching model is unable to explain the cyclical variation of unemployment and vacancies in the U.S. economy. Costain and Reiter (2007) have found the existence of a trade-off in the modelÕs performance : any attempt to change the calibrated values in order to amend such business cycle inability would jeopardize the modelÕs predictions about the impact of unemployment benefits on the hazard rate. In surveying the literature originated in these findings, I distinguish three different avenues that have been followed to corret the model : change in wage formation, change in the calibration, changes in the model specification. The last approach seems to reach the best results both from a business cycle and from a microeconomic viewpoint.
    Keywords: Search-matching equilibrium, Business Cycles, Labour markets
    JEL: E24 E32 J63 J64
    Date: 2008–04–28
  23. By: Víctor Olivo; Mercedes da Costa
    Abstract: By definition, fiscal dominance impedes the effective implementation of any monetary strategy aimed at controlling inflation. Economies that exhibit oil dominance-a situation in which oil exports largely affect the main macroeconomic indicators-may also exhibit fiscal dominance. However, in this case, the standard indicators used to gauge the presence of fiscal dominance may fail to give the appropriate signals. The main purpose of this paper is twofold: i) to present a simple framework to analyze fiscal dominance in oil exporting countries and ii) to test the hypothesis of the presence of oil dominance/fiscal dominance (OD/FD) in the case of Venezuela. Using VAR and VEC models it is possible to conclude that there is relevant evidence supporting the validity of the OD/FD hypothesis.
    Keywords: Venezuela, Republica Bolivariana de , Oil exporting countries , Oil exports , Monetary policy , Fiscal policy ,
    Date: 2008–06–12
  24. By: Antonio Diez de los Rios
    Abstract: McCallum (1994a) proposes a monetary rule where policymakers have some tendency to resist rapid changes in exchange rates to explain the forward premium puzzle. We estimate this monetary policy reaction function within the framework of an affine term structure model to find that, contrary to previous estimates of this rule, the monetary authorities in Canada, Germany and the U.K. respond to nominal exchange rate movements. Our model is also able to replicate the forward premium puzzle.
    Keywords: Exchange rates; Interest rates; Transmission of monetary policy
    JEL: E43 F31 G12 G15
    Date: 2008
  25. By: Kelly, Logan J
    Abstract: In this paper, I will examine the problems created by incorrectly using a simple sum monetary aggregate to measure the monetary stock. Specifically, I will show that simple sum monetary aggregate confounds the current stock of money with the investment stock of money and that this confounding leads the simple sum monetary aggregate to report an artificially smooth monetary stock. This smoothing causes important information about the dynamic movements of the monetary stock to be lost. This may offer at least a partial explanation of why so many studies find that money has little economic relevance. To that end, we will conclude the paper by examining a reduced form backward looking IS equation to determine whether monetary aggregates contain information about real GDP gap. This paper differs from previous work in that it focuses on smoothing of the monetary stock data caused by the use of simple sum methodology, where the previous work focuses on the bias exhibited by simple sum monetary aggregates.
    Keywords: Monetary Aggregation; Money Stock; Currency Equivalent Index
    JEL: C43 E49 E47
    Date: 2008–11–07
  26. By: Meredith J. Beechey
    Abstract: Inflation targeting as practiced by the Bank of England has undergone several changes since its adoption in 1992, including redefinition of the goal, measures to increase transparency and the granting of independence to the central bank. These changes are likely to have affected long-run inflation expectations and perceptions of future inflation risk. To that end, this paper estimates a no-arbitrage, affine, factor model of the term structure of inflation compensation in the United Kingdom. The model yields time series of expected inflation and inflation risk premia at short and long horizons estimated in a theoretically consistent manner. The results reveal that long-run inflation expectations drifted down slowly during the first five years of inflation targeting, but inflation risk premia moved down abruptly only once the Bank of England was granted independence. This event, which arguably signalled more credible commitment by the central bank to its inflation anchor, appears to have been more important in shaping inflation expectations and perceptions of inflation risk than changes in the definition of the target or measures to increase transparency.
    Keywords: Inflation (Finance)
    Date: 2008
  27. By: Engelbert Stockhammer; Erik Klär
    Abstract: According to the mainstream view, labour market institutions (LMI) are the key determinants of unemployment in the medium run. The actual empirical explanatory power of measures for labour market institutions, however, has been called into question recently (Baker et al 2005, Baccaro and Rei 2007). The Keynesian view holds periods of high real interest rates and insufficient capital accumulation responsible for unemployment (Arestis et al 2007). Empirical work in this tradition has paid little attention to role of LMI. This paper contributes to the debate by highlighting the role of autonomous changes in capital accumulation as a macroeconomic shock. In the empirical analysis, medium-term unemployment is explained by capital accumulation, labour market institutions and a number of macroeconomic shocks in a panel analysis covering 20 OECD countries. The economic effects of institutional changes, variations in capital accumulation and other macro shocks are compared. Capital accumulation and the real interest rate are found to have statistically significant effects that are robust to the inclusion of control variables and show larger effects than LMI.
    Keywords: Unemployment, NAIRU, capital accumulation, labour market institutions, Keynesian economics
    JEL: E12 E20 E24 E60
    Date: 2008
  28. By: Olusanya E. Olubusoye; Rasheed Oyaromade
    Abstract: This study is motivated by the conviction that inflation entails sizeable economic and social costs, and controlling it is one of the prerequisites for achieving a sustainable economic growth. The study analyses the main sources of fluctuations in inflation in Nigeria. Using the framework of error correction mechanism, it was found that the lagged CPI, expected inflation, petroleum prices and real exchange rate significantly propagate the dynamics of inflationary process in Nigeria. The level of output was found to be insignificant in the parsimonious error correction model. Surprisingly, the coefficient of the lagged value of money supply was found to be negative and significant only at the 10% level. One of the major implications of this result is that efforts of the monetary regulating authorities to stabilize the domestic prices would continuously be disrupted by volatility in the international price of crude oil.
    Date: 2008–08
  29. By: Chris Edmond; Laura Veldkamp
    Abstract: Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, heterogeneous labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical, long-run and cross-state patterns of standard business cycle aggregates.
    JEL: E32
    Date: 2008–10
  30. By: Gillman, Max (Cardiff Business School); Harris, Mark N.
    Abstract: The paper examines the effect of inflation on growth in transition countries. It presents panel data evidence for 13 transition countries over the 1990-2003 period; it uses a fixed effects, full-information maximum likelihood, panel approach to account for possible bias from correlations among the unobserved effects and the observed country heterogeniety. The results find a strong, robust, negative effect of inflation on growth, and one that declines in magnitude as the inflation rate increases. These results include a role for a normalized money demand, by itself and as part of a nonlinearity in the inflation-growth effect. And these results derive from both a baseline single equation model and one that is then expanded into a three equation simultaneous system. This allows for possible simultaneity bias in the baseline model.
    Keywords: Growth; transition; panel data; inflation; money demand; endogeneity
    JEL: C23 E44 O16 O42
    Date: 2008–10
  31. By: Tanya, Molodtsova; Nikolsko-Rzhevskyy, Alex; Papell, David
    Abstract: This paper uses real-time data to analyze whether the variables that normally enter central banks’ interest-rate-setting rules, which we call Taylor rule fundamentals, can provide evidence of out-of-sample predictability for the United States Dollar/Euro exchange rate from the inception of the Euro in 1999 to the end of 2007. The major result of the paper is that the null hypothesis of no predictability can be rejected against an alternative hypothesis of predictability with Taylor rule fundamentals for a wide variety of specifications that include inflation and a measure of real economic activity in the forecasting regression. We also present less formal evidence that, with real-time data, the Taylor rule provides a better description of ECB than of Fed policy during this period. While the evidence of predictability is only found for specifications that do not include the real exchange rate in the forecasting regression, the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the U.S. and the Euro Area and to whether or not there is interest rate smoothing. The evidence of predictability is stronger for real-time than for revised data, about the same with inflation forecasts as with inflation rates, and weakens if output gap growth is included in the forecasting regression. Bad news about inflation and good news about real economic activity both lead to out-of-sample predictability through forecasted exchange rate appreciation.
    Keywords: Taylor rule; euro; exchange rate; forecasting; ECB; euro area.
    JEL: F37 E58 E52 F31
    Date: 2008–09–29
  32. By: Gregory de Walque (National Bank of Belgium, Research Department; University of Namur); Olivier Pierrard (Central Bank of Luxembourg; Catholic University of Louvain); Abdelaziz Rouabah (Central Bank of Luxembourg)
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between an heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbankmarket. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  33. By: Chen, Yan; Zhang, Yan
    Abstract: Dromel and Pintus [Are Progressive Income Taxes Stabilizing?, Journal of Public Economic Theory 10, (2008) 329-349] have shown that labor-income tax progressivity reduces the likelihood of local indeterminacy, sunspots and cycles in a one sector monetary economy with constant returns to scale. In this note, we extend Dromel and Pintus (2008) into a two sector monetary economy with constant returns to scale studied by Bosi et al. (2007) and reassess the stabilizing effect of progressive income taxes. We show that the result in Dromel and Pintus (2008) is robust to this extension, which means that changes of the production structure won't affect the stabilizing effect of progressive income taxes, i.e., tax progressivity (regressivity) reduces (increases) the likelihood of local indeterminacy, sunspots and cycles.
    Keywords: Tax Progressivity; local indeterminacy
    JEL: E32 P35
    Date: 2008–11–06
  34. By: Hillinger, Claude; Süssmuth, Bernd
    Abstract: We test the quantity theory of money (QTM) using a novel approach and a large new sample. We do not follow the usual approach of first differentiating the logarithm of the Cambridge equation to obtain an equation relating the growth rate of real GDP, the growth rate of money and inflation. These variables must then again be ‘integrated’ by averaging in order to obtain stable relationships. Instead we suggest a much simpler procedure for testing directly the stability of the coefficient of the Cambridge equation. For 125 countries and post-war data we find the coefficient to be surprisingly stable. We do not select for high inflation episodes as was done in most empirical studies; inflation rates do not even appear in our data set. Much work supporting the QTM has been done by economic historians and at the University of Chicago by Milton Friedman and his associates. The QTM was a foundation stone of the monetarist revolution. Subsequently belief in it waned. The currently dominant New Keynesian School, implicitly or explicitly denies the validity of the QTM. We survey this history and argue that the QTM is valid and New Keynesians are wrong.
    Keywords: new Keynesian theory; quantity theory of money
    JEL: B22 E31 E41 E52
    Date: 2008–10–30
  35. By: Eckhard Hein (IMK at the Hans Boeckler Foundation and Carl von Ossietzky University Oldenburg, Germany); Artur Tarassow (University of Hamburg)
    Abstract: Empirical research based on the Bhaduri/Marglin-variant of the Kaleckian model has recently shown that aggregate demand in many medium-sized and large open economies tends to be wage-led in the medium to long run, even in a period of increasing globalisation. In this paper we extend this type of analysis and integrate the effects on productivity growth, theoretically and empirically. Productivity growth is introduced into the theoretical model making use of the Verdoorn effect or of Kaldor’s technical progress function and hence of a positive relationship between GDP or capital stock growth and productivity growth. Further on, a costpush or Marx/Hicks-effect and hence a positive impact of real wage growth or the wage share on productivity growth is taken into account. In the empirical part we estimate productivity growth equations for six countries introducing these two effects. Finally, economic policy conclusions are drawn.
    Keywords: Demand-led growth, endogenous technical change, wage-led and profit-led demand regimes, productivity regime
    JEL: E12 E21 E22 E25 O41
    Date: 2008
  36. By: Grassi, Stefano; Proietti, Tommaso
    Abstract: The local level model with stochastic volatility, recently proposed for U.S. by Stock and Watson (Why Has U.S. Inflation Become Harder to Forecast?, Journal of Money, Credit and Banking, Supplement to Vol. 39, No. 1, February 2007), provides a simple yet sufficently rich framework for characterizing the evolution of the main stylized facts concerning the U.S. inflation. The model decomposes inflation into a core component, evolving as a random walk, and a transitory component. The volatility of the disturbances driving both components is allowed to vary over time. The paper provides a full Bayesian analysis of this model and readdresses some of the main issues that were raised by the literature concerning the evolution of persistence and predictability and the extent and timing of the great moderation. The assessment of various nested models of inflation volatility and systematic model selection provide strong evidence in favor of a model with heteroscedastic disturbances in the core component, whereas the transitory component has time invariant size. The main evidence is that the great moderation is over, and that volatility, persistence and predictability of inflation underwent a turning point in the late 1990s. During the last decade volatility and persistence have been increasing and predictability has been going down.
    Keywords: Marginal Likelihood; Bayesian Model Comparison; Stochastic Volatility; Great Moderation; Inflation Persistence.
    JEL: E31 C22
    Date: 2008–11–07
  37. 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: 2008–09–20
  38. By: George S. Tavlas (Bank of Greece)
    Abstract: With the 14 members of the Southern African Development Community (SADC) having set the objective of adopting a common currency for the year 2018, an expanding empirical literature has emerged evaluating the benefits and costs of a common-currency area in Southern Africa. This paper reviews that literature, focusing on two categories of studies; (1) those that assume that a country’s characteristics are invariant to the adoption of a common currency; and, (2) those that assume that a monetary union alters an economy’s structure, resulting in trade creation and credibility gains. The literature review suggests that a relative-small group of countries, typically including South Africa, satisfies the criteria necessary for monetary unification. The literature also suggests that, in a monetary union comprised of all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g., fiscal balances) in the region, the potential losses (i.e., higher inflation) from giving up an existing credible national central bank, a relevant consideration for South Africa, could outweigh any potential benefits of trade creation resulting from a common currency.
    Keywords: South African Development Community; monetary union; optimum currency areas
    JEL: E42 E52 F36
    Date: 2008–04
  39. By: Sophia Lazaretou (Bank of Greece)
    Abstract: This paper aims to trace the history of central banking in pre-WWII Greece. To this end, we first study the country’s financial structure and its process of financial development. Several indices of financial development have been assessed and their evolvement has been studied. The country’s financial development had passed through different stages. Financial depth had increased in the turn of the 19th century and expanded further in the 1920s. However, on the basis of behavioural indices, banks were shown to be poorly asset-liability managed. They were also suffered by capital adequacy and were highly leveraged. The analysis of the composition of money supply and its long run behaviour suggests that monetary base variations were the proximate determinants of money supply movements, whereas money multiplier had a minimum impact. Central banking in pre-WWII Greece is viewed with regard to the monetary policy strategy, the monetary policy implementation framework and state interventions. The balance sheet of the Bank of Greece reveals an excessive focus on the chosen monetary policy strategy of a currency peg. Domestic credit was controlled via liquidity-providing standing facilities, either discounts or advances. Moreover, Bank’s considerable involvement in government re-financing might indicate that state interventions were considerable.
    Keywords: Central banking; Financial intermediation; Money.
    JEL: E50 N23
    Date: 2008–07
  40. By: Santos Monteiro, Paulo (University of Warwick)
    Abstract: Full consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies.
    Keywords: Consumption insurance ; Idiosyncratic risk ; Frequency domain
    JEL: D1 E21
    Date: 2008
  41. By: Regis Barnichon
    Abstract: This paper presents new empirical evidence on the cyclical behavior of US unemployment that poses a challenge to standard search and matching models. The correlation between cyclical unemployment and the cyclical component of labor productivity switched sign in the mid 80s: from negative it became positive, while standard search models imply a negative correlation. I argue that the inconsistency arises because search models do not allow output to be demand determined in the short run, and I present a search model with nominal rigidities that can rationalize the empirical findings. In addition, I show that the interaction of hiring frictions and nominal frictions can generate a new propagation mechanism absent in standard New-Keynesian models.
    Date: 2008
  42. By: Noureddine Krichene
    Abstract: Following record low interest rates and fast depreciating U.S. dollar, crude oil prices became under rising pressure and seemed boundless. Oil price process parameters changed drastically in 2003M5-2007M10 toward consistently rising prices. Short-term forecasting would imply persistence of observed trends, as market fundamentals and underlying monetary policies were supportive of these trends. Market expectations derived from option prices anticipated further surge in oil prices and allowed significant probability for right tail events. Given explosive trends in other commodities prices, depreciating currencies, and weakening financial conditions, recent trends in oil prices might not persist further without triggering world economic recession, regressive oil supply, as oil producers became wary about inflation. Restoring stable oil markets, through restraining monetary policy, is essential for durable growth and price stability.
    Keywords: Working Paper , Oil prices , Commodity prices , Exchange rate depreciation , Inflation , Monetary policy ,
    Date: 2008–05–27
  43. By: A. Prasad; Charles Frederick Kramer; Hélène Poirson
    Abstract: The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.
    Keywords: India , Monetary policy , Globalization , Capital inflows , Economic conditions , Domestic liquidity , Liquidity management ,
    Date: 2008–05–22
  44. By: Khemraj, Tarron
    Abstract: The paper argues that contemporary Caribbean economic policy agenda is driven by a quest to liberalize the economic realm and minimize the role of a developmental state. In particular, the agenda of financial liberalization – which holds that minimizing the role of the state in the financial sector is growth augmenting – is examined. The Fry (1989) financial liberalization model is augmented to demonstrate that what has actually taken place is a movement from government financial repression to private oligopoly bank stagnation. The paper also underscores that stabilization via market-based monetary policy has taken precedence over long-term production-based or industrial policy, a primary component of the Lewis legacy. However, a model which aims at unifying stabilization policies and long-term industrial strategy is presented.
    Keywords: industrial policy; monetary policy
    JEL: O42 O25 E52 O16
    Date: 2008–10
  45. By: Rossi Lorenza (DISCE, Università Cattolica); Guido Ascari (Università di Pavia)
    Abstract: There is widespread agreement that the two most widely used pricing assumptions in the New-Keynesian literature, i.e., Calvo and Rotemberg price-setting mechanisms, deliver equivalent dynamics. We show that, instead, they entail a very di¤erent dynamics of adjustment after a disin?ation, once non linear simulations are employed. In the Calvo model disin?ation implies output gains, while in the Rotemberg model a disin?ation experiment implies output losses. We show that this is due to the di¤erent wedges created by the nominal rigidities in the two models: between output and hours in the Calvo model, while between output and consumption in the Rotemberg model. More- over, unlike the Calvo model, in the Rotemberg model real wage rigidi- ties cause a signi?cant output slump along the adjustment path, thus restoring a dynamics in line both with the conventional wisdom and the empirical evidence.
    Keywords: Disinfation, Sticky Prices, Nonlinearities
    JEL: G3
    Date: 2008–06
  46. By: Xavier Debrun; Jean Pisani-Ferry; André Sapir
    Abstract: The paper takes stock of the debate on the positive link between output volatility and the size of government-which reflects automatic stabilizers. After a survey of the literature, we show that the contribution of automatic stabilizers to output stability may have disappeared since the 1990s. However, econometric analysis suggests that the breakdown in the government size-volatility relationship largely reflects temporary developments (better monetary management and financial intermediation). Once these factors are taken into account, the stabilizing role of government size remains important although little extra stability can be gained by expanding public expenditure beyond 40 percent of GDP.
    Keywords: Government expenditures , Financial stability , Gross domestic product ,
    Date: 2008–05–15
  47. By: Santos Monteiro, Paulo (University of Warwick)
    Abstract: I study the impact of idiosyncratic risk on savings and employment in a small open economy populated by two-member families. Families incur a fixed cost of participation when both members are employed. Because of market incompleteness and information asymmetries, this cost coupled with labor market frictions can generate multiple equilibria. In particular, there might be one equilibrium with high employment and low saving and another one with low employment and high saving. The model predicts that aggregate saving and employment rates are negatively correlated across countries. I present empirical evidence that supports the general equilibrium prediction of the model
    Keywords: Saving ; Employment ; Family labor supply ; Multiple equilibria
    JEL: D52 D90 E13 E21 J21 J22
    Date: 2008
  48. By: Ivanna Vladkova Hollar; Jeromin Zettelmeyer
    Abstract: Fiscal performance in Latin America looks much improved this decade compared to the 1980s or 1990s. Is this a "structural" improvement or likely to be transitory? This paper answers this question by estimating the relationship between non-commodity revenue and the economic cycle, and evaluating commodity revenues using alternative medium term commodity price projections. The main result is that structural revenues have indeed improved as a share of GDP, and structural primary balances are currently in surplus in many Latin American countries. However, the magnitude of these improvements is uncertain, in part due to uncertainty about the commodity price outlook.
    Keywords: Working Paper , South America , Central America , Latin America , Revenue sources , Tax revenues , Commodity markets , Balance of payments , Business cycles ,
    Date: 2008–05–30
  49. By: Naqvi, Nadeem
    Abstract: The American economy has undergone a dramatic structural change in the first decade of the 21st Century. The real-economy causes of this transformation, and their expression via the real estate market and its financial derivatives’ market, and their final manifestation in world financial markets, is explained using traditional economic theory. A three-sector Walrasian general equilibrium model, and a non-Walrasian temporary equilibrium model with fixed prices and quantity constraints, are both utilized to explain the real-economy causes of the observed stylized facts. Some remedies that will likely work, and ones that will not, are also identified. (95 words)
    Keywords: financial crisis; credit crunch; mortgage backed securities; fiscal policy; monetary policy; the U.S. economy; outsourcing; international capital mobility
    JEL: D5 D3 F2 E5 F1 E3
    Date: 2008–11–04
  50. By: Milan Sojic (National Bank of Serbia); Ljiljana Djurdjevic (National Bank of Serbia)
    Abstract: In the first thirty years of its operations, key functions of the privileged National Bank of the Kingdom of Serbia (1884-1914) were those of a creditor of the economy, issuer of currency and banker to the government. The National Bank’s success in the performance of its functions was mainly determined by the state of government finances. Peace and stability are a prerequisite for economic development and when we look at Serbia’s history from 1884 to 1914, all we see is a chain of wars. In such circumstances, Serbia did make significant economic headway, and the National Bank did do its best to achieve the goal it was set up to perform – to promote trade and economic activity by providing credits.
    Keywords: National Bank of Serbia; Central banking; Central bank objectives; History of finance; Financial institutions; Monetary policy.
    JEL: E58 N13 N23
    Date: 2008–07
  51. By: Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU.
    Keywords: European monetary integration, co-movements, AR models, CEECs.
    Date: 2008–10
  52. By: Özer Karagedikli (Bank of England); Troy Matheson (Reserve Bank of New Zealand); Christie Smith (Norges Bank (Central Bank of Norway)); Shaun Vahey (Melbourne Business School, Norges Bank (Central Bank of Norway) , and Reserve Bank of New Zealand)
    Abstract: Real Business Cycle (RBC) and Dynamic Stochastic General Equilibrium (DSGE) methods have become essential components of the macroeconomist’s toolkit. This literature review stresses recently developed techniques for computation and inference, providing a supplement to the Romer (2006) textbook, which stresses theoretical issues. Many computational aspects are illustrated with reference to the simple divisible labour RBC model. Code and US data to replicate the computations are provided on the Internet, together with a number of appendices providing background details.
    Keywords: RBC, DSGE, Computation, Bayesian Analysis, Simulation
    JEL: C11 C50 E30
    Date: 2008–10–24
  53. By: Kunieda, Takuma
    Abstract: This paper examines the effect of financial development on growth volatility with the dynamic panel data analysis. It demonstrates empirically that financial development has a hump-shaped effect on growth volatility. In early stages of financial development, growth rates are less volatile. As the financial sector develops, an economy is highly volatile. However, as the financial sector matures and the financial market approaches a perfect one, the economy becomes less volatile once again.
    Keywords: Growth Volatility; Financial Development; Dynamic Panel Models.
    JEL: E51 O16 E44
    Date: 2008–08–31
  54. By: Kunieda, Takuma
    Abstract: This research examines the effect of financial development on volatility in economic growth. It demonstrates theoretically that financial development has a hump-shaped effect on volatility in economic growth. In early stages of the development of a financial sector, growth rates evolve monotonically. At the intermediate level of financial development, as the degree of credit market imperfections diminishes and as asymmetric information between borrowers and lenders is less pronounced, an economy exhibits endogenous growth cycles. However, as the financial sector matures, the volatility in the growth process dissipates and the growth rates evolve once again monotonically.
    Keywords: Endogenous Growth Cycles; Financial Deepening; Credit market imperfections; Heterogeneous agents.
    JEL: O41 E22 E23
    Date: 2008–07–12
  55. By: Kunieda, Takuma
    Abstract: This paper investigates how financial globalization and financial development affect income inequality within a country. We demonstrate that when a country is financially closed to the world market, the Gini coefficient is monotonically decreasing with respect to the degree of financial development, whereas when a country becomes so small due to financial globalization that financial development in the country does not affect the world interest rate, the Gini coefficient is monotonically increasing with respect to the degree of financial development. A simple quantitative analysis for the Gini coefficients shows that income inequality in the United States is negatively affected by its financial development. In the United States, income inequality has widened since the late-1970s probably due to financial globalization and financial development.
    Keywords: Income inequality; Financial globalization; Financial development; Gini coefficient; Heterogeneous agents.
    JEL: E24 O16 F43
    Date: 2008–10–25
  56. By: Frédéric DUFOURT (EUREQUA, Université de Paris 1)
    Abstract: Cet article propose une évaluation quantitative du modèle de collusion implicite de Rotemberg et Woodford (1992), en s'appuyant sur une version totalement spécifiée qui permet notamment une détermination analytique de l'élasticité du taux de marge face aux variations de la demande agrégée. Dans ce cadre, on montre qu'un tel mécanisme ne parvient pas à générer des effets réels suffisants pour reproduire un certain nombre de faits stylisés importants associés aux chocs de demande, tels que la réaction procyclique de la production, de l'emploi et du salaire réel. Comparé à des mécanismes concurrents de fluctuations des marges évalués dans un cadre analytique si¬milaire, le mécanisme de collusion implicite semble donc avoir des difficultés à s'imposer à lui seul comme une explication dominante de la transmission des chocs de demande à l'activité économique.
    JEL: E32
    Date: 2008–09–01
  57. By: Stefano Nobili (Bank of Italy, Asset Management Department); Gerardo Palazzo (Bank of Italy, Asset Management Department)
    Abstract: We use a no-arbitrage essentially affine three-factor model to estimate term premia in US and German ten-year government bond yields. In line with the existing literature, we find that estimated premia have followed a downward trend since the 1980s: from 4.9 per cent in 1981 to 0.7 per cent in 2006 for the US bond and from 3.3 to 0.5 per cent for the German one. Subsequently, using an Error Correction Model (ECM) we prove that the decline is explained by a decrease in global output variability and an increase in the power of ten-year government bonds to diversify the investors’ portfolios. In addition, the ECM also forecasts both the US and the German term premia converging to around one percentage point over a five year horizon. Long-term return expectations for ten-year government bonds will have to incorporate bond risk premia that - while in line with average excess returns during the twentieth century - are significantly lower than average excess returns over the last two decades.
    Keywords: Term structure model, bond risk premium, modern portfolio theory
    JEL: C13 C14 E43 E47 G12 G15
    Date: 2008–09
  58. By: George Virgil Stoenescu (National Bank of Romania); Elisabeta Blejan (National Bank of Romania); Brindusa Costache (National Bank of Romania); Adriana Iarovici Aloman (National Bank of Romania)
    Abstract: The paper looks at the National Bank of Romania’s issue of banknotes from 1880 through 1914, highlighting the developments in the notes’ cover, the channels whereby the central bank put its notes into circulation, as well as the behaviour of the issuing house during episodes of crisis. The narrative evidence reveals that the Bank had successfully managed its seignorage right and maintained a stable and trustworthy domestic currency that ensured the country’s economic development in line with the other European economies of the time.
    Keywords: Money circulation; Banknote issue; Cover stock; Mortgage notes; Gold standard
    JEL: N13 N23 E42 E52 G21
    Date: 2008–07
  59. By: Alessandro Calza (European Central Bank); Andrea Zaghini (Bank of Italy, Economics, Research and International Relations Area)
    Abstract: The paper finds evidence of non-linearities in the dynamics of the euro-area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of non-linearities in the dynamics of adjustment to equilibrium stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US.
    Keywords: Euro area, cointegration, non-linear error-correction, demand for money
    JEL: E41 C22
    Date: 2008–09
  60. By: Zagaglia , Paolo (Bank of Finland Research)
    Abstract: In this paper we study how the pattern of segmentation in the euro area money market has been affected by the recent turmoil in financial markets. We use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions.In this paper we study how the pattern of segmentation in the euro area money market has been affected by the recent turmoil in financial markets. We use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions.
    Keywords: money market; high-frequency data; time-series methods
    JEL: C22 E58
    Date: 2008–10–20
  61. By: Dean Baker; John Schmitt
    Abstract: This report uses the past three recessions of the early 1980s, early 1990s and early 2000s to project the effects of a recession in 2008. The report finds that such a recession would result in a significant rise in unemployment and the poverty rate along with a significant decrease in the employment rate and the median family income. These effects would be felt long after financial markets begin to recover with workers feeling the negative effects of the recession for the next three to four years.
    Keywords: recession, unemployment, poverty
    JEL: E E32 E37 E66
    Date: 2008–01
  62. By: Lenno Uusküla
    Abstract: Only a few papers consider the sectoral effects of aggregate shocks. But do the shocks have homogeneous effects across sectors? This paper looks at the impact of liquidity and neutral productivity shocks on the creation of firms across 8 sectors in Estonia. I show that the sectoral heterogeneity in the reaction is low for liquidity shocks and high for technology shocks. An increase in liquidity leads to a uniform growth in the creation of firms across sectors with the exception of the financial sector. An increase in the labor productivity shock the entry of firms permanently in sectors that are traditionally considered to be producing tradables, such as transport or manufacturing. The increase in the creation of firms is short and close to zero in the long run in the nontradable sectors, such as retail and whole sale, real estate, and hotels and restaurants.
    Keywords: VAR, liquidity shocks, technology shocks, firm entry
    JEL: E32 C32
    Date: 2008–10–30
  63. By: Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority)
    Abstract: Hong Kong has witnessed an equity initial public offering (IPO) boom since 2005. As the interbank payments involved in an IPO can be hundreds of times larger than the Aggregate Balance, increased funding needs and heightened demand for interbank liquidity may drive interbank interest rates up. Empirical estimates from error-correction models and GARCH models for HIBORs show that funding needs on the closing date of an IPO increase the level and conditional volatility of the overnight and one-week HIBORs (but not those of the one-month and longer-term HIBORs). On the other hand, estimated models for HIBORs with different maturities do not detect any statistically significant effect of the IPO variable on the refund date of an IPO.
    Keywords: IPO, interbank liquidity, interest rate volatility, event studies
    JEL: E4 E43 E50 G14
    Date: 2008–07
  64. By: Markus K. Brunnermeier; Stefan Nagel; Lasse H. Pedersen
    Abstract: This paper documents that carry traders are subject to crash risk: i.e. exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed. We argue that this negative skewness is due to sudden unwinding of carry trades, which tend to occur in periods in which risk appetite and funding liquidity decrease. Funding liquidity measures predict exchange rate movements, and controlling for liquidity helps explain the uncovered interest-rate puzzle. Carry-trade losses reduce future crash risk, but increase the price of crash risk. We also document excess co-movement among currencies with similar interest rate. Our findings are consistent with a model in which carry traders are subject to funding liquidity constraints.
    JEL: E44 F3 F31 G12
    Date: 2008–11
  65. By: Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Lillie Lam (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper investigates the determinants of variations in the yield spreads (swap spreads) between Hong Kong dollar interest rate swaps and Exchange Fund paper for a period from July 2002 to April 2008. A vector error-correction model is used to analyse the impact of various shocks on swap spreads. The issue is whether "liquidity" or "credit" (or both) is the main determinant of swap spread dynamics. The results show that the dynamics are influenced significantly by "credit" between July 2002 and September 2007. However, "liquidity" between the Exchange Fund long-term notes and short-term bills is the major determinant of swap spreads between September 2007 and April 2008. The substantial demand of the Exchange Fund short-term bills, that reflected the strong preference of market participants for holding short-term instruments for liquidity purposes probably due to the sub-prime crisis in the US, is the driving force of the rise in swap spreads in the last quarter of 2007.
    Keywords: Hong Kong dollar interest rates, swap spreads, vector error-correction model, sub-prime crisis
    JEL: G15 E43
    Date: 2008–07
  66. By: Jon D. Wisman
    Abstract: The saving rate for U.S. households has long been low relative to those in other wealthy countries and in recent decades this rate has plummeted. Most studies of household saving behavior are based on the life-cycle theory of saving. However, there is doubt as to whether these studies adequately explain the low and declining rate in the U.S. This study explores two hypotheses that depart from the life-cycle explanatory framework. The first hypothesis examines the possibility that the low rate of household saving in the U.S. is related to Americans’ strong belief that vertical mobility in the U.S. is readily possible and hence their relatively weak sense of class identity. A second corollary hypothesis is that in an economy in which a high degree of vertical mobility is thought possible, a high degree of inequality in the distribution of income and wealth may reinforce the tendency to save little.
    Date: 2008–10
  67. By: Donato Masciandaro (Paolo Baffi Centre, Bocconi University); Marc Quintyn (IMF Institute, International Monetary Fund)
    Abstract: We propose a path dependence approach to analyze the evolution of the financial supervisory architecture, focusing on the institutional role of the central bank, and then apply our framework to describe the institutional settings in a selected sample of countries. The policymaker who decides to maintain or reform the supervisory architecture is influenced by the existing institutional setting in a systematic way: the more the central bank is actually involved in supervision, the less likely a more concentrated supervisory regime will emerge, and vice versa (path dependence effect). We test the path dependence effect describing and evaluating the evolution and the present state of the architecture of six national supervisory regimes in South Eastern Europe (SEE): Albania, Bulgaria, Greece, Romania, Serbia and Turkey. The study of the SEE countries confirms the postulated role of the central bank in the institutional setting. In five cases the high involvement of the central bank in supervision is correlated with a multi–authority regime, while in one case a high degree of financial supervision unification is related with low central bank involvement.
    Keywords: Financial Supervision; Central Banks; Path Dependence; Political Economy; South Eastern Europe.
    JEL: G18 G28 E58
    Date: 2008–09
  68. By: Hall, Robert (Stanford University); Krueger, Alan B. (Princeton University)
    Abstract: Some workers bargain with prospective employers before accepting a job. Others could bargain, but find it undesirable, because their right to bargain has induced a sufficiently favorable offer, which they accept. Yet others perceive that they cannot bargain over pay; they regard the posted wage as a take-it-or-leave-it opportunity. Theories of wage formation point to substantial differences in labor-market equilibrium between bargained and posted wages. The fraction of workers hired away from existing jobs is another key determinant of equilibrium, because a worker with an existing job has a better outside option in bargaining than does an unemployed worker. Our survey measures the incidences of wage posting, bargaining, and on-the-job search. We find that about a third of workers had precise information about pay when they first met with their employers, a sign of wage posting. We find that another third bargained over pay before accepting their current jobs. And about 40 percent of workers could have remained on their earlier jobs at the time they accepted their current jobs.
    Keywords: jobs, wages, bargaining, equilibrium
    JEL: E24 J3 J64
    Date: 2008–10
  69. By: Philip R. Lane
    Abstract: This essay addresses the macroeconomics of international financial integration from a European perspective. We first analyse the role of international financial integration in promoting economic convergence among members of the European Union. Next, we analyse the implications of increasing financial linkages, both within Europe and between Europe and other regions in the world economy. Finally, we assess how increased financial integration has altered the economics of external adjustment.
    Date: 2008–11–04
  70. By: Michael D. Bordo (Rutgers University and NBER)
    Abstract: This lecture briefly revisits the evidence on the incidence and severity of different varieties of crises within the context of globalization then (pre 1914) and now (1980 to the present), in my earlier work with Barry Eichengreen and in my recent work with Chris Meissner. I then discuss the determinants of emerging market crises from the perspective of the recent balance sheet approach to financial crises which build on the earlier literatures of banking crises, debt crises, and first and second generation currency crises. This approach puts at centre stage the importance of financial development. I then peel the onion back further and consider the “deep” institutional determinants of financial development and their relation to financial stability. I conclude with some lessons from history.
    Keywords: Financial crises; Financial development and stability; Institutions.
    JEL: E44 G15 N20
    Date: 2008–07
  71. By: Pierre VILLA (CEPII)
    Abstract: L’introduction des profits dans les fonctions d’investissement s’inscrit dans le cadre du retour de l’argument empirique sur les spécifications proposées par Jorgenson. Selon la théorie de la profitabilité les entreprises ont une demande d’investissement croissante avec le rapport taux de profit de pleine capacité/taux d’intérêt afin de se prémunir contre l’incertitude de la demande ou de gagner des parts de marché (effet de clientèle). La théorie des contraintes financières définit une offre d’investissement dépendant des profits réalisés, du ratio d’endettement et du taux d’intérêt réel anticipé. On estime un modèle de déséquilibre d’investissement avec CES par le maximum de vraisemblance et le pseudo maximum de vraisemblance simulé; robustes au changement de méthode : les profits réalisés, la profitabilité, le ratio endettement/capital et la demande anticipée. Les contraintes financières ne s’exercent pas forcément lorsque le ratio d’endettement est élevé et la chutte de l’offre d’investissement est plus forte que la chute de la demande en phase de récession. Le report des contraintes financières est plutôt négatif (comportement “rationnel” vs “extrapolatif”).
    JEL: E2
    Date: 2008–07–16
  72. By: Mark Weisbrot; Luis Sandoval
    Abstract: This paper is an update of CEPR’s July 2007 overview of the Venezuelan economy, and includes the latest available data (at the time of publication) for growth, employment, poverty, budget information, and other data. The paper notes continued progress in economic growth, poverty reduction, employment, and health and education indicators.
    Keywords: Venezuala, Chavez, economy
    JEL: O E I O4 O54 E65 E61 E2 I3
    Date: 2008–02
  73. By: YATSENKO, Yuri; BOUCEKKINE, Raouf (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); HRITONENKO, Natali
    Abstract: Several R&D-based models of endogenous economic growth are investigated under the Solow-like assumption of fixed allocation of resources across activities. We identify model parameters that lead to explosive dynamics and analyze various economic techniques to avoid it. The techniques include adding stricter constraints on model trajectories and limiting factors in technology equation. In particular, we demonstrate that our vintage version of the well known R&D-based model of economic growth (Jones, 1995) exhibits the same balanced dynamics as the original model.
    Keywords: vintage capital models, endogenous technological change, R&D investment, explosive dynamics, nonlinear Volterra integral equations.
    JEL: E20 O40 C60
    Date: 2008–09
  74. By: Sebastian Katz
    Abstract: El presente informe analiza de manera sucinta las ponencias efectuadas tanto por las autoridades del gobierno de Honduras como por el representante del Fondo Monetario Internacional (FMI) en la reunión mantenida por ambas partes el 24 de abril de 2007 en Tegucigalpa. En la exposición se han tomado en cuenta, asimismo, las conversaciones previas mantenidas por el consultor con las autoridades del gobierno en la misión de apoyo realizada en los últimos días de febrero de 2007, así como algunos análisis cuantitativos llevados a cabo en el marco de consistencia elaborado, en la órbita de dicha misión, a pedido de las autoridades.
    Date: 2008–10
  75. By: Christian Schulz
    Abstract: In this paper, the dynamic common factors method of Forni et al. (2000) is applied to a large panel of economic time series on the Estonian economy. In order to improve forecasting of economic activity in Estonia, we derive a leading indicator composed of the common components of twelve series, which were identified as leading. The resulting indicator performs better than two other indicators, which are based on a small-scale state-space model used by Stock and Watson (1991) and a large-scale static principal components model used by Stock and Watson (2002), respectively. It also clearly outperforms the naive benchmark in both in-sample and out-of-sample forecast comparisons
    Keywords: Estonia, forecasting, turning points, dynamic factor models, dynamic principal components, forecast performance
    JEL: C32 C33 C53 E37
    Date: 2008–10–30
  76. By: Morten Bech; James T. E. Chapman; Rod Garratt
    Abstract: We use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). Along the way we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.
    Keywords: Payment, clearing, and settlement systems
    JEL: C11 E50 G20
    Date: 2008
  77. By: Yuksel Gormez (Central Bank of Turkey)
    Abstract: The early stages of banking and finance in Turkey were one of its brightest periods, even though it was the toughest because of lack of capital and unfavourable initial conditions. The finance and banking conception was quite rational and potential crises were eliminated through careful choices. In the following years, boom and bust conditions dominated financial services provision with a crisis in every decade under different economic policy frameworks. Since 2001, European convergence has been leading the way and one may argue that Turkish banking and finance is ready for the challenges of the 21st century, supported by fast-increasing foreign participation that has increased capital adequacy ratios.
    Keywords: Money; Banking and finance; Turkey.
    JEL: E4 G1
    Date: 2008–07
  78. By: Rault, Christophe (University of Orléans); Caporale, Guglielmo Maria (Brunel University); Sova, Ana Maria (CREST & Université Paris 1 Panthéon-Sorbonne); Sova, Robert (CREST & Université Paris 1 Panthéon-Sorbonne)
    Abstract: The expansion of regionalism has spawned an extensive theoretical literature analysing the effects of Free Trade Agreements (FTAs) on trade flows. In this paper we focus on FTAs (also called European agreements) between the European Union (EU-15) and the Central and Eastern European countries (CEEC-4, i.e. Bulgaria, Hungary, Poland and Romania) and model their effects on trade flows by treating the agreement variable as endogenous. Our theoretical framework is the gravity model, and the econometric method used to isolate and eliminate the potential endogeneity bias of the agreement variable is the fixed effect vector decomposition (FEVD) technique. Our estimation results indicate a positive and significant impact of FTAs on trade flows. This finding is robust to the inclusion in the sample of a group of control countries (specifically Belarus, the Russian Federation and Ukraine) that did not sign an FTA. Besides, we show that trade growth after the FTA agreement with the EU was signed exceeded trade growth of the control group of countries which did not become members.
    Keywords: regionalisation, European integration, panel data methods
    JEL: E61 F13 F15 C25
    Date: 2008–10

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