nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒11‒18
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Money Demand Accommodation in the U.S. By Javier Gómez; Antonio Moreno; Fernando Pérez de Gracia
  2. An alternative reconsideration of macroeconomic convergence criteria for West African Monetary Zone By Balogun, Emmanuel Dele
  3. An empirical analysis of the curvature factor of the term structure of interest rates By Modena, Matteo
  4. Determinacy of interest rate rules with bond transaction services in a cashless economy  By Marzo, Massimiliano; Zagaglia , Paolo
  5. A continuous-time model of the term structure of interest rates with fiscal-monetary policy interactions By Marzo , Massimiliano; Romagnoli , Silvia; Zagaglia, Paolo
  6. A Measure for Credibility: Tracking US Monetary Developments By Maria Demertzis; Massimiliano Marcellino; Nicola Viegi
  7. Demand for money in Iran: An ARDL approach By Shahrestani, Hamid; Sharifi-Renani, Hosein
  8. Money wage rigidity, monopoly power and hysteresis By Alfonso Palacio Vera
  9. What broke the bubble? By Barnett, William A.
  10. The Macroeconomic Management of Increased Aid: Policy Lessons Date Recent Experience By Aiyar, Shekhar; Berg, Andrew; Hussain, Mumtaz
  11. Monetary Policy Rules for Managing Aid Surges in Africa By Adam, Chris-Datepher S.; Buffie, Edward; O'Connell, Stephen; Pattillo, Catherine
  12. Budget Deficit, Money Growth and Inflation: Evidence from the Colombian Case By Ignacio Lozano
  13. Short-Term Forecasts of Euro Area GDP Growth By Elena Angelini; Gonzalo Camba-Mendez; Domenico Giannone; Lucrezia Reichlin; Gerhard Rünstler
  14. Fiscal Policy and Monetary Integration in Europe: An Update By Candelon Bertrand; Muysken Joan; Vermeulen Robert
  15. The Sub-Prime Crisis and UK Monetary Policy By Christopher Martin; Costas Milas
  16. Delegation and Loose Commitment By Nunes, Ricardo
  17. Recession, Depression, and Financial Crisis: Everything Economists Want to Know But Are Afraid to Ask By Graeme Donald Snooks
  18. Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model By Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
  19. The Inconsistency Puzzle Resolved: an Omitted Variable By Nikolay Arefiev
  20. Macro-finance VARs and bond risk premia: a caveat By Marco, Taboga
  21. The case for a financial approach to money demand By Xavier Ragot
  22. Analyzing Growth and Welfare Effects of Public Policies in Models of Endogenous Growth with Human Capital: Evidence from South Africa By Badibanga, Thaddee M.
  23. RESTAURANT PRICES AND THE MINIMUM WAGE By Fougere, Denis; Gautier, Erwan; Le Bihan, Herve
  24. Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis By J. David Brown; John S. Earle
  25. Large Bayesian VARs By Marta Banbura; Domenico Giannone; Lucrezia Reichlin
  26. Optimal Linear Filtering, Smoothing and Trend Extraction for m-period Differences of Processes with a Unit Root By Dimitrios Thomakos
  27. Sustainable Development in a Post Keynesian Perspective: Return to Basics of Ecodevelopment By Eric BERR (GREThA UMR CNRS 5113)
  28. Sustainable Development in a Post Keynesian Perspective: Return to Basics of Ecodevelopment (In French) By Eric BERR ( (GREThA-GRES)
  29. Opening the Black Box: Structural Factor Models with Large Cross-Sections By Mario Forni; Domenico Giannone; Marco Lippi; Lucrezia Reichlin
  30. Nonlinear Adjustment in US Bond Yields: an Empirical Analysis with Conditional Heteroskedasticity By Lucchetti, Riccardo; Palomba, Giulio
  31. Competition, Bargaining Power, and the Cattle Cycle By Crespi, John M.; Xia, Tian; Jones, Rodney
  32. How Central Bankers See It: The First Decade of ECB Policy and Beyond By Stephen G. Cecchetti; Kermit L. Schoenholtz
  33. A Simple Accounting Framework for the Effect of Resource Misallocation on Aggregate Productivity By Aoki, Shuhei
  34. Disentangling Intertemporal Substitution and Risk Aversion under the Expected Utility Theorem By Lau, Chi-Lei Oscar
  35. Top Incomes and National Savings By Andrew Leigh; Alberto Posso
  36. Investment in Pakistan: A Critical Review By Muhammad, Zakaria
  37. The Depreciation Impact of the Profit and Activity Development Carried out by an Economic Operator By dobrota, gabriela; chirculescu, felicia maria
  38. Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-Country Evidence from the Amadeus Dataset By Jens Arnold; Cyrille Schwellnus
  39. Decentralization Policy and Equality: A Theil Analysis of Indonesian Income Inequality By Djoni Hartono; Tony Irawan
  40. The Impact of the Housing Crash on Family Wealth By Dean Baker; David Rosnick
  41. Agrarian Structure and Endogenous Financial System Development By Vollrath, Dietrich
  42. The Housing Crash and the Retirement Prospects of Late Baby Boomers By Dean Baker; David Rosnick
  43. Argentina: The Crisis that Isn't By Mark Weisbrot

  1. By: Javier Gómez (IESE Business School, University of Navarra); Antonio Moreno (Universidad de Navarra); Fernando Pérez de Gracia (Universidad de Navarra)
    Abstract: In this paper we account for the U.S. Fed's response to money demand shocks by allowing for less-than-complete accommodation in the estimation of its money supply policy rule. We estimate a significantly lower degree of money accommodation in the 1979-1982 period than before and after. We identify the path of money demand and money supply shocks and show their effects on the money market, output and inflation. Both money demand and money supply shocks have been considerably less destabilizing since 1984. We also find that monetary policy was significantly pro-cyclical in the 70s. Additionally, the price puzzle disappears for two of the three subperiods considered in the study.
    Keywords: Money demand shocks, money demand accommodation, monetary policy procedures, macroeconomic dynamics
    JEL: E32 E41 E52 E58
    Date: 2008–10–11
  2. By: Balogun, Emmanuel Dele
    Abstract: This study presents an alternative reconsideration of traditional Optimum Currency Areas (OCA) macroeconomic convergence criteria as options for West African Monetary Zone (WAMZ) commencement, in the light of recent advancements in monetary theory. It presents micro-founded models, rooted in New Keynesian traditions to show that tests confirming widespread divergence from ideal macroeconomic benchmarks with unsustainable independent monetary and exchange rates pursuits and trade gravity models offer a more appropriate evaluating criterion for WAMZ than the current one, if the ultimate objective is a merger with West African Economic and Monetary Union (WAEMU). Using econometrics methods, especially pooled single equation models applied to national macroeconomic data which span 1991Q1 to 2007Q4, I evaluate the roles of past unsustainable independent national monetary and exchange rates policy pursuits as determinants of macroeconomic stabilizations (reflected by the inflation differential and output gaps/performance vis-à-vis the WAMZ area targets) and inter/intra-regional export performance. This was accompanied by the estimation of a trade gravity model. The strong convergence of aggregate output/demand pattern between WAMZ countries based on trade gravity models thus emerges as a possible positive attribute of countries participating in efficient currency areas
    Keywords: Optimum Currency Area; monetary policy; business cycles costs; exchange rates; WAM Z
    JEL: E31 E52 F33
    Date: 2008–10–31
  3. By: Modena, Matteo
    Abstract: This work extends the strand of literature that examines the relation between the term structure of interest rates and macroeconomic variables. The yield curve is summarized by few latent factors (level, slope, and curvature) which are obtained through Kalman filtering. In this paper, we address the challenging issue of attributing an economic interpretation to the third unobservable component of the term structure, i.e. curvature. In particular, we find significant evidence suggesting that curvature reflects the cyclical fluctuations of the economy. Interestingly, this result holds in spite of whether the curvature factor is extracted from the nominal or the real term structure. A negative shock to curvature seems either to anticipate or to accompany a slowdown in economic activity. The curvature effect thus appears to complement the transition from an upward sloping yield curve to a flat one. Finally, a joint macro-econometric model for curvature and real activity is developed and estimated
    Keywords: Term Structure; Kalman Filtering; Latent Factors; Curvature; Business Cycle
    JEL: C32 E32 E44
    Date: 2008–09
  4. By: Marzo, Massimiliano (Università di Bologna); Zagaglia , Paolo (Bank of Finland Research and Stockholm University)
    Abstract: Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless New Keynesian model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosanct, and that the results of Leeper (1991) are confirmed.
    Keywords: monetary policy; fiscal policy; government bonds; determinacy
    JEL: C68 E52
    Date: 2008–10–16
  5. By: Marzo , Massimiliano (Università di Bologna); Romagnoli , Silvia (Università di Bologna); Zagaglia, Paolo (Bank of Finland Research and Stockholm University)
    Abstract: We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.
    Keywords: bond pricing; fiscal policy; mathematical methods
    JEL: D90 G12
    Date: 2008–10–17
  6. By: Maria Demertzis; Massimiliano Marcellino; Nicola Viegi
    Abstract: Our objective is to identify a way of checking empirically the extent to which expectations are de-coupled from inflation, how well they might be anchored in the long run, and at what level. This methodology allows us then to identify a measure for the degree of anchorness, and as anchored expectations are associated with credibility, this will serve as a proxy for credibility. We apply this methodology to the US history of inflation since 1963 and examine how well our measure tracks the periods for which credibility is known to be either low or high. Of particular interest to the validity of the measure is the start of the Great Moderation. Following the narrative of a number of well documented incidents in this period, we check how well our measure captures both the evolution of credibility in US monetary policy, as well as reactions to inflation scares.
    Keywords: Great Inflation; Great Moderation; Anchors for Expectations
    JEL: E52 E58
    Date: 2008–11
  7. By: Shahrestani, Hamid; Sharifi-Renani, Hosein
    Abstract: The objective of this study is to estimate the demand for money in Iran using the autoregressive distributed lag (ARDL) approach to cointegration analysis. The empirical results show that there is a unique cointegrated and stable long-run relationship among M1 monetary aggregate, income, inflation and exchange rate. We find that the income elasticity and exchange rate coefficient are positive while the inflation elasticity is negative. This indicates that depreciation of domestic currency increases the demand for money, supporting the wealth effect argument and people prefer to substitute physical assets for money balances that are supporting our theoretical expectation. Our results also after incorporating the CUSUM and CUSUMSQ tests reveal that the M1 money demand function is stable between 1985 and 2006.
    Keywords: Money demand; ARDL; Stability; Iran
    JEL: E44 E4 E41
    Date: 2007–10–10
  8. By: Alfonso Palacio Vera (Universidad Complutense de Madrid. Departamento de Política Económica)
    Abstract: The literature that addresses the effects on the level of aggregate demand of changes in the degree of monopoly typically assumes away the existence of an “inflation barrier” and an inflationtargeting central bank. The presence of these two institutional factors entails that any aggregate demand change brought about by changes in the functional distribution of income will tend to be offset by changes in real interest rates. We postulate a simple macroeconomic model for a closed economy with a government sector and hypothesize that a change in the average mark up affects the inflation rate, the “inflation-barrier” and aggregate demand. The model allows for the analysis of the effects on the employment rate of demand and supply shocks when the economy exhibits asymmetric inflation dynamics (AID) and hysteresis effects. Among other results we find that, if the economy exhibits AID and hysteresis, the effect on the employment rate of a change in the mark up is likely to be either ineffectual or counterproductive even if the associated demand shock is expansionary. We also show that an inadequate functional distribution of income may lead to the occurrence of an aggregate demand deficiency problem.
    Date: 2008
  9. By: Barnett, William A.
    Abstract: This paper is the basis for the Guest Columnist article in the Tuesday, November 11, 2008 issue of the Kansas City Star newspaper's Business Weekly. Because of space limitations, the published newspaper column had to be shortened from the original and unfortunately did not include either of the two supporting figures. This is the unedited source article. The position taken by this opinion editorial is that the declining trend of total reserves during the recent period of financial crisis was counterproductive, and the declining level of the federal funds rate during that period was an inadequate indicator of Federal Reserve policy stance. But the recent startling surge in reserves potentially offsets the problem, although for reasons not motivated by the issues raised by this article. In fact, the reason for the surge is associated with the declining stock of Treasury bonds available to the Federal Reserve for sterilization of the effects of the new lending initiatives on bank reserves.
    Keywords: bubbles; bailouts; monetary policy; reserves; TAFs; sterilization; financial crisis.
    JEL: E32 G18 E52 E44 G28 E61
    Date: 2008–11–11
  10. By: Aiyar, Shekhar; Berg, Andrew; Hussain, Mumtaz
    Abstract: This paper investigates the macroeconomic challenges created by a surge in aid inflows. It develops an analytical framework for examining possible policy responses -Date increased aid, in terms of absorption and spending of aid?where the central bank controls absorption through monetary policy and the sale of foreign exchange and the fiscal authority controls spending. Different combinations of absorption and spending lead -Date different macroeconomic consequences. Evidence Date five countries that recently experienced an aid surge (Ethiopia, Ghana, Tanzania, Mozambique and Uganda) shows no support for aid-related real exchange rate appreciation in these countries, but indicates that the fear of Dutch disease played an important part in the policy reaction -Date aid surges. Fiscal and monetary authorities should coordinate their responses -Date an aid surge, because an uncoordinated response?typically when fiscal authority wants -Date spend aid while the central bank wants -Date avoid exchange rate appreciation?can have serious negative macroeconomic consequences.
    Keywords: aid, exchange rate, aid absorption, policy
    Date: 2008
  11. By: Adam, Chris-Datepher S.; Buffie, Edward; O'Connell, Stephen; Pattillo, Catherine
    Abstract: We examine the properties of alternative monetary policy rules in response -Date large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic s-Datechastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative -Date a range of conventional alternatives, including those involving heavy reliance on bond sterilization or a commitment -Date a pure exchange rate float. These simple rules, which are shown -Date be robust across a range of fiscal responses -Date aid inflows, appear -Date be consistent with actual responses -Date recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.
    Keywords: monetary policy, currency substitution, aid, Africa, DSGE models
    Date: 2008
  12. By: Ignacio Lozano
    Abstract: Evidence of the causal long-term relationship between budget deficit, money growth and inflation in Colombia is analyzed in this paper, considering the standard (M1), the narrowest (M0-Base) and the broadest (M3) definitions of money supply. Using a vector error correction (VEC) model with quarterly data over the last 25 years, the study found a close relationship between inflation and money growth on the one hand, and between money growth and fiscal deficit, on the other. The size of the long-term parameters looks acceptable, particularly when compared to what is seen in other countries, using analogous or different techniques. The conclusion, supported by several statistical tests, is that the Sargent and Wallace hypothesis would be the most appropriate approach to understanding the dynamics of these variables.
    Date: 2008–11–09
  13. By: Elena Angelini; Gonzalo Camba-Mendez; Domenico Giannone; Lucrezia Reichlin; Gerhard Rünstler
    Abstract: This paper evaluates models that exploit timely monthly releases to compute early estimates of current quarter GDP (now-casting) in the euro area. We compare traditional methods used at institutions with a new method proposed by Giannone, Reichlin, and Small (2005). The method consists in bridging quarterly GDP with monthly data via a regression on factors extracted from a large panel of monthly series with different publication lags. We show that bridging via factors produces more accurate estimates than traditional bridge equations. We also show that survey data and other ‘soft’ information are valuable for now-casting.
    Keywords: Forecasting, Monetary Policy, Factor Model, Real Time Data, Large data-sets, News
    JEL: E52 C33 C53
    Date: 2008
  14. By: Candelon Bertrand; Muysken Joan; Vermeulen Robert (METEOR)
    Abstract: By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy has remained procyclical after 1992. This result contradicts the previous findings of Galí and Perotti (2003). It also appears that fiscal rules differ between large and small countries; large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy exhibits different behaviour when facing supply or demand constraints. A procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline.
    Keywords: Economics (Jel: A)
    Date: 2008
  15. By: Christopher Martin (Brunel University, Uxbridge, UK); Costas Milas (Keele University, Staffordshire, UK and The Rimini Centre for Economic Analysis, Italy)
    Abstract: The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis.
    Keywords: optimal monetary policy; sub-prime crisis
    JEL: C51 C52 E52 E58
    Date: 2008–01
  16. By: Nunes, Ricardo
    Abstract: This paper analyzes and compares the performance of different delegation schemes when the central bank has imperfect commitment. A continuum of loose commitment possibilities is considered ranging from full commitment to full discretion. The results show that the performance of inflation targeting improves substantially with higher commitment levels. On the other hand, the performance of other targeting regimes does not necessarily improve with the commitment level of the central bank. While it was previously thought that inflation targeting is inferior to other targeting regimes, the results show that it can be the best performing regime as long as the commitment level is not too low. These results may provide a theoretical explanation for the high popularity of inflation targeting among central banks.
    Keywords: Targeting Regimes; Imperfect Commitment
    JEL: E58 E52 E61
    Date: 2008–10
  17. By: Graeme Donald Snooks
    Abstract: Once again the economic experts are telling us that the current (October 2008) financial “crisis” will lead to a deep recession or depression. The financial press is even claiming that we are headed for “global meltdown”. Heard it all before? The last time was in 1998 when we were told that the financial difficulties in the East would generate the “East Asian meltdown”, which would last for at least a decade and would generate a “global economic crisis”. The economic summit called by President Bush for later in 2008 is reminiscent of the G7 and G22 meetings called to discuss similar issues in 1998. And yet nothing happened. Of course the financial gurus, such as Alan Greenspan were quick to claim the credit, but the truth is that financial crises are supply-side happenings that generate a lot of excitement among the stock market speculators but have little real-world fallout as long as the dynamic strategies being pursued by the world’s leading societies are viable. The stock market crash of 1987 is another case in point: nothing serious happened in the real economy. Depressions only occur when dominant dynamic strategies are finally exhausted and new ones are slow to emerge: as happened in the USA during the 1920s and 1930s. The conventional wisdom among the orthodox economic fraternity, that the Great Depression was the outcome of the 1929 Wall Street crash, is totally incorrect. Economists and their political masters will only understand the relationship between recession, depression, and financial crisis, when they have developed a realist general dynamic theory of human society. Until then, economic policy will be confused, ineffective, and distorting. A general dynamic theory is presented in this paper and used to analyse financial crises and economic downturns. To the degree that the real global economy is in trouble, it is due not to financial mismanagement, but to the misconceived policy of inflation targeting pursued for the past decade or so. Once again, our compulsion to intervene exceeds our capacity to understand the implications of our actions.
    Keywords: financial crisis, depression, dynamic-strategy theory, inflation targeting, economic policy, global meltdown.
    JEL: O40 O50 O43 E31 E32 E42 E50 E60
    Date: 2008–10
  18. By: Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
    Abstract: We show that a ‡ex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.
    Keywords: Current account dynamics, real exchange rates, incomplete markets, financial frictions.
    JEL: E32 F32 F41
    Date: 2008–11
  19. By: Nikolay Arefiev
    Abstract: The contemporary version of the dynamic Ramsey problem omits expectations of a household’s initial lump-sum wealth taxation due to policy revision; therefore, the attainable resource allocation set in this problem is ill-defined. This omission leads to misleading conclusions about the optimal policy in the short run and, in particular, that the Ramsey policy is dynamically inconsistent. The effect of introducing the expectations into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only an unexpected policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of an optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.
    Keywords: Consistency, Equilibrium policy, Optimal taxation
    JEL: E61 E62 H21
    Date: 2008–10–26
  20. By: Marco, Taboga
    Abstract: Around the turn of the Twentieth century, US and euro area long-term bond yields experienced a remarkable decline and remained at historically low levels even in the face of rising short-term rates (the so called "conundrum"). This unusual phenomenon has been analyzed by many researchers through the lens of macro-finance VARs and no-arbitrage term structure models. A commonly found result is that the decline in long-term rates was primarily driven by an unprecedented reduction in risk premia. I show that such result might be an artefact of the class of models employed to study the phenomenon. I propose an alternative model which suggests that, although risk premia played an important role in reducing bond yields, other two equally important forces were at play, i.e. a decline in the real natural rate of interest and a structural reduction in inflation expectations. I conclude that, after accounting for permanent shifts in the expectations about the future path of short-term rates, the dynamics of risk premia observed after the turn of the century have not been unusual if considered from an historical perspective.
    Keywords: Bond yields; forward premia; macro-finance models.
    JEL: E0 C32 G12
    Date: 2008–11–14
  21. By: Xavier Ragot
    Abstract: The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels, even controlling for life-cycle effects. This is a puzzle for theories which directly link money demand to consumption, such as cash-in-advance (CIA), money-in-the-utility function (MIUF) or shopping-time models. This paper shows that the joint distribution of money and nancial assets can be explained by an incomplete-market model when frictions are introduced into financial markets. Money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets.
    Date: 2008
  22. By: Badibanga, Thaddee M.
    Abstract: Since the abolition of its Apartheid regime in 1994, South Africa has launched a massive program of education, which has been financed through resources representing on average 21% of the national budget or 7% of GDP. Today, the GDP share of public spending on education is 1.3 times the average of industrialized countries (5.4%) and almost twice that of developing countries (3.9%). In this paper, we simulate fiscal policy experiments to analyze the growth and welfare effects of a shift in the allocation of government expenditures between public spending on education and transfers as well as those of a change in the tax rate in a model of endogenous growth with human capital accumulation for the South African economy. The results of simulations demonstrate that a shift in the allocation of fiscal resources between educational spending and transfers does not affect the long run allocation decisions. In the transition, however, this shift generates a negative effect on the rate of growth of GDP. In fact, a reallocation of expenditures shifts resources away from saving and toward consumption, and translate into lower rate of growth but higher welfare. Nonetheless, these growth and welfare effects are very small. On the other hand, a tax cut generates growth effects in the long run as well as in transition. In fact, reducing or cutting the tax rate in the long run lowers the interest rate, which in turn creates disincentives for saving and results in low rate of growth of GDP. However, in the transition, it reduces or removes distortions and translates into high work effort, high accumulation of human capital, and thus high rate of growth of GDP. Nonetheless, its welfare effect is negative.
    Keywords: Fiscal Policy, Government Expenditures and Education, Growth Model, International Development, Labor and Human Capital, E62, H52, O41,
    Date: 2008
  23. By: Fougere, Denis; Gautier, Erwan; Le Bihan, Herve
    Abstract: We examine the effect of the minimum wage on restaurant prices. For that purpose, we estimate a price rigidity model by exploiting a unique data set of individual price quotes used to calculate the Consumer Price Index in France. We …find a positive and signifi…cant impact of the minimum wage on prices. We obtain that the effect of the minimum wage on prices is very protracted. The aggregate impact estimated with our model takes more than a year to fully pass through to retail prices.
    Keywords: Price stickiness, minimum wage, inflation, restaurant prices, Demand and Price Analysis, Industrial Organization,
    Date: 2008–10
  24. By: J. David Brown (Heriot-Watt University); John S. Earle (W.E. Upjohn Institute for Employment Research and Central European University)
    Abstract: We analyze comprehensive manufacturing firm data to measure the contribution of inter-firm employment reallocation to aggregate productivity growth during the socialist and reform periods in six transition economies. Modifying a standard decomposition technique to better reflect the role of firm entry, we find that reallocation rates and productivity contributions are very low under socialism, but they rise dramatically after reforms, and productivity contributions greatly exceed those observed in market economies. Early in transition, more reform is associated with larger contributions from reallocation, but later, and on average over the whole transition, this relationship is reversed. Though reallocation rates are larger in faster reforming economies, higher productivity dispersion in slower reformers creates higher productivity gains for a given volume of reallocation. The results imply that reallocation should be viewed as necessary regular maintenance for a well-functioning economy, and patticularly large productivity contributions tend to reflect previous neglect more than current virtue.
    Keywords: productivity, reallocation, industry dynamics, entry, exit, creative destruction, reform, transition, Georgia, Hungary, Lithuania, Romania, Russia, Ukraine
    JEL: E32 O47 P23
    Date: 2008–08
  25. By: Marta Banbura; Domenico Giannone; Lucrezia Reichlin
    Abstract: This paper shows that Vector Autoregression with Bayesian shrinkage is an appropriate tool for large dynamic models. We build on the results by De Mol, Giannone, and Reichlin (2008) and show that, when the degree of shrinkage is set in relation to the cross-sectional dimension, the forecasting performance of small monetary VARs can be improved by adding additional macroeconomic variables and sectoral information. In addition, we show that large VARs with shrinkage produce credible impulse responses and are suitable for structural analysis.
    Keywords: Bayesian VAR, Forecasting, Monetary VAR, large cross-sections
    JEL: C11 C13 C33 C53
    Date: 2008
  26. By: Dimitrios Thomakos
    Abstract: In this paper I consider the problem of optimal linear filtering, smoothing and trend extraction for m-period differences of processes with a unit root. Such processes arise naturally in economics and finance, in the form of rates of change (price inflation, economic growth, financial returns) and finding an appropriate smoother is thus of immediate practical interest. The filter and resulting smoother are based on the methodology of Singular Spectrum Analysis (SSA) and their form and properties are examined in detail. In particular, I find explicit representations for the asymptotic decomposition of the covariance matrix and show that the first two leading eigenvalues of the decomposition account for over 90% of the variability of the process. I examine the structure of the impulse and frequency response functions finding that the optimal filter has a “permanent” and a “transitory component” with the corresponding smoother being the sum of two such components. I also find explicit representations for the extrapolation coefficients that can be used in out-of-sample prediction. The methodology of the paper is illustrated with three short empirical applications using data on U.S. inflation and real GDP growth and data on the Euro/US dollar exchange rate. Finally, the paper contains a new technical result: I derive explicit representations for the filtering weights in the context of SSA for an arbitrary covariance matrix. This result allows one to examine specific effects of smoothing in any situation and has not appeared so far, to the best of my knowledge, in the related literature.
    Keywords: core inflation, business cycles, differences, euro, linear filtering, singular spectrum analysis, smoothing, trading strategies, trend extraction and prediction, unit root.
    Date: 2008
  27. By: Eric BERR (GREThA UMR CNRS 5113)
    Abstract: While sustainable development is a unanimously accepted watchword today, we wish to show that the post Keynesian school, even if it did not emphasize on environmental issues and, generally speaking, on sustainable development as such, has tools that make it relevant on this topic. Indeed, post Keynesian sustainable development can be close to Sachs’ ecodevelopment, which is inspired by Kalecki. Thus, post Keynesianism and ecodevelopment share the same position related to economic growth. They meet, via the concept of radical uncertainty, on the importance of the precautionary principle. If the implications of the principle of effective demand seem to oppose them, these divergences can be easily overcome.
    Keywords: ustainable development, ecodevelopment, Kalecki, Keynes, Sachs, post Keynesian
    JEL: B59 E12 O11
    Date: 2008
  28. By: Eric BERR ( (GREThA-GRES)
    Abstract: While sustainable development is a unanimously accepted watchword today, we wish to show that the post Keynesian school, even if it did not emphasize on environmental issues and, generally speaking, on sustainable development as such, has tools that make it relevant on this topic. Indeed, post Keynesian sustainable development can be close to Sachs’ ecodevelopment, which is inspired by Kalecki. Thus, post Keynesianism and ecodevelopment share the same position related to economic growth. They meet, via the concept of radical uncertainty, on the importance of the precautionary principle. If the implications of the principle of effective demand seem to oppose them, these divergences can be easily overcome.
    Keywords: sustainable development, ecodevelopment, Kalecki, Keynes, Sachs, post Keynesian
    JEL: B30 B59 E12 O11
    Date: 2008
  29. By: Mario Forni; Domenico Giannone; Marco Lippi; Lucrezia Reichlin
    Abstract: This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We argue that all identification schemes employed in SVAR analysis can be easily adapted in dynamic factor models. Moreover, the “problem of fundamentalness”, which is intractable in structural VARs, can be solved, provided that the impulse-response functions are sufficiently heterogeneous. We provide consistent estimators for the impulse-response functions, as well as (n, T) rates of convergence. An exercise with US macroeconomic data shows that our solution of the fundamentalness problem may have important empirical consequences.
    Keywords: Dynamic factor models, structural VARs, identification, fundamentalness
    JEL: E0 C1
    Date: 2008
  30. By: Lucchetti, Riccardo; Palomba, Giulio
    Abstract: Starting from the work by Campbell and Shiller (1987), empirical analysis of interest rates has been conducted in the framework of cointegration. However, parts of this approach have been questioned recently, as the adjustment mechanism may not follow a simple linear rule; another line of criticism points out that stationarity of the spreads is difficult to maintain empirically. In this paper, we analyse data on US bond yields by means of an augmented VAR specification which approximates a generic nonlinear adjustment model. We argue that nonlinearity captures macro information via the shape of the yield curve and thus provides an alternative explanation for some findings recently appeared in the literature. Moreover, we show how conditional heteroskedasticity can be taken into account via GARCH specifications for the conditional variance, either univariate and multivariate.
    Keywords: interest rates; cointegration; nonlinear adjustment; conditional heteroskedasticity
    JEL: C51 C32 E43
    Date: 2008
  31. By: Crespi, John M.; Xia, Tian; Jones, Rodney
    Abstract: Cattle production follows a dynamic cycle that has often been analyzed, and cattle markets receive much scrutiny because of the potential for buyer market power. The relationship between the two has been little studied, however. This paper provides a simple conceptual framework to study how the cattle cycle and market concentration jointly affect the bargaining power of producers and packers yielding the following main results. Not surprisingly, a larger cattle stock reduces producers' bargaining position, which results in a lower fed cattle price. More importantly, however, the cattle stock's negative effect on price is magnified by the market concentration in beef packing. Thus, the cycle itself is very importantly related to a posited cycle of bargaining power between cattle producers and beef packers. Secondly, the model also shows how beef packers may use the special feature of cattle as both consumption and capital goods to lower the cattle price by influencing cattle inventories.
    Keywords: Livestock Production/Industries,
    Date: 2008
  32. By: Stephen G. Cecchetti; Kermit L. Schoenholtz
    Abstract: In this history of the first decade of ECB policy, we also discuss key challenges for the next decade. Beyond the ECB's track record and an array of published critiques, our analysis relies on unique source material: extensive interviews with current and former ECB leaders and with other policymakers and scholars who viewed the evolution of the ECB from privileged vantage points. We share the assessment of our interviewees that the ECB has enjoyed many more successes than disappointments. These successes reflect both the ECB's design and implementation. Looking forward, we highlight the unique challenges posed by enlargement and, especially, by the euro area's complex arrangements for guarding financial stability. In the latter case, the key issues are coordination in a crisis and harmonization of procedures. As several interviewees suggested, in the absence of a new organizational structure for securing financial stability, the current one will need to function as if it were a single entity.<br><br><i><b><font size="3">Note to readers: The final version of this paper was completed in June 2008. </i></b></font>
    JEL: E42 E58
    Date: 2008–11
  33. By: Aoki, Shuhei
    Abstract: This paper develops a simple accounting framework that measures the effect of resource misallocation on aggregate productivity. This framework is based on a multi-sector general equilibrium model with sector-specific frictions in the form of taxes on sectoral factor inputs. Our framework is flexible for the assumption on preferences or aggregate production functions. Moreover, this framework is consistent with that commonly used in productivity analysis. I apply this framework to measure to what extent resource misallocation explains the differences in aggregate productivity across developed countries. I find that resource misallocation explains, on average, about 25% of the differences in the measured aggregate productivity among developed countries. I also provide methods to decompose the causes of the misallocation effect.
    Keywords: distortions; frictions; productivity; resource allocation
    JEL: O11 O41 O47 E23
    Date: 2008–10–26
  34. By: Lau, Chi-Lei Oscar
    Abstract: A disturbing feature of the conventional objective function for intertemporal decisions under uncertainty is that the agent's attitudes toward intertemporal substitution and risk aversion are entangled. This paper shows that, in contrast to common perception, the two attitudes can be completely disentangled under the expected utility theorem (EUT) by modeling each of them successively in two steps. The conventional form is nested as a special case where the functions describing the two attitudes are identical. The proposed framework requires only the standard axioms of the EUT, in addition to a regulatory assumption. It is flexible in accommodating different combinations of the two attitudes, indifferent to the timing of resolution of uncertainty, intuitive to interpret, and extendable to multiple goods. The objective function under the proposed framework is time inconsistent according to Strotz's (1955) definition. I argue that Strotz's notion of time consistency is misguided. It is constructed based on a priori assumption that the agent should continuously forget history as time progresses. But this means the agent is either chronically amnesiac or self-contradictory. To be truly consistent, the agent should have one and only one objective function, determined at birth, throughout his entire life. As history unfolds, the agent updates his information set, but not his objective function.
    Keywords: Intertemporal substitution; Risk aversion; Expected utility theorem; Time consistency; Equity premium puzzle
    JEL: D81 G12 D91 E21
    Date: 2008–11–06
  35. By: Andrew Leigh; Alberto Posso
    Abstract: The relationship between income inequality and national savings is theoretically ambiguous, and past empirical studies have delivered mixed results. We revisit the question using a newly available source of data on inequality: the income share of the richest 10 percent and the richest 1 percent. Combining this with historical data on national savings rates, we are able to investigate the relationship for eleven developed countries over the period 1921-2002. We find no consistent relationship between lagged top income shares and current savings rates, and our standard errors are small enough that we are able to reject more than modest effects in either direction. We view this as suggesting that inequality at the top end of the distribution is not a major driver of national savings rates.
    Keywords: national savings; inequality; top incomes; panel data
    JEL: D30 E21 O50
    Date: 2008–10
  36. By: Muhammad, Zakaria
    Abstract: The paper critically evaluates investment climate in Pakistan. It covers incentives given by the government to domestic and foreign investors. Special emphasis is placed on identifying the barriers that discourage investment in Pakistan. Major impediments include high doing business cost, political instability, corruption, government bureaucracy, inconsistent government policies, and poor law and order situation. The paper also highlights some international best practice solutions to encourage investment in the country. Pakistan should attach short-term priority to attracting investment to foreign exchange earning sector or at least both the foreign exchange earning sector and other sectors simultaneously.
    Keywords: Growth; Foreign Investment; Portfolio Investment
    JEL: H54 E22 F21
    Date: 2008–11–12
  37. By: dobrota, gabriela; chirculescu, felicia maria
    Abstract: It's interesting how an economic operator decides to depreciate its depreciable fixed assets, because depreciation is an expense input from the taxable profit in accordance with the laws in force, thus contributing to diminishing the operating profit/loss and implicitly the gross and net earnings, without real impact on profitability and especially without any impact on the self-funding capacity. But the impact given by the depreciation expenses may be influenced by the organization policy in the field of depreciation and by the fiscal laws.
    Keywords: depreciable fixed assets; profit; loss; fiscal law
    JEL: L25 E26 P16
    Date: 2008–01–08
  38. By: Jens Arnold; Cyrille Schwellnus
    Abstract: This paper uses a stratified sample of firms across OECD economies over the period 1996-2004 to analyse the effects of corporate taxes on productivity and investment. Applying a differences-in-differences estimation strategy which exploits differential effects of corporate taxes on firms with different profitability, it is found that corporate taxes have a negative effect on productivity at the firm level. The effect is negative across firms of different size and age classes except for the small and young, which may be attributable to the relatively low profitability of small and young firms. The negative effect of corporate taxes is particularly pronounced for firms that are catching up with the technological frontier. In the investment analysis, the results suggest that corporate taxes reduce investment through an increase in the user cost of capital. This may partly explain the negative productivity effects of corporate taxes if new capital goods embody technological change.
    Keywords: Productivity; growth; corporate income tax; firm level data; fiscal policy
    JEL: D21 D24 E22 E62 H25 H32
    Date: 2008–09
  39. By: Djoni Hartono (Department of Economics, University of Indonesia); Tony Irawan (Department of Economics,Faculty of Economics and Management; Bogor Agricultural University)
    Abstract: The decentralization policy has been implemented for almost 8 years in Indonesia. One of the main purposes of decentralization policy was to increase economic growth followed by equality. In this paper, we construct gini coefficient and Theil indices of sector income distribution to evaluate the trend of Indonesian income inequality during the implementation of the policy. We will analyze the equality between sector and within sector (e.q. agriculture, industry and services) both in the country and province level data. The output of this study is expected could answer the question whether there is a growth with equality during the implementation of decentralization both between and within sector.
    Keywords: Decentralization, Inequality, Theil indices
    JEL: E62 I32
    Date: 2008–10
  40. By: Dean Baker; David Rosnick
    Abstract: This paper extrapolates from data from the 2004 Survey of Consumer Finance to project household wealth, by wealth quintile, in 2009 under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average. The projections show that the vast majority of families will see a substantial reduction in wealth by 2009 in any of these scenarios and that the cohorts just approaching retirement will have very little to support themselves in retirement other than their Social Security. The projections also show that a large number of families will have little or no equity in their homes in 2009.
    Keywords: housing bubble, home prices, household wealth
    JEL: R21 L85 O51 E E21
    Date: 2008–07
  41. By: Vollrath, Dietrich
    Abstract: The development of the financial system is shown, both historically and in contemporary data, to be adversely affected by inequality in the distribution of land. To accommodate these empirical findings, a theory is developed that highlights the incentives of landowners to oppose competition in the financial sector. The theory provides an explanation for the co-incident development of the financial sector and overall economy.
    Keywords: Land distribution; financial development; overlapping generations; financial institutions
    JEL: E25 G18 N2 O4
    Date: 2008–11–11
  42. By: Dean Baker; David Rosnick
    Abstract: This paper extrapolates from data from the 2004 Survey of Consumer Finance to project household wealth, by wealth quintile, for the cohort that will be between the ages of 45-54 in 2009 under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average. The projections show that the vast majority of families in these age cohorts will have little or no wealth by 2009 in any of these scenarios and that the cohorts just approaching retirement will have very little to support themselves in retirement other than their Social Security. The projections also show that a large number of families in these age cohorts will have little or no equity in their homes in 2009. Finally, the projections show that the renters within the same wealth quintiles in 2004 will have more wealth in 2009 than homeowners in all three scenarios.
    Keywords: housing bubble, retirement, home equity, household wealth
    JEL: R21 L85 O51 E E21
    Date: 2008–06
  43. By: Mark Weisbrot
    Abstract: This report looks at Argentina’s current debt, fiscal, and overall economic situation to see if there is justification for concerns that Argentina is facing serious economic problems that could lead to a default on its sovereign debt. The Argentine economy has grown more than 60 percent since its recovery began six years ago, has trade and current account surpluses, and has declining levels of debt relative to GDP and other indicators. It also has a large amount of reserves relative to potential debt financing shortfalls. The paper finds that there is little or no basis for the fear that Argentina might default on its sovereign debt at any time in the foreseeable future, or indeed even the more distant future.
    Keywords: Argentina, Argentina crisis, Argentina debt
    JEL: E H F O H60 H50 F50 O54
    Date: 2008–10

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