nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒11‒25
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Policy Design under Imperfect Knowledge: An Open Economy Analysis By Yu-chin Chen; Pisut Kulthanavit
  2. Inflation persistence in the Franc Zone: evidence from disaggregated prices By Simeon Coleman
  3. Monetary Policy and European Unemployment By Ronald Schettkat; Rongrong Sun
  4. Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model By Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
  5. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  6. Do Nominal Rigidities Matter for the Transmission of Technology Shocks? By Zheng Liu; Louis Phaneuf
  7. On Financial Markets Incompleteness, Price Stickiness, and Welfare in a Monetary Union ? By Stéphane Auray; Aurélien Eyquem
  8. The Spirit of Capitalism and Expectation Driven Business Cycles By Lilia Karnizova
  9. New Keynesian Endogenous Stabilization in a Panel of Countries By David Kiefer
  10. Comparing the New Keynesian Phillips Curve with Time Series Models to Forecast Inflation By Fabio Rumler; Maria Teresa Valderrama
  11. On The Road to Monetary Union – Do Arab Gulf Cooperation Council Economies React in the same way to United States' Monetary Policy Shocks? By Louis, Rosmy; Osman, Mohammad; Balli, FAruk
  12. Assessing Spill-Over Effects of U.S. Monetary Policy and Macroeconomic Announcements on Financial Markets in Argentina By Bernd Hayo; Matthias Neuenkirch
  13. The End of the Great Moderation: “We told you so.” By Barnett, William A.; Chauvet, Marcelle
  14. Effect of Government Spending and Macro-Economic Uncertainty on Private Investment in Services Sector: Evidence from Pakistan By Ahmed, Imtaiz; Qayyum, Abdul
  15. Is the Great Moderation Ending? UK and US Evidence. By Giorgio Canarella; WenShwo Fang; Stephen M. Miller; Stephen K. Pollard
  16. On the role of progressive taxation in a Ramsey Model with heterogeneous households. By Stefano Bosi; Thomas Seegmuller
  17. The impact of unstable aids on consumption volatility in developing countries By Kodama, Masahiro
  18. The effect of the great moderation on the U.S. business cycle in a time-varying multivariate trend-cycle model By Drew Creal; Siem Jan Koopman; Eric Zivot
  19. Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real Time Data are Available By Nilss Olekalns; Kalvinder Shields
  20. Monetary Union Among Arab Gulf Cooperation Council (AGCC) Countries: Does the symmetry of shocks extend to the non-oil sector? By Louis, Rosmy; Balli, Faruk; Osman, Mohammad
  21. Macroeconomic determinants of agricultural preferential investment credit in Poland By Danilowska, Alina
  22. Private investment in guinea, does macro-instability matter? A comparative analysis By Sanogo, Issa; Gyengani, Zakaria
  23. Prices and output co-movements : an empirical investigation for the CEECs. By Iuliana Matei
  24. Which Output Gap Measure Matters for the Arab Gulf Cooperation Council Countries (AGCC): The Overall GDP Output Gap or the Non-Oil Sector Output Gap? By Osman, Mohammad; Louis, Rosmy; Balli, Faruk
  25. What Broke the Bubble? By William Barnett
  26. Openness, imported commodities and the Phillips Curve By Andrew Pickering; Hector Valle
  27. What Drives the NAIRU? Evidence from a Panel of OECD Countries By Christian Gianella; Isabell Koske; Elena Rusticelli; Olivier Chatal
  28. Price adjustments in a general model of state-dependent pricing By James Costain; Antón Nákov
  29. Geographic Deregulation and Commerical Bank Performance in US State Banking Markets By YongDong Zou; Stephen M. Miller; Bernard Malamud
  30. An Exploration of the Japanese Slowdown during the 1990s By Diego A. Comin
  31. State & Territory Beveridge Curvesand the National Equilibrium Unemployment Rate By Robert Dixon; John Freebairn; Emayenesh Seyoum-Tegegn
  32. Economic Activity and the Stock Market: The Asymmetric Impact of Fundamental and Non-Fundamental News By Ólan Henry; Nilss Olekalns; Kalvinder Shields
  33. Bootstrap Panel Granger-Causality Between Government Spending and Revenue By António Afonso; Cristophe Rault
  34. Stabilization Theory and Policy: 50 Years after the Phillips Curve By Stephen J. Turnovsky
  35. The Changing Relation Between the Canadian and U.S. Yield Curves By Kathlyn Lucia; Stephanie Price; Edwin Wong; Richard Startz
  36. A Comment on Weak Instrument Robust Tests in GMM and the New Keynesian Phillips Curve By Eric Zivot; Saraswata Chaudhuri
  37. What does a financial system say about future economic growth? By Grabowski, Szymon
  38. Imbalances in China and U.S. Capital Flows By Tatom, John
  39. An International Rule System to Avoid Financial Instability By Horst Siebert
  40. Directed Search, Unemployment and Public Policy By Benoit Julien; John Kennes; Ian King; Sephorah Mangin
  41. Financial Development and Wage Inequality: Theory and Evidence By Jerzmanowski, Michal; Nabar, Malhar
  42. Employment Flows with Endogenous Financing Constraints By Shuyun May Li
  43. Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks? By João Ejarque; Søren Leth-Petersen
  44. Costly External Finance, Reallocation, and Aggregate Productivity By Shuyun May Li
  45. Forward and Backward Dynamics in implicitly defi…ned Overlapping Generations Models By Laura Gardini; Cars Hommes; Fabio Tramontana; Robin de Vilder
  46. Impact of exchange rate shock on prices of imports and exports By Duasa, Jarita
  47. The ECB and IMF indicators for the macro-prudential analysis of the banking sector: a comparison of the two approaches By Anna Maria Agresti; Patrizia Baudino; Paolo Poloni
  48. THE SIGMOIDAL INVESTMENT FUNCTION By Yuzo Honda; Kazuyuki Suzuki
  49. Budgetary and External Imbalances Relationship : a Panel Data Diagnostic By António Afonso; Christophe Rault
  50. Estimating the dynamics of R&D-based growth models By YATSENKO, Yuri; BOUCEKKINE, Raouf; HRITONENKO, Natali
  51. Optimal investment models with vintage capital: Dynamic Programming approach By Silvia Faggian; Fausto Gozzi
  52. A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance By Casey B. Mulligan
  53. On the Real Exchange Rate Effects of Higher Electricity Prices in South Africa By Jan van Heerden; James Blignaut; Andre Jordaan
  54. Credit Crunch: A Lesson from the Japanese Case By Daisuke Ishikawa; Yoshiro Tsutsui
  55. Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice By Poschke, Markus
  56. Understanding PPPs and PPP-based national accounts By Angus Deaton; Alan Heston

  1. By: Yu-chin Chen (University of Washington); Pisut Kulthanavit (University of Washington)
    Abstract: This paper incorporates adaptive learning into a standard New-Keynesian open economy dynamic stochastic general equilibrium (DSGE) model and analyze under what conditions policymakers should target domestic producer price inflation (DI) versus consumer price inflation (CI). Our goal is to examine how monetary policy rules should adjust when agents’ information sets deviate from those assumed under the rational expectation paradigm. When agents form expectations using an adaptive learning mechanism, even though the central bank has no informational advantage, monetary policy can nonetheless facilitate the learning process and thus mitigate distortions associated with imperfect knowledge. We assume the policy-maker follows a forwardlooking Taylor rule and focus on analyzing the interplay between the source of the dominant shock and the extent of knowledge imperfection. We find that when agents have very limited knowledge and have to learn the dynamics governing both the relevant economic indicators and the underlying structural shocks, a DI targeting rule introduces fewer forecast errors and is better at stabilizing the economy. However, when agents can observe contemporaneous shocks and need only learn how key economic variables evolve (a situation akin to a post-structural-shift economy), targeting away from the dominant shocks helps anchor expectations and improve welfare. A CI target can then become the preferred policy rule when the economy is subject to large domestic shocks.
    Date: 2008–05
  2. By: Simeon Coleman
    Abstract: In sub-Saharan Africa, where inflation persistence is likely to have deleterious welfare consequences, little attempt has been made to study this phenomenon. Using data over 1989:11-2002:09, this paper investigates persistence in disaggre- gated (food and non-food) inflation for thirteen Communaute Financiere Africaine (CFA) member states using fractional integration (FI) methods. The results show that both inflation series are characterized by mean-reversion and finite variance, however it also exposes some asymmetry in inflation persistence across member states in both sectors. In Chad and Niger, the phenomenon is found to exist in both sectors. With uniform monetary policy across member states, implications for Monetary Policy, Nominal Convergence and Optimal Currency Area are then discussed.
    Keywords: Fractional integration, inflation persistence, Franc Zone
    JEL: C22 E31 E32
    Date: 2008–11
  3. By: Ronald Schettkat (Department of Economics University of Wuppertal); Rongrong Sun (Department of Economics University of Wuppertal)
    Abstract: In the long history of rising and persistent unemployment in Europe almost all institutions - employment protection legislation, unions, wages, wage structure, unemployment insurance, etc. - have been alleged and found guilty to have caused this tragic development at some point in time. Later, welfare state institutions in interaction with external shocks were identified as more plausible causes for rising equilibrium unemployment in Europe. Monetary policy has managed to be regarded as innocent. Based on the assertion of the neutrality of money in the medium and long run, the search for causes of European unemployment has shied away from the policy of central banks. But actually the institutional setup regarding monetary policy is very different between the FED and the Bundesbank (ECB). We argue that the interaction of negative external shocks and tight monetary policies may have been the major - although probably not the only - cause of unemployment in Europe remaining at ever higher levels after each recession. We identify the monetary policy of the Bundesbank as asymmetrical in the sense that the Bank did not actively fight against recessions, but that it dampened recovery periods. Less constraint on growth would have kept German unemployment at lower levels.
    Keywords: Production, Employment, Unemployment, Monetary Policy, Central Banks and Their Policies
    JEL: E23 E24 E42 E43 E52 E58
    Date: 2008–10
  4. By: Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
    Abstract: This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank's empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
    JEL: E52 E58 F33 F41
    Date: 2008–11
  5. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of the simple sum monetary aggregates and the Divisia monetary aggregate indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although traditional comparisons of the series sometimes suggest that simple sum and Divisia monetary aggregates share similar dynamics, there are important differences during certain periods, such as around turning points. These differences cannot be evaluated by their average behavior. We use a factor model with regime switching. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each individual series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors reveal where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginnings and ends of economic recessions, and during some high interest rate phases. We note the inferences’ policy relevance, which is particularly dramatic at the broadest (M3) level of aggregation. Indeed, as Belongia (1996) has observed in this regard, “measurement matters.”
    Keywords: Measurement Error, Divisia Index, Aggregation, State Space, Markov Switching, Monetary Policy
    JEL: E51 C30 E4
    Date: 2008–08–06
  6. By: Zheng Liu; Louis Phaneuf
    Abstract: A commonly held view is that nominal rigidities are important for the transmission of monetary policy shocks. We argue that they are also important for understanding the dynamic effects of technology shocks, especially on labor hours, wages, and prices. Based on a dynamic general equilibrium framework, our closed-form solutions reveal that a pure sticky-price model predicts correctly that hours decline following a positive technology shock, but fails to generate the observed gradual rise in the real wage and the near-constance of the nominal wage; a pure sticky-wage model does well in generating slow adjustments in the nominal wage, but it does not generate plausible dynamics of hours and the real wage. A model with both types of nominal rigidities is more successful in replicating the empirical evidence about hours, wages and prices. This finding is robust for a wide range of parameter values, including a relatively small Frisch elasticity of hours and a relatively high frequency of price reoptimization that are consistent with microeconomic evidence.
    Keywords: Technology shock, nominal rigidities, monetary policy
    JEL: E31 E32
    Date: 2008
  7. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France)
    Abstract: The paper builds a two-country model of a monetary union with home bias and price stickiness. Incompleteness of financial asset markets is allowed. In this environment, we derive the solution for optimal behavior by the monetary policymaker and show that welfare can be higher under incomplete markets than under complete markets. The argument is a second- best one. In a monetary union with equal nominal rigidity across countries, optimal monetary policy stabilizes aggregate, union-wide inflation, but cannot fully stabilize the country-level inflation rates. Market incompleteness results in less volatility of the terms of trade (because part of the adjustment goes through the current account), and hence less volatile national inflation rates. Through this channel, welfare ends up being higher under incomplete markets. These results are also robust when nominal rigidity differs across countries and when the form of the monetary policy is modified.
    Keywords: monetary union, asymmetric shocks, financial market incompleteness, price stickiness, welfare
    JEL: E51 E58 F36 F41
    Date: 2008
  8. By: Lilia Karnizova (Department of Economics, University of Ottawa)
    Abstract: While news shocks are believed to be instrumental in explaining business cycles, many existing models fail to predict an economic boom in consumption, investment, employment, output and the stock market in response to good news about future productivity. This paper proposes and evaluates a model with the intrinsic desire for wealth accumulation, or ‘the spirit of capitalism’ hypothesis, which generates the aforementioned responses. Restrictions for the existence of expectation driven business cycles are derived analytically. The restrictions are confirmed by an estimated version of the model. The proposed preference specification is supported with additional empirical evidence.
    Keywords: Spirit of Capitalism; News Shocks; Business Cycles
    JEL: E32
    Date: 2008
  9. By: David Kiefer
    Abstract: In the new Keynesian model of endogenous stabilization governments have objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. We develop an econometric characterization of the political-economic equilibrium using the Kalman filter to model the unobserved natural rate. Applying this methodology to a panel of North Atlantic countries, we find it consistent with history with a few qualifications. For one, governments are more likely to target growth rates, than output gaps. And, inflation expectations are more likely adaptive, than rational. Also, the error restrictions implied by the standard inflation-productivity shocks formulation needs to be relaxed.
    Keywords: endogenous stabilization, objectives, expectations, Kalman filtering
    JEL: E61 E63
    Date: 2008
  10. By: Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,); Maria Teresa Valderrama (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,)
    Abstract: The New Keynesian Phillips Curve, as a structural model of inflation dynamics, has mostly been used to explain past inflation developments, but has hardly been used for forecasting purposes. We propose a method of forecasting inflation based on the present-value formulation of the hybrid New Keynesian Phillips Curve. To evaluate the forecasting performance of this model we compare it with forecasts generated from time series models at different forecast horizons. As state-of-the-art time series models used in inflation forecasting we employ a Bayesian VAR, a traditional VAR and a simple autoregressive model. We find that the New Keynesian Phillips Curve delivers relatively more accurate forecasts compared to the other models for longer forecast horizons (more than 3 months) while they are outperformed by the time series models only for the very short forecast horizon. This is consistent with the finding in the literature that structural models are able to outperform time series models only for longer horizons.
    Keywords: New Keynesian Phillips Curve, Inflation Forecasting, Forecast Evaluation, Bayesian VAR
    JEL: E31 C32 C53
    Date: 2008–09–30
  11. By: Louis, Rosmy; Osman, Mohammad; Balli, FAruk
    Abstract: This paper empirically estimates the responses of inflation and non-oil output growth from Arab Gulf Cooperation Council (AGCC) Countries to monetary policy shocks from the United States (US) in order to determine whether there is evidence to support the US dollar as the anchor for the proposed unified currency. For this, a structural vector autoregression identified with short-run restrictions was employed for each country with fund rate as US monetary policy instrument, non-oil output growth, and inflation. The main results that are of interest to decision makers suggest that (i) with respect to inflation, AGCC countries show synchronized responses to monetary policy shocks from the US and these responses are similar to US own inflation; (ii) with respect to non-oil output growth, there is no clear indication that US monetary policy can do as good of a job for AGCC countries as it has done at home. Therefore, importing monetary policy from the United States via a dollar peg may guarantee stable inflation for AGCC countries but not necessarily stable non-oil output growth. To the extent that the non-oil output response is taken seriously and there are concerns over the dollar's ability to perform its role as a store of value, a basket peg with both the US dollar and the Euro may be a sound alternative as confirmed by the variance decomposition analysis of our augmented SVAR with a proxy for the European short-term interest rate.
    Keywords: AGCC Countries; US monetary policy shock; monetary union; currency peg; SVARs
    JEL: C32 F15 E52
    Date: 2007–12
  12. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: We study the effects of U.S. monetary policy and macroeconomic announcements on Argentine money, stock and foreign exchange markets’ returns and volatility over the period 1998 to 2006 using a GARCH model. Firstly, we show that both types of news have a significant impact on all markets. Secondly, we conclude that the Argentine markets have become less dependent on U.S. news after the abandonment of the currency board. Thirdly, we find that U.S. dollar-denominated assets react less to news which suggests that the currency board was not completely credible. Fourthly, we discover that financial markets react stronger during the financial crisis. Fifthly, in the case of peso-denominated assets, U.S. central bank communication helps to reduce money market volatility during the financial crisis in Argentina.
    Keywords: Argentina, Financial Markets, U.S. Monetary Policy, Federal Reserve Bank, Central Bank Communication, Macroeconomic Announcements
    JEL: E52 F33 G14 G15
    Date: 2008
  13. By: Barnett, William A.; Chauvet, Marcelle
    Abstract: The current financial crisis followed the “great moderation,” according to which the world’s central banks had gotten so good at countercyclical policy that the business cycle no longer existed. As more and more economists and media people became convinced that the risk of recessions had moderated or ended, lenders and investors became willing to increase their leverage and risk-taking activities. Mortgage lenders, insurance companies, investment banking firms, and home buyers increasingly engaged in activities that would have been considered unreasonably risky, prior to the great moderation that was viewed as having lowered systemic risk. It is the position of this paper that the great moderation did not reflect improved monetary policy, and the perceptions that systemic risk had decreased and that the business cycle had ended were false. Contributing to those misperception was low quality data provided by central banks. Since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” have produced decades of misunderstandings in economic research and policy, and contributed to the widely held views about decreased systemic risk. While better data, based correctly on index number theory and aggregation theory, now exist, the usual official central bank data are not based on that better approach. While aggregation-theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation-theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. Dual to the aggregation-theoretic monetary aggregates are the aggregation-theoretic user cost and interest rate aggregates, which similarly are not in official use by central banks. No other area of economics has been so seriously damaged by data unrelated to valid index-number and aggregation theory. Many commentators have been quick to blame insolvent financial firms for their “greed” and their presumed self-destructive, reckless risk taking. Perhaps some of those commentators should look more carefully at their own role in propagating the misperceptions of the great moderation that induced those firms to be willing to take such risks.
    Keywords: Measurement error; monetary aggregation; Divisia index; aggregation; monetary policy; index number theory; financial crisis; great moderation; Federal Reserve.
    JEL: C43 E32 E58 E52 E40
    Date: 2008–11–14
  14. By: Ahmed, Imtaiz; Qayyum, Abdul
    Abstract: This study examines the effect of government spending and macroeconomic uncertainty on private fixed investment in services sector of the Pakistan for the period from 1972 to 2005. We first investigated time series properties of data then estimated long run model using cointegration technique. The results show that government spending and interest rate affect private investment in services sector in Pakistan. The preferred short-run dynamic investment function indicates that increase in government current spending and interest rate discourages private investment and similarly macroeconomic instability and uncertainty affect the private investment negatively.
    Keywords: Private Investment; Government Expenditure; Macroeconomic uncertainty; Services Sector; Co-integration; Pakistan
    JEL: E2 E22
    Date: 2008–08
  15. By: Giorgio Canarella (Department of Economics, University of Nevada, Las Vegas); WenShwo Fang (Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Stephen K. Pollard (Department of Economics, California State University, Los Angeles)
    Abstract: The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories: good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist: energy-price and housing-price shocks.
    Keywords: Great Moderation, Regime switching, SWARCH
    JEL: C32 E32 O40
    Date: 2009–11
  16. By: Stefano Bosi (EQUIPPE - Université de Lille 1 et EPEE - Université d'Evry); Thomas Seegmuller (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: The aim of this paper is to study the role of progressive tax rules on the allocations of steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply in elastic, considering different tax rates on capital and labor incomes is relevant. The steady state analysis allows us to highlight the existence of different types of stationary equilibria. While patient agents always hold capital, impatient ones have or not positive savings, depending on the leval of real interest rate. Furthermore, it is not always optimal for all households to have a positive labor supply. Studying the comparative statics and local dynamics, we focus on the steady state with a segmented population : patient households own the whole stock of capital, while the impatient ones are workers. Varying the population sizes and the tax rates, we underline the crucial role of fiscal progressivity and endogenous labor. Moreover, in contrast to many contributions, we prove that progressive tax rules can promote expectation-driven fluctuations and endogenous cycles which means that progressivity can be inopportune to stabilize macroeconomic volatility.
    Keywords: Progressive taxation, heterogeneous agents, borrowing constraint, endogenous labor supply, steady state allocation, macroeconomic stability.
    JEL: C62 H20 E32
    Date: 2008–06
  17. By: Kodama, Masahiro
    Abstract: In recent years, a large and expanding literature has examined the properties of developing economies with regard to the macroeconomic cycle.1 One such property that is characteristic of developing economies is large fluctuations in consumption. Meanwhile, aid for the low income countries is extremely volatile, and under certain circumstances, the volatile aid amplifies the consumption volatility. This document examines whether it is possible that the volatile aid yields high consumption volatility in African countries that constitute the majority of the low income countries. Our numerical analysis reveals that the strongly influential aid disbursements yield a considerably large fluctuation in consumption.
    Keywords: Africa, Consumption, Economic assistance, Econometric model, Aid, Consumption Volatility, International Macroeconomics
    JEL: E21 E32 F35
    Date: 2008–10
  18. By: Drew Creal (Department of Econometrics, Vrije Universiteit Amsterdam); Siem Jan Koopman (Department of Econometrics, Vrije Universiteit Amsterdam); Eric Zivot (University of Washington)
    Abstract: In this paper we investigate whether the dynamic properties of the U.S. business cycle have changed in the last fifty years. For this purpose we develop a flexible business cycle indicator that is constructed from a moderate set of macroeconomic time series. The coincident economic indicator is based on a multivariate trend-cycle decomposition model that accounts for time variation in macroeconomic volatility, known as the great moderation. In particular, we consider an unobserved components time series model with a common cycle that is shared across different time series but adjusted for phase shift and amplitude. The extracted cycle can be interpreted as the result of a model-based bandpass filter and is designed to emphasize the business cycle frequencies that are of interest to applied researchers and policymakers. Stochastic volatility processes and mixture distributions for the irregular components and the common cycle disturbances enable us to account for all the heteroskedasticity present in the data. The empirical results are based on a Bayesian analysis and show that time-varying volatility is only present in the a selection of idiosyncratic components while the coefficients driving the dynamic properties of the business cycle indicator have been stable over time in the last fifty years.
    Date: 2008–08
  19. By: Nilss Olekalns; Kalvinder Shields
    Abstract: A canonical model is described which reflects the real time informational context of decision-making. Comparisons are drawn with ‘conventional’ models that incorrectly omit market-informed insights on future macroeconomic conditions and inappropriately incorporate information that was not available at the time. It is argued that conventional models are misspecified and misinterpret news. However, neither diagnostic tests applied to the conventional models nor typical impulse response analysis will be able to expose these deficiencies clearly. This is demonstrated through an analysis of quarterly US data 1968q4-2006q1. However, estimated real time models considerably improve out-of-sample forecasting performance, provide more accurate ‘nowcasts’ of the current state of the macroeconomy and provide more timely indicators of the business cycle. The point is illustrated through an analysis of the US recessions of 1990q3—1991q2 and 2001q1—2001q4
    Keywords: Structural Modelling; Real Time Data; Nowcasting; Business Cycles
    JEL: E52 E58
    Date: 2008
  20. By: Louis, Rosmy; Balli, Faruk; Osman, Mohammad
    Abstract: AGCC countries' output is heavily dichotomized into oil and non-oil. The oil shocks have similar effects on all member countries but little is known about their responses to non-oil shocks. This paper sets out to determine whether (1) aggregate demand (AD) and non-oil supply shocks (AS) are symmetrical across these countries to justify their suitability for monetary union; and (2) whether there is any commonality of shocks with the United States and the three major European countries, namely France, Germany, and Italy, which can warrant the choice of either the US dollar or the Euro as the anchor for the expected common currency of the bloc. We use bivariate structural vector autoregression models identified with long-run restrictions a la Blanchard and Quah (1989) to extract the shocks. Our results show that (a) AD shocks are unequivocally symmetrical but non-oil AS shocks are weakly symmetrical across AGCC countries thereby giving a green light for monetary union; (b) neither AD nor AS shocks are symmetrical between AGCC countries and the selected European countries; (c) AGCC's AD shocks are symmetrical with the US but non-oil AS shock are not. We therefore surmise that the US dollar is a far better candidate for the new currency than the Euro since US monetary policy can at least help smooth demand shocks in AGCC countries. Our results hold even when we consider the AGCC countries as a bloc. This paper makes a valuable contribution to AGCC decision makers who have been wrestling with the dilemma of whether to revalue or to depeg their actual currencies.
    Keywords: AGCC; monetary union; shocks symmetry; currency anchor
    JEL: E32 F33 F36
    Date: 2008–07–04
  21. By: Danilowska, Alina
    Abstract: In the paper the impact of macroeconomic determinants on the number and value of agricultural investment preferential credits in Poland is examined. This kinds of determinants are of an exogenous character and they cannot be controlled by individual farm. They are related to economic growth, price level changes, monetary policy, inflation, changes in foreign trade conditions. The econometric analysis showed that macroeconomic environment influenced farmers€٠credit decisions at number and value of taken credits. The statistically significant variables in the case of these measures were the index of price relations of sold agricultural products to goods and services purchased by private farms (€ܰrice gap€ݩ, interest rate of central bank and real interest rate paid by farmers. Somewhat surprisingly, neither rate of GDP growth nor real effective exchange rate affected the scope of credits. In the case of GDP rate, the result can suggest that farmers expectations does not depend on current phase of business cycle. The reason of luck the influence of terms of foreign exchange can be explained partly by relatively low share of agricultural products in foreign trade turnover.
    Keywords: preferential credit, farmers, macroeconomic determinants, Agricultural Finance,
    Date: 2008
  22. By: Sanogo, Issa; Gyengani, Zakaria
    Abstract: This paper examines empirically the link between macro-instability and private investment rate in Guinea, in comparison with WAEMU countries . Notwithstanding the caution imposed by data and methodological limitations in interpreting the results, the paper shows that macroeconomic instability is, in general, higher in Guinea than WAEMU countries. Consequently, macroeconomic uncertainties are cause of concern. Using a panel data approach, the findings suggest that the negative effects of relative price volatility (mainly inflation, real effective exchange rates) expected in theory, do not occur when small deviations are combined with competitiveness, resulting from a declining real effective exchange rate. In addition, the positive effect of foreign exchange reserves on the private investment rate supports the view that the availability of foreign exchange reserves is critical in a fixed exchange rate regime as that of WAEMU, as well as in an imperfect floating exchange rate regime as that of Guinea. While the panel data approach shows no evidence of negative impact of macroeconomic uncertainties, it suggests further analysis to explore the robustness of this result. A time series approach is carried out for Guinea, with regard to this purpose. As mentioned above, Guinea registers higher level of macroeconomic instability, compared to WAEMU countries. Using a single error correction model, the counter-intuitive impact of macroeconomic instability variables (measured by the real effective exchange rate, inflation rate and the terms of trade) persists. Given the dominant share of the mining sector in the private investment figures, the findings may be misleading as this sector may be protected from the wrong market signals resulting from the increasing macro-instability. However, capturing such an ‘enclave-effect’ is unfortunately limited by the lack of disaggregated investment data by sector. Finally, the results indicate a negative (indirect) impact of macroeconomic instability (measured by the real lending rate and the flow of credit to the economy) on the private sector investment. They suggest additional efforts to improve the overall macroeconomic context and especially, an in-depth openness of the financial sector, to diversify credit instruments to the private sector in Guinea.
    Keywords: Guinea; Macro-instability; Inflation; Private investment
    JEL: E62 C23 B22 C22
    Date: 2008–02–04
  23. By: Iuliana Matei (Centre d'Economie de la Sorbonne)
    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.
    JEL: C22 E30 F33 F42 F47
    Date: 2008–10
  24. By: Osman, Mohammad; Louis, Rosmy; Balli, Faruk
    Abstract: In this paper we estimate the output gaps of the AGCC countries using four different methods that are: the linear trend model, Hodrick-Prescott filter, Band-Pass filter and the unobserved components model. To perform meaningful comparisons, we differentiate between the overall and non-oil output gap and estimate their respective gaps. Several primary conclusions are manifestly noted from our analysis. First, all the different methods but the unobserved components model has produced almost similar results. Second, our results indicate that all the countries in the region have similar business cycles. Third, we find that there is no significant difference between the overall output gap measures and the non-oil output gaps for all the countries in the region. Fourth, the estimated output gaps did not have any explanatory power on domestic inflation for all the countries with the exception of Saudi Arabia and Oman.
    Keywords: ; Output gap; Inflation; Hodrick-Prescott filter; Frequency domain filter; Band-Pass filter; Unobserved Components model; Kalman filter; Phillips Curve
    JEL: C13
    Date: 2008–10
  25. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This paper is the basis for the Guest Columnist article in the Tuesday, November 11, 2008 issue of the Kansas City Star 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: E3 E4 E5 E6 G1 G2
    Date: 2008–11
  26. By: Andrew Pickering; Hector Valle
    Abstract: This paper derives a Phillips curve with imported commodities as an additional input in the production process. Given greater reliance on exogenously priced imported commodities in production then changes in output lead to a reduced impact on marginal costs and prices. The Phillips curve becomes flatter relative to the bench-mark New Keynesian case. Empirical evidence supports the hypothesis that greater imported commodity intensity in production increases the sacrifice ratio. Econometrically controlling for imported commodity intensity also doubles the explanatory power of openness in determining the sacrifice ratio, as conjectured by Romer (1993).
    Keywords: openness, imported commodities, sacrifice ratio
    JEL: E31 E32 F41
    Date: 2008–10
  27. By: Christian Gianella; Isabell Koske; Elena Rusticelli; Olivier Chatal
    Abstract: This paper analyses the determinants of structural unemployment rates in a two-stage approach. First, time-varying NAIRUs are estimated for a panel of OECD economies on the basis of Phillips curve equations using Kalman filter techniques. In a second stage, the estimated NAIRUs are regressed on selected policy and institutional variables. As predicted by theoretical wage-setting/price-setting models, the level of the tax wedge and the user cost of capital are found to be important drivers of structural unemployment. Consistent with earlier studies, the level of product market regulation, union density and the unemployment benefit replacement rate also play an important role in explaining changes in the NAIRU although there is considerable variation in estimates across countries. Nonetheless, the set of structural variables provides a reasonable explanation of NAIRU dynamics over the period 1978-2003, even though recent decreases are better explained than the earlier surge. <P>Quels déterminants du NAIRU ? Évidence empirique à partir d’un panel de pays de l’OCDE <BR>Cette étude analyse les déterminants du taux de chômage structurel par une approche en deux étapes. Premièrement, des taux de chômage non inflationnistes (NAIRU) variables au cours du temps sont estimés sur la base de courbes de Phillips en utilisant les techniques de type filtre de Kalman. Dans une seconde étape, les NAIRUs estimés sont régressés sur une sélection de variables institutionnelles et de politique économique. Conformément aux prédictions théoriques de modèles de type WS PS «wage-setting/pricesetting », le niveau du coin fiscal et le coût d’usage du capital et apparaissent comme des déterminants-clés du chômage structurel. Conformément aux études précédentes, le niveau de réglementation sur le marché de biens, l’implantation syndicale et le taux de remplacement des allocations chômage jouent également un rôle important dans l’explication des variations du NAIRU bien qu'il y ait des différences considérables d’un pays à l’autre dans les résultats. Néanmoins, cet ensemble de variables structurelles s’avèrent avoir une capacité prédictive de la dynamique du NAIRU relativement élevée sur la période 1978-2003, même si la phase récente de reflux est mieux expliquée que la hausse préalable.
    Keywords: unemployment, chômage, NAIRU, Phillips curve, institutions, policy rules, courbe de Phillips, user cost, coût d'usage, réformes économiques
    JEL: C13 C22 E24 E31 J38 J58 J68
    Date: 2008–11–10
  28. By: James Costain (Banco de España); Antón Nákov (Banco de España)
    Abstract: In this paper, we show that a simple model of smoothly state-dependent pricing generates a distribution of price adjustments similar to that observed in microeconomic data, both for low and high inflation. Our setup is based on one fundamental assumption: price adjustment is more likely when it is more valuable. The constant probability model (Calvo 1983) and the fixed and stochastic menu cost models (Golosov and Lucas 2007; Dotsey, King and Wolman 1999) are nested as special cases of our framework. All parameterizations of our model can be ranked according to a measure of state dependence. The fixed menu cost model has the highest possible degree of state dependence; the parameterization which best fits US microdata has low state dependence. The fixed menu cost model is inconsistent with the evidence both because it never generates small price adjustments, and because it implies a large fall in the standard deviation of price adjustments as trend inflation increases. Even though the state dependence of our preferred parameterization is almost as low as that of the Calvo model, it is well-behaved when we change the steady state inflation rate, matching the data at least as well as Golosov and Lucas' model.
    Keywords: Price stickiness, state-dependent pricing, stochastic menu costs, generalized (S,s), bounded rationality
    JEL: E31 D81
    Date: 2008–11
  29. By: YongDong Zou (Sany Group, Changsha, Hunan, CHINA); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Bernard Malamud (Department of Economics, University of Nevada, Las Vegas)
    Abstract: This paper examines the effects of geographical deregulation on commercial bank performance across states. We reach some general conclusions. First, the process of deregulation on an intrastate and interstate basis generally improves bank profitability and performance. Second, the macroeconomic variables -- the unemployment rate and real personal income per capita – and the average interest rate affect bank performance as much, or more, than the process of deregulation. Finally, while deregulation toward full interstate banking and branching may produce more efficient banks and a healthier banking system, we find mixed results on this issue.
    Keywords: commercial banks, geographic deregulation, bank performance
    JEL: E5 G2
    Date: 2009–11
  30. By: Diego A. Comin
    Abstract: Why did the Japanese slowdown of the 90s last so long if none of the shocks that hit the Japanese economy had a comparable persistence? In this paper, I use the Comin and Gertler (2006) model of medium term fluctuations to explore whether their endogenous technology mechanisms can amplify and propagate the wage markup fluctuations observed in Japan over the early 90s to drive a Japanese productivity slowdown. The model can reproduce the observed decline, relative to trend of R&D expenditures and the slowdown in the diffusion of new technologies. This slowdown in the development and adoption of new technologies constitutes a powerful propagation mechanism. As a result, the model does a good job in reproducing the evolution of output, consumption, investment, TFP and hours worked in Japan during the "lost decade", specially up to 1998. During the last two years of the decade, the propagation mechanisms in the model seem to run out of steam, while the Japanese economy continued to deteriorate.
    JEL: E3
    Date: 2008–11
  31. By: Robert Dixon; John Freebairn; Emayenesh Seyoum-Tegegn
    Abstract: Shifts in the ‘national’ equilibrium rate of unemployment relevant for determining national economic policy settings, we contend, are those shifts which are ‘common across states & territories’. One way to identify these is to identify the common shifts in state and territory Beveridge curves in Australia over time. When we do this we recover a national equilibrium unemployment rate series which is similar to, but at the same time different enough from, other measures to make it interesting. In our view it is this, or some other “national” equilibrium rate series, a series which ‘by construction’ will capture national (nation-wide) factors based on common shocks or common trends across states and territories, that should be the basis for policy and not an ‘aggregate series’ which does not do this. We estimate the value of the equilibrium unemployment rate for 2006 to be 3.7%, which may be compared with the actual unemployment rate for that year of 4.8%, indicating that even as recently as 2006 the actual rate was at least 1 percentage point above the equilibrium rate
    Keywords: Equilibrium Unemployment Rate Beveridge curve Australia
    JEL: E24 J63 J64
    Date: 2008
  32. By: Ólan Henry; Nilss Olekalns; Kalvinder Shields
    Abstract: In this paper, we present a general model of the joint data generating process underlying economic activity and stock market returns allowing for complex nonlinear feedbacks and interdependencies between the conditional means and conditional volatilities of the variables. We propose statistics that capture the long and short run responses of the system to the arrival of fundamental and non-fundamental news, conditioning on the sign and time of arrival of the news. The model is applied to US data. We find that there are significant differences between the short and long run responses of economic activity and stock returns to the arrival of news. Moreover, for certain classifications of news, the respective responses of economic activity and stock returns vary according to the nature of the news and the phase of the business cycle at which the news arrives
    Keywords: Nonlinearity; Asymmetry; Stochastic Simulation; Business Cycle
    JEL: E44 E47
    Date: 2008
  33. By: António Afonso; Cristophe Rault
    Abstract: Using bootstrap panel analysis, allowing for cross-country correlation, without the need of pre-testing for unit roots, we study the causality between government revenue and spending for the EU in the period 1960-2006. Spend-and-tax causality is found for Italy, France, Spain, Greece, and Portugal, while tax-and-spend evidence is present for Germany, Belgium, Austria Finland and the UK, and for several EU New Member States.
    Keywords: panel causality; fiscal policy; EU.
    JEL: C23 E62 H62
    Date: 2008–07
  34. By: Stephen J. Turnovsky
    Date: 2008–05
  35. By: Kathlyn Lucia; Stephanie Price; Edwin Wong; Richard Startz
    Abstract: The term structures of Canada and of the United States, two countries with historically close economic ties, have been closely linked. We investigate the link between Canadian and U.S. yield curves and show previously strong correlations between yield curve components dissipate after Canadian monetary policy reforms in the early 1990s. First, the effect is particularly evident in the diminished cross-country correlations of the short term bond yields. Secondly, cross-country yields are cointegrated before the reforms, but not afterwards. Lastly, the results on the term structure are shown using a vector autoregression with an endogenously determined break date for Canadian and U.S. estimates of the three-factor Nelson-Siegel (1987) yield curve model.
    Date: 2008–05
  36. By: Eric Zivot (University of Washington); Saraswata Chaudhuri (University of North Carolina, Chapel Hill)
    Date: 2008–10
  37. By: Grabowski, Szymon
    Abstract: In many research studies it is argued that it is possible to extract useful information about future economic growth from the performance of financial markets. However, this study goes further and shows that it is not only possible to use expectations derived from financial markets to forecast future economic growth, but that data about the financial system can be used for this purpose as well. The research is conducted for the Polish emerging economy on the basis of monthly data. The results suggest that, based purely on the data from the financial system, it is possible to construct reasonable measures that can, even for an emerging economy, effectively forecast future real economic activity. The outcomes are proved by two various econometric methods, namely, by a time series analysis and by a probit model. All presented models are tested in-sample and out-of-sample.
    Keywords: CCAPM; economic growth; financial markets; term spreads; expectations; forecasting
    JEL: E43 G12 E44
    Date: 2008–09–12
  38. By: Tatom, John
    Abstract: China’s major imbalances include trade and capital account surpluses and a large annual build-up of international reserves. China has a capital account surplus reinforcing the accumulation of foreign exchange reserves, mainly U.S. dollar-denominated assets. Usually, a sustainable fixed or floating exchange rate system requires that a country with a large current account surplus run a capital account deficit. The U.S. is widely criticized for having a comparable trade deficit that mirrors, to a large extent, China’s surplus and for its dependence on large capital inflows including from China. There is political pressure for protectionism and for China to implement wasteful economic policies to reduce the surplus. Negative consequences of China’s imbalances include the build-up of large, low-return foreign exchange, leading to rapid growth in money and credit and to a sharp acceleration in inflation. Moreover, efforts to offset money growth and inflation have deepened inefficiencies in the financial system, which China had hoped to remedy by its efforts to recapitalize and list its banks’ equities on stock exchanges. China could eliminate these imbalances by policies that would reduce growth. One solution is to lift restrictions on capital outflows, allowing households and business to diversify their wealth holdings and realize higher returns and/or less volatility in their income and wealth. This would transform future asset growth to holdings of higher return, lower risk assets abroad and also would eliminate pressures on the People’s Bank of China, allowing for more rapid deregulation of banks, slower money and credit growth and lower inflation. The U.S. is already adjusting to these imbalances as the current account deficit began to decline in 2005 and the dollar has fallen dramatically. Unfortunately, such adverse developments are coming from political pressures to raise taxes, especially on capital resources income, and from protectionist policies, both of which are slowing growth in the U.S.
    Keywords: Capital account imbalance; capital controls and banking inefficiencies; capital outflows and financial development; exchange rate management; banking regulation
    JEL: F42 E58 G15
    Date: 2008–09
  39. By: Horst Siebert
    Abstract: In a series of summits, leading countries of the world will meet to draw up an in¬ternational arrangement for financial stability. Such a rule system should prevent a financial crisis as we have seen it in 2007 and 2008. It should include appropriate principles of mone¬tary policy, rules for financial soundness and agreements on the role of prudent regulation. The paper discusses the lessons from the subprime crisis, failures of regulation, crisis man¬agement in the US and in the EU and considers the problems that have to be solved by an in¬ternational rule system
    Keywords: Financial instability, lessons from the subprime crisis, failures of regulation, crisis management, elements of an international rule system, role of the IMF; climate change, financial crises, the world trading system, oil supplies, immigration
    JEL: E2 E3 E5 F02 F33 F37 F4 F5 G2 P00
    Date: 2008–11
  40. By: Benoit Julien; John Kennes; Ian King; Sephorah Mangin
    Abstract: We examine the effects of public policy parameters in a simple directed search model of the labour market, and contrast them with those in standard random matching models with Nash bargaining. Both finite and limit versions of the directed search model are considered, and the value of the limit model as an approximation of the finite one is assessed. As with the random matching model, job creation is the key channel through with the policy parameters effect the equilibrium of the directed search model. Both comparative static effects of the policy parameters and optimal configurations are identified.
    JEL: E24 J31 J41 J64 H20 D44
    Date: 2008
  41. By: Jerzmanowski, Michal; Nabar, Malhar
    Abstract: We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the US since the 1980s. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation and wage dispersion between skilled and unskilled workers. The experience of US states following banking deregulation provides empirical support for our hypothesis. We find that wages of college educated workers increased by between 0.5 - 1.2% following deregulation while those of workers with a high school diploma fell by about 2.2%. Similarly, residual (or within-group) inequality increased. The 90-50 percentile ratio of residuals from a Mincerian wage regression and their standard deviation increased by 4.5% and 1.8%, respectively.
    Keywords: Skill Premium; Residual Wage Inequality; Financial Deregulation
    JEL: E25 J31 G24
    Date: 2008–10–08
  42. By: Shuyun May Li
    Abstract: Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in the U.S. manufacturing. Distortions in financial market could hinder the reallocation process and hencemay adversely affect aggregate productivity growth. This paper studies the quantitative impact of costly external finance on aggregate productivity through resource reallocation across firms with idiosyncratic productivity shocks. A partial equilibrium model calibrated to the U.S. manufacturing data shows that costly external finance causes inefficient output reallocation from high productivity firms to low productivity firms and as a result leads to a 1 percent loss in aggregate TFP.
    Keywords: Costly external Finance; Reallocation; Output weighted aggregate productivity
    Date: 2008
  43. By: João Ejarque (University of Essex); Søren Leth-Petersen (Department of Economics, University of Copenhagen)
    Abstract: We characterize savings behavior around the point of the first house purchase. Using a panel data set with income and wealth information on Danish first-time house owners we document that households save for the down payment, mortgage to the limit, run down liquid assets at purchase, and adjust to adverse income shocks occurring just after the purchase by reducing consumption. We build a model that replicates these observations, show that the preference parameters are identified from the data, and estimate them. Based on the estimated model house buying significantly reduces the ability to smooth adverse income shocks.
    Date: 2008–11
  44. By: Shuyun May Li
    Abstract: This paper develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in U.S. manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment.
    Keywords: Asymmetric information; Limited liability; Limited commitment; Dynamiccontract; Job reallocation; Stationary competitive equilibrium; Stationary firm distribution.
    JEL: E24 D82 L14
    Date: 2008
  45. By: Laura Gardini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Cars Hommes (CeNDEF, Department of Quantitative Economics, University of Amsterdam); Fabio Tramontana (Università Politecnica delle Marche & Dipartimento di Economia e Metodi Quantitativi, Università di Urbino); Robin de Vilder (Department of Mathematics, University of Amsterdam)
    Abstract: In dynamic economic models derived from optimization principles, the forward equilibrium dynamics may not be uniquely de…fined, while the backward dynamics is well de…fined. We derive properties of the global forward equilibrium paths based on properties of the backward dynamics. We propose the framework of iterated function systems (IFS) to describe the set of forward equilibria, and apply the IFS framework to a one- and a two-dimensional version of the overlapping generations (OLG)-model. We show that, if the backward dynamics is chaotic and has a homoclinic orbit (a "snap-back repeller") the set of forward equilibrium paths converges to a fractal attractor. Forward equilibria may be interpreted as sunspot equilibria, where a random sunspot sequence determines equilibrium selection at each date.
    Keywords: forward and backward dynamics, chaos, homoclinic orbit, snap-back repellor, sunspot equilibria, overlapping generations models.
    JEL: E32 C62 C02
    Date: 2008
  46. By: Duasa, Jarita
    Abstract: This study examines the significant impact of exchange rate shock on prices of Malaysian imports and exports. In methodology, the study adopts vector error correction (VECM) model using monthly data of nominal exchange rates, money supply, prices of imports and prices of exports covering the period of M1:1999 to M12:2006. For further analysis, we adopt an innovation accounting by simulating variance decompositions (VDC) and impulse response functions (IRF). VDC and IRF serve as tools for evaluating the dynamic interactions and strength of causal relations among variables in the system. In fact, IRF is used to calculate the exchange rate pass-through on import prices and export prices. The findings indicate that, while the exchange rate shock is significantly affect the fluctuation of import prices, the degree of pass-through is incomplete.
    Keywords: Import prices; Export prices; VECM; Impulse Response; Variance Decomposition.
    JEL: E30 C22 F31
    Date: 2008
  47. By: Anna Maria Agresti (International Financial Corporation, World Bank Group, 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA.); Patrizia Baudino (Financial Stability Forum, Bank for International Settlements, Basel, Switzerland.); Paolo Poloni (European Central Bank, Directorate General Statistics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In January 2007 the International Monetary Fund (IMF) published, on an ad hoc basis, a series of financial soundness indicators (FSIs) based on a common methodology (the IMF compilation Guide) for 62 countries, including all 27 European Union countries. The European Central Bank (ECB), jointly with the Banking Supervision Committee (BSC), has an interest in monitoring the development of this IMF initiative in the context of its own work on compiling macro-prudential indicators (MPIs). The aim of this paper is to identify the main similarities and differences between the FSIs and the MPIs for national banking sectors, as the overlap between MPIs and FSIs in this sub-set is greatest. As a result of the recently issued amendments to the IMF compilation Guide for FSIs, some key methodological differences between the two approaches have been eliminated and it is therefore expected that the figures published by the two institutions will soon converge. The paper concludes with an investigation of the few other areas where the remaining differences could potentially be narrowed. JEL Classification: C82, G20, G21, G28, G32
    Keywords: Macro-prudential indicators (MPIs), financial soundness indicators (FSIs), financial stability statistics
    Date: 2008–11
  48. By: Yuzo Honda (Osaka University); Kazuyuki Suzuki (Meiji University)
    Abstract: Based on the investment theory of Abel and Eberly (1994), we develop an analytical model of adjustment costs, which produces a sigmoidal investment function. We also estimate the piecewise linear investment function, which includes as special cases linear models, models with one threshold, the original model of Abel and Eberly, which has two thresholds, and sigmoidal models. Empirical evidence clearly supports the sigmoidal model. The threshold estimate of Tobinfs q is 0.91. The investment ratio does not respond at value of Tobinfs q below 0.91, but begins to react sensitively as Tobinfs q passes 0.91.
    Keywords: Tobinfs q, financial constraints, irreversibility of investment, unlisted, Japanese firms, piecewise linear function
    JEL: E22 G31
    Date: 2008–11
  49. By: António Afonso; Christophe Rault
    Abstract: We assess the cointegration relationship between current account and budget balances, and effective real exchange rates, using recent bootstrap panel cointegration techniques and SUR methods. We investigate the magnitude of the relationship between the two imbalances for each country for the period 1970-2007, and for different EU and OECD country groupings. The panel cointegration tests used allow for within and between correlation, while the SUR results show both positive and negative effects of budget balances on current account balances for several countries. The magnitude of the effects varies across countries, and there is no evidence pointing to a direct and close relationship between budgetary and current account balances.
    Keywords: budget balance; external balance; EU; panel cointegration.
    JEL: C23 E62 F32 H62
    Date: 2008–10
  50. 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
  51. By: Silvia Faggian (Department of Applied Mathematics, University of Venice); Fausto Gozzi (LUISS Guido Carli)
    Abstract: The Dynamic Programming approach for a family of optimal investment models with vintage capital is here developed. The problem falls into the class of infinite horizon optimal control problems of PDE's with age structure that have been studied in various papers (see e.g. [11, 12], [30, 32]) either in cases when explicit solutions can be found or using Maximum Principle techniques. The problem is rephrased into an infinite dimensional setting, it is proven that the value function is the unique regular solution of the associated stationary Hamilton-Jacobi-Bellman equation, and existence and uniqueness of optimal feedback controls is derived. It is then shown that the optimal path is the solution to the closed loop equation. Similar results were proven in the case of finite horizon in [26][27]. The case of infinite horizon is more challenging as a mathematical problem, and indeed more interesting from the point of view of optimal investment models with vintage capital, where what mainly matters is the behavior of optimal trajectories and controls in the long run. The study of infinite horizon is performed through a nontrivial limiting procedure from the corresponding finite horizon problems
    Keywords: Optimal investment, vintage capital, age-structured systems, optimal control, dynamic programming, Hamilton-Jacobi-Bellman equations, linear convex control, boundary control
    JEL: C61 C62 E22
    Date: 2008–11
  52. By: Casey B. Mulligan
    Abstract: When asset values fall, the owners of collateralized loans are not in an enviable position. Nonetheless, they possess a kind of monopoly power over their borrowers that they do not possess when borrowers are solvent. Lenders maximize profits by price discriminating, but create deadweight costs in the process. From the perspective of the aggregate labor market, it is as if lenders were levying their own labor income tax, on top of the taxes already levied by public treasuries. Governments have an incentive to regulate this price discrimination, repudiate part of the private debts, cut their own tax rates, or acquire the debt themselves. These conditions may describe both the 1930s and economic events today.
    JEL: E24 H21 J22
    Date: 2008–11
  53. By: Jan van Heerden (Department of Economics, University of Pretoria); James Blignaut (Department of Economics and Econometrics, University of Johannesburg); Andre Jordaan (Department of Economics, University of Pretoria)
    Abstract: The paper uses a static Computable General Equilibrium (CGE) model of South Africa and simulates various shocks to the price of electricity. We attempt di¤erent closures to the model and compare their respective e¤ects on the Consumer Price Index. In a CGE model, this is measuring the real appreciation of the exchange rate, or international trade competitiveness. In general, we conclude that electricity prices per se does not signi?cantly in?uence the real exchange rate, regardless of which closure is used.
    JEL: D5 E3 H2
    Date: 2008–11
  54. By: Daisuke Ishikawa (Kyoto University); Yoshiro Tsutsui (Osaka University)
    Abstract: The purpose of this paper is to elucidate whether the supply side played a crucial role in causing the credit crunch in Japan in the 1990s. To this end, we estimate the supply and demand functions using prefectural panel data from 1990 to 2001 and calculate the shifts of those functions. The results reveal that until 1996 the supply side was not the main cause of stagnant loans, and after 1996 the contraction of the supply side at best contributed as much as the demand side to the decrease in loans. Thus, the countermeasures on the banking sector were not adequate to increase the loans.
    Keywords: credit crunch, prefectural panel data, shift of functions, Japanese loan market
    JEL: G21 E51 R51
    Date: 2008–09
  55. By: Poschke, Markus (McGill University)
    Abstract: Why do some people become entrepreneurs (and others don't)? Why are firms so heterogeneous, and many firms so small? To start, the paper briefly documents evidence from the empirical literature that the relationship between entrepreneurship and education is U-shaped, that many entrepreneurs start a firm "out of necessity", that most firms are small, remain so, yet persist in the market, and that returns to entrepreneurship have a much larger cross-sectional variance than returns to wage work. Popular models of firm heterogeneity cannot easily account for the U-shape or for the persistence of low-productivity firms. The paper shows that these facts can be explained in a model of occupational choice between wage work and entrepreneurship where agents are heterogeneous in their ability as workers, and starting entrepreneurs face uncertainty about their project's productivity. Then, if agents' expected productivity as entrepreneurs is increasing and not too concave in their ability as workers, the most and the least able individuals choose to become entrepreneurs. This sorting is due to heterogeneous outside options in the labor market. Because of their low opportunity cost, low-ability agents benefit disproportionately from the ability to pursue only good business projects and abandon low-productivity ones. This also makes them more likely to immediately abandon a project for a new one. Data from the NLSY79 gives support to these two predictions. Individuals with relatively high or low wages when employed, or with a high or low degree, are more likely to be entrepreneurs or to become entrepreneurs, and spend more time in entrepreneurship. Among entrepreneurs, more of the firms run by individuals with low wages when employed, or with a low degree, are abandoned after only a year.
    Keywords: occupational choice, entrepreneurship, firm entry, selection, search
    JEL: E20 J23 L11 L16
    Date: 2008–11
  56. By: Angus Deaton; Alan Heston
    Abstract: PPP-based national accounts have become an important part of the database for macroeconomists, development economists, and economic historians. Frequently used global data come from the Penn World Table (PWT) and the World Bank's World Development Indicators; a substantial fraction of the world is also covered in the PPP accounts produced by the OECD and the European Union. This paper provides an overview of how these data are constructed, and discusses both the theory and the practical problems of implementing it. All of these data are underpinned by the International Comparison Program (ICP), which collects data on prices worldwide. The most recent round of the ICP was for 2005 with final results published in early 2008; version 7.0 of the Penn World Table will soon incorporate these results. The 2005 ICP, like earlier rounds, involved substantial revisions to previous data, most notably revising downwards the size of the Chinese (40 percent smaller) and Indian (36 percent) economies. We discuss the reasons for the revisions, and assess their plausibility. We focus on four important areas: how to handle international differences in quality, the treatment of urban and rural areas of large countries such as China, India, and Brazil, how to estimate prices for government services, health, and education, and the effects of the regional structure of the ICP. All of these affect the interpretation of previous data, as well as the current revisions. We discuss previous revisions of the PWT, and their effects on various kinds of econometric analysis. The paper concludes with health warnings that should be kept in mind when using these data, which are not always suitable for the purposes to which they are put. Some international comparisons are close to impossible, even in theory, and in others, the practical difficulties make comparison exceedingly hazardous.
    JEL: E01 N1 O47
    Date: 2008–11

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