nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒12‒01
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. McCallum rule and Chinese monetary policy By Mehrotra, Aaron; Koivu, Tuuli; Nuutilainen, Riikka
  2. Optimal monetary policy and the transmission of oil-supply shocks to the euro area under rational expectations. By Stéphane Adjemian; Matthieu Darracq Pariès
  3. Does Global Slack Matter More than Domestic Slack in Determining U.S. Inflation? By Fabio Milani
  4. Fiscal Policy and Economic Cycles in Oil-Exporting Countries By Kamilya Tazhibayeva; Anna Ter-Martirosyan; Aasim M. Husain
  5. Economic Integration and Macroeconomic Convergence in the Euro Area By Dino Martellato
  6. Optimal monetary policy in a new Keynesian model with habits in consumption By Campbell Leith; Ioana Moldovan; Raffaele Rossi
  7. Heterogeneous Risk Preferences and the Welfare Cost of Business Cycles By Sam Schulhofer-Wohl
  8. Unemployment Dynamics and the Cost of Business Cycles By Hairault, Jean-Olivier; Langot, François; Osotimehin, Sophie
  9. The NAICU and the Phillips curve – An Approach Based on Micro Data By Eva Köberl; Sarah M. Lein
  10. Strain and Inflation-Unemployment Relationship in Transitional Economies: A theoretical and empirical investigation By Albu, Lucian Liviu
  11. Writing Clearly: ECB’s Monetary Policy Communication By Martin Cihák; Katerina Smídková; Ales Bulir
  12. Policy Responses to Sudden Stops in Capital Flows: The Case of Chile in 1998 By Rodrigo O. Valdes
  13. Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence By Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob De Haan; David-Jan Jansen
  14. Trade linkages and macroeconomic effects of the price of oil By Korhonen, Iikka; Ledyaeva, Svetlana
  15. "Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary IES" By Hisasi Nakamura; Wataru Nozawa; Akihiko Takahashi
  16. The political economy under monetary union - has the euro made a difference? By Marcel Fratzscher; Livio Stracca
  17. On implications of micro price data for macro models. By Bartosz Maćkowiak; Frank Smets
  18. Perspectives on High Real Interest Rates in Turkey By Prakash Kannan
  19. The Effects of Unification: Markets, Policy and Cyclical Convergence in Italy, 1861-1913 By Carlo Ciccarelli; Stefano Fenoaltea; Tommaso Proietti
  20. Large Bayesian VARs. By Marta Bańbura; Domenico Giannone; Lucrezia Reichlin
  21. Comouvements économiques dans les pays de la Zone CFA : Une analyse par le modèle factoriel dynamique généralisé By DIAGNE, Abdoulaye; NIANG, Abdou-Aziz
  22. Optimizing Time-series Forecasts for Inflation and Interest Rates Using Simulation and Model Averaging By Jumah, Adusei; Kunst, Robert M.
  23. Globalization and Business Cycle Transmission By Michael Artis; Toshihiro Okubo
  24. Banks' Precautionary Capital and Credit Crunches By Fabian Valencia
  25. Money Illusion and Nominal Inertia in Experimental Asset Markets By Charles N. Noussair; Gregers Richter; Jean-Robert Tyran
  26. Long run and cyclical strong dependence in macroeconomic time series. Nelson and Plosser revisited By Luis A. Gil-Alana
  27. Talking about Monetary Policy: The Virtues (and Vices?) of Central Bank Communication By Alan S. Blinder
  28. Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation By Vasiliki Skreta; Laura Veldkamp
  29. Production and Finance in EURACE By Sander Van Der Hoog; Christophe Deissenberg; Herbert Dawid
  30. Interest Rate Elasticity of Residential Housing Prices By Martin Cihák; Plamen Iossifov; Amar Shanghavi
  31. Modelling the Informal Economy in Mexico. A Structural Equation Approach By José Brambila Macias; Guido Cazzavillan
  32. Fiscal Federalism in the UK By Bell, David
  33. Growth and the Ageing Joneses By Fisher, Walter H.; Heijdra, Ben J.
  34. Making Monetary Policy by Committee By Alan S. Blinder
  35. Public and private sector wages - co-movement and causality. By Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  36. Equilibrium Points for Optimal Investment with Vintage Capital By Silvia Faggian
  37. Budgetary and external imbalances relationship - a panel data diagnostic. By António Afonso; Christophe Rault
  38. Predicting the Signs of Forecast Errors By Nazaria Solferino; Robert J. Waldmann
  39. Maximum Principle for Boundary Control Problems Arising in Optimal Investment with Vintage Capital By Silvia Faggian
  40. Did Active Labour Market Policies Help Sweden Rebound from the Depression of the Early 1990s? By Anders Forslund; Alan B. Krueger
  41. Oil Prices and Venezuela's Economy By Mark Weisbrot; Rebecca Ray
  42. Régimes de politique monétaire et effet de variété By Stéphane Auray; Aurélien Eyquem; Jean-Christophe Poutineau
  43. Behind the 2008 Capital Market Collapse By C-René Dominique
  44. The Quiet Life Hypothesis in Banking - Evidence from German Savings Banks By Oliver Vins; Michael Koetter
  45. The Dynamics of Parallel Economies. Measuring the Informal Sector in México By José Brambila Macias; Guido Cazzavillan

  1. By: Mehrotra, Aaron (BOFIT); Koivu, Tuuli (BOFIT); Nuutilainen, Riikka (BOFIT)
    Abstract: This paper evaluates the usefulness of a McCallum monetary policy rule based on money supply for maintaining price stability in mainland China. We examine whether excess money relative to rulebased values provides information that improves the forecasting of price developments. The results suggest that our monetary variable helps in predicting both consumer and corporate goods price inflation, but the results for consumer prices depend on the forecasting period. Nevertheless, growth of the Chinese monetary base has tracked the McCallum rule quite closely. Moreover, results using a structural vector autoregression suggest that our measure of excess money supply could be used to identify monetary policy shocks in the Chinese economy.
    Keywords: McCallum rule; monetary policy; China
    JEL: E31 E52
    Date: 2008–11–21
  2. By: Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper presents first the estimation of a two-country DSGE model for the euro area and the rest-of-the-world including relevant oil-price channels. We then investigate the optimal resolution of the policy tradeoffs emanating from oil-price disturbances. Our simulations show that the inflationary forces related to the use of oil as an intermediate good seem to require specific policy actions in the optimal allocation. However, the direct effects of oil prices should be allowed to exert their mechanical influence on CPI inflation and wage dynamics through the indexation schemes. We also illustrate that any fine-tuning strategy which tries to counteract the direct effects of oil-price changes in headline inflation would prove counter-productive both in terms to stabilization of underlying inflation and by causing unnecessary volatility in the macroeconomic landscape. Finally, it appears that perfect foresight on future oil price developments allows a more rapid absorption of the steady state decline in purchasing power and real national income in the optimal allocation. Through the various expectation channels, economic agents facilitate the necessary adjustments and optimal monetary policy can still tolerate the direct effects of oil price changes on CPI inflation as well as some degree of underlying inflationary pressures in the view of easing partly the burden of downward real wage shifts. Our monetary policy prescriptions have been derived in a modeling framework where oil-price fluctuations are essentially exogenous to policy actions and where expectations are formed under the rational expectations paradigm. Notably, the extension of such conclusions to imperfect knowledge and weak central bank credibility configurations remain challenging fields for further research. JEL Classification: E4, E5, F4.
    Keywords: Oil prices, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation.
    Date: 2008–11
  3. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper employs a structural model to estimate whether global output gap has become an important determinant of U.S. inflation dynamics. The results provide support for the relevance of global slack as a determinant of U.S. inflation after 1985. The role of domestic output gap, instead, seems to have diminished over time.
    Keywords: Globalization; Global Slack; Inflation Dynamics; Phillips Curve; Bayesian Estimation
    JEL: E31 E50 E52 E58 F41
    Date: 2008–11
  4. By: Kamilya Tazhibayeva; Anna Ter-Martirosyan; Aasim M. Husain
    Abstract: This paper empirically assesses the impact of oil price shocks on the underlying non-oil economic cycle in oil-exporting countries. Panel VAR analysis and the associated impulse responses indicate that in countries where the oil sector is large in relation to the economy, oil price changes affect the economic cycle only through their impact on fiscal policy. Once fiscal policy changes are removed, oil price shocks do not have a significant independent effect on the economic cycle.
    Keywords: Oil exporting countries , Fiscal policy , Business cycles , Oil prices , Nonoil sector , Economic growth , Economic models ,
    Date: 2008–11–07
  5. By: Dino Martellato (University Of Venice Cà Foscari)
    Abstract: In this paper I discuss various notions and aspects of integration and macroeconomic convergence, namely economic and monetary integration; real and nominal convergence. The EU has offered a great deal of information about the relation between all these types of integration and macroeconomic convergence. The EU has assumed that monetary integration is a precondition of deep economic integration and it has also assumed that the criteria to be adopted to converge to its own brand of economic and monetary union (EMU) are basically the same needed within the monetary union itself. Judging from the evidence of the first ten years of EMU, the actual relationship between real growth and inflation has turned out to be far from clear; and the paper provides a comparison between statistical evidence and the diverging predictions offered by two standard macroeconomic models.
    Keywords: Inflation, stability, euro zone
    JEL: E12 E41 E52 E63
    Date: 2008
  6. By: Campbell Leith; Ioana Moldovan; Raffaele Rossi
    Abstract: While consumption habits have been utilised as a means of generating a humpshaped output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly, external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the stabilising properties of standard simple rules.
    Keywords: consumption habits, nominal inertia, optimal monetary policy
    JEL: E30 E61
    Date: 2008–11
  7. By: Sam Schulhofer-Wohl (Princeton University)
    Abstract: I study the welfare cost of business cycles in a complete-markets economy where some people are more risk averse than others. Relatively more risk-averse people buy insurance against aggregate risk, and relatively less risk-averse people sell insurance. These trades reduce the welfare cost of business cycles for everyone. Indeed, the least risk-averse people benet from business cycles. Moreover, even innitely risk-averse people suer only nite and, in my empirical estimates, very small welfare losses. In other words, when there are complete insurance markets, aggregate uctuations in consumption are essentially irrelevant not just for the average person { the surprising nding of Lucas (1987) { but for everyone in the economy, no matter how risk averse they are. If business cycles matter, it is because they aect productivity or interact with uninsured idiosyncratic risk, not because aggregate risk per se reduces welfare.
    Keywords: business cycles; risk aversion; risk sharing; heterogeneity
    JEL: E32 E21
    Date: 2008–01
  8. By: Hairault, Jean-Olivier (University of Paris 1); Langot, François (University of Le Mans); Osotimehin, Sophie (CREST & Université Paris 1 Panthéon-Sorbonne)
    Abstract: In this paper, we investigate whether business cycles can imply sizable effects on average unemployment. First, using a reduced-form model of the labor market, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry is enough to generate substantial welfare implications. This result also holds when we allow the job finding rate to be endogenous, provided the structural model is able to reproduce the volatility of the job finding rate. Moreover, the matching model embeds other non-linearities which alter the average job finding rate and so the business cycle cost.
    Keywords: business cycle costs, unemployment dynamics
    JEL: E32 J64
    Date: 2008–11
  9. By: Eva Köberl (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sarah M. Lein (Swiss National Bank, Zurich, Switzerland)
    Abstract: In this paper we propose a straightforward method to derive a non-accelerating inflation capacity utilisation rate (NAICU) based on micro data. We condition the current capacity utilisation of firms on their current and planned price adjustments. The non-accelerating inflation capacity utilisation rate is then defined as the rate where a firm feels no price adjustment pressure. One of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with –often rather arbitrary– statistical filters. We show that our aggregate NAICU performs remarkably well as an indicator of inflationary pressure in a Phillips curve estimation.
    Keywords: prices, capacity utilisation, NAICU, Phillips curve
    JEL: E31 E32 E52
    Date: 2008–11
  10. By: Albu, Lucian Liviu
    Abstract: Standard economic theory tells that a command system, like the former eastern economies, allocates resources poorly due to the impossibility of accurate calculation. Therefore, once prices are freed and start to operate at quasi-equilibrium (market-clearing) levels, the hidden inefficiencies come into the open and a possible massive resource reallocation would have to take place. More precisely, the issue refers to the possible and probable intensity of resource reallocation in view of constraints like the balance between exit and entry in the labour market, the size of the budget deficit and the means for its non-inflationary financing, social and political stability, etc. This paper tries to conceptualise the fact that the dynamics of unemployment and inflation are correlated not in a classical sense but in a very complicated mode that suggests the occurrence of some attractors when certain slow parameters are evolving in the neighbourhood of special threshold-values. The start is made with simple models that are based on empirical data and can show to us the traces to discover the steps of transition in eastern economies on the inflation-unemployment relationship space. Then, using economic theory combined with non-linear modelling more refined information is extracted from the statistical standardised data for to evaluate other faces of the eastern transition.
    Keywords: natural rate of unemployment, potential function, Hurst exponent, pitchfork bifurcation, modified Phillips curve, Rössler attractor
    JEL: C61 C65 E24 E27 E32
    Date: 2008–11
  11. By: Martin Cihák; Katerina Smídková; Ales Bulir
    Abstract: The paper presents a methodology for measuring the clarity of central bank communication, illustrating it with the case of the European Central Bank (ECB) in 1999-2007. The analysis identifies the ECB's written communication as clear about 95 percent of instances, which is comparable to, or even better than, other central banks for which a similar analysis is available. We also find that the additional information contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In particular, the Bulletins contain useful clarifying information on individual inflation factors and the overall forecast risk; in contrast, the bulletin's communication on monetary shocks has a negative, albeit small, impact on clarity.
    Keywords: European Central Bank , Monetary policy , Central bank policy , External shocks ,
    Date: 2008–10–28
  12. By: Rodrigo O. Valdes
    Abstract: This chapter revisits the sudden stop in capital flows episode experienced by Chile in 1998. It documents the macroeconomic environment, the macro framework in place, and the shocks that hit it. The chapter examines the policy reaction to the shocks, evaluating its most likely consequences and analyzing key policy constraints faced at the time. Finally, it describes how the economy adjusted and compares the Chilean episode with a few other recent sudden stop cases.
    Keywords: Sudden Stop, Chile, Capital Flows, Adjustment
    JEL: E58 E63 F32
    Date: 2008–11
  13. By: Alan S. Blinder (Princeton University); Michael Ehrmann (European Central Bank); Marcel Fratzscher (European Central Bank); Jakob De Haan (University of Groningen and CESifo); David-Jan Jansen (De Nederlandsche Bank)
    Abstract: Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication—mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank’s toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks’ macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy.
    Date: 2008–03
  14. By: Korhonen, Iikka (BOFIT); Ledyaeva, Svetlana (BOFIT)
    Abstract: In this paper we assess the impact of oil price shocks on oil-producer and oil-consumer economies. VAR models for different countries are linked together via a trade matrix, as in Abeysinghe (2001). As expected, we find that oil producers (Russia and Canada here) benefit from oil price shocks. For example, a large oil shock, leading to a price increase of 50%, boosts Russian GDP by some 12%. However, oil producers are hurt by indirect effects of oil shocks, as economic activity in their export countries suffers. For oil consumers, the effects are more diverse. In some countries, output drops in response to an oil price shock, while other countries seem to be relatively immune to oil price changes. Finally, indirect effects are also detected for oil-consumer countries. Those countries trading more with oil producers receive indirect benefits via higher demand from the oil producing countries. In general the largest negative total effects from positive oil price shocks are found in China, USA and Japan while European countries seem to fare quite well during recent positive oil-price shocks.
    Keywords: oil; macroeconomic fluctuations; trade linkages; Russia
    JEL: C32 E32 F43 Q43
    Date: 2008–11–21
  15. By: Hisasi Nakamura (Faculty of Economics, University of Tokyo); Wataru Nozawa (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary intertemporal elasticity of substitution (IES, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and ination. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors, in particular, ination expectation. Specifically, we show that, if (1) the IES is less than one, (2) the agent is comparatively more risk-averse relative to time-separable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected ination is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.
    Date: 2008–11
  16. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Economic and Monetary Union (EMU) has transformed Europe and has created an integrated pan-European economy. Much research has focused on understanding this integration process and what benefits and costs it entails. This paper identifies a political economy channel of EMU as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas, such as monetary policy and fiscal policy. The paper shows that EMU has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area. Equally importantly, economies with a weaker track record in terms of economic and institutional quality exhibited a significantly higher sensitivity to domestic political shocks before EMU, but not thereafter. While this may entail that EMU has brought benefits to countries with a weaker economic and institutional stability by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability. JEL Classification: F31; F33; G14.
    Keywords: EMU, political economy, political news, monetary policy, fiscal policy, stock markets, transmission.
    Date: 2008–11
  17. By: Bartosz Maćkowiak (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We review the recent literature that studies new, detailed micro data on prices. We discuss implications of the new micro data for macro models. We argue that the new micro data are helpful for macro models, but not decisive. There is no simple mapping from the frequency of price changes in micro data to impulse responses of prices and quantities to shocks. We discuss ideas that promise to deliver macro models matching the impulse responses seen in macro data while being broadly in line with micro data. JEL Classification: E3, E5.
    Keywords: sticky prices, micro price data, models of price setting, real effects of nominal shocks.
    Date: 2008–11
  18. By: Prakash Kannan
    Abstract: The Turkish economy is typically characterized as having particularly high real interest rates. Fundamental considerations, such as high growth rates or high returns to capital, do not provide a satisfactory resolution of this puzzle. Instead, we find that two other factors- doubts about the sustainability of disinflation and the existence of a risk premium-have a significant impact on the level of real interest rates in Turkey. Importantly, fiscal policy variables are shown to affect both these factors, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.
    Keywords: Interest rates , Turkey , Risk premium , Disinflation , Fiscal policy , Foreign exchange , Capital , Economic models ,
    Date: 2008–10–28
  19. By: Carlo Ciccarelli (Faculty of Economics, University of Rome "Tor Vergata"); Stefano Fenoaltea (Faculty of Economics, University of Rome "Tor Vergata"); Tommaso Proietti (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper examines the convergence of regional business cycles in the decades that followed Italy's Unification. The aggregate construction series point to cyclical convergence, but a sectorlevel analysis traces this result to the decline in differentiated "regional-policy" shocks. The regional market cycles diverged, as the regions specialized in different sectors of production; market-cycle convergence is observed only within the "industrial triangle," the regions of which also developed different specializations. This suggests that the balance between growing interdependence and growing differentiation is not general, as the current literature presumes, but specialization-specific.
    Date: 2008–11–18
  20. By: Marta Bańbura (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Domenico Giannone (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School, Regents Park, London NW1 4SA, United Kingdom.)
    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. JEL Classification: C11, C13, C33, C53.
    Keywords: Bayesian VAR, Forecasting, Monetary VAR, large cross-sections.
    Date: 2008–11
  21. By: DIAGNE, Abdoulaye (Consortium pour la Recherche Economique et Sociale (CRES) - Université Cheikh Anta Diop, Dakar, Sénégal); NIANG, Abdou-Aziz (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: The aim of this paper is to check whether the economic and monetary policies developed under the CFA area create co-movements of business cycles of member countries. Indeed, the synchronization of business cycles is a result which can help to appreciate the degree of regional integration. Using the generalized dynamic factor model by Forni et al. (2004), we analyzed the one hand the co-movements between countries of CFA area over the period 1980-2004 and on the other hand we also conducted an analysis for UEMOA and CEMAC areas over the same period. This enabled us also to examine the effectiveness of the economic and monetary integration policies which are specific to these two sub-regional entities and also to check determinants of co-movements in their business cycles.
    Keywords: regional integration ; Co-movement ; Dynamic Factor Model ; CFA area
    JEL: F02 E30 C33 F41
    Date: 2008–10
  22. By: Jumah, Adusei (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria)
    Abstract: Motivated by economic-theory concepts—the Fisher hypothesis and the theory of the term structure—we consider a small set of simple bivariate closed-loop time-series models for the prediction of price inflation and of long- and short-term interest rates. The set includes vector autoregressions (VAR) in levels and in differences, a cointegrated VAR, and a non-linear VAR with threshold cointegration based on data from Germany, Japan, UK, and the U.S. Following a traditional comparative evaluation of predictive accuracy, we subject all structures to a mutual validation using parametric bootstrapping. Ultimately, we utilize the recently developed technique of Mallows model averaging to explore the potential of improving upon the predictions through combinations. While the simulations confirm the traded wisdom that VARs in differences optimize one-step prediction and that error correction helps at larger horizons, the model-averaging experiments point at problems in allotting an adequate penalty for the complexity of candidate models.
    Keywords: Threshold cointegration, Parametric bootstrap, Model averaging
    JEL: C32 C52 E43 E47
    Date: 2008–11
  23. By: Michael Artis (Institute for Political and Economic Governance, Manchester University); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: The paper uses long-run GDP data for developed countries drawn from Maddison (2003) to generate deviation cycles for the period from 1870 to 2001. The cyclical deviates are examined for their bilateral cross-correlation values in three separate periods, those of the first globalization wave (1870 to 1914), the period of the“bloc economyâ€(1915 to 1959) and for the period of the second globalization (1960-2001). Cluster analysis is applied and the McNemar test is used to test for the relative coherence of alternative groupings of countries in the three periods. The bloc economy period emerges as one that features some well-defined sub-global clusters, where the second globalization period does not, the first globalization period lying between the two in this respect. The second globalization period shows a generally higher level of cross correlations and a lower variance than the other two periods. The features uncovered suggest that the second globalization period is indeed one that comprises a more inclusive world economy than ever before.
    Keywords: Globalization, Bloc economy, Business cycle, Cluster analysis, McNemar test
    JEL: F02 F15 F41 N10 E32
    Date: 2008–10
  24. By: Fabian Valencia
    Abstract: Periods of banking distress are often followed by sizable and long-lasting contractions in bank credit. They may be explained by a declined demand by financially impaired borrowers (the conventional financial accelerator) or by lower supply by capital-constrained banks, a "credit crunch". This paper develops a bank model to study credit crunches and their real effects. In this model, banks maintain a precautionary level of capital that serves as a smoothing mechanism to avert disruptions in the supply of credit when hit by small shocks. However, for larger shocks, highly persistent credit crunches may arise even when the impulse is a one time, non-serially correlated event. From a policy perspective, the model justifies the use of public funds to recapitalize banks following a significant deterioration in their capital position.
    Keywords: Banking crisis , Bank credit , External shocks , Liquidity management , Financial risk , Economic models ,
    Date: 2008–10–28
  25. By: Charles N. Noussair (Tilburg University); Gregers Richter (Sydbank, Schweiz); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset, while holding the real fundamental value constant. After an inflationary shock, nominal prices adjust upward rapidly and we observe no real effects. However, after a deflationary shock, nominal prices display considerable inertia and real prices adjust only slowly and incompletely toward the levels that would prevail in the absence of a shock. Thus, an asymmetry is observed in the price response to inflationary and deflationary nominal shocks.
    Keywords: money illusion; nominal inertia; asset market bubble; nominal loss aversion; laboratory experiment
    JEL: C9 E40
    Date: 2008–11
  26. By: Luis A. Gil-Alana (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra)
    Abstract: This paper deals with the presence of long range dependence at the long run and the cyclical frequencies in macroeconomic time series. We use a procedure that allows us to test unit roots with fractional orders of integration in raw time series. The tests are applied to an extended version of Nelson and Plosser’s (1982) dataset, and the results show that, though the classic unit root hypothesis cannot be rejected in most of the series, fractional degrees of integration at both the zero and the cyclical frequencies are plausible alternatives in some cases. Additionally, the root at the zero frequency seems to be more important than the cyclical one for all series, implying that shocks affecting the long run are more persistent than those affecting the cyclical part. The results are consistent with the empirical fact observed in many macroeconomic series that the long-term evolution is nonstationary, while the cyclical component is stationary.
    Date: 2008–11–25
  27. By: Alan S. Blinder (Princeton University)
    Abstract: Central banks, which used to be so secretive, are communicating more and more these days about their monetary policy. This development has proceeded hand in glove with a burgeoning new scholarly literature on the subject. The empirical evidence, reviewed selectively here, suggests that communication can move financial markets, enhance the predictability of monetary policy decisions, and perhaps even help central banks achieve their goals. A number of theoretical drawbacks to greater communication are also reviewed here. None seems very important in practice. That said, no consensus has yet emerged regarding what constitutes “optimal” communication strategy—either in quantity or nature.
    Date: 2008–05
  28. By: Vasiliki Skreta; Laura Veldkamp
    Date: 2008
  29. By: Sander Van Der Hoog (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Christophe Deissenberg (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Herbert Dawid (Dept. of Business Administration - Bielefeld University)
    Abstract: EURACE is a major FP6 STREP project aiming at constructing anexhaustive agent-based model of the European economy, populated by avery large number of sophisticated, autonomous agents. The EURACEmodel, which has an explicit spatial structure, includes all the majormarkets considered in quantitative macroeconomic modelling (consumergoods, investment goods, labour, credit and finance). It offers aunique opportunity for studying, from a new perspective, theempirically observed but theoretically poorly understood link betweenthe real and the financial sphere of a modern economy. After summarilypresenting the main features of EURACE, this paper describes in moredetail the newly developed financial management module thatintermediates between the real and the financial spheres in EURACE. Ina nutshell, this module defines the link between the hiring andinvestment behavior of the firms as a function of the revenues theyobtain by selling their products, of the money they can raise on thecredit and financial markets, of their dividend policy, and othermajor aspects of financial decision-making.
    Keywords: Agent-based macroeconomics; Financial policy; Parallel computing
    Date: 2008–11–18
  30. By: Martin Cihák; Plamen Iossifov; Amar Shanghavi
    Abstract: We examine the interest rate elasticity of housing prices, advancingthe empirical literature in two directions. First, we take a commonly used cross-country panel dataset and evaluate the housing price equation using a consistent estimator in the presence of endogenous explanatory variables and a lagged dependent variable. Second, we carry-out a novel analysis of determinants of residential housing prices in a cross-section of countries. Our results show that the short-term interest rate, and hence monetary policy, has a sizable impact on residential housing prices.
    Keywords: Housing prices , Real estate prices , Interest rate policy , Economic models ,
    Date: 2008–10–21
  31. By: José Brambila Macias (Department of Economics, University Of Venice Cà Foscari); Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper uses annual data for the period 1970-2006 in order to estimate and investigate the evolution of the Mexican informal economy. In order to do so, we model the informal economy as a latent variable and try to explain it through relationships between possible cause and indicator variables using structural equation modeling (SEM). The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. Our results indicate that the Mexican informal sector at the beginning of the 1970’s accounted for 40 percent of GDP, and then it slightly decreased to stabilize around 30 percent of GDP from the late 1980’s onwards. The results also confirm the importance of salaries and excessive regulation as causes of the informal economy in Mexico and the existence of a positive relationship between informality and GDP.
    Keywords: Informal Economy, Economic Growth, Structural Equations
    JEL: C39 E27 O17
    Date: 2008
  32. By: Bell, David
    Date: 2008–08
  33. By: Fisher, Walter H. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Heijdra, Ben J. (Department of Economics, University of Groningen, Groningen, The Netherlands, and Institute for Advanced Studies, Netspar, CESifo)
    Abstract: We incorporate Keeping-up-with-the-Joneses (KUJ) preferences into the Blanchard-Yaari (BY) framework and develop, using an AK technology, a model of balanced growth. In this context we investigate status preference, demographic, and pension policy shocks. We find that a higher degree of KUJ lowers economic growth, while, in contrast, a decrease in the fertility and mortality rates increase it. In the second part of the paper we extend the model by incorporating a Pay-as-you-go (PAYG) pension system with a statutory retirement date. This introduces a life-cycle in human wealth earnings and implies that the growth rate is higher under PAYG. We also consider the implications of an increase in the retirement date under both defined benefit and defined contribution schemes.
    Keywords: Relative consumption, OLG, Endogenous growth, Pension reform
    JEL: D91 E21 H55
    Date: 2008–11
  34. By: Alan S. Blinder (Princeton University)
    Abstract: I was Vice Chairman of the Federal Reserve Board while I was preparing my Marshall Lectures for delivery at Cambridge in 1995. So I asked the Board staff to research what had been written about making monetary policy by committees—as opposed to by individuals. Although they were (and remain) a knowledgeable and thorough bunch, they unearthed almost nothing. So when I delivered the Robbins Lectures at the London School of Economics the following year,1 this is what I concluded on the subject: My own hunch is that, on balance, the additional monetary policy inertia imparted by group decisionmaking provides a net benefit to society… But my main point is simpler: My experience as a member of the FOMC left me with a strong feeling that the theoretical fiction that monetary policy is made by a single individual maximizing a well-defined preference function misses something important. In my view, monetary theorists should start paying some attention to the nature of decisionmaking by committee, which is rarely mentioned in the academic literature. (Blinder (1998), p. 22) I made reference in that lecture to only one paper on the subject, Faust’s (1996) clever model of the seemingly-odd construction of the FOMC, though I should have cited Waller’s (1992) earlier work as well. (Mea culpa.) My point is that, up to then, there had been hardly any research on committee decisionmaking. Fortunately, that is no longer the case. By the time of my three Okun lectures at Yale in 2002 (Blinder (2004)), the subject merited a whole lecture, including references to about ten papers on the subject—and I missed some. (Mea culpa again.) The literature has continued to grow since then, including seven papers at a Netherlands Central Bank conference in 2005 and eleven papers at a Bank of Norway conference last year. The study of central banking by committee thus appears to be a growth industry, albeit a small one.
    Date: 2008–06
  35. By: Ana Lamo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper looks at public and private sector wages interactions since the 1960s in the euro area, euro area countries and a number of other OECD countries. The paper reports, first, a strong positive annual contemporaneous correlation of public and private sector wages over the business cycle; this finding is robust across methods and measures of wages and quite general across countries. Second, we show evidence of long-run relationships between public and private sector wages in all countries. Finally, causality analysis suggests that feedback effects between private and public wages occur in a direct manner and, importantly also via prices. While influences from the private sector appear on the whole to be stronger, there are direct and indirect feedback effects from public wage setting in a number of countries as well. We show how country-specific institutional features of labour and product markets contain helpful information to explain the heterogeneity across countries of our results on public/private wage leadership. JEL Classification: C32, J30, J51, J52, E62, E63, H50.
    Keywords: government wages, private sector wages, causality, co-movement.
    Date: 2008–11
  36. By: Silvia Faggian (Department of Applied Mathematics, University of Venice)
    Abstract: The paper concerns the study of equilibrium points, namely the stationary solutions to the closed loop equation, of an infinite dimensional and infinite horizon boundary control problem for linear partial differential equations. Sufficient conditions for existence of equilibrium points in the general case are given and later applied to the economic problem of optimal investment with vintage capital. Explicit computation of equilibria for the economic problem in some relevant examples is also provided. Indeed the challenging issue here is showing that a theoretical machinery, such as optimal control in infinite dimension, may be effectively used to compute solutions explicitly and easily, and that the same computation may be straightforwardly repeated in examples yielding the same abstract structure. No stability result is instead provided: the work here contained has to be considered as a first step in the direction of studying the behavior of optimal controls and trajectories in the long run.
    Keywords: Linear convex control, Boundary control, Hamilton–Jacobi–Bellman equations, Optimal investment problems, Vintage capital
    JEL: C61 C62 E22
    Date: 2008–11
  37. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christophe Rault (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France.)
    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. JEL Classification: C23, E62, F32, H62.
    Keywords: budget balance, external balance, EU, panel cointegration.
    Date: 2008–11
  38. By: Nazaria Solferino (Faculty of Economics, University of Rome "Tor Vergata"); Robert J. Waldmann (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: The signs of forecast errors can be predicted using the difference between individuals' forecasts and the average of earlier forecasts of the same variable. It is possible to improve forecasts without worsening any. It is difficult to reconcile this result with the rational expectations hypothesis, because the average of earlier forecasts is in the information set of the forecasters
    Keywords: Rational Expectations, Panel, Loss Function, Forecast, Interest Rate.
    JEL: G14 E47
    Date: 2008–11–24
  39. By: Silvia Faggian (Department of Applied Mathematics, University of Venice)
    Abstract: The paper concerns the study of the Pontryagin Maximum Principle for an infinite dimensional and infinite horizon boundary control problem for linear partial differential equations. The optimal control model has already been studied both in finite and infinite horizon with Dynamic Programming methods in a series of papers by the same author et al. [26, 27, 28, 29, 30]. Necessary and sufficient optimality conditions for open loop controls are established. Moreover the co-state variable is shown to coincide with the spatial gradient of the value function evaluated along the trajectory of the system, creating a parallel between Maximum Principle and Dynamic Programming. The abstract model applies, as recalled in one of the first sections, to optimal investment with vintage capital.
    Keywords: Linear convex control, Boundary control, Hamilton–Jacobi–Bellman equations, Optimal investment problems, Vintage capital
    JEL: C61 C62 E22
    Date: 2008–11
  40. By: Anders Forslund (Uppsala University); Alan B. Krueger (Princeton University and NBER)
    Abstract: In the early 1990s the Swedish labour market was hit by the worst shock it experienced since the 1930s, with the unemployment rate rising to 10 percent. This development stands out in light of Sweden’s performance in the post-war period. Between the mid 1940s and the crisis of the 1990s, the Swedish unemployment rate oscillated between one percent and just under four percent (Figure 1). Unemployment even remained low in the 1970s despite oil price shocks that led to persistently high unemployment elsewhere in Europe. A natural question is what, if anything, in Swedish institutions and policies explains why Sweden’s unemployment rate did not follow the same pattern as in most western European countries? A factor often mentioned for this envious performance is Sweden’s active labour market policies (cf e.g. Layard, Nickell and Jackman, 1991).
    Date: 2008–03
  41. By: Mark Weisbrot; Rebecca Ray
    Abstract: This paper looks at Venezuela’s export revenue, imports, and trade and current account balances under a range of oil price outcomes for the next two years. It finds that Venezuela would run large current account surpluses for prices between $60-90 per barrel, and would even run a small surplus with prices at $50 per barrel. (Most oil industry estimates for the next two years are in the range of $80-90 per barrel). The authors conclude that Venezuela is unlikely to run into foreign exchange constraints in the foreseeable future, and can pursue expansionary fiscal policies to counter any economic downturn.
    Keywords: Venezuela, Venezuelan oil exports, Venezuelan government revenue
    JEL: E E6 E62 F F1 F14 O54 Q4 Q43 Q48
    Date: 2008–11
  42. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France); Jean-Christophe Poutineau (CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France)
    Abstract: Cet article propose une extension du cadre de travail théorique proposée par Bilbiie, Ghironi et Melitz [2007] en économie ouverte afin d'étudier les effets de la politique monétaire sur marges intensives et extensives sur l'activité économique. Deux régimes de politique monétaire sont envisagés : un régime de politiques monétaires conduites de maniµere indépendante et un régime d'union monétaire. En cas de choc de productivité, on montre que le régime d'union monétaire amplifiée la création de nouvelles activités dans le pays ou la région qui bénéficie du choc et exerce un effet dépressif sur la création de nouvelles activités dans l'autre pays ou région, alors que les créations de nouvelles activités ne sont affectées ni dans le régime de politiques monétaires indépendantes, ni dans le cas où les prix sont flexibles. Par conséquent, le régime d'union monétaire est relativement ine±cace en comparaison du régime de politiques monétaires indépendantes lorsque les chocs sont asymétriques et les prix rigides.
    Keywords: union monétaire, règles de politique monétaire, marges intensive et extensives
    JEL: E51 E58 F36 F41
    Date: 2008
  43. By: C-René Dominique
    Abstract: Greed and the unethical behavior of financial institutions obviously played a part in the collapse of the world capital market in 2008. But, this paper argues that the main culprits are the neo-liberal ideology (requiring ever smaller gov-ernments and privatization) and the flawed theories of risk assessment. It also finds that given the fact that market economies are fractal structures, the objective assessment and / or the quantification of risks is not even possible. It concludes with some recommendations as to how to avoid future collapses.
    Keywords: Efficiency and self-correction in market economies; Linear-positive and non-linear modelings; creative destruction of coefficients; determinism and randomness, and risk assessment.
    JEL: E22
    Date: 2008–10–26
  44. By: Oliver Vins; Michael Koetter
    Abstract: The "quiet life hypothesis (QLH)" posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. We suggest a unied approach to measure competition and efficiency simultaneously to test this hypothesis. We estimate bank-specific Lerner indices as measures of competition and test if cost and profitt efficiency are negatively related to market power in the case of German savings banks. We find that both market power and average revenues declined among these banks between 1996 and 2006. While we find clear evidence supporting the QLH, estimated effects of the QLH are small from an economical perspective.
    JEL: E42 E52 E58 G21 G28
    Date: 2008–11
  45. By: José Brambila Macias (Department of Economics, University Of Venice Cà Foscari); Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari)
    Abstract: The existence of parallel economies that operate in the shadows of informality within most Latin American countries is widely recognized by the economic literature. However, its composition, size and effects on economic growth are still open questions. In this paper, we estimate the size and the evolution of the Mexican informal economy in the last three decades using a vector error correction model. In addition to the standard explanatory variables traditionally used in the currency demand approach, we include remittances given their relevance in the Mexican economic system. The results indicate that informality prior to the late 1980’s accounted for at least two thirds of GDP, while stabilizing around one third of GDP in the last decade. Furthermore, our estimates provide evidence of a positive long run relationship between informality and economic growth.
    Keywords: Informal Sector, currency demand, VEC, Remittances
    JEL: C32 E41 F24 O17
    Date: 2008

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