nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒12‒07
fifty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Central Bank misperceptions and the role of money in interest rate rules. By Guenter W. Beck; Volker Wieland
  2. Determinacy, Stock Market Dynamics and Monetary Policy Inertia By Damjan Pfajfar; Emiliano Santoro
  3. Reconnecting Money to Inflation: The Role of the External Finance Premium By Jagjit S. Chadha; Luisa Corrado; Qi Sun
  4. Money, Prices and Liquidity Effects: Separating Demand from Supply By Chadha, J.S.; Corrado, L.; Sun, Q.
  5. Measuring the Welfare Costs of Inflation in a Life-cycle Model By Paul Gomme
  6. Monetary Policy Analysis: An Undergraduate Toolkit By Jagjit S. Chadha
  7. Sluggish responses of prices and inflation to monetary shocks in an inventory model of money demand By Fernando Alvarez; Andrew Atkeson; Chris Edmond
  8. Monetary policy and housing prices in an estimated DSGE model for the US and the euro area. By Matthieu Darracq Pariès; Alessandro Notarpietro
  9. Reconnecting Money to Inflation: The Role of the External Finance Premium By Jagjit S. Chadha; Luisa Corrado; Sean Holly
  10. How forward-looking is the Fed? Direct estimates from a ‘Calvo-type’ rule By Vasco J. Gabriel; Paul Levine; Christopher Spencer
  11. Imperfect information and monetary models: multiple shocks and their consequences By Leon W. Berkelmans
  12. Monetary Policy in a Small Open Economy Model: A DSGE-VAR Approach for Switzerland By Gregor Bäuerle; Tobias Menz
  13. Interacting nominal and real labour market rigidities By Vogel, Lukas
  14. Keynesian economics without the LM and IS curves: a dynamic generalization of the Taylor-Romer model By Evan F. Koenig
  15. Current account dynamics and monetary policy By Andrea Ferrero; Mark Gertler; Lars E.O. Svensson
  16. The End of the Great Moderation? By William Barnett; Marcelle Chauvet
  17. Interactions between private and public sector wages. By António Afonso; Pedro Gomes
  18. Imperfectly credible disinflation under endogenous time-dependent pricing By Marco Bonomo; Carlos Carvalho
  19. The Return to Capital and the Business Cycle By Paul Gomme; B. Ravikumar; Peter Rupert
  20. The U.S. Business Cycle, 1867-1995: Dynamic Factor Analysis vs. Reconstructed National Accounts By Albrecht Ritschl; Samad Sarferaz; Martin Uebele
  21. Neural Network Models for Inflation Forecasting: An Appraisal By Ali Choudhary; Adnan Haider
  22. What drives U.S. current account fluctuations? By Alina Barnett; Roland Straub
  23. Do nominal rigidities matter for the transmission of technology shocks? By Zheng Liu; Louis Phaneuf
  24. The Fed’s new front in the financial crisis By Tatom, John
  25. How Misleading is Linearization? Evaluating the Dynamics of the Neoclassical Growth Model By Manoj Atolia; Santanu Chatterjee; Stephen J. Turnovsky
  26. Central Bank Losses and Economic Convergence By Martin Cincibuch; Tomas Holub; Jaromir Hurnik
  27. On the threat of counterfeiting By Yiting Li; Guillaume Rocheteau
  28. Constructing Structural VAR Models with Conditional Independence Graphs By Les Oxley,; Marco Reale; Granville Tunnicliffe Wilson
  29. Sectoral vs. aggregate shocks : a structural factor analysis of industrial production By Andrew T. Foerster; Pierre-Daniel G. Sarte; Mark W. Watson
  30. Managing Beliefs about Monetary Policy under Discretion? By Elmar Mertens;
  31. Determinants of House Prices in Central and Eastern Europe By Balazs Egert; Dubravko Mihaljek
  32. The topology of the federal funds market By Morten L. Bech; Enghin Atalay
  33. The stability of macroeconomic systems with Bayesian learners By James B. Bullard; Jacek Suda
  34. Uncertainty and disagreement in economic forecasting By Stefania D'Amico; Athanasios Orphanides
  35. Facts and myths about the financial crisis of 2008 By V.V. Chari; Lawrence J. Christiano; Patrick J. Kehoe
  36. The case for TIPS: an examination of the costs and benefits By Jennifer Roush; William Dudley; Michelle Steinberg Ezer
  37. Priors from DSGE Models for Dynamic Factor Analysis By Gregor Bäurle
  38. "Excess Capital and Liquidity Management" By Jan Toporowski
  39. Eight Hundred Years of Financial Folly By Reinhart, Carmen
  40. Individual Expectations and Aggregate Behavior in Learning to Forecast Experiments By Cars Hommes; Thomas Lux
  41. Are Spectral Estimators Useful for Implementing Long-Run Restrictions in SVARs? By Nils Herger;
  42. Coin sizes and payments in commodity money systems By Angela Redish; Warren E. Weber
  43. Some instability puzzles in Kaleckian models of growth and distribution: A critical survey By Eckhard Hein; Marc Lavoie; Till van Treeck
  44. Testing for Group-Wise Convergence with an Application to Euro Area Inflation By Claude Lopez; David H. Papell
  45. Do energy prices respond to U.S. macroeconomic news? a test of the hypothesis of predetermined energy prices By Lutz Kilian; Clara Vega
  46. Is There A Trade-off Between Regional Growth and National Income? Theory and Evidence from the EU By Young-Bae Kim
  47. China's Renminbi Currency Logistics Network: A Brief Introduction By Smith, Reginald
  48. Wage Differentiation and Unemployment in the Districts of the Czech Republic By Kamila Fialová
  49. Capital Formation and Capital Stock in Indonesia, 1950-2007 By Pierre van der Eng
  50. Testing the expectations hypothesis when interest rates are near integrated By Meredith Beechey; Erik Hjalmarsson; Par Osterholm
  51. Bayesian inference based only on simulated likelihood: particle filter analysis of dynamic economic models By Thomas Flury; Neil Shephard
  52. Testing for Service-Led and Investment-Led Hypothesis: Evidence from ‘Chindia’ By Baharom, A.H.; Habibullah, M.S.
  53. Crime and economic conditions in Malaysia: An ARDL Bounds Testing Approach By Habibullah, M.S.; Baharom, A.H.
  54. Is crime cointegrated with income and unemployment?: A panel data analysis on selected European countries By Baharom, A.H.; Habibullah, M.S.

  1. By: Guenter W. Beck (Goethe University Frankfurt, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany.); Volker Wieland (Goethe University Frankfurt, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany.)
    Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially. JEL Classification: E32, E41, E43, E52, E58.
    Keywords: Taylor rules, money, quantity theory, output gap uncertainty, monetary policy under uncertainty.
    Date: 2008–11
  2. By: Damjan Pfajfar (Tilburg University); Emiliano Santoro (Department of Economics, University of Copenhagen)
    Abstract: This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy.
    Keywords: monetary policy; asset prices; rational expectation equilibrium uniqueness
    JEL: E31 E32 E52
    Date: 2008–11
  3. By: Jagjit S. Chadha; Luisa Corrado; Qi Sun
    Abstract: In the canonical monetary policy model, money is endogenous to the optimal path for interest rates, output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have dominated the time series in both the UK and the US in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation.
    Keywords: Money; Prices; Bayesian; VAR Identification; Sign Restrictions
    JEL: E32 F32 F41
    Date: 2008–11
  4. By: Chadha, J.S.; Corrado, L.; Sun, Q.
    Abstract: In the canonical monetary policy model, money is endogenous to the optimal path for interest rates and output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have dominated the time series in both the UK and the US in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation.
    Keywords: Money, Prices, Bayesian VAR Identi.cation, Sign Restrictions.
    JEL: E32 F32 F41
    Date: 2008–11
  5. By: Paul Gomme (Department of Economics, Concordia University)
    Abstract: In macroeconomics, life-cycle models are typically used to address exclusively life-cycle issues. This paper shows that modeling the life-cycle may be important when addressing public policy issues, in this case the welfare costs of inflation. In the representative agent model, the optimal inflation rate is characterized by the Friedman rule: deflate at the real interest rate. In the corresponding life-cycle model, the optimal inflation rate is quite high: for the benchmark calibration, it is around 95% per annum. Much of the paper is concerned with understanding this result. Briefly, in the life-cycle model there are distributional consequences of injecting money via lump-sum transfers. The net effect is to transfer income from old, rich agents to young, poor ones. These transfers twist the age-utility profile in a way that agents find desirable from a lifetime utility point of view. A second issue concerns how to assess the costs of inflation in a life-cycle model. Metrics that are equivalent in the representative agent model can give very different answers in a life-cycle model.
    Keywords: monetary policy, inflation, welfare costs, life-cycle model
    JEL: E52 E31 E32 D58 D91
    Date: 2008–08
  6. By: Jagjit S. Chadha
    Abstract: We develop simple diagrams that can be used by undergraduates to understand interest rate setting by policy- makers. We combine an inflation target, Fisher equation, policy reaction function and short and long run aggregate supply analysis to give a depiction of the policy problem. We illustrate the appropriate response by the policy maker to each of a positive shock to demand, a negative supply shock and dislodged inflation expectations. We also illustrate the problems of a zero bound for policy rates within this framework and consider the role of an interest rate rule in offsetting money market perturbations. Some key readings are introduced.
    Keywords: Interest rate setting; monetary policy; zero-bound; money markets
    JEL: E42 E52 E58
    Date: 2008–11
  7. By: Fernando Alvarez; Andrew Atkeson; Chris Edmond
    Abstract: We examine the responses of prices and inflation to monetary shocks in an inventory-theoretic model of money demand. We show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households' money inventories leads to a partially offsetting endogenous reduction in velocity. We also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate. In a quantitative example, we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match U.S. households' holdings of M2.
    Keywords: Demand for money ; Inflation (Finance) ; Prices
    Date: 2008
  8. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alessandro Notarpietro (Università Bocconi, Via Sarfatti 25, I-20136 Milano, Italy.)
    Abstract: We estimate a two-country Dynamic Stochastic General Equilibrium model for the US and the euro area including relevant housing market features and examine the monetary policy implications of housing-related disturbances. In particular, we derive the optimal monetary policy cooperation consistent with the structural specification of the model. Our estimation results reinforce the existing evidence on the role of housing and mortgage markets for the US and provide new evidence on the importance of the collateral channel in the euro area. Moreover, we document the various implications of credit frictions for the propagation of macroeconomic disturbances and the conduct of monetary policy. We find that allowing for some degree of monetary policy response to fluctuations in the price of residential goods improves the empirical fit of the model and is consistent with the main features of optimal monetary policy response to housing-related shocks. JEL Classification: E4, E5, F4.
    Keywords: Housing, credit frictions, optimal monetary policy, new open economy macroeconomics, Bayesian estimation.
    Date: 2008–11
  9. By: Jagjit S. Chadha; Luisa Corrado; Sean Holly
    Abstract: We re-connect money to inflation using Goodfriend and McCallum’s (2007) model where banks supply loans to cash-in-advance constrained consumers on the basis of the value of collateral provided and the monitoring skills of banks. We show that when shocks to monitoring and collateral dominate those to goods productivity and the velocity of money demand, money and the external finance premium become closely linked. This is because increases in asset prices allow banks to raise the supply of loans leading to an expansion in aggregate demand, via a compression of financial interest rates spreads, which in turn tends to be inflationary. Thus money and financial spreads are negatively correlated when banking sector shocks dominate. We suggest a simple augmented stabilising monetary policy rule that exploits the joint information from money and the external finance premium.
    Keywords: money, DSGE, policy rules, external finance premium
    JEL: E31 E40 E51
    Date: 2008–11
  10. By: Vasco J. Gabriel (Department of Economics, University of Surrey and Universidade do Minho - NIPE); Paul Levine (Department of Economics, University of Surrey); Christopher Spencer (Department of Economics, Loughborough University)
    Abstract: We estimate an alternative type of monetary policy rule, termed Calvo rule, according to which the central bank is assumed to target a discounted infinite sum of future expected inflation. Compared to conventional inflation forecast-based rules, which are typically of the Taylor-type with discrete forward looking horizons, this class of rule is less prone to the problem of indeterminacy. Parameter estimates obtained from GMM estimation provide support for Calvo-type rules, suggesting that the Federal Reserve targeted a mean forward horizon of between 4 and 8 quarters.
    Keywords: Calvo-type interest rules, Inflation Forecast Based rules, GMM, indeterminacy.
    JEL: C22 E58
    Date: 2008
  11. By: Leon W. Berkelmans
    Abstract: This paper examines the role of multiple aggregate shocks in monetary models with imperfect information. Because agents can draw mistaken inferences about which shock has occurred, the existence of multiple aggregate shocks profoundly influences macroeconomic dynamics. In particular, after a contractionary monetary shock these models can generate an initial increase in inflation (the "price puzzle") and a delayed disinflation (a "hump"). A conservative numerical illustration exhibits these patterns. In addition, the model shows that increased price flexibility is potentially destabilizing.
    Date: 2008
  12. By: Gregor Bäuerle (University of Bern); Tobias Menz (University of Bern and Study Center Gerzensee)
    Abstract: We study the transmission of monetary shocks and monetary policy with a behavioral model, corrected for potential misspecification using the DSGE-VAR framework elaborated by DelNegro and Schorfheide (2004). In particular, we investigate if the central bank should react to movements in the nominal exchange rate. We contribute to the empirical literature as we use Swiss data, which is very rarely used in that context.
    Date: 2008–11
  13. By: Vogel, Lukas
    Abstract: Abstract: This note investigates the interaction between nominal and real labour market rigidities. It shows nominal wage rigidity to have little effect on the welfare loss from labour adjustment costs under a labour supply shock. This implies that the second best effect of nominal price stickiness under real wage persistence studied in Duval and Vogel (2007) does not apply to the propagation of supply shocks under nominal wage rigidity and labour adjustment costs.
    Keywords: Labour adjustment costs; wage stickiness; rigidity interaction
    JEL: E32 E24 J23 J30
    Date: 2008–11
  14. By: Evan F. Koenig
    Abstract: John Taylor and David Romer champion an approach to teaching undergraduate macroeconomics that dispenses with the LM half of the IS-LM model and replaces it with a rule for setting the interest rate as a function of inflation and the output gap?i.e., a Taylor rule. But> the IS curve is problematic, too. It is consistent with the permanent-income hypothesis only when the interest rate that enters the IS equation is a long-term rate?not the short-term rate controlled by the monetary authority. This article shows how the Taylor-Romer framework can be readily modified to eliminate this maturity mismatch. The modified model is a dynamic system in output and inflation, with a unique stable path that behaves very much like Taylor and Romer?s aggregate demand (AD) schedule. Many?but not all?of the original Taylor-Romer model?s predictions carry over to the new framework. It helps bridge the gap between the Taylor-Romer analysis and the more sophisticated models taught in graduate-level courses.
    Keywords: Economics - Study and teaching ; Taylor's rule ; Interest rates ; Macroeconomics ; Monetary policy
    Date: 2008
  15. By: Andrea Ferrero; Mark Gertler; Lars E.O. Svensson
    Abstract: We explore the implications of current account adjustment for monetary policy within a simple two country SGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second is a "fast burn" where, owing to a sudden shift in expectations of relative growth rates, there is a rapid reversal of the home country's current account. We examine several different monetary policy regimes under each of these scenarios. Our principal finding is that the behavior of the domestic variables (for instance, output, inflation) is quite sensitive to the monetary regime, while the behavior of the international variables (for instance, the current account and the real exchange rate) is less so. Among different policy rules, domestic inflation targeting achieves the best stabilization outcome of aggregate variables. This result is robust to the presence of imperfect pass-through on import prices, although in this case stabilization of consumer price inflation performs similarly well.
    Date: 2008
  16. By: William Barnett (Department of Economics, The University of Kansas); Marcelle Chauvet (University of California at Riverside)
    Abstract: The current financial crisis followed the “great moderation,” according to which some commentators and economists believed that the world’s central banks had gotten so good at countercyclical policy that the business cycle volatility had declined to low levels. As more and more economists and media people became convinced that the risk of recessions had moderated, 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 based on other phenomena, such as improved technology and communications. Contributing to the misperceptions about monetary policy solutions 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. The failure to use aggregation-theoretic quantity, user-cost price, and interest-rate index numbers as official data by central banks often is connected with the misstatement that expenditure share weights move in a predictable manner, when interest rates change. In fact the direction in which a share will change when an interest rate changes depends upon whether or not the price elasticity of demand is greater than or less than -1. No other area of economics has been so seriously damaged by data unrelated to valid index-number and aggregation theory. We provide evidence supporting the view that misperceptions based upon poor data were responsible for excess risk taking by financial firms and borrowers, and by regulators at central banks. We also provide evidence indicating the poor data may have induced the Federal Reserve to underestimate the rate of growth of monetary services and hence to have fed the bubbles with excess liquidity unintentionally. We also provide evidence indicating that a similar misperception produced an excessively contractionary policy that finally burst the bubble. 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 that induced those firms to be willing to take such risks. While there are many considerations relevant to the misguided actions of private firms, individuals, and central banks during the period leading up to the current financial crisis, there is one common thread associated with all of them: misperceptions induced by poor data disconnected from the relevant economic aggregation theory.
    Keywords: Measurement error, monetary aggregation, Divisia index, aggregation, monetary policy, index number theory, financial crisis, great moderation, Federal Reserve.
    JEL: E40 E52 E58 C43 E32
    Date: 2008–11
  17. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pedro Gomes (London School of Economics & Political Science; STICERD – Suntory and Toyota InternationalCentres for Economics and Related Disciplines, Houghton Street, London WC2A 2AE, U.K..)
    Abstract: We analyse the interactions between public and private sector wages per employee in OECD countries. We motivate the analysis with a dynamic labour market equilibrium model with search and matching frictions to study the effects of public sector employment and wages on the labour market, particularly on private sector wages. Our empirical evidence shows that the growth of public sector wages and of public sector employment positively affects the growth of private sector wages. Moreover, total factor productivity, the unemployment rate, hours per worker, and inflation, are also important determinants of private sector wage growth. With respect to public sector wage growth, we find that, in addition to some market related variables, it is also influenced by fiscal conditions. JEL Classification: E24, E62, H50.
    Keywords: public wages, private wages, employment.
    Date: 2008–11
  18. By: Marco Bonomo; Carlos Carvalho
    Abstract: The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. Therefore, the study of how policymakers' credibility affects the outcome of an announced disinflation should include an analysis of the determinants of the frequency of price adjustments. In this paper, we examine how credibility affects the outcome of a disinflation in a model with endogenous time-dependent pricing rules. Both the initial degree of price rigidity, calculated optimally, and, more notably, changes in the duration of price spells during disinflation play an important role in explaining the effects of imperfect credibility. We initially consider the costs of disinflation when the degree of credibility is fixed, and then allow agents to use Bayes' rule to update beliefs about the "type" of monetary authority that they face. In both cases, the interaction between the endogeneity of time-dependent rules and imperfect credibility increases the output costs of disinflation. The pattern of the output response is more realistic in the case with learning.
    Keywords: Inflation (Finance) ; Pricing ; Monetary policy ; Price levels
    Date: 2008
  19. By: Paul Gomme (Department of Economics, Concordia University); B. Ravikumar (Department of Economics, University of Iowa); Peter Rupert (Department of Economics, University of California, Santa Barbara)
    Abstract: We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. Specifically, we construct a quarterly time series of the after-tax return to business capital. The business cycle properties of this return differs considerably from those of the S&P 500 returns. First, its volatility is considerably smaller than that of S\&P 500 returns. Second, our measured return is procyclical and leads output by one quarter; S&P 500 returns are countercyclical and lead the cycle by four quarters. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output), and does well in capturing the lead-lag pattern. We consider several departures from the benchmark model; the model with stochastic taxes captures nearly 85% of the relative volatility in the return to capital and the model with high risk aversion captures 80% of the relative volatility. We then include capital gains in our measurement and use a model with investment specific technological change to address the higher volatility in the return to capital. This model accounts for more than 80% of the return volatility, and essentially all of the relative volatility.
    Keywords: return to capital, business cycles, asset returns
    JEL: E01 E32 E13
    Date: 2008–04
  20. By: Albrecht Ritschl; Samad Sarferaz; Martin Uebele
    Abstract: This paper presents insights on U.S. business cycle volatility since 1867 de- rived from diffusion indices. We employ a Bayesian dynamic factor model to obtain aggregate and sectoral economic activity indices. We find a remarkable increase in volatility across World War I, which is reversed after World War II. While we can generate evidence of postwar moderation relative to pre-1914, this evidence is not robust to structural change, implemented by time-varying factor loadings. We do find evidence of moderation in the nominal series, however, and reproduce the standard result of moderation since the 1980s. Our estimates broadly confirm the NBER historical business cycle chronology as well the National Income and Product Accounts, except for World War II where they support alternative estimates of Kuznets (1952).
    Keywords: U.S. business cycle, volatility, dynamic factor analysis
    JEL: N11 N12 C43 E32
    Date: 2008–11
  21. By: Ali Choudhary (University of Surrey and State Bank of Pakistan); Adnan Haider (State Bank of Pakistan)
    Abstract: We assess the power of artificial neural network models as forecasting tools for monthly inflation rates for 28 OECD countries. For short out-of-sample forecasting horizons, we find that, on average, for 45% of the countries the ANN models were a superior predictor while the AR1 model performed better for 21%. Furthermore, arithmetic combinations of several ANN models can also serve as a credible tool for forecasting inflation.
    Keywords: Artificial Neural Networks; Forecasting; Inflation
    JEL: C51 C52 C53 E31 E37
    Date: 2008–11
  22. By: Alina Barnett (University of Warwick, Coventry CV4 7AL, UK.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We use a structural VAR with sign restrictions to jointly identify the impact of monetary policy, private absorption, technology and oil price shocks on current account fluctuations in the U.S.. We derive the sign restrictions from theoretical impulse response functions of a DSGE model with oil, ensuring that these are consistent with a broad range of parameter values. We find that a contractionary oil price shock has a negative effect on the current account which lasts for approximately 3 years. We also find that monetary policy shocks and private absorption shocks are the main drivers of historical current account deteriorations in the U.S. Furthermore, monetary policy shocks can explain approximately 60 percent at a one year forecast horizon, although this reduces to around 40 per cent at a 7 year horizon, whilst the oil price explains just under 10 percent of the forecast error variance of the U.S. current account. JEL Classification: E0, F32, F4.
    Keywords: Current Account, Global Imbalances, Sign Restrictions.
    Date: 2008–11
  23. 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.
    Date: 2008
  24. By: Tatom, John
    Abstract: The continuing foreclosure crisis worsened in October 2008. The Federal Reserve (Fed) continued the aggressive expansion of new private credit that it began in mid-September and it created three new credit facilities to add to the plethora of other facilities created since the financial crisis component of the foreclosure crisis began in August 2007. These new facilities are aimed at stabilizing the commercial paper (CP) market, most recently adversely affected by the failure of Lehman Brothers and the failures of several money market mutual funds (MMMF). From mid-September to the end of October, the Fed more than doubled its total assets, largely by expanding its private sector lending. Perhaps the most significant question to emerge over the past two months is whether the Fed has an exit strategy to pull all of this new financial asset creation out after it succeeds in stemming deflation and before it kick starts the economy into a major inflation problem.
    Keywords: commercial paper; monetary policy; financial crisis
    JEL: E58 G28 G21
    Date: 2008–10–31
  25. By: Manoj Atolia (Department of Economics, Florida State University); Santanu Chatterjee (Terry College of Business, University of Georgia); Stephen J. Turnovsky (Department of Economics, University of Washington)
    Abstract: The standard procedure for analyzing transitional dynamics in non-linear macro models has been to employ linear approximations. This raises the central question of this paper: How reliable is this procedure in evaluating the dynamic adjustments to policy changes or structural shocks? This question is significant since one of the basic objectives of contemporary micro-based macroeconomic models is the analysis of intertemporal welfare. We analyze this issue in the context of a neoclassical Ramsey growth model, with two alternative specifications of productive government spending, by employing both linearization and non-linear solution techniques. We find that if government expenditure is introduced as a flow and the dynamic adjustment is fast, linearization may be a reasonably good approximation of the true dynamics even for fairly large policy shocks. In contrast, if government expenditure assumes the form of a stock, leading to more sluggish adjustment, linearization is more problematic. The linearization procedure may yield misleading predictions, both qualitatively and quantitatively. These occur at the beginning of the transition and therefore weigh heavily in intertemporal welfare calculations. These patterns are verified for temporary shocks as well.
    Keywords: Public expenditure, growth, nonlinearities, welfare analysis
    JEL: E62 O41
    Date: 2008–01
  26. By: Martin Cincibuch; Tomas Holub; Jaromir Hurnik
    Abstract: This paper discusses the issue of central bank losses, developing a framework for assessing the ability of a central bank to keep its balance sheet sustainable without having to default on its policy objectives. Compared to the earlier literature, it analyses in more depth the consequences of economic convergence for the evolution of the central bank’s balance sheet and the important role played in this process by the risk premium and equilibrium real exchange rate appreciation. A combination of a closed-form comparative-static analysis and numerical solutions of the future evolution of the central bank’s own capital is used. Applying the framework to the Czech National Bank’s case, the paper concludes that the CNB should be able to repay its accumulated loss in about 15 years without any transfer from public budgets.
    Keywords: Balance sheet, central bank, economic convergence, monetary policy, real appreciation, risk premium, seigniorage, transition.
    JEL: E52 E58
    Date: 2008–10
  27. By: Yiting Li; Guillaume Rocheteau
    Abstract: We study counterfeiting of currency in a search–theoretic model of monetary exchange. In contrast to Nosal and Wallace (2007), we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility to counterfeit ?at money can affect its value, velocity, output and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trades in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society’s welfare, but the latter policy does not always decrease counterfeiting.
    Keywords: Counterfeits and counterfeiting
    Date: 2008
  28. By: Les Oxley, (University of Canterbury); Marco Reale; Granville Tunnicliffe Wilson
    Abstract: In this paper graphical modelling is used to select a sparse structure for a multivariate time series model of New Zealand interest rates. In particular, we consider a recursive structural vector autoregressions that can subsequently be described parsimoniously by a directed acyclic graph, which could be given a causal interpretation. A comparison between competing models is then made by considering likelihood and economic theory.
    Keywords: Graphical models; directed acyclic graphs; term structure; causality.
    JEL: E43 E44 C01 C32
    Date: 2008–11–28
  29. By: Andrew T. Foerster; Pierre-Daniel G. Sarte; Mark W. Watson
    Abstract: This paper uses factor analytic methods to decompose industrial production (IP) into components arising from aggregate shocks and idiosyncratic sector-specific shocks. An approximate factor model finds that nearly all (90%) of the variability of quarterly growth rates in IP are associated with common factors. Because common factors may reflect sectoral shocks that have propagated by way of input-output linkages, we then use a multisector growth model to adjust for the effects of these linkages. In particular, we show that neoclassical multisector models, of the type first introduced by Long and Plosser (1983), produce an approximate factor model as a reduced form. A structural factor analysis then indicates that aggregate shocks continue to be the dominant source of variation in IP, but the importance of sectoral shocks more than doubles after the Great Moderation (to 30%). The increase in the relative importance of these shocks follows from a fall in the contribution of aggregate shocks to IP movements after 1984.
    Keywords: Econometric models ; Business cycles
    Date: 2008
  30. By: Elmar Mertens (Study Center Gerzensee and University of Lausanne);
    Abstract: Optimal monetary policy becomes tricky when the central bank has better information than the public: Policy does not only affect economic fundamentals, but also people’s beliefs. For a general class of widely studied DSGE models, this paper derives the optimal discretionary policy under hidden information. Illustrated with a simple New Keynesian model, the introduction of hidden information has striking effects on discretionary policies: Policy losses are better under hidden information than under full transparency. Looking at Markov-perfect policies excludes reputational mechanisms via history dependent strategies. Under full transparency, discretion policies are then myopic, since a current policymaker cannot influence future decisions. But imperfect information adds public beliefs as a distinct, endogenous state variable. Managing beliefs connects the actions of policymakers such that they realize the inflationary consequences of expansionary policies. The optimal policy shares similarities with those from commitment models. Additionally, disinflations are pursued more vigorously the larger the credibility problems from hidden information. Optimal policy also responds to belief shocks, which shift public perceptions about fundamentals even when those fundamentals are unchanged.
    Date: 2008–11
  31. By: Balazs Egert; Dubravko Mihaljek
    Abstract: This paper studies the determinants of house prices in eight transition economies of Central and Eastern Europe (CEE) and 19 OECD countries. The main question addressed is whether the conventional fundamental determinants of house prices, such as GDP per capita, real interest rates, housing credit and demographic factors, have driven observed house prices in CEE. We show that house prices in CEE are determined to a large extent by the underlying conventional fundamentals and some transition-specific factors, in particular institutional development of housing markets and housing finance and quality effects.
    Keywords: Central and Eastern Europe, house prices, housing market, OECD countries, transition economies.
    JEL: E20 E39 P25 R21 R31
    Date: 2008–10
  32. By: Morten L. Bech; Enghin Atalay
    Abstract: The recent turmoil in global financial markets underscores the importance of the federal funds market as a means of distributing liquidity throughout the financial system and a tool for implementing monetary policy. In this paper, we explore the network topology of the federal funds market. We find that the network is sparse, exhibits the small-world phenomenon, and is disassortative. In addition, reciprocity loans track the federal funds rate, and centrality measures are useful predictors of the interest rate of a loan.
    Keywords: Federal funds market (United States) ; Liquidity (Economics) ; Monetary policy ; Federal funds rate
    Date: 2008
  33. By: James B. Bullard; Jacek Suda
    Abstract: We study abstract macroeconomic systems in which expectations play an important role. Consistent with the recent literature on recursive learning and expectations, we replace the agents in the economy with econometricans. Unlike the recursive learning literature, however, the econometricians in the analysis here are Bayesian learners. We are interested in the extent to which expectational stability remains the key concept in the Bayesian environment. We isolate conditions under which versions of expectational stability conditions govern the stability of these systems just as in the standard case of recursive learning. We conclude that the more sophisticated Bayesian learning schemes do not alter the essential expectational stability findings in the literature.
    Keywords: Rational expectations (Economic theory)
    Date: 2008
  34. By: Stefania D'Amico; Athanasios Orphanides
    Abstract: Using the probabilistic responses from the Survey of Professional Forecasters, we study the evolution of uncertainty and disagreement associated with inflation forecasts in the United States since 1968. We compare and contrast alternative measures summarizing the distributions of mean forecasts and forecast uncertainty across individuals at an approximate one-year-ahead horizon. In light of the heterogeneity in individual uncertainty reflected in the survey responses, we provide quarterly estimates for both average uncertainty and disagreement regarding uncertainty. We propose direct estimation of parametric distributions characterizing the uncertainty across individuals in a manner that mitigates errors associated with rounding and approximation of responses when individual uncertainty is small. Our results indicate that higher average expected inflation is associated with both higher average inflation uncertainty and greater disagreement about the inflation outlook. Disagreement about the mean forecast, however, may be a weak proxy for forecast uncertainty. We also examine the relationship of these measures with the term premia embedded in the term-structure of interest rates.
    Date: 2008
  35. By: V.V. Chari; Lawrence J. Christiano; Patrick J. Kehoe
    Abstract: The United States is indisputably undergoing a financial crisis. Here we examine four claims about the way the financial crisis is affecting the economy as a whole and argue that all four claims are myths. Conventional analyses of the financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing.
    Keywords: Financial crises
    Date: 2008
  36. By: Jennifer Roush; William Dudley; Michelle Steinberg Ezer
    Abstract: Several studies have shown that, ex-post, the issuance of Treasury Inflation-Protected Securities (TIPS) has cost U.S. taxpayers money. We propose that evaluations of the TIPS program be more comprehensive and focus on the ex-ante costs of TIPS issuance versus nominal Treasury issuance and, especially when these costs are negligible, the more difficult-to-measure benefits of the program. Our study finds that the ex-ante costs of TIPS issuance versus nominal Treasury issuance are currently about equal and that TIPS provide meaningful benefits to investors and policymakers.
    Keywords: Treasury bonds ; Government securities ; Inflation risk ; Liquidity (Economics)
    Date: 2008
  37. By: Gregor Bäurle
    Abstract: We propose a method to incorporate information from Dynamic Stochastic General Equilibrium (DSGE) models into Dynamic Factor Analysis. The method combines a procedure previously applied for Bayesian Vector Autoregressions and a Gibbs Sampling approach for Dynamic Factor Models. The factors in the model are rotated such that they can be interpreted as variables from a DSGE model. In contrast to standard Dynamic Factor Analysis, a direct economic interpretation of the factors is given. We evaluate the forecast performance of the model with respect to the amount of information from the DSGE model included in the estimation. We conclude that using prior information from a standard New Keynesian DSGE model improves the forecast performance. We also analyze the impact of identified monetary shocks on both the factors and selected series. The interpretation of the factors as variables from the DSGE model allows us to use an identification scheme which is directly linked to the DSGE model. The responses of the factors in our application resemble responses found using VARs. However, there are deviations from standard results when looking at the responses of specific series to common shocks.
    Keywords: Dynamic Factor Model; DSGE Model; Bayesian Analysis; Forecasting; Transmission of Shocks
    JEL: C11 C32 E0
    Date: 2008–08
  38. By: Jan Toporowski
    Abstract: These notes present a new approach to corporate finance, one in which financing is not determined by prospective income streams but by financing opportunities, liquidity considerations, and prospective capital gains. This approach substantially modifies the traditional view of high interest rates as a discouragement to speculation; the Keynesian and Post-Keynesian theory of liquidity preference as the opportunity cost of investment; and the notion of the liquidity premium as a factor in determining the rate of interest on longer-term maturities.
    Date: 2008–11
  39. By: Reinhart, Carmen
    Abstract: The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. With a few notable exceptions, cross-country empirical studies on financial crises typically begin in 1980 and are limited in other important respects. Yet an event that is rare in a three decade span may not be all that rare when placed in a broader context. In my paper with Kenneth Rogoff we introduce a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements. The data covers sixty-six countries in across all regions. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries.
    Keywords: Financial crises; inflation;; default
    JEL: E0
    Date: 2008–03
  40. By: Cars Hommes; Thomas Lux
    Abstract: Models with heterogeneous interacting agents explain macro phenomena through interactions at the micro level. We propose genetic algorithms as a model for individual expectations to explain aggregate market phenomena. The model explains all stylized facts observed in aggregate price fluctuations and individual forecasting behaviour in recent learning to forecast laboratory experiments with human subjects (Hommes et al. 2007), simultaneously and across different treatments
    Keywords: Learning, heterogeneous expectations, genetic algorithms, experimental economics
    JEL: C91 C92 D83 D84 E3
    Date: 2008–11
  41. By: Nils Herger (Study Center Gerzensee);
    Abstract: Using count data on the number of bank failures in US states during the 1960 to 2006 period, this paper endeavors to establish how far sources of economic risk (recessions, high interest rates, in ation) or differences in solvency and branching regulation can explain some of the fragility in banking. Assuming that variables are predetermined, lagged values provide instruments to absorb potential endogeneity between the number of bank failures and economic and regulatory conditions. Results suggest that bank failures are not merely self-fulfilling prophecies but relate systematically to inflation as well as to policy changes in banking regulation. Furthermore, in terms of statistical and economic significance, the distribution and development of bankruptcies across US states depends crucially on past bank failures suggesting that contagion provides an important channel through which banking crises emerge.
    Date: 2008–11
  42. By: Angela Redish; Warren E. Weber
    Abstract: Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving.
    Keywords: Coinage
    Date: 2008
  43. By: Eckhard Hein (IMK at the Hans Boeckler Foundation and Carl von Ossietzky University Oldenburg, Germany); Marc Lavoie (University of Ottawa); Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: We tackle the issue of the possible instability of the Kaleckian distribution and growth model and the consequences for the endogeneity of the equilibrium rate of capacity utilization and for the paradox of thrift and the paradox of costs. Distinguishing between Keynesian and Harrodian instability, we review various mechanisms that have been proposed to tame Harrodian instability while bringing back the rate of utilization to its normal rate. We find that the mechanisms that have been suggested are far from being convincing. We thus review some approaches arguing that the adjustment towards a predetermined normal rate should not be expected at all, either because the normal rate reacts to the actual rate, or because of other constraints on the behaviour of entrepreneurs. We conclude that Kaleckian models are more flexible than their Harrodian and Marxian critics suppose when attacking the simple textbook version.
    Keywords: Kaleckian models, distribution, investment function, stability, utilization rate.
    JEL: E12 E20 O41
    Date: 2008
  44. By: Claude Lopez; David H. Papell
    Abstract: While panel unit root tests have been used to investigate a wide range of macroeconomic issues, the tests suffer from low power to reject the unit root null in panels of stationary series if the panels consist of highly persistent series, contain a small number of series, and/or have series with a limited length. We propose a new procedure to increase the power of panel unit root tests when used to study convergence by testing for stationarity between a group of series and their cross-sectional means. Although each differential has non-zero mean, the group of differentials has a cross-sectional average of zero for each time period by construction, and we incorporate this constraint for estimation and when generating finite sample critical values. This procedure leads to significant power gains for the panel unit root test. We apply our new approach to study inflation convergence within the Euro Area countries for the post 1979 period. The results show strong evidence of convergence soon after the implementation of the Maastricht treaty. Furthermore, median unbiased estimates of the half life for the period before and after the Euro show a dramatic decrease in the persistence of the differential after the occurrence of the single currency.
    Date: 2008
  45. By: Lutz Kilian; Clara Vega
    Abstract: Models that treat innovations to the price of energy as predetermined with respect to U.S. macroeconomic aggregates are widely used in the literature. For example, it is common to order energy prices first in recursively identified VAR models of the transmission of energy price shocks. Since exactly identifying assumptions are inherently untestable, this approach in practice has required an act of faith in the empirical plausibility of the delay restriction used for identification. An alternative view that would invalidate such models is that energy prices respond instantaneously to macroeconomic news, implying that energy prices should be ordered last in recursively identified VAR models. In this paper, we propose a formal test of the identifying assumption that energy prices are predetermined with respect to U.S. macroeconomic aggregates. Our test is based on regressing cumulative changes in daily energy prices on daily news from U.S. macroeconomic data releases. Using a wide range of macroeconomic news, we find no compelling evidence of feedback at daily or monthly horizons, contradicting the view that energy prices respond instantaneously to macroeconomic news and supporting the use of delay restrictions for identification.
    Date: 2008
  46. By: Young-Bae Kim (University of Surrey)
    Abstract: The paper theoretically and empirically investigates the effect of changes in national labourmarket conditions on regional growth from the point of view of local economies. The mechanism of efficiency wage is introduced to a growth model and it is argued that local regions belonging to richer countries would experience slower economic growth than those in poorer countries, ceteris paribus. The model emphasises the process of interregional wage dependence in which national average wage or income plays an important role in determining regional wages and growth. The empirical findings from EU regional data also suggest that national income is significantly and negatively associated with regional growth. The adverse effect of national income on regional growth is also observed to be stronger among richer regions whose income is above the national average.
    Keywords: Artificial Neural Networks; Forecasting; Inflation
    JEL: C51 C52 C53 E31 E37
    Date: 2008–11
  47. By: Smith, Reginald
    Abstract: Currency logistics is becoming a field of increasing interest and importance both in government and academic circles. In this paper, a basic description of China's nationwide logistics network for the Renminbi is discussed and analyzed. In addition to its basic structure, its key problems such as production costs, inventory levels, and transportation and storage security are discussed.
    Keywords: currency; logistics; China; money supply
    JEL: E42 E58
    Date: 2008–11–30
  48. By: Kamila Fialová (Komerční Banka, Prague; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper concerns the labour market differences among the 77 districts of the Czech Republic. There was a remarkable trend of increasing regional labour market differentiation in the 1990’s, however, the patterns of differentiation have stabilised since then. The first part of the paper aims to describe the regional differentiation in wages and unemployment on the descriptive method basis. The other part of the study attempts to explain the differences in wages by an econometric model. We focus on the effect of unemployment rate, representing an exogenous factor of the region itself. The model’s specification arises out of the general concept of wage differentiation and the concept of the wage curve. According to our analysis there were several factors of influence on the regional wage differentiation in 2001: educational structure of the population, employment structure of the regional economy, degree of economic concentration, and district rate of unemployment. The coefficient of the unemployment elasticity of wages equals –0.08, which can be considered as evidence of the existence of the wage curve in the districts of the Czech Republic. Moreover, the relationship is stronger in the low-unemployment districts.
    Keywords: regional disparities, wages, unemployment, wage curve
    JEL: E24 J31 J64 R23
    Date: 2008–11
  49. By: Pierre van der Eng
    Abstract: This paper presents long-term estimates of gross fixed capital formation for 1951-2007 that are disaggregated by categories of productive assets. These data, combined with approximations of probable average asset lives and a feasible asset retirement method are used in a Perpetual Inventory Method to estimate gross fixed capital stock in Indonesia for 1950-2007 disaggregated by productive assets. Most of Indonesia’s capital stock long consisted of residential and non-residential structures. Total capital stock grew significantly since the late-1960s at about 10% per year, until the 1997-98 economic crisis. The high capital-output ratio in 1997 suggests that part of Indonesia’s high economic growth during the 1990s was due to unsustainable resource accumulation.
    Keywords: investment, capital formation, capital stock, economic growth, Indonesia
    JEL: E22 E43 N15 O11 O47
    Date: 2008
  50. By: Meredith Beechey; Erik Hjalmarsson; Par Osterholm
    Abstract: Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries we consider, and the cointegrating vector is similar across countries. However, the parameters differ from those suggested by theory. We relate our findings to existing literature on the failure of the expectations hypothesis and to the role of term premia.
    Date: 2008
  51. By: Thomas Flury; Neil Shephard
    Abstract: Suppose we wish to carry out likelihood based inference but we solely have an unbiased simulation based estimator of the likelihood. We note that unbiasedness is enough when the estimated likelihood is used inside a Metropolis-Hastings algorithm. This result has recently been intro- duced in statistics literature by Andrieu, Doucet, and Holenstein (2007) and is perhaps surprising given the celebrated results on maximum simulated likelihood estimation. Bayesian inference based on simulated likelihood can be widely applied in microeconomics, macroeconomics and financial econometrics. One way of generating unbiased estimates of the likelihood is by the use of a particle filter. We illustrate these methods on four problems in econometrics, producing rather generic methods. Taken together, these methods imply that if we can simulate from an economic model we can carry out likelihood based inference using its simulations.
    Keywords: Dynamic stochastic general equilibrium models, inference, likelihood, MCMC, Metropolis-Hastings, particle filter, state space models, stochastic volatility
    JEL: C11 C13 C15 C32 E32
    Date: 2008
  52. By: Baharom, A.H.; Habibullah, M.S.
    Abstract: This study examines the meaningful relationship between economic growth, and service sector contribution and domestic investment in two major Asian economies, namely India and China. Autoregressive Distributed Lag (ARDL) bounds testing procedure is employed to analyze the impact of the selected variables namely (1) contribution by the service sector, (2) (4) domestic investment on economic growth and vice versa. The period of interest is 1960-2005 using annual data. The empirical results demonstrate that for the case of India, there is (1) a unidirectional causality from domestic investment to economic growth and (2) from economic growth to services. As for China, only unidirectional causality from services sector to economic growth is detected, while no meaningful relationship was found between domestic investment and economic growth.
    Keywords: Service-led; investment-led; growth; China; India
    JEL: E22 E01
    Date: 2008–10–17
  53. By: Habibullah, M.S.; Baharom, A.H.
    Abstract: Economists recognized that economic conditions have an impact on crime activities. In this study we employed the Autoregressive Distributed Lag (ARDL) bounds testing procedure to analyze the impact of economic conditions on various categories of criminal activities in Malaysia for the period 1973-2003. Real gross national product was used as proxy for economic conditions in Malaysia. Our results indicate that murder, armed robbery, rape, assault, daylight burglary and motorcycle theft exhibit long-run relationships with economic conditions, and the causal effect in all cases runs from economic conditions to crime rates and not vice versa. In the long-run, strong economic performances have a positive impact on murder, rape, assault, daylight burglary and motorcycle theft, while on the other hand, economic conditions have negative impact on armed robbery.
    Keywords: Bounds Testing; Malaysia; Crime
    JEL: E24 E00
    Date: 2008–10–12
  54. By: Baharom, A.H.; Habibullah, M.S.
    Abstract: This paper examines the causality between income, unemployment and crime in 11 European countries employing the panel data analysis for the period 1993-2001 for both aggregated (total crime) and disaggregated (subcategories) crime data. Fixed and random effect models are estimated to analyze the impact of income and unemployment on total crime and various disaggregated categories of criminal activities. Hypothesis tests show that random effect model should be used for all (namely total crime, motor vehicle crime, domestic burglary, and violent crime) except for drug trafficking. Our results indicate that both income and unemployment have meaningful relationship with both aggregated and disaggregated crime. Crime exhibits positive significant relationship with income for all the categories except for domestic burglary, whereby it is significantly negative relationship. Crime also shows positive significant relationship with unemployment except for violent crime, whereby it is significantly negative relationship. The results also show strong country specific effect in determining the crime level.
    Keywords: income; unemployment; crime; Europe; panel data analysis
    JEL: E24 E26
    Date: 2008–10–16

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