nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒01‒03
124 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods By Andreas Beyer; Vitor Gaspar; Christina Gerberding; Otmar Issing
  2. Financial shocks and the US business cycle By Charles Nolan; Christoph Thoenissen
  3. Central Banks Two-Way Communication with the Public and Inflation Dynamics By Kosuke Aoki; Takeshi Kimura
  4. Long Run Inflation Indicators – Why the ECB got it Right By Andersson, Fredrik N. G.
  5. The price puzzle: Mixing the temporary and permanent monetary policy shocks By Ida Wolden Bache; Kai Leitemo
  6. Inflation Forecasting with Inflation Sentiment Indicators By Roland Döhrn; Christoph M. Schmidt; Tobias Zimmermann
  7. Revealing the preferences of the US Federal Reserve By Pelin Ilbas
  8. Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve By Canale, Rosaria Rita
  9. A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles By Scheffel, Eric
  10. Sticky Prices, Limited Participation, or Both? By Niki X. Papadopoulou
  11. The Role of International Shocks in Australia's Business Cycle By Philip Liu
  12. The Impact of Introducing a Minimum Wage on Business Cycle Volatility: A Structural Analysis for Hong Kong SAR By Nathaniel John Porter; Francis Vitek
  13. The Effects of Monetary Policy in the Czech Republic: An Empirical Study By Magdalena Morgese Borys; Roman Horvath
  14. Switching to the Inflation Targeting Regime: Does it necessary for the case of Egypt? By Ibrahim L. Awad
  15. Futures contract rates as monetary policy forecasts By Giuseppe Ferrero; Andrea Nobili
  16. The Macroeconomic Effects of Fiscal Policy By António Afonso; Ricardo M. Sousa
  17. The Macroeconomic Effects of Fiscal Policy By Ricardo M. Sousa; António Afonso
  18. New issues in Indian macro policy. By Shah, Ajay
  19. Financial Intermediation, Liquidity and Inflation By Jonathan Chiu; Cesaire Meh
  20. The role of house prices in the monetary policy transmission mechanism in the U.S. By Hilde C. Bjørnland; Dag Henning Jacobsen
  21. The “Credit–Cost Channel” of Monetary Policy. A Theoretical Assessment By Tamborini, Roberto
  22. An Empirical Analysis of the Curvature Factor of the Term Structure of Interest Rates By Matteo Modena
  23. Core Inflation - Why the Federal Reserve Got it Wrong By Andersson, Fredrik N. G.
  24. Optimal Monetary Policy under Imperfect Financial Integration By Nao Sudo; Yuki Teranishi
  25. Stock Market Uncertainty and Monetary Policy Reaction Functions of the Federal Reserve Bank By Mario Jovanovic; Tobias Zimmermann
  26. Measuring monetary policy expectations from financial market instruments By Joyce, Michael; Relleen, Jonathan; Sorensen, Steffen
  27. A no-arbitrage structural vector autoregressive model of the UK yield curve By Kaminska, Iryna
  28. Inflation Determinants in Paraguay: Cost Push versus Demand Pull Factors By Brieuc Monfort; Santiago Peña
  29. Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates By Michael Joyce; Jonathan Relleen; Steffen Sorensen
  30. What Happens During Recessions, Crunches, and Busts? By M. Ayhan Kose; Stijn Claessens; Marco Terrones
  31. Estimating the output gap in real time: A factor model approach By Knut Are Aastveit; Tørres G. Trovik
  32. Fiscal Policy, Wealth Effects, and Markups By Tommaso Monacelli; Roberto Perotti
  33. Communicating monetary policy intentions: The case of Norges Bank By Amund Holmsen; Jan F. Qvigstad; Øistein Røisland; Kristin Solberg-Johansen
  34. Imperfect Knowledge and the Pitfalls of Optimal Control Monetary Policy By Athanasios Orphanides; John C. Williams
  35. Learning, Expectations Formation, and the Pitfalls of Optimal Control Monetary Policy By Athanasios Orphanides; John C. Williams
  36. Russian economic report No.16 (June 2008), The World Bank By Bogetic, Zeljko; Ulatov, Sergey; Emelyanova, Olga; Smits, Karlis
  37. Financial globalization and monetary policy By Devereux, Michael B.; Sutherland, Alan
  38. Fiscal Policy, Housing and Stock Prices By António Afonso; Ricardo M. Sousa
  39. The Financial Accelerator: Evidence using a procedure of Structural Model Design By Roger Hammersland and Dag Henning Jacobsen
  40. Macroeconomic Agenda for Fiscal Policy and Aid Effectiveness in Post-Conflict Countries By AZAM, Jean-Paul
  41. The Great Moderation and the New Business Cycle By Spehar, Ann O'Ryan
  42. Modelling short-term interest rate spreads in the euro money market By Nuno Cassola; Claudio Morana
  43. What explains the spread between the euro overnight rate and the ECB's policy rate? By Tobias Linzert; Sandra Schmidt
  44. Banking globalization, monetary transmission and the lending channel By Cetorelli, Nicola; Goldberg, Linda S.
  45. Sales and Monetary Policy By Bernardo Guimaraes; Kevin D. Sheedy
  46. Extracting market expectations from yield curves augmented by money market interest rates - the case of Japan By Teppei Nagano; Naohiko Baba
  47. Real Wages over the Business Cycle: OECD Evidence from the Time and Frequency Domains By Messina, Julián; Strozzi, Chiara; Turunen, Jarkko
  48. Fiscal Policy Responiveness, Persistence and Discretion By António Afonso; Luca Agnello; Davide Furceri
  49. The daily and policy-relevant liquidity effects By Daniel L. Thornton
  50. Shocks and rigidities as determinants of CEE labor markets' performance. A panel SVECM approach By Bukowski, Maciej; Koloch, Grzegorz; Lewandowski, Piotr
  51. Interactions between Private and Public Sector Wages By António Afonso; Pedro Gomes
  52. A Thermodynamic Approach to Monetary Economics. An application to the UK Economy 1969-2006 and the USA Economy 1966-2006 By John Bryant
  53. Understanding the real rate conundrum: an application of no-arbitrage finance models to the UK real yield curve By Joyce, Michael; Kaminska, Iryna; Lildholdt, Peter
  54. Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism? By Claudio Borio; Sahminan Haibin Zhu
  55. Macroeconomic Relaxation: Adjustment Processes of Hierarchical Economic Structures By Hawkins, Raymond J.; Aoki, Masanao
  56. A Term Structure Decomposition of the Australian Yield Curve By Richard Finlay; Mark Chambers
  57. Consumption Velocity in a Cash Costly-Credit Model By Scheffel, Eric
  58. The Term Structure and the Expectations Hypothesis: a Threshold Model By Matteo Modena
  59. Impact of bank competition on the interest rate pass-through in the euro area By Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian van Rixtel
  60. Analyzing Determinants of Inflation When There Are Data Limitation:The Case of Sierra Leone By Jan Gottschalk; Ken Miyajima; Kadima D. Kalonji
  61. Fiscal Policy Responsiveness, Persistence, and Discretion By António Afonso; Luca Agnello; Davide Furceri
  62. Early warnings of inflation in India. By Bhattacharya, Rudrani; Patnaik, Ila; Shah, Ajay
  63. Globalisation, import prices and inflation dynamics By Peacock, Chris; Baumann, Ursel
  64. Are economic growth and the variability of the business cycle related ? Evidence from five European countries By Stilianos Fountas; Menelaos Karanasos
  65. Managing capital flows: The case of India. By Shah, Ajay; Patnaik, Ila
  66. Expenditure Ceilings - A Survey By Gösta Ljungman
  67. Solving Linear Rational Expectations Models with Predictable Structural Changes By Adam Cagliarini; Mariano Kulish
  68. "Euler Equation Branching" By David R. Stockman and Brian E. Raines
  69. A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules By Groneck, Max
  70. Fiscal policy economic reforms. By Reddy, Y.V.
  71. Exchange Rate Volatility and Output Volatility: a Theoretical Approach By Maria Grydaki; Stilianos Fountas
  72. Early estimates of euro area real GDP growth - a bottom up approach from the production side. By Elke Hahn; Frauke Skudelny
  73. DSGE Models and Central Banks By Tovar, Camilo Ernesto
  74. A Small Quarterly Multi-Country Projection Model with Financial-Real Linkages and Oil Prices By Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard
  75. Understanding the Contributions of Reallocation to Productivity Growth: Lessons from a Comparative Firm-Level Analysis By J. David Brown; John Earle
  76. Schumpeterian Foundations of Real Business Cycles By Galo Nuño Barrau
  77. Strain and Inflation-Unemployment Relationship: A conceptual and empirical investigation By Daianu, Daniel; Albu, Lucian Liviu
  78. One-Size-Fits-One: Tailor-Made Fiscal Responses to Capital Flows By Daria Zakharova
  79. Modeling Maximum Entropy and Mean-Field Interaction in Macroeconomics By Di Guilmi, Corrado; Gallegati, Mauro; Landini, Simone
  80. Equity Depletion from Government-Guaranteed Debt By Robert E. Hall
  81. Policy Rate Decisions and Unbiased Parameter Estimation in Conventionally Estimated Monetary Policy Rules By Jiri Podpiera
  82. Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates By Massimo Guidolin; Daniel L. Thornton
  83. How much nominal rigidity is there in the US economy? Testing a New Keynesian DSGE Model using indirect inference By Le, Vo Phuong Mai; Minford, Patrick; Wickens, Michael
  84. A Small Quarterly Multi-Country Projection Model By Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard
  85. Longevity and Education Externalities: A Macroeconomic Perspective By RICCI Francesco; ZACHARIADIS Marios
  86. The economic and financial crisis in Europe: addressing the causes and the repercussions By Watt, Andrew
  87. Social Security’s Five OASI Inflation Indexing Problems By Lovell, Michael C.
  88. Banking Crises: An Equal Opportunity Menace By Carmen M. Reinhart; Kenneth S. Rogoff
  89. Structural Reform, Intra-Regional Trade, and Medium-Term Growth Prospects of East Asia and the Pacific --- Perspectives from a new multi-region model By Papa N'Diaye; Ping Zhang; Wenlang Zhang
  90. Fiscal Policy and International Competitiveness: Evidence from Ireland By Vahagn Galstyan and Philip R. Lane
  91. Life Cycle of Products and Cycles By Jean De Beir; Mouez Fodha; Francesco Magris
  92. Why the effective price for money exceeds the policy rate in the ECB tenders? By Tuomas Välimäki
  93. The relationship between housing investment and economic growth in ChinaFA panel analysis using quarterly provincial data By Chen, Jie; Zhu, Aiyong
  94. Combining inflation density forecasts By Christian Kascha; Francesco Ravazzolo
  95. Una Nota sobre Reserva Óptima y Riesgo Soberano: el caso Argentino 1997-2007 By Zarate, Cristina A.
  96. Why Aren't Developed Countries Saving? By Loretti I. Dobrescu; Laurence J. Kotlikoff; Alberto F. Motta
  97. What Can Survey Forecasts Tell Us About Informational Rigidities? By Olivier Coibion; Yuriy Gorodnichenko
  98. Forecast Evaluation of Small Nested Model Sets By Kirstin Hubrich; Kenneth D. West
  99. Strategies for Countries with Favourable Fiscal Positions By Robert Price; Isabelle Joumard; Christophe André; Makoto Minegishi
  100. Fiscal Equalisation and the Soft Budget Constraint By Plachta, Robert
  101. Macroeconomics of Migration in New Member States By Rudolfs Bems; Philip Schellekens
  102. Stress Testing Banks' Credit Risk Using Mixture Vector Autoregressive Models By Tom Pak-wing Fong; Chun-shan Wong
  103. The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory By Aoki, Masanao; Yoshikawa, Hiroshi
  104. Imperfect Central Bank Communication: Information versus Distraction By Spencer Dale; Athanasios Orphanides; Par Osterholm
  105. Trading Frictions and House Price Dynamics By Andrew Caplin; John Leahy
  106. Precautionary Savings by Natives and Immigrants in Germany By Matloob Piracha; Yu Zhu
  107. Deciphering the Liquidity and Credit Crunch 2007-08 By Markus K. Brunnermeier
  108. The Role of Profit Sharing in a Dual Labour Market with Flexible Outsourcing By Koskela, Erkki; König, Jan
  109. Unemployment Insurance Generosity: A Trans-Atlantic Comparison By Pallage, Stéphane; Scruggs, Lyle; Zimmermann, Christian
  110. Post Keynesian economics - how to move forward By Engelbert Stockhammer; Paul Ramskogler
  111. A Spatial-Dependence Continuous-Time Model for Regional Unemployment in Germany By Johan H. L. Oud; Henk Folmer; Roberto Patuelli; Peter Nijkamp
  112. Measuring Consumer Preferences and Estimating Demand Systems By Barnett, William A.; Serletis, Apostolos
  113. How do Taxes Affect Investment and Productivity?: An Industry-Level Analysis of OECD Countries By Laura Vartia
  114. Agrarian Structure and Endogenous Financial System Development By Vollrath, Dietrich
  115. Russian economic report No. 17 (November 2008), The World Bank By Zeljko, Bogetic; Karlis , Smits; Sergey , Ulatov; Olga, Emelyanova; Marco , Hernandez
  116. Institutions vs. Policies: A Tale of Two Islands By Peter Blair Henry; Conrad Miller
  117. Measuring the Size of the Informal Economy: A Critical Review By George M. Georgiou
  118. The transformation of work? A quantitative evaluation of changes in work in Portugal By António B. Moniz
  119. The Differential Approach to Demand Analysis and the Rotterdam Model By Barnett, William A.; Serletis, Apostolos
  120. Markets and the role of government in an economy from Islamic perspective By Hasan, Zubair
  121. The causal relationships in mean and variance between stock returns and foreign institutional investment in India By Inoue, Takeshi
  122. Main features of the labour policy in Portugal By António B. Moniz; Tobias Woll
  123. Forecasting Economic Impact of Climate Policy (in Finnish with an English abstract/summary) By Olavi Rantala
  124. Labour Market Institutions and Labour Market Performance in the European Union By Michal, Tvrdon

  1. By: Andreas Beyer; Vitor Gaspar; Christina Gerberding; Otmar Issing
    Abstract: During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time.
    JEL: E31 E32 E41 E52 E58
    Date: 2008–12
  2. By: Charles Nolan; Christoph Thoenissen
    Abstract: Employing the financial accelerator (FA) model of Bernanke, Gertler and Gilchrist (1999) enhanced to include a shock to the FA mechanism, we construct and study shocks to the efficiency of the financial sector in post-war US business cycles. We find that financial shocks are very tightly linked with the onset of recessions, more so than TFP or monetary shocks. The financial shock invariably remains contractionary for sometime after recessions have ended. The shock accounts for a large part of the variance of GDP and is strongly negatively correlated with the external finance premium. Second-moments comparisons across variants of the model with and without a (stochastic) FA mechanism suggests the stochastic FA model helps us understand the data.
    Keywords: Financial accelerator; financial shocks; macroeconomic volatility
    JEL: E30 E44 E52
    Date: 2008–12
  3. By: Kosuke Aoki; Takeshi Kimura
    Abstract: Using a model of island economy where financial markets aggregate dispersed information ofthe public, we analyze how two-way communication between the central bank and the publicaffects inflation dynamics. When inflation target is observable and credible to the public,markets provide the bank with information about the aggregate state of the economy, andhence the bank can stabilize inflation. However, when inflation target is unobservable or lesscredible, the public updates their perceived inflation target and the information revealed frommarkets to the bank becomes less perfect. The degree of uncertainty facing the bank cruciallydepends on how two-way communication works.
    Keywords: Monetary policy, central bank communication, inflation target
    JEL: E31 E52 E58
    Date: 2008–11
  4. By: Andersson, Fredrik N. G. (Department of Economics, Lund University)
    Abstract: This paper studies the issue of whether money contains useful information about future inflation in a panel of nine developed countries. A low frequency estimate of excess money growth is compared to an estimate of the inflation trend following the discussion in Woodford (2007). The empirical analysis shows that money contains more information about future CPI-inflation than an estimate of the inflation trend, and that the output gap has some influence over the medium run movements of inflation, but the effect varies over time. The result is the same for small countries as it is for large countries. Money thus contains information about future headline inflation that the inflation trend does not.
    Keywords: Inflation; Money; Inflation Indicators; Wavelet Analysis
    JEL: C19 E31 E32 E41
    Date: 2008–12–02
  5. By: Ida Wolden Bache (Norges Bank (Central Bank of Norway)); Kai Leitemo (Norwegian School of Management BI)
    Abstract: We argue that the correct identification of monetary policy shocks in a vector autoregression requires that the identification scheme distinguishes between permanent and transitorymonetary policy shocks. The permanent shocks reflect changes in the inflation target while the transitory shocks represent temporary deviations from the interest rate reaction function. Whereas both shocks may raise the nominal interest rate on impact, the inflation and output responses of the two shocks are different. We show, using a simple simulation experiment, that a failure to distinguish between the two types of shocks can result in a ”price puzzle”.
    Keywords: Monetary policy shocks, VAR modeling, identification, price puzzle
    JEL: E47 E52 E61
    Date: 2008–11–03
  6. By: Roland Döhrn; Christoph M. Schmidt; Tobias Zimmermann
    Abstract: In this paper we argue that future inflation in an economy depends on the way people perceive current inflation, their inflation sentiment.We construct some simple measures of inflation sentiment which capture whether price acceleration is shared by many components of the CPI basket. In a comparative analysis of the forecasting power of the different inflation indicators for the US and Germany, we demonstrate that our inflation sentiment indicators improve forecast accuracy in comparison to a standard Phillips curve approach. Because the forecast performance is particularly good for longer horizons, we also compare our indicators to traditional measures of core inflation.Here, the sentiment indicators outperform the weighted median and show a similar forecasting power as a trimmed mean. Thus, they offer a convincing alternative to traditional core inflation measures.
    Keywords: Inflation forecasting, monetary policy
    JEL: E30 E31 E37 C53
    Date: 2008–12
  7. By: Pelin Ilbas (Norges Bank (Central Bank of Norway))
    Abstract: We use Bayesian methods to estimate the preferences of the US Federal Reserve by assuming that monetary policy is performed optimally under commitment since the mid-sixties. For this purpose, we distinguish between three subperiods, i.e. the pre-Volcker, the Volcker-Greenspan and the Greenspan period. The US economy is described by the Smets and Wouters (2007) model. We find that there has been a switch in the monetary policy regime since Volcker, with a focus on output growth instead of the output gap level as a target variable. We further show that both interest rate variability and interest rate smoothing are significant target variables, though less important than the in‡ation and output growth targets. We find that the "Great Moderation" of output growth is largely explained by the decrease in the volatility of the structural shocks. The Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the start of Volcker's mandate. During the Greenspan period, the optimal Taylor rule appears to be equally robust to parameter uncertainty as the unrestricted optimal commitment rule.
    Keywords: optimal monetary policy, central bank preferences, parameter uncertainty
    JEL: E42 E52 E58 E61 E65
    Date: 2007–09–01
  8. By: Canale, Rosaria Rita
    Abstract: The aim of the paper is to present a derivation of a simple tool describing monetary policy behaviour, useful to teach macroeconomic policies in open economies, the MP curve. The objective is to overcome the limits of the standard IS-LM model and underline the importance of the central bank strategy in influencing output and employment. We demonstrate that if the main policy instrument is the interest rate, the monetary policy authorities have very great influence in determining macroeconomic equilibrium. In fact the monetary policy strategy - of which the MP curve is the representation - is able to create, once given the dynamic supply curve and the IS curve, different levels of income in accordance to the inflation target, or different levels of inflation in accordance to the income target. Furthermore - because the nature and form of the MP curve depends both on constraints and targets the monetary policy considers and they might not be correctly interpreted - the central bank could assume a misleading behaviour, guiding the economic system toward a level of activity, not consistent with full employment and price stability
    Keywords: teaching intermidiate macroeconomics; monetary policy strategy; equilibrium income;
    JEL: E58 A20 E61
    Date: 2008–12–18
  9. By: Scheffel, Eric (Cardiff Business School)
    Abstract: Micro-founded de-centralized financial intermediation in a cash and costly-credit model (see Gillmand and Kejak, 2008) results in a cost-distortion of returns implying a lower average nominal and real risk-free rate when compared to standard cah-in-advance RBC models. Failure of both short-run and long-run Fisher equation relationships based on observable real and nominal rates and inflation are obtained. The cost-distortion also leads to an unconditionally upward-sloping average yield curve of interest rates which is also convex in shape. The model is capable of producing a positive correlation between the nominal rate and velocity, and a negative correlation between the ex-post real rate and inflation. More importantly, the model also predicts a negative correlation between the ex-ante real rate and the ex-ante expected rate of inflation. Finally, the condition spread between the usual CCAPM rate as defined by Canzoneri and Diba (2005) and the model-implied money market rate is positively correlated with the stance of monetary policy, offering a new perspective on this systematic link recently studied empirically by Canzoneri et al. (2007a) and theoretically by Canzoneri and Diba (2005).
    Keywords: Business cycles; Money; Term structure of interest rates
    JEL: E4 E44
    Date: 2008–12
  10. By: Niki X. Papadopoulou (Central Bank of Cyprus)
    Abstract: This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the U.S economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households’ are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.
    JEL: E31 E32 E44 E52
    Date: 2008–06
  11. By: Philip Liu (Reserve Bank of Australia)
    Abstract: This paper examines the sources of Australia’s business cycle fluctuations. The cyclical component of GDP is extracted using the Beveridge-Nelson decomposition and a structural VAR model is identified using robust sign restrictions derived from a small open economy model. In contrast to previous VAR studies, international factors are found to contribute to over half of the output forecast errors, whereas demand shocks have relatively modest effects.
    Keywords: Australian business cycle; sign restriction VAR; stabilisation policy; international shocks
    JEL: E32 E52 E63 F41
    Date: 2008–12
  12. By: Nathaniel John Porter; Francis Vitek
    Abstract: We study the impact of a minimum wage on business cycle volatility, depending upon its coverage and adjustment mechanism. As with other small open economies, Hong Kong SAR is vulnerable to external shocks, with its exchange rate regime precluding active monetary policy. Adjustment to past shocks has relied on flexible domestic prices. We find that a minimum wage affecting 20 percent of employees would amplify output volatility by 0.2 percent to 9.2 percent, and employment volatility by ?1.2 percent to 7.8 percent. A fixed wage or indexation to consumption price inflation increases volatility most. Indexation to wage inflation or unit labor cost growth is preferable, largely preserving labor market flexibility.
    Keywords: Minimum wage , Hong Kong Special Administrative Region of China , Business cycles , External shocks , Exchange rate regimes , Monetary policy , Inflation , Wage indexation , Labor market policy , Economic models ,
    Date: 2008–12–10
  13. By: Magdalena Morgese Borys; Roman Horvath
    Abstract: In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a wellfunctioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so.Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the realtime output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.
    Keywords: Monetary policy transmission, real-time data, sectoral prices, VAR.
    JEL: E31 E52 E58
    Date: 2008–10
  14. By: Ibrahim L. Awad (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The purpose of this paper is to answer the question of whether the switching to the Inflation Targeting (IT) regime is necessary for the Egyptian case or not? Our judgment of applying IT regime in the Egyptian economy is established on doubled criterion. That is, the practical experience of the inflation targeters, and the efficiency of Monetary Targeting Regime (MTR) in the case of Egypt. Defining the efficiency of a monetary policy regime by the efficiency of the embedded nominal anchor to send the right message to all practitioners about the potential behavior of the price level, I assessed the efficiency of MTR in Egypt by measuring; whether there is a relationship between money and prices, the stability of the velocity of circulation, and the stability of the demand for money function. The study concluded that MTR is not efficient to tie down individuals expectations about the future path of inflation in Egypt. Taking into account that IT regime is a way to reform monetary policy and it does not worsen economic performance it becomes necessary for Egypt to switch to the IT regime once the prerequisites for IT regime have been met.
    Keywords: inflation targeting; demand for money function; monetary policy in Egypt.
    JEL: E31 E41 E51 E52 E58 E59
    Date: 2008–12
  15. By: Giuseppe Ferrero (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Andrea Nobili (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.)
    Abstract: The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are negatively correlated with the business cycle only in the United States. JEL Classification: E43, E44, E52.
    Keywords: Monetary policy expectations, excess returns, futures contracts, business cycle.
    Date: 2008–12
  16. By: António Afonso; Ricardo M. Sousa
    Abstract: We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression approach. We build on a recursive identification scheme, but we: (i) include the feedback from government debt (ii); look at the impact on the composition of output; (iii) assess the effects on asset markets (via housing and stock prices); (iv) add the exchange rate; (v) assess potential interactions between fiscal and monetary policy; (vi) use quarterly data, particularly, fiscal data; and (vii) analyze empirical evidence from the U.S., the U.K., Germany, and Italy. The results show that government spending shocks, in general, have a small effect on GDP; lead to important “crowding-out” effects; have a varied impact on housing prices and generate a quick fall in stock prices; and lead to a depreciation of the real effective exchange rate. Government revenue shocks generate a small and positive effect on both housing prices and stock prices that later mean reverts; and lead to an appreciation of the real effective exchange rate. The empirical evidence also shows that it is important to explicitly consider the government debt dynamics in the model.
    Keywords: fiscal policy; Bayesian Structural VAR; debt dynamics.
    JEL: C11 C32 E62 H62
    Date: 2008–12
  17. By: Ricardo M. Sousa (Universidade do Minho - NIPE); António Afonso (European Central Bank, Directorate General Economics)
    Abstract: We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression approach. We build on a recursive identification scheme, but we: (i) include the feedback from government debt (ii); look at the impact on the composition of output; (iii) assess the effects on asset markets (via housing and stock prices); (iv) add the exchange rate; (v) assess potential interactions between fiscal and monetary policy; (vi) use quarterly data, particularly, fiscal data; and (vii) analyze empirical evidence from the U.S., the U.K., Germany, and Italy. The results show that government spending shocks, in general, have a small effect on GDP; lead to important “crowding-out” effects; have a varied impact on housing prices and generate a quick fall in stock prices; and lead to a depreciation of the real effective exchange rate. Government revenue shocks generate a small and positive effect on both housing prices and stock prices that later mean reverts; and lead to an appreciation of the real effective exchange rate. The empirical evidence also shows that it is important to explicitly consider the government debt dynamics in the model.
    Keywords: fiscal policy, Bayesian Structural VAR, debt dynamics.
    JEL: C11 C32 E62 H62
    Date: 2008
  18. By: Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: Macroeconomic policy thinking in India has been rooted in an environment with five key parameters: agricultural shocks rather than a conventional business cycle, a closed economy, deeply distortionary tax policy coupled with a fiscal crisis, financial markets that lacked speculative price discovery, and a monetary policy shaped by deficit financing. This environment has been completely altered through India's integration into the world economy, the rise of one financial market (the equity market), the reduced importance of the monsoon, the rise of conventional business cycle dynamics, a partial abatement of the fiscal crisis and a monetary policy environment with loss of autonomy owing to exchange rate pegging. These changes call for a rethink of the macroeconomic policy framework. The agenda of assuring fiscal stability needs to be seen to its conclusion. Monetary policy and fiscal policy need to be converted into tools for macroeconomic stabilisation.
    Keywords: Macroeconomics
    Date: 2008–05
  19. By: Jonathan Chiu; Cesaire Meh
    Abstract: This paper develops a search-theoretic model to study the interaction between banking and monetary policy and how this interaction affects the allocation and welfare. Regarding how banking affects the welfare costs of inflation: First, we find that, with banking, inflation generates smaller welfare costs. Second, we show that, lowering inflation improves welfare not just by reducing consumption/production distortions, but also by avoiding intermediation costs. Therefore, understanding the nature of intermediation cost is critical for accurately assessing the welfare gain of lowering the inflation target. Regarding how monetary policy affects the welfare effects of banking: First, banking always improves efficiency of production, but the banking technology has to be efficient to improve welfare (especially in low inflation economy). Second, welfare effects of banking depend on monetary policy. For low inflation, banking is not active. For high inflation, banking is active and improves welfare. For moderate inflation, banking is active but reduces welfare. Owing to general equilibrium feedback, banking is supported in equilibrium even though welfare is higher without banking.
    Keywords: Monetary policy framework
    JEL: E40 E50
    Date: 2008
  20. By: Hilde C. Bjørnland (Norwegian School og Management and Norges Bank (Central Bank of Norway)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway)and The World Bank)
    Abstract: We analyze the role of house prices in the monetary policy transmission mechanism in the U.S. using structural VARs. The VAR is identified using a combination of short-run and long-run (neutrality) restrictions, allowing for a contemporaneous interaction between monetary policy and various asset prices. By allowing the interest rate and asset prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, following a monetary policy shock that raises the interest rate by one percentage point, house prices fall immediately by 1 percent, for then to decline by a total of 4-5 percent after three years. Furthermore, the fall in house prices enhances the negative response in output and consumer price inflation that has traditionally been found in the conventional literature.
    Keywords: VAR, monetary policy, house prices, identification.
    JEL: C32 E52 F31 F41
    Date: 2008–12–12
  21. By: Tamborini, Roberto
    Abstract: Current macro-models based on the demand-side effects of monetary policy and sticky prices account for the observed correlations between policy interest rates, output and inflation, but they fail with regard to other empirical regularities, such as the negative effects of policy shocks on real wages and profits. Moreover, the lack in these models of an explicit role of the credit market in the transmission mechanism is now regarded as a major limitation. Drawing on the modern literature on the monetary transmission mechanisms with capital market imperfections, this paper presents a model of the “credit-cost channel” of monetary policy. The thrust of the model is that firms’ reliance on bank loans (“credit channel”) may make aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the official rate controlled by the central bank. The model is assessed theoretically by examining whether, and under what conditions, changes in the policy interest rate produce the whole pattern of the observed relationships, with no recourse to non-competitive hypotheses and frictions. This result is obtained for parameter values in the range of available consensus estimates, with a caveat concerning labour-supply elasticity to the real wage rate.
    Keywords: Macroeconomics and monetary economics, monetary transmission mechanisms, credit channel, cost channel
    JEL: C32 E51
    Date: 2008
  22. By: Matteo Modena
    Abstract: This work extends the strand of literature that examines the relation between the term structure of interest rates and macroeconomic variables. The yield curve is summarized by few latent factors (level, slope, and curvature) which are obtained through Kalman filtering. In this paper, we address the challenging issue of attributing an economic interpretation to the third unobservable component of the term structure, i.e. curvature. In particular, we find significant evidence suggesting that curvature reflects the cyclical fluctuations of the economy. Interestingly, this result holds in spite of whether the curvature factor is extracted from the nominal or the real term structure. A negative shock to curvature seems either to anticipate or to accompany a slowdown in economic activity. The curvature effect thus appears to complement the transition from an upward sloping yield curve to a flat one. Finally, a joint macro-econometric model for curvature and real activity is developed and estimated.
    Keywords: Term Structure, Kalman Filtering, Latent Factors, Curvature, Business Cycle
    JEL: C01 C32 E32 E44 G12
    Date: 2008–09
  23. By: Andersson, Fredrik N. G. (Department of Economics, Lund University)
    Abstract: This paper introduces a new estimate of core inflation. Core inflation is a real time estimate of monetary inflation. Most existing core inflation estimate do not account for persistent relative price changes and are therefore likely to be poor estimates of the underlying monetary inflation rate. The proposed core inflation estimate estimates core inflation by first estimating the inflation signal in all price series from the price index with a wavelet based signal estimation algorithm. In the second step the weighted inflation average is calculated by using the expenditure weights from the price index as weights. Relative price changes are thus accounted for under the assumption that the household must apply to its long run budget restriction. The proposed estimate of core inflation is estimated using data from the United States and the United Kingdom. It is evaluated by comparing it to existing estimates of core inflation. The empirical analysis show that the proposed estimate has a smaller forecasting error of future inflation than the other estimates and that it rapidly responds to increases in monetary inflation.
    Keywords: Core Inflation; Signal Estimation; Wavelets
    JEL: E31 E52
    Date: 2008–12–02
  24. By: Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudo; Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: After empirically showing imperfect financial integration among the euro countries, i.e., bank loan market heterogeneities in stickinesses of loan interest rates and markups from policy interest rate to loan rates, we build a New Keynesian model where such elements of imperfect financial integration coexist within a single currency area. Our welfare analysis reveals characteristics of optimal monetary policy. A central bank should take these heterogeneities into consideration. The optimal monetary policy is tied to difference in the degree of loan rate stickiness, the size of the steady-state loan rate markup, and the share of the loan market. By calibrating our model to the euro, we present the raking of the euro countries in terms of monetary policy priority. Because of the heterogeneity in the loan markets among the euro area countries, this ordering is not equivalent to the size of the financial market.
    Keywords: optimal monetary policy, financial integration, heterogeneous financial market, staggered loan contracts
    JEL: E44 E52
    Date: 2008–12
  25. By: Mario Jovanovic; Tobias Zimmermann
    Abstract: In this paper we examine the link between stock market uncertainty and monetary policy in the US. There are strong arguments why central banks should account for stock market uncertainty in their strategy. Amongst others, they can maintain the functioning of financial markets and moderate possible economic downswings. To describe the behavior of the Federal Reserve Bank, augmented forward-looking Taylor rules are estimated by GMM. The standard specification is expanded by a measure for stock market uncertainty, which is estimated by an exponential GARCH-model.We show that, given a certain level of inflation and output, US central bank rates are significantly lower when stock market uncertainty is high and vice versa. These results are achieved by using the federal funds rate from 1980:10 to 2007:7.
    Keywords: Monetary policy rules, financial markets, stock market uncertainty, EGARCH
    JEL: E58
    Date: 2008–11
  26. By: Joyce, Michael (Bank of England); Relleen, Jonathan (Bank of England); Sorensen, Steffen (Barrie+Hibbert Ltd)
    Abstract: This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants' expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate risk-adjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information.
    Keywords: Interest rates; forecasting; term premia
    JEL: E43 E44 E52
    Date: 2008–11–24
  27. By: Kaminska, Iryna (Bank of England)
    Abstract: This paper combines a structural vector autoregression (SVAR) with a no-arbitrage approach to build a multifactor affine term structure model (ATSM). The resulting no-arbitrage structural vector autoregressive (NA-SVAR) model implies that expected excess returns are driven by the structural macroeconomic shocks. This is in contrast to a standard ATSM, in which agents are concerned with non-structural risks. As a simple application of a NA-SVAR model, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields. The short end of the yield curve is driven mainly by the expectations component, while the term premium matters for the dynamics of the long end of the yield curve.
    Keywords: Structural vector autoregression; interest rate risk; essentially affine term structure model
    JEL: C32 E43 E44
    Date: 2008–12–22
  28. By: Brieuc Monfort; Santiago Peña
    Abstract: This article uses two analytical methodologies to understand the dynamics of inflation in Paraguay, the mark-up theory of inflation and the monetary theory of inflation. We also study the impact of different monetary aggregates. The results suggest that monetary factors, in particular currency in circulation, play a major role in determining long-run inflation, while foreign prices, in particular from Brazil, or some food products have a large impact on the short-term dynamics of inflation. Wage indexation may also contribute to locking up price increases.
    Keywords: Paraguay , Inflation , Wage indexation , Price increases , Demand for money , Spillovers ,
    Date: 2008–12–05
  29. By: Michael Joyce (Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R, U.K.); Jonathan Relleen (Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R, U.K.); Steffen Sorensen (Barrie+Hibbert Ltd, Financial Economic Research, 41 Lothbury, London, EC2R 7HG., U.K.)
    Abstract: This paper reviews the main instruments and associated yield curves that can be used to measure financial market participants’ expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate riskadjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information. JEL Classification: E43, E44, E52.
    Keywords: Interest rates, forecasting, term premia.
    Date: 2008–12
  30. By: M. Ayhan Kose; Stijn Claessens; Marco Terrones
    Abstract: We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. JEL Classification Numbers: E32; E44; E51; F42
    Keywords: Economic recession , Business cycles , Financial crisis , Credit , Housing prices , Stock prices , Oil prices , Databases , Economic models ,
    Date: 2008–12–05
  31. By: Knut Are Aastveit (Norges Bank (Central Bank of Norway)and The University of Oslo); Tørres G. Trovik (Norges Bank (Central Bank of Norway)and The World Bank)
    Abstract: An approximate dynamic factor model can substantially improve the reliability of real time output gap estimates. The model extracts a common component from macroeconomic indicators, which reduces errors in the gap due to data revisions. The model's ability to handle the unbalanced arrival of data, also yields favorable nowcasting properties and thus starting conditions for the filtering of data into trend and deviations from trend. Combined with the method of augmenting data with forecasts prior to filtering, this greatly reduces the end-of-sample imprecision in the gap estimate. The increased precision has economic significance for real time policy decisions.
    Keywords: Output gap, Real time analysis, Monetary policy, Forecasting, Factor model
    JEL: C33 C53 E52 E58
    Date: 2008–12–12
  32. By: Tommaso Monacelli; Roberto Perotti
    Abstract: We document that variations in government purchases generate a rise in consumption, the real and the product wage, and a fall in the markup. This evidence is robust across alternative empirical methodologies used to identify innovations in government spending (structural VAR vs. narrative approach). Simultaneously accounting for these facts is a formidable challenge for a neoclassical model, which relies on the wealth effect on labor supply as the main channel of transmission of unproductive government spending shocks. The goal of this paper is to explore further the role of the wealth effects in the transmission of government spending shocks. To this end, we build an otherwise standard business cycle model with price rigidity, in which preferences can be consistent with an arbitrarily small wealth effect on labor supply, and highlight that such effect is linked to the degree of complementarity between consumption and hours. We show that the model is able to match our empirical evidence on the effects of government spending shocks remarkably well. This happens when the preferences are such that the positive wealth effect on labor supply is small and therefore the negative wealth effect on consumption is, somewhat counterintuitively, large.
    JEL: D91 E21 E62
    Date: 2008–12
  33. By: Amund Holmsen (Norges Bank (Central Bank of Norway)); Jan F. Qvigstad (Norges Bank (Central Bank of Norway)); Øistein Røisland (Norges Bank (Central Bank of Norway)); Kristin Solberg-Johansen (Norges Bank (Central Bank of Norway))
    Abstract: Monetary policy works mainly through private agents' expectations. How precisely future policy intentions are communicated has, according to theory, implications for the outcome of monetary policy. Norges Bank has gone further than most other central banks in communicating its policy intentions. The Bank publishes its own interest rate forecast, along with forecasts of inflation, the output gap, and other key variables. Moreover, Norges Bank aims to be precise about how the policy intentions are formed. The Bank currently uses optimal policy in a timeless perspective as the normative benchmark when assessing the policy intentions. Given the reaction pattern based on the timeless perspective, the Bank identifies and explains the factors that bring about a change in the interest rate forecast from one Monetary Policy Report to the next. The main arguments for publishing the interest rate forecast are discussed and validated against three years of experience with such forecasts. In this paper, we find evidence of reduced volatility in market interest rates on the days with interest rate decisions, which suggests that communicating policy intentions more precisely improves the market participants' understanding of the central bank's reaction pattern.
    Keywords: Transparency, optimal monetary policy, interest rate forecasts
    JEL: E52 E58
    Date: 2008–12–12
  34. By: Athanasios Orphanides (Central Bank of Cyprus); John C. Williams (Federal Reserve Bank of San Francisco)
    Abstract: This paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations formation and uncertainty about the natural rates of interest and unemployment. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We also allow for central bank uncertainty regarding the natural rates of interest and unemployment. We find that the optimal control policy derived under the assumption of perfect knowledge about the structure of the economy can perform poorly when knowledge is imperfect. These problems are exacerbated by natural rate uncertainty, even when the central bank's estimates of natural rates are efficient. We show that the optimal control approach can be made more robust to the presence of imperfect knowledge by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to the presence of imperfect knowledge about the economy provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to the alternative models of learning that we study and natural rate uncertainty and outperform the optimal control policy and generally perform as well as the robust optimal control policy that places less weight on stabilizing economic activity and interest rates.
    Keywords: Rational Expectations, Robust Control, Model Uncertainty, Natural Rate of Unemployment, Natural Rate of Interest.
    JEL: E52
    Date: 2008–07
  35. By: Athanasios Orphanides (Central Bank of Cyprus); John C. Williams (Federal Reserve Bank of San Francisco)
    Abstract: This paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We find that the optimal control policy derived under the assumption of rational expectations can perform poorly when expectations deviate modestly from rational expectations. We then show that the optimal control policy can be made more robust by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to learning provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to empirically plausible parameterizations of the learning models and perform about as well or better than optimal control policies.
    Keywords: Rational Expectations, Robust Control, Model Uncertainty.
    JEL: E52
    Date: 2008–04
  36. By: Bogetic, Zeljko; Ulatov, Sergey; Emelyanova, Olga; Smits, Karlis
    Abstract: Russia’s short-term economic growth has accelerated above its long term trend, defying weak global conditions. In 2007, the economy grew by 8.1 percent on the heels of very high (and perhaps unsustainable) oil prices, robust domestic demand and strong macroeconomic fundamentals. Preliminary data indicate an even faster real growth in GDP and industrial production of 8.7 and 6.2 percent in the first quarter of 2008. Rising inflation and capacity and labor utilization, tightening infrastructure constraints, and real wage increases outpacing productivity gains, however, suggest that the economy is overheating, i.e., aggregate demand is outpacing long-term productive capacity of the economy. Reducing inflation and reinvigorating the remaining structural reforms will be key policy challenges for the new Russian government going forward.
    Keywords: Russia; Russian economy; Russia economic developments; Russian health
    JEL: E0 F3 P2 E6 I1 H6
    Date: 2008–06–02
  37. By: Devereux, Michael B.; Sutherland, Alan
    Abstract: Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model shows that monetary policy takes on new importance due to its impact on nominal asset returns. Nevertheless, the case for price stability as an optimal monetary rule remains. In fact, it is reinforced. Even without nominal price rigidities, price stability is optimal because it enhances the risk sharing properties of nominal bonds.
    Keywords: Portfolio Choice, International Risk Sharing, Exchange Rate
    JEL: E52 E58 F41
    Date: 2008
  38. By: António Afonso; Ricardo M. Sousa
    Abstract: This paper investigates the link between fiscal policy shocks and movements in asset markets using a Fully Simultaneous System approach in a Bayesian framework. Building on the works of Blanchard and Perotti (2002), Leeper and Zha (2003), and Sims and Zha (1999, 2006), the empirical evidence for the U.S., the U.K., Germany, and Italy shows that it is important to explicitly consider the government debt dynamics when assessing the macroeconomic effects of fiscal policy and its impact on asset markets. In addition, the results from a VAR counter-factual exercise suggest that: (i) fiscal policy shocks play a minor role in the asset markets of the U.S. and Germany; (ii) they substantially increase the variability of housing and stock prices in the U.K..; and (iii) government revenue shocks have apparently contributed to an increase of volatility in Italy.
    Keywords: Bayesian Structural VAR; fiscal policy; housing prices; stock prices.
    JEL: C32 E62 G10 H62
    Date: 2008–12
  39. By: Roger Hammersland and Dag Henning Jacobsen (Statistics Norway)
    Abstract: We find empirical evidence of a financial accelerator using a data based procedure of Structural Model Design. Credit to firms, asset prices and aggregate economic activity interact over the business cycle in our empirical model of a dynamic economy. Furthermore, the interdependence between credit and asset prices creates a mechanism by which the effects of shocks persist and amplify. However, while innovations to asset prices and credit do cause short-run movements in production, and while real activity spurs credit, such innovations do not precede real economy movements in the long run. Hence, there obviously is a case for Modigliani-Miller in the long run.
    Keywords: Financial variables and the real economy; The Financial Accelerator; Business fluctuations; Structural vector Error Correction modeling; Identification; Cointegration.
    JEL: C30 C32 C50 C51 C53 E44 E51
    Date: 2008–12
  40. By: AZAM, Jean-Paul
    Date: 2008–11
  41. By: Spehar, Ann O'Ryan
    Abstract: There is a new approach to modeling business cycles that is gaining acceptance. It appears that there is good evidence that this approach may have a great deal to offer in understanding the causes and processes of major economic business cycles associated with financial crisis. This paper does not intend to define a mathematical model but instead describes the ideas and theories behind this new approach. In addition, this paper addresses a few of the unique challenges officials within the United States face with the current global crisis. The new approach has at its core the belief that the structure of our current economy, as well as many European economies, has changed significantly. Starting around 1983-1985 a structural break occurred that resulted in a period where changes in GDP, consumption and inflation ceased to experience high volatility. This period has been dubbed “The Great Moderation” and it is significant. The standard deviation during the years 1985-2004 was but one-half the standard deviation of the quarterly growth rate of real gross domestic product between the years 1960-1984. A variety of hypothesis for this period has been put forth of which will not be discussed in this paper. More importantly here, is that these new economies are subject to business cycles that are endogenous in nature and are highly correlated with financial crisis. It is believed that these new economies have specific characteristics that generate these financial business cycles. These cycles are not triggered by exogenous supply or demand shocks that throw an economy off of a steady state but instead are an endogenous force within the gears of the system itself that creates imbalances that can build up without any noticeable increase in inflation - the traditional parameter typically used to monitor imbalances. The main characteristic of this new era of Great Moderation is rapidly rising growth coupled with low and stable prices which is highly correlated with an increase in the probability of episodes of financial instability (Borio 2003). In fact, within these new economies inflation shows up first as excess demand within credit aggregates and asset prices rather than in the traditional goods and services markets. This means that a financial crisis could occur without inflation ever having occurred within the broader economy. If asset bubbles are left unattended the resulting implosion of the bubbles can create virulent deflationary episodes. And it is the unwinding of the financial imbalances caused by the bubbles that are the source of financial instability. Note that according to this model, it is not a sudden decline in inflation brought on by a contraction in the money supply that triggers a crisis as is often argued (for example Friedman and Schwartz 1963). So, minimizing the deflationary impact will not stop the necessary unwinding and required rebalancing. There are many parameters that have been used in developing predictive models that anticipate a financial crisis. A few leading indicators that may warn of a growing financial crisis are: 1. Widening Credit gaps and rapidly rising assets values (equities, real estate- inelastic assets) 2. Over confidence / ‘exuberance’ coupled with faith in central bankers anti-inflationary commitments 3. Misalignments in intertemporal consumption, savings and investment decisions 4. Output gaps 5. Currency exchange rates / imbalance in global savings Again, this paper does not intend to define a model but instead simply lays out the ideas and theories behind this new modeling approach. This paper will first compare the traditional to the new modeling approach by first describing the economic environment that creates the business cycle. Secondly it will compare the two paradigms and explain how each generates different questions and answers in monitoring and explaining economic stability. Finally, I touch on a few of the unique challenges facing our current crisis within the United States.
    Keywords: Great Moderation; Business Cycles; Austrian Economics
    JEL: E32
    Date: 2008–12–17
  42. By: Nuno Cassola (Financial Research Divison, DG Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Claudio Morana (Università del Piemonte Orientale, Facoltà di Economia, Dipartimento di Scienze Economiche e Metodi Quantitativi, Via Perrone 18, 28100, Novara, Italy; International Center for Economic Research (ICER, Torino) and Center for Research on Pensions and Welfare Policies (CeRP, Torino).)
    Abstract: In the framework of a new money market econometric model, we assess the degree of precision achieved by the European Central Bank ECB) in meeting its operational target for the short-term interest rate and the impact of the U.S. sub-prime credit crisis on the euro money market during the second half of 2007. This is done in two steps. Firstly, the long-term behaviour of interest rates with one-week maturity is investigated by testing for co-breaking and for homogeneity of spreads against the minimum bid rate (MBR, the key policy rate). These tests capture the idea that successful steering of very short-term interest rates is inconsistent with the existence of more than one common trend driving the one-week interest rates and/or with nonstationarity of the spreads among interest rates of the same maturity (or measured against the MBR). Secondly, the impact of several shocks to the spreads (e.g. interest rate expectations, volumes of open market operations, interest rate volatility, policy interventions, and credit risk) is assessed by jointly modelling their behaviour. We show that, after August 2007, euro area commercial banks started paying a premium to participate in the ECB liquidity auctions. This puzzling phenomenon can be understood by the interplay between, on the one hand, adverse selection in the interbank market and, on the other hand, the broad range of collateral accepted by the ECB. We also show that after August 2007, the ECB steered the “risk-free” rate close to the policy rate, but has not fully off-set the impact of the credit events on other money market rates. JEL Classification: C32, E43, E50, E58, G15.
    Keywords: Money market interest rates, euro area, sub-prime credit crisis, credit risk, liquidity risk, long memory, structural change, fractional co-integration, co-breaking, fractionally integrated factor vector autoregressive model.
    Date: 2008–12
  43. By: Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Sandra Schmidt (Centre for European Economic Research, L7, 1, D-68161 Mannheim, Germany.)
    Abstract: We employ a time series econometric framework to explore the structural determinants of the spread between the European Overnight Rate and the ECB’s Policy Rate (EONIA spread) aiming to explain the widening of the EONIA spread from mid-2004 to mid-2006. In particular, we estimate a model on the EONIA spread since the introduction of the new operational framework in March 2004 until August 2006. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks’ liquidity uncertainty lead to a significant upward pressure on the spread. The ECB’s liquidity policy only reduces the spread if a loose policy is conducted during the last week of a maintenance period. Interestingly, interest rate expectations have not been found to have an important influence. JEL Classification: E43, E52, C22.
    Keywords: Overnight Market Rate (EONIA), Interest Rate Determination, Monetary Policy Implementation, Operational Framework.
    Date: 2008–12
  44. By: Cetorelli, Nicola; Goldberg, Linda S.
    Abstract: The globalization of banking in the United States is influencing the monetary transmission mechanism both domestically and in foreign markets. Using quarterly information from all U.S. banks filing call reports between 1980 and 2005, we find evidence for the lending channel for monetary policy in large banks, but only those banks that are domestically-oriented and without international operations. We show that the large globally-oriented banks rely on internal capital markets with their foreign affiliates to help smooth domestic liquidity shocks. We also show that the existence of such internal capital markets contributes to an international propagation of domestic liquidity shocks to lending by affiliated banks abroad. While these results imply a substantially more active lending channel than documented in the seminal work of Kashyap and Stein (2000), the lending channel within the United States is declining in strength as banking becomes more globalized.
    Keywords: Lending channel, Bank, global, liquidity, transmission, internal capital markets
    JEL: E44 F36 G32
    Date: 2008
  45. By: Bernardo Guimaraes; Kevin D. Sheedy
    Abstract: A striking fact about prices is the prevalence of ``sales': large temporary price cuts followedby a return exactly to the former price. This paper builds a macroeconomic model with arationale for sales based on firms facing consumers with different price sensitivities. Even iffirms can vary sales without cost, monetary policy has large real effects owing to sales beingstrategic substitutes: a firm's incentive to have a sale is decreasing in the number of otherfirms having sales. Thus the flexibility of prices at the micro level due to sales does nottranslate into flexibility at the macro level.
    Keywords: sales, monetary policy, nominal rigidities
    JEL: E3 E5
    Date: 2008–08
  46. By: Teppei Nagano (Bank of Japan, 2-1-1 Nihonbashi-Hongokucho Chuo-ku, Tokyo 103-8660, Japan.); Naohiko Baba (Corresponding author: Bank for International Settlements, Centralbahnplatz 2, Basel CH-4002, Switzerland.)
    Abstract: This paper attempts to extract market expectations about the Japanese economy and the BOJ’s policy stance from the yen yield curves augmented by money market interest rates, during the period from the end of the quantitative easing policy in March 2006. We use (i) the swap yield curves augmented by OIS interest rates (OIS/Swap), and (ii) the JGB yield curve augmented by FB/TB interest rates. First, using the Nelson-Siegel [1987] model, we estimate three latent dynamic factors, which can be interpreted as reflecting market expectations. Second, we investigate the relative importance of price discovery for each factor between OIS/Swap and FBTB/JGB, and find that the former has a more dominant role of price discovery for all factors. Third, we estimate the efficient price for each factor common to both yield curves using a time-series structural model, which enables us to decompose each factor into the efficient price and idiosyncratic factor. JEL Classification: E43, E52, G12.
    Keywords: Yield curve, overnight index swap, price discovery, structural time-series model, swap spread.
    Date: 2008–12
  47. By: Messina, Julián (University of Girona); Strozzi, Chiara (University of Modena and Reggio Emilia); Turunen, Jarkko (European Central Bank)
    Abstract: We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market.
    Keywords: dynamic correlation, business cycle, real wages, labour market institutions
    JEL: E32 J30 C10
    Date: 2008–12
  48. By: António Afonso; Luca Agnello; Davide Furceri
    Abstract: We decompose fiscal policy in three components: i) responsiveness, ii) persistence and iii) discretion. Using a sample of 132 countries, our results point out that fiscal policy tends to be more persistent than to respond to output conditions. We also found that while the effect of cross-country covariates is positive (negative) for discretion, it is negative (positive) for persistence thereby suggesting that countries with higher persistence have lower discretion and vice versa. In particular, while government size, country size and income have negative effects on the discretion component of fiscal policy, they tend to increase fiscal policy persistence.
    Keywords: Fiscal Policy; Fiscal Volatility.
    JEL: E62 H50
    Date: 2008–10
  49. By: Daniel L. Thornton (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.)
    Abstract: The phrase “liquidity effect” was introduced by Milton Friedman (1969) to describe the first of three effects on interest rates caused by an exogenous change in the money supply. The lack of empirical support for the liquidity effect using monthly and quarterly data using various monetary and reserve aggregates led Hamilton (1997) to suggest that more convincing evidence of the liquidity effect could be obtained using daily data – the daily liquidity effect. This paper investigates the implications of the daily liquidity effect for Friedman’s liquidity effect using a comprehensive model of the Fed’s daily operating procedure. The evidence indicates that it is no easier to find convincing evidence of a Friedman’s liquidity effect using daily data than it has been using lower frequency data. JEL Classification: E40, E52.
    Keywords: liquidity effect, federal funds rate, monetary policy, operating procedure, FOMC.
    Date: 2008–12
  50. By: Bukowski, Maciej; Koloch, Grzegorz; Lewandowski, Piotr
    Abstract: In this paper the dynamic responses of labor markets to macroeconomic shocks in eight CEE countries are empirically analyzed in panel SVECM. Identification of shocks, interpreted as real wage, productivity, labor demand and supply shocks, is based on DSGE model with labor market explicitly modeled after Mortensen and Pissarides (1994). Fluctuations in foreign demand are controlled for and the model is estimated with panel procedure, which improves estimation's precision. We show that propagation of shocks on NMS labor markets fairly resembles that characterizing OECD countries. Productivity improving shocks temporarily increase unemployment. Positive labor demand shocks increase employment, depress unemployment, rise real average wages, and were found to be the main determinant of variability of employment and unemployment in the short-run. In the medium term, in Czech Republic, Latvia, Lithuania and Poland innovations in wages seem to be prevalent drivers of employment and unemployment. The retrospective simulations of the model show that Baltic states and Poland were significantly affected by the collapse of Russian exports in late 1990s, and in 2000 an adverse labor demand shock hit all NMS, except for Hungary and Slovenia. However, the flexibility of wages is found to be crucial factor behind the diverse labor market performance in the region. Slovenia and Estonia fared best when it comes to flexibility of wages on macro level, on the other hand in Czech Republic, Lithuania and Poland downward wage rigidities were especially binding after employment-contracting shocks.
    Keywords: Unemployment; Rigidities; Transition economies; Cointegration;;Structural VECM; Panel econometrics; DSGE models
    JEL: C32 E32 E24 J60
    Date: 2008–12–01
  51. By: António Afonso; Pedro Gomes
    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.
    Keywords: public wages; private wages; employment.
    JEL: E24 E62 H50
    Date: 2008–11
  52. By: John Bryant (Vocat International)
    Abstract: This paper develops further monetary aspects of a model, first set out as part of a paper by the author, published in 2007, concerning the application of thermodynamic principles to economics. The model is backed up by statistical regression analysis of quarterly data of the UK and USA economies, with significant levels of correlation. The model sets out relationships between price, output volume, velocity of circulation and money supply, and develops an equation to measure entropy gain in an economic system, linked to interest rates, and thence to an equation for the yield of a money instrument.
    Keywords: Monetary, thermodynamics, economics, entropy, interest rates, yield, money, UK economy
    Date: 2008–08
  53. By: Joyce, Michael (Bank of England); Kaminska, Iryna (Bank of England); Lildholdt, Peter
    Abstract: Long-horizon interest rates in the major international bond markets fell sharply during 2004 and 2005, at the same time as US policy rates were rising; a phenomenon famously described as a 'conundrum' by Alan Greenspan the Federal Reserve Chairman. But it was arguably the decline in international long real rates over this period which was more unusual and, by the end of 2007, long real rates in the United Kingdom remained at recent historical lows. In this paper, we try to shed light on the recent behaviour of long real rates, by estimating several empirical models of the term structure of real interest rates, derived from UK index-linked bonds. We adopt a standard 'finance' approach to modelling the real term structure, using an essentially affine framework. While being empirically tractable, these models impose the important theoretical restriction of no arbitrage, which enables us to decompose forward real rates into expectations of future short (ie risk-free) real rates and forward real term premia. One general finding that emerges across all the models estimated is that time-varying term premia appear to be extremely important in explaining movements in long real forward rates. Although there is some evidence that long-horizon expected short real rates declined over the conundrum period, our results suggest lower term premia played the dominant role in accounting for the fall in long real rates. This evidence could be consistent with the so-called 'search for yield' and excess liquidity explanations for the conundrum, but it might also partly reflect strong demand for index-linked bonds by institutional investors and foreign central banks.
    Keywords: Yield curve; term premia; conundrum
    JEL: C32 E43 E44 G12
    Date: 2008–12–22
  54. By: Claudio Borio; Sahminan Haibin Zhu
    Abstract: Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.
    Keywords: risk-taking channel, transmission mechanism, capital regulation, procyclicality
    Date: 2008–12
  55. By: Hawkins, Raymond J.; Aoki, Masanao
    Abstract: We show how time-dependent macroeconomic response follows from microeconomic dynamics using linear response theory and a time-correlation formalism. This theory provides a straightforward approach to time-dependent macroeconomic model construction that preserves the heterogeneity and complex dynamics of microeconomic agents. We illustrate this approach by examining the relationship between output and demand as mediated by changes in unemployment, or Okun's law. We also demonstrate that time dependence implies overshooting and how this formalism leads to a natural definition of economic friction.
    Keywords: Macroeconomic adjustment process, microeconomic dynamics, aggregation, anelastic relaxation, Okun's law, time-correlation formalism
    JEL: A12 C31 D50 E24 J21
    Date: 2008
  56. By: Richard Finlay (Reserve Bank of Australia); Mark Chambers (Reserve Bank of Australia)
    Abstract: We use data on coupon-bearing Australian Government bonds and overnight indexed swap (OIS) rates to estimate risk-free zero-coupon yield and forward curves for Australia from 1992 to 2007. These curves, and analysts’ forecasts of future interest rates, are then used to fit an affine term structure model to Australian interest rates, with the aim of decomposing forward rates into expected future overnight cash rates plus term premia. The expected future short rates derived from the model are on average unbiased, fluctuating around the average of actual observed short rates. Since the adoption of inflation targeting and the entrenchment of low and stable inflation expectations, term premia appear to have declined in levels and displayed smaller fluctuations in response to economic shocks. This suggests that the market has become less uncertain about the path of future interest rates. Towards the end of the sample period, term premia have been negative, suggesting that investors may have been willing to pay a premium for Commonwealth Government securities. Due to the complexity of the model and the difficulty of calibrating it to data, the results should not be interpreted too precisely. Nevertheless, the model does provide a potentially useful decomposition of recent changes in the expected path of interest rates and term premia.
    Keywords: expected future short rate; term premia; term structure decomposition; affine term structure model; zero-coupon yield
    JEL: C51 E43 G12
    Date: 2008–12
  57. By: Scheffel, Eric (Cardiff Business School)
    Abstract: In a seminal study Hodrick et al. (1991) evaluate the ability of a simple cash-credit model to produce realistic variability in consumption velocity while at the same time successfully explaining other key statistics. Sufficient variability in the latter is found to be associated with far too volatile interest rate behaviour. Introducing habit-formation in consumption into a production-based cash costly-credit model (see Gillman and Benk, 2007) makes the evolution of deposits more rigid relative to credit. The same deposit rigidity leads to a more volatile price of credit, causing credit production overshooting relative to deposits. But only by introducing adjustment costs to investment in addition to habit persistence does credit production overshoot sufficiently to produce realistic variability in consumption velocity. The model succeeds in capturing sufficient variability in consumption velocity without obtaining too volatile interest rates. Also, this model of endogenous velocity does not suffer from indeterminacy problems discussed in Auray et al. (2005). In contrast to Gillmand and Benk (2007), the present study examies the role of the price-channel of credit production at business cycle frequency, ignoring or holding fixed the marginal cost channel stemming from credit productivity shocks.
    Keywords: Velocity; Consumption; Interest Rates
    JEL: E0 E2 E3 E4
    Date: 2008–12
  58. By: Matteo Modena
    Abstract: The expectations hypothesis implies that rational investors can predict future changes in interest rates by simply observing the yield spread. According to Mishkin (1990) the expectations theory can also be reformulated in terms of the ability of the spread to predict future inflation. Unfortunately, although appealing, the theory has found little empirical support. Time-varying term premia and changing risk perception have been advocated to rationalize the aforementioned weak empirical evidence. In this work we suggest that the time-varying nature of term premia makes single-equation models inappropriate to analyse the informative content of the term structure. In particular, when the deviations between the expected and the actual spread are large, which occurs in times of soaring term premia volatility, linear models fail to support the expectations theory. Within a threshold model for term premia, we provide evidence that the yield spread contains valuable information to predict future interest rates changes once the risk-averse attitude of economic agents is appropriately considered. Empirical results show that the predictive ability of the yield spread is contingent on the level of uncertainty as captured by the size of monetary policy surprise.
    Keywords: Expectations Hypothesis, Term Premia, Threshold Models.
    JEL: C01 C30 E43 G12
    Date: 2008–07
  59. By: Michiel van Leuvensteijn (CPB Netherlands Bureau for Economic Policy Analysis); Christoffer Kok Sørensen (European Central Bank); Jacob A. Bikker (Nederlandsche Bank); Adrian van Rixtel (Banco de España)
    Abstract: This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest ratesin more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective.
    Keywords: Monetary transmission, banks, retail rates, competition, panel data
    JEL: D4 E50 G21 L10
    Date: 2008
  60. By: Jan Gottschalk; Ken Miyajima; Kadima D. Kalonji
    Abstract: This paper examines the determinants of inflation in Sierra Leone using a structural vector autoregression (VAR) approach to help forecast inflation for operational purposes. Despite data limitations, the paper accurately models inflation in Sierra Leone. As economic theory predicts, domestic inflation is found to increase with higher oil prices, higher money supply, and nominal exchange rate depreciation. The paper then employs a historical decomposition approach to pinpoint the sources of a marked decline in inflation in 2006 and assesses its forecasting properties. Overall, the model serves as a useful addition to the toolkit for analyzing and forecasting inflation in countries with limited data availability.
    Keywords: Inflation , Sierra Leone , Data analysis , Economic forecasting , Oil prices , Money supply , Exchange rate depreciation , Forecasting models ,
    Date: 2008–12–08
  61. By: António Afonso; Luca Agnello; Davide Furceri
    Abstract: In this working paper, we decompose fiscal policy in three components: i) responsiveness, ii) persistence and iii) discretion. Using a sample of 132 countries, our results point out that fiscal policy tends to be more persistent than responding to output variations. We also found that while the effect of cross-country covariates is positive (negative) for discretion, it is negative (positive) for persistence, suggesting that countries with higher persistence have lower discretion and vice versa. In particular, while government size, country size and income have negative effects on the discretion component of fiscal policy, they tend to increase fiscal policy persistence. <P>Réaction au cycle, persistance et effet discrétionnaire de la politique budgétaire <BR>Nous décomposons la politique budgétaire en trois composantes : i) réponse, ii) persistance et iii) effet discrétionnaire. Utilisant un échantillon de 132 pays, nos résultats montrent que la politique budgétaire tend à être plus persistante qu’elle ne répond aux variations du PIB. Nous trouvons également qu’alors que l’effet des covariations entre pays affecte positivement (négativement) l’effet discrétionnaire, il a un effet négatif (positif) sur la persistance. Cela suggère que les pays dotés d’une forte persistance ont un effet discrétionnaire plus faible et vice versa. En particulier, alors que la taille du gouvernement, la taille du pays et le revenu ont des effets négatifs sur la composante discrétionnaire de la politique budgétaire, ils tendent à augmenter la persistance de la politique budgétaire.
    Keywords: fiscal policy, politique fiscale, fiscal volatility, volatilité fiscale
    JEL: E62 H50
    Date: 2008–12–17
  62. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: In India, year-on-year percentage changes of price indexes are widely used as the measure of inflation. In terms of monthly data, each observation of a one-year change in inflation is the sum of twelve one month changes. This suggests that better information about inflationary pressures can be obtained using point-on-point monthly changes. This requires seasonal adjustment. We apply standard seasonal adjustment procedures in order to obtain a point-on-point seasonally adjusted monthly time-series of inflation in India. In three interesting high inflation episodes { 1994-95, 2007 and 2008 - we find that this data yields a faster and better understanding of inflationary pressures.
    Date: 2008–08
  63. By: Peacock, Chris (Bank of England); Baumann, Ursel (European Central Bank)
    Abstract: In this paper we model the role of open-economy effects within a New Keynesian Phillips Curve (NKPC) via the inclusion of intermediate imports in firms' production technology. Using this framework we provide evidence on two questions: first, does the inclusion of import prices help explain post-war inflation dynamics in the United Kingdom , United States and Japan; and second, has the influence of import prices in firms' costs become greater over the more recent period since the mid-1980s. Overall, our results suggest that import prices do help explain movements in inflation; in particular, NKPC models that allow for import prices to enter into firms' costs outperform closed-economy models in sample. However, our results suggest that the influence of import prices has generally remained constant across our sample period, with perhaps only the United Kingdom providing some evidence that import prices have become more important in firms' marginal costs.
    Keywords: Globalisation; inflation dynamics; import prices; New Keynesian Phillips Curves
    Date: 2008–12–22
  64. By: Stilianos Fountas (Department of Economics, University of Macedonia); Menelaos Karanasos (Department of Economics and Finance, Brunel University)
    Abstract: We use a long series of annual data that span over 100 years to examine the relationship between output growth and its uncertainty in five European countries. Using the GARCH methodology to proxy uncertainty, we obtain two important results. First, more uncertainty about output leads to a higher rate of growth in three of the five countries. Second, output growth reduces its uncertainty in all countries except one. Our results are robust to alternative specifications and provide strong support to the recent emphasis by macroeconomists on the joint examination of economic growth and the variability of the business cycle.
    Keywords: Output growth, output growth uncertainty, GARCH.
    JEL: C22 E32
    Date: 2008–12
  65. By: Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: From the early 1990s, India embarked on easing capital controls. Liberalization emphasised openness towards equity flows, both FDI and portfolio flows. In particular, there are few barriers in the face of portfolio equity flows. In recent years, a massive increase in the value of foreign ownership of Indian equities has come about, largely reflecting improvements in the size, liquidity and corporate governance of Indian firms. While the system of capital controls appears formidable, the de facto openness on the ground is greater than is apparent, particularly because of the substantial enlargement of the current account. These changes to capital account openness were not accompanied by commensurate monetary policy reform. The monetary policy regime has consisted essentially of a pegged exchange rate to the US dollar throughout. Increasing openness on the capital account, coupled with exchange rate pegging, has led to a substantial loss of monetary policy autonomy. The logical way forward now consists of bringing the de jure capital controls uptodate with the de facto convertibility, and embarking on reforms of the monetary policy framework so as to shift the focus of monetary policy away from the exchange rate to domestic inflation.
    Keywords: International investment ; Long term capital movements ; International lending and debt problems ; Monetary systems
    JEL: F21 F34 E42
    Date: 2008–05
  66. By: Gösta Ljungman
    Abstract: This paper looks at the factors that have to be considered when designing an aggregate expenditure ceiling. It is argued that expenditure ceilings are effective in promoting fiscal discipline and sustainability, but that a number of trade-offs have to be made when setting up a fiscal framework that will survive in a politically charged environment. The paper illustrates the discussion with a case study of medium-term aggregate expenditure ceilings in three countries: Finland, the Netherlands and Sweden.
    Keywords: Government expenditures , Budgetary policy , Finland , Netherlands , Sweden , Fiscal policy , Political economy , Fiscal sustainability , Inflation ,
    Date: 2008–12–10
  67. By: Adam Cagliarini (Reserve Bank of Australia); Mariano Kulish (Reserve Bank of Australia)
    Abstract: Standard solution methods for linear stochastic models with rational expectations presuppose a time-invariant structure as well as an environment in which shocks are unanticipated. Consequently, credible announcements that entail future changes of the structure cannot be handled by standard solution methods. This paper develops the solution for linear stochastic rational expectations models in the face of a finite sequence of anticipated structural changes. These events encompass anticipated changes to the structural parameters and anticipated additive shocks. We apply the solution technique to some examples of practical relevance to monetary policy.
    Keywords: structural change; anticipated shocks; rational expectations
    JEL: C63 E17 E47
    Date: 2008–12
  68. By: David R. Stockman and Brian E. Raines (Department of Economics,University of Delaware; Department of Mathematics,Baylor University)
    Abstract: Some macroeconomic models exhibit a type of global indeterminacy known as Euler equation branching (e.g., the one-sector growth model with a production externality). The dynamics in such models are governed by a differential inclusion. In this paper, we show that in models with Euler equation branching there are multiple equilibria and that the dynamics are chaotic. In particular, we provide sufficient conditions for a dynamical system on the plane with Euler equation branching to be chaotic and show analytically that in a neighborhood of a steady state, these sufficient conditions will typically be satisfied. We also extend the results of Christiano and Harrison (JME, 1999) for the one-sector growth model with a production externality. In a more general setting, we provide necessary and sufficient conditions for Euler equation branching in this model. We show that chaotic and cyclic equilibria are possible and that this behavior is not dependent on the steady state being "locally" determinate or indeterminate.
    Keywords: global indeterminacy, Euler equation branching, multiple equilibria, cycles,chaos, increasing returns to scale, externality, regime switching
    JEL: E13 E32 E62
    Date: 2008
  69. By: Groneck, Max
    Abstract: In this paper, we compare growth and welfare e¤ects of various budget rules within an endogenous growth model with productive public capital, utility enhancing public consumption and public debt. We find that a fixed deficit regime does not affect the long run growth rate compared to a balanced budget while the growth rate is increased by a golden rule. Welfare effects are ambiguous. Simulations indicate that economies populated by households who have a strong tendency to smooth consumption should adhere to a balanced budget rather than a golden rule or a fixed deficit rule from a welfare point of view.
    Keywords: Budget rules, golden rule of public finance, fiscal policy, endogenous growth, welfare
    JEL: E62 H50 H62 H63 O40
    Date: 2008
  70. By: Reddy, Y.V. (National Institute of Public Finance and Policy)
    Abstract: Given a parctitioner's perspective of fiscal policy and economic reforms based on his working experience from different Indian and International government institutions.
    Keywords: Fiscal Policy ; Economic Reforms
    Date: 2008–06
  71. By: Maria Grydaki (Department of Economics, University of Macedonia); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as, output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values.
    Keywords: Vexchange rate volatility, output volatility, open-economy models.
    JEL: E32 F31 F41
    Date: 2008–12
  72. By: Elke Hahn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frauke Skudelny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper derives forecasts for euro area real GDP growth based on a bottom up approach from the production side. That is, GDP is forecast via the forecasts of value added across the different branches of activity, which is quite new in the literature. Linear regression models in the form of bridge equations are applied. In these models earlier available monthly indicators are used to bridge the gap of missing GDP data. The process of selecting the best performing equations is accomplished as a pseudo real time forecasting exercise, i.e. due account is taken of the pattern of available monthly variables over the forecast cycle. Moreover, by applying a very systematic procedure the best performing equations are selected from a pool of thousands of test bridge equations. Our modelling approach, finally, includes a further novelty which should be of particular interest to practitioners. In practice, forecasts for a particular quarter of GDP generally spread over a prolonged period of several months. We explore whether over this forecast cycle, where GDP is repeatedly forecast, the same set of equations or different ones should be used. Changing the set of bridge equations over the forecast cycle could be superior to keeping the same set of equations, as the relative merit of the included monthly indictors may shift over time owing to differences in their data characteristics. Overall, the models derived in this forecast exercise clearly outperform the benchmark models. The variables selected in the best equations for different situations over the forecast cycle vary substantially and the achieved results confirm the conjecture that allowing the variables in the bridge equations to differ over the forecast cycle can lead to substantial improvements in the forecast accuracy. JEL Classification: C22, C52, C53, E27.
    Keywords: Forecasting, bridge equations, euro area, GDP, bottom up approach.
    Date: 2008–12
  73. By: Tovar, Camilo Ernesto
    Abstract: Over the past 15 years there has been remarkable progress in the specification and estimation of dynamic stochastic general equilibrium (DSGE) models. Central banks in developed and emerging market economies have become increasingly interested in their usefulness for policy analysis and forecasting. This paper reviews some issues and challenges surrounding the use of these models at central banks. It recognises that they offer coherent frameworks for structuring policy discussions. Nonetheless, they are not ready to accomplish all that is being asked of them. First, they still need to incorporate relevant transmission mechanisms or sectors of the economy; Second, issues remain on how to empirically validate them; and finally, challenges remain on how to effectively communicate their features and implications to policy makers and to the public. Overall, at their current stage DSGE models have important limitations. How much of a problem this is will depend on their specific use at central banks.
    Keywords: DSGE models, Central Banks, Communication, Estimation, Modelling
    JEL: B4 C5 E0 E32 E37 E50 E52 E58 F37 F41 F47
    Date: 2008
  74. By: Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard
    Abstract: This is the third of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies that incorporates oil prices and allows us to trace out the effects of shocks to oil prices. The model is estimated with Bayesian techniques. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook.
    Keywords: Economic forecasting , United States , Euro Area , Japan , Oil prices , Monetary policy , External shocks , Forecasting models ,
    Date: 2008–12–10
  75. By: J. David Brown; John Earle
    Abstract: We analyze comprehensive manufacturing firm data to measure the contribution of inter-firm employment reallocation to aggregate productivity growth during the socialist and reform periods in six transition economies. Modifying a standard decomposition technique to better reflect the role of firm entry, we find that reallocation rates and productivity contributions are very low under socialism. After reforms, they rise dramatically, and productivity contributions greatly exceed those observed in market economies. Early in transition, faster reform is associated with larger contributions from reallocation, but later, and on average over the whole transition, this relationship is reversed. Though reallocation rates are larger in faster reforming economies, higher productivity dispersion in slower reformers creates much higher productivity gains for a given volume of reallocation. The results imply that reallocation should be viewed as necessary regular maintenance for a well-functioning economy, and particularly large productivity contributions tend to reflect previous neglect more than current virtue.
    Keywords: productivity, reallocation, industry dynamics, entry, exit, creative destruction, reform, transition, Georgia, Hungary, Lithuania, Romania, Russia, Ukraine
    JEL: E32 O47 P23
    Date: 2008
  76. By: Galo Nuño Barrau (Research Department, Banco Bilbao Vizcaya Argentaria)
    Abstract: Technology shocks are at the core of real business cycle models. Although tra- ditionaly described as exogenous, technology shocks can be the result of the endoge- nous decisions by economic agents under uncertainty. To demostrate it, in this paper I develop a dynamic stochastic general equilibrium model that incorporates Schum- peterian endogenous growth features that affect the convergence to the steady-state. In this model, technology advances are due to the introduction of vertical innovations by entrepreneurs who try to become monopolists in different economic sectors. En- trepreneurs? ventures are ?nanced by banks. The model is solved and estimated by bayesian methods for the United States economy to compute the value of some of its structural parameters. Results show that for a country close to the technology fron- tier, the presented innovation mechanism is roughly equivalent in terms of volatilies, correlations and impulse responses to technology shocks in real business cycle mod- els. Therefore, the behavior of the productivity can be due not only to technology considerations but also to ?nancial and entrepreneurial reasons.
    JEL: C50 E27 O40
    Date: 2008–12
  77. By: Daianu, Daniel; Albu, Lucian Liviu
    Abstract: Economic theory tells that a command system allocates resources poorly because of the impossibility of economic 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 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 makes an attempt to conceptualise the emergence of strain emerges an economic system when relative prices change dramatically, and explores what can be implications for stabilisation policy. The start is made with the closed economy, after which the open economy case is looked at, and a possible formalised expression of strain is suggested, The distributional struggle, as a consequence of resource reallocation, is highlighted. Some modelling and empirical analysis help in substantiating the main thesis. it is contented that the line of reasoning espoused herein can help in developing an economic explanation of shocks in economic systems.
    Keywords: open economy, Phillips curve, long-run atractor, fractal dimension
    JEL: C61 C63 E24 E27 P24
    Date: 2008–12
  78. By: Daria Zakharova
    Abstract: This paper surveys policy responses in recent years to capital inflows in a diverse group of countries that are represented by the Netherlands at the IMF Executive Board. Based on the findings from cross-country empirical literature, the paper distills some guiding principles for policy responses to excessive capital inflows, depending on country-specific circumstances and with a particular focus on fiscal policy. In addition to considering the conventional macroeconomic and structural policy tools, the paper also discusses the role of microfiscal policies in affecting the size and the composition of capital inflows. While conditions in these countries have changed very recently, the policy principles remain salient.
    Keywords: Fiscal policy , Capital flows , Capital inflows , Capital account , Capital account , Current account deficits ,
    Date: 2008–12–05
  79. By: Di Guilmi, Corrado; Gallegati, Mauro; Landini, Simone
    Abstract: The representation of the economic system, from a complexity perspective, focuses on interactions among heterogeneous agents in conditions of uncertainty. Heterogeneity entails asymmetric reactions to shocks and, through interaction mechanisms and feedback loops at micro, macro and meso level, these diverse reactions influence behaviours of other agents. Such a system cannot be modelled with mainstream economics’ tools. In this work we propose a stochastic dynamic model with heterogeneous firms. Their responses to stochastic shocks, in order to maximize profit, modifies their financial ratios, determining in this way the evolution of the system. The model is analytically solved by means of maximum entropy maximization and master equation’s solution techniques (Aoki and Yoshikawa, 2006).
    Keywords: Business cycles, heterogeneity, financial fragility, stochastic aggregation
    JEL: E1 E6
    Date: 2008
  80. By: Robert E. Hall
    Abstract: Government guarantees of private debt deplete equity. The depletion is greatest during periods when the probability of a guarantee payoff is highest. In a setting otherwise subject to Modigliani-Miller neutrality, firms issue guaranteed debt up to the limit the government permits. Declines in asset values raise debt in relation to asset values and thus deplete equity directly, under the realistic assumption that the government is unable to enforce rules calling for marking asset values to market. Less widely recognized is that guaranteed debt creates an incentive to pay equity out to owners — such a payout lowers the value of the firm's call option on its assets by less than the amount of the payout. I build a simple dynamic equilibrium model of an economy that would have a constant consumption/capital ratio but for debt guarantees. Exogenous changes in asset values cause major swings in allocations as participants respond to changing incentives. Periods when default is unusually likely because asset values have fallen are times of abnormally high consumption/capital ratios. The withdrawal of equity from firms to pay for the consumption will turn out to be free on the margin if the firm defaults. Consumers concentrate their consumption during the periods when consumption is cheap. Because these periods are transitory, they generate expectations of negative consumption growth, which implies that interest rates are low. Thus guarantees generate substantial volatility throughout the economy.
    JEL: E32 E58 G18 G32
    Date: 2008–12
  81. By: Jiri Podpiera
    Abstract: The use of estimated policy rules has been on the rise over the past few decades as central banks have increasingly relied on them as policy benchmarks. While simple, conventionally estimated rules have proven insightful, their value is generally seen to depend, among other things, on the ability of the benchmark to accurately reflect the policy environment and on the relevance of the econometric assumptions behind the estimation method. This paper addresses a potential source of econometric bias that might naturally arise and adversely affect the accuracy of conventionally estimated policy rules as benchmarks. In particular, the discrete nature of the policy rate setting process at central banks leaves open the possibility that observed policy rate changes may include significant rounding errors. If so, parameter estimates using conventional econometric methods could be seriously biased; technically, this is an example of a censoring bias. To address this concern, the paper offers a new method for estimating monetary policy rules and demonstrates the ability of the resulting bias-adjusted policy rules to outperform conventionally estimated ones in characterizing the policy environments in the cases of the Czech Republic and the United States.
    Keywords: Bias in parameters, Monetary policy, Policy rule.
    JEL: E4 E5
    Date: 2008–10
  82. By: Massimo Guidolin (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.); Daniel L. Thornton (Federal Reserve Bank of St. Louis, 411 Locust St, St Louis, MO, 63166-0442, USA.)
    Abstract: Despite its important role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support. The empirical failure of the EH was attributed to a variety of econometric biases associated with the single-equation models used to test it; however, none account for it. This paper analyzes the EH by focusing on its fundamental tenet - the predictability of the short-term rate. This is done by comparing h-month ahead forecasts for the 1- and 3-month Treasury yields implied by the EH with the forecasts from random-walk, Diebold and Lei (2006), and Duffee (2002) models. The evidence suggests that the failure of the EH is likely a consequence of market participants’ inability to predict the short-term rate. JEL Classification: E40, E52.
    Keywords: Expectations theory, random walk, time-varying risk premium
    Date: 2008–12
  83. By: Le, Vo Phuong Mai (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael
    Abstract: We evaluate the Smets-Wouters model of the US using indirect inference with a VAR representation of the main US data series. We find that the original New Keynesian SW model is on the margin of acceptance when SW's own estimates of the variances and time-series behaviour of the structural errors are used. However when the structural errors implied jointly by the data and the structural model are used the model is rejected. We also construct an alternative (New Classical) version of the model with flexible wages and prices and a one-period information lag. This too is rejected. But when small proportions of both the labour and product markets are assumed to be imperfectly competitive within otherwise flexible markets the resulting `weighted' model is accepted.
    Keywords: Bootstrap; US model; DGSE; VAR; New Keynesian; New Classical; indirect inference; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2008–12
  84. By: Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard
    Abstract: This is the second of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook.
    Keywords: Economic forecasting , United States , Euro Area , Japan , Monetary policy , Forecasting models ,
    Date: 2008–12–10
  85. By: RICCI Francesco; ZACHARIADIS Marios
    Date: 2009–01
  86. By: Watt, Andrew
    Abstract: The article analyses the situation facing the European economy and traces both the more fundamental and the proximate causes of the worsening crisis. It argues that European policymakers have the tools at their disposal to limit the extent and duration of the recession and proposes a package consisting of five elements: expansionary monetary policy; a coordinated fiscal stimulus; anti-deflationary wage policies; continued efforts to stabilise the financial sector; and ad hoc national measures to break negative feedback loops. Proposals are also developed for more medium-term measures to prevent crises in the future and improve Europe's ability to effectively manage its economy. The article concludes that, given the major question marks as to whether, with the current institutional structures, Europe actually will manage to put in place the required coordinated response, a 1929-scenario, while far from inevitable, remains a possibility.
    Keywords: economic crisis; European policy-making; coordinated fiscal stimulus
    JEL: E63 N14
    Date: 2008–12
  87. By: Lovell, Michael C.
    Abstract: This paper examines five problems with the inflation indexing procedures used by the Social Security Administration of the United States in taking inflation into account when calculating Old Age and Survivors Insurance (OASI) Benefits. Because of Problem #1, the commingling of unindexed with indexed earnings, a retiree born in 1930 who continued in a high earning career until age 75 receives an annual benefit more than $1,800 larger than would have been generated with full indexing. As a result of Problems #2 and #4 your OASI check will be larger if wage inflation happens to be extra high in your 60th year or if price inflation is exceptionally low in your 61st year. Because of the indexing problems, the percentage increase in your inflation (CPI-W) adjusted benefit if you elect to postpone retirement and the start of OASI benefits will depend in part on the pace of inflation. While inflation indexing problems do not attract much attention in normal times, they can contribute to serious short-run financial instability for the OASI trust fund in periods of substantial inflation or deflation.
    Keywords: Social Security, inflation, indexing
    JEL: H55
    Date: 2008
  88. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark's financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States. Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike.
    JEL: E6 F3 N0
    Date: 2008–12
  89. By: Papa N'Diaye (International Monetary Fund); Ping Zhang (External Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper analyses the potential benefits from reforms aimed at promoting domestic demand in the region, as well as the effects of slower growth in the United States and the G3 on EMEAP economies.The analysis is based on simulation scenarios using an expanded version of the IMF Global Integrated Monetary and Fiscal (GIMF) model. The GIMF model is particularly useful for conducting medium-term policy analysis, because it incorporates rich layers of intra-regional trade, production, and demand that allow the transmission mechanism of structural reforms and external shocks to be fully articulated. The simulation results show that reforms to rebalance the pattern of demand in regional economies (such as Mainland China) more towards domestic demand could entail non-negligible benefits for the EMEAP. These benefits could be even larger for those economies that more flexibly adjust to the shift in China's trade pattern. The simulation results also illustrate structural reforms in EMEAP economies will allow them to reduce vulnerabilities to economic downturns in the major advanced economies.
    Keywords: GIMF model, Slowdown; Demand rebalancing; Confidence effects
    JEL: E2 E6 F4 O4
    Date: 2008–12
  90. By: Vahagn Galstyan and Philip R. Lane
    Abstract: Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness.
    Date: 2008–12–16
  91. By: Jean De Beir (EPEE - Université d'Evry-Val d'Essonne); Mouez Fodha (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Francesco Magris (EPEE - Université d'Evry-Val d'Essonne)
    Abstract: The aim of this paper is to examine whether the development of waste recycling activities can be a source of economic fluctuation. We assume that the recycling sector has four fundamental characteristics. (i) The production factors are restricted by the production of the last period. (ii) These production factors are waste for which the price determination is non-competitive. (iii) It produces a recycled good, which is a perfect substitute to th primary good. (iv) It reduces waste stream. We consider the simplest economy with an infinitely lived agent and a life cycle hypothesis for the goods. We show that the equilibrium is unique and is always determinate. In spite of the lack of indeterminacy, however, our system can display cyclical behavior, depending on some usual conditions on parameters. Namely, the steady-state may undergo a Flip and a Hopf bifurcation.
    Keywords: Cycles, recycling, waste.
    Date: 2008–05
  92. By: Tuomas Välimäki (Suomen Pankki, P.O. Box 160, FIN-00101 Helsinki, Finland.)
    Abstract: The tender spread, i.e. the difference between the effective price for money in the ECB’s main refinancing operations and the prevailing policy rate, is one of the main determinants behind the evolution of the EONIA with respect to the ECB’s operational target. This study assesses the reasons for which the average tender spread did not reduce after the banks’ demand for liquidity was isolated from their interest rate expectations in March 2004. The paper offers two potential explanations for the unexpected behavior. First, following the increased precision in the ECB’s liquidity provision after the end-of- period fine tuning operations were added to the regularly applied tools, even a small bias in the liquidity supply could have resulted in a strictly positive tender spread. Second, banks’ uncertainty over their individual allotments in the tender operations may have led to a strictly positive tender spread. Furthermore, the significant growth in the refinancing volumes may have intensified the allotment uncertainty. JEL Classification: D44, E58.
    Keywords: Main refinancing operations, liquidity, EONIA, tenders.
    Date: 2008–12
  93. By: Chen, Jie (nstitute for Housing and Urban Research, Uppsala University); Zhu, Aiyong (Department of Word Economy)
    Abstract: In this paper we investigate the long-run and short-run relationship between housing investment and economic growth in China using the quarterly province-level panel data for the period 1999 q1 to 2007 q4. Recently developed econometric techniques for panel unit root testing and heterogeneous panel cointegration analysis are employed. The empirical results provide clear support of a stable long-run relationship between housing investment, non-housing investment and GDP in China. We then estimate the long-run elasticity of GDP with respect to housing investment for the whole country as well as three sub regions. The variations across regions are detected and reasons for this fact are discussed. Based on the panel ECM, we show that there is bidirectional Granger causality between housing investment and GDP in both short run and long run for the whole country, while the impacts of housing investment on GDP behave strikingly differently in the three sub-regions of China.
    Keywords: Housing investment; Economic growth; Panel cointegration; Granger causality
    JEL: E22 L74 R31
    Date: 2008–12–02
  94. By: Christian Kascha (Norges Bank (Central Bank of Norway)); Francesco Ravazzolo (Norges Bank (Central Bank of Norway))
    Abstract: In this paper, we empirically evaluate competing approaches for combining inflation density forecasts in terms of Kullback-Leibler divergence. In particular, we apply a similar suite of models to four different data sets and aim at identifying combination methods that perform well throughout different series and variations of the model suite. We pool individual densities using linear and logarithmic combination methods. The suite consists of linear forecasting models with moving estimation windows to account for structural change. We find that combining densities is a much better strategy than selecting a particular model ex-ante. While combinations do not always perform better than the best individual model, combinations always yield accurate forecasts and, as we show analytically, provide insurance against selecting inappropriate models. Combining with equal weights often outperforms other weighting schemes. Also, logarithmic combinations can be advantageous, in particular if symmetric densities are preferred.
    Keywords: Forecast Combination, Logarithmic Combinations, Density Forecasts, Inflation Forecasting
    JEL: C53 E37
    Date: 2008–12–12
  95. By: Zarate, Cristina A.
    Abstract: It has been observed in the last years a systematic process of reserve accumulation from emerging countries, even though is a clear consequence of international liquidity it is worth asking ourselves the purpose and the limits of applying this policies by Monetary Officials. The purpose herein is to resume the debate on Optimum Reserves in Argentina, from the analysis of our recent past and on the basis of three stylized facts that have hindered our growth on a long term stable path: Debt crisis, Bank or financial crisis and currency exchange crisis. Taking into account the Default declaration in 2001 and the enormous adjustment that our economy had to face, reflecting on the “Productive model” implemented in 2003, I propose to find the optimum level of reserves given a probability of default for the period 1997-2007. Likewise, in order to overcome the static feature of the previous issue, a possible dynamic extension is presented through the calculus of variations theory, appealing to a hypothetical situation in order to analyze the analytical results found. The most important result that is reached is that during the 90s the level of reserves studied is much lower than the optimum, while in the following decade this trend is reverted obtaining since 2007 an accumulation surplus on these assets. Finally, when incorporating the adjustment costs to the issue of optimization it was possible to obtain a “genuine” reserve feature, that is, a flow demand that represents the desired variations in the reserve stock.This allows inferring accumulation policies that the policy maker should apply, to obtain the desired optimum stock.
    Keywords: Reservas Optimas; Default; Riesgo soberano
    JEL: E52
    Date: 2008–07
  96. By: Loretti I. Dobrescu; Laurence J. Kotlikoff; Alberto F. Motta
    Abstract: National saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 17 percent of national income in 1970, but less than 7 percent in 2006. Japan saved 30 percent in 1970, but only 8 percent in 2006. And the U.S. saved 9 percent in 1970, but only 2 percent in 2006. What explains these international and intertemporal differences? Is it demographics, government spending, productivity growth or preferences? Our answer is preferences. Developed societies are placing increasing weight on the welfare of those currently alive, particularly contemporaneous older generations. This conclusion emerges from estimating two models in which society makes consumption and labor supply decisions in light of uncertainty over future government spending, productivity, and social preferences. The two models differ in terms of the nature of preference uncertainty and the extent to which current society can control future societies' spending and labor supply decisions.
    JEL: E21
    Date: 2008–12
  97. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: This paper uses three different surveys of economic forecasts to assess both the support for and the properties of informational rigidities faced by agents. Specifically, we track the impulse responses of mean forecast errors and disagreement among agents after exogenous structural shocks. Our key contribution is to document that in response to structural shocks, mean forecasts fail to completely adjust on impact, leading to statistically and economically significant deviations from the null of full information: the half life of forecast errors is roughly between 6 months and a year. Importantly, the dynamic process followed by forecast errors following structural shocks is consistent with the predictions of models of informational rigidities. We interpret this finding as providing support for the recent expansion of research into models of informational rigidities. In addition, we document several stylized facts about the conditional responses of forecast errors and disagreement among agents that can be used to differentiate between some of the models of informational rigidities recently proposed.
    JEL: D84 E3 E4 E5
    Date: 2008–12
  98. By: Kirstin Hubrich; Kenneth D. West
    Abstract: We propose two new procedures for comparing the mean squared prediction error (MSPE) of a benchmark model to the MSPEs of a small set of alternative models that nest the benchmark. Our procedures compare the benchmark to all the alternative models simultaneously rather than sequentially, and do not require reestimation of models as part of a bootstrap procedure. Both procedures adjust MSPE differences in accordance with Clark and West (2007); one procedure then examines the maximum t-statistic, the other computes a chi-squared statistic. Our simulations examine the proposed procedures and two existing procedures that do not adjust the MSPE differences: a chi-squared statistic, and White’s (2000) reality check. In these simulations, the two statistics that adjust MSPE differences have most accurate size, and the procedure that looks at the maximum t-statistic has best power. We illustrate our procedures by comparing forecasts of different models for U.S. inflation.
    JEL: C32 C53 E37
    Date: 2008–12
  99. By: Robert Price; Isabelle Joumard; Christophe André; Makoto Minegishi
    Abstract: The financial crisis and economic downturn are going to weigh on fiscal positions in OECD countries over the short to medium-term, both through the operation of automatic stabilisers and the enactment of discretionary fiscal stimulus packages. However, the strategic policy options facing OECD countries are mainly determined by the soundness of their underlying fiscal positions which vary substantially. This paper first describes how OECD economies are situated with respect to underlying fiscal balances and net government debt. A number of countries seem to enjoy favourable fiscal positions with underlying fiscal surpluses, low government debt or even positive net financial asset positions. When taking account, as far as possible, of implicit liabilities associated with ageing populations and resource-based revenues, fiscal positions still vary greatly across countries. The paper then examines the criteria involved in deciding whether government financial asset accumulation is in excess of needs and the use to which any excess government saving might be put, whether increasing public spending or reducing taxes. Finally, the determinants of the optimal size of the government balance sheet for any given desired net debt position are discussed. <P>Stratégies pour les pays bénéficiant de situations budgétaires favorables <BR>La crise financière et le ralentissement économique vont peser sur la situation budgétaire des pays de l’OCDE à court et moyen terme, à la fois à travers le jeu des stabilisateurs automatiques et la mise en oeuvre de politiques discrétionnaires de relance budgétaire. Toutefois, les options stratégiques dont disposent les pays de l’OCDE sont principalement déterminées par la solidité de leur situation budgétaire sous-jacente, très variable d’un pays à l’autre. Ce document commence par décrire la situation des économies de l’OCDE en termes de déficit sous-jacents et de dette nette des administrations publiques. Un certain nombre de pays semblent bénéficier d’une situation budgétaire favorable, avec des surplus sousjacents, une faible dette des administrations publiques, ou même une situation créditrice nette. Lorsque l’on prend en compte, dans la mesure du possible, les engagements implicites liés au vieillissement de la population et les revenus associés à l’exploitation de ressources naturelles, les situations budgétaires restent très variables selon les pays. Ce document examine ensuite les critères pertinents pour décider si l’accumulation d’actifs financiers par les administrations publiques est excessive par rapport aux besoins et quelles utilisations pourraient être faites d’une épargne excédentaire des administrations publiques, que ce soit pour accroître les dépenses publiques ou réduire les impôts. Il s’achève par une analyse des déterminants de la taille optimale du bilan des administrations publiques pour un niveau désiré de dette nette donné.
    Keywords: fiscal policy, politique budgétaire, fiscal sustainability, solde budgétaire sous-jacent, budget surplus, commodity-related revenues, government debt, government financial assets, public investment, underlying fiscal balance, actifs financiers des administrations publiques, dette des administrations publiques, excédent budgétaire, investissement public, revenus liés à l’exploitation de ressources naturelles, soutenabilité budgétaire
    JEL: E62 H2 H5 H6 J11 Q33
    Date: 2008–12–17
  100. By: Plachta, Robert
    Abstract: This paper assesses the interactions of horizontal fiscal equalisation schemes with debt policy by sovereign regional governments. Local public goods are either financed by debt or taxation. A horizontal equalisation scheme eleviates regional public revenue disparities under horizontal and vertical tax competition. We show that fiscal equalisation schemes have no impact on the optimal central government grant whereas they can either soften or harden the regional budget constraint depending on the specific formulae. Revenue equalisation softens the budget constraint whereas tax base equalisation hardens the budget constraint of poor states.
    Keywords: Fiscal federalism, public debt, soft budget constraint, fiscal equalisation, tax competition
    JEL: E62 H7
    Date: 2008
  101. By: Rudolfs Bems; Philip Schellekens
    Abstract: This paper examines the macroeconomic impact of migration on income convergence in the EU's New Member States (NMS). The paper focuses on cross-border mobility of labor and examines the implications for policymakers with the help of a general equilibrium model. It finds that cross-border labor mobility provides ample benefits in terms of faster and smoother convergence. Challenges, however, include containing wage pressures and better mobilizing and utilizing resident labor that does not cross borders.
    Keywords: Migration , Labor mobility , European Economic and Monetary Union , Wages , Capital flows , Economic growth , Income ,
    Date: 2008–12–04
  102. By: Tom Pak-wing Fong (Research Department, Hong Kong Monetary Authority); Chun-shan Wong (Department of Finance, The Chinese University of Hong Kong)
    Abstract: This paper estimates macroeconomic credit risk of banks¡¦ loan portfolio based on a class of mixture vector autoregressive models. Such class of models can differentiate distributions of default rates and macroeconomic conditions for different market situations and can capture their dynamics evolving over time, including the feedback effect from an increase in fragility back to the macroeconomy. These extensions can facilitate the evaluation of credit risks of loan portfolio based on different credit loss distributions.
    Keywords: Stress test; Hong Kong Banking; Credit risk; Mixture autoregressive models; Macroeconomic shocks; Value-at-risk.
    JEL: C15 C32 C53 E37 G21
    Date: 2008–10
  103. By: Aoki, Masanao; Yoshikawa, Hiroshi
    Abstract: The standard Walrasian equilibrium theory requires that the marginal value product of production factor such as labor is equal across firms and industries. However, productivity dispersion is widely observed in the real economy. Search theory allegedly fills this gap by encompassing apparent disequilibrium phenomena in the neoclassical equilibrium framework. Taking up Lucas and Prescott (1974) as a primary example, we show that the neoclassical search theory cannot explain the observed pattern of productivity dispersion. Non-self-averaging, a concept little known to economists, plays the major role. Empirical observation suggests strongly the presence of disturbing forces which dominate equilibrating forces due to optimizing behavior of economic agents. We must seek a new concept of equilibrium different from the standard Walrasian equilibrium in macroeconomics.
    Keywords: Equilibrium, search theory, productivity dispersion, power-law, non-self-averaging
    JEL: D50 E50 J64
    Date: 2008
  104. By: Spencer Dale (Board of Governors of the Federal Reserve System); Athanasios Orphanides (Central Bank of Cyprus); Par Osterholm (Department of Economics, Uppsala University)
    Abstract: Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. If the public is able to assess accurately the quality of the imperfect information communicated by a central bank, such communication can inform and improve the public's decisions and expectations. But if not, communicating imperfect communication has the potential to mislead and distract. The risk that imperfect communication may detract from the public's understanding should be considered in the context of a central bank's communications strategy. The risk of distraction means the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public's understanding to the extent that it "crowds out" a role for communicating imperfect information.
    Keywords: Transparency, Forecasts, Learning
    JEL: E52 E58
    Date: 2008–02
  105. By: Andrew Caplin; John Leahy
    Abstract: We construct a model of trade with matching frictions. The model provides a simple characterization for the joint proces of prices, sales and inventory. We compare the implications of the model to certain properties of housing markets. The model can generate the large price changes and the positive correlation between prices and sales that we see in the data. Unlike the data, prices are negatively autocorrelated and high inventory predicts price appreciation. We investigate several amendments to the model.
    JEL: D83 E3
    Date: 2008–12
  106. By: Matloob Piracha; Yu Zhu
    Abstract: This paper analyses the savings behaviour of natives and immigrants in Germany. It is argued that uncertainty about future income and legal status (in case of immigrants) is a key component in the determination of the level of precautionary savings. Using the German dataset, we exploit a natural experiment arising from a change in the nationality law in Germany to estimate the importance of precautionary savings. Using difference-in-differences approach, we find a significant reduction in savings and remittances for immigrants after the easing of citizenship requirements, compared to the pre-reform period. Our parametric specification shows that introduction of the new nationality law reduces the marginal propensity to save gap between natives and immigrants by up to 80%. These findings suggest that much of the differences in terms of the savings behaviour between natives and immigrants are driven by the savings arising from the uncertainties about future income and legal status rather than cultural differences.
    Keywords: Migrants; Remittances; Savings; Uncertainty
    JEL: D80 E21 F22
    Date: 2008–12
  107. By: Markus K. Brunnermeier
    Abstract: This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.
    JEL: E4 E5 G2
    Date: 2008–12
  108. By: Koskela, Erkki (University of Helsinki); König, Jan (Free University of Berlin)
    Abstract: We analyze the following questions associated with flexible outsourcing under partly imperfect dual domestic labour markets, where high skilled workers participate in firm's profit via profit sharing: How does the implementation of profit sharing influence flexible outsourcing? What is the relationship between outsourcing cost, profit sharing and wages? We show that profit sharing has a positive effect on low skilled wage and thus an outsourcing enhancing character. The wages of both types of labour are negatively correlated and lower outsourcing cost can increase the wage dispersion by decreasing the low skilled wage and raising the high skilled wage. The overall effect of profit sharing on high skilled wage is ambiguous due to a positive direct effect and a negative indirect effect via the low skilled wage.
    Keywords: profit sharing, dual labour market, flexible outsourcing, labour market imperfection, employee effort
    JEL: E23 E24 H22 J23 J51 J82
    Date: 2008–12
  109. By: Pallage, Stéphane (University of Québec at Montréal); Scruggs, Lyle (University of Connecticut); Zimmermann, Christian (University of Connecticut)
    Abstract: The goal of this paper is to establish if unemployment insurance policies are more generous in Europe than in the United States, and by how much. We take the examples of France and one particular American state, Ohio, and use the methodology of Pallage, Scruggs and Zimmermann (2008) to find a unique parameter value for each region that fully characterizes the generosity of the system. These two values can then be used in structural models that compare the regions, for example to explain the differences in unemployment rates.
    Keywords: unemployment insurance, labor market policy evaluation
    JEL: E24 J65
    Date: 2008–12
  110. By: Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.); Paul Ramskogler (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: Post Keynesian Economics (PKE) is at a cross road. The academic climate at universities has become more hostile to survival and the mainstream has become more diverse internally. Moreover, a heterodox camp of diverse groups of non-mainstream economists is forming. The debate on the future of PKE has so far focussed on the relation to the mainstream. This paper argues that this is not an important issue for the future of PKE. The debate has overlooked the dialectics between academic hegemony and economic (and social) stability. The important question is, whether PKE offers useful explanations of the ongoing socio-economic transformation. PKE has generated valuable insights but it offers little on important real world phenomena such as supply-side phenomena like the increasing use of ICT and the globalisation of production, social issues like precarisation and the polarization of income distribution or ecological challenges like climate change. It is these issues that will decide the future of PKE.
    JEL: B20 B50 B59 E12
    Date: 2008–12
  111. By: Johan H. L. Oud (Radboud University Nijmegen, The Netherlands); Henk Folmer (University of Groningen, The Netherlands; University of Wageningen, The Netherlands); Roberto Patuelli (University of Lugano, Switzerland; The Rimini Centre for Economic Analysis, Italy); Peter Nijkamp (VU University Amsterdam, The Netherlands)
    Abstract: This paper analyzes patterns of regional labour market development in Germany over the period 2000-2003 by means of a spatial-dependence continuous-time model. (Spatial) panel data are routinely modelled in discrete time. However, there are compelling arguments for continuous time modelling of (spatial) panel data. Particularly, most social processes evolve in continuous time such that analysis in discrete time is an oversimplification, gives a distorted representation of reality and leads to misinterpretation of estimation results. The most compelling reason for continuous time modelling is that, in contrast to discrete time modelling, it allows for adequate modelling of dynamic adjustment processes (see, for example, Special Issue 62:1, 2008, of Statistica Neerlandica). We introduce spatial dependence in a continuous time modelling framework and apply the unified framework to regional labour market development in Germany. The empirical results show substantial autoregressive effects for unemployment and population development, as well as a negative effect of unemployment development on population development. The reverse effect is not significant. Neither are the effects of the development of regional average wages and of the manufacturing sector on the development of unemployment and population.
    Keywords: Continuous time modelling, structural equation modelling, spatial dependence, panel data, disattenuation, measurement errors, Germany
    JEL: C33 E24 O18 R11
    Date: 2008–12
  112. By: Barnett, William A.; Serletis, Apostolos
    Abstract: This chapter is an up-to-date survey of the state-of-the art in consumer demand analysis. We review (and evaluate) advances in a number of related areas, in the spirit of the recent survey paper by Barnett and Serletis (2008). In doing so, we only deal with consumer choice in a static framework, ignoring a number of important issues, such as, for example, the effects of demographic or other variables that affect demand, welfare comparisons across households (equivalence scales), and the many issues concerning aggregation across consumers.
    Keywords: demand systems; consumer preferences; theoretical regularity
    JEL: D12 C52 E21
    Date: 2008–12–20
  113. By: Laura Vartia
    Abstract: This paper analyses how different tax policies can affect investment and productivity. To address this question the paper uses industry-level data from a set of OECD countries and examines whether different industries are affected differently by taxation. Investment is shown to respond negatively to an increase in the corporate tax rate and a decrease in capital depreciation allowances through changes in the user cost of capital. The analysis of potential links between taxes and productivity tests the hypothesis that taxes affect productivity through different channels and that due to some salient industry characteristics some industries are inherently more affected than others by certain taxes. The paper finds evidence that corporate and top personal income taxes have a negative effect on productivity. In contrast, tax incentives for research and development (R&D) are found to have a positive effect on productivity. These effects are stronger in those industries that are inherently more profitable, have more entrepreneurial activity and are more R&D intensive, respectively. <P>L’effet des politiques de taxation sur les investissements and la productivité dans les pays de l'OCDE : Une analyse sectorielle <BR>Cette étude vise à étudier l’effet des politiques de taxation sur les investissements et la productivité des entreprises. Nous utilisons des données sectorielles pour un ensemble de pays de l’OCDE et analysons dans quelle mesure l’impact de la taxation diffère selon les secteurs. Selon nos résultats, une hausse de l’impôt sur les sociétés ou une baisse des provisions pour amortissement du capital provenant de variations du coût d’usage du capital induisent une baisse de l’investissement des entreprises. Nous analysons les mécanismes de l’impact de la taxation des entreprises sur leur productivité et nous testons si certains secteurs y sont plus sensibles que d’autres. Selon nos estimations, l’impôt sur les sociétés, mais aussi les dernières tranches de l’impôt sur le revenu, ont un impact négatif sur la productivité. En revanche, les avantages fiscaux visant à promouvoir la recherche et développement semblent avoir un effet bénéfique sur la productivité. Ces effets sont plus forts dans les secteurs plus rentables, dans les secteurs caractérisés par un niveau plus élevé d’activité entrepreneuriale, et dans les secteurs caractérisés par un niveau plus élevé de recherche et développement.
    Keywords: investment, investissement, impôt sur le revenu, user cost, coût d'usage, corporate and personal income taxation, total factor productivity, impôt sur les sociétés, productivité globale des facteurs
    JEL: C23 E22 H24 H25 H30
    Date: 2008–12–19
  114. By: Vollrath, Dietrich
    Abstract: The development of the financial system is shown, both historically and in contemporary data, to be adversely affected by inequality in the distribution of land. To accommodate these empirical findings, a theory is developed that highlights the incentives of landowners to oppose competition in the financial sector. The theory provides an explanation for the co-incident development of the financial sector and overall economy.
    Keywords: Land Distribution; financial development; overlapping generations; financial institutions
    JEL: E25 G18 N2 O4
    Date: 2008–12–19
  115. By: Zeljko, Bogetic; Karlis , Smits; Sergey , Ulatov; Olga, Emelyanova; Marco , Hernandez
    Abstract: After a decade of high growth, the Russian econoomy is experiencing a slowdown in the wake of the global financial crisis. While Russia's strong short-term macroeconomic fundamentals make it better than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than otherwise. But the crisis also presents an opportunity to address the medium- to longer term challenges of competitiveness, economic diversification, and financial sector modernization which are necessary to boost growth and living standards.
    Keywords: Russia; Russian economy; Russian financial crisis; energy efficiency
    JEL: P2 B22 A10 Q4 E2 F3 E5 F41 G21
    Date: 2008–11–18
  116. By: Peter Blair Henry; Conrad Miller
    Abstract: Recent work emphasizes the primacy of differences in countries' colonially-bequeathed property rights and legal systems for explaining differences in their subsequent economic development. Barbados and Jamaica provide a striking counter example to this long-run view of income determination. Both countries inherited property rights and legal institutions from their English colonial masters yet experienced starkly different growth trajectories in the aftermath of independence. From 1960 to 2002, Barbados' GDP per capita grew roughly three times as fast as Jamaica's. Consequently, the income gap between Barbados and Jamaica is now almost five times larger than at the time of independence. Since their property rights and legal systems are virtually identical, recent theories of development cannot explain the divergence between Barbados and Jamaica. Differences in macroeconomic policy choices, not differences in institutions, account for the heterogeneous growth experiences of these two Caribbean nations.
    JEL: E0 F0 N0 O0
    Date: 2008–12
  117. By: George M. Georgiou (Publications Section, Central Bank of Cyprus)
    Abstract: There has been a burgeoning number of studies attempting to measure the size of the ‘black’ economy. These are based on a variety of methodologies and provide a range of estimates, not just across countries but also within the same countries and often by the same author(s). This raises a number of issues: What is meant by the term ‘black’ economy? Is it an appropriate description? What, if any, is the theory underlying the estimates of informal economic activity? This discussion paper examines these and other issues, and concludes that whilst the existence of what we prefer to call the ‘informal’ or ‘grey’ economy in most countries is incontrovertible, there is a lack of consensus on the appropriate methodology for estimating its size. More importantly, the large number of studies so far are simply exercises in measurement without theory, though we are sceptical that even with strong theoretical underpinnings it is possible to provide accurate estimates of a complicated web of informal activities.
    JEL: E26 H26 K42
    Date: 2007–05
  118. By: António B. Moniz (IET, FCT-Universidade Nova de Lisboa)
    Abstract: This report is made for the Work Package 15 of WORKS project and tries to develop more information on the Portuguese situation in the work structures changes in the recent years. It starts with an analysis of socio- economical indicators (Macro economical indicators, Employment indicators, Consumption, Technology at the workplace, Productivity), and then approaches the situation in terms of work flexibility in its dimensions of time use and New forms of work organisation. It traces employment in business functions with a sectoral and occupational approach, and analyses the occupational change in South Europe with particular relevance to Portugal (skill utilisation and job satisfaction, occupational and industrial mobility, quantitative evaluation of the shape of employment in Europe. Finaly are analysed the globalisation indicators.
    Keywords: work organisation, institutions, employment, labour markets, investment, technology modernisation
    JEL: D24 E20 F21 J2 J80 L6 M54
    Date: 2008–08
  119. By: Barnett, William A.; Serletis, Apostolos
    Abstract: This paper presents the differential approach to applied demand analysis. The demand systems of this approach are general, having coefficients which are not necessarily constant. We consider the Rotterdam parameterization of differential demand systems and derive the absolute and relative price versions of the Rotterdam model, due to Theil (1965) and Barten (1966). We address estimation issues and point out that, unlike most parametric and semi-nonparametric demand systems, the Rotterdam model is econometrically regular.
    Keywords: differential demand systems; theoretical regularity; econometric regularity
    JEL: D12 C52 E21
    Date: 2008–12–10
  120. By: Hasan, Zubair
    Abstract: This paper explains the notion of market in historical perspective and the role markets play in free enterprise economies. It lists the major market failures and the role governments are expected to play in regulating and supplementing markets including the promotion of CSR from Islamic perspective. The discussion is limited to product and factor markets.
    Keywords: Market; Invisible hand; Market failures; Islam norms; Trade; Role of state; CSR
    JEL: F10 D41 E61
    Date: 2008–12–15
  121. By: Inoue, Takeshi
    Abstract: This paper examines the causalities in mean and variance between stock returns and Foreign Institutional Investment (FII) in India. The analysis in this paper applies the Cross Correlation Function approach from Cheung and Ng (1996), and uses daily data for the timeframe of January 1999 to March 2008 divided into two periods before and after May 2003. Empirical results showed that there are uni-directional causalities in mean and variance from stock returns to FII flows irrelevant of the sample periods, while the reverse causalities in mean and variance are only found in the period beginning with 2003. These results point to FII flows having exerted an impact on the movement of Indian stock prices during the more recent period.
    Keywords: Causality, Cross correlation, Foreign institutional investment, India, Stock price
    JEL: E44 F21
    Date: 2008–11
  122. By: António B. Moniz (IET, FCT-Universidade Nova de Lisboa); Tobias Woll (IET, FCT-Universidade Nova de Lisboa)
    Abstract: In this working paper is presented information on the Portuguese labour market developed with the support of the European project WORKS-“Work organisation and restructuring in the knowledge society”. Is still a on the process article and thus commentaries are welcome. The structure is based on the following topics: a) The employment policy (Time regimes - time use, flexibility, part-time work, work-life balance -, and the work contracts regimes – wages, contract types, diversity); b) Education and training (skilling outcomes, rules on retraining and further training, employability schemes, transferability of skills); c) Equal opportunities (relevance of equal opportunity regulation for restructuring outcomes, the role of gender and age regulation); d) Restructuring effects (policy on transfer of personnel, policy on redundancies, and participation or voice in restructuring).
    Keywords: labour market; gender; work organisation; knowledge society; employment policy; Education
    JEL: E24 J21 J31 J48 J68 J82 M12 M54
    Date: 2007–12
  123. By: Olavi Rantala
    Abstract: ABSTRACT : This paper describes the main features of a model developed for forecasting economic developments, energy demand and greenhouse gas emissions in the EU area and Finland as well as for simulating the economic impacts of EU climate policy. Climate policy analysis necessitates a model of the whole EU area, because CO2 emissions of the EU area emission trading sector determine the demand and price of emission allowances. The main conclusion from model simulations is that output and employment losses induced by EU climate policy in 2008-2012 will be more severe in a small open energy intensive economy like Finland than in the rest of the EU area. The negative impacts of EU climate policy on export competitiveness, exports and output volume in Finland will be strongest in the energy intensive industrial sec-tors which belong to the EU emission trading sector.
    Keywords: greenhouse gas emissions, economic impacts of emission reduction
    JEL: C5 E3 Q4 Q5
    Date: 2008–12–19
  124. By: Michal, Tvrdon
    Abstract: The presented article deals with labour market institutions and labour market performance in the European Union. The first chapter is devoted to theoretical and methodological background of labour market performance. Theoretical literature has created a set of institutional aspects such as employment protection legislation, structure of wage bargaining, taxation of labour, active labour market policy, the system of unemployment and social benefits. All these aspects determine the institutional framework of labour market. Theoretical literature also has defined labour market flexibility as an instrument for adjustment process in case of asymmetric shock. Attention is also paid to influence of these institutional aspects on employment or unemployment. The second chapter is composed of the comparative analysis of selected criteria and corresponding economic indicators of the EU member states. The author has chosen the method of comparative analysis as the basic method for accomplishing the goal of the paper - to analyse the labour market institutions and their contribution to labour market performance in the EU member states. The evidence shows that the labour market flexibility in the Visegrad group countries is better than average of old EU-15 member states. However, this level of flexibility is much behind the level of USA or Anglo-Saxon countries. The main problem of Visegrad group is long-term unemployment and its composition and a lower level of employment. The author assumes that improving these indicators is one of the most important tasks for political-economic authorities.
    Keywords: Labour market; tax wedge; wage bargaing; EMU; integration; labour market flexibility
    JEL: E24 J60 J01
    Date: 2008–05–22

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