nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒02‒07
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Monetary Policy with a Convex Phillips Curve By Tambakis, D.N.
  2. Central Banking at a Time of Crisis and Beyond: A Practitioner’s Perspective By David A. Dodge
  3. Does Monetary Policy Play Effective Role in Controlling Inflation in Pakistan By Qayyum, Abdul
  4. Sources of the Great Moderation: shocks, friction, or monetary policy? By Zheng Liu; Daniel F. Waggoner; Tao Zha
  5. The role of labor markets for Euro area monetary policy By Kai Christoffel; Keith Kuester; Tobias Linzert
  6. What drives euro area break-even inflation rates? By Matteo Ciccarelli; Juan Angel García
  7. Monetary policy regime shifts and inflation persistence By Troy Davig; Taeyoung Doh
  8. On the Non-Optimality of Information: An Analysis of the Welfare Effects of Anticipated Shocks in the New Keynesian Model By Wohltmann, Hans-Werner; Winkler, Roland
  9. A Theory of the Corrupt Keynesian By Aidt, T.S.; Dutta, J.
  10. Central bank independence and ageing By Farvaque, Etienne; Héricourt, Jérôme; Lagadec, Gaël
  11. On-the-job search, sticky prices, and persistence By Willem Van Zandweghe
  12. A Local Examination for Persistence in Exclusions-from-Core Measures of Inflation Using Real-Time Data By Tierney, Heather L.R.
  13. Real time estimation of potential output and output gap for theeuro-area: comparing production function with unobserved componentsand SVAR approaches By Lemoine , Matthieu; Mazzi , Gian Luigi; Monperrus-Veroni , Paola; Reynes, Frédéric
  14. The Superlative Recession and economic policies By Tatom, John
  15. Monetary Ease – A Factor behind Financial Crises? Some Evidence from OECD Countries By Ahrend, Rudiger
  16. The Bank, the Bank-Run, and the Central Bank: The Impact of Early Deposit Withdrawals in a New Keynesian Framework By Totzek, Alexander
  17. Wealth effects in emerging market economies By Tuomas A. Peltonen; Ricardo M. Sousa; Isabel S. Vansteenkiste
  18. Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking? By Gabriel Jiménez; Steven Ongena; José Luis Peydró; Jesús Saurina
  19. Experimetnal Evidence on Inflation Expectation Formation By Pfajfar, D.; Zakelj, B.
  20. Uncertainty over models and data: the rise and fall of American inflation By Seth Pruitt
  21. Fiscal policy in the European Monetary Union By Betty C. Daniel; Christos Shiamptanis
  22. State and local finances and the macroeconomy: the high-employment budget and fiscal impetus By Glenn Follette; Andrea Kusko; Byron Lutz
  23. Does forecast combination improve Norges Bank inflation forecasts? By Hilde C. Bjørnland; Karsten Gerdrup; Anne Sofie Jore; Christie Smith; Leif Anders Thorsrud
  24. Estimating Term Structure Equations Using Macroeconomic Variables By Fair, Ray C.
  25. Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds By John Y. Campbell; Adi Sunderam; Luis M. Viceira
  26. Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q* By Enrique G. Mendoza
  27. The Shimer puzzle and the identification of productivity shocks By Regis Barnichon
  28. Understanding Markov-Switching Rational Expectations Models By Roger E.A. Farmer; Tao Zha; Daniel F. Waggoner
  29. Risk Bearing, Implicit Financial Services and Specialization in the Financial Industry By J. Christina Wang; Susanto Basu
  30. Wage rigidity, institutions, and inflation By Steinar Holden; Fredrik Wulfsberg
  31. Holiday Price Rigidity and Cost of Price Adjustment By Levy, Daniel; Müller, Georg; Chen, Allan (Haipeng); Bergen, Mark; Dutta, Shantanu
  32. Generational policy and the macroeconomic measurement of tax incidence By Juan Carlos Conesa; Carlos Garriga
  33. Accumulation Regimes in Dynastic Economies with Resource Dependence and Habit Formation By Simone Valente
  34. Implicit Microfoundations for Macroeconomics By Wright, Ian
  35. Government spending composition, technical change and wage inequality By Guido Cozzi; Giammario Impullitti
  36. Financing obstacles and growth: An analysis for euro area non-financial corporations By Chiara Coluzzi; Annalisa Ferrando; Carmen Martínez-Carrascal
  37. Federal, State, and Local Governments: Evaluating their Separate Roles in US Growth By Higgins, Matthew; Young, Andrew; Levy, Daniel
  38. Building and Using a Small Macroeconometric Model: Klein Model I as an Example By Renfro, Charles G
  39. La transmisión de la política monetaria sobre el consumo en presencia de restricciones de liquidez By Ana María Iregui; Ligia Alba Melo B.
  40. La transmisión de la política monetaria sobre el consumo en presencia de restricciones de liquidez By Ana María Iregui; Ligia Alba Melo B.

  1. By: Tambakis, D.N.
    Abstract: This paper shows that convexity of the short-run Phillips curve is a source of positive inflation bias even when policymakers target the natural unemployment rate, that is when they operate with prudent discretion, and their loss function is symmetric. Optimal monetary policy also induces positive co-movement between average inflation, average unemployment and inflation variability–suggesting a new motive for inflation stabilization policy–and positively skewed unemployment distributions. The reduced form model is applied to the post-disinflation period (1986-2006) in developed countries and its properties are illustrated numerically for the United States.
    Keywords: Monetary policy, inflation bias, inflation variability, prudent discretion.
    JEL: E24 E31 E52 E58
    Date: 2008–12
  2. By: David A. Dodge
    Keywords: monetary policy, inflation targeting
    JEL: E52 E58
    Date: 2008–11
  3. By: Qayyum, Abdul
    Abstract: This paper presented the salient features of current Monetary Policy and its effectiveness to control inflation in Pakistan. The monetary authority was successful in controlling inflation when it successfully controlled the money supply target. The calculation of money supply target needs to be improved to get appropriate target level of M2. It is also concluded that in the recent years SBP failed to control money supply and hence rate of inflation within the set target level. There seems to be a lack of coordination between Fiscal and Monetary Authorities. The understanding of issues regarding monetary policy transmission mechanism, effectiveness of different channels, lag structure of monetary policy changes, magnitude of pass-through of policy changes to inflation and output and nature of relationship amongst, instruments and goals of monetary policy (inflation and output) seems to be lacking and need fresh investigation.
    Keywords: Monetary Policy; Pakistan; Money Supply; Inflation
    JEL: E31 E58 E52
    Date: 2008
  4. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale DSGE models that incorporate regime switches in shock variances and in the inflation target. The best-fit model, the one with two regimes in shock variances, gives quantitatively different dynamics in comparison with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate much less nominal rigidities than those suggested in the literature.
    Keywords: Econometric models ; Business cycles
    Date: 2009
  5. By: Kai Christoffel; Keith Kuester; Tobias Linzert
    Abstract: In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions.> We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.
    Keywords: Labor market - Europe ; European Union countries ; Monetary policy - Europe
    Date: 2009
  6. By: Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Angel García (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The yield spread between nominal and inflation-linked bonds (or break-even inflation rates, BEIR) is a fundamental indicator of inflation expectations (and associated premia). This paper investigates which macroeconomic and financial variables explain BEIRs. We evaluate a large number of potential explanatory variables through Bayesian model selection techniques and document their explanatory power at different horizons. At short horizons, actual inflation dynamics is the main determinant of BEIRs. At long horizons, financial variables (i.e. term spread, bond market volatility) become increasingly relevant, but confidence and cyclical indicators remain important. JEL Classification: C11, C52, E31.
    Keywords: Break-even inflation rates, inflation risk premia, business cycle indicators, Bayesian model selection.
    Date: 2009–01
  7. By: Troy Davig; Taeyoung Doh
    Abstract: This paper reports the results of estimating a Markov-Switching New Keynesian (MSNK) model using Bayesian methods. The broadest and best fitting MSNK model is a four-regime model allowing independent changes in the regimes governing monetary policy and the volatility of the shocks. We use the estimates to investigate the mechanisms that lead to a decline in the persistence of inflation. We show that the population moment describing the serial correlation of inflation is a weighted average of the autocorrelation parameters of the exogenous shocks. Changes in the monetary or shock volatility regimes shift weight over these serial correlation parameters and affect the serial correlation properties of inflation. Estimation results indicate that a shift to a monetary regime that reacts more aggressively to inflation reduces the weight on the more persistent shocks, so lowers inflation persistence. Similarly, a shift to the low-volatility regime reduces the weight on the more persistent shocks and also contributes to reducing inflation persistence. Estimates of model-implied inflation persistence indicate that it began rising in the late 1960s and peaked around the Volcker disinflation. The subsequent decline in persistence is due to both a more aggressive monetary policy regime and less volatile shocks.
    Date: 2008
  8. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: This paper compares the welfare effects of anticipated and unanticipated cost-push shocks in the canonical New Keynesian model with optimal monetary policy. We find that, for empirically plausible degrees of nominal rigidity, the anticipation of a future cost-push shock leads to a higher welfare loss than an unanticipated shock. A welfare gain from the anticipation of a future cost shock may only occur if prices are sufficiently flexible. We analytically show that this surprising result holds although unanticipated shocks lead to higher negative impact effects on welfare than anticipated shocks.
    Keywords: Anticipated Shocks, Optimal Monetary Policy, Sticky Prices, Welfare Analysis
    JEL: E31 E32 E52
    Date: 2008
  9. By: Aidt, T.S.; Dutta, J.
    Abstract: We evaluate the impact of real business cycle shocks on corruption and economic policy in a model of entry regulation in a representative democracy. We .nd that corruption is procyclical and regulation policy is counter-cyclical. Corrupt politicians engage in excessive stabilization of aggregate fluctuations and behave as if they were Keynesian. We also find that business cycle shocks can induce political instability with politicians losing office in recessions.
    Keywords: Corruption; entry regulation; performance voting; business cycles.
    JEL: D72 K42 O41
    Date: 2008–12
  10. By: Farvaque, Etienne; Héricourt, Jérôme; Lagadec, Gaël
    Abstract: We contrast the influence of demography and central bank independence on inflation. The recent demographic trends in developed countries are shown to weight more on inflation than central bank independence, while the contrary stands for the period from 1960 to 1979.
    Keywords: Demography ; Central Bank Independence ; Inflation
    JEL: E58
    Date: 2008
  11. By: Willem Van Zandweghe
    Abstract: Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence.
    Date: 2009
  12. By: Tierney, Heather L.R.
    Abstract: Using parametric and nonparametric methods, inflation persistence is examined through the relationship between exclusions-from-core inflation and total inflation for two sample periods and in five in-sample forecast horizons ranging from one quarter to three years over fifty vintages of real-time data in two measures of inflation: personal consumption expenditure and the consumer price index. Unbiasedness is examined at the aggregate and local levels. A local nonparametric hypothesis test for unbiasedness is developed and proposed for testing the local conditional nonparametric regression estimates, which can be vastly different from the aggregated nonparametric model. This paper finds that the nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons.
    Keywords: Real-Time Data; Local Estimation; Nonparametrics; Inflation Persistence; Monetary Policy
    JEL: C14 E52 E40
    Date: 2009–01–30
  13. By: Lemoine , Matthieu; Mazzi , Gian Luigi; Monperrus-Veroni , Paola; Reynes, Frédéric
    Abstract: We develop a new version of the production function (PF) approach usually used for estimating the output gap of the euro area. Our version does not call for any (often imprecise) measure of the capital stock and improves the estimation of the trend total factor productivity. We asses this approach by comparing it with two other multivariate methods mostly used for output gap estimates, a multivariate unobserved components (MUC) model and a Structural Vector Auto-Regressive (SVAR) model. The comparison is conducted by relying on assessment criteria such as the concordance of the turning points chronology with a reference one, the inflation forecasting power and the real-time consistency of the estimates. Two contributions are achieved. Firstly, we take into account data revisions and their impact on the output gap estimates by using vintage datasets coming from the Euro Area Business Cycle (EABCN) Real-Time Data-Base (RTDB). Secondly, the PF approach, generally employed by policy-makers despite of its difficult implementation, is assessed. We thus improve on previous papers which limited their assessment on other multivariate methods, e.g. MUC or SVAR models. The different methods show different ranks in relation to the three criteria. This new PF estimate appears highly concordant with the reference chronology. Its forecasting power appears favourable only for the shortest horizon (1 month). Finally, the SVAR model appears more consistent in real-time.
    Keywords: potential output; production function; state-space models; structural VARs
    JEL: C32 E32
    Date: 2008–11
  14. By: Tatom, John
    Abstract: In late 2008 and early 2009, there has been a serious deterioration in the economic outlook of political leaders, the media and many economic analysts. Comparisons of recent performance and the outlook have degenerated into comparisons with the Great Depression of the 1930s, suggesting that the current recession is the worst since the 1930s. This recession should be called the superlative recession because discussions invariably refer to the most dismal performance since the Great Depression. These superlative comparisons are far off base. But more importantly, the superlatives seem to have succeeded in reversing 70 years of history on economic policy and economic thought. With the benefit of time, depression era policies had been seen as complete failures that extended and worsened the depression. A long delayed monetary policy easing has offered new possibilities for an end to the deepening recession, but its continuation remains in doubt because it is the result of a shift in policy procedures more than of a shift in policy. More troublesome is that massive fiscal policy programs have become central to the policy debate, despite three large failed fiscal responses over the past year and a strong consensus in the policy community that such efforts are not likely to be effective. A change of leadership has focused efforts on increasing federal spending in ways and to an extent not seen in many years, comparable with the fall 2008 explosion in money growth and putting fiscal policy in the same superlative response category as the recession itself.
    Keywords: recession; monetary policy; fiscal policy
    JEL: E32 E52 E63 A10
    Date: 2009–01–30
  15. By: Ahrend, Rudiger
    Abstract: This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil.
    Keywords: Interest rates, monetary policy, housing, sub-prime crisis, financial markets, macro-prudential, regulation Taylor rule, house prices
    JEL: E44 E5 F3 G15
    Date: 2008
  16. By: Totzek, Alexander
    Abstract: Currently, private trust in commercial banks declines as a consequence of today´s financial crisis. As past crises, e.g. the Asian crisis, show, the loss of confidence in the financial sector typically causes private agents to withdraw their capital from financial institutions. Thus, the purpose of this paper is to implement the feature of early deposit withdrawal in a New Keynesian framework with commercial banks in order to analyze the implications of a loss of confidence. In addition, we present the optimal monetary policy to ensure a stabilized system.
    Keywords: banks, financial crises, deposit withdrawal, optimal monetary policy
    JEL: E44 E50
    Date: 2008
  17. By: Tuomas A. Peltonen (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ricardo M. Sousa (University of Minho, Department of Economics and Economic Policies Research Unit (NIPE), Campus of Gualtar, 4710-057 - Braga, Portugal; London School of Economics, Department of Economics and Financial Markets Group (FMG), Houghton Street, London WC2 2AE, United Kingdom; European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main.); Isabel S. Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We build a panel of 14 emerging economies to estimate the magnitude of housing, stock market, and money wealth effects on consumption. Using modern panel data econometric techniques and quarterly data for the period 1990/1-2008/2, we show that; (i) wealth effects are statistically significant and relatively large in magnitude; (ii) housing wealth effects tend to be smaller for Asian emerging markets while stock market wealth effects are, in general, smaller for Latin American countries; (iii) housing wealth effects have increased for Asian coutries in recent years; and (iv) consumption reacts stronger to negative than to positive shocks in housing and financial wealth. JEL Classification: E21, E44, D12.
    Keywords: Wealth effects, consumption, emerging markets.
    Date: 2009–01
  18. By: Gabriel Jiménez (Banco de España); Steven Ongena (Center–Tilburg University); José Luis Peydró (European Central Bank); Jesús Saurina (Banco de España)
    Abstract: We identify the impact of short-term interest rates on credit risk-taking by analyzing a comprehensive credit register from Spain, a country where for the last twenty years monetary policy was mostly decided abroad. Discrete choice, within borrower comparison and duration analyses show that lower overnight rates prior to loan origination lead banks to lend more to borrowers with a worse credit history and to grant more loans with a higher per period probability of default. Lower overnight rates during the life of the loan reduce this probability. Bank, borrower and market characteristics determine the impact of overnight rates on credit risk-taking.
    Keywords: monetary policy, low interest rates, financial stability, lending standards, credit risk-taking, credit composition, business cycle, liquidity risk
    JEL: E44 E5 G21
    Date: 2009–01
  19. By: Pfajfar, D.; Zakelj, B. (Tilburg University, Center for Economic Research)
    Abstract: Using laboratory experiments, we establish a number of stylized facts about the process of inflation expectation formation. Within a New Keynesian sticky price framework, we ask subjects to provide forecasts of inflation and their corresponding confidence bounds. We study individual responses and properties of the aggregate empirical distribution. Many subjects do not rely on a single model of expectation formation, but are rather switching between di¤erent models. About 40% of the subjects predominately use a rational rule when forecasting inflation and about 35% of agents simply extrapolate trend. Around 5% of subjects behave in an adaptive manner, while the remaining 20% behaves in accordance to adaptive learning and sticky information models. Furthermore, we find that subjects in only 60% of cases correctly perceive the underlying uncertainty in the economy when reporting confidence intervals. However, empirical analysis does not support a significant countercyclical behavior of individuals' confidence intervals.
    Keywords: Inflation Expectations;Experiments;New Keynesian Model;Adaptive Learning
    JEL: E37 C90 D80
    Date: 2009
  20. By: Seth Pruitt
    Abstract: An economic agent who is uncertain of her model updates her beliefs in response to the data. The updating is sensitive to measurement error which, in many cases of macroeconomic interest, is apparent from the process of data revision. I make this point through simple illustrations and then analyze a recent model of the Federal Reserve's role in U.S. inflation. The existing model succeeds at fitting inflation to optimal policy, but fails to link inflation to the economic trade-off at the heart of the story. I modify the model to account for data uncertainty and find that doing so ameliorates the existing problems. This suggests that the Fed's model uncertainty is largely overestimated by ignoring data uncertainty. Consequently, now there is an explanation for the rise and fall in inflation: the concurrent rise and fall in the perceived Philips curve trade-off.
    Date: 2008
  21. By: Betty C. Daniel; Christos Shiamptanis
    Abstract: A country entering the EMU surrenders its monetary policy, and its debt becomes denominated in terms of a currency over which it has no direct control. A country's promise to uphold the fiscal limits in the Maastricht Treaty and the Stability and Growth Pact is implicitly a promise not to allow its fiscal stance to deteriorate to a position in which it places pressure on the central bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority's freedom to determine the price level. We specify a simple model of fiscal policy in which the fiscal authority faces an upper bound on the size of its primary surplus. Policy is determined by a fiscal rule, specified as an error correction model, in which the primary surplus responds to debt and a target variable. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Using panel techniques that allow for unit roots and for heterogeneity and cross-sectional dependence across countries, we estimate the coefficients of the error correction model for the primary surplus in a panel of ten EMU countries over the period 1970-2006. The group mean estimate for the coefficient on lagged debt is consistent with the hypothesis that the monetary authority can control the price level in the EMU, independent of fiscal influence.
    Date: 2008
  22. By: Glenn Follette; Andrea Kusko; Byron Lutz
    Abstract: We examine the interplay of the economy and state and local budgets by developing and examining two measures of fiscal policy: the high-employment budget and fiscal impetus. We find that a 1 percentage point increase in cyclical GDP results in a 0.1 percentage point increase in NIPA-based net saving through the automatic response of taxes and expenditures. State and local budget policies are found to be modestly pro-cyclical. Stimulus to aggregate demand is about 0.2 percentage point less following a business cycle peak than it is during the period before the business cycle peak.
    Date: 2009
  23. By: Hilde C. Bjørnland (Norwegian School of Management (BI) and Norges Bank (Central Bank of Norway)); Karsten Gerdrup (Norges Bank (Central Bank of Norway)); Anne Sofie Jore (Norges Bank (Central Bank of Norway)); Christie Smith (Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (Norges Bank (Central Bank of Norway))
    Abstract: We develop a system that provides model-based forecasts for inflation in Norway. Forecasts are recursively evaluated from 1999 to 2008. The performance of the models over this period is then used to derive weights that are used to combine the forecasts. Our results indicate that model combination improves upon the point forecasts from individual models. Furthermore, when comparing the whole forecasting period; model combination outperforms Norges Banks own point forecast for inflation at the forecast horizon up to a year. By using a suite of models we allow for a greater range of modelling techniques and data to be used in the forecasting process.
    Keywords: Forecasting, forecast combination
    JEL: E52 E37 E47
    Date: 2009–01–27
  24. By: Fair, Ray C. (Yale U)
    Abstract: This paper begins with the expectations theory of the term structure of interest rates with constant term premia and then postulates how expectations of future short term interest rates are formed. Expectations depend in part on predictions from a set of VAR equations and in part on the current and two lagged values of the short term interest rate. The results suggest that there is relevant independent information in both the VAR equations' predictions and the current and two lagged values of the short rate. The model fits the long term interest rate data well, including the 2004-2006 period, which some have found a puzzle. The properties of the model are consistent with the response of the long term U.S. Treasury bond rate to surprise price and employment announcements. The overall results suggest that long term rates can be fairly well explained by modeling expectation formation of future short term rates.
    JEL: E43
    Date: 2008–01
  25. By: John Y. Campbell; Adi Sunderam; Luis M. Viceira
    Abstract: The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953-2005, it was particularly high in the early 1980's and negative in the early 2000's. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion, temporary and permanent components of expected inflation, and the covariance between nominal variables and the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. Log nominal bond yields and term premia are quadratic in these state variables, with term premia determined mainly by the product of risk aversion and the nominal-real covariance. The concavity of the yield curve -- the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields -- is a good proxy for the level of term premia. The nominal-real covariance has declined since the early 1980's, driving down term premia.
    JEL: G0 G10 G11 G12
    Date: 2009–02
  26. By: Enrique G. Mendoza
    Abstract: This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin's Q driven by Irving Fisher's debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
    Date: 2008
  27. By: Regis Barnichon
    Abstract: Shimer (2005) argues that the Mortensen-Pissarides (MP) model of unemployment lacks an amplification mechanism because it generates less than 10 percent of the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework to control for the endogeneity of productivity, this paper estimates that the MP model can account for a third, and possibly as much as 60 percent, of fluctuations in labor market variables.
    Date: 2009
  28. By: Roger E.A. Farmer; Tao Zha; Daniel F. Waggoner
    Abstract: We develop a set of necessary and sufficient conditions for equilibria to be determinate in a class of forward-looking Markov-switching rational expectations models and we develop an algorithm to check these conditions in practice. We use three examples, based on the new-Keynesian model of monetary policy, to illustrate our technique. Our work connects applied econometric models of Markov-switching with forward looking rational expectations models and allows an applied researcher to construct the likelihood function for models in this class over a parameter space that includes a determinate region and an indeterminate region.
    JEL: C02 C1 E0 E4
    Date: 2009–02
  29. By: J. Christina Wang; Susanto Basu
    Abstract: This paper makes three points regarding the proper measurement of the output of financial intermediaries. Two of them concern the measurement of nominal financial output, especially banking output. First, we show that, to impute the nominal value of implicitly priced financial output, it is necessary to adjust each reference rate of interest (also called “the user cost of fundsâ€) for the risk inherent in that corresponding financial transaction. Otherwise, nominal financial output will be overstated, and the bias can be large (about 25 percent). Second, we argue that, according to finance theory, the required risk correction can be implemented practically at the level of industries (e.g., the banking sector as a whole). The third point concerns the construction of a financial services price index, and thus applies to the measurement of real output. We argue that the reference rates or the related rate spreads, which are used to impute the nominal output of financial institutions, are not the right implicit price deflators for deriving the real output of financial institutions
    JEL: E01 E44 G21 G32
    Date: 2008–12
  30. By: Steinar Holden (University of Oslo, Norges Bank (Central Bank of Norway)and CESifo Department of Economics, University of Oslo); Fredrik Wulfsberg (Norges Bank (Central Bank of Norway))
    Abstract: A number of recent studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries. However, DNWR for individual workers may induce downward rigidity or "a floor" for the aggregate wage growth at positive or negative levels. Aggregate wage growth may be below zero because of compositional effects, for example that old, high-wage workers are replaced by young low-wage workers. DNWR may also lead to a positive growth in aggregate wages because of changes in relative wages. We explore industry data for 19 OECD countries, over the period 1971-2006. We find evidence for floors on nominal wage growth at 6 percent and lower in the 1970s and 1980s, at one percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralised wage setting and high inflation.
    Keywords: Wage inflation, downward nominal wage rigidity, OECD, wage setting
    JEL: J3 C14 C15 E31
    Date: 2009–01–27
  31. By: Levy, Daniel; Müller, Georg; Chen, Allan (Haipeng); Bergen, Mark; Dutta, Shantanu
    Abstract: The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks such as restocking shelves, handling customers’ questions and inquiries, running cash registers, cleaning, and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that indeed, prices are more rigid during holiday periods than non-holiday periods. For example, the econometric model we estimate suggests that the probability of a price change is lower during holiday periods, even after accounting for cost changes. Moreover, we find that the probability of a price change increases with the size of the cost change, during both, the holiday as well as non-holiday periods. We argue that these findings are best explained by higher price adjustment costs (menu cost) the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc., do not vary between holiday and nonholiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity, and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity.
    Keywords: Price Rigidity; Sticky Price; Rigid Price; Cost of Price Adjustment; Menu Cost; Holiday Period; Asymmetric Price Adjustment; Monetary Policy
    JEL: L16 M31 E12 L11 E31 E52 E50 M21
    Date: 2008–05–06
  32. By: Juan Carlos Conesa; Carlos Garriga
    Abstract: In this paper we show that the generational accounting framework used in macroeconomics to measure tax incidence can, in some cases, yield inaccurate measurements of the tax burden across age cohorts. This result is very important for policy evaluation, because it shows that the selection of tax policies designed to change generational imbalances could be misleading. We illustrate this problem in the context of a Social Security reform where we show how fiscal policy can affect the intergenerational gap across cohorts without impacting the distribution of welfare. We provide a more accurate procedure that only measures changes in generational imbalances derived from policies with real effects.
    Keywords: Fiscal policy ; Taxation
    Date: 2009
  33. By: Simone Valente (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We analyze the consequences of habit formation for income levels and long-term growth in an overlapping generations model with dynastic altruism and resource dependence. If the strength of habits is below a critical level, the competitive economy displays an altruistic (Ramsey-like) equilibrium where consumption sustainability obeys the Stiglitz condition, and habits yield permanent effects on output levels due to transitional effects on growth rates, capital profitability and speed of resource depletion. If the strength of habits is above the critical threshold, the economy achieves a selfish (Diamond-like) equilibrium in which habits increase growth rates and resource depletion even in the long run, sustainability conditions are less restrictive, consumption and output grow faster than in Ramsey equilibria, but welfare is much lower. Results hinge on resource dependence, as different depletion rates modify the intergenerational distribution of wealth and thereby the growth rate attained in either equilibrium.
    Keywords: Dynastic Altruism, Overlapping Generations, Capital-Resource Model, Habit Formation
    JEL: Q30 D91 E21
    Date: 2009–01
  34. By: Wright, Ian
    Abstract: A large market economy has a huge number of degrees of freedom with weak microlevel coordination. The ‘implicit microfoundations’ approach assumes this property of micro-level interactions more strongly conditions macro-level outcomes compared to the precise details of individual choice behavior; that is, the ‘particle’ nature of individuals dominates their ‘mechanical’ nature. So rather than taking an ‘explicit microfoundations’ approach, in which individuals are represented as ‘white-box’ sources of fully-specified optimizing behavior (rational agents), we instead represent individuals as ‘black box’ sources of unpredictable noise subject to objective constraints (zero-intelligence agents). To illustrate the potential of the approach we examine a parsimonious, agent-based macroeconomic model with implicit microfoundations. It generates many of the reported empirical distributions of capitalist economies, including the distribution of income, firm sizes, firm growth, GDP and recessions.
    Keywords: Micro foundations, macroeconomics, aggregation, power laws
    JEL: A12 B41 C63 D50 E11 P16
    Date: 2008
  35. By: Guido Cozzi; Giammario Impullitti
    Abstract: In this paper we argue that government spending played a significant role in stimulating the wave of innovation that hit the U.S. economy in the late 1970s and in the 1980s, as well as the simultaneous increase in inequality and in education attainment. Since the late 1970’s U.S. policy makers began targeting commercial innovations more directly and explicitly. We focus on the shift in the composition of public demand towards high-tech goods which, by increasing the market-size of innovative firms, functions as a de-facto innovation policy tool. We build a quality-ladder non- scale growth model with heterogeneous industries and endogenous supply of skills, and show that increases in the technological content of public spending stimulates R&D, raise the wage of skilled workers and, at the same time, stimulate human capital accumulation. A calibrated version of the model suggests that government policy explains between 12 and 15 percent of the observed increase in wage inequality in the period 1976-91.
    Keywords: R&D-driven growth theory, heteregeneous industries, fiscal policy composition, innovation policy, wage inequality, educational choice.
    JEL: E62 H57 J31 O31 O32 O41
    Date: 2008–12
  36. By: Chiara Coluzzi (University of Rome Tor Vergata); Annalisa Ferrando (European Central Bank); Carmen Martínez-Carrascal (Banco de España)
    Abstract: This paper investigates whether financial obstacles, and, more generally, financial pressure faced by firms, significantly affect firm growth. For this purpose, we use an unbalanced panel of about 1,000,000 observations for around 155,000 non-financial corporations in five euro area countries. In addition to the balance sheet information in this panel, we also rely on firm level survey data. In this way we are able to work out a direct measure of the firms’ probability of facing financing obstacles. Our results indicate that, though based on few variables, this measure appears to be relevant in explaining firm growth in four out of the five countries considered. Other firm-level variables related to the financial pressure faced by firms, such as cash flow (debt burden) are found to exert a positive (negative) impact on firm growth, while the results for leverage are less clear-cut.
    Keywords: Financing Constraints, Firm Growth, Panel Data
    JEL: C23 E22 G32 L11 L25
    Date: 2009–01
  37. By: Higgins, Matthew; Young, Andrew; Levy, Daniel
    Abstract: We use US county level data (3,058 observations) from 1970 to 1998 to explore the relationship between economic growth and the extent of government employment at three levels: federal, state and local. We find that increases in federal, state and local government employments are all negatively associated with economic growth. We find no evidence that government is more efficient at lower levels. While we cannot separate out the productive and redistributive services of government, we document that the county-level income distribution became slightly more unequal from 1970 to 1998. For those who justify government activities in terms of equity concerns – perhaps even trading off economic growth for equity – the burden falls on them to show that the income distribution would have widened more in the absence of government activities. We conclude that a release of government-employed labor inputs to the private sector would be growth-enhancing.
    Keywords: Economic Growth; Federal Government; State Government; Local Government; County-Level Data; Metro and Non-Metro Counties; Income Distribution; Equity
    JEL: E62 O18 H50 O40 H70 O11 O43 O51 R11
    Date: 2009–01–29
  38. By: Renfro, Charles G
    Abstract: This book describes the estimation and use of Klein Model I, including the formation of the individual equations, the data used for its estimation and the methodology of the construction and use of the model involving the MODLER software and an electronic computer
    Keywords: econometrics; macroeconomics; econometric computation
    JEL: C51 C53 E00 C80 C01
    Date: 2009–01–01
  39. By: Ana María Iregui; Ligia Alba Melo B.
    Abstract: El objetivo de este documento es evaluar el impacto de la política monetaria, sobre el consumo de los hogares colombianos, a través del efecto que ésta tiene sobre la tasa de interés. Para esto, se utiliza un modelo que combina elementos de la hipótesis del ingreso permanente y del ciclo de vida. Adicionalmente, se incorporan restricciones de liquidez debido al poco acceso de la población al sistema financiero en Colombia. El análisis empírico se realiza a partir de un ejercicio de calibración de una función consumo, utilizando información trimestral para el período 1994-2006, en el cual se considera, de un lado, que toda la población tiene acceso al sistema financiero y, de otro, que un segmento de la población no tiene acceso. En el primer caso, la calibración arroja una elasticidad de sustitución intertemporal de 0,405, y se encuentra que un choque inesperado a la tasa de interés de un punto porcentual disminuye, ceteris paribus, el consumo corriente en 0,41%. En el segundo caso, se obtiene una elasticidad intertemporal de sustitución de 0,445, cuando se supone que el 43% del ingreso laboral pertenece a los consumidores con restricciones de liquidez; entre más alto sea este porcentaje, mayor será la elasticidad intertemporal de sustitución.
    Date: 2009–01–26
  40. By: Ana María Iregui; Ligia Alba Melo B.
    Abstract: El objetivo de este documento es evaluar el impacto de la política monetaria, sobre el consumo de los hogares colombianos, a través del efecto que ésta tiene sobre la tasa de interés. Para esto, se utiliza un modelo que combina elementos de la hipótesis del ingreso permanente y del ciclo de vida. Adicionalmente, se incorporan restricciones de liquidez debido al poco acceso de la población al sistema financiero en Colombia. El análisis empírico se realiza a partir de un ejercicio de calibración de una función consumo, utilizando información trimestral para el período 1994-2006, en el cual se considera, de un lado, que toda la población tiene acceso al sistema financiero y, de otro, que un segmento de la población no tiene acceso. En el primer caso, la calibración arroja una elasticidad de sustitución intertemporal de 0,405, y se encuentra que un choque inesperado a la tasa de interés de un punto porcentual disminuye, ceteris paribus, el consumo corriente en 0,41%. En el segundo caso, se obtiene una elasticidad intertemporal de sustitución de 0,445, cuando se supone que el 43% del ingreso laboral pertenece a los consumidores con restricciones de liquidez; entre más alto sea este porcentaje, mayor será la elasticidad intertemporal de sustitución.
    Date: 2009–01–26

This nep-mac issue is ©2009 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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