nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒02‒14
fifty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Economies of scale in banking, confidence shocks, and business cycles By Dressler, Scott J.
  2. Are Commodity Prices Useful Leading Indicators of Inflation? By Calista Cheung
  3. Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting By Shin-Ichi Nishiyama
  4. The Phillips Curve and the Italian Lira, 1861-1998 By Alessandro Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci
  5. Fractional Integration and Structural Breaks in U.S. Macro Dynamics By Luis A. Gil-Alana; Antonio Moreno
  6. Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? By Abo-Zaid, Salem
  7. The bank lending channel reconsidered By Milne , Alistair; Wood, Geoffrey
  9. Oil Price Shocks and the Optimality of Monetary Policy By Anna Kormilitsina
  10. Prices of residential property in Italy: constructing a new indicator By Salvatore Muzzicato; Roberto Sabbatini; Francesco Zollino
  11. Inventories, Markups, and Real Rigidities in Menu Cost Models By Oleksiy Kryvtsov; Virgiliu Midrigan
  12. An estimated DSGE model of the Hungarian economy By Zoltán M. Jakab; Balázs Világi
  13. The Role of Trends and Detrending in DSGE Models By Andrle, Michal
  14. Hawtreyan 'Credit Deadlock' or Keynesian 'Liquidity Trap'? Lessons for Japan from the Great Depression By Roger Sandilands
  15. The role of compensation in money market and new money market instruments Open By Duduiala-Popescu, Lorena
  16. Identifying good inflation forecaster By Duasa, Jarita; Ahmad, Nursilah
  17. On the International Dimension of Fiscal Policy By Gianluca Benigno; Bianca De Paoli
  18. Asymmetric collateral requirements and output composition By Óscar Arce; José Manuel Campa; Ángel Gavilán
  19. Liquidity Effects and Cost Channels in Monetary Transmission By Yunus Aksoy; Henrique S Basso; Javier Coto Matinez
  20. Collateral Constraints and Macroeconomic Adjustment in an Open Economy By Philip Brock
  21. Uninsurable Investment Risks and Capital Income Taxation By Césaire A. Meh; Yaz Terajima
  22. The Great Moderation Flattens Fat Tails: Disappearing Leptokurtosis By WenShwo Fang; Stephen M. Miller; ChunShen Lee
  23. What determines debt intolerance? The role of political and monetary institutions By Raffaela Giordano; Pietro Tommasino
  24. Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited By WenShwo Fang; Stephen M. Miller
  25. How much is enough? By Freeman, Alan
  26. Resurrecting Keynes to Stabilize the International Monetary System By Pietro Alessandrini; Michele Fratianni
  27. Growth, Fiscal Policy and the Informal Sector in an Informal Economy By Pedro, de Mendonça
  28. Bond risk premia, macroeconomic fundamentals and the exchange rate By Marcello Pericoli; Marco Taboga
  29. Emerging Asia's Impact on Food and Oil Prices: A Model-Based Analysis By René Lalonde; Philipp Maier; Dirk Muir
  30. The strategy adopted by Romania EURO By Duduiala-Popescu, Lorena
  31. "After the Bust: The Outlook for Macroeconomics and Macroeconomic Policy" By Thomas I. Palley
  32. Linden Dollar and Virtual Monetary Policy By Philip Ernstberger
  33. Forecasting Consumption Growth with the Real Term Structure By Kwok Ping Tsang
  34. The Consumption-Wealth Ratio, Real Estate Wealth, and the Japanese Stock Market By Kohei Aono; Tokuo Iwaisako
  35. Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies By Demirguc-Kunt, Asli; Serven, Luis
  36. Canada and the IMF: Trailblazer or Prodigal Son? By Michael Bordo; Tamara Gomes; Lawrence Schembri
  37. The 1990’s financial crises in Nordic countries By Honkapohja, Seppo
  38. The Macroeconomic Role of Unemployment Compensation By Tomer Blumkin; Yossi Hadar; Eran Yashiv
  39. Federal Regulation and Aggregate Economic Growth By John W. Dawson; John J. Seater
  40. Optimal Irrational Behavior By James Feigenbaum; Frank N. Caliendo; Emin Gahramanov
  41. The first global financial crisis of the 21st century: Introduction By Reinhart, Carmen
  42. بحران مالی جهانی و شکست الگوی سرمایه‌داری نئو لیبرال یا آمریکائی By Vahabi, Mehrdad
  43. ‘Backyard’ technology and regulated wages in a neoclassical OLG growth model By Luciano Fanti; Luca Gori
  44. The Italian public finances in the period 1998-2007: temporary factors, medium-term trends and discretionary measures By Maria Rosaria Marino; Sandro Momigliano; Pietro Rizza
  45. Money, Crises, and Transition Essays in Honor of Guillermo A. Calvo: An Introduction By Reinhart, Carmen; Vegh, Carlos; Velasco, Andres
  46. An Archival Case Study: Revisiting The Life and Political Economy of Lauchlin Currie By Roger Sandilands
  47. Solving Portfolio Problems with the Smolyak-Parameterized Expectations Algorithm By Ángel Gavilán; Juan A. Rojas
  48. Sovereign external assets and the resilience of global imbalances By Gabriel Enrique Alberola; José María Serena
  49. The process of convergence towards the euro for the Visegrad-4 countries By Giuliana Passamani
  50. Spatial Filtering and Eigenvector Stability: Space-Time Models for German Unemployment Data By Roberto Patuelli; Daniel A. Griffith; Michael Tiefelsdorf; Peter Nijkamp
  51. Fertility and regulated wages in an OLG model of neoclassical growth: Pensions and old age support By Luciano Fanti; Luca Gori
  52. National IQ means, calibrated and transformed from educational attainment, and their underlying gene frequencies By Weiss, Volkmar
  53. Holdups and Overinvestment in Physical Capital Markets By André Kurmann
  54. What Accounts for the U.S.-Canada Education-Premium Difference? By Oleksiy Kryvtsov; Alexander Ueberfeldt

  1. By: Dressler, Scott J.
    Abstract: This paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation.
    Keywords: Financial Intermediation; Inside Money; Indeterminacy; Business Cycles
    JEL: E32 C68 E44
    Date: 2009–01
  2. By: Calista Cheung
    Abstract: Commodity prices have increased dramatically and persistently over the past several years, followed by a sharp reversal in recent months. These large and persistent movements in commodity prices raise questions about their implications for global inflation. The process of globalization has motivated much debate over whether global factors have become more important in driving the inflation process. Since commodity prices respond to global demand and supply conditions, they are a potential channel through which foreign shocks could influence domestic inflation. The author assesses whether commodity prices can be used as effective leading indicators of inflation by evaluating their predictive content in seven major industrialized economies. She finds that, since the mid-1990s in those economies, commodity prices have provided significant signals for inflation. While short-term increases in commodity prices can signal inflationary pressures as early as the following quarter, the size of this link is relatively small and declines over time. The results suggest that monetary policy has generally accommodated the direct effects of short-term commodity price movements on total inflation. While indirect effects of short-term commodity price movements on core inflation have remained relatively muted, more persistent movements appear to influence inflation expectations and signal changes in both total and core inflation at horizons relevant for monetary policy. The results also suggest that commodity price movements may provide larger signals for inflation in the commodity-exporting countries examined than in the commodity-importing economies.
    Keywords: Business fluctuations and cycles; Economic models; Inflation and prices; International topics; Transmission of monetary policy
    JEL: E3 E52 E58
    Date: 2009
  3. By: Shin-Ichi Nishiyama
    Abstract: Although the concept of monetary policy lag has historical roots deep in the monetary economics literature, relatively little attention has been paid to the idea. In this paper, we build on Svensson’s (1997) inflation targeting framework by explicitly taking into account the lagged effect of monetary policy and characterize the optimal monetary policy reaction function both in the absence and in the presence of the zero lower bound on the nominal interest rate. We numerically show the function to be more aggressive and more pre-emptive with the lagged effect than without it. We also characterize the long-run stabilization cost to the central bank by explicitly taking into account the lagged effect of monetary policy. It turns out that, in the presence of the zero lower bound constraint, the long-run stabilization cost is higher with the lagged effect than the case without it. This result suggests that the central bank and/or the government should set a relatively high inflation target when confronted with a relatively long monetary policy lag. This can be interpreted as another justification for targeting a positive inflation rate in the long-run.
    Keywords: Inflation targets; Monetary policy framework; Monetary policy implementation
    JEL: E52 E58 C63
    Date: 2009
  4. By: Alessandro Del Boca (University of Brescia); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR); Franco Spinelli (University of Brescia); Carmine Trecroci (University of Brescia)
    Abstract: We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to the entry of Italy in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate the extent to which nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off relying partly on sub-sample estimates and partly on time-varying parameters estimated with the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply.
    Keywords: Inflation, Italian Lira, Phillips curve
    JEL: E31 E32 E5 N10
    Date: 2008–11
  5. By: Luis A. Gil-Alana (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra); Antonio Moreno (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra)
    Abstract: This paper identifies structural breaks in the post-World War II joint dynamics of U.S. inflation, unemployment and the short-term interest rate. We derive a structural break-date procedure which allows for long-memory behavior in all three series and perform the analysis for alternative data frequencies. Both long-memory and short-run coefficients are relevant for characterizing the changing patterns of U.S. macroeconomic dynamics. We provide an economic interpretation of those changes by examining the link between macroeconomic events and structural breaks.
    Keywords: Fractional integration, structural breaks, multivariate analysis, inflation dynamics
    JEL: C32 C51 E31 E32 E52
    Date: 2009–01–20
  6. By: Abo-Zaid, Salem
    Abstract: This paper studies optimal monetary policy in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that the right index to target depends on the structure of the individual economy. When wages are fully flexible, the consumer price index (CPI) is better to target given low to moderate levels of pass-through. On the other hand, assuming complete pass-through, economies with relatively high degrees of wage rigidity and wage indexation should either target their CPIs or fully stabilize nominal wages. Also, CPI targeting and nominal wage targeting are superior to targeting the Producer Price Index (DPI) in relatively high degrees of pass-through given that wages are relatively rigid and indexation degrees are high. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be conducting monetary policy optimally.
    Keywords: Optimal Monetary Policy; Incomplete Pass-Through; Sticky Wages; Inflation Targeting; Conumer Price Index; Domestic Price Index
    JEL: E12 E31 E52 E4 F31
    Date: 2009–02–05
  7. By: Milne , Alistair (Cass Business School, UK and Monetary Policy and Research Department, Bank of Finland); Wood, Geoffrey (Cass Business School, UK and Monetary Policy and Research Department, Bank of Finland)
    Abstract: It has been widely accepted that constraints on the wholesale funding of bank balance sheets amplify the transmission of monetary policy through what is called the ‘bank lending channel’. We show that the effect of such bank balance sheet constraints on monetary transmission is in fact theoretically ambiguous, with the prior expectation, based on standard theoretical models of household and corporate portfolios, that the bank lending channel attenuates monetary policy transmission. We examine macroeconomic data for the G8 countries and find no evidence that banking sector deposits respond negatively and more than lending to tightening of monetary policy, as the accepted view of the bank lending channel requires. The overall picture is mixed, but these data generally suggest that deposits fluctuate procyclically and somewhat less over the business cycle than bank lending, and that total bank deposits, unlike bank lending, show little direct response to changes in interest rates. This suggests it is very unlikely that the bank lending channel amplifies monetary policy. Our paper has thus corrected a misunderstanding about the role of banks in monetary policy transmission that has persisted in the literature for some two decades.
    Keywords: credit channel; monetary transmission; bank financing constraints
    JEL: E44 E52 G32
    Date: 2009–01–21
  8. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: Recent empirical evidence on the direct link of inflation targeting and inflation volatility is at best mixed. However, comparing inflation volatility across alternative monetary policy regimes within a country based on conventional ways, used in previous studies, begs the question. The question is not whether the volatility of inflation has changed, but rather whether the volatility is different than it otherwise would have been. In such a backdrop, this paper uses the cosine-squared cepstrum to provide evidence that CPI inflation in South Africa has become more volatile since the first quarter of 2000, when the country moved into an inflation targeting regime, than it would have been had the South African Reserve Bank (SARB) continued with the more eclectic monetary policy approach pursued in the pre-targeting era.
    Keywords: Cosine-Squared Cepstrum; Inflation Targeting; Inflation Volatility; Saphe Cracking
    JEL: C65 E42 E52 E64
    Date: 2009–02
  9. By: Anna Kormilitsina (Southern Methodist University)
    Abstract: The observed tightening of interest rates in the aftermath of the post-World War II oil price hikes led some to argue that U.S. monetary policy exacerbated the recessions induced by oil price shocks. This paper provides a critical evaluation of this claim. Within an estimated dynamic stochastic general equilibrium model with the demand for oil, I contrast Ramsey optimal with estimated monetary policy. I find that monetary policy amplified the negative effect of the oil price shock. The optimal response to the shock would have been to raise inflation and interest rates above what had been seen in the past.
    Keywords: Oil price, Optimal monetary policy, DSGE model.
    JEL: C68 E52 Q43
    Date: 2009–01
  10. By: Salvatore Muzzicato (Banca d'Italia); Roberto Sabbatini (Banca d'Italia); Francesco Zollino (Banca d'Italia)
    Abstract: We present a new indicator of house prices in Italy, with more extensive geographical and time coverage. The new indicator now makes it possible to analyze medium- and long-term trends with satisfactory representation of the Italian housing market. It also allows for timely updating, for prompt assessment of housing input both to the business cycle and to inflationary pressures. We offer a preliminary identification, based solely on graphical inspection, of four different property price cycles since the late 1960s; the latest began at the end of the 1990s and signaled a slowdown since 2006. Finally, we tentatively assess the effect of including transactions in dwellings in the Italian HICP basket according to the net acquisition approach, which apparently results in about a quarter point of additional inflation each year since 2000.
    Keywords: business cycle, housing market, property prices, inflation measures
    JEL: E31 E32 R21 R31
    Date: 2008–08
  11. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of Bils and Kahn (2000), that the behavior of marginal cost over the cycle is directly related to that of inventories, data on which is readily available.We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs. We find that, for low rates of depreciation similar to those in the data, inventories are highly sensitive to changes in the cost of holding and acquiring them over the cycle. This implies that the model requires an elasticity of real marginal cost to output approximately equal to the inverse of the elasticity of intertemporal substitution in order to account for the countercyclical inventory-to-sales ratio in the data. Stronger real rigidities lower the cost of acquiring and holding inventories during booms and counterfactually predict a procyclical inventory-to-sales ratio.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2009
  12. By: Zoltán M. Jakab (Magyar Nemzeti Bank); Balázs Világi (Magyar Nemzeti Bank)
    Abstract: This paper presents and estimates a dynamic stochastic general equilibrium (DSGE) small-open-economy model for the Hungarian economy. The model features different types of frictions, real and nominal rigidities which are necessary to replicate the empirical persistence of Hungarian data. Bayesian methods are applied, and the structural break due to changing monetary regime over the studied period is explicitly taken into account in the estimation procedure. A real-time adaptive learning mechanism describes agents’ perception on underlying inflation. This creates an additional inertia in inflation. We describe the properties of the estimated model by impulse-response analysis, variance decomposition and the analysis of identified structural shocks. Our results are compared with that of estimated euro-area DSGE models, and estimated non-DSGE models of the Hungarian economy. As a robustness check, a model without real time adaptive learning is also estimated and it’s results are also compared to those of the original model.
    Keywords: New Keynesian models, DSGE models, small open economy, Bayesian econometrics.
    JEL: E40 E50
    Date: 2008
  13. By: Andrle, Michal
    Abstract: The paper discusses the role of stochastic trends in DSGE models and effects of stochastic detrending. We argue that explicit structural assumptions on trend behavior is convenient, namely for emerging countries. In emerging countries permanent shocks are an important part of business cycle dynamics. The reason is that permanent shocks spill over the whole frequency range, potentially, including business cycle frequencies. Applying high- or band-pass filter to obtain business cycle dynamics, however, does not eliminate the influence of permanent shocks on comovements of time series. The contribution of the paper is to provide a way how to calculate the role of permanent shocks on the detrended/ filtered business cycle population dynamics in a DSGE model laboratory using the frequency domain methods.
    Keywords: detrending; band-pass filter; spectral density; DSGE.
    JEL: E32 C53 D58
    Date: 2008–08–01
  14. By: Roger Sandilands (Department of Economics, University of Strathclyde)
    Abstract: Hawtreyan 'Credit Deadlock' or Keynesian 'Liquidity Trap'? Lessons for Japan from the Great Depression
    Keywords: Great Depression; Japan’s Great Stagnation; Hawtreyan Credit deadlock; Keynesian Liquidity trap
    JEL: B22 B23 E12 E32 E58
    Date: 2009–01
  15. By: Duduiala-Popescu, Lorena
    Abstract: Creation and proper functioning of the money market in Romania is subject to a preponderant constancy of private property, to support competition as a factor increasing the efficiency of the economy. Appearance money market in Romania is related to the transformations that have manifested in our country since 1989. As a mechanism of market economy, can not talk about them in existence before 1989. In a centralized economy, instruments, financial categories have ceased to reflect the actual situation in the economy. Fixing of prices with a high dose of subjectivism has generated the emergence of profitable enterprises without their own merits and others with losses that were not responsible for their financial situation.
    Keywords: money market; compensation; surplus; deficit
    JEL: E62 E42 E52 E44 E00 G32 F43
    Date: 2009–02–03
  16. By: Duasa, Jarita; Ahmad, Nursilah
    Abstract: The objective of this paper is to identify the best indicator variable in forecasting inflation in Malaysia. Due to the fact that Malaysia experienced the rise of CPI by 4.8 percent in March 2006, the country’s highest inflation rate in seven years, there is a need to foresee future trend of general price level. To determine whether certain indicator (variable) could predict inflation, we construct a simple forecasting model that incorporates the variable. We estimate a two-variable VECM model of quasi-tradable inflation using monthly data covering the period 1980:01 to 2006:12. We alternate between the following inflation indicators: commodity prices, financial indicators and economic activities. We evaluate each model using out-of-sample forecast. The study proposes that a simple model using industrial production index improves the accuracy of inflation forecasts. The results support our hypothesis.
    Keywords: Goods inflation; VECM ; Malaysian economy.
    JEL: C50 E31 C22
    Date: 2008
  17. By: Gianluca Benigno; Bianca De Paoli
    Abstract: This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.
    Keywords: optimal policy, fiscal policy, small open economy
    JEL: E62 E63 F41
    Date: 2009–01
  18. By: Óscar Arce (Banco de España); José Manuel Campa (IESE Business School); Ángel Gavilán (Banco de España)
    Abstract: This paper studies how investment and production in an economy is allocated across sectors when they face asymmetric financial conditions. Namely, when investors in one sector may run projects with higher loan-to-values than in another sector. Investors decide where to invest based on total rents and face a trade-off. While they may run larger projects in the sector with the best financial conditions, unit rents in this sector are lower than in the other sector due to a pledgeability premium. The level of interest rates affects this trade-off and therefore investors' endogenous segmentation across sectors. The effect is non-monotonic. When interest rates are high, projects are small and the differences in unit rents across sectors dominate the differences in project sizes. In this case, a drop in interest rates, move investors toward the most productive sector. Instead, when interest rates are low, projects are large, but much larger in the sector with the best financial conditions. In this case, the differences in project sizes across sectors dominate the differences in unit rents and a drop in interest rates moves investors towards the least productive sector but with the best access to external funding. We find that this hump-shaped relationship between interest rates and the share of investors allocated to a given sector may translate into a similar hump-shaped relationship between interest rates and the ratio of aggregate investment across sectors. Instead, in a model without financial asymmetries across sectors both relationships are monotonic and do not exhibit a hump. We claim that this paper provides helpful insights to understand the pattern of sectoral reallocation of investment and production observed in some OECD countries recently.
    Keywords: Investment and credit, pledgeability premium, collateral constraints, sectoral allocation, housing
    JEL: E22 E32 E44
    Date: 2009–02
  19. By: Yunus Aksoy; Henrique S Basso; Javier Coto Matinez (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We study liquidity effects and cost channels within a model of nominal rigidities and imperfect competition that gives explicit role for money-credit markets and investment decisions. We find that cost channels matter for monetary transmission, amplifying the impact of supply shocks and dampening the effects of demand shocks. Liquidity effects only obtain when the policy is specified by an interest rate policy rule and money-credit conditions are determined endogenously. We also find that determinacy issues are particularly relevant when models include the cost channel and explicit money-credit markets.’s score is variable along its life cycle or if he search process uses resources. It is shown that the discount effect of gradual recognition of popularity tends to reduce growth. Hence, growth is enhanced if the search engine is less sensitive to popularity. Also, growth is lower when the search engine rewards "web page quality" better because of the resources diverted away from R and D into advertising. But these mechanisms generate opposite level effects on the average quality selected by consumers. As a result the net effect on welfare is ambiguous.
    Date: 2009–01
  20. By: Philip Brock (University of Washington)
    Date: 2009–01
  21. By: Césaire A. Meh; Yaz Terajima
    Abstract: This paper studies the capital accumulation and welfare implications of reducing capital income taxation in a general equilibrium economy with uninsurable investment risks. It has been shown that, with uninsurable investment risks, under-accumulation of capital may result compared to the complete markets economy. We show that reducing somewhat the capital income tax rate increases the capital stock and leads to a welfare gain. The complete elimination of the capital income tax, however, is not necessarily welfare improving.
    Keywords: Economics models
    JEL: E21 E22 E62 G32 H24 H25
    Date: 2009
  22. By: WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); ChunShen Lee (Department of Economics, Feng Chia University)
    Abstract: Recently, Fagiolo et al. (2008) find fat tails in the distribution of economic growth rates after adjusting for outliers, autocorrelation, and heteroskedasticity. This paper employs US quarterly real output growth, showing that this finding of fat tails may reflect the Great Moderation. That is, leptokurtosis disappears after GARCH adjustment once we incorporate the break in the variance equation to account for the Great Moderation.
    Keywords: real GDP growth, the Great Moderation, leptokurtosis, GARCH models
    JEL: C32 E32 O40
    Date: 2009–01
  23. By: Raffaela Giordano (Bank of Italy, Structural Economic Analysis Department); Pietro Tommasino (Bank of Italy, Structural Economic Analysis Department)
    Abstract: Why do some states default on their debt more often than others? We argue that sovereign default is the outcome of a political struggle among different groups of citizens. It is more likely to happen if: (i) domestic debt-holders are relatively weak; (ii) the the political costs of the financial turmoil typically triggered by a sovereign bankrupcy are small. We show that these conditions are in turn more likely to be present if a country lacks a well-developed financial system and/or a sufficiently independent central bank.
    Keywords: fiscal sustainability, political economy, bank runs, central bank independance, financial development.
    JEL: E51 E52 H63
    Date: 2009–01
  24. By: WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: Previous studies (e.g., Hamori, 2000; Ho and Tsui, 2003; Fountas et al., 2004) find high volatility persistence of economic growth rates using generalized autoregressive conditional heteroskedasticity (GARCH) specifications. This paper reexamines the Japanese case, using the same approach and showing that this finding of high volatility persistence reflects the Great Moderation, which features a sharp decline in the variance as well as two falls in the mean of the growth rates identified by Bai and Perron’s (1998, 2003) multiple structural change test. Our empirical results provide new evidence. First, excess kurtosis drops substantially or disappears in the GARCH or exponential GARCH model that corrects for an additive outlier. Second, using the outlier-corrected data, the integrated GARCH effect or high volatility persistence remains in the specification once we introduce intercept-shift dummies into the mean equation. Third, the time-varying variance falls sharply, only when we incorporate the break in the variance equation. Fourth, the ARCH in mean model finds no effects of our more correct measure of output volatility on output growth or of output growth on its volatility.
    Keywords: Japan, real GDP growth, the Great Moderation, outlier, structural changes, IGARCH effect
    JEL: C32 E32 O40
    Date: 2009–01
  25. By: Freeman, Alan
    Abstract: This article assesses the extent and nature of the stimulus that will be required to end the economic crisis that opened in 2008. It compares the present economic situation to that which opened in 1929 and studies the relation between state spending, investment, and employment.
    Keywords: Keywords: Credit Crunch; Investment; Liquidity Preference; Rate of Profit; State; Welfare State; War; Military Keynesianism
    JEL: E0 E12 E32
    Date: 2009–02–08
  26. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR)
    Abstract: We adapt the basic principles of the Keynes Plan and argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union (NICU). These principles remain timely because the fundamental causes of the instability of the international monetary system are as valid today as they were in the early Forties. The new international money would be created against domestic earning assets of the Fed and the ECB. The quantity of this supranational bank money would be demand driven and thus would differ from the helicopter-money Special Drawing Rights. NICU would not hold open positions in assets denominated in national currency and consequently would not bear exchange rate risk. NICU would be more than an office where to record credit and debit entries of the supranational bank money. The financial tsunami that has hit the United States in 2007-2008 provides a unique opportunity for a coordinated strategy.
    Keywords: Keynes Plan, exchange rates, external imbalances, international monetary system, key currency, supranational banl money
    JEL: E42 E52 F33 F36
    Date: 2008–10
  27. By: Pedro, de Mendonça
    Abstract: We discuss the implications of informality on growth and fiscal policy by considering an informal sector based on low tech firms, in an open economy model of endogenous growth, where labour supply is elastic and increasing returns arise from public spending. We allow for both labour and capital to allocate between sectors and examine the dynamic and policy issues that arise in an economy, where long run outcomes are still dominated by formal activities, but long macroeconomic transitions arise as a result of informal microeconomic activities, which take advantage of both government taxation and limited fiscalization.
    Keywords: Endogenous Growth Theory; Optimal Fiscal Policy; Informal Sector; Public Capital
    JEL: E62 O41 O17 C61 F43
    Date: 2009–02–05
  28. By: Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy)
    Abstract: We introduce a two-country no-arbitrage term-structure model to analyse the joint dynamics of bond yields, macroeconomic variables, and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries, and how the exchange rate is influenced by the interactions between macroeconomic variables and time-varying bond risk premia. Estimating the model with US and German data, we obtain an excellent fit of the yield curves and we are able to account for up to 75 per cent of the variability of the exchange rate. We find that time-varying risk premia play a non-negligible role in exchange rate fluctuations due to the fact that a currency tends to appreciate when risk premia on long-term bonds denominated in that currency rise. A number of other novel empirical findings emerge.
    Keywords: exchange rate, term structure, UIP
    JEL: C5 E4 G1
    Date: 2009–01
  29. By: René Lalonde; Philipp Maier; Dirk Muir
    Abstract: The authors explore the usefulness of macroeconomic models in analyzing global economic developments by examining movements in commodity prices between July 2007 and July 2008. They use the Bank of Canada's version of the Global Economy Model and investigate the longerterm outlook for commodity prices by constructing two different, globally consistent, scenarios for emerging Asia. In the first scenario, the authors assume that a persistent increase in emerging Asia's productivity underlies its sustained growth; in the second scenario, they assume that a combination of productivity increases and a temporary demand shock underlie its growth. The demand for commodities increases in both scenarios, but, by comparing the two, the authors reveal that each scenario has considerably different economic implications. Allowing for the possibility that a small share of emerging Asia's growth might be fuelled by a temporary demand shock generates a strong "boom-bust" outcome for emerging Asia, and amplifies the volatility in commodity markets. The authors also investigate the possibility that emerging markets react to inflation by revaluing their exchange rates by 10 per cent. This affects the outlook for commodities only marginally.
    Keywords: International topics; Recent economic and financial developments
    JEL: E30 E50 E58 E60
    Date: 2009
  30. By: Duduiala-Popescu, Lorena
    Abstract: In the context in which most countries in Western Europe is almost unanimously accepted advantage of using the single currency, it appreciates that for Romania, whose foreign trade is facing up to approximately 2 / 3 to the market, adopting the single currency will bring real benefits. To become a EU member state, Romania has had to build and a reference system, the reference currency is Euro, not U.S. dollars. The new currency will be a factor of stability which will reduce a lot of trading losses due to local fluctuations of the dollar against euro. From 1 January 2003, the currency has been established in relation to EURO.
    Keywords: euro; economic and monetary union; the safeguard clause; budget deficit; inflation
    JEL: F15 G31 F02 F01 E44 F43 F36
    Date: 2009–02–03
  31. By: Thomas I. Palley
    Abstract: "Change" was the buzzword of the Obama campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas Palley, the neoliberal economic policy paradigm underlying that agenda must itself change if there is to be a successful policy response to the crisis. Mainstream economic theory remains unreformed, says Palley, and he warns of a return to failed policies if a deep crisis is averted. Since Post Keynesians accurately predicted that the U.S. economy would implode from within, there is an opportunity for Post Keynesian economics to replace neoliberalism with a more successful approach. Palley notes that there is significant disagreement among economic paradigms about how to ensure full employment and shared prosperity. A salient feature of the neoliberal economy is the disconnect between wages and productivity growth. Workers are boxed in on all sides by globalization, labor market flexibility, inflation concerns, and a belief in “small government” that has eroded economic rights and government services. Financialization, the economic foundation of neoliberalism, serves the interests of financial markets and top management. Thus, reversing the neoliberal paradigm will require a policy agenda that addresses financialization and ensures that financial markets and firms are more closely aligned with the greater public interest.
    Date: 2009–01
  32. By: Philip Ernstberger
    Abstract: Growing activity and commitment of money in Second Life motivate the analysis of its economic and monetary system. It is stated that the allocation of resources to the virtual world can increase utility. Resulting demand for virtual goods drives demand for Linden Dollars - the unit of exchange used in Second Life. Since these can be interpreted as money, the effects of monetary policy are shown, which if unanticipated are fully reflected in a change of demand for virtual goods. If money flows out of the economy, costs of maintaining the fi?xed currency peg arise. In a currency crises model these are weighed against costs of depreciating the currency.
    Date: 2009–01
  33. By: Kwok Ping Tsang
    Abstract: From the log-linearized consumption Euler equation, consumption growth of any horizon m is a function of the expected real return of maturity m, and they are linked through the elasticity of intertemporal substitution (EIS). Instead of using only the 1- period return and consumption growth, this result allows us to use the term structure of interest rates to identify the EIS. Using quarterly US data from 1954Q1 to 2007Q4, GMM results show that the real term structure is unrelated to future consumption growth: after controlling for small sample bias, we cannot reject the hypothesis that the EIS is zero. However, allowing a break in 1979 changes the results dramatically: the EIS is around 0.4 in the first period and it drops to around 0.2 in the second period. Not only is the EIS smaller, the out-sample forecasting power of ex post real return also drops in the second subsample compared to a simple AR(1) model for consumption growth. I find a lower EIS also for annual data.
    Keywords: Consumption Euler Equation, Term Structure of Interest Rates, Inflation, Forecast, Elasticity of Intertemporal Substitution, GMM
    Date: 2008
  34. By: Kohei Aono; Tokuo Iwaisako
    Abstract: The first contribution of this paper, following the works of Lettau and Ludvigson (2001a,b), is construction of the Japanese consumption-wealth ratio data series and to examine whether it explains Japanese stock market data. We find that the consumption- wealth ratio does not predict future stock returns, but it does help to explain the cross-section of Japanese stock returns. The second contribution of the paper is that we propose new consumption-wealth ratios in terms of which we more explicitly deal with household real estate wealth utilizing Japanese aggregate level data. Such ``real estate augmented'' consumption-wealth ratios work in a similar way, but perform bet- ter than, the consumption-wealth ratio calculated with only financial wealth data. While the scaled factor model with the consumption-wealth ratio proposed by Let- tau and Ludvigson performs relatively well with Japanese data, the book-to-market related anomaly pointed out by Jagannathan et al. (1998) remains strong.
    Keywords: consumption-wealth ratio; cointegration; cross-section of stock returns
    JEL: E21 G12
    Date: 2008–06
  35. By: Demirguc-Kunt, Asli (The World Bank); Serven, Luis (The World Bank)
    Abstract: The recent global financial crisis has shaken the confidence of developed and developing countries alike in the very blueprint of financial and macro policies that underlie the western capitalist systems. In an effort to contain the crisis from spreading, the authorities in the US and many European governments have taken unprecedented steps of providing extensive liquidity, giving assurances to bank depositors and creditors that include blanket guarantees, and structuring bail-out programs that include taking large ownership stakes in financial institutions, in addition to establishing programs for direct provision of credit to non-financial institutions. Emphasizing the importance of incentives and tensions between short term and longer term policy responses to crisis management, this paper draws on a large body of research evidence and country experiences to discuss the implications of the current crisis for financial and macroeconomic policies going forward.
    Keywords: Financial crisis; Regulation and Supervision; Safety Nets; Role of State in Finance; Monetary Policy; Asset Bubbles; Capital Controls
    JEL: E52 E58 F32 G21 G28 G32
    Date: 2009–02–01
  36. By: Michael Bordo; Tamara Gomes; Lawrence Schembri
    Abstract: Canada played an important role in the postwar establishment of the International Monetary Fund (IMF), yet it was also the first major member to challenge the orthodoxy of the BrettonWoods par value system by abandoning it in 1950 in favour of a floating, market-determined exchange rate. Although the IMF heavily criticized this decision, Canada's trail-blazing experience demonstrated that a flexible exchange rate could operate in a stable and effective manner under a high degree of capital mobility. Equally important, it showed that monetary policy needs to be conducted differently under a flexible exchange rate and capital mobility. The remarkable stability of the dollar during the 1950s contradicted previous wisdom on floating exchange rates, which had predicted significant volatility. In May of 1962, Canada returned to the BrettonWoods system as a "prodigal son" after a period of controversial monetary policy and a failed attempt to depreciate the value of the Canadian dollar. The authors critically analyze the interaction between Canadian and IMF officials regarding Canada's exchange rate policy in view of the economic circumstances and the prevailing wisdom at the time. They also examine the impact on IMF research and policy, because the Canadian experience influenced the work of Rudolf Rhomberg as well as Robert Mundell and Marcus Fleming, resulting in the development of the Mundell–Fleming model. Thus, the Canadian experience with a floating exchange rate not only had important implications for the IMF and the BrettonWoods system, but also for macroeconomic theory and policy in open economies.
    Keywords: Exchange rate regimes; Exchange rates; Monetary policy framework
    JEL: F41 N72 E52 E58
    Date: 2009
  37. By: Honkapohja, Seppo (Bank of Finland)
    Abstract: The current financial crisis, which has lasted almost one and a half years, is the 19th such crisis in the post-war period in advanced economies. Recent literature classifies the Nordic crises in Norway, Sweden and Finland in late 1980's and early 1990’s among the Big Five crises that have happened before the current crisis, which is now of a global nature. This paper outlines the developments of the Nordic crises, reasons behind them and crisis management by the authorities. Relatively more emphasis is placed on the Finnish crisis, as it was the deepest one. The paper concludes by considering the lessons that can be drawn from the Nordic crises.
    Keywords: financial deregulation; bank lending; overheating; financial crisis
    JEL: E44 G21
    Date: 2009–01–21
  38. By: Tomer Blumkin; Yossi Hadar; Eran Yashiv
    Abstract: The standard motivation for unemployment compensation is consumption smoothing andmost papers in the literature have analyzed trade-offs involving consumption smoothing andmoral hazard. This paper shows how such policy can increase output by enhancing theassignment of workers to jobs in the face of firm productivity heterogeneity and skill-biasedtechnological change. It shows that in order to do so policy needs to be a function of theproperties of the firm's productivity distribution. The paper undertakes an empiricallygrounded,normative analysis of this issue. The analysis also bears upon the wagedistribution, showing how optimal unemployment compensation policy is affected by wagesand affects them in turn. A key insight emerging from the analysis is that the degree of firmproductivity heterogeneity, in terms of skewness and variance, matters for the design of thetime path of unemployment compensation.
    Keywords: Productivity, heterogeneity, unemployment compensation policy, technologicalchange, assortative matching
    JEL: E24 E61
    Date: 2009–02
  39. By: John W. Dawson; John J. Seater
    Abstract: We introduce a new measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it–total factor productivity (TFP), physical capital, and labor. Regulation has caused substantial reductions in the growth rates of both output and TFP and has had effects on the trends in capital and labor that vary over time in both sign and magnitude. Regulation also affects deviations about the trends in output and its factors of production, and the effects differ across dependent variables. Regulation changes the way output is produced by changing the mix of inputs. Changes in regulation and marginal tax rates offer a straightforward explanation for the productivity slowdown of the 1970s. Key Words: Regulation; macroeconomic performance; economic growth; productivity slowdown
    JEL: E20 L50 O40
    Date: 2009
  40. By: James Feigenbaum (University of Pittsburgh); Frank N. Caliendo (Department of Economics and Finance, Utah State University); Emin Gahramanov (Deakin University)
    Abstract: Contrary to the usual presumption that welfare is maximized if consumers behave rationally, we show in a two-period overlapping generations model that there always exists a rule of thumb that can weakly improve upon the lifecycle/permanent-income rule in general equilibrium with irrational households. The market-clearing mechanism introduces a pecuniary externality that individual rational households do not consider when making decisions, but a publically shared rule of thumb can exploit this effect. For typical calibrations, the improvement of the welfare of irrational households is robust to the introduction of rational agents. Generalizing to a more realistic lifecycle model, we find in particular that the Save More Tomorrow(TM) (SMarT) Plan can confer higher lifetime utility than the permanent-income rule in general equilibrium.
    Keywords: consumption, saving, coordination, lifecycle/permanent-income hypothesis, SMarT Plan, general equilibrium, rules of thumb, pecuniary externality
    JEL: C61 D11 E21
    Date: 2009–02–03
  41. By: Reinhart, Carmen
    Abstract: Global financial markets are showing strains on a scale and scope not witnessed in the past three-quarters of a century. What started with elevated losses on U.S.-subprime mortgages has spread beyond the borders of the United States and the confines of the mortgage market. Many risk spreads have ballooned, liquidity in some market segments has dried up, and large complex financial institutions have admitted significant losses. Bank runs are no longer the subject exclusively of history.These events have challenged policymakers, and the responses have varied across region. The European Central Bank has injected reserves in unprecedented volumes. The Bank of England participated in the bail-out and, ultimately, the nationalization of a depository, Northern Rock. The U.S. Federal Reserve has introduced a variety of new facilities and extended its support beyond the depository sector. These events have also challenged economists to explain why the crisis developed, how it is unfolding, and what can be done. This volume compiles contributions by leading economists in VoxEU over the past year that attempt to answer these questions. We have grouped these contributions into three sections corresponding to those three critical questions.
    Keywords: financial crisis subprime mortgages monetary policy
    JEL: E0 F3
    Date: 2008–07
  42. By: Vahabi, Mehrdad
    Abstract: The paper first investigates the causes of the recent financial and liquidity crisis in the US and all over the world as a preliminary phase of the imminent recession. It then questions Paulson-Bernanke’s plan as a solution to the crisis and ponders over the differences between EU plan and the American one. Finally, it provides an overview of some apparent consequences of the crisis and anticipates some major critical issues in the future. The crux of the paper is to argue that the easy money policy and lack of the state regulation which are usually regarded as the causes of the crisis should be understood as the specific features of a particular model of accumulation, namely the neo-liberal or American type of capitalism. The roots of the crisis lie in this type of accumulation. In this context, Paulson-Bernanke’s plan provides only a further impetus to merging and acquisitions in the banking sector, a process that has already led to the emergence of three giant banks, namely Stanley Morgan Chase, Bank of America and Citicorp. In fact, if the Glass-Steagall Act has become discredited in the nineties, the concentration of the banking sector during this recent crisis make the whole financial system more fragile and vulnerable to systemic risks. Moreover, the state will be hold up by giant banks and should bailout them whenever they encounter financial difficulties.
    Keywords: Global financial crisi;American model of capitalsim; merging and acquistion in the banking sector; Fordism and post-Fordism; shareholding capitalism; Systemic risk
    JEL: G2 G38 G34 E44 G32 F36
    Date: 2008–10
  43. By: Luciano Fanti; Luca Gori
    Abstract: This paper formally explores the joint roles played, on the one side, by the regulation of wages and, on the other side, by the existence of a “backyard” (or home) technology exploited by the unemployed people, in a standard neoclassical OLG growth model. The main findings are the following: 1) the introduction of a “binding” regulated wage fosters the capital accumulation and lead to a higher long term capital stock (and thus to higher output and welfare as well) in comparison with a competitive wage economy, provided that both the labour productivity at “home” and the capital weight in the firms technology are sufficiently high; 2) however, if the regulated wage is set at a too high level, the capital accumulation will be inferior to that of the competitive wage economy. These results, so far escaped closer scrutiny by economic growth literature, shed a new light on the effects of the regulation of wages and may have interesting policy implications.
    Keywords: Regulated wage; Unemployment; Home production; OLG model
    JEL: D13 E24 J22 O41
    Date: 2008–09–01
  44. By: Maria Rosaria Marino (Banca d'Italia); Sandro Momigliano (Banca d'Italia); Pietro Rizza (Banca d'Italia)
    Abstract: The paper examines the development of Italy’s public finances after the consolidation period 1992-97, which secured participation in the European Monetary Union from the outset. The “structural” developments in the main budgetary components are assessed, excluding the effects of the economic cycle and of temporary measures. The analysis shows a rapid deterioration in the years 1998-2003, whose roots can be traced back to the consolidation of the early 1990s, achieved primarily by means of tax increases and cuts in capital expenditure. Since 2004 there has been a structural improvement, initially modest but substantial in 2006 and 2007. Sustaining this adjustment and making further progress may again prove difficult, as the fiscal correction is similar in nature to the previous consolidation effort. Looking at the whole period 1998-2007, the deterioration of the public finances seems attributable to the difficulty to restrain the growth of current primary expenditure.
    Keywords: structural budget, business cycle, temporary measures, public finances
    JEL: H62 H20 H50 E69
    Date: 2008–07
  45. By: Reinhart, Carmen; Vegh, Carlos; Velasco, Andres
    Abstract: Most of the chapters in this volume were prepared for a conference in honor of Guillermo Calvo, organized by the International Monetary Fund’s Research Department and held at Fund headquarters in Washington, DC, on April 15–16,2004. At the editors’ request, a couple of chapters were specially prepared after the conference for inclusion in this volume. The Fund was a natural and gracious host since Guillermo had a distinguished affiliation with the Fund’s Research Department from 1987 to 1994. Under his intellectual leadership, the Research Department carried out path-breaking research on, among other issues, capital flows, debt maturity, and inflation stabilization. Guillermo also made important contributions to the internal discussion and formulation of Fund policies, particularly in Eastern Europe, the former Soviet Union, and Latin America.
    Keywords: crises inflation exchange rates debt transition
    JEL: F3 E4
    Date: 2008
  46. By: Roger Sandilands (Department of Economics, University of Strathclyde)
    Abstract: This paper forms part of a wider project to show the significance of archival material on distinguished economists, in this case Lauchlin Currie (1902-93), who studied and taught at Harvard before entering government service at the US Treasury and Federal Reserve Board as the intellectual leader of Roosevelt’s New Deal, 1934-39, as FDR’s White House economic adviser in peace and war, 1939-45, and as a post-war development economist. It discusses the uses made of the written and oral material available when the author was writing his intellectual biography of Currie (Duke University Press 1990) while Currie was still alive, and the significance of the material that has come to light after Currie’s death.
    Keywords: Lauchlin Currie; economic biography; the New Deal; macroeconomic policy; development economics.
    JEL: A11 B25 E50 O10 O54
    Date: 2009–01
  47. By: Ángel Gavilán (Banco de España); Juan A. Rojas (Banco de España)
    Abstract: We propose a new numerical method to solve stochastic models that combines the parameterized expectations (PEA) and the Smolyak algorithms. This method is especially convenient to address problems with occasionally binding constraints (a feature inherited from PEA) and/or a large number of state variables (a feature inherited from Smolyak), i.e. DSGE models that incorporate portfolio problems and incomplete markets. We describe the proposed Smolyak-PEA algorithm in the context of a one-country stochastic neoclassical growth model and compare its accuracy with that of a standard PEA collocation algorithm. Despite estimating fewer parameters, the former is able to reach the high accuracy levels of the latter. We further illustrate the working of this algorithm in a two-country neoclassical model with incomplete markets and portfolio choice. Again, the Smolyak-PEA algorithm approximates the solution of the problem with a high degree of accuracy. Finally, we show how this algorithm can efficiently incorporate both occasionally binding constraints and a partial information approach.
    Keywords: Portfolio Choice, Dynamic Macroeconomics, Computational Methods
    JEL: E2 C68
    Date: 2009–02
  48. By: Gabriel Enrique Alberola (Banco de España); José María Serena (Banco de España)
    Abstract: Sovereign external assets (SEAs) comprise foreign exchange reserves and sovereign wealth funds (SWFs). The global stock of reserves reached 7 $trn in the second quarter of 2008, but data on SWF are rather elusive. Our estimation puts the SWFs at around 2,5 $trn dollars by 2007 and in the last years they have grown at a high pace, fostered by high commodity prices. Therefore, SEAs have surpassed the 10 $trn mark (around 5% of global assets and 15% of global GDP). This paper argues that reserves and SWF assets should be jointly considered for the assessment of global imbalances. Both are official capital outflows from developing to developed countries, both hinder internal adjustment in current account surplus countries, both help to cover the financing needs of deficit countries, in particular in the US, and, therefore, both contribute to sustain global imbalances. The importance of SEAs in financing the external imbalances of the US has been widely recognised but scantly measured. Our rule-of-thumb calculations suggests that they have greatly increased their importance in the last years, having surpassed the US$ trillion increase in 2007; relative to US financing needs, this amount represents around a 135% and 50% of net and gross needs, respectively, in 2007. Reserves have in the last years contributed 80% and SWFs 20%.Looking ahead, two main conclusions can be put forward: 1) the relative importance SWFs in the financing of the US deficits and global imbalances is set to increase (also relative to reserves), but this is conditional to commodity prices remaining at high levels. On the one hand, the economic motivation of SWFs -intertemporal smoothing- is more palatable than that of reserves (exchange rate management), despite political concerns on SWFs; on the other hand, SWFs do not have significant internal costs, contrary to reserves, whose monetary and fiscal costs are increasing in the margin; 2) SEAs can well buttress US financial needs in the years ahead, providing resilience to the global imbalances. Dramatic shifts in the pace of SEAs accumulation -due for instance to an adjustment of commodity prices- or in the investment allocation would jeopardise these prospects.
    Keywords: international reserves, sovereign wealth funds, global imbalances, exchange rates
    JEL: E58 F21 F36 G15
    Date: 2009–01
  49. By: Giuliana Passamani
    Abstract: The aim of the paper is to analyze the foreign transmission mechanism between each of the Visegrad-4 countries and the eurozone, through an empirical analysis of the basic international parity conditions linking Czech, Hungarian, Polish and Slovakian inflations and interest rates with the ones of the current euro area members. The focus of the analysis is to show the differences among these catching-up economies, with particular attention to their process of convergence towards the eurozone economy. For reasons due to the availability of data, the sample covers the last decade. We use the cointegrated VAR model to define longrun stationary relations as well as common stochastic trends. The methodology adopted is properly apt to uncover the dynamic structure underlying the stochastic behaviour of prices, interest rates and exchange rate. Of particular interest is the empirical finding that the parities do not hold on their own, as expected, but that weaker form of the same parities, or linear combinations of them, hold in our data set, with some differences for each country. Also the process of convergence is different: the Czech Republic seems to have reached a relative convergence, while for the other countries we have that the process show a tendency towards convergence.
    Keywords: Visegrad_4 countries, PPP, UIP, RIP, Cointegrated VAR, Convergence
    JEL: E31 E43 F31
    Date: 2008
  50. By: Roberto Patuelli (Institute for Economic Research (IRE), University of Lugano, Switzerland; The Rimini Centre for Economic Analysis (RCEA), Italy); Daniel A. Griffith (School of Economic, Political and Policy Sciences, University of Texas at Dallas, USA); Michael Tiefelsdorf (School of Economic, Political and Policy Sciences, University of Texas at Dallas, USA); Peter Nijkamp (Department of Spatial Economics, VU University Amsterdam, The Netherlands)
    Abstract: Regions, independent of their geographic level of aggregation, are known to be interrelated partly due to their relative locations. Similar economic performance among regions can be attributed to proximity. Consequently, a proper understanding, and accounting, of spatial liaisons is needed in order to effectively forecast regional economic variables. Several spatial econometric techniques are available in the literature, which deal with the spatial autocorrelation in geographically-referenced data. The experiments carried out in this paper are concerned with the analysis of the spatial autocorrelation observed for unemployment rates in 439 NUTS-3 German districts. We employ a semi-parametric approach – spatial filtering – in order to uncover spatial patterns that are consistently significant over time. We first provide a brief overview of the spatial filtering method and illustrate the data set. Subsequently, we describe the empirical application carried out: that is, the spatial filtering analysis of regional unemployment rates in Germany. Furthermore, we exploit the resulting spatial filter as an explanatory variable in a panel modelling framework. Additional explanatory variables, such as average daily wages, are used in concurrence with the spatial filter. Our experiments show that the computed spatial filters account for most of the residual spatial autocorrelation in the data.
    Keywords: spatial filtering, eigenvectors, Germany, unemployment
    JEL: C33 E24 R12
    Date: 2009–01
  51. By: Luciano Fanti; Luca Gori
    Abstract: Since little attention has been paid to the effects of the regulation of wages on individuals' fertility choice, this paper investigates such effects within a standard OLG model of neoclassical growth. Some new results, so far escaped closer scrutiny by the increasing literature investigating economic growth and fertility, and which may have interesting policy implications, emerge: introducing minimum wages may, under suitable conditions, (1) have a favourable impact on the long-run outcomes of the economy; and (2) reduce the population growth rate. This occurs more likely when both sufficiently high capital's weight in technology and unemployment benefits do exist. Interestingly, these results are robust to different extensions introducing pensions and intra-family transfers. Therefore, to the extent that the absence of unions and of any regulation of wages are related with low wages, and the weight of capital in the distribution is increasing, the findings of this work also offer some policy implications which are, especially for developing countries in which the population growth may be too high, very interesting.
    Keywords: Minimum wage, Unemployment, Endogenous fertility
    JEL: E24 J13 O41
    Date: 2008–01–01
  52. By: Weiss, Volkmar
    Abstract: Any general statement as to whether the secular trend of a society is eugenic or dysgenic depends upon a reliable calibration of the measurement of general intelligence. Richard Lynn set the mean IQ of the United Kingdom at 100 with a standard deviation of 15, and he calculated the mean IQs of other countries in relation to this “Greenwich IQ”. But because the UK test scores could be declining, the present paper recalibrates the mean IQ 100 to the average of seven countries having a historical mean IQ of 100. By comparing Lynn-Vanhanen-IQ with PISA scores and educational attainment of native and foreign born populations transformed into the IQ metric, we confirmed brain gain and brain drain in a number of nations during recent decades. Furthermore, the growth of gross domestic product per capita can be derived as a linear function of the percentage of people with an IQ above 105 and its underlying frequency of a hypothetical major gene of intelligence.
    Keywords: General intelligence; PISA; GDP; Dysgenics; Smart fraction theory; Immigration; Brain Drain; Brain Gain
    JEL: I2 O57 E01
    Date: 2008–08–08
  53. By: André Kurmann
    Abstract: Firms in many situations must make investment decisions long before they meet with new capital suppliers. In addition, most physical capital is specific to a task or location, thus implying potentially important switching costs in case negotiations between a firm and a supplier break down. The present paper analyzes the implications of these frictions. The sequentiality of investment makes it impossible to write binding ex-ante contracts. Together with the rents arising from switching costs, this implies a holdup problem. In partial equilibrium, firms react strategically by overinvesting so as to reduce their marginal productivity and thus the price of capital they negotiate with their suppliers upon matching. In general equilibrium, the holdup problem interacts with externalities from switching costs, resulting in inefficient allocations. In a more general macroeconomic context, the holdup problem in physical capital markets interacts with holdup problems in labor markets that typically lead to underinvestment. As long as capital and labor are complements, this presents the firm with a trade-off between overinvestment and overemployment that neutralizes, at least partially, the distortionary effects of each of the two holdup problems.
    Keywords: Holdup problems, Trading frictions, Investment, Strategic bargaining
    JEL: D23 D24 E22
    Date: 2009
  54. By: Oleksiy Kryvtsov; Alexander Ueberfeldt
    Abstract: This paper analyzes the differences in wage ratios of university graduates to less than university graduates, the education premium, in Canada and the United States from 1980 to 2000. Both countries experienced a similar increase in the fraction of university graduates and a similar increase in skill biased technological change based on capital-embodied technological progress, but only the United States had a large increase in the education premium. Using a calibrated Krussel et al. (2000) model, the paper finds that the cross country difference is in equal proportion due to the effective stock of capital equipment, the growth in skilled labor supply relative to unskilled labor and the relative abundance of skilled population in 1980. Growth in the working age population is unimportant for the difference.
    Keywords: Labour markets; Productivity
    JEL: E24 E25 J24 J31
    Date: 2009

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