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on Macroeconomics |
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Issue of 2009‒02‒28
95 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Beck, Günter; Wieland, Volker |
| Abstract: | Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially. |
| Keywords: | monetary policy under uncertainty; money; output gap uncertainty; quantity theory; Taylor rules |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6947&r=mac |
| By: | Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín; Uusküla, Lenno |
| Abstract: | This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, the model can account both for the price puzzle and for inflation persistence. We also show that the deep habits mechanism and nominal rigidities are complementary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. We show that the results are stable over time and are not caused by monetary policy changes. |
| Keywords: | countercyclical markup; deep habits; inflation persistence; monetayr policy shocks; price puzzle |
| JEL: | E21 E31 E32 E52 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7128&r=mac |
| By: | Benk, Szilárd; Gillman, Max; Kejak, Michal |
| Abstract: | The post-1983 moderation coincided with an ahistorical divergence in the money aggregate growth and velocity volatilities away from the downward trending GDP and inflation volatilities. Using an en dogenous growth monetary DSGE model, with micro-based banking production, enables a contrasting characterization of the two great volatility cycles over the historical period of 1919-2004, and enables this puzzle to be addressed more easily. The volatility divergence is explained by the upswing in the credit volatility that kept money supply variability from translating into inflation and GDP volatility. |
| Keywords: | Growth; Inflation; Money and credit shocks; Volatility |
| JEL: | E13 E32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7150&r=mac |
| By: | Keiichi Morimoto (Graduate School of Economics, Osaka University) |
| Abstract: | This paper analyzes the relationship between the optimal weight on output gap in the central bankfs loss function and the degree of inertia in a hybrid version of New Keynesian model with a pure discretionary inflation targeting. I present the policy recommendations as to the weight on output gap in the presence of endogenous persistence in inflation dynamics. Especially, I show that under endogenous persistence of inflation dynamics, even in discretionary monetary policy regime, a Rogofffs (1985) conservative central banker does not necessarily improve social welfare. |
| Keywords: | hybrid New Keynesian model; inflation targeting; policy weight |
| JEL: | E52 E58 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0905&r=mac |
| By: | Spivak, Avia; Sussman, Nathan |
| Abstract: | Financial globalization has seen the emergence of a new monetary standard based on inflation targeting. At the same time the most financially advanced economies moved away from exchange rate targeting which also characterized the previous era of globalization - the era of the Classical Gold Standard. Does the new financial environment of free capital flows constrain the independence of central banks to conduct monetary policy? We argue, and show empirically, that credible inflation targeting allows central banks to conduct an independent monetary policy as manifested in their ability to deviate from the world (Fed) interest rate. This new regime, with exchange rate flexibility, generates sufficient short term volatility that prevents short term arbitrage against central banks that deviate from the Fed rate. In contrast, during the Gold Standard only limited deviation was possible within the 'gold points'. On the other hand, the credibility of inflation targeting regime is as good as gold in anchoring inflation expectations for the long run as manifested in strong co-movement and similar levels of long term borrowing rates- just as was the case during the gold standard. We conclude that inflation targeting allows more flexibility than the Gold Standard to conduct monetary policy in the short run and has similar benefits for long term stability. We suggest that it is the new golden rule. |
| Keywords: | Credibility; Exchange rate variability; Gold standard; Inflation targeting |
| JEL: | E31 E4 E42 E43 E44 E58 F3 F33 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7001&r=mac |
| By: | Bikbov, Ruslan; Chernov, Mikhail |
| Abstract: | This paper proposes to investigate whether US monetary policy changed over time by evaluating evidence from the entire yield curve. A regime-switching no-arbitrage term structure model relies on inflation, output and the short interest rate as factors. In a departure from the finance literature, the model is complemented with identifying assumptions that allow the private sector (inflation and output dynamics) to be separated from monetary policy (short interest rate). The model posits regime changes in the volatility of exogenous output and inflation shocks, in the monetary policy rule, and in the volatility of monetary shocks. The monetary policy regimes cannot be identified correctly if the yield curve is ignored during estimation. Counterfactual analysis uses the disentangled regimes in policy and shocks to understand their importance for the great moderation. The low-volatility regime of exogenous shocks during the last two decades plays an important role, while monetary policy contributes by trading off asymmetric responses of output and inflation under different regimes. |
| Keywords: | great moderation; monetary policy; regime switches; structural VAR; term structure model |
| JEL: | C52 E43 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7096&r=mac |
| By: | Gregory de Walque (National Bank of Belgium, Research Department; University of Namur); Olivier Pierrard (Central Bank of Luxembourg; Catholic University of Louvain); Henri Sneessens (Catholic University of Louvain); Raf Wouters (National Bank of Belgium, Research Department; University of Louvain) |
| Abstract: | We consider a model with frictional unemployment and staggered wage bargaining where hours worked are negotiated for each period. The workers' bargaining power in the working time negotiations affects both unemployment volatility and inflation persistence. The closer to zero this parameter, (i) the more firms tend to adjust on the intensive margin, reducing employment volatility, (ii) the lower the effective workers' bargaining power for wages and (iii) the more important the hourly wage in determining the marginal cost. This set-up produces realistic labour market figures together with inflation persistence. Distinguishing the probability to bargain the wage rate for existing and new jobs, we show that the intensive margin helps reduce the new entrants' wage rigidity required to match observed unemployment volatility. |
| Keywords: | DSGE, Search and Matching, Nominal Wage Rigidity, Monetary Policy |
| JEL: | E31 E32 E52 J64 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200902-19&r=mac |
| By: | Aron, Janine; Muellbauer, John |
| Abstract: | Inflation targeting central banks will be hampered without good models to assist them to be forward-looking. Many current inflation models fail to forecast turning points adequately, because they miss key underlying long-run influences. The world is on the cusp of a dramatic turning point in inflation. If inflation falls rapidly, such models can underestimate the speed at which interest rates should fall, damaging growth. Our forecasting models for the new measure of producer price inflation suggest methodological lessons, and build in conflicting pressures on SA inflation from exchange rate depreciation, terms of trade shocks, collapsing oil, food and other commodity prices, and other shocks. Our US and SA forecasting models for consumer price inflation underline the methodological points, and suggest the usefulness of thinking about sectoral trends. Finally, we apply the sectoral approach to understanding the monetary policy implications of introducing a new CPI measure in SA that uses imputed rents rather than interest rates to capture housing costs. |
| Keywords: | forecasting inflation; homeowner costs in the CPI; PPI inflation; South Africa |
| JEL: | C22 C51 C52 C53 E31 E52 E58 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7183&r=mac |
| By: | Söderström, Ulf |
| Abstract: | I revisit the potential costs and benefits for Sweden of joining the Economic and Monetary Union (EMU) of the European Union. I first show that the Swedish business cycle since the mid-1990s has been closely correlated with the Euro area economies, suggesting that common shocks have been an important driving force of business cycles in Europe. However, evidence from an estimated model of the Swedish economy instead suggests that country-specific shocks have been important for fluctuations in the Swedish economy since 1993, implying that EMU membership could be costly. The model also indicates that the exchange rate has to a large extent acted to destabilize, rather than stabilize, the Swedish economy, pointing to the costs of independent monetary policy with a flexible exchange rate. Finally, counterfactual simulations of the model suggest that Swedish inflation and GDP growth might have been slightly higher if Sweden had been a member of EMU since the launch in 1999, but also that GDP growth might have been more volatile. The evidence is therefore not conclusive about whether or not participation in the monetary union would be advantageous for Sweden. |
| Keywords: | DSGE model; Monetary union; Open economy; Optimum Currency Area |
| JEL: | E42 E58 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7062&r=mac |
| By: | Horii, Ryo; Ono, Yoshiyasu |
| Abstract: | This paper presents a simple model in which the learning behavior of agents generates fluctuations in money demand and possibly causes a prolonged depression. We consider a stochastic Money-in-Utility model, where agents receive utility from holding money only when a liquidity shock (e.g., a bank run) occurs. Households update the subjective probability of the shock based on the observation and change their money demand accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of low output. We show that the adverse effects of the shocks are largest when they occur in succession in an economy which has enjoyed a long period of stability. |
| Keywords: | Bayesian Learning; Money Demand; Hamilton-Jacobi-Bellman Equations; Markov Modulated Poisson Processes; Partial Delay Differential Equations |
| JEL: | E32 D83 E41 |
| Date: | 2009–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13485&r=mac |
| By: | Aron, Janine; Muellbauer, John |
| Abstract: | South Africa in the 1990s became globally more integrated after years of isolation. Opening the trade and capital accounts gave impetus to a monetary policy regime change to inflation targeting from 2000, after a costly transitional period of monetary mismanagement with low policy transparency. Changes in openness can, however, disrupt the inflation forecasting on which targeting monetary policies depend. This chapter demonstrates how the central bank’s own producer price inflation equation in its core model can be improved by taking account of greater openness, using both innovative time-series openness measures and a more conventional measure. The model has a greatly improved fit and stability over longer samples when also including the real exchange rate and the interest rate differential (making explicit the exchange rate channel of monetary transmission) and asymmetric food price inflation. Moreover, there is a role for the level of the output gap rather than simply a short-run effect, as in the central bank’s model. This helps mitigate the arguments in current South African debate regarding the apparent unconcern of inflation targeting policy for the level of economic activity. |
| Keywords: | inflation dynamics; modelling producer prices; trade openness |
| JEL: | C22 E31 F13 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6992&r=mac |
| By: | Forni, Mario; Gambetti, Luca |
| Abstract: | We use the structural factor model proposed by Forni, Giannone, Lippi and Reichlin (2007) to study the effects of monetary policy. The advantage with respect to the traditional vector autoregression model is that we can exploit information from a large data set, made up of 112 US monthly macroeconomic series. Monetary policy shocks are identified using a standard recursive scheme, in which the impact effects on both industrial production and prices are zero. Such a scheme, when applied to a VAR including a suitable selection of our variables, produces puzzling results. Our main findings are the following. (i) The maximal effect on bilateral real exchange rates is observed on impact, so that the “delayed overshooting” or “forward discount” puzzle disappears. (ii) After a contractionary shock prices fall at all horizons, so that the price puzzle is not there. (iii) Monetary policy has a sizable effect on both real and nominal variables. Such results suggest that the structural factor model is a promising tool for applied macroeconomics. |
| Keywords: | Delayed Overshooting Puzzle; Monetary Policy; Price Puzzle; Structural Factor Model |
| JEL: | C32 E32 E52 F31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7098&r=mac |
| By: | Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O |
| Abstract: | This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank's empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible. |
| Keywords: | impulse responses; instrument rules; open-economy DSGE models; Optimal monetary policy; output gap; potential output |
| JEL: | E52 E58 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7070&r=mac |
| By: | Mario Forni; Luca Gambetti |
| Abstract: | We use the structural factor model proposed by Forni, Giannone, Lippi and Reichlin (2007) to study the effects of monetary policy. The advantage with respect to the traditional vector autoregression model is that we can exploit information from a large data set, made up of 112 US monthly macroeconomic series. Monetary policy shocks are identified using a standard recursive scheme, in which the impact effects on both industrial production and prices are zero. Such a scheme, when applied to a VAR including a suitable selection of our variables, produces puzzling results. Our main findings are the following. (i) The maximal effect on bilateral real exchange rates is observed on impact, so that the “delayed overshooting” or “forward discount” puzzle disappears. (ii) After a contractionary shock prices fall at all horizons, so that the price puzzle is not there. (iii) Monetary policy has a sizable effect on both real and nominal variables. Such results suggest that the structural factor model is a promising tool for applied macroeconomics. |
| Keywords: | Delayed Overshooting Puzzle, Monetary Policy, Price Puzzle, Structural Factor Model, Structural VAR. |
| JEL: | C32 E32 E52 F31 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:026&r=mac |
| By: | Hafedh Bouakez; Emanuela Cardia; Francisco J. Ruge-Murcia |
| Abstract: | In this paper, we study the macroeconomic implications of sectoral heterogeneity and, in particular, heterogeneity in price setting, through the lens of a highly disaggregated multi-sector model. The model incorporates several realistic features and is estimated using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are remarkably consistent with those reported in micro-based studies, especially for non-sale prices. The model is used to study (i) the contribution of sectoral characteristics to the observed cross sectional heterogeneity in sectoral output and inflation responses to a monetary policy shock, (ii) the implications of sectoral price rigidity for aggregate output and inflation dynamics and for cost pass-through, and (iii) the role of sectoral shocks in explaining secotral prices and quantities. |
| Keywords: | Multi-sector models, price stickiness, simulated method of moments, sectoral shocks, monetary policy |
| JEL: | E3 E4 E5 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0906&r=mac |
| By: | Joyce, Michael (Bank of England); Lildholdt, Peter; Sorensen, Steffen |
| Abstract: | This paper analyses the nominal and real interest rate term structures in the United Kingdom over the fifteen-year period that the UK monetary authorities have pursued an explicit inflation target, using a four-factor essentially affine term structure model. The model imposes no-arbitrage restrictions across nominal and real yields, enabling us to decompose nominal forward rates into expected real short rates, expected inflation, real term premia and inflation risk premia. We find that inflation risk premia and longer-term inflation expectations fell significantly when the Bank of England was made operationally independent in 1997. The 'conundrum' of unusually low long-term real rates that began in 2004 is mainly attributed by the model to a fall in real term premia, though a significant part of the fall is left unexplained. The relative inability of the model to fit long real forwards during much of this recent period may reflect strong pension fund demand for index-linked bonds. Moreover, the model decompositions suggest that these special factors affecting the index-linked market may also partly account for the contemporaneous rise in longer-horizon inflation breakeven rates. |
| Keywords: | Inflation expectations; inflation risk premia; affine term structure model |
| JEL: | C40 E43 E52 |
| Date: | 2009–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0360&r=mac |
| By: | Claessens, Stijn; Kose, Ayhan; Terrones, Marco E. |
| Abstract: | We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. |
| Keywords: | business cycles; busts; credit crunches; equity prices; house prices; recessions |
| JEL: | E32 E44 E51 F42 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7085&r=mac |
| By: | Monacelli, Tommaso; Perotti, Roberto |
| Abstract: | We document that an increase in government purchases generates a rise in consumption, the real and the product wage, and a fall in the markup. This evidence is robust across alternative empirical methodologies used to identify innovations in government spending (structural VAR vs. narrative approach). Simultaneously accounting for these facts is a formidable challenge for a neoclassical model, which relies on the wealth effect on labor supply as the main channel of transmission of unproductive government spending shocks. The goal of this paper is to explore further the role of the wealth effect in the transmission of government spending shocks. To this end, we build an otherwise standard business cycle model with price rigidity, in which preferences can be consistent with an arbitrarily small wealth effect on labor supply, and highlight that such effect is linked to the degree of complementarity between consumption and hours. The model is able to match our empirical evidence on the effects of government spending shocks remarkably well. This happens when the preferences are such that the positive wealth effect on labor supply is small and therefore the negative wealth effect on consumption is, somewhat counterintuitively, large. |
| Keywords: | Government spending; markup; private consumption; wealth effect |
| JEL: | D91 E21 E62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7099&r=mac |
| By: | Keiichi Morimoto (Graduate School of Economics, Osaka University) |
| Abstract: | In this paper, I show that accountability for inflation target will improve social welfare when the central bank makes transparency-opaqueness choices endogenously. The key elements are uncertainty of the firmsf informational quality, the opacity bias of constrained discretionay monetary policy under noisy information, and the role of harmful noisy public information. Based on the qualitative and quantitative result, I present a policy recommendation as to policy announcements and inflation targeting regime. |
| Keywords: | asymmetric information, economic transparency, inflation targeting |
| JEL: | D82 E52 E58 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0906&r=mac |
| By: | Acocella, Nicola; Di Bartolomeo, Giovanni; Hughes Hallett, Andrew |
| Abstract: | Rational expectations are often used as a strong argument against policy activism, as they may undermine or neutralize the policymaker’s actions. Although this sometimes happens, rational expectations do not always imply policy invariance or ineffectiveness. In fact, in certain circumstances rational expectations can enhance our power to control an economy over time. In those cases, policy announcements, properly communicated, can be used to extend the impact of conventional policy instruments. In this paper we present a general forward-looking policy framework and use it to provide a formal justification for attempting to anchor expectations, and as a possible justification for publishing interest rate forecasts or tax rate projections. This approach allows us to test when policymakers can and cannot expect to be able to manage expectations. |
| Keywords: | controllability; fiscal policy; monetary policy; policy neutrality; Rational expectations |
| JEL: | C61 C62 E52 E61 E62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7078&r=mac |
| By: | Bernd Hayo (Faculty of Business Administration and Economics, Philipps-University Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps-University Marburg) |
| Abstract: | Using a GARCH model, we study the effects of Canadian and U.S. central bank communication and macroeconomic news on Canadian bond, stock, and foreign exchange market returns and volatility. First, news in both categories and from both countries has an impact on all financial markets. Canadian and U.S. price shocks and monetary policy news are less important than shocks relating to the real economy. Second, Canadian central bank communication is more relevant than its U.S. counterpart, whereas in the case of macro news that originating from the United States dominates. Third, we find evidence that the impact of Canadian news reaches its maximum when the Canadian target rate departs from the Federal Funds target rate (2002–2004). The introduction of fixed announcement dates (FAD) does not cause a noticeable break in the data. Finally, Canadian and U.S. target rate changes lead to higher price volatility, and so does other U.S. news. Other Canadian news, however, lowers price volatility. |
| Keywords: | Bank of Canada, Central Bank Communication, Federal Reserve Bank, Financial Markets, Macroeconomic News, Monetary Policy |
| JEL: | E52 G14 G15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200908&r=mac |
| By: | Demertzis, Maria; Marcellino, Massimiliano; Viegi, Nicola |
| Abstract: | Our objective is to identify a way of checking empirically the extent to which expectations are de-coupled from inflation, how well they might be anchored in the long run, and at what level. This methodology allows us then to identify a measure for the degree of anchorness, and as anchored expectations are associated with credibility, this will serve as a proxy for credibility. We apply this methodology to the US history of inflation since 1963 and examine how well our measure tracks the periods for which credibility is known to be either low or high. Of particular interest to the validity of the measure is the start of the Great Moderation. Following the narrative of a number of well documented incidents in this period, we check how well our measure captures both the evolution of credibility in US monetary policy, as well as reactions to inflation scares. |
| Keywords: | anchors for expectations; credibility; Great Inflation; Great Moderation |
| JEL: | E52 E58 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7036&r=mac |
| By: | Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia |
| Abstract: | This paper shows that the EMU has not affected historical characteristics of member countries’ business cycles and their cross-correlations. Member countries which had similar levels of GDP per-capita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening. |
| Keywords: | euro area; European integration; European monetary union; international business cycles |
| JEL: | C5 E32 F2 F43 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7124&r=mac |
| By: | Jacobson, Tor; Kindell, Rikard; Lindé, Jesper; Roszbach, Kasper F. |
| Abstract: | This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a multiperiod logit approach on a panel data set for all incorporated Swedish businesses over 1990-2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms' relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level. |
| Keywords: | Business cycles; Default; Default-risk model; Logit model; Macroeconomic variables; Micro-data |
| JEL: | C35 C41 C52 E44 G21 G33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7083&r=mac |
| By: | Loening, Josef L. (World bank); Durevall, Dick (Department of Economics, School of Business, Economics and Law, Göteborg University); Ayalew Birru, Yohannes (University of Sussex) |
| Abstract: | Ethiopia has experienced a historically unprecedented increase in inflation, mainly driven by cereal price inflation, which is among the highest in Sub-Saharan Africa. Using monthly data over the past decade, we estimate error correction models to identify the relative importance of several factors contributing to overall inflation and its three major components, cereal prices, food prices and non-food prices. Our main finding is that, in the long run, domestic food and non-food prices are determined by the exchange rate and international food and goods prices. In the short to medium run, agricultural supply shocks and inflation inertia strongly affect domestic inflation, causing large deviations from long-run price trends. Money supply growth affects food price inflation in the short run, though excess money supply does not seem to drive inflation in the long run. Our results suggest a challenging time ahead for Ethiopia, with the need for a multipronged approach to fight inflation. Forecast scenarios suggest monetary and exchange rate policies need to take into account the cereal sector, as food staple growth is among the key determinants of inflation, assuming a decline in global commodity prices. Implementation of successful policies will be contingent on the availability of foreign exchange and the performance of agriculture.<p> |
| Keywords: | Agriculture; Cointegration analysis; Ethiopia; Exchange rate; Money demand; Food prices; Forecast; Inertia; Inflation |
| JEL: | E31 E37 E52 O55 |
| Date: | 2009–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0347&r=mac |
| By: | Ritschl, Albrecht; Sarferaz, Samad; Uebele, Martin |
| Abstract: | This paper reexamines U.S. business cycle volatility since 1867. We employ dynamic factor analysis as an alternative to reconstructed national accounts. We find a remarkable volatility increase across World War I, which is reversed after World War II. While we can generate evidence of postwar moderation relative to pre-1914, this evidence is not robust to structural change, implemented by time-varying factor loadings. However, we find moderation in the nominal series. Moreover, we reproduce the standard moderation since the 1980s. Our estimates confirm the NIPA data also for the 1930s but support alternative estimates of Kuznets (1952) for World War II. |
| Keywords: | dynamic factor analysis; U.S. business cycle; volatility |
| JEL: | C43 E32 N11 N12 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7069&r=mac |
| By: | Annicchiarico , Barbara; Piergallini, Alessandro |
| Abstract: | The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depends on whether monetary policy is active or passive. |
| Keywords: | Risk Premium on Foreign Debt; Taylor Rules; Exchange Rate Dynamics. |
| JEL: | F32 E52 F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13553&r=mac |
| By: | Guimarães, Bernardo; Sheedy, Kevin D. |
| Abstract: | A striking fact about prices is the prevalence of "sales": large temporary price cuts followed by a return exactly to the former price. This paper builds a macroeconomic model with a rationale for sales based on firms facing consumers with different price sensitivities. Even if firms can vary sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility of prices at the micro level due to sales does not translate into flexibility at the macro level. |
| Keywords: | monetary policy; nominal rigidities; sales |
| JEL: | E3 E5 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6940&r=mac |
| By: | Ansgar, Rannenberg |
| Abstract: | Unemployment in the big continental European economies like France and Germany has been substantially increasing since the mid 1970s. So far it has been difficult to empirically explain the increase in unemployment in these countries via changes in supposedly employment unfriendly institutions like the generosity and duration of unemployment benefits. At the same time, there is some evidence produced by Ball (1996, 1999) saying that tight monetary policy during the disinflations of the 1980s caused a subsequent increase in the NAIRU, and that there is a relationship between the increase in the NAIRU and the size of the disinflation during that period across advanced OECD economies. There is also mounting evidence suggesting a role of the slowdown in productivity growth, e.g. Nickell et al. (2005), IMF (2003), Blanchard and Wolfers (2000). This paper introduces endogenous growth via a capital stock externality into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to a cost push shock lasting for 1 quarter, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disinflation by following a standard interest feedback rule calibrated to an estimate of a Bundesbank reaction function. About 40 quarters after the shock has vanished, unemployment is still about 1.7 percentage points above its steady state, while annual productivity growth has decreased. Over the same horizon, a higher weight on the output gap increases employment (i.e. reduces the fall in employment below its steady state). Thus the model generates an increase in unemployment following a disinflation without relying on a change to labour market structure. We are also able to coarsely reproduce cross country differences in unemployment. A higher disinflation generated by a larger cost push shock causes a stronger persistent increase in unemployment, the correlation noted by Ball. For a given cost push shock, a policy rule estimated by Clarida, Gali and Gertler (1998) for the Bundesbank and the Federal Reserve Bank produces a stronger persistent increase in the case of the Bundesbank than of the Federal Reserve. Testable differences in real wage rigidity between continental Europe and the United States, namely, as pointed out by Blanchard and Katz (1999), the presence of the labour share in the wage setting function for Europe with a negative coefficient but it's absence in the U.S. also imply different unemployment outcomes following a cost push shock. If real wage growth does not depend on the labour share, the persistent increase in unemployment is about one percentage point smaller than when it does. To the extent that the wage setting structure is determined by labour market rigidities, "Shocks and Institutions" jointly determine the unemployment outcome, as suggested by Blanchard and Wolfers (2000). The calibration of unobservable model parameters is guided by a comparison of second moments of key variables of the model with Western German data. The endogenous growth model matches the moments better than a model without endogenous growth but otherwise identical features. This is particularly true for the persistence in employment as measured by first and higher order autocorrelation coefficients. |
| Keywords: | NAIRU; Endogenous Growth; Monetary Policy; European Unemployment |
| JEL: | O42 J64 E50 |
| Date: | 2009–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13610&r=mac |
| By: | Julián Messina; Chiara Strozzi; Jarkko Turunen |
| Abstract: | We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market. |
| Keywords: | Real Wages, Business Cycle, Dynamic Correlation, Labour Market Institutions |
| JEL: | E32 J30 C10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:028&r=mac |
| By: | Moscarini, Giuseppe; Postel-Vinay, Fabien |
| Abstract: | We provide new evidence that large firms or establishments are more sensitive than small ones to business cycle conditions. Larger employers shed proportionally more jobs in recessions and create more of their new jobs late in expansions, both in gross and net terms. The differential growth rate of employment between large and small firms varies by about 5% over the business cycle. Omitting cyclical indicators may lead to conclude that, on average, these cyclical effects wash out and size does not predict subsequent growth (Gibrat's law). We employ a variety of measures of relative employment growth, employer size and classification by size. We revisit two statistical fallacies, the Regression and Reclassification biases, that can affect our results, and we show empirically that they are quantitatively modest given our focus on relative cyclical behavior. We exploit a variety of (mostly novel) U.S. datasets, both repeated cross-sections and job flows with employer longitudinal information, starting in the mid 1970's and now spanning four business cycles. The pattern that we uncover is robust to different treatments of entry and exit of firms and establishments, and occurs within, not across broad industries, regions and states. Evidence on worker flows suggests that the pattern is driven at least in part by excess layoffs by large employers in and just after recessions, and by excess poaching by large employers late in expansions. We find the same pattern in similar datasets in four other countries, including full longitudinal censuses of employers from Denmark and Brazil. Finally, we sketch a simple firm-ladder model of turnover that can shed light on these facts, and that we analyze in detail in companion papers. |
| Keywords: | Business Cycle; Firm Size; Gibrat's Law; Job flows |
| JEL: | E24 E32 J21 J63 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7173&r=mac |
| By: | Menzio, Guido; Moen, Espen R |
| Abstract: | We consider a frictional labor market in which firms want to insure their senior employees against income fluctuations and, at the same time, want to recruit new employees to fill their vacant positions. Firms can commit to a wage schedule, i.e. a schedule that specifies the wage paid by the firm to its employees as function of their tenure and other observables. However, firms cannot commit to the employment relationship with any of their workers, i.e. firms can dismiss workers at will. We find that, because of the firm's limited commitment, the optimal schedule prescribes not only a rigid wage for senior employees, but also a downward rigid wage for new hires. Moreover, we find that, while the rigidity of the wage of senior workers does not affect the allocation of labor, the rigidity of the wage of new hires magnifies the response of unemployment and vacancies to negative shocks to the aggregate productivity of labor. |
| Keywords: | Business Cycles; Competitive Search; Risk Sharing; Unemployment |
| JEL: | E24 E32 J64 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7075&r=mac |
| By: | Frale, Cecilia; Marcellino, Massimiliano; Mazzi, Gian Luigi; Proietti, Tommaso |
| Abstract: | A continuous monitoring of the evolution of the economy is fundamental for the decisions of public and private decision makers. This paper proposes a new monthly indicator of the euro area real Gross Domestic Product (GDP), with several original features. First, it considers both the output side (six branches of the NACE classification) and the expenditure side (the main GDP components) and combines the two estimates with optimal weights reflecting their relative precision. Second, the indicator is based on information at both the monthly and quarterly level, modelled with a dynamic factor specification cast in state-space form. Third, since estimation of the multivariate dynamic factor model can be numerically complex, computational efficiency is achieved by implementing univariate filtering and smoothing procedures. Finally, special attention is paid to chain-linking and its implications, via a multistep procedure that exploits the additivity of the volume measures expressed at the prices of the previous year. |
| Keywords: | Chain-linking; Dynamic factor Models; euro area GDP; Kalman filter and smoother; Multivariate State Space Models; Temporal Disaggregation |
| JEL: | C53 E32 E37 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7007&r=mac |
| By: | Artis, Michael J; Okubo, Toshihiro |
| Abstract: | The paper uses annual data on real GDP for the UK regions and 12 manufacturing sectors to derive regional and regional/sectoral business cycles using an H-P filter. The cohesion of the cycles is examined via cross-correlations and comparisons made with the regional cycles for Japan, the United States and the EuroArea. The UK emerges as especially cohesive and efforts to explain the overall cross-correlations of regional GDP not very successful owing to the low variance of the explicand; when attention is turned to the sectoral/regional cycles, with their greater variance it is possible to demonstrate that economic variables such as distance, dissimilarity in structure and level of output play a significant role in explaining the variance in the cross-correlations. A significant feature of the cross-correlations in relation to those of EU countries is that whilst they continue to provide support for the “UK idiosyncrasy” they no longer do so as strongly as they did in earlier data samples. |
| Keywords: | Euro-sympathy; Hodrick-Prescott filter; income convergence; intranational business cycle; regional business cycles |
| JEL: | E32 E41 R11 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7152&r=mac |
| By: | Moscarini, Giuseppe (Yale University); Postel-Vinay, Fabien (University of Bristol) |
| Abstract: | We provide new evidence that large firms or establishments are more sensitive than small ones to business cycle conditions. Larger employers shed proportionally more jobs in recessions and create more of their new jobs late in expansions, both in gross and net terms. The differential growth rate of employment between large and small firms varies by about 5% over the business cycle. Omitting cyclical indicators may lead to conclude that, on average, these cyclical effects wash out and size does not predict subsequent growth (Gibrat’s law). We employ a variety of measures of relative employment growth, employer size and classification by size. We revisit two statistical fallacies, the Regression and Reclassification biases, that can affect our results, and we show empirically that they are quantitatively modest given our focus on relative cyclical behavior. We exploit a variety of (mostly novel) U.S. datasets, both repeated cross-sections and job flows with employer longitudinal information, starting in the mid 1970’s and now spanning four business cycles. The pattern that we uncover is robust to different treatments of entry and exit of firms and establishments, and occurs within, not across broad industries, regions and states. Evidence on worker flows suggests that the pattern is driven at least in part by excess layoffs by large employers in and just after recessions, and by excess poaching by large employers late in expansions. We find the same pattern in similar datasets in four other countries, including full longitudinal censuses of employers from Denmark and Brazil. Finally, we sketch a simple firm-ladder model of turnover that can shed light on these facts, and that we analyze in detail in companion papers. |
| Keywords: | job flows, firm size, business cycle, Gibrat's law |
| JEL: | J21 J63 E24 E32 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4014&r=mac |
| By: | Mackowiak, Bartosz Adam; Smets, Frank |
| Abstract: | We review the recent literature that studies new, detailed micro data on prices. We discuss implications of the new micro data for macro models. We argue that the new micro data are helpful for macro models, but not decisive. There is no simple mapping from the frequency of price changes in micro data to impulse responses of prices and quantities to shocks. We discuss ideas that promise to deliver macro models matching the impulse responses seen in macro data while being broadly in line with micro data. |
| Keywords: | micro price data; models of price setting; real effects of nominal shocks; sticky prices |
| JEL: | E3 E5 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6961&r=mac |
| By: | Agustín S. Bénétrix and Philip R. Lane |
| Abstract: | We study the short-run effects of shocks to government spending on Ireland’s output and its real exchange rate. We show that the impact of government spending shocks critically depend on the nature of the fiscal innovation. Our main finding is that there are important differences between shocks to public investment and shocks to government consumption. Moreover, within the latter category, shocks to the wage and non-wage components also have dissimilar effects. |
| Date: | 2009–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp281&r=mac |
| By: | Goggin, Jean (ESRI); Siedschlag, Iulia (ESRI) |
| Abstract: | This paper examines patterns and factors underlying the international transmission of business cycles between Ireland and its trading partners over the period 1980-2007. We estimate a model of simultaneous equations using a panel of cross–country annual data where trade integration, sectoral specialisation and financial integration are considered endogenous. Our results suggest that deeper trade and financial integration had strong direct positive effects on the synchronisation of Irish business cycles with its trading partners. Sectoral specialisation and national competitiveness differentials were sources of cyclical divergence. Sectoral specialisation had however an indirect positive effect on business cycle synchronisation via its positive effect on trade and financial integration. The adoption of the euro has led to more synchronised business cycles between Ireland and its euro area trading partners. |
| JEL: | E32 F41 F42 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp279&r=mac |
| By: | Corsetti, Giancarlo; Konstantinou, Panagiotis T |
| Abstract: | The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction. |
| Keywords: | Consumption Smoothing; Current Account; International Adjustment Mechanism; Intertemporal Approach to the Current Account; Net Foreign Wealth; Permanent-Transitory Decomposition |
| JEL: | C32 E21 F32 F41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7134&r=mac |
| By: | Magnusson, Kristin (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | The current economic slowdown in the United States and the decline in remittance growth to some Latin American countries have intensified the interest in the relationship between these variables. We investigate whether host country conditions affect remittance outflows to Latin America, focusing on the roles of regional U.S. business cycles, geographical variation in immigrant density and sectoral factors. Using quarterly data for 1995-2008, we find that remittance flows are strongly influenced by economic conditions in the specific regions of the U.S. where migrants are clustered, as well as in the sectors especially important for immigrants' employment opportunities. The results are in sharp contrast to previous research suggesting that remittance flows are relatively insensitive to fluctuations in the aggregate U.S. business cycle. Precise estimation of these linkages is also shown to matter for gauging the sensitivity of remittances to economic conditions in the home country, and hence the extent to which remittances might buffer domestic shocks as well as transmitting external ones. |
| Keywords: | Remittances; Business Cycles; Central America; Mexico; United States |
| JEL: | E32 F15 F22 F24 R11 |
| Date: | 2009–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0710&r=mac |
| By: | Burda, Michael C; Hamermesh, Daniel S |
| Abstract: | Using time-diary data from four countries we show that the unemployed spend most of the time not working for pay in additional leisure and personal maintenance, not in increased household production. There is no relation between unemployment duration and the split of time between household production and leisure. U.S. data for 2003-2006 show that almost none of the lower amount of market work in areas of long-term high unemployment is offset by additional household production. In contrast, in those areas where unemployment has risen cyclically reduced market work is made up almost entirely by additional time spent in household production. |
| Keywords: | household production; paid work; time use; unemployment |
| JEL: | D13 E24 J22 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7166&r=mac |
| By: | Jose Angelo Divino (Catholic University of Brasilia) |
| Abstract: | IPC One Pager 51 argued that inflation targeting has only slim prospects of success. This One Pager presents the findings of a recent empirical study of the impact of inflation targeting in a cross section of developing and emerging countries. The reasons usually given to justify adoption of this policy regime are transparency and credibility in monetary policy, the reduction of uncertainty, and implementation of the institutional and economic reforms required by the new regime. For developing and emerging countries, however, the economic benefits of inflation targeting are not yet well documented. (...) |
| Keywords: | What Impact Does Inflation Targeting Have on Unemployment? |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:opager:74&r=mac |
| By: | Polito, Vito; Wickens, Michael R |
| Abstract: | In this paper we propose a new way to formulate optimal policy based on a quadratic intertemporal welfare function where the dynamic constraint is based on a VAR model of the economy which we call the PVAR method. We argue that the VAR under control should not be derived simply by replacing the VAR equation for the policy instruments by an optimal control rule because this alters the stochastic structure of the VAR. Instead, one should first transform the VAR in order to condition the non-policy variables on the policy instruments, then use the resulting sub-system as the dynamic constraint, and finally construct the VAR under control by combining this sub-system with the resulting optimal policy rule. In this way the original stochastic structure of the VAR is retained. In comparing the two approaches we explain the theoretical advantages of the PVAR over the standard method and we illustrate the methods by examining the formulation of optimal monetary policy for the US. We suggest that since the whole process is easily automated, the PVAR method may provide a useful benchmark for use in real time against which to compare other, probably far more labour intensive, policy choices. |
| Keywords: | monetary policy; optimal control; VAR models |
| JEL: | C2 C6 E5 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6957&r=mac |
| By: | Alan S. Blinder (Princeton University); Jeremy B. Rudd (Federal Reserve Board) |
| Abstract: | U.S. inflation data exhibit two notable spikes into the double-digit range in 1973-1974 and again in 1978-1980. The well-known “supply-shock” explanation attributes both spikes to large food and energy shocks plus, in the case of 1973-1974, the removal of price controls. Yet critics of this explanation have (a) attributed the surges in inflation to monetary policy and (b) pointed to the far smaller impacts of more recent oil shocks as evidence against the supply-shock explanation. This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century. We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago. We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes. Finally, we examine several changes in the economy that may explain why the impacts of oil shocks are so much smaller now than they were in the 1970s. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1097&r=mac |
| By: | Kozo Ueda (Institute for Monetary and Economic Studies, Deputy Director and Bank of Japan (Email: kouzou.ueda boj.or.jp)) |
| Abstract: | We construct a simple model in which a central bank communicates with money market traders. We demonstrate that there exist multiple equilibria. In one equilibrium, traders truthfully reveal their own information, and by learning this, the central bank can make better forecasts. Another equilibrium is a gdog-chasing-its-tailh equilibrium in Blinder (1998). Traders mimic the central bankfs forecast, so the central bank simply observes its own forecast from traders. The latter equilibrium is socially worse in that inflation variability becomes larger. We also demonstrate that too high transparency of central banks is bad because it yields the gdog-chasing-its-tailh equilibrium, and that central banks should conduct continuous monitoring or emphasize that their forecasts are conditional because doing so eliminates the gdog- chasing-its-tailh equilibrium. |
| Keywords: | Transparency, disclosure, coordination |
| JEL: | C72 D83 E52 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-05&r=mac |
| By: | Artis, Michael J; Okubo, Toshihiro |
| Abstract: | The paper uses long-run GDP data for developed countries drawn from Maddison (2003) to generate deviation cycles for the period from 1870 to 2001. The cyclical deviates are examined for their bilateral cross-correlation values in three separate periods, those of the first globalization wave (1870 to 1914), the period of the “bloc economy” (1915 to 1959) and for the period of the second globalization (1960-2001). Cluster analysis is applied and the McNemar test is used to test for the relative coherence of alternative groupings of countries in the three periods. The bloc economy period emerges as one that features some well-defined sub-global clusters, where the second globalization period does not, the first globalization period lying between the two in this respect. The second globalization period shows a generally higher level of cross correlations and a lower variance than the other two periods. The features uncovered suggest that the second globalization period is indeed one that comprises a more inclusive world economy than ever before. |
| Keywords: | bloc economy; business cycle; cluster analysis; globalization; McNemar Test |
| JEL: | E32 F0 F15 F41 N10 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7041&r=mac |
| By: | Bertrand Gruss; Silvia Sgherri |
| Abstract: | The ongoing financial turmoil has triggered a lively debate on ways of containing systemic risk and lessening the likelihood of future boom-and-bust episodes in credit markets. Particularly, it has been argued that banking regulation might attenuate procyclicality in lending standards by affecting the behavior of banks capital buffers. This paper uses a two-country DSGE model with financial frictions to illustrate how procyclicality in borrowing limits reinforces the ”overreaction” of asset prices to shocks described by Aiyagari and Gertler (1999), and to quantify the stabilization gains from policies aimed at smoothing cyclical swings in credit conditions. Results suggest that, in financially constrained economies, the ensuing volatility reduction in equity prices, investment, and external imbalances would be sizable. In the presence of cross-border spillovers, gains would be even higher. |
| Keywords: | Credit Cycles; Collateral Constraints; DSGE Models |
| JEL: | E32 F42 F36 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/07&r=mac |
| By: | Robert J. Barro; Jose Ursua |
| Abstract: | Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events - the Great Depression 1929-33 and the post-WWI years 1917-21, likely driven by the Great Influenza Epidemic. 45% of the matched cases are associated with war, and the two world wars are prominent. Conditional on a stock-market crash, the probability of a minor depression (macroeconomic decline of at least 10%) is 30% and of a major depression (at least 25%) is 11%. In a non-war environment, these probabilities are lower but still substantial - 20% for a minor depression and 3% for a major depression. Thus, the stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression. In reverse, the probability of a stock-market crash is 69%, conditional on a depression of 10% or more, and 91% for 25% or more. Thus, the largest depressions are particularly likely to be accompanied by stock-market crashes, and this finding applies equally to non-war and war events. We allow for flexible timing between stock-market crashes and depressions for the 58 matched cases to compute the covariance between stock returns and an asset-pricing factor, which depends on the proportionate decline of consumption during a depression. If we assume a coefficient of relative risk aversion around 3.5, this covariance is large enough to account in a familiar looking asset-pricing formula for the observed average (levered) equity premium of 7% per year. This finding complements previous analyses that were based on the probability and size distribution of macroeconomic disasters but did not consider explicitly the covariance between macroeconomic declines and stock returns. |
| JEL: | E01 E21 E23 E44 G12 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14760&r=mac |
| By: | Reinhart, Carmen; Rogoff, Kenneth |
| Abstract: | The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark’s financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States. Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike. |
| Keywords: | bail out; banking; crisis; debt; equity prices; house prices |
| JEL: | E6 F3 N10 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7131&r=mac |
| By: | Reinhart, Carmen; Felton, Andrew |
| Abstract: | This book is a selection of VoxEU.org columns that deal with the ongoing global financial crisis. VoxEU.org is a portal for research-based policy analysis and commentary written by leading economists. It was launched in June 2007 with the aim of enriching the economic policy debate by making it easier for serious researchers to contribute and to make their contributions more accessible to the public. |
| Keywords: | financial crisis monetary policy bank failures |
| JEL: | F42 E5 F41 E6 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13604&r=mac |
| By: | Jean-Marie Dufour; Lynda Khalaf; Maral Kichian |
| Abstract: | Using identification-robust methods, the authors estimate and evaluate for Canada and the United States various classes of inflation equations based on generalized structural Calvo-type models. The models allow for different forms of frictions and vary in their assumptions regarding the type of price indexation adopted by firms. Point and confidence-set parameter estimates are obtained based on the inversion of identification-robust test statistics. Focus is maintained on the structural aspect of the model with formal imposition of the restrictions that map the theoretical model into the econometric one. The results show that there is some statistical merit to using indexation-based Calvo-type models for inflation. However, some identification difficulties are also uncovered with considerable uncertainty associated with estimated parameter values. In particular, we find that implausibly-high frequency of price re-optimization values cannot be ruled out from our identification-robust confidence sets. |
| Keywords: | Inflation and prices; Econometric and statistical methods |
| JEL: | C13 C52 E31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-7&r=mac |
| By: | Davide Furceri (OECD and University of Palermo); Ricardo M. Sousa (Universidade do Minho - NIPE) |
| Abstract: | The aim of this paper is to analyze the impact of government spending on the private sector, assessing the existence of crowding-out versus crowding-in effects. Using a panel of 145 countries from 1960 to 2007, the results suggest that government spending produces important crowding-out effects, by negatively affecting both private consumption and investment. Moreover, while the effects do not seem to depend on the different phases of economic cycle, they vary considerably among regions. The results are economically and statiscally significant, and robust to several econometic techniques. |
| Keywords: | Fiscal Policy, Government Spending, Crowding-out, Crowding-in. |
| JEL: | E0 E6 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:6/2009&r=mac |
| By: | Fernández-Villaverde, Jesús |
| Abstract: | In this paper, I review the literature on the formulation and estimation of dynamic stochastic general equilibrium (DSGE) models with a special emphasis on Bayesian methods. First, I discuss the evolution of DSGE models over the last couple of decades. Second, I explain why the profession has decided to estimate these models using Bayesian methods. Third, I briefly introduce some of the techniques required to compute and estimate these models. Fourth, I illustrate the techniques under consideration by estimating a benchmark DSGE model with real and nominal rigidities. I conclude by offering some pointers for future research. |
| Keywords: | Bayesian Methods; DSGE Models; Likelihood Estimation |
| JEL: | C11 C13 E30 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7157&r=mac |
| By: | Matthew D. Shapiro; Joel B. Slemrod |
| Abstract: | Only one-fifth of respondents to a rider on the University of Michigan Survey Research Center’s Monthly Survey said that the 2008 tax rebates would lead them to mostly increase spending. Almost half said the rebate would mostly lead them to pay off debt, while about a third saying it would lead them mostly to save more. The survey responses imply that the aggregate propensity to spend from the rebate was about one-third, and that there would not be substantially more spending as a lagged effect of the rebates. Because of the low spending propensity, the rebates in 2008 provided low “bang for the buck†as economic stimulus. Putting cash into the hands of the consumers who use it to save or pay off debt boosts their well-being, but it does not necessarily make them spend. Low-income individuals were particularly likely to use the rebate to pay off debt. |
| JEL: | E21 E62 E65 H31 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14753&r=mac |
| By: | Kilian, Lutz; Vega, Clara |
| Abstract: | Models that treat innovations to the price of energy as predetermined with respect to U.S. macroeconomic aggregates are widely used in the literature. For example, it is common to order energy prices first in recursively identified VAR models of the transmission of energy price shocks. Since exactly identifying assumptions are inherently untestable, this approach in practice has required an act of faith in the empirical plausibility of the delay restriction used for identification. An alternative view that would invalidate such models is that energy prices respond instantaneously to macroeconomic news, implying that energy prices should be ordered ast in recursively identified VAR models. In this paper, we propose a formal test of the identifying assumption that energy prices are predetermined with respect to U.S. macroeconomic aggregates. Our test is based on regressing cumulative changes in daily energy prices on daily news from U.S. macroeconomic data releases. Using a wide range of macroeconomic news, we find no compelling evidence of feedback at daily or monthly horizons, contradicting the view that energy prices respond instantaneously to macroeconomic news and supporting the use of delay restrictions for identification. |
| Keywords: | Gasoline price; Identification; Impulse responses; News; Oil price |
| JEL: | C32 E37 Q43 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7015&r=mac |
| By: | Buiter, Willem H |
| Abstract: | A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing and those short housing and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run. |
| Keywords: | house prices; speculative bubbles; wealth effect |
| JEL: | E2 E3 E5 E6 G1 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6920&r=mac |
| By: | Eduardo Lora |
| Abstract: | El éxito de un pacto fiscal se mide por el grado en que incorpore a los diversos grupos sociales en las discusiones, el cumplimiento y la vigilancia de ciertos acuerdos sobre la forma como se financia el Estado y se utilizan los recursos públicos. Partiendo de los factores políticos que pueden explicar las estructuras fiscales de América Latina, este artículo muestra la necesidad de alcanzar pactos fiscales, discute los incentivos que influyen en su viabilidad y propone prioridades de política fiscal y de reforma institucional para mejorar sus posibilidades de éxito. |
| Keywords: | Pacto fiscal, política fiscal, economía política, sistemas políticos, América Latina |
| JEL: | E62 H61 P16 N46 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4614&r=mac |
| By: | Aurelien Saidi |
| Abstract: | This paper makes use of optimal control relaxed problems to prove the absence of optimal trajectory in continuous time models with social increasing returns to scale where indeterminacy occurs. Although an efficient optimal policy does not exist, some chattering stabilization policies can mimic trajectories whose criterion functional approximates the supremum of the relaxed problem. This configuration is closely related to indeterminacy: by contrast, when the steady state is determined, an optimal policy is likely to exist. |
| Keywords: | Increasing returns, Indeterminacy, Stabilization policy, Relaxed problems |
| JEL: | C61 C62 E32 E6 H61 O4 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/01&r=mac |
| By: | Viktors Ajevskis; Kristine Vitola |
| Abstract: | This paper develops a convergence model of the term structure of interest rates in the context of entering the EMU. Compared with the other models developed so far in this field, our model specification ensures convergence of the domestic short-term interest rates to the euro area ones. We achieve this convergence by stating that the spread between the domestic and euro short-term interest rates follows the Brownian bridge process. We also develop an econometric counterpart of the theoretical model. To address the problem of nonstationarity and nonlinearity of the model, the extended Kalman filter for coefficient estimation is applied. |
| Keywords: | term structure of interest rates, the Brownian bridge, the EMU, nonlinear Kalman filter |
| JEL: | E43 F36 G12 G15 |
| Date: | 2009–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:200901&r=mac |
| By: | Michio Suzuki (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: michio.suzuki@boj.or.jp)) |
| Abstract: | The purpose of this paper is to study whether trade frictions in durable goods markets help account for the patterns of household consumption expenditures observed in the Consumer Expenditure Survey (CEX), namely that the response of durable goods expenditures to income shocks is 78 percent larger than that of nondurable goods and the variance of the idiosyncratic part of log durable goods expenditures is four times as high as that of log nondurable goods expenditures. To do so, I develop a model with a continuum of households that purchase durable as well as nondurable goods. The key assumption is that durable goods cannot be rented or sold after purchase. By comparing stationary distributions of the model with and without trade frictions, I find that trade frictions are crucial in accounting for the expenditure patterns observed in the data. |
| Keywords: | Durable Goods, Irreversibility, Consumption Insurance |
| JEL: | E21 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-04&r=mac |
| By: | Vladimir Kuzin; Massimiliano Marcellino; Christian Schumacher |
| Abstract: | This paper discusses pooling versus model selection for now- and forecasting in the presence of model uncertainty with large, unbalanced datasets. Empirically, unbalanced data is pervasive in economics and typically due to di¤erent sampling frequencies and publication delays. Two model classes suited in this context are factor models based on large datasets and mixed-data sampling (MIDAS) regressions with few predictors. The specification of these models requires several choices related to, amongst others, the factor estimation method and the number of factors, lag length and indicator selection. Thus, there are many sources of mis-specification when selecting a particular model, and an alternative could be pooling over a large set of models with di¤erent specifications. We evaluate the relative performance of pooling and model selection for now- and forecasting quarterly German GDP, a key macroeconomic indicator for the largest country in the euro area, with a large set of about one hundred monthly indicators. Our empirical findings provide strong support for pooling over many speci.cations rather than selecting a specific model. |
| Keywords: | nowcasting, forecast combination, forecast pooling, model selection, mixed-frequency data, factor models, MIDAS |
| JEL: | E37 C53 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/13&r=mac |
| By: | Acharya, Viral V; Gromb, Denis; Yorulmazer, Tanju |
| Abstract: | We study liquidity transfers between banks through the interbank borrowing and asset sale markets when (i) surplus banks providing liquidity have market power, (ii) there are frictions in the lending market due to moral hazard, and (iii) assets are bank-specific. We show that when the outside options of needy banks are weak, surplus banks may strategically under-provide lending, thereby inducing inefficient sales of bank-specific assets. A central bank can ameliorate this inefficiency by standing ready to lend to needy banks, provided it has greater information about banks (e.g., through supervision) compared to outside markets, or is prepared to extend loss- making loans. The public provision of liquidity to banks, in fact its mere credibility, can thus improve the private allocation of liquidity among banks. This rationale for central banking finds support in historical episodes preceding the modern era of central banking and has implications for recent debates on the supervisory and lender-of-last-resort roles of central banks. |
| Keywords: | Asset specificity; Central bank; Competition; Interbank lending; Lender of last resort; Market power |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6984&r=mac |
| By: | Bing Li (Indiana University Bloomington) |
| Abstract: | To estimate a single-equation scal policy rule by Ordinary Least Squares (OLS) method has been one of the common approaches to identify scal policy behavior. However, OLS regression on the scal policy rule is subject to simultaneity bias because the scal rule is isolated from a system of equations implied by general equilibrium theory. This paper investigates the simultaneity bias problem within a simple Dynamic Stochastic General Equilibrium (DSGE) model. We derive the analytical form of the simultaneity bias, which turns out to extensively exist in the parameter space. Consequently, structural interpretation of the OLS estimator of the scal policy rule may be misleading and the corresponding identication of scal policy behavior may be unreliable. We calibrate the model to the U.S. data and use Monte Carlo experiments for illustration. The simultaneity bias problem examined here is inherent in general equilibrium framework, which should call for extra caution of the empirical macroeconomists. |
| JEL: | E62 H2 H3 H6 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2008-026&r=mac |
| By: | Blanchard, Olivier J; Cottarelli, Carlo; Spilimbergo, Antonio; Symansky, Steven |
| Abstract: | The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy. The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers. |
| Keywords: | financial crisis; fiscal stimulus |
| JEL: | E60 H30 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7130&r=mac |
| By: | Eduardo Lora |
| Abstract: | La estabilización de las economías y una transformación profunda pero silenciosa de las instituciones ocurrieron en forma paralela en América Latina en las últimas décadas. Este artículo analiza los canales de influencia de los cambios de las instituciones fiscales y de los sistemas políticos en los resultados fiscales, en la inflación y en la probabilidad de ocurrencia y costos de las crisis bancarias. Aunque la fragmentación del poder político tendió a debilitar la disciplina fiscal, las reformas de las instituciones fiscales corrigieron esa tendencia. La mayor competencia política y las restricciones al poder del Ejecutivo hicieron posible el éxito de los bancos centrales independientes, mitigaron algunos canales de riesgo de crisis bancarias y redujeron los costos de largo plazo de dichas crisis. Por consiguiente, los sistemas políticos merecen buena parte del mérito de la estabilización. |
| Keywords: | instituciones fiscales, instituciones monetarias, crisis bancarias, sistemas políticos, fragmentación política |
| JEL: | E58 E62 G28 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4615&r=mac |
| By: | Clayton, Tony; Dal Borgo, Mariela; Haskel, Jonathan |
| Abstract: | We (a) propose an implementable innovation index, (b) relate it to existing innovation definitions and (c) show whole-economy and industry-specific results for the UK market sector, 2000-2005. Our innovation measure starts by observing that we could get more GDP without innovation by simply duplicating existing physical capital and labour (e.g. adding a second aircraft and crew on an existing route). Thus we propose to measure innovation as the additional GDP over and above the addition existing physical capital and labour. In our measure this is the contribution to GDP growth of market sector investment in knowledge (or intangible) capital. This contribution is measured from company spending on knowledge/intangible assets and TFP growth. We relate our measure to the literature on innovation definitions, TFP, creative industries and hidden innovation. We implement it for six UK market sector industries, 2000-2005, combining with output and tangible investment data from the EUKLEMS database. Our main findings are as follows. Over 2000-2005, market sector labour productivity grew at 2.74% per annum, of which the contribution of knowledge capital, our innovation measure, was 1.24% pa. In turn, manufacturing accounted for about 60% of this latter figure. If one includes increase in labour skill deepening (0.45% pa) as innovation, then innovation contributed 61% (=(1.24+0.45)/2.74)of labour productivity growth over the period. |
| Keywords: | innovation; productivity growth |
| JEL: | E01 E22 O47 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7158&r=mac |
| By: | Marzo, Massimiliano (Università di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | This note reconsiders the impact of the reform of the operational framework of the European Central Bank that took place in March 2004. We estimate a bivariate GARCH model with the overnight rate and 1-year swap rate, where identifying restrictions are imposed on the conditional variance. Differently from previous studies, we use a measure of structural correlation to show that the 1-year swap segment has decoupled from the overnight rate as the two rates do not co-vary any longer. |
| Keywords: | Money Market; Multivariate GARCH; Structural Identification |
| JEL: | C22 E58 |
| Date: | 2009–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0008&r=mac |
| By: | Clayton, Tony (Office of National Statistics); Dal Borgo, Mariela (University of Warwick); Haskel, Jonathan (Imperial College London) |
| Abstract: | We (a) propose an implementable innovation index, (b) relate it to existing innovation definitions and (c) show whole-economy and industry-specific results for the UK market sector, 2000-2005. Our innovation measure starts by observing that we could get more GDP without innovation by simply duplicating existing physical capital and labour (e.g. adding a second aircraft and crew on an existing route). Thus we propose to measure innovation as the additional GDP over and above the addition existing physical capital and labour. In our measure this is the contribution to GDP growth of market sector investment in knowledge (or intangible) capital. This contribution is measured from company spending on knowledge/intangible assets and TFP growth. We relate our measure to the literature on innovation definitions, TFP, creative industries and hidden innovation. We implement it for six UK market sector industries, 2000-2005, combining with output and tangible investment data from the EUKLEMS database. Our main findings are as follows. Over 2000-2005, market sector labour productivity grew at 2.74% per annum, of which the contribution of knowledge capital, our innovation measure, was 1.24% pa. In turn, manufacturing accounted for about 60% of this latter figure. If one includes increase in labour skill deepening (0.45% pa) as innovation, then innovation contributed 61% (=(1.24+0.45)/2.74)of labour productivity growth over the period. |
| Keywords: | innovation, productivity growth |
| JEL: | O47 E22 E01 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4021&r=mac |
| By: | Arvate, Paulo; Avelino, George; Tavares, José |
| Abstract: | Several authors claim that voters in new democracies reward deficits at the polls and this fact is due to a lack of 'voter sophistication'. We test this claim for gubernatorial elections in Brazil, an important case study since it is the fourth most populous democracy in the world, displays a high variance in economic and social characteristics across states, and effectively imposes mandatory voting. Our evidence shows that voters are fiscally conservative, that is, they reward lower deficits, which is in contradiction to the literature. We do find that, when we use state income per capita, education and income inequality as proxies for 'voter sophistication', 'naïve' voters do not reward low deficits as opposed to 'sophisticated' voters, and education is the key element for this distinction. We propose that education rather than the youth of the democracy, is the key element for assessing voter 'sophistication'. |
| Keywords: | Budget Deficits; Elections; Fiscal Conservatism; Political Cycles |
| JEL: | D72 E62 H72 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6931&r=mac |
| By: | Bertocchi, Graziella; Brunetti, Marianna; Torricelli, Costanza |
| Abstract: | We study the joint impact of gender and marital status on financial decisions. First, we test the hypothesis that marriage represents - in a portfolio framework - a sort of safe asset, and that this effect is stronger for women. Controlling for a number of observable characteristics, we show that single women have a lower propensity to invest in risky assets than married females and males. Second, we show that the differential behavior of single women evolves over time, reflecting the increasing incidence of divorce and the expansion of female labor market participation. In particular, towards the end of our sample period, we observe a reduction in the gap between women with different family status, which can be attributed to the gradual erosion of the perception of marriage as a sort of safe asset. Our results therefore suggest that the differential behavior of single vs. married women can be explained by the evolution of gender roles in society, even after controlling for differential risk attitudes. Our empirical investigation is based on a dataset drawn from the 1989-2006 Bank of Italy Survey of Household Income and Wealth. |
| Keywords: | divorce; labor force participation; marriage; Portfolio choice |
| JEL: | E21 G11 J12 J21 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7162&r=mac |
| By: | Andrea de Michelis |
| Abstract: | The global financial crisis that emerged in mid 2007 has caused considerable economic disruptions in the United States and elsewhere, and exposed major flaws in the global financial system. After examining the origins of the crisis, this paper recommends specific policy responses to resolve the immediate problems and discusses how to make the US financial system more resilient and stable in the future.<P>Surmonter la crise financière<BR>La crise financière qui a éclaté à la mi-2007 a provoqué des perturbations économiques considérables aux États-Unis et ailleurs, et révélé des failles majeures dans le système financier mondial. Après une analyse des origines de la crise, ce chapitre préconise des réponses spécifiques pour résoudre les problèmes immédiats et étudie les moyens de rendre le système financier des États-Unis plus résilient et plus stable dans l’avenir. |
| Keywords: | United States, États-Unis, surveillance prudentielle, financial regulation, financial crisis, crise financière, deleveraging, housing finance, financement du logement, financial supervision, réglementation des marchés financiers, market stability regulator, securitisation, subprime mortgage, autorité de contrôle pour la stabilité des marchés financiers, crédit hypothécaire à risques, réduction de l’effet de levier, titrisation |
| JEL: | E44 G20 G21 G28 R21 |
| Date: | 2009–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:669-en&r=mac |
| By: | Graziella Bertocchi; Marianna Brunetti; Costanza Torricelli |
| Abstract: | We study the joint impact of gender and marital status on financial decisions. First, we test the hypothesis that marriage represents - in a portfolio framework - a sort of safe asset, and that this effect is stronger for women. Controlling for a number of observable characteristics, we show that single women have a lower propensity to invest in risky assets than married females and males. Second, we show that the differential behavior of single women evolves over time, reflecting the increasing incidence of divorce and the expansion of female labor market participation. In particular, towards the end of our sample period, we observe a reduction in the gap between women with different family status, which can be attributed to the gradual erosion of the perception of marriage as a sort of safe asset. Our results therefore suggest that the differential behavior of single vs. married women can be explained by the evolution of gender roles in society, even after controlling for differential risk attitudes. Our empirical investigation is based on a dataset drawn from the 1989-2006 Bank of Italy Survey of Household Income and Wealth. |
| Keywords: | Portfolio choice, marriage, divorce, labor force participation |
| JEL: | G11 E21 J12 J21 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:030&r=mac |
| By: | Persson, Torsten; von Below, David |
| Abstract: | The paper illustrates how one may assess our comprehensive uncertainty about the various relations in the entire chain from human activity to climate change. Using a modified version of the RICE model of the global economy and climate, we perform Monte Carlo simulations, where full sets of parameters in the model's most important equations are drawn randomly from pre-specified distributions, and present results in the forms of fan charts and histograms. Our results suggest that under a Business-As-Usual scenario, the median increase of global mean temperature in 2105 relative to 1900 will be around 4.5 °C. The 99 percent confidence interval ranges from 3.0 °C to 6.9 °C. Uncertainty about socio-economic drivers of climate change lie behind a non-trivial part of this uncertainty about global warming. |
| Keywords: | Climate-economy models; Global warming; Monte Carlo study |
| JEL: | E17 O13 Q54 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7024&r=mac |
| By: | Pesaran, M Hashem; Pick, Andreas; Timmermann, Allan G |
| Abstract: | This paper conducts a broad-based comparison of iterated and direct multi-step forecasting approaches applied to both univariate and multivariate models. Theoretical results and Monte Carlo simulations suggest that iterated forecasts dominate direct forecasts when estimation error is a first-order concern, i.e. in small samples and for long forecast horizons. Conversely, direct forecasts may dominate in the presence of dynamic model misspecification. Empirical analysis of the set of 170 variables studied by Marcellino, Stock and Watson (2006) shows that multivariate information, introduced through a parsimonious factor-augmented vector autoregression approach, improves forecasting performance for many variables, particularly at short horizons. |
| Keywords: | factor-augmented VAR; forecast horizon; macroeconomic forecasting |
| JEL: | C53 E27 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7139&r=mac |
| By: | Kitov, Ivan |
| Abstract: | Headline CPI, core CPI, and indices for various small expenditure categories were analyzed. Sustainable long-term linear trends have been found in the difference between the headline CPI and these indices. Overall, the results completely support our previous findings for such principal categories as energy, food, housing, etc. One should return to relative price of apples and oranges in order to explain these linear trends in terms of the mainstream economics. |
| Keywords: | CPI; core CPI; expenditure categories; price index |
| JEL: | G12 E31 D40 E37 |
| Date: | 2009–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13587&r=mac |
| By: | Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier |
| Abstract: | In this paper we argue that the persistent global imbalances, the subprime crisis, and the volatile oil and asset prices that followed it, are tightly interconnected. They all stem from a global environment where sound and liquid financial assets are in scarce supply. Our story goes as follows: Global asset scarcity led to large capital flows toward the U.S. and to the creation of asset bubbles that eventually crashed. The crash in the real estate market was particularly complex from the point of view of asset shortages since it compromised the whole financial sector, and by so doing, closed many of the alternative saving vehicles. Thus, in its first phase, the crisis exacerbated the shortage of assets in the world economy, which triggered a partial recreation of the bubble in commodities and oil markets in particular. The latter led to an increase in petrodollars seeking financial assets in the U.S. Thus, rather than the typical destabilizing role played by capital outflows during financial crises, petrodollar flows became a source of stability for the U.S. The second phase of the crisis is more conventional and began to emerge toward the end of the summer of 2008. It became apparent then that the financial crisis would permeate the real economy and sharply slow down global growth. This slowdown worked to reverse the tight commodity market conditions required for a bubble to develop, ultimately destroying the commodity bubble. |
| JEL: | E0 F3 F4 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7064&r=mac |
| By: | Acharya, Viral V |
| Abstract: | Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a bank’s own risk fail to mitigate aggregate risk-shifting incentives, and can, in fact, accentuate systemic risk. Prudential regulation is shown to operate at a collective level, regulating each bank as a function of both its joint (correlated) risk with other banks as well as its individual (bank-specific) risk. |
| Keywords: | Bank regulation; Capital adequacy; Crisis; Risk-shifting; Systemic risk |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7164&r=mac |
| By: | Besley, Timothy J.; Meads, Neil; Surico, Paolo |
| Abstract: | This paper uses mortgage data to construct a measure of terms on which households access to external finance, and relates it to consumption at both the aggregate and cohort levels. The Household External Finance (HEF) index is based on the spread paid by risky borrowers in the mortgage market. There is evidence that the terms of access to external finance matter more for the consumption of young cohorts in U.K. data. Results are robust to a wide variety of specifications. |
| Keywords: | birth cohorts; external finance; household consumption; pseudo panels; terms of access |
| JEL: | D10 E21 G21 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6934&r=mac |
| By: | Niepelt, Dirk |
| Abstract: | I analyze how lack of commitment affects the maturity structure of sovereign debt. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short- versus long-term debt affects default and rollover decisions by subsequent policy makers. The equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that reflect the price impact of these decisions. The model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high, output low, or a cross default more likely. These predictions are consistent with empirical evidence. |
| Keywords: | debt; default; maturity structure; no commitment |
| JEL: | E62 F34 H63 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7093&r=mac |
| By: | Thesmar, David; Thoenig, Mathias |
| Abstract: | Over the past decades, the real and financial volatility of listed firms has increased, while the volatility of private firms has decreased. We first provide panel data evidence that, at the firm level, sales and employment volatility are impacted by changes in the degree of ownership concentration. We then construct a model with private and listed firms where risk taking is a choice variable at the firm-level. Due to general equilibrium feedback, we find that an increase in stock market participation or integration in international capital markets generate opposite trends in volatility for private and listed firms. This pattern cannot be replicated by alternative comparative statics exercises, such as an increase in product market competition, an increase in product market size, an increase in the fraction of listed firms, or a decrease in aggregate volatility. |
| Keywords: | Financial Integration; Firm-level Volatility; Listed vs non-listed Firms; Stockmarket Participation |
| JEL: | E44 F41 G32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7135&r=mac |
| By: | Campos, Nauro F; Karanasos, Menelaos; Tan, Bin |
| Abstract: | This paper investigates the effects of financial development and political instability on economic growth in a power-ARCH framework with data for Argentina from 1896 to 2000. Our findings suggest that (i) informal or unanticipated political instability (e.g., guerrilla warfare) has a direct negative impact on growth; (ii) formal or anticipated instability (e.g., cabinet changes) has an indirect (through volatility) impact on growth; (iii) the effect of financial development is positive and, surprisingly, not via volatility; (iv) the informal instability effects are much larger in the short- than in the long-run; and (v) the impact of financial development on economic growth is negative in the short- but positive in the long-run. |
| Keywords: | economic growth; financial development; political instability; power-ARCH; volatility |
| JEL: | C14 D72 E23 O40 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7004&r=mac |
| By: | Andersen, Torben M |
| Abstract: | Approaching demographic shifts are raising concerns about fiscal sustainability in most OECD countries. A widespread view based on the tax-smoothing idea is that a prior consolidation of public finances is required to cope with the predicted trend deterioration in the primary budget balance. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed. It is argued that the smoothing argument cannot unconditionally be applied to the demographic problem. It is important to distinguish between increases in the dependency ratio driven by changes in fertility and longevity. For the former the smoothing argument may be appropriate, but not for the latter. In the case of longevity, a trade-off between consolidation and increasing retirement ages becomes relevant, and there are strong arguments why the latter should be pursued by e.g. linking retirement ages to longevity. |
| Keywords: | fertility; fiscal sustainability; longevity; Tax smoothing |
| JEL: | E60 H50 J11 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7044&r=mac |
| By: | Piero Gottardi; Felix Kubler |
| Abstract: | In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with many calibrations of the model used in the literature. In our model financial markets are complete and competitive equilibria are interim Pareto e¢ cient. Therefore, a welfare improvement can only be obtained if agents' welfare is evaluated exante, and arises from the possibility of inducing, through social security, an improved level of intergenerational risk sharing. We will also examine the optimal size of a given social security system as well as its optimal reform. The analysis will be carried out in a relatively simple set-up, where the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can be clearly identified. |
| Keywords: | Intergenerational Risk Sharing, Social Security, Ex Ante Welfare Improvements, Social Security Reform, Price E¤ects |
| JEL: | H55 E62 D91 D58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/12&r=mac |
| By: | Chen, Natalie; Graham, Liam; Oswald, Andrew |
| Abstract: | Nearly all post-war recessions were preceded by oil-price shocks, but is this because spikes in the price of oil cause economic downturns? At the heart of this question lies an identification problem: oil prices and the state of the world economy are endogenously determined. This paper uses terrorist incidents as an instrumental variable. In an international panel of industries, we show that, after correction for simultaneity bias -- though not before -- the price of oil has large negative effects upon profitability. We test for weak instruments and check sub-sample robustness. Our findings seem to lend support to the claim that oil-price spikes can be a source of recessions. |
| Keywords: | Energy prices; Industries; Oil shocks; Profitability |
| JEL: | E3 L6 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6937&r=mac |
| By: | Miles S. Kimball; Claudia R. Sahm; Matthew D. Shapiro |
| Abstract: | Survey measures of preference parameters provide a means for accounting for otherwise unobserved heterogeneity.This paper presents measures of relative risk tolerance based on responses to survey questions about hypothetical gambles over lifetime income.It discusses how to impute estimates of utility function parameters from the survey responses using a statistical model that accounts for survey response error. There is substantial heterogeneity in true preference parameters even after survey response error is taken into account.The paper discusses how to use the preference parameters imputed from the survey responses in regression models as a control for differences in preferences across individuals. This paper focuses on imputations for respondents in the Panel Study of Income Dynamics (PSID).It also studies the covariation of risk preferences among members of households.It finds fairly strong covariation in attitudes about risk -- between parents and children and especially between siblings and between spouses. |
| JEL: | C42 D12 D81 E21 J12 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14754&r=mac |
| By: | Strulik, Holger |
| Abstract: | This paper proposes a theory for the evolution of knowledge diffusion and growth over the very long run. A feedback mechanism between capital accumulation and knowledge spillovers creates a unified growth theory that explains a long epoch of (quasi-) stasis and an epoch of high growth linked by gradual economic take-off. It is shown how the feedback mechanism can explain the Great Divergence, the failure of less developed countries to attract capital from abroad, the productivity slowdown in fully developed countries, and why R&D effort, TFP growth, and income growth are jointly rising along the transition towards modern growth. Finally, it is explained how a First Industrial Revolution, brought forth by increasing propositional knowledge, triggered a Second Industrial Revolution from which onwards technological progress was increasingly produced by market R&D activities. |
| Keywords: | Endogenous Growth, Knowledge Spillovers, R&D, Globalization, Unified Growth Theory, Productivity Slowdown, Roaring Twenties. |
| JEL: | O10 O30 O40 E22 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-414&r=mac |
| By: | van der Ploeg, Frederick; Venables, Anthony J. |
| Abstract: | A windfall of foreign aid or natural resource revenue faces government with choices of how to manage public borrowing, public asset accumulation, and the distribution of funds to households (across time and household types), particularly when the windfall is both anticipated and temporary. These choices are acute if some households do not have access to credit markets and are unable to smooth consumption, and if the country as a whole is not a price-taker in international capital markets - both reasonable descriptions of many developing countries experiencing resource (or aid) booms. We analyse the optimal policy actions for countries in this position and show that the usual permanent income hypothesis prescription of engineering a permanent increase in consumption financed by borrowing ahead of the windfall and then accumulating a Sovereign Wealth Fund (SWF) is not optimal. Heavily indebted countries with a small windfall should both increase current consumption and accumulate capital to accelerate their development. Only if the windfall is large relative to initial debt is it optimal to build a SWF. We study the intricate dynamic trade-offs faced when using the windfall to pay off debt and possibly accumulate a SWF, build public infrastructure and hand out citizen dividends. Finally, we show that a more sophisticated range of instruments (e.g., an asset holding subsidy) makes the trade-offs easier. |
| Keywords: | asset holding subsidy; credit constraints; debt management; developing economies; optimal fiscal policy; private investment; public infrastructure; risk premium on foreign debt; Sovereign Wealth Fund; windfall public revenues |
| JEL: | E60 F34 F35 F43 H21 H63 O11 Q33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6954&r=mac |
| By: | Papaioannou, Elias; Siourounis, Gregorios |
| Abstract: | This paper challenges cross-sectional findings that democratic institutions have a negligible direct effect on economic growth. We employ a newly constructed data-set of permanent democratic transitions during the so-called Third Wave of Democratization and examine the within effect of democratization in countries that abandoned autocracy and consolidated representative institutions. We study democratization in a before-after event study approach that enables us to control for time-invariant country-specific effects and general time trends. The panel estimates imply that on average democratizations are associated with a one half to one percent increase in annual per capita growth. The dynamic analysis also reveals a J-shaped growth pattern: during the transition growth is slow and on average negative; in the medium and especially long run, however, growth stabilizes at a higher level. The evidence supports "development" theories of democracy and growth that highlight the positive impact of representative institutions on economic activity. They also favour Friedrich Hayek (1960)’s idea that the merits of democracy appear in the long run. |
| Keywords: | annual growth; democracy; event study; institutions; political economy |
| JEL: | C30 E60 O40 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6987&r=mac |
| By: | Estevadeordal, Antoni; Taylor, Alan M |
| Abstract: | According to the Washington Consensus, developing countries’ growth would benefit from a reduction in tariffs and other barriers to trade. But a backlash against this view now suggests that trade policies have little or no impact on growth. If "getting policies right" is wrong or infeasible, this leaves only the more tenuous objective of "getting institutions right" (Easterly 2005, Rodrik 2006). However, the empirical basis for judging recent trade reforms is weak. Econometrics are mostly ad hoc; results are typically not judged against models; trade policies are poorly measured (or not measured at all, as when trade volumes are spuriously used); and the most influential studies in the literature are based on pre-1990 experience (which predates the "Great Liberalization" in developing countries which followed the GATT Uruguay Round). We address all of these concerns - by using a model-based analysis which highlights tariffs on capital and intermediate goods; by compiling new disaggregated tariff measures to empirically test the model; and by employing a treatment-and-control empirical analysis of pre- versus post-1990 performance of liberalizing and nonliberalizing countries. We find evidence that a specific treatment, liberalizing tariffs on imported capital and intermediate goods, did lead to faster GDP growth, and by a margin consistent with theory (about 1 percentage point per annum). Endogeneity problems are considered and other observations are consistent with the proposed mechanism: changes to other tariffs, e.g. on consumption goods, though collinear with general tariffs reforms, are more weakly correlated with growth outcomes; and the treatment and control groups display different behavior of investment prices and quantities, and capital flows. |
| Keywords: | capital goods; developing countries; GATT; growth; intermediate goods; trade liberalization; Uruguay Round |
| JEL: | E65 F10 F13 F43 F53 N10 N70 O40 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6942&r=mac |
| By: | Fabian Muniesa (Centre de Sociologie de l'Innovation, Mines ParisTech); Dominique Linhardt (Centre de Sociologie de l'Innovation, Mines ParisTech) |
| Abstract: | Studies a number of aspects of the reform of public finance and public management in France (LOLF), with special attention to science and technology policy, using a pragmatist approach to the sociology of the state. |
| Keywords: | Science and technology studies, science and technology policy, political sociology, government, France, LOLF, performance, New Public Management, statistics |
| JEL: | D73 D78 E61 E65 H11 H41 H52 H61 H83 I20 I23 I28 O32 O38 Z13 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:emn:wpaper:015&r=mac |
| By: | van der Ploeg, Frederick |
| Abstract: | We investigate the Hartwick rule for saving of a nation necessary to sustain a constant level of private consumption for a small open economy with an exhaustible stock of natural resources. The amount by which a country saves and invests less than the marginal resource rents equals the expected capital gains on reserves of natural resources plus the expected increase in interest income on net foreign assets plus the expected fall in the cost of resource extraction due to expected improvements in extraction technology. Effectively, depletion is then postponed until better times. This suggests that it is not necessarily sub-optimal for resource-rich countries to have negative genuine saving. However, in countries with different groups with imperfectly defined property rights on natural resources, political distortions induce faster resource depletion than suggested by the Hotelling rule. Fractionalised societies with imperfect property rights build up more foreign assets than their marginal resource rents, but in the long run accumulate less foreign assets than homogenous societies. Hence, such societies end up with lower sustainable consumption and are worse off, especially if seepage is strong, the number of rival groups is large and the country does not enjoy much monopoly power on the resource market. Genuine saving is zero in such societies. However, World Bank genuine saving figures based on market rather than accounting prices will be negative, albeit less so in more fractionalised societies with less secure property rights. |
| Keywords: | accounting price; capital; common pool; exhaustible resources; extraction technology; fractionalisation; genuine saving; Hartwick rule; Hotelling rule; property rights; seepage; sovereign wealth fund; sustainable consumption; voracity |
| JEL: | E20 F32 O13 Q01 Q32 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7021&r=mac |
| By: | Antràs, Pol; Rossi-Hansberg, Esteban |
| Abstract: | We survey an emerging literature at the intersection of organizational economics and international trade. We argue that a proper modelling of the organizational aspects of production provides valuable insights on the aggregate workings of the world economy. In reviewing the literature, we describe certain predictions of standard models that are affected or even overturned when organizational decisions are brought into the analysis. We also suggest potentially fruitful areas for future research. |
| Keywords: | comparative advantage; contractual frictions; fragmentation; internalization; matching; offshoring; organizations; outsourcing; technology; wage inequality |
| JEL: | D23 E25 F10 F23 L23 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6965&r=mac |
| By: | Acharya, Viral V; Shin, Hyun Song; Yorulmazer, Tanju |
| Abstract: | Fire sales that occur during crises beg the question of why sufficient outside capital does not move in quickly to take advantage of fire sales, or in other words, why outside capital is so slow-moving. We propose an answer to this puzzle in the context of an equilibrium model of capital allocation. Keeping capital in liquid form in anticipation of possible fire sales entails costs in terms of foregone profitable investments. Set against this, those same profitable investments are rendered illiquid in future due to agency problems embedded with expertise. We show that a robust consequence of this trade-off between making investments today and waiting for arbitrage opportunities in future is the combination of occasional fire sales and limited stand-by capital that moves in only if fire-sale discounts are sufficiently deep. An extension of our model to several types of investments gives rise to a novel channel for contagion where sufficiently adverse shocks to one type can induce fire sales in other types that are fundamentally unrelated, provided arbitrage activity in these investments is sourced from a common pool of capital. |
| Keywords: | arbitrage; crises; fire sales; illiquidity; spillover |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7147&r=mac |
| By: | Bovenberg, A Lans; Teulings, Coen N |
| Abstract: | We argue in favour of the shareholder model of the firm for three main reasons, First, serving multiple stakeholders leads to ill-defined property rights. What sounds like a fair compromise between stakeholders can easily evolve in a permanent struggle between the stakeholders about the ultimate goal of the company. In many cases, the vague Rhineland principles no longer offer much protection to workers. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs, which harms the position of job seekers, including new entrants to the labour market. Third, and most importantly, making shareholders the ultimate owner of the firm provides the best possible diversification of firm- specific risks. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. Diversification of this risk on the capital market is an efficient form of social insurance. Reducing the claims of workers on the surplus of the firm can be seen as the next step in the emancipation of workers. Workers derive their security not from the firm that employs them but from the value of their own human capital. In such a world, global trade in corporate control, global competition and creative destruction associated with these developments are more legitimate. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm’s surplus, thereby protecting workers against firm-specific risks. Indeed, in Denmark, workers bear less firm- specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation. This is why corporate governance legislation that gives moral legitimacy to the claim of insiders on the surplus of the firm is damaging. The transition from the Rhineland model (in which management serves the interests of all stakeholders) towards the shareholder model is fraught with difficulties. While society reaps long-run gains in efficiency, in the short run a generation of insiders has to give up their rights without benefiting from increased job creation and higher starting wages. Whereas the claims of older workers on the surplus of a firm may thus have some legitimacy, younger cohorts should be denied such moral claims. These problems require extreme political skill to solve. In particular, they may require some grandfathering provisions or temporary explicit transfers from younger to older generations. |
| Keywords: | corporate governance; employment protection; optimal risk sharing; wagesetting |
| JEL: | E24 G32 G34 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6936&r=mac |
| By: | Poncet, Sandra; Steingress, Walter; Vandenbussche, Hylke |
| Abstract: | This paper uses a unique micro-level data-set on Chinese firms to test for the existence of a 'political-pecking order' in the allocation of credit. Our findings are threefold. Firstly, private Chinese firms are credit constrained while State-owned firms and foreign-owned firms in China are not; Secondly, the geographical and sectoral presence of foreign capital alleviates credit constraints faced by private Chinese firms. Thirdly, geographical and sectoral presence of state firms aggravates financial constraints for private Chinese firms ('crowding out'). Therefore it seems that ongoing restructuring of the state-owned sector and further liberalization of foreign capital inflows in China can help to circumvent financial constraints and can boost the investment of private firms. |
| Keywords: | China; firm level data; foreign direct investment; Investment-cashflow sensitivity; pecking-order |
| JEL: | E22 G32 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7132&r=mac |