nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒03‒07
forty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Fixed and variable-rate mortgages, business cycles and monetary policy By Margarita Rubio
  2. The anti-Phillips curve By Kitov, Ivan
  3. Inventories and Real Rigidities in New Keynesian Business Cycle Models By Oleksiy Kryvtsov; Virgiliu Midrigan
  4. A Macroeconomic Model of the Term Structure of Interest Rates in Mexico. By Josué Fernando Cortés Espada; Manuel Ramos Francia
  5. A Note on Regime Switching, Monetary Policy, and Multiple Equilibria By Jess Benhabib
  6. Business Cycle Evidence on Firm Entry By V. LEWIS
  7. Sticky information vs. Backward-looking indexation: Inflation inertia in the U.S. By Carrillo Julio A.
  8. Taylor Rules and the Euro By Tanya Molodtsova; Alex Nikolsko-Rzhevskyy; David H. Papell
  9. Lasting Bang for the Stimulus Buck: Priorities for the 2009 Federal Budget By William B.P. Robson; Alexandre Laurin; Finn Poschmann
  10. The Media is the Measure: Technical change and employment, 1909-49 By Michelle Alexopoulos; Jon Cohen
  11. The Yield Curve and its Relation with Economic Activity: The Mexican Case. By Mario Reyna Cerecero; Diana Salazar Cavazos; Héctor Salgado Banda
  12. Optimal Endowment Destruction under Campbell-Cochrane Habit Formation By Lars Ljungqvist; Harald Uhlig
  13. Accounting for Output Fluctuations in Mexico. By Arturo Antón Sarabia
  14. QMM. A Quarterly Macroeconomic Model of the Icelandic Economy By Ásgeir Daníelsson; Magnús F. Gudmundsson; Svava J. Haraldsdóttir; Thorvardur T. Ólafsson; Ásgerdur Ó. Pétursdóttir; Thórarinn G. Pétursson; Rósa Sveinsdóttir
  15. Fiat money and the value of binding portfolio constraints By Páscoa, Mário R.; Petrassi, Myrian; Torres-Martínez, Juan Pablo
  16. How Bad is US Unemployment? By Freeman, Alan; Desai, Radhika
  17. Optimal Policy under Commitment and Price Level Stationarity By Gino Cateau
  18. An Empirical Analysis of the Mexican Term Structure of Interest Rates. By Josué Fernando Cortés Espada; Alberto Torres García; Manuel Ramos Francia
  19. Expectations, learning and policy rule By Michele Berardi
  20. The comovement between household loans and real activity By Wouter den Haan; Vincent Sterk
  21. A Model of Near-Rational Exuberance By James Bullard; George Evans; Seppo Honkapohja
  22. Fiscal (and external) sustainability By Ley, Eduardo
  23. Pooling versus model selection for nowcasting with many predictors: An application to German GDP By Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
  24. Sticky Rents and the Stability of Housing Cycles By Erdem Basci; Ismail Saglam
  25. International Evidence on Stochastic and Deterministic Monetary Neutrality. By Antonio E. Noriega; Luis M. Soria; Ramón Velázquez
  26. The great dissolution: organization capital and diverging volatility puzzle By Che, Natasha Xingyuan
  27. Fiscal Shocks and The Real Exchange Rate By Agustín S. Bénétrix and Philip R. Lane
  28. Out on a Limb: Assessing the Fiscal Sustainability and Effectiveness of the 2009 Federal Budget By Alexandre Laurin; Colin Busby; Benjamin Dachis
  29. Quantitative Macroeconomics with Heterogeneous Households By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  30. Karnataka Budget 2009-10 By Government of Karnataka GoK
  31. Financial distress and banks' communication policy in crisis times By Besancenot, Damien; Vranceanu, Radu
  32. The first global financial crisis of the 21st century,Part II: Introduction By Reinhart, Carmen; Felton, Andrew
  33. Raízes da crise financeira dos derivativos subprime By Claudio Gontijo
  34. Cycles, Contagion and Crises By Nikolaj Schmidt; Ashley Taylor; Charles Goodhart; Amil Dasgupta
  35. Impact of the Global Financial Crisis on India Collateral Damage and Response By Duvvuri Subbarao
  36. Can Open Capital Markets Help Avoid Currency Crises? By Gus Garita; Chen Zhou
  37. Economic Dynamics Under Heterogeneous Learning: Necessary and Sufficient Conditions for Stability By Dmitri Kolyuzhnov
  38. Financial Dollarization: Short-Run Determinants in Transition Economies By Kyriakos C. Neanidis; Christos S. Savva
  39. Gestão de ativo bancário diferenciada no território: um estudo para os estados brasileiros By Mara Nogueira; Ana Tereza Lanna Figueiredo; Marco Crocco
  40. Financial crash, commodity prices and global imbalances: A comment By Reinhart, Carmen
  41. Financial Dollarization: Short-Run Determinants in Transition Economies By M. Emranul Haque; Kyriakos C. Neanidis
  42. El efecto riqueza de la vivienda en Colombia By Enrique López Enciso; Andrés Salamanca Lugo
  43. A theoretical and practical study on linear reforms of dual taxes By Samuel Calonge; Oriol Tejada
  44. Groupthink: Collective Delusions in Organizations and Markets By Roland Bénabou
  45. Measuring Our Ignorance, One Book at a Time: New Indicators of Technological Change, 1909-1949 By Michelle Alexopoulos; Jon Cohen

  1. By: Margarita Rubio (Banco de España)
    Abstract: The aim of this paper is twofold. First, I study how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. Aggregate effects are also larger for the variable-rate economy. For plausible parametrizations, differences are muted by wealth effects on labor supply and by the presence of savers. More persistent shocks, such as inflation target and technology shocks, cause larger aggregate differences. From a normative perspective I find that, in the presence of collateral constraints, the optimal Taylor rule is less aggressive against inflation than in the standard sticky-price model. Furthermore, for given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, housing market, collateral constraint
    JEL: E32 E44 E52
    Date: 2009–02
  2. By: Kitov, Ivan
    Abstract: There is no Phillips curve in the United States, i.e. unemployment does not drive inflation at any time horizon. There is a statistically robust anti-Phillips curve - inflation leads unemployment by 10 quarters. Apparently, the anti-Phillips curve would be the conventional one, if the time would flow in the opposite direction. Several tests for cointegration do not reject the hypothesis that there exist a long-term equilibrium relation between inflation and unemployment in the US. The cointegrating relation between inflation and unemployment is not the proof of causality, however, and both variables are driven by the same external force. Also presented are some statistical evidences that there exist conventional Phillips curves in Germany and France, but there is no causality link between unemployment and inflation as well.
    Keywords: the Phillips curve; inflation; unemployment; causality
    JEL: E24 E31 E58 E52
    Date: 2009–02–26
  3. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2009
  4. By: Josué Fernando Cortés Espada; Manuel Ramos Francia
    Abstract: This paper investigates how different macroeconomic shocks affect the term-structure of interest rates in Mexico. In particular, we develop a model that combines a no-arbitrage specification of the term structure with a macroeconomic model of a small open economy. We find that shocks that are perceived to have a persistent effect on inflation affect the level of the yield curve. The effect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive shock leads to an upward flattening shift in the yield curve. The flattening of the curve is explained by both the monetary policy response and the time-varying term premia.
    Keywords: Term-Structure, No-Arbitrage, Macroeconomic Shocks.
    JEL: C13 E43 G12
    Date: 2008–07
  5. By: Jess Benhabib
    Abstract: When monetary policy is subject to regime switches conditions for determinacy become more complex. Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009a) have studied such conditons. Using some new results from stochastic processes, we characterize the moments of the stationary distribution of inflation under regime switiching to obtain conditions for indeterminacy that can be easily checked and interpreted in terms of expected values of Taylor coefficients. In the last section, we outline methods to compute the moments of stationary distributions in regime switching models of higher dimensions.
    JEL: E31 E43 E52
    Date: 2009–03
  6. By: V. LEWIS
    Abstract: Business cycle models with sticky prices and endogenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. I test some of these predictions using a vector autoregression with model-based sign restrictions. I find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new .firms to survive when the number of startups rises.
    Keywords: firm entry, business cycles, VAR
    Date: 2008–10
  7. By: Carrillo Julio A. (METEOR)
    Abstract: This paper compares two approaches towards the empirical inertia of inflation and output. Two variants that produce persistence are added to a baseline DSGE model of sticky prices: 1) sticky information applied to firms, workers, and households; and 2) a backward-looking inflation indexation along with habit formation. The rival models are then estimated using U.S. data in order to determine their plausibility. It is shown that the sticky information model is better at predicting inflation, wage inflation, and the degree of price stickiness. Output dynamics, however, are better explained by habit persistence.
    Keywords: macroeconomics ;
    Date: 2009
  8. By: Tanya Molodtsova; Alex Nikolsko-Rzhevskyy; David H. Papell
    Abstract: This paper uses real-time data to show that inflation and either the output gap or unemployment, the variables which normally enter central banks’ Taylor rules for interest-rate-setting, can provide evidence of out-of-sample predictability and forecasting ability for the United States Dollar/Euro exchange rate from the inception of the Euro in 1999 to the end of 2007. We also present less formal evidence that, with real-time data, the Taylor rule provides a better description of ECB than of Fed policy during this period. The strongest evidence is found for specifications that neither incorporate interest rate smoothing nor include the real exchange rate in the forecasting regression, and the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the U.S. and the Euro Area. The evidence is stronger with inflation forecasts than with inflation rates and with real-time data than with revised data. Bad news about inflation and good news about real economic activity both lead to out-of-sample predictability and forecasting ability through forecasted exchange rate appreciation.
    Date: 2009–02
  9. By: William B.P. Robson (C.D. Howe Institute); Alexandre Laurin (C.D. Howe Institute); Finn Poschmann (C.D. Howe Institute)
    Abstract: Unusual economic and political circumstances surround the framing of the 2009 federal budget. A period of global spending outrunning productive capacity has ended with financial crisis and recession in much of the world, Canada included. The sudden slump has prompted demand for, and expectations of, fiscal action.
    Keywords: fiscal policy, Canadian government budget
    JEL: E62 E61 E66
    Date: 2009–01
  10. By: Michelle Alexopoulos; Jon Cohen
    Abstract: Difficulties in sorting out the empirical relationship between technical change and employment is attributable, at least in part, to the shortcomings associated with traditional measures of the former. In this paper, we use new indicators of technical change that we believe resolve many issues associated with other methods of identifying technology shocks, and use them to explore the impact of technical change on employment from 1909-49. The payoff to this effort is substantial for at least three reasons. First, it sheds light on the role of technology shocks in cyclical fluctuations during this period, second, it informs business cycle model selection (New Keynesian vs. Real Business Cycle), and, third, it contributes to our understanding of the part played by the New Deal Policies in the recovery from the Great Depression.
    Keywords: Business Cycles; Technical Change; Great Depression; Unemployment
    JEL: E2 E3 N1 O3
    Date: 2009–02–23
  11. By: Mario Reyna Cerecero; Diana Salazar Cavazos; Héctor Salgado Banda
    Abstract: There are a significant number of papers that show that the slope of the yield curve has a certain ability to forecast real economic activity and inflation. However, in emerging economies this source of information has not been thoroughly used; Mexico is not an exception. The economic stability achieved in this country in recent years has allowed the government to issue, since 2001,long-term bonds. With more stable economic cycles, the information included in the long part of the yield curve could be a useful tool to estimate future economic activity. This document analyses the predictive power of the spread. Moreover, the spread is divided into two main components to analyse the origin of its predictive power. Next, the power of the spread to forecast economic cycles is tested. Last, out-of-sample tests of the spread are carried out. The findings show that the yield curve provides significant information about future economic activity.
    Keywords: Budgetary Institutions, Fiscal Outcomes, Transparency.
    JEL: C5 E44 E52 F37
    Date: 2008–12
  12. By: Lars Ljungqvist; Harald Uhlig
    Abstract: Campbell and Cochrane (1999) formulate a model that successfully explains a wide variety of asset pricing puzzles, by augmenting the standard power utility function with a time-varying subsistence level, or "external habit", that adapts nonlinearly to current and past average consumption in the economy. This paper demonstrates, that this comes at the "price" of several unusual implications. For example, we calculate that a society of agents with the preferences and endowment process of Campbell and Cochrane (1999) would experience a welfare gain equivalent to a permanent increase of nearly 16% in consumption, if the government enforced one month of fasting per year, reducing consumption by 10 percent then. We examine and explain these features of the preferences in detail. We numerically characterize the solution to the social planning problem. We conclude that Campbell-Cochrance preferences will provide for interesting macroeconomic modeling challenges, when endogenizing aggregate consumption choices and government policy.
    JEL: C61 E21 E44 G12
    Date: 2009–03
  13. By: Arturo Antón Sarabia
    Abstract: During the last years, Mexico has registered relatively large output falls. The business cycle accounting method of Chari, Kehoe and McGrattan (2007) is applied to the two most recent recessions in Mexico (including the “Tequila crisis”) in order to understand what are the most important wedges driving output over the cycle and to evaluate to what extent such falls may be smoothed. First, it is found that efficiency and labor wedges may reasonably account for output fluctuations in each recession. Second, counterfactual exercises suggest that the elimination of distortions represented in terms of the efficiency wedge might result in output falls about one third of those observed in the data.
    Keywords: Business cycle accounting, Tequila crisis, Total factor productivity, Mexico
    JEL: E32 O41 O54
    Date: 2008–05
  14. By: Ásgeir Daníelsson; Magnús F. Gudmundsson; Svava J. Haraldsdóttir; Thorvardur T. Ólafsson; Ásgerdur Ó. Pétursdóttir; Thórarinn G. Pétursson; Rósa Sveinsdóttir
    Abstract: This paper documents and describes Version 2.0 of the Quarterly Macroeconomic Model of the Central Bank of Iceland (QMM). QMM and the underlying quarterly database have been under construction since 2001 at the Research and Forecasting Division of the Economics Department at the Bank and was first implemented in the forecasting round for the Monetary Bulletin 2006.1 in March 2006. QMM is used by the Bank for forecasting and various policy simulations and therefore plays a key role as an organisational framework for viewing the medium-term future when formulating monetary policy at the Bank. This paper is mainly focused on the short and medium-term properties of QMM. Steady state properties of the model are documented in a paper by Daníelsson (2009).
    Date: 2009–02
  15. By: Páscoa, Mário R.; Petrassi, Myrian; Torres-Martínez, Juan Pablo
    Abstract: We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.
    Keywords: Binding credit constraints; Fundamental value of money; Asset pricing bubbles.
    JEL: C61 E44
    Date: 2009–03
  16. By: Freeman, Alan; Desai, Radhika
    Abstract: This article assesses the significance of the January 2009 US unemployment figures. The steep fall of 4 million jobs is greater than any 12-month fall in history. Does this mean that 2007-2008 heralds the worst recession since 1929? This article assesses the empirical evidence of the US payroll figures to date.
    Keywords: Keywords: Credit Crunch; Investment; Liquidity Preference; Rate of Profit; State; Welfare State; War; Military Keynesianism
    JEL: E0 E12 E24
    Date: 2009–02–24
  17. By: Gino Cateau
    Abstract: This paper proposes a simple analytical method to determine the stationarity of an unnormalized variable from the solution to a normalized model i.e. a model whose variables must be expressed in relative terms or must be differenced for a solution to exist. The paper then applies the method to answer a question of interest to policy-makers: does optimal policy under commitment lead to stationarity in the price level? Unlike Gaspar, Smets, and Vestin (2007), the paper finds that optimal policy under commitment does not lead to price level stationarity in the Smets and Wouters (2003) model.
    Keywords: Monetary policy framework
    JEL: E52 E58
    Date: 2009
  18. By: Josué Fernando Cortés Espada; Alberto Torres García; Manuel Ramos Francia
    Abstract: We study the dynamics of the term-structure of interest rates in Mexico. Specifically, we investigate time variation in bond risk premia and the common factors that have influenced the behavior of the yield curve. We find that term-premia in government bonds appear to be time-varying. We then estimate a principal components model. We find that over 95% of the total variation in the yield curve can be explained by two factors. The first factor captures movements in the level of the yield curve, while the second one captures movements in the slope. Moreover, we find that the level factor is positively correlated with measures of long-term inflation expectations and that the slope factor is negatively correlated with the overnight interest rate.
    Keywords: Term-Structure, Time-Varying Risk Premia, Principal Components
    JEL: C13 E43 G12
    Date: 2008–07
  19. By: Michele Berardi
    Abstract: The optimal discretionary policy rule in the New Keynesian forwardlooking model under the hypothesis of rational expectations responds only to fundamental shocks. This leads to indeterminacy of equilibria and E-unstability of the MSV REE. The outcome can be improved by responding to private expectations. This requires the Central Bank to be able to observe those expectations, or to precisely estimate them. It has also been shown in the literature that when the private sector doesn’t have RE and instead is trying to learn the structure of the economy from data, the policymaker should implement a more aggressive policy. In light of these considerations, we ask how a policymaker that responds only to fundamental shocks should change its response when private expectations depart from rationality. In addition, we show that a policy rule that adeguately takes into account the learning process of agents while responding only to fundamentals can obtain the same results as an expectations based policy rule.
    Date: 2009
  20. By: Wouter den Haan; Vincent Sterk
    Abstract: In this paper, we analyze the business cycle behavior of home mortgages and consumer credit and investigate whether the observed changes. and in particular observed changes in the comovement between the loan variables and real activity. are likely to be caused by changes in financial markets. We find that there may have been such a role for changes in markets for consumer credit, but even before the financial crisis hit, the data do not support the hypothesis that changes in mortgage markets reduced the impact of economic shocks on real activity.
    JEL: C10 E44 F15 F36 F37
    Date: 2009–02
  21. By: James Bullard; George Evans; Seppo Honkapohja
    Abstract: We study how the use of judgement or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria. learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.
    Keywords: Learning, expectations, excess volatility, bounded rationality.
    JEL: E52 E61
    Date: 2009–02
  22. By: Ley, Eduardo
    Abstract: Nothing new here---just a concise yet detailed presentation of the simple but inexorable algebra of sustainability.
    Keywords: Debt; Sustainability
    JEL: E62 H68
    Date: 2009–02–28
  23. By: Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian
    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 different 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 different 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 specifications rather than selecting a specific model.
    Keywords: factor models; forecast combination; forecast pooling; MIDAS; mixed-frequency data; model selection; nowcasting
    JEL: C53 E37
    Date: 2009–03
  24. By: Erdem Basci; Ismail Saglam
    Date: 2009–02
  25. By: Antonio E. Noriega; Luis M. Soria; Ramón Velázquez
    Abstract: We analyze the issue of the impact of multiple breaks on monetary neutrality results, using a long annual international data set. We empirically verify whether neutrality propositions remain addressable (and if so, whether they hold or not), when unit root tests are carried out allowing for multiple structural breaks in the long-run trend function of the variables. It is found that conclusions on neutrality are sensitive to the number and location of breaks. In order to interpret the evidence for structural breaks, we introduce a notion of deterministic monetary neutrality, which naturally arises in the absence of permanent stochastic shocks to the variables.
    Keywords: Deterministic and Stochastic Neutrality and Superneutrality of Money, Unit Roots, Structural Breaks, Resampling Methods
    JEL: C15 C32 E51 E52
    Date: 2008–04
  26. By: Che, Natasha Xingyuan
    Abstract: Most traditional explanations for the decreasing aggregate output volatility - so-called "Great Moderation" - fail to accommodate, or even directly contradict, another aspect of empirical data: the average sales volatility for publicly-traded US firms has been increasing during the same period. The paper aims to reconcile the opposite trends of firm-level and aggregate volatilities. I argue that the rise of organization capital, or firm-specific intangible capital, is the origin of the volatility divergence. Firms in the modern economy have been investing heavily in intangible and organizational assets, such as R&D, management processes, intellectual property, software, and brand name - the "soft" capitals that distinguish a firm from the sum of its physical properties. Most intangible assets are firm-specific, inseparable from the company that originally produced them, and difficult to trade on outside market. Investing in these organization-specific capitals insulates a firm from market-wide shocks, but introduces higher firm-specific risk that does not equally affect its peers. When value creation is increasingly relying on organization capital, the impact of idiosyncratic risk factor rises, while that of general risk factor declines. The former elevates firm-level volatility; the latter reduces aggregate volatility, mainly through weakening the positive co-movements among firms. Therefore, the decrease in aggregate output volatility is not because of less turbulent macro environment, but a result of more heterogeneity among production units. In this sense, the Great Moderation is rather a story of "Great Dissolution". It may indicate greater economic uncertainty faced by individual agents, instead of less. My empirical investigation found that, consistent with the paper's hypotheses, firm-level volatility increases with organizational investment, but general factors' impact on firm performance and a firm's correlation with others decrease with organizational investment. Simulations of the general equilibrium model featuring organization capital investment are capable of replicating the volatility trends at both aggregate and firm level for the past two decades.
    Keywords: organization capital; intangible capital; great moderation; firm volatility; business cycle; business investment
    JEL: D21 E22 D58 E10 E32 C23 E23 D24
    Date: 2009
  27. By: Agustín S. Bénétrix and Philip R. Lane
    Abstract: We estimate the impact of shocks to government spending on the real exchange rate for a panel of EMU member countries. Our key finding is that the impact differs across different types of government spending, with shocks to public investment generating a larger and more persistent impact on the real exchange rate than shocks to government consumption. Within the latter category, we also show that the impact of shocks to the wage component of government consumption is larger than for shocks to the non-wage component.
    Date: 2009–03–03
  28. By: Alexandre Laurin (C.D. Howe Institute); Colin Busby (C.D. Howe Institute); Benjamin Dachis (C.D. Howe Institute)
    Abstract: The 2009 federal budget proposed a $40 billion economic stimulus package spanning two years and projecting a return to balanced budgets within five. The projected quick recovery of federal finances relies primarily on aggressive assumptions about future interest rates, growth of program expenditures and effectiveness of the economic stimulus plan.
    Keywords: fiscal policy, Canadian Federal budget
    JEL: E62 E63
    Date: 2009–01
  29. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the "standard" incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals' key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk?
    JEL: E2 J22
    Date: 2009–03
  30. By: Government of Karnataka GoK
    Abstract: Budget speech by finance minister of Karnataka
    Keywords: India, revenue, receipts, rural , development, state, bank loan, interest, Karnataka, India, fiscal deficit, state, economic system,
    Date: 2009
  31. By: Besancenot, Damien (CEPN and University Paris 13); Vranceanu, Radu (ESSEC Business School)
    Abstract: This short paper analyzes banks' communication policies in crisis times and the role of imperfect information in enhancing banks' distress. If banks differ in their exposure to risky assets, fragile banks may claim to be solid only in order to manipulate investors' expectations. Then solid banks must pay a larger interest rate than in a perfect information set-up. A stronger sanction for false information would improve the situation of the low-risk banks but deteriorate the situation of the high-risk banks. The total effect on defaulting credit institutions is ambiguous. It is shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behaviour.
    Keywords: Banks; Disclosure; Financial Crisis; Transparency
    JEL: D82 E44 G21
    Date: 2008–11
  32. By: Reinhart, Carmen; Felton, Andrew
    Abstract: Sadly, our previous compilation of VoxEU columns, ‘The First Global Financial Crisis of the 21st Century,’ was not the last word on the subject. Since the publication of that volume in June 2008, the global crisis has both deepened and widened. The industrial world has seen the largest bank failures in its history, and many governments have intervened in the financial system in a manner that would once have been unthinkable. Wall Street and the City of London, along with most other financial centers, have been changed forever. Many storied financial firms have failed or been merged away, and others are left with significant ownership positions of national governments. The economy of Iceland has suffered a collapse just as sizable as any of Latin America or East Asia during the last few decades. Vox authors have kept up their prolific pace of commenting on unfolding events. In keeping with the mission of Vox, columnists both applied existing economic research to understand events and pointed the way to new avenues for research. These articles, it has to be understood, were written ‘in the moment’ over the past six months and so incorporate to a varying extend the history we have lived through. To help place individual contributions within this historical sequence, an appendix updates the timeline of events from our June publication through December.
    Keywords: financial crisis monetary policy bank failures contagion
    JEL: F3 E5 E6
    Date: 2009–02–22
  33. By: Claudio Gontijo (Face-UFMG)
    Abstract: This article analyses the roots of the financial crisis caused by the devaluation of the subprime mortgage derivatives, triggered by the reversion of the last cycle of residential constructions in the USA. It describes the process of securitization of the mortgage titles and the boost of the subprime sector, showing that the crisis became systemic due to (i) the insurance net that was set up in order to ensure a degree of investment to the securitized mortgages; (ii) the economic agents’ high degree of leverage; (ii) the dense speculative relations established with other instruments of the hedge market; (iv) the liberalization and deregulation of the financial markets. Finally, it discusses, although on a preliminary approach, whether the ongoing crisis can aptly be described as a “Minsky moment”.
    Keywords: financial markets
    JEL: E44
    Date: 2008–12
  34. By: Nikolaj Schmidt; Ashley Taylor; Charles Goodhart; Amil Dasgupta
    Abstract: On 28-29 June 2007, the Financial Markets Group organised a conference covering topics under all three themes of its title, 'Cycles, Contagion and Crises', from the perspective of both developed and emerging economies.
    Date: 2008–11
  35. By: Duvvuri Subbarao
    Abstract: The impact of economic crisis on India has been analysed in the speech. [Speech delivered at the Symposium on 'The Global Economic Crisis and Challenges for the Asian Economy in a Changing World'].
    Keywords: money market, credit, forex, India, economic crisis, Indian banking system, growth, domestic consumption, investment, GDP, financial integration, markets, banks
    Date: 2009
  36. By: Gus Garita; Chen Zhou
    Abstract: By proposing a measure for cross-market rebalancing effects, we provide new insights into the different sources of currency crises. We address three interrelated questions: (i) How can we best capture contagion; (ii) Is the contagion of currency crisis a regional or global phenomenon?; and (iii) By controlling for “cross-market rebalancing” do other mechanisms like "financial openness" increase the probability of a currency crisis? We introduce the concept of conditional probability of joint failure (CPJF) to measure the linkages of currency crisis intra- and inter-regionally. From estimating this measure, we test for contagion and conclude that contagion only exists regionally. Furthermore, we construct a “cross-market rebalancing” variable based on the regional CPJF. By employing a probit model to compare our new variable with a regular contagion variable often used in literature, we conclude that our new variable captures contagion better; moreover, it also captures cross-market rebalancing effects. When we properly account for these effects, then financial openness helps to diminish the probability of a currency crisis even after controlling for the onset of a banking crisis. We also show that monetary policy geared towards price stability reduces the probability of a currency crisis.
    Keywords: Crisis; Contagion; Cross-Market Rebalancing; Exchange Market Pressure; Extreme Value Theory; Financial Integration.
    JEL: C10 E44 F15 F36 F37
    Date: 2009–02
  37. By: Dmitri Kolyuzhnov
    Abstract: I provide sufficient conditions and necessary conditions for stability of a structurally heterogeneous economy under heterogeneous learning of agents. These conditions are written in terms of the structural heterogeneity independent of heterogeneity in learning. I have found an easily interpretable unifying condition which is sufficient for convergence of an economy under mixed RLS/SG learning with different degrees of inertia towards a rational expectations equilibrium for a broad class of economic models and a criterion for such a convergence in the univariate case. The conditions are formulated using the concept of a subeconomy and a suitably defined aggregate economy. I demonstrate and provide interpretation of the derived conditions and the criterion on univariate and multivariate examples, including two specifications of the overlapping generations model and the model of simultaneous markets with structural heterogeneity.
    Keywords: Adaptive learning, stability of equilibrium, heterogeneous agents.
    JEL: C62 D83 E10
    Date: 2008–12
  38. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: This paper examines the determinants of financial dollarization in transition economies from a short-run perspective. Using monthly data of deposit and loan dollarization we study the drivers of short-term fluctuations in dollarization and test their importance at different levels of dollarization. The results provide evidence that (a) the positive short-run effects of depreciation on deposit dollarization are exacerbated in high-dollarization countries; (b) short-run loan dollarization is mainly driven by banks matching of domestic loans and deposits, international financial integration, and institutional quality; and (c) both types of dollarization are affected by interest rate differentials and deviations from desired dollarization.
    Date: 2009
  39. By: Mara Nogueira (Cedeplar-UFMG); Ana Tereza Lanna Figueiredo (Cedeplar-UFMG e PUC-MG); Marco Crocco (Cedeplar-UFMG)
    Abstract: The aim of this paper is to investigate in what extent there is a differentiated regional bank strategy. Based on the post-Keynesian theory of regional liquidity preference (DOW, 1993), the article analyses the consolidate balance sheet of bank’s branches in 27 Brazilian states. Through the analyses of some of the indicators that has been built using the balance sheet, the paper concludes that there are evidences that supports the statement that the state’s Bank System works in a different way over the space. This behavior reinforces the uneven regional patterns of development in its economy.
    Keywords: Bank’s Strategy, Regional Economy, Banks
    Date: 2009–02
  40. By: Reinhart, Carmen
    Abstract: I appreciate the opportunity to discuss this paper by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas. This paper was described to me as a mix of theoretical and empirical work that attempts a hat trick: explaining the joint combination of global imbalances, the deflation of the housing price bubble that created the subprime crisis, and volatile oil prices.
    Keywords: oil prices volatility saving global imbalances
    JEL: E2
    Date: 2009
  41. By: M. Emranul Haque; Kyriakos C. Neanidis
    Abstract: This paper tests the proposition that fiscal transparency, measured by a newly constructed data on budget openness, can be a powerful control on corruption. This result is robust to the choice of index of corruption, conditioning variables, country sample, exclusion of outliers, and the use of different instrumentation and estimation techniques.
    Date: 2009
  42. By: Enrique López Enciso; Andrés Salamanca Lugo
    Abstract: Este documento analiza la riqueza en vivienda como un canal de trasmisión de la política monetaria en Colombia, a partir de la evidencia de un modelo de Equilibrio general dinámico y estocástico calibrado para la economía colombiana. La medición del efecto riqueza para Colombia arrojó como resultado una propensión marginal a consumir anual igual a 0,012. Con estos resultados, se encontró que el efecto riqueza estimado es poco significativo en relación a las medidas realizadas para otros países. El análisis de impulso-respuesta mostró que: i) el efecto riqueza posee una duración esperada corta y con efectos asimétricos sobre el consumo; ii) el canal de oferta de vivienda de la política monetaria es pequeño aunque sus efectos de jalonamiento sobre los demás sectores de la economía son importantes y; iii) los efectos del apalancamiento del crédito hipotecario son pequeños.
    Date: 2009–02–24
  43. By: Samuel Calonge; Oriol Tejada (Universitat de Barcelona)
    Abstract: We extend the linear reforms introduced by Pf ahler (1984) to the case of dual taxes. We study the relative effect that linear dual tax cuts have on the inequality of income distribution -a symmetrical study can be made for dual linear tax hikes-. We also introduce measures of the degree of progressivity for dual taxes and show that they can be connected to the Lorenz dominance criterion. Additionally, we study the tax liability elasticity of each of the reforms proposed. Finally, by means of a microsimulation model and a considerably large data set of taxpayers drawn from 2004 Spanish Income Tax Return population, 1) we compare different yield-equivalent tax cuts applied to the Spanish dual income tax and 2) we investigate how much income redistribution the dual tax reform (Act 35/2006) introduced with respect to the previous tax.
    Keywords: lattices, dual taxes, lorenz domination, linear reforms
    JEL: E60 E62
    Date: 2009
  44. By: Roland Bénabou
    Abstract: I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants' tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other's delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general "Mutually Assured Delusion" principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierachical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious "exuberance" can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations' attitudes toward free speech and dissent.
    JEL: D23 D53 D83 D84 E32 Z1
    Date: 2009–03
  45. By: Michelle Alexopoulos; Jon Cohen
    Abstract: We present new indicators of U.S. technological change for the period 1909-49 based on information in the Library of Congress’ catalogue. We use these indicators to estimate the connections between technological change and economic activity, and to investigate the relationship between fluctuations in innovative activity and the Great Depression. Although we do find links between technological change, output and productivity, our results suggest that the slowdown in technological progress in the early 1930s did not contribute significantly to the Great Depression. On the other hand, the remarkable acceleration in innovations after 1934 did play a role in the recovery.
    Keywords: Technical Change, Productivity, the Great Depression
    JEL: E3 O3 O4 N1
    Date: 2009–02–23

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