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on Macroeconomics |
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Issue of 2009‒03‒22
53 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Meixing DAI; Moïse SIDIROPOULOS |
| Abstract: | Recent financial crises and central banks’ interventions to ensure liquidity on the monetary markets around the world have shown that using interest rate as instrument of monetary policy can be insufficient. Using an aggregate dynamic macro-economic model, we study how to combine inflation targeting with monetary targeting to warrant macro-economic and financial stability. A commitment to a long-run money growth rate corresponding to the inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. We show that, using Friedman’s k-percent money growth rule to help anchoring inflation expectations under inflation-targeting regime can generate dynamic instability in output, inflation, assets prices as well as real money demand. Alternatively, a well-specified monetary targeting rule that responds negatively to the evolution of expected inflation allows achieving macro-economic and financial stability. |
| Keywords: | inflation targeting, monetary targeting, stock prices, macro-economic and financial stability, Friedman’s k-percent money growth rule. |
| JEL: | E41 E44 E52 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2009-05&r=mac |
| By: | Aleksandra Maslowska (Department of Economics and Public Choice Research Centre, University of Turku) |
| Abstract: | In this paper we trace changes in monetary policy caused by institutional amendments in legal acts of central banks. We estimate coefficients of the Taylor Rule for central banks of Sweden, United Kingdom, Switzerland and EU15 to shed some light on monetary policy ex ante and ex post significant improvements in central bank independence. Results presented suggest differences in accommodating monetary policy in countries and support the idea that initial level of CBI matters for reactions to variability both of inflation and output gap. A preindependence period characterizes with strong inflation targeting features, whereas a post-independence time resembles more discretionary type of monetary policy. As a spin-off from our original idea, we find that changing properties of inflation in the last decade make econometric analysis more difficult |
| Keywords: | Taylor rule, central bank independence, interest rate rules |
| JEL: | E52 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp46&r=mac |
| By: | Carsten Hefeker (University of Siegen, Department of Economics, Hoelderlinstrasse 3, 57068 Siegen, Germany); Blandine Zimmer (University of Siegen, Department of Economics, Hoelderlinstrasse 3, 57068 Siegen, Germany) |
| Abstract: | We examine monetary and fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. It is first shown that monetary uncertainty discourages excessive taxation and may thus reduce average inflation and output distortions. However, as countries enter the monetary union, this tax-restraining effect of uncertainty is mitigated. The monetary union may hence lead to higher fiscal distortions in some member countries, depending on governments’ spending targets and on the change in the degree of uncertainty implied by common monetary policy. |
| Keywords: | Monetary union, fiscal policy, transparency of monetary policy, asymmetries |
| JEL: | E58 E63 F36 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200913&r=mac |
| By: | Ester Faia; Lorenza Rossi |
| Abstract: | We study the design of optimal monetary policy (Ramsey policies) in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power tend to dampen wage fluctuations and to amplify employment fluctuations relatively to a DNK model with walrasian labour markets. The optimal monetary policy must trade-off counteracting forces. On the one side deviations from zero inflation allow the policy maker to smooth inefficient employment fluctuations. On other side, the presence of wage mark-ups and wage stickiness produce inflationary pressures that require aggressive inflation targeting. Overall we find that the Ramsey planner deviates from full price stability and that an optimal rule targets inflation the real economic activity alongside inflation |
| Keywords: | optimal monetary policy, labour market unionization, threat points |
| JEL: | E0 E4 E5 E6 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1490&r=mac |
| By: | Meixing DAI; Moïse SIDIROPOULOS |
| Abstract: | In this paper, we examine the link between political transparency of a common central bank (CCB) and decentralized supply-side fiscal policies in a monetary union. We find that the opacity of a conservative CCB has a restrictive effect on national fiscal policies since each government internalizes the influence of its actions on the common monetary policy and thus reinforces the disciplinary effect of institutional constraints such as the Stability and Growth Pact on national fiscal authorities. However, more opacity could imply higher inflation and unemployment when the union is large enough and induce higher inflation and output-gap variability. An enlargement of the union incites national governments to increase tax rate, and weakens the disciplinary effects of opacity on member countries if fiscal policymaking is relatively decentralized and the CCB quite conservative. It induces an increase in the level of inflation and unemployment, and could increase inflation and outputgap variability. |
| Keywords: | central bank transparency; supply-side fiscal policy; monetary union. |
| JEL: | E50 E52 E58 E63 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2009-06&r=mac |
| By: | Taeyoung Doh |
| Abstract: | What moves the yield curve? This paper specifies and estimates a dynamic stochastic general equilibrium (DSGE) model solved using a second order approximation to equilibrium conditions to answer this question. From the empirical analysis of U.S. data from 1983:Q1 to 2007:Q4, I find that the monetary policy response to the inflation gap defined by the difference between expected inflation and the inflation target of the central bank is a key channel transmitting macro shocks to the yield curve and that the degree of nominal rigidity determines which macro shocks are more important determinants of the yield curve. With the low degree of nominal rigidity, the inflation target of the central bank drives persistent movements of inflation and the yield curve while fluctuations of markups do so with the high degree of nominal rigidity. Although the estimated linear model puts nearly zero probability on the low degree of nominal rigidity, there is a positive probability mass in the nonlinear model. The analysis in this paper suggests caution on interpreting estimation results in which nonlinear terms of the DSGE model solution are ignored. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-04&r=mac |
| By: | Mirdala, Rajmund |
| Abstract: | The stable macroeconomic environment, as one of the primary objectives of the Visegrad countries in the 1990s, was partially supported by the exchange rate policy. Fixed exchange rate systems within gradually widen bands (Czech republic, Slovak republic) and crawling peg system (Hungary, Poland) were replaced by the managed floating in the Czech republic (May 1997), Poland (April 2000), Slovak republic (October 1998) and fixed exchange rate to euro with broad band in Hungary (October 2001). Higher macroeconomic and banking sector stability allowed countries from the Visegrad group to implement the monetary policy strategy based on the interest rate transmission mechanism. Continuous harmonization of the monetary policy framework (with the monetary policy of the ECB) and the increasing sensitivity of the economy agents to the interest rates changes allowed the central banks from the Visegrad countries to implement monetary policy strategy based on the key interest rates determination. In the paper we analyze the impact of the central banks’ monetary policy in the Visegrad countries on the selected macroeconomic variables in the period 1999-2008 implementing SVAR (structural vector autoregression) approach. We expect that the higher sensitivity of the selected macroeconomic indicators of the EMÚ candidate countries to the national monetary policy shocks would indicate the higher exposure of the selected countries to the ECB monetary policy impulses after the euro adoption in the future. |
| Keywords: | monetary policy, short-term interest rates, structural vector autoregression, variance decomposition, impulse-response function |
| JEL: | C32 E52 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14061&r=mac |
| By: | Tobias Adrian; Hao Wu |
| Abstract: | We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model not only to yields, but also to the yields' variance-covariance matrix, thus increasing identification power. We find that model-implied inflation expectations can differ substantially from break-even inflation rates when market volatility is high. Our model's ability to be updated weekly makes it suitable for real-time monetary policy analysis. |
| Keywords: | Inflation risk ; Asset pricing ; Financial markets ; Stochastic analysis |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:362&r=mac |
| By: | Meixing DAI; Moïse SIDIROPOULOS; Eleftherios Spyromitros |
| Abstract: | Using a New Keynesian small open economy model, we examine the effects of central bank transparency on inflation persistence. We have found that more opacity could reinforce the effect of persistent shocks on the level and variability of endogenous variables if the difference between the interest elasticity of domestic goods demand and the degree of trade openness is sufficiently large or sufficiently low, judging on structural parameters characterising the economy, the central bank preference and its initial degree of opacity. Our result implies that, under perfect capital mobility, a high degree of domestic financial development is a good reason for increasing transparency. |
| Keywords: | Central bank’s transparency, open economy, inflation persistence. |
| JEL: | E52 E58 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2009-08&r=mac |
| By: | Saborowski, Christian (University of Warwick) |
| Abstract: | In this paper, we take an analytical approach to examine possible adverse effects of the use of inflation targeting as a disinflation regime. The idea is that a strict interpretation of an inflation target may preserve inflationary distortions after price stability is attained. We show that such a policy not only creates a slump in output but may increase macroeconomic volatility substantially in a model in which wages are subject to a Taylor staggering structure. |
| Keywords: | Disinflation ; Inflation Targeting ; Wage Staggering |
| JEL: | E4 E5 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:894&r=mac |
| By: | Todd E. Clark; Stephen J. Terry |
| Abstract: | From Bayesian estimates of a vector autoregression (VAR) which allows for both coefficient drift and stochastic volatility, we obtain the following three results. First, beginning in approximately 1975, the responsiveness of core inflation to changes in energy prices in the United States fell rapidly and remains muted. Second, this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation. Finally, reduced energy inflation passthrough has persisted in the face of monetary policy which quickly became less responsive to energy inflation starting around 1985. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-06&r=mac |
| By: | Campbell Leith; Simon Wren-Lewis |
| Abstract: | Recent attempts to incorporate optimal fiscal policy into New Keynesian models subject to nominal inertia, have tended to assume that policy makers are benevolent and have access to a commitment technology. A separate literature, on the New Political Economy, has focused on real economies where there is strategic use of policy instruments in a world of political conflict. In this paper we combine these literatures and assume that policy is set in a New Keynesian economy by one of two policy makers facing electoral uncertainty (in terms of infrequent elections and an endogenous voting mechanism). The policy makers generally share the social welfare function, but differ in their preferences over fiscal expenditure (in its size and/or composition). Given the environment, policy shall be realistically constrained to be time-consistent. In a sticky-price economy, such heterogeneity gives rise to the possibility of one policy maker utilising (nominal) debt strategically to tie the hands of the other party, and influence the outcome of any future elections. This can give rise to a deficit bias, implying a sub-optimally high level of steady-state debt, and can also imply a sub-optimal response to shocks. The steady-state distortions and inflation bias this generates, combined with the volatility induced by the electoral cycle in a sticky-price environment, can significantly raise the costs of having a less thankfully benevolent policy maker. |
| Keywords: | New Keynesian Model; Government Debt; Monetary Policy; Fiscal Policy, Electoral Uncertainty, Time Consistency. |
| JEL: | E62 E63 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_11&r=mac |
| By: | João Loureiro (CEMPRE, Faculdade de Economia, Universidade do Porto); Manuel M. F. Martins (CEMPRE, Faculdade de Economia, Universidade do Porto); Ana Paula Ribeiro (CEMPRE, Faculdade de Economia, Universidade do Porto) |
| Abstract: | After 10 years of a fixed exchange rate against the euro and a deepening integration with the European Union (EU), the authorities of Cape Verde maintain a strong commitment to nominal stability and are now considering the official euroization of the country. Compared to the current pegging, euroization could be costly if the economic conditions of Cape Verde were to require control over the interest rates and the exchange rate. Given the strong economic and financial integration between Cape Verde and Europe, and the fact that Cape Verde records inflation rates at levels that are similar to those of the European Monetary Union (EMU), the relevant issue is whether the European Central Bank (ECB) monetary policy fits the needs of Cape Verde. In order to answer this question, we empirically assess the synchronization between the business cycle of Cape Verde and the business cycle of the EMU. For that purpose, we compute output gaps and then use conventional correlation measures as well as other indicators recently suggested in the literature. Replicating the methodology for each of the current 27 EU members, our results show that Cape Verde ranks better than several EU countries and even better than some EMU countries. We thus argue that there is a strong case for the euroization of Cape Verde. Euroization would secure the benefits already attained with the pegging to the euro and would warrant additional benefits, most likely with no relevant costs stemming from inappropriate ECB monetary policies. |
| Keywords: | Africa, Cape Verde, European Monetary Union, Euroization, Business Cycles |
| JEL: | E32 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:317&r=mac |
| By: | Erixon, Lennart (Dept. of Economics, Stockholm University) |
| Abstract: | Johan Åkerman and Erik Dahmén’s structural theory of economic fluctuations is a constructive alternative to traditional macroeconomic approaches and also to modern business-cycle models based on micro economic concepts. There are similarities between Åkerman and Dahmén’s theory and Schumpeter’s theory in Business Cycles. Both theories underline the importance of progressive industries for the recovery or prosperity phase. However, by the notions of faulty investment, structural tensions and development blocks, Åkerman and Dahmén provided an original explanation of the turning points in the business cycle. An empirical study of the severely overheated Swedish economy in the 1980s and the following depression did not confirm the Åkerman-Dahmén theory. One weakness of the theory is that it downplays the independent role of financial-market conditions. Åkerman and Dahmén’s theory is more valid for innovation-driven cycles such as the ICT boom in the late 1990s and the subsequent crisis. |
| Keywords: | Development Blocks; Faulty Investment; Structural Change; Juglar Cycles; Progressive Industries |
| JEL: | B25 B52 E11 E32 G33 O31 |
| Date: | 2009–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0009&r=mac |
| By: | Degol Hailu (UNDP SURF) |
| Abstract: | Rich countries have earmarked about $7 trillion to reverse the current global economic slump. The United States allotted $700 million to rescue ailing banks. About $180 billion was used to rescue just one insurer (AIG). A $787 billion stimulus package is also in place. The United Kingdom set aside $692 billion. The Chinese announced a $586 billion fiscal stimulus. Monetary policy has also become expansionary. The US and the UK cut interest rates to zero per cent and 0.5 per cent, respectively. Can low-income countries embark on such expansionary fiscal and monetary policies? Unfortunately not, as the case of Ethiopia demonstrates |
| Keywords: | The Rich Expand, the Poor Contract. The Paradox of Macroeconomic Policy in Ethiopia |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:opager:78&r=mac |
| By: | Martins, Guilherme; Sinigaglia, Daniel |
| Abstract: | This paper incorporates Rational Inattention as defined by Sims (2003a) to a traditional RBC model with multiple sources of uncertainty. Our model distinguishes between transitory and permanent labor and relative investment productivity shocks. The introduction of information frictions works as an endogenous adjustment cost: given the model parameters, the degree of sluggishness of endogenous variables in response to shocks is optimally determined. In practical terms, Rational Inattention increases the volatility and the contemporaneous correlations with output of consumption and decreases those of investment and hours. Moreover, it generates a trade-off between short-run and long-run shock variances. We believe these effects might have important welfare implications and can provide an analytical understanding on the links between business cycle fluctuations and the long-run performance of an economy. |
| Keywords: | Real Business Cycle; Rational Inattention; Technology Diffusion |
| JEL: | E32 D80 |
| Date: | 2009–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14089&r=mac |
| By: | Todd E. Clark; Troy Davig |
| Abstract: | The level and volatility of survey-based measures of long-term inflation expectations have come down dramatically over the past several decades. To capture these changes in inflation dynamics, we embed both short- and long-term expectations into a medium-scale VAR with stochastic volatility. The model documents a marked decline in the volatility of expectations, but also reveals a shift in the factors driving their movement. Throughout the 1980s and early 1990s, the majority of the variance in long-term expectations were driven by 'own' shocks. Beginning in the mid-1990s, however, the factors explaining the variance of long-term expectations began shifting amidst an overall decline in volatility. At the end of the sample in 2008, innovations to measures of inflation and output account for the majority of the remaining low-level of volatility in long-term expectations. We document a shift in monetary policy towards more systematic behavior that precedes the shift in the factors driving long-term expectations. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-05&r=mac |
| By: | Magdalena Morgese Borys (CERGE-EI); Roman Horvath (Czech National Bank and Charles University, Prague) |
| Abstract: | In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008. |
| Date: | 2008–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1109&r=mac |
| By: | Caponi, Vincenzo (Ryerson University); Kayahan, Cevat Burc (affiliation not available); Plesca, Miana (University of Guelph) |
| Abstract: | So far the literature has found that the effect of macroeconomic fluctuations on training decisions is ambiguous. On the one hand, the opportunity cost to train is lower during downturns, and thus training should be counter-cyclical. On the other hand, a positive shock may be related to the adoption of new technologies and increased returns to skill, making training incidence pro-cyclical. Using the Canadian panel of Workplace and Employee Survey (WES) we find that (i) training moves counter-cyclical with the aggregate business cycle (more training during downturns), while at the same time (ii) the idiosyncratic sectoral shocks have a positive impact on training incidence (more training in sectors doing relatively better). This finding helps us understand training decisions by firms and has important theoretical and policy implications. |
| Keywords: | business cycles, training |
| JEL: | E32 J24 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4042&r=mac |
| By: | Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | We observe that the inconsistency of optimal policy comes from inconsistency of the social loss function with respect to the economic structure. Accordingly, this paper designs the central bank loss functions and rules, which are consistent with the economic structure and serve as mechanisms to implement optimal policy. We minimize the social loss function and use the idea of implementation theory, in designing the central bank loss functions and policy rules. Both ways result in identical central bank loss functions and policy rules. We also examine four equivalent methods of implementing optimal monetary policy, committing to the social loss function, using discretion with the central bank long-run and short-run loss functions, and following monetary policy rules. The same outcomes emerge from these different policymaking methods because the central bank actually follows the same (similar) policy rules. To some extent, policy rules appear more basic and flexible than social and central bank loss functions. In addition, we observe that the short-run natural employment target eliminates both the average and the state-contingent inflation biases, and a liberal, not conservative, preference eliminates the stabilization bias. As a result, under the designed central bank loss function discretionary policy proves optimal for social welfare. In conclusion, the social loss function, the central bank long-run and short-run loss functions, and monetary policy rules imply a complete regime for implementing optimal policy. |
| Keywords: | Optimal Policy, Central Bank Loss Functions, Policy Rules |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0911&r=mac |
| By: | Bettina Becker (Department of Economics, Loughborough University); Stephen G. Hall (Department of Economics, University of Leicester) |
| Abstract: | We present a common factor framework of convergence which we implement using principal components analysis. We apply this technique to a dataset of monthly inflation rates of EMU and the Eastern European New Member Countries (NMC) over 1996-2007. In the earlier years, the NMC rates moved independently from an average of the three best performing countries over the past twelve months, while they moved somewhat closer in line with them in the later years. Looking at the sample of the EMU and NMC countries as a whole, there is evidence of a formation of convergence clubs across the two groups. |
| Keywords: | Convergence, inflation rates, European Monetary Union, principal components analysis. |
| JEL: | C22 F31 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2009_05&r=mac |
| By: | Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | The cross-country relationship between the relative price level and the relative GDP level is found to be significant and stable for EU member states over the period 1997-2006. The joint dynamics of price and GDP levels tend to gravitate towards the regression line but there is no shorter-term trade-off between fast real convergence and low inflation. Contrary to popular perception high inflation is not necessary for fast convergence. Moreover the trajectories of certain euro area states indicate that giving up one's national currency is risky: it may stop convergence or even precipitate divergence. Problems may also emerge when the initial parity is weak. In addition, the inability to nominally devalue may prove very costly. However retaining one's national currency is not risk-free, even if domestic inflation is low, and even though subsequent corrective devaluations remain possible. While participation in the euro area has proved troublesome for some countries, it is in the interest of all member states to deepen wage and fiscal policy integration in order to help overcome the stagnation experienced in those euro area states that suffer from strongly overvalued price levels. |
| Keywords: | real convergence, relative price level, inflation, euro, EU |
| JEL: | E31 F15 F43 O47 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:49&r=mac |
| By: | Andra C. Ghent; Michael T. Owyang |
| Abstract: | We analyze the relationship between housing and the business cycle in a set of 36 US cities. Most surprisingly, we find that falls in house prices are often not followed by declines in employment. We also find that the leading indicator property of residential investment is not consistent across cities and that, at the national level, the leading indicator property of residential investment is not robust to including financial factors as control variables. |
| Keywords: | Housing ; Housing - Prices ; Business cycles |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-07&r=mac |
| By: | Nergiz Dincer; Barry Eichengreen |
| Abstract: | We present updated estimates of central bank for 100 countries up through 2006 and use them to analyze both the determinants and consequences of monetary policy transparency in an integrated econometric framework. We establish that there has been significant movement in the direction of greater central bank transparency in recent years. Transparent monetary policy arrangements are more likely in countries with strong and stable political institutions. They are more likely in democracies, with their culture of transparency. Using these political determinants as instruments for transparency, we show that more transparency monetary policy operating procedures is associated with less inflation variability though not also with less inflation persistence. |
| JEL: | E0 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14791&r=mac |
| By: | Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Huiping Yuan (Department of Finance, Xiamen University) |
| Abstract: | Kydland and Prescott (1977) consider the issue of the time-inconsistency of optimal policy and its source. Our paper provides additional insight on this issue. They develop a simple model of monetary policy making, where the central bank needs some commitment technique to achieve optimal monetary policy over time. Although not their main focus, they illustrate the difference between consistent and optimal policy in a sequential-decision one-period world. In our solution, the government appoints a central bank or delegates to the central bank an objective function that differs from the social welfare function. The central bank’s welfare function causes the consistent policy implemented by the central bank to prove optimal for society. The optimal institutional design for the Kydland-Prescott sequential-decision one-period model requires the appointment or delegation to a completely conservative central banker. |
| Keywords: | Consistent policy, Optimal policy, Consistent targets |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0908&r=mac |
| By: | Habibullah, M.S.; Baharom, A.H.; Fong , Kin Hing |
| Abstract: | This study examines the impact of inflation and output growth on stock market returns and volatility in selected Asian countries, namely India, Japan, Korea, Malaysia and Philippines. By using monthly data from 1991 to 2004 and by employing GARCH (1, 1) model, it is found that macroeconomic volatility, which is measured by movement in inflation and output growth, have a weak predictive power for stock market returns and volatility in these countries. The movements of the inflation rate have significant impact to the stock market returns, either positive or negative depending on the inflation rates and their fluctuation in that country. While output growth movements have significant effect to stock market volatility, countries with relatively higher output volatility is associated with higher conditional volatility of stock returns, which is positive effect but is negative for countries which have relatively lower output volatility. |
| Keywords: | Stock returns; volatility; output; inflation; Asian countries |
| JEL: | G14 E44 |
| Date: | 2009–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14114&r=mac |
| By: | Kin-Boon Tang (Nottingham University Business School - Malaysia Campus); Hui-Boon Tan (Nottingham University Business School - Malaysia Campus) |
| Abstract: | This paper examines the direct and indirect effects of financial intermediary development on output fluctuations based on the theoretical works by Bacchetta and Caminal (2000) and Beck, Lundberg and Majnoni (2006). According to credit market imperfections, well-developed financial intermediaries dampen the effect of real sector shocks and magnify the effect of monetary shocks on output fluctuations. This paper examines whether financial intermediaries serve as shock absorbers or shock magnifiers that mitigate or amplify the effect of real and monetary shocks on output fluctuations. Using data from 8 countries of ASEAN-5 Plus 3, the empirical results indicate that (1) there is strong and robust evidence for the dampening effect of financial intermediary development on output fluctuations via the propagation of real shocks, (2) there is somewhat weak evidence for the magnifying effect of financial intermediary development via the propagation of monetary shocks and (3) financial intermediary development has strong direct impact on output fluctuations if countries are bankdependent in the cointegration regression. |
| Keywords: | Panel cointegration; Financial development; Output fluctuations |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nom:nubsmc:2008-06&r=mac |
| By: | Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. As a result, the social loss function cannot serve as a direct loss function for the central bank. Accordingly, we employ implementation theory to design a central bank loss function (mechanism design) with consistent targets, while the social loss function serves as a social welfare criterion. That is, with the correct mechanism design for the central bank loss function, optimal policy and consistent policy become identical. In other words, optimal policy proves implementable (consistent). |
| Keywords: | Optimal policy, Consistent policy, Implementation theory |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0910&r=mac |
| By: | Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna,); Alfred Stiglbauer (Oesterreichische Nationalbank, Economic Analysis Division, P.O. Box 61, A-1010 Vienna,) |
| Abstract: | In this paper we present an extension of the Taylor model with staggered wages in which wage-setting is also influenced by reference norms (i.e. by benchmark wages). We show that reference norms can considerably increase the persistence of inflation and the extent of real wage rigidity but that these effects depend on the definition of reference norms (e.g. how backward-looking they are) and on whether the importance of norms differs between sectors. Using data on collectively bargained wages in Austria from 1980 to 2006 we show that wage-setting is strongly influenced by reference norms, that the wages of other sectors seem to matter more than own past wages and that there is a clear indication for the existence of wage leadership (i.e. asymmetries in reference norms). |
| Keywords: | Inflation Persistence, Real Wage Rigidity, Staggered Contracts, Wage Leadership. |
| JEL: | E31 E32 E24 J51 |
| Date: | 2009–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:153&r=mac |
| By: | Marlene Amstad; Andreas M. Fischer |
| Abstract: | This paper estimates monthly pass-through ratios from import prices to consumer prices in real time. Conventional time series methods impose restrictions to generate exogenous shocks on exchange rates or import prices when estimating pass-through coefficients. Instead, a natural experiment based on data releases defines our shock to foreign prices. Our estimation strategy follows an event-study approach based on monthly releases in import prices. Projections from a dynamic common factor model with daily panels before and after monthly releases of import prices define the shock. This information shock allows us to recover a monthly pass-through ratio. We apply our identification procedure to Swiss prices and find strong evidence that the monthly pass-through ratio is around 0.3. Our real-time estimates yield higher pass-through ratios than time series estimates. |
| Keywords: | Monetary policy ; Econometric models ; Foreign exchange rates ; Prices |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:26&r=mac |
| By: | Terry McKinley (International Poverty Centre) |
| Keywords: | La Mise en ?uvre de Politiques de Maîtrise de l?inflation en Afrique Subsaharienne. Pourquoi Maintenant? Pour quoi Faire ? |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:opfran:51&r=mac |
| By: | Wolk Leonard; Peeters Ronald (METEOR) |
| Abstract: | Prediction markets serve as popular devices to aggregate beliefs and to assess market estimated probabilities. By looking at the interaction between real- and play-money prediction markets, this paper shows that traded volume has a significant positive effect on the probability of real- and play-money market cointegration. This indicates that the information aggregation process, eliminating individual traders'' biases, operates even when not inducing truthful belief revelation with monetary incentives. The study is based on data from four markets covering the 2008 presidential election in the United States of America |
| Keywords: | financial economics and financial management ; |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2009013&r=mac |
| By: | David Haugh; Patrice Ollivaud; David Turner |
| Abstract: | This paper examines the characteristics of downturns and subsequent recoveries following past banking crises in OECD countries as well as evidence of any effects on potential output growth. It is differentiated from previous analyses because it makes use of OECD measures of the output gap and potential output. Downturns following banking crises are found to be more protracted with larger output losses and disproportionate falls in housing and business investment. The recovery is typically more muted with exports providing a disproportionately large positive contribution. Evidence regarding possible effects on potential growth of a banking crisis is mixed. The banking crisis in Japan was followed by a deterioration in potential growth partly due to a worsening in productivity performance which may be related to the protracted nature of the banking problems and the resulting misallocation of capital. Following the Nordic banking crises, which were resolved more quickly, there was no deterioration in productivity performance, although there was a temporary deterioration in potential growth which is mostly explained by an increase in the structural unemployment rate, which in turn may reflect the interaction of an exceptionally severe downturn with structural labour market rigidities.<P>Conséquences macroéconomiques des crises bancaires dans les pays de l’OCDE<BR>Ce papier analyse, dans le contexte des crises bancaires passées des pays de l’OCDE, les caractéristiques des ralentissements économiques et de la reprise qui suit, ainsi que de mettre en évidence de possibles effets sur la croissance du potentiel de production. Cette étude se différencie des précédentes par l’utilisation de l’écart de production et du potentiel de l’économie. Les ralentissements qui font suite à une crise bancaire semblent durer plus longtemps avec des pertes plus importantes et avec une réaction négative de l’investissement privé disproportionnée. Le rythme de la reprise est plus modéré et se caractérise par des contributions fortement positives des exportations. Les résultats de l’analyse des conséquences des crises bancaires sur le potentiel de l’économie sont mitigés. La crise bancaire au Japon a affecté négativement le potentiel de production via une baisse de la productivité du travail. Cela peut être relié à la durée des problèmes bancaires qui ont touché le Japon et de leurs conséquences néfastes sur l’allocation du capital. Dans le cas des crises bancaires des pays nordiques qui ont duré moins longtemps, il n’y a pas eu d’effets sur la productivité, bien que temporairement le potentiel ait baissé ce qui provient principalement d’une augmentation du taux de chômage structurel. Cette dernière relation peut refléter l’interaction entre d’une part un ralentissement exceptionnellement sévère et d’autre part des rigidités structurelles sur le marché du travail. |
| Keywords: | cycle économique, croissance potentielle, potential output, output gap, écart de production, financial crisis, crise financière, banking crisis, crise bancaire, downturn, ralentissement économique, business cycle |
| JEL: | E32 E44 |
| Date: | 2009–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:683-en&r=mac |
| By: | Huiping Yuan (Department of Finance, Xiamen University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Langnan Chen (Institute for Economics, Sun Yat-sen University) |
| Abstract: | This paper shows that optimal policy and consistent policy outcomes require the use of control-theory and game-theory solution techniques. While optimal policy and consistent policy often produce different outcomes even in a one-period model, we analyze consistent policy and its outcome in a simple model, finding that the cause of the inconsistency with optimal policy traces to inconsistent targets in the social loss function. Control theory can identify the optimal plan and, thus, the optimal economic outcomes. Then, we can seek a consistent plan that coincides with the optimal plan through institutional design. That is, the optimal plan can indicate how to design the optimal institution, through which we implement the optimal plan with a consistent plan. |
| Keywords: | Optimal policy, Consistent policy, Institutional design |
| JEL: | E42 E52 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0909&r=mac |
| By: | Elena Bojesteanu (Academy of Economic Studies (Romania)); Gabriel Bobeica (Academy of Economic Studies (Romania)) |
| Abstract: | The present study sheds light on important aspects of monetary integration in the European Union involving the newest member states. It assesses the degree to which they satisfy the business cycle correlation criteria. Our results demonstrate that there is a common business cycle in the Euro area and that most of the candidate countries exhibit convergence with this group, with the remarkable exception of Estonia, Lithuania, Slovakia and Romania. Bulgaria shows better achievements than Romania in terms of business cycle synchronization with the Euro zone.This paper was presented at the 18th International Conference of the International Trade and Finance Association meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008. |
| Date: | 2008–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1121&r=mac |
| By: | Lasse Bork (Aarhus School of Business, University of Aarhus,and CREATES) |
| Abstract: | Economy-wide effects of shocks to the US federal funds rate are estimated in a state space model with 120 US macroeconomic and financial time series driven by the dynamics of the federal funds rate and a few dynamic factors. This state space system is denoted a factor-augmented VAR (FAVAR) by Bernanke et al. (2005). I estimate the FAVAR by the fully parametric one-step EM algorithm as an alternative to the two-step principal component method and the one-step Bayesian method in Bernanke et al. (2005). The EM algorithm which is an iterative maximum likelihood method estimates all the parameters and the dynamic factors simultaneously and allows for classical inference. I demonstrate empirically that the same impulse responses but better fit emerge robustly from a low order FAVAR with eight correlated factors compared to a high order FAVAR with fewer correlated factors, for instance four factors. This empirical result accords with one of the theoretical results from Bai & Ng (2007) in which it is shown that the information in complicated factor dynamics may be substituted by panel information. |
| Keywords: | Monetary policy, large cross-sections, factor-augmented vector autoregression, EM algorithm, state space |
| JEL: | E3 E43 E51 E52 C33 |
| Date: | 2009–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-11&r=mac |
| By: | Arief Ramayandi (Center for Economics and Development Studies Dept. of Economics, Padjadjaran University) |
| Abstract: | This paper investigates whether or not monetary policy has been conducted efficiently in five selected ASEAN economies. It derives a utility-consistent social loss function, as a metric for welfare, to assess monetary policy efficiency in a small open economy model. An optimal monetary policy that minimises the social loss function is solved using information on structural parameters estimated for a model that represents each of the selected ASEAN-5 countries. The results are largely consistent with common wisdom in the literature, where policies based on credible commitment give the best welfare outcome. The paper further examines the welfare implications of the currently adopted simple monetary policy feedback rule for each of the sample economies. This exercise points out that there is room for improving the performance of monetary policy in each country, and it should be explored further. It also suggests the possibility that monetary authorities in the sample countries may be optimising over an objective function that di§er from the social welfare function derived in the paper. |
| Keywords: | ASEAN, monetary policy, optimal policy rules, social welfare function |
| JEL: | E52 E58 C61 F41 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200902&r=mac |
| By: | Giovanni L. Violante; Jonathan Heathcote; Kjetil Storesletten |
| 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? |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:420&r=mac |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper considers the "real-time" forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model--the Federal Reserve Board's new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005, thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting exercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecasting, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-10&r=mac |
| By: | Rangan Gupta (Department of Economic, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa) |
| Abstract: | This paper first tests the restrictions implied by Hall’s (1978) version of the permanent income hypothesis (PIH) obtained from a bivariate system of labor income and savings, using quarterly data over the period of 1947:01 to 2008:03 for the US economy, and then uses the model to forecast changes in labor income over the period of 1991:01 to 2008:03. First, our results indicate the overwhelming rejection of the restrictions on the data implied by the PIH. Second, we found that, when compared to univariate and bivariate versions of classical and Bayesian Vector Autoregressive (VAR) models, the PIH model, in general, is outperformed by all other models in terms of the average RMSEs for one- to eight-quarters-ahead forecasts for the changes in labor income. Finally, as far as forecasting is concerned, we found the most tight Gibbs sampled univarite Bayesian VAR to perform the best. In sum, we do not find evidence for the US data to be consistent with the PIH, neither does the PIH model perform better relative to alternative atheoretical models in forecasting changes in labor income over an out of sample horizon that was characterized by high degree of volatility for the variable of interest. |
| Keywords: | Permanent Income Hypothesis, Forecast accuracy, Gibbs Sampling |
| JEL: | E17 E21 E27 E37 E47 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200909&r=mac |
| By: | Rime, Dagfinn; Sarno, Lucio; Sojli, Elvira |
| Abstract: | This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations. |
| Keywords: | exchange rates; forecasting; macroeconomic news; microstructure; order flow |
| JEL: | F31 F41 G10 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7225&r=mac |
| By: | Tatom, John |
| Abstract: | Financial sector regulatory reform has been a leading national issue since the U.S. Treasury issued its Blueprint for reform in spring (2008). The mortgage foreclosure and financial crises reinforced popular interest in whether the U.S. regulatory framework was deficient and how to fix the regulatory framework. Meanwhile, some key decisions in the United States, particularly concerning the failure and bailout of AIG and some investment banks in fall 2008, have established precedents for a new regulatory framework and policies. Where policymakers go from here is not certain, but the ideas on the table and the direction of policy suggest that the role of the Federal Reserve (Fed) in financial regulation will become central, at least in critical periods. This paper reviews the calls for a new “financial stability” regulator and the potential role of the Fed as such a regulator. It argues that the takeover of AIG provides a useful example and precursor of the Fed’s suitability in that role. Section 1 explains the Fed’s role as regulator and the relationship of the Fed’s lender of last resort function to systemic risk. It also addresses recent changes in the notion of systemic risk and systemically significant firms in concluding that there is a remaining case for a new regulator of such risk. Section II reviews the financial problems of AIG and the changing intervention of the Fed and the U.S. Treasury in AIG. The last section takes up some related issues, the role of a central bank versus a Financial Stability Authority in regulating banks or systemic risk, the potential role of the Fed or a another federal regulator in regulating the insurance industry and the risk to Fed independence from extending its regulatory role to cover systemic risk. The Fed’s actions with regard to AIG provide strong evidence that broadening the too big to fail policy or broadening the Fed’s lender of last resort policy to include non-bank firms pose strong conflicts for the achievement of the objectives of monetary policy or of financial stability. Moreover, the loss experience of AIG indicates the problems of fragmented or absent federal regulation of insurers for regulatory reform. |
| Keywords: | Financial Regulation; Central Banking; Systemic Risk; |
| JEL: | E58 G28 |
| Date: | 2009–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14122&r=mac |
| By: | Dramane Coulibaly (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This paper examines the macroeconomic determinants of migrants' remittances cycles. The study uses panel VAR methods in order to compensate for both data limitations and endogeneity among variables. The analysis considers annual data for 16 latin and Caribbean countries. By using these data I compute variance decompositions (VDCs) and impulse response functions (IRFs). The VDCs show that the forecast error variance of remittances is explained by host country GDP, home country GDP and the differential of interest rates between home and host countries. The IRFs analysis confirms these findings. First, the IRFs show that remittances respond positively to boom in host country. Second, for altruistic motivations, a recession in home country is accompanied by a increase in remittances inflows. The last result, related to self-interested motivations, is the increase in remittances inflows following a rise in the differential of interest rates between home and host countries. |
| Keywords: | International migration, remittances, business cycles. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00367704_v1&r=mac |
| By: | Ansgar Belke |
| Abstract: | Policymakers in the EU member states are currently shaping rescue packages to prevent the financial crisis hitting their economies with unmitigated force. Each government is responding to the emerging problems with a country-specific set of measures. Given the global nature of the crisis, would coordinated action at the European level not be a better approach?Was the German government – much-criticized for its initial reluctance to adopt massive fiscal stimulation measures – right after all to exploit the option value of waiting in a situation of high uncertainty? The answer to the second question is a qualified “yes”. However, the answer to the first one is more complex and crucially depends on how reasonable it appears to model the impact of the economic crisis as an exogenous demand shock which has hit the euro area countries. |
| Keywords: | Policy co-ordination, fiscal multiplier, fiscal stimulus package, liquidity constraint, option value of waiting, uncertainty |
| JEL: | E62 F42 H62 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0088&r=mac |
| By: | Alejandro Francisco Peláez Ruiz-Fornells |
| Abstract: | From a purely speculative approach and under the usual assumptions, a wellknown symmetrical structure appears, connecting neoclassical and Keynesian views of the markets. This framework admits graphical and formal explanation. In previous work, we addressed this topic reaching some conclusions. Now that the credit bust spreads worldwide, we focus on formal analysis leading to more advanced results linked to our previous perspective that seems to hold. Using an ex ante formal treatment, we conclude that when applied to explain real interest rate behaviour, this symmetrical look shows a countercyclical pattern of response for this variable in neoclassical approach, while being procyclical from Keynesian view. This implies either a magnifying or a stabilizing role for the real rate in each case and could affect the financial to real investment flows ratio and, as a result, aggregate capital stock composition. The trend this ratio could follow, though difficult to explain, is of great interest to help explain the behaviour of financial markets. This appears as a key feature to approach the focal points of the financial markets reform |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doctra:09-03&r=mac |
| By: | Ivan Vidangos |
| Abstract: | This paper studies variation in individual labor income over time using a panel vector autoregression (PVAR) in income, the wage rate, hours of work, and hours of unemployment. The framework is used to investigate how much of the residual variation in labor income is due to residual variation in the wage rate, work hours, and unemployment hours. I also explore the dynamic effects of unanticipated changes in each of the variables in the system, investigate their interactions, and assess their contribution to short-run and long-run income movements. The model is estimated on a sample of male household heads from the Panel Study of Income Dynamics (PSID). I find that innovations in the wage rate and work hours (conditional on unemployment) are about equally important in the short run. Wage innovations are very persistent, while the effect of changes in hours is mostly transitory. As a result, the wage rate is much more important in the determination of income movements in the long run. Innovations in unemployment have a relatively small, but very persistent effect on income which operates through the wage rate. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-09&r=mac |
| By: | Enrique Martinez-Garcia; Jens Sondergaard |
| Abstract: | This paper develops a tractable two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model's ability to match these stylized facts. Nominal rigidities cannot account for these features either. |
| Keywords: | Macroeconomics - Econometric models ; Capital investments ; International trade ; Foreign exchange |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:28&r=mac |
| By: | Janice Eberly; Sergio Rebelo; Nicolas Vincent |
| Abstract: | Do investment models fit firm-level data? - which model fits best? To answer this question we estimate alternative models using Compustat data. We find that both a version of the Hayashi (1982) and a model with decreasing returns to scale in production fit firm-level data very well. Our estimates suggest that there is substantial measurement error in Q. This measurement error implies that the investment-cash-flow regressions that have received so much attention are ineffectual to discriminate among alternative models. In fact, the models that we estimate generate empirically plausible cash-flow and lagged-investment effects even though they were not designed to produce them. |
| Keywords: | Investment, Hayashi, Investment adjustment costs, Tobin's Q, Regime switching |
| JEL: | E22 D92 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0908&r=mac |
| By: | Smith, Reginald |
| Abstract: | Currency logistics is becoming a field of increasing interest and importance both in government and academic circles. In this paper, a basic description of China's nationwide logistics network for the Renminbi is discussed and analyzed. In addition to its basic structure, its key problems such as production costs, inventory levels, and transportation and storage security are discussed. |
| Keywords: | currency; logistics; China; money supply |
| JEL: | E42 E58 |
| Date: | 2008–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14126&r=mac |
| By: | Benjamin Eden (Department of Economics, Vanderbilt University); Matthew Jaremski (Department of Economics, Vanderbilt University) |
| Abstract: | This paper studies price setting within a chain of grocery stores, using a scanner database that contains observations of retail prices for 435 products within 75 stores over 121 weeks. We find price dispersion within the chain. Stores differentiate themselves by the prices of relatively few items. Typically most prices in the store are at the mode of the cross sectional price distribution, some are above the mode and some are below the mode. The probability of a price change is 3.6% when the price is at the mode and 76.2% when the price is not at the mode. We explain the apparent attraction to the mode in terms of a model in which price discreteness plays an important role but there is no inertia. We also find that the probability of a price change is higher when the deviation from the mean of the cross sectional price distribution is large. But unlike conventional wisdom, the probability of a price change is higher for young prices. |
| Keywords: | Price discreteness, price dispersion, price changes substitution, the Friedman rule, seigniorage |
| JEL: | E00 L11 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0903&r=mac |
| By: | Hui-Boon Tan (Nottingham University Business School - Malaysia Campus); Lee-Lee Chong (Faculty of Management, Malaysia Multimedia University) |
| Abstract: | This study highlights the importance of choice of exchange rate system to macroeconomic stability of small- open countries based on the outcomes of the recent exchange rate regime switches of three small Asian countries during the post Asian financial crisis period. The three selected countries are Indonesia, Malaysia and Thailand, which have high similarities in their economic structures, but have reacted very differently in mitigating the economic distortion of the 1997 financial crisis, in particular in the adoption of exchange rate system. By focussing on macroeconomic volatilities of these countries, our results show that the amplified volatilities due to the crisis were not stabilised by switching the system to a more flexible regime. For instance, Thailand and Indonesia had switched their system from a managed-float to an independent-float, and as a result, the volatilities were increased instead of reduced after the switch. The volatilities, however, were effectively stabilised after the countries made the second switch - from the independent-float back to the managed-float with pre-announcement. For Malaysia, a switch from the managed-float to the pegged system successfully reduced the volatilities. The exchange rate misalignments of the countries, except Indonesia, were also reduced when the countries switched from a flexible to a more fixed system. These empirical findings thus strongly support central banks of small-open economies to adopt a more fixed, such as the managed-float system, rather than a flexible, such as the independentfloat. However, the managed-float system needs to couple with efficient management to ensure a smooth and stable regime. |
| Keywords: | Exchange rate regimes; Macroeconomic volatility; Financial crisis; Exchange rate misalignment |
| JEL: | E42 E44 F31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nom:nubsmc:2008-03&r=mac |
| By: | Balázs Égert; Tomasz Kozluk; Douglas Sutherland |
| Abstract: | Investment in network infrastructure can boost long-term economic growth in OECD countries. Moreover, infrastructure investment can have a positive effect on growth that goes beyond the effect of the capital stock because of economies of scale, the existence of network externalities and competition enhancing effects. This paper, which is part of a project examining the links between infrastructure and growth and the role of public policies, reports the results on the links with growth from a variety of econometric approaches. Time-series results reveal a positive impact of infrastructure investment on growth. They also show that this effect varies across countries and sectors and over time. In some cases, these results reveal evidence of possible over-investment, which may be related to inefficient use of infrastructure. Bayesian model averaging of cross-section growth regressions confirm that infrastructure investment in telecommunications and the electricity sectors has a robust positive effect on long-term growth (but not in railways and road networks). Furthermore, this effect is highly nonlinear as the impact is stronger if the physical stock is lower.<P>Infrastructure et croissance : Évidence empirique<BR>L’investissement dans les réseaux d’infrastructure est susceptible d’encourager la croissance économique de long terme dans les pays de l’OCDE. De surcroît, il peut avoir un effet positif sur la croissance qui va au-delà de l’effet du stock du capital en raison des économies d’échelles, de l’existence d’externalités de réseaux et des effets bénéfiques sur la concurrence. Ce document, qui fait partie d'un projet sur les liens entre l'infrastructure et la croissance et le rôle des politiques publiques, présente les résultats sur les liens avec la croissance d'une variété de méthodes économétriques. Des résultats fondés sur des séries temporelles indiquent que l’investissement dans les infrastructures a un effet positif sur la croissance économique. Les résultats suggèrent que cet effet varie entre pays et secteurs ainsi que dans le temps. Dans certains cas, ces résultats indiquent un possible sur-investissement qui pourrait provenir d’une utilisation peu efficace des infrastructures. Par le biais d’un moyennage Bayésien de régressions de croissance effectuées en coupe instantanée, nous démontrons que l’investissement d’infrastructure dans les secteurs des télécommunications et de l’électricité (mais pas dans les réseaux ferroviaire et routier) a une influence positive et robuste sur la croissance. De plus, cet effet est non-linéaire car il est plus important si le stock du capital est moins élevé. |
| Keywords: | economic growth, croissance économique, investment, investissement, industrie de réseau, infrastructure, infrastructure, network industry, co-integration, cointégration, choix de modèles par estimateur Bayésien, Bayesian model averaging |
| JEL: | E22 O11 O40 |
| Date: | 2009–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:685-en&r=mac |
| By: | Hervé Boulhol |
| Abstract: | The composition of the working-age population can influence aggregate employment and average productivity because both employment rates and productivity levels vary across population groups. This paper assesses the quantitative importance of the working-age population broken down by age, gender and education in explaining differences in employment and productivity levels across countries. Differences in population structure are found to contribute importantly to variations in both labour utilisation and productivity performances. Combining these effects in a mechanical way, differences in the composition of the working-age population account for around a third of the gap in GDP per capita for Europe (EU15) vis-à-vis the United States, mainly due to differences in educational attainment.<P>Les effets de la structure de la population sur l’emploi et la productivité<BR>La composition de la population d’âge actif peut influer sur le niveau global de l’emploi et sur la productivité moyenne car aussi bien les taux d’emploi que les niveaux de la productivité varient selon les groupes de population. Cette étude a pour objectif d’évaluer dans quelle mesure la structure de la population d’âge actif, en fonction de l’âge, du sexe et du niveau d’éducation, peut expliquer les différences de niveau d’emploi et de productivité entre pays. Les différences dans la structure de la population contribuent pour beaucoup aux écarts entre pays tant des niveaux d’utilisation de la main d’oeuvre que de la productivité. En combinant ces effets mécaniques, on observe que les différences dans la composition de la population d’âge actif expliquent pour environ un tiers l’écart de PIB par habitant de l’Europe (UE15) par rapport aux États-Unis, principalement du fait des différences de niveau d’éducation. |
| Keywords: | démographie, aggregate employment, emploi agrégé, qualité de l'emploi, quality of labour, labour productivity, productivité du travail, demographics |
| JEL: | E24 J10 J21 J31 |
| Date: | 2009–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:684-en&r=mac |