nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒04‒05
fifty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Sources of the Great Moderation: shocks, frictions, or monetary policy? By Zheng Liu; Daniel F. Waggoner; Tao Zha
  2. Monetary policy rules with financial instability By Sofia Bauducco; Ales Bulir; Martin Cihak
  3. Assessing the Macroeconomic Effects of Fiscal By Ignacio Lozano Espitia; Karen Rodríguez
  4. Interest rate transmission mechanism of the monetary policy in the selected EMU candidate countries (SVAR approach) By Mirdala, Rajmund
  5. Monetary Policy Transmission and House Prices : European Cross Country Evidence By Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
  6. New-Keynesian Economics: An AS-AD View By Pierpaolo Benigno
  7. CONDI: a cost-of-nominal-distortions index By Stefano Eusepi; Bart Hobijn; Andrea Tambalotti
  8. Credit frictions and optimal monetary policy By Vasco Cúrdia; Michael Woodford
  9. Has the monetary transmission process in the euro area changed? Evidence vased on VAR estimates By Axel A Weber; Rafael Gerke; Andreas Worms
  10. Robust Monetary Policy under Model Uncertainty and Inflation Persistence. By Li Qin; Moïse SIDIROPOULOS; Eleftherios Spyromitros
  11. Linear Contracts, Common Agency and Central Bank Preference Uncertainty By Giuseppe Ciccarone; Enrico Marchetti
  12. Are Macroeconomic Variables Useful for Forecasting the Distribution of U.S. Inflation? By Manzan, Sebastiano; Zerom, Dawit
  13. IS U.S. MONEY CAUSING CHINA'S OUTPUT? By Johansson, Anders C.
  14. In search of monetary stability: the evolution of monetary policy By Otmar Issing
  15. Oil and the macroeconomy: a quantitative structural analysis By Francesco Lippi; Andrea Nobili
  16. Currency Misalignments and Optimal Monetary Policy: A Re-examination By Charles Engel
  17. Velocity and Monetary Expansion in a Growing Economy with Interest-Rate Control By Seiya Fujisaki
  18. Inventory accelerator in general equilibrium By Pengfei Wang; Yi Wen
  19. Currency Misalignments and Optimal Monetary Policy: A Reexamination By Charles Engel
  20. What do we know and not know about potential output? By Susanto Basu; John G. Fernald
  21. Time of Troubles: The Yen and Japan's Economy, 1985-2008 By Maurice Obstfeld
  22. Surprising Comparative Properties of Monetary Models: Results from a New Data Base By John B. Taylor; Volker Wieland
  23. The impact of monetary policy on the yield curve in the Brazilian economy By ARANHA, Marcel Z.; MOURA, Marcelo L.
  24. Assess The Long Run Effects Of Monetary Policy On Bank lending,Foreign Asset and Liability In MENA Countries By Ziaei, Sayyed Mahdi
  25. China's financial conundrum and global imbalances By Ronald McKinnon; Gunther Schnabl
  26. Does a Monetary Union protect again shocks? An assessment of Latin American integration By Jean-Pierre Allegret; Alain Sand-Zantman
  27. U.S. commercial bank lending through 2008:Q4: new evidence from gross credit flows By Silvio Contessi; Johanna Francis
  28. Inflation dynamics with labour market matching: assessing alternative specifications By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  29. Hysteresis in Unemployment: Old and New Evidence By Laurence M. Ball
  30. "What Role for Central Banks in View of the Current Crisis?" By Philip Arestis; Elias Karakitsos
  31. Talking about monetary policy: the virtues (and vice?) of central bank communication By Alan Blinder
  32. Macroeconomic effects of greater competition in the service sector: the case of Italy By Lorenzo Forni; Andrea Gerali; Massimiliano Pisani
  33. A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks By Eric Wong; Cho-Hoi Hui
  34. Unemployment and inflation in Western Europe: solution by the boundary element method By Kitov, Ivan; Kitov, Oleg
  35. Expectations, learning and policy rule By Michele Berardi
  36. Growth, Fiscal Policy and the Informal Sector in a Small Open Economy By Pedro, de Mendonça
  37. The German banking system and the global financial crisis: causes, developments and policy responses By Bleuel, Hans-H.
  38. Monetary Time Series of Southeastern Europe from the 1870s to 1914 By Members of the SEEMHN data collection task force with a foreword by Michael Bordo and an introduction by Matthias Morys;
  39. Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008 By Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
  40. Confidence, Crashes and Animal Spirits By Roger E.A. Farmer
  41. Government Consumption Volatility and the Size of Nations By Davide Furceri; Marcos Poplawski Ribeiro
  42. A Balancing Act: Making the Canadian Secured Credit Facility Work By Alexandre Laurin
  43. Confidence Risk and Asset Prices By Ravi Bansal; Ivan Shaliastovich
  44. Discrete-continuos analysis of optimal equipment replacement By YATSENKO, Yuri; HRITONENKO, Natali
  45. Growth Volatility and Financial Repression: Time Series Evidence from India By Ang, James
  46. Macroeconomic Consequences of Alternative Reforms to the Health Insurance System in the U.S. By Zhigang Feng
  47. Why has home ownership fallen among the young? By Jonas D. M. Fisher; Martin Gervais
  48. The Macroeconomic Effects of European Financial Development : A Heterogenous Panel Analysis By Sean Holly; Mehdi Raissi
  49. The Causes and Effects of International Migrations: Evidence from OECD Countries 1980-2005 By Francesc Ortega; Giovanni Peri
  50. Learning and Asset-Price Jumps By Ravi Bansal; Ivan Shaliastovich
  51. Un modèle macroéconomique multi-agents avec monnaie endogène By Pascal Seppecher
  52. A Unified Theory of Tobin’s q, Corporate Investment, Financing, and Risk Management By Patrick Bolton; Hui Chen; Neng Wang
  53. The taxation of capital returns in overlapping generations economies without Financial assets By Davila, Julio
  54. Equivalence entre taxation et permis d'emission echangeables By Pierre Villa

  1. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale dynamic stochastic general equilibrium (DSGE) models that incorporate regime switches in shock variances and the inflation target. The best-fit model—the one with two regimes in shock variances—gives quantitatively different dynamics compared with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate considerably fewer nominal rigidities than the literature suggests. incompl s
    Keywords: regime-switching DSGE, shock variances, inflation target, nominal rigidities, intertemporal capital accumulation shocks, model comparison CL HG2567 A4A5
    Date: 2009
  2. By: Sofia Bauducco; Ales Bulir; Martin Cihak
    Abstract: To provide a rigorous analysis of monetary policy in the face of financial instability, we extend the standard dynamic stochastic general equilibrium model to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag, and if the central bank has privileged information about credit risk, monetary policy responding instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule. This augmented rule leads in some parameterizations to improved outcomes in terms of long-term welfare, however, the welfare impacts of such a rule appear to be negligible.
    Keywords: DSGE models, financial instability, monetary policy rule.
    JEL: E52 E58 G21
    Date: 2008–12
  3. By: Ignacio Lozano Espitia; Karen Rodríguez
    Abstract: The focus of this paper is on the short-term macroeconomic effects of fiscal policy in Colombia in a structural vector autoregression context. Government spending shocks are found to have positive and significant effects on output, private consumption, employment, prices and short-term interest rates. The cumulative output multiplier fluctuates between 1.12 and 1.19 from the first to third year after the spending innovation. Shocks to direct taxation seem to be less efficient, because they mainly affect private investment, whereas shocks to indirect taxation do not seem to affect real activities significantly. From a policy perspective, our results support the smoothing role of fiscal policy on output fluctuations, which implies its capacity to restore real activity effectively in critical times like the ones currently being forecast. From a theoretical standpoint, the results are consistent with real business cycle and Keynesian models of both traditional partial equilibrium and new general equilibrium types. Keywords:
    Date: 2009–03–02
  4. 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
  5. By: Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: This paper explores the importance of housing and mortgage market heterogeneity in 13 European countries for the transmission of monetary policy. We use a pooled VAR model which is estimated over the period 1995-2006 to generate impulse responses of key macroeconomic variables to a monetary policy shock. We split our sample of countries into two disjoint groups according to the impact of the monetary policy shock on real house prices. Our results suggest that in countries with a more pronounced reaction of real house prices the propagation of monetary policy shocks to macroeconomic variables is amplified.
    Keywords: Pooled VAR model, house prices, monetary policy transmission, country clusters, sign restrictions
    JEL: C32 C33 E52
    Date: 2009
  6. By: Pierpaolo Benigno
    Abstract: A simple New-Keynesian model is set out with AS-AD graphical analysis. The model is consistent with modern central banking, which targets short-term nominal interest rates instead of money supply aggregates. This simple framework enables us to analyze the economic impact of productivity or mark-up disturbances and to study alternative monetary and fiscal policies. The impact of the fiscal multipliers on output and the output gap can be quantified showing that a short-run increase in public spending has a multiplier less than one on output and a much smaller multiplier on the output gap, while a decrease in short-run taxes has a positive multiplier on output, but negative on the output gap. In the AS-AD graphical view, optimal policy simplifies to nothing more than an additional line, IT, along which the trade-off between the objective of price stability and that of stabilizing the output gap can be optimally exploited. The framework is also suitable for studying a liquidity-trap environment and possible solutions.
    JEL: E0
    Date: 2009–03
  7. By: Stefano Eusepi; Bart Hobijn; Andrea Tambalotti
    Abstract: We construct a price index with weights for the prices of different PCE (personal consumption expenditures) goods chosen to minimize the welfare costs of nominal distortions. In this cost-of-nominal-distortions index (CONDI), the weights are computed in a multi-sector New Keynesian model with time-dependent price setting. The model is calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We find that the CONDI weights depend mostly on price stickiness and are less affected by the dispersion in labor shares. Moreover, CONDI stabilization closely approximates the optimal monetary policy and leads to negligible welfare losses. Finally, CONDI is better approximated by targeting core inflation rather than headline inflation--and is even better approximated with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but including food away from home.
    Keywords: Personal Consumption Expenditures Price Index ; Prices; core inflation, nominal rigidities, optimal monetary policy, price indexes
    Date: 2009
  8. By: Vasco Cúrdia; Michael Woodford
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterises optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule", in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Olivier Blanchard and Charles Goodhart.
    Keywords: Financial Frictions, Interest Rate Spreads
    Date: 2009–03
  9. By: Axel A Weber; Rafael Gerke; Andreas Worms
    Abstract: Empirical evidence on whether the euro area monetary transmission process has changed is, at best, mixed. We argue that this inconclusiveness is likely to be due to the fact that existing empirical studies concentrate on the effects of a particular development on a specific transmission channel. Another problem of this literature is that specific changes could have off-setting effects regarding the overall effectiveness of monetary policy, leaving open the question whether the ability of monetary policy to control inflation has been altered. In order to shed light on this issue, we investigate whether there has been a significant change in the overall transmission of monetary policy to inflation and output by estimating a standard VAR for the euro area and by searching for a possible break date. We find a significant break point around 1996 and some evidence for a second one around 1999. We compare impulse responses to a monetary policy shock for these episodes and find that the well-known "stylised facts" of monetary policy transmission remain valid. Therefore, we argue that the general guiding principles of the Eurosystem monetary policy remain adequate. Moreover, it seems that monetary transmission after 1998 is not very different from before 1996, but probably very different in the interim period. This implies that evidence for the euro area could be biased by an "atypical" interim period 1996-1999. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Marvin Goodfriend and Armínio Fraga Neto.
    Keywords: Monetary policy transmission, Eurosystem, euro area, globalisation, financial development, VAR
    Date: 2009–03
  10. By: Li Qin; Moïse SIDIROPOULOS; Eleftherios Spyromitros
    Abstract: This paper examines the relationship between the preference for ro- bustness of central bank (when it fears that its model is misspecified), the inflation persistence and the output cost of disinflation. Using a simple monetary game model in which higher preference for robustness of central bank is positively associated with the inflation persistence and thus nega- tively with the speed of disinflation, this paper shows that the output cost of disinflation is higher when the less the central bank believes that its reference model is robust.
    Keywords: Model uncertainty, Robust control, Minmax policies, Inflation persistence, Sacrifice ratio.
    JEL: E50 E52 E58
    Date: 2009
  11. By: Giuseppe Ciccarone; Enrico Marchetti
    Abstract: The aim of this paper is to bring together two recent developments in the ”contracting” approach to the time-inconsistency problem of monetary policy: linear contracts under common agency and central bank preference uncertainty under single agency. We show that under common agency and imperfect ”political” transparencey, the full transparency finding that the interest group contract dominates the government’s one is confirmed, but equilibrium expected inflation is lower, as the new source of uncertainty makes the two principals more cautious in their instrument setting. This reduces the average inflation bias. We then extend the analysis to the case of uncertainty on the central bank output target and show that the expected values of inflation and output are the same as those obtained under perfect ”economic” transparency, whereas the actual values are different only for the presence of an additive term depending on opacity. Finally, we demonstrate that when the principals are uncertain about the weight attached by the central banker to the incentive scheme the equilibrium inflation surprise may be negative and output may be lower than the natural rate.
    Keywords: Central bank transparency, Inflation, uncertainty.
    JEL: E58
    Date: 2008–12
  12. By: Manzan, Sebastiano; Zerom, Dawit
    Abstract: Much of the US inflation forecasting literature deals with examining the ability of macroeconomic indicators to predict the mean of future inflation, and the overwhelming evidence suggests that the macroeconomic indicators provide little or no predictability. In this paper, we expand the scope of inflation predictability and explore whether macroeconomic indicators are useful in predicting the distribution of future inflation. To incorporate macroeconomic indicators into the prediction of the conditional distribution of future inflation, we introduce a semi-parametric approach using conditional quantiles. The approach offers more flexibility in capturing the possible role of macroeconomic indicators in predicting the different parts of the future inflation distribution. Using monthly data on US inflation, we find that unemployment rate, housing starts, and the term spread provide significant out-of-sample predictability for the distribution of core inflation. Importantly, this result is obtained for a forecast evaluation period that we intentionally chose to be after 1984, when current research shows that macroeconomic indicators do not add much to the predictability of the future mean inflation. This paper discusses various findings using forecast intervals and forecast densities, and highlights the unique insights that the distribution approach offers, which otherwise would be ignored if we relied only on mean forecasts.
    Keywords: Conditional quantiles; Distribution; Inflation; Predictability; Phillips curve; Combining
    JEL: C53 E31 E52 C22
    Date: 2009–01–30
  13. By: Johansson, Anders C. (China Economic Research Center)
    Abstract: This paper tries to answer the long-standing question of whether money causes output. Instead of focusing on domestic monetary policy and output, we analyze U.S. monetary policy and its possible effects on real output in China. Our results indicate that U.S. money supply Granger causes China’s real output, but that an alternative monetary instrument, the Federal Fund Rate, does not. Furthermore, there is a significant cointegrating relationship between U.S. money and China’s output, which means that there is a long-run relationship between them. Impulse response functions and variance decompositions also support the results, showing that shocks in the U.S. money supply have an effect on China’s real output. The results have important implications for policy makers in China that focus on maintaining a high and stable economic growth. They also have implications for U.S. policy makers. A number of countries around the world still fix their currencies against the U.S. dollar, which means that U.S. monetary policy has effects not only domestically but also in these countries.
    Keywords: China; United States; Monetary policy; Output; Causality; VECM
    JEL: C32 E40 E51 E52 E58
    Date: 2009–03–15
  14. By: Otmar Issing
    Abstract: The mid-1980s began a period that might, in retrospect, be seen as the golden age of monetary policy. Worldwide inflation rates, which had come down from the high levels reached in the 1970s, were at the lowest level seen in a long time. In the real economy, low and stable inflation went along with growth - at first, reasonable, and later, remarkable - and with reduced volatility. The term Goldilocks is sometimes used to describe this solid, sustainable situation - meaning that, like the porridge in the fairy tale, it was neither too hot nor too cold but just right. A number of fortunate circumstances contributed to the Goldilocks economy. Deregulation and globalisation, with their impact on competition and pricing power in goods and labour markets, are sometimes seen as major factors supporting the achievement and maintenance of low inflation (Rogoff (2003)). With the weakening of deregulation and globalisation, will we see the end of the golden age, which then will turn out to have been only a short episode? On the one hand, an end to the golden age would be no surprise for those who have stressed from the outset that its highly positive macroeconomic outcomes were the result, if not of luck, then of benign circumstances whose combination could not be expected to last forever (Sims and Zha (2006)). And do not recent developments already confirm this sceptical assessment of the role of central banks and monetary policy during this period? Isn't inflation rising? Doesn't the ongoing turbulence in financial markets indicate that central banks did not - or, rather, could not - prevent such developments? On the other hand, have we not seen the emergence of a policy regime that should be robust enough to continue the period of monetary stability? And would not a regime of monetary stability contribute to the stability of the real economy? We might only ex post be able to give a definite answer to these questions. For the time being, we can just study the emergence of the current policy regime and its elements via the practice of central banking and the results of research. I would like to start with a personal note. It would be, to say the least, overambitious to survey in just a few pages roughly three decades of research on monetary policy. The same is true for the analysis of monetary policymaking during this period. What I have tried to do is simply provide the reflections of someone who, coming from academia, played a special role in two central banks - the Bundesbank (from 1990 to 1998) and the European Central Bank (from 1998 to 2006) - under extremely difficult circumstances, namely the aftermath of German reunification in 1990 and the launch of the European Union two years later. It was a challenge and a privilege to build the bridge between monetary policy research and monetary policymaking in those two central banks. What were the most relevant aspects of theory to be considered when deciding on monetary policy? How did it work in practice? I will start with some results of monetary policy and the advances in research that, to a large degree, were triggered by those results. The later sections analyse the principles guiding the conduct of monetary policy by the Bundesbank and the ECB and some specific aspects of monetary policy. One of the main lessons I got during my 16 years of central banking practice is that it is critical to raise questions and not ignore important insights - even if the dominant approaches in research seem to suggest otherwise. It should therefore not come as a surprise that the paper ends with open questions. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Allan H Meltzer.
    Keywords: Cross-Shareholding; European Monetary Union, Monetary Policy Strategy
    Date: 2009–03
  15. By: Francesco Lippi (University of Sassari, EIEF and CEPR); Andrea Nobili (Bank of Italy)
    Abstract: We consider an economy in which the oil costs, industrial production, and other macroeconomic variables fluctuate in response to fundamental domestic and external demand and supply shocks. We estimate the effects of these structural shocks on US monthly data for the 1973.1-2007.12 period using robust sign restrictions suggested by theory. The interplay between the oil market and the US economy goes in both directions. About 20% of changes in the cost of oil come in response to US aggregate demand shocks, while shocks originating in the oil market also affect the US economy, the impact depending on the nature of the shock: a negative oil supply shock reduces US output, whereas a positive oil demand shock has a positive and persistent effect on GDP.
    Keywords: Business cycle; Oil prices; Structural VAR
    JEL: C32 E3 F4
    Date: 2009–03
  16. By: Charles Engel (University of Wisconsin)
    Abstract: This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. Currency misalignments are shown to be inefficient and lower world welfare. Also, optimal policy must target not only inflation and the output gap, but also the currency misalignment. However, the interest rate reaction function that supports this targeting rule involves only the CPI inflation rate. This result illustrates how examination of ‘instrument rules’ may hide important trade-offs facing policy-makers that are incorporated in ‘targeting rules’. The model is a modified version of Clarida, Galí and Gertler’s (2002). The key change is to allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. Besides highlighting the importance of the currency misalignment, this model also gives a rationale for targeting CPI inflation, rather than producer price inflation as in Clarida, Galí and Gertler.
    Keywords: local currency pricing; pricing to market; targeting rule; instrument rule; optimal monetary policy
    JEL: E52 F41
    Date: 2009–03
  17. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: We analyze the income velocity of money in an endogenous growth model with an interest-rate control rule and a cash-in-advance (CIA) constraint. We show that the long-term relationship between the income velocity of money and the nominal growth rate of money supply depends not only on the form of the CIA constraint but also on the central bankfs stance of interest-rate control rule.
    Keywords: velocity, an interest-rate control, endogenous growth, cash-in-advance constraint
    JEL: O42 E52
    Date: 2009–03
  18. By: Pengfei Wang; Yi Wen
    Abstract: We develop a general-equilibrium model of inventories with explicit micro-foundations by embedding the production-cost-smoothing motive (e.g., Eichenbaum, AER 1989) into an otherwise standard DSGE model. We show that firms facing idiosyncratic cost shocks have incentives to bunch production and smooth sales by carrying inventories. The optimal inventory target of a firm is derived explicitly. The model is broadly consistent with many of the observed stylized facts of aggregate inventory fluctuations, such as the procyclical inventory investment and the countercyclical inventory-sales ratio. In addition, the model yields novel predictions for the role of inventories in macroeconomic stability: Inventories may not only greatly amplify but also propagate the business cycle. That is, the incentive to accumulate inventories under the cost-smoothing motive can give rise to hump-shaped output dynamics and significantly higher volatility of GDP. Such predictions are in sharp contrast to the implications of the recent general-equilibrium inventory literature (e.g., Khan and Thomas, 2007; and Wen, 2008), which shows that inventory investment induced by traditional mechanisms (e.g., the stockout-avoidance motive and the (S,s) rule) does not increase the variance of aggregate output.
    Keywords: Equilibrium (Economics) ; Business cycles ; Inventories
    Date: 2009
  19. By: Charles Engel
    Abstract: This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target not only inflation and the output gap, but also the currency misalignment. However the interest rate reaction function that supports this targeting rule may involve only the CPI inflation rate. This result illustrates how examination of "instrument rules" may hide important trade-offs facing policymakers that are incorporated in "targeting rules". The model is a modified version of Clarida, Gali, and Gertler's (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. Besides highlighting the importance of the currency misalignment, our model also gives a rationale for targeting CPI, rather than PPI, inflation.
    JEL: E52 F41
    Date: 2009–04
  20. By: Susanto Basu; John G. Fernald
    Abstract: Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and often assume that potential output is a smooth series in the short run--approximated by a medium- or long-run estimate. But in both the short and long run, the one-sector model falls short empirically, reflecting the importance of rapid technical change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows us to discuss a range of other issues that are less well understood, and where further research could be valuable.
    Keywords: Input-output analysis ; Productivity ; Monetary policy CL HG2567 S3A5
    Date: 2009
  21. By: Maurice Obstfeld
    Abstract: This paper explores the links between macroeconomic developments, especially monetary policy, and the exchange rate during the period of Japan's bubble economy and subsequent stagnation. The yen experienced epic gyrations over that period, starting with its rapid ascent after the March 1985 Plaza Accord of major industrial countries. Two distinct periods of endaka fukyo, or recession induced by a strong yen, occurred in the late 1980s and the early 1990s at critical phases of the monetary policy cycle. My approach emphasizes the interaction of short-term developments driven by monetary factors (as they affect international real interest rate differentials) and the long-term determinants of the real exchange rate's equilibrium path. Chief among those long-run determinants are relative sectoral productivity levels and the terms of trade, including the price of oil. Since the mid-1990s, the yen's real exchange rate has generally followed a depreciating trend and Japan's comprehensive terms of trade have deteriorated.
    JEL: F14 F41 F42 F51 N15
    Date: 2009–03
  22. By: John B. Taylor; Volker Wieland
    Abstract: In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.
    JEL: C52 E30 E52
    Date: 2009–04
  23. By: ARANHA, Marcel Z.; MOURA, Marcelo L.
    Date: 2008–10
  24. By: Ziaei, Sayyed Mahdi
    Abstract: In this empirical study, we perform cointegrated relation to analyze the effects of monetary policy on bank credit to private sector, foreign assets and foreign debts in ten MENA countries include: Algeria, Bahrain, Egypt, Kuwait, Lebanon, Morocco, Oman, Qatar, Tunis and Turkey. There are two co-integration techniques, the Johanson co-integration and dynamic ordinary least square (DOLS) are used to examine long run relationship between the variables. The empirical evidences with aggregate data of ten MENA countries show that bank credit to private sector and foreign asset increasing with a monetary expansion. However, the positions of banks’ foreign debts aren’t similar for different countries. Hence, the aggregate data show that bank lending channel is likely to be an effective monetary transmission mechanism in MENA countries.
    Keywords: Bank Lending; Monetary Transmission; Capital Flows
    JEL: E51 F32 E52
    Date: 2009–03–29
  25. By: Ronald McKinnon; Gunther Schnabl
    Abstract: China's financial conundrum arises from two sources: (1) its large trade (saving) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead foreign currency claims (largely dollars) build up within domestic financial institutions. And (2), economists - both American and Chinese - mistakenly attribute the surpluses to an undervalued renminbi. To placate the United States, the result is a gradual appreciation of the renminbi against the dollar of 6 percent or more per year. This predictable appreciation since 2004, and the fall in US interest rates since mid 2007, not only attracts hot money inflows but inhibits private capital outflows from financing (compensating?) China's huge trade surplus. This one-way bet in the foreign exchange markets can no longer be offset by relatively low interest rates in China compared to the United States, as had been the case in 2005-06. Thus, the People's Bank of China (PBC) now must intervene heavily to prevent the renminbi from ratcheting upwards - and so becomes the country's sole international financial intermediary. Despite massive efforts by the PBC to sterilise the monetary consequences of the reserve buildup, inflation in China is increasing, with excess liquidity that spills over into the world economy. China has been transformed from a deflationary force on American and European price levels into an inflationary one. Because of the currency mismatch, floating the RMB is neither feasible nor desirable - and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal yuan/dollar rate similar to that which existed between 1995 and 2004. But for any newly reset yuan/dollar rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Currency stabilisation would allow the PBC to regain monetary control and quash inflation. Only then can the Chinese government take decisive steps to reduce the trade (saving) surplus by tax cuts, increased social expenditures, and higher dividend payouts. But as long as the economy remains overheated, the government hesitates to take these trade-surplus-reducing measures because of their near-term inflationary consequences. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Michael Mussa.
    Keywords: Global Imbalances, Chinese Exchange Rate Regime
    Date: 2009–03
  26. By: Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Alain Sand-Zantman (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper analyses the monetary consequences of the Latin-American trade integration process. We consider a sample of five countries -Argentina, Brazil, Chile, Mexico and Uruguay- spanning the period 1991-2007. The main question raised pertains to the feasibility of a monetary union between L.A. economies. To this end, we study whether this set of countries is characterized by business cycle synchronization with the occurrence of common shocks, a strong similarity in the adjustment process and the convergence of policy responses. We focus especially our attention on two points. First, we tryto determine to what extent international disturbances influence the domestic business cycles through trade and/or financial channels. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries' responses to shocks. All these features are the main issues in the literature relative to regional integration and OCA process.
    Keywords: bayesian VAR ; business cycles ; Latin American countries ; optimum currency area
    Date: 2009
  27. By: Silvio Contessi; Johanna Francis
    Abstract: How have U.S. commercial banks responded during the current financial crisis? What was hiding behind the dynamics of aggregate commercial bank loans through the end of 2008? We use balance sheet data for the entire population of commercial banks to construct quarterly gross credit flows (credit expansion and credit contraction series) for the U.S. banking system during the period 1999:Q1-2008:Q4 and provide new evidence on changes in lending. We show that credit expansion, as defined in this paper, began declining during the first half of 2008 while credit contraction began steeply increasing only between the third and fourth quarters of 2008. Until then net credit growth was below trend but positive and not dissimilar to the 1980 and 2001 recessions. However, between the third and fourth quarter credit contraction grew larger than credit expansion across all types of loans (real estate, individual, commercial, and industrial loans) and for the largest banks. On the contrary, smaller banks continued to display positive net credit growth. Once we include 2008:Q4 data, the cyclical properties of our series most resemble the beginning of the 1991 recession and the intensification of the Savings and Loan crisis.
    Keywords: Financial crises ; Business cycles ; Credit; Credit Market, Reallocation, Aggregate Restructuring, Business Cycle, Financial crisis
    Date: 2009
  28. By: Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
    Abstract: This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.
    Keywords: Labor market ; Business cycles; Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities.
    Date: 2009
  29. By: Laurence M. Ball
    Abstract: This paper argues that hysteresis helps explain the long-run behavior of unemployment. The natural rate of unemployment is influenced by the path of actual unemployment, and hence by shifts in aggregate demand. I review past evidence for hysteresis effects and present new evidence for 20 developed countries. A central finding is that large increases in the natural rate are associated with disinflations, and large decreases with run-ups in inflation. These facts are consistent with hysteresis theories and inconsistent with theories in which the natural rate is independent of aggregate demand.
    JEL: E24
    Date: 2009–03
  30. By: Philip Arestis; Elias Karakitsos
    Abstract: Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out. The authors of this new Policy Note say that a far better approach is for central banks to widen their scope and target the net wealth of the personal sector. Using interest rates in both the upswing and the downswing of a (business) cycle would avoid moral hazard. A net wealth target would not impede the free functioning of the financial system, as it deals with the economic consequences of the rise and fall of asset prices rather than with asset prices (equities or houses) per se. It would also help to control liquidity and avoid future crises. The current crisis has its roots in the excessive liquidity that, beginning in the mid 1990s, financed a series of asset bubbles. This liquidity was the outcome of “bad” financial engineering that spilled over to other banks and to the personal sector through securitization, in conjunction with overly accommodating monetary policy. Hence, targeting net wealth would also help control liquidity, the authors say, without interfering with the financial engineering of banks.
    Date: 2009–03
  31. By: Alan Blinder
    Abstract: Central banks, which used to be so secretive, are communicating more and more these days about their monetary policy. This development has proceeded hand in glove with a burgeoning new scholarly literature on the subject. The empirical evidence, reviewed selectively here, suggests that communication can move financial markets, enhance the predictability of monetary policy decisions, and perhaps even help central banks achieve their goals. A number of theoretical drawbacks to greater communication are also reviewed here. None seems very important in practice. That said, no consensus has yet emerged regarding what constitutes "optimal" communication strategy - either in quantity or nature. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Benjamin M Friedman and YV Reddy.
    Keywords: Central Bank Communication, Monetary Policy Transparency
    Date: 2009–03
  32. By: Lorenzo Forni (Bank of Italy); Andrea Gerali (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: The paper assesses the effects of increasing competition in the service sector in Italy which, based on cross-country comparisons, is the OECD country with the highest markups in non-manufacturing industries. We propose a two-region (Italy and the rest of the euro area) dynamic general equilibrium model allowing for monopolistic competition in the labor, manufacturing and service markets. We then use the model to simulate the macroeconomic and spillover effects of increasing the degree of competition in the Italian services sector. Our results indicate that reducing the service sector markups to the levels of the rest of the euro area increases in the long run Italian GDP by 11 percent and welfare (measured in terms of steady state consumption equivalents) by about 3.5 percent. Half of the GDP increase would be realized in the first three years. The spillover effects to the rest of the euro area are limited.
    Keywords: competition, general equilibrium models, markups, monetary policy
    JEL: C51 E31 E52
    Date: 2009–03
  33. By: Eric Wong (Research Department, Hong Kong Monetary Authority); Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority)
    Abstract: This study develops a stress-testing framework to assess liquidity risk of banks, where liquidity and default risks can stem from the crystallisation of market risk arising from a prolonged period of negative asset price shocks. In the framework, exogenous asset price shocks increase banks¡¯ liquidity risk through three channels. First, severe mark-to-market losses on the banks¡¯ assets increase banks¡¯ default risk and thus induce significant deposits outflows. Secondly, the ability to generate liquidity from asset sales continues to evaporate due to the shocks. Thirdly, banks are exposed to contingent liquidity risk, as the likelihood of drawdowns on their irrevocable commitments increases in such stressful financial environments. In the framework, the linkage between market and default risks of banks is implemented using a Merton-type model, while the linkage between default risk and deposit outflows is estimated econometrically. Contagion risk is also incorporated through banks¡¯ linkage in the interbank and capital markets. Using the Monte Carlo method, the framework quantifies liquidity risk of individual banks by estimating the expected cash-shortage time and the expected default time. Based on publicly available data as at the end of 2007, the framework is applied to a group of banks in Hong Kong. The simulation results suggest that liquidity risk of the banks would be contained in the face of a prolonged period of asset price shocks. However, some banks would be vulnerable when such shocks coincide with interest rate hikes due to monetary tightening. Such tightening is, however, relatively unlikely in a context of such shocks.
    Keywords: Liquidity risk, stress testing, default risk, banks
    JEL: C60 G13 G28
    Date: 2009–03
  34. By: Kitov, Ivan; Kitov, Oleg
    Abstract: Using an analog of the boundary element method in engineering and science, we analyze and model unemployment rate in Austria, Italy, the Netherlands, Sweden, Switzerland, and the United States as a function of inflation and the change in labor force. Originally, the model linking unemployment to inflation and labor force was developed and successfully tested for Austria, Canada, France, Germany, Japan, and the United States. Autoregressive properties of neither of these variables are used to predict their evolution. In this sense, the model is a self-consistent and completely deterministic one without any stochastic component (external shocks) except that associated with measurement errors and changes in measurement units. Nevertheless, the model explains between ~65% and ~95% of the variability in unemployment and inflation. For Italy, the rate of unemployment is predicted at a time horizon of nine (!) years with pseudo out-of-sample root-mean-square forecasting error of 0.55% for the period between 1973 and 2006. One can expect that the unemployment will be growing since 2008 and will reach ~11.4% [±0.6 %] near 2012. After 2012, unemployment in Italy will start to descend.
    Keywords: unemployment; inflation; labor force; boundary integral method; prediction; Western Europe
    JEL: E31 E24 J21 J64 J11
    Date: 2009–03–29
  35. By: Michele Berardi
    Abstract: In his monograph The conquest of American inflation (1999) Sargent suggests that the sharp reduction in US inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (1976). At the core of this vindication strory are the escape dynamics, recurrent sliding away from the path leading to the time-consistent sub-optimal equilibrium level of inflation. We try to understand here under which conditions this phenomenon arises. In particular, we note that economists, and consequently policymakers, knew long before the Lucas critique that in order to do policy analysis structural models were required. We thus endow our policymaker with a correctly specified model, one that takes explicitly into account the role of expectations. Using such a model, together with a policy that takes expectations as given, the escape dynamics do not appear. But they reappear when long run considerations of policy effects enter into the picture. We thus conclude that what really matters is the way in which the policymaker designs its policy, rather than the econometric specification of the model he uses.
    Date: 2009
  36. By: Pedro, de Mendonça
    Abstract: We discuss the implications of informality on growth and fiscal policy by considering an informal sector based on low tech firms, in an open economy model of endogenous growth, where labour supply is elastic and increasing returns arise from public spending. We allow for both labour and capital to allocate between sectors and examine the dynamic and policy issues that arise in an economy, where long run outcomes are still dominated by formal activities, but long macroeconomic transitions arise as a result of informal microeconomic activities, which take advantage of both government taxation and limited fiscalization.
    Keywords: Endogenous Growth Theory; Optimal Fiscal Policy; Informal Sector; Public Capital
    JEL: E62 O41 O17 C61 F43
    Date: 2009–02–05
  37. By: Bleuel, Hans-H. (Department of Economics of the Duesseldorf University of Applied Sciences)
    Abstract: Germany’s banking sector has been severely hit by the global financial crisis. In a German context as of February, 2009, this paper reviews briefly the structure of the banking industry, quantifies effects of the crisis on banks and surveys responses of economic policy. It is argued that policy design needs to enhance transparency and enforce the liability principle. In addition, economic policy should not eclipse principles of competition policy.
    Keywords: bank, banking crisis, financial crisis, economic policy, germany
    JEL: E52
    Date: 2009–03
  38. By: Members of the SEEMHN data collection task force with a foreword by Michael Bordo and an introduction by Matthias Morys;
    Abstract: TThe South-Eastern European Monetary History Network (SEEMHN) is a community of financial historians, economists and statisticians, established in April 2006 at the initiation of the Bulgarian National Bank and the Bank of Greece. Its objective is to spread knowledge on the economic history of the region in the context of European experience with a specific focus on financial, monetary and banking history. The SEEMHN Data Collection Task Force aims at establishing a historical database with 19th and 20th century financial and monetary data for the countries in the region. A set of data has already been published as an annex to the 2007 conference proceedings, released by the OeNB (2008, Workshops, no 13). The second stage of the SEEMHN Data Collection Task force includes reports from all participating central banks. For each country, historical aggregates are preceded by a description of the country’s monetary events and explanatory remarks. The data set refers to banknotes in circulation, reserves, discount rates and exchange rates. The frequency is monthly and the time span covers the period from 1870 and beyond to 1914. A foreword on the paramount importance of historical data series is supplemented by Prof. Michael Bordo (Rutgers University). An introduction on crosscountry historical comparison is written by Dr. Matthias Morys (University of York). Here we present data displays for each country written by Kliti Ceca, Kelmend Rexha and Elsida Orhan for Albania (Banka e Shqiperise); Thomas Scheiber for Austria-Hungary (Oesterreichische Nationalbank); Kalina Dimitrova (Balgarska Narodna Banka) and Martin ivanov (Bulgarian Academy of Science) for Bulgaria; Sopfia Lazaretou for Greece (Bank of Greece); George Virgil Stoenescu, Elisabeta Blejan, Brindusa Costache and Adriana Iarovici Aloman for Romania (Banca Nationala a Romaniei); Milan Sojic, Ljiljana Durdevic, Sanja Borkovic and Olivera Jovanovic for Serbia (Narodna Banka Srbije). We strongly believe that by making the historical time series available to a wider audience for the first time ever, research interests in monetary and financial economics in this part of Europe will be further stimulated.
    Date: 2009–02
  39. By: Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
    Abstract: In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply to avert the possibility of an internal/external double drain (a bank run combined with capital flight). Thus, simply looking at trade or short-term debt as motivations for reserve holdings is insufficient; one must also consider the size of the banking system (M2). Here, we show that a country's reserve holdings just before the current crisis, relative to their predicted holdings based on these financial motives, can significantly predict exchange rate movements of both emerging and advanced countries in 2008. Countries with large war chests did not depreciate -- and some appreciated. Meanwhile, those who held insufficient reserves based on our metric were likely to depreciate. Current account balances and short-term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account. Our model's typically high predicted reserve levels provide important context for the unprecedented U.S. dollar swap lines recently provided to many countries by the Federal Reserve.
    JEL: E42 E44 E58 F21 F31 F33 F36 F41 F42 O24
    Date: 2009–03
  40. By: Roger E.A. Farmer
    Abstract: This paper argues that the equilibrium business cycle theory which has guided macroeconomics for the past thirty years is flawed. I introduce an alternative paradigm that retains the main message of Keynes' General Theory and which reconciles that message with Walrasian economics. I argue that there are two market failures in the labor market: A lemons problem and an externality. I show how those two problems lead to inefficient equilibria in which the unemployment rate is determined by the self-fulfilling beliefs of stock market participants.
    JEL: E0 E12 E32
    Date: 2009–04
  41. By: Davide Furceri; Marcos Poplawski Ribeiro
    Abstract: The aim of this paper is to analyze the relation between the volatility of government consumption and country size. Using a sample of 160 countries from 1960 to 2000 the main findings of our empirical analysis suggest that: 1) smaller countries have more volatile non-discretionary and discretionary government consumption, and also a more volatile government size; 2) the relation between government spending volatility and the size of a country is more negative for more volatile economies; 3) the relation between government consumption volatility and country size is more negative for functions of government spending that are characterized by a high level on non-rivality. The results are robust to different time and country samples, different econometric techniques and to several sets of control variables.<P>La volatilité de la consommation du gouvernement et la taille du pays<BR>L'objectif de ce papier est d'analyser la relation existant entre la volatilité de la consommation du gouvernement et la taille du pays. Utilisant un échantillon de 160 pays de 1960 à 2000, les principaux résultats de notre analyse suggèrent que : 1) Les petits pays ont une consommation du gouvernement discrétionnaire et non-discrétionnaire plus volatile, de même qu'une taille de gouvernement plus volatile; 2) La relation entre la volatilité des dépenses du gouvernement et la taille du pays est plus négative pour les économies les plus volatiles; 3) La relation entre la volatilité de la consommation du gouvernement et la taille du pays est plus négative for les catégories de dépense publiques qui sont caractérisées par un haut niveau de non-rivalité. Les résultats sont robustes à des changements de période et d'échantillons de pays, à l'utilisation de différentes techniques économétriques et au choix de différentes variables de contrôle.
    Keywords: fiscal policy, politique budgétaire, fiscal volatility, volatilité budgétaire, government size, taille du gouvernement, country size, taille du pays
    JEL: E62 H10
    Date: 2009–03–20
  42. By: Alexandre Laurin (C.D. Howe Institute)
    Abstract: The January 2009 federal budget proposed funding a “Canadian Secured Credit Facility” as part of an economic action plan. This Facility will allocate up to $12 billion to purchases of term asset-backed securities (ABS) for loans and leases on vehicles and equipment. The Facility will be managed by the Business Development Bank of Canada (BDC), which has since conducted consultations on the proposal.
    Keywords: Canadian federal budget, Business Development Bank of Canada, asset-backed securities, financial liquidity
    JEL: E51 H81
    Date: 2009–03
  43. By: Ravi Bansal; Ivan Shaliastovich
    Abstract: In the data, asset prices exhibit large negative moves at frequencies of about 18 months. These large moves are puzzling as they do not coincide, nor are they followed by any significant moves in the real side of the economy. On the other hand, we find that measures of investor's uncertainty about their estimate of future growth have significant information about large moves in returns. We set-up a recursive-utility based model in which investors learn about the latent expected growth using the cross-section of signals. The uncertainty (confidence measure) about investor's growth expectations, as in the data, is time-varying and subject to large moves. The fluctuations in confidence measure affect the distribution of future consumption given investors' information, and consequently influence equilibrium asset prices and risk premia. In calibrations we show that the model can account for the large return move evidence in the data, distribution of asset prices, predictability of excess returns and other key asset market facts.
    JEL: E0 E44 G00 G12
    Date: 2009–03
  44. By: YATSENKO, Yuri; HRITONENKO, Natali
    Abstract: In Operations Research, the equipment replacement process is usually modeled in discrete time. The optimal replacement strategies are found from discrete (or integer) programming problems, well known for their analytic and computational complexity. An alternative approach is represented by continuous-time vintage capital models that explicitly involve the equipment lifetime and are described by nonlinear integral equations. Then the optimal replacement is determined via the optimal control of such equations. These two alternative techniques describe essentially the same controlled dynamic process. We introduce and analyze a model that unites both approaches. The obtained results allow us to explore such important effects in optimal asset replacement as the transition and long-term dynamics, clustering and splitting of replaced assets, and the impact of improving technology and discounting. In particular, we demonstrate that the cluster splitting is possible in our replacement model with given demand in the case of an increasinTheoretical findings are illustrated with numeric examples.
    Keywords: vintage capital models, optimization, equipment lifetime, discrete-continuous models.
    JEL: E20 O40 C60
    Date: 2008–12
  45. By: Ang, James
    Abstract: The main objective of this paper is to explore the determinants of private consumption volatility in India. While considerable effort has been expended on the examining the relationship between growth and volatility, we focus on financial repression and private consumption volatility in India. Using annual time series data, the results show that the implementation of financial repressionist policies are strongly associated with lower consumption volatility in India. The results remain robust after controlling for a wide range of macroeconomic shocks and variables. Additional analysis which involves examining each component of private consumption provides further evidence to support this finding. The presence of a threshold effect suggests that the benefits of financial openness in dampening consumption volatility can only be reaped when India becomes sufficiently liberalized.
    Keywords: Growth volatility; financial repression; India.
    JEL: E58 O53 E44
    Date: 2009
  46. By: Zhigang Feng (Department of Economics, University of Miami)
    Abstract: This paper examines the macroeconomic and welfare implications of alternative re- forms to the U.S. health insurance system. In particular, I study the effect of the expansion of Medicare to the entire population, the expansion of Medicaid, an individ- ual mandate, the removal of the tax break to purchase group insurance and providing a refundable tax credit for insurance purchases. To do so, I develop a stochastic OLG model with heterogenous agents facing uncertain health shocks. In this model individ- uals make optimal labor supply, health insurance, and medical usage decisions. Since buying insurance is endogenous, my model captures how the reforms may affect the characteristics of the insured as well as health insurance premiums. I use the Medi- cal Expenditure Panel Survey to calibrate the model and succeed in closely matching the current pattern of health expenditure and insurance demand as observed in the data. Numerical simulations indicate that reforming the health insurance system has a quantitatively relevant impact on the number of uninsured, hours worked, and welfare.
    Keywords: Health insurance reform, Heterogeneous agent model, Welfare analysis
    JEL: E21 E62 I10
    Date: 2009–01–12
  47. By: Jonas D. M. Fisher; Martin Gervais
    Abstract: <p><p>We document that home ownership of households with 'heads' aged 25-44 years fell substantially between 1980 and 2000 and recovered only partially during the 2001-2005 housing boom. The 1980-2000 decline in young home ownership occurred as improvements in mortgage opportunities made it easier to purchase a home. This paper uses an equilibrium life-cycle model calibrated to micro and macro evidence to understand why young home ownership fell over a period when it became easier to own a home. Our findings indicate that a trend toward marrying later and the increase in household earnings risk that occurred after 1980 account for 3/5 to 4/5 of the decline in young home ownership.</p></p>
    Keywords: Housing, home ownership, tenure choice, first-time home-buyers, marriage, income risk
    JEL: E0 E2 J1 R21
    Date: 2009–03
  48. By: Sean Holly; Mehdi Raissi
    Abstract: This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union.
    Date: 2009
  49. By: Francesc Ortega; Giovanni Peri
    Abstract: This paper contains three important contributions to the literature on international migrations. First, it compiles a new dataset on migration flows (and stocks) and on immigration laws for 14 OECD destination countries and 74 sending countries for each year over the period 1980-2005. Second, it extends the empirical model of migration choice across multiple destinations, developed by Grogger and Hanson (2008), by allowing for unobserved individual heterogeneity between migrants and non-migrants. We use the model to derive a pseudo-gravity empirical specification of the economic and legal determinants of international migration. Our estimates clearly show that bilateral migration flows are increasing in the income per capita gap between origin and destination. We also find that bilateral flows decrease when destination countries adopt stricter immigration laws. Third, we estimate the impact of immigration flows on employment, investment and productivity in the receiving OECD countries using as instruments the "push" factors in the gravity equation. Specifically, we use the characteristics of the sending countries that affect migration and their changes over time, interacted with bilateral migration costs. We find that immigration increases employment, with no evidence of crowding-out of natives, and that investment responds rapidly and vigorously. The inflow of immigrants does not seem to reduce capital intensity nor total factor productivity in the short-run or in the long run. These results imply that immigration increases the total GDP of the receiving country in the short-run one-for-one, without affecting average wages and average income per person.
    JEL: E25 F22 J61
    Date: 2009–04
  50. By: Ravi Bansal; Ivan Shaliastovich
    Abstract: We develop a general equilibrium model in which income and dividends are smooth, but asset prices are subject to large moves (jumps). A prominent feature of the model is that the optimal decision of investors to learn the unobserved state triggers large asset-price jumps. We show that the learning choice is critically determined by preference parameters and the conditional volatility of income process. An important prediction of the model is that income volatility predicts future jumps, while the variation in the level of income does not. We find that indeed in the data large moves in returns are predicted by consumption volatility, but not by the changes in the consumption level. We show that the model can quantitatively capture these novel features of the data.
    JEL: E0 E4 E44 G0 G1 G12
    Date: 2009–03
  51. By: Pascal Seppecher (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: Nous présentons un modèle macroéconomique multi-agents dans lequel la création et la destruction de monnaie résultent des interactions entre les agents. Il est l'ébauche d'un modèle plus complet, destiné à évaluer par la simulation l'impact économique et social des politiques macroéconomiques. Dans ce modèle simplifié, toute la monnaie est une monnaie scripturale créée par le crédit bancaire pour le financement de la production. Nous trouvons que ce modèle rend compte de certains traits essentiels d'une économie capitaliste industrielle et en particulier de la possibilité de la réalisation en monnaie d'un profit macroéconomique.
    Keywords: systèmes dynamiques complexes ; économie computationnelle ; macroéconomie multi-agents ; économie monétaire de production ; crédits bancaires et création monétaire
    Date: 2009–03–01
  52. By: Patrick Bolton; Hui Chen; Neng Wang
    Abstract: This paper proposes a simple homogeneous dynamic model of investment and corporate risk management for a financially constrained firm. Following Froot, Scharfstein, and Stein (1993), we define a corporation’s risk management as the coordination of investment and financing decisions. In our model, corporate risk management involves internal liquidity management, financial hedging, and investment. We determine a firm’s optimal cash, investment, asset sales, credit line, external equity finance, and payout policies as functions of the following key parameters: 1) the firm’s earnings growth and cash-flow risk; 2) the external cost of financing; 3) the firm’s liquidation value; 4) the opportunity cost of holding cash; 5) investment adjustment and asset sales costs; and 6) the return and covariance characteristics of hedging assets the firm can invest in. The optimal cash inventory policy takes the form of a double-barrier policy where i) cash is paid out to shareholders only when the cash-capital ratio hits an endogenous upper barrier, and ii) external funds are raised only when the firm has depleted its cash. In between the two barriers, the firm adjusts its capital expenditures, asset sales, and hedging policies. Several new insights emerge from our analysis. For example, we find an inverse relation between marginal Tobin’s q and investment when the firm draws on its credit line. We also find that financially constrained firms may have a lower equity beta in equilibrium because these firms tend to hold higher precautionary cash inventories.
    JEL: E22 G12 G32 G35
    Date: 2009–04
  53. By: Davila, Julio (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE); ---; ---)
    Abstract: I show in this paper that in an overlapping generations economy with production ˆ la Diamond (1970) in which the agents can only save in terms of capital (i.e. with no asset bubbles ˆ la Tirole (1985) or public debt as in Diamond (1965)), there is a period-by- period balanced Þscal policy supporting a steady state allocation that Pareto-improves upon the laissez-faire competitive equilibrium steady state (without having to resort to intergenerational transfers) if there is no Þrst generation or the economy starts there. A transition from the competitive equilibrium steady state to this other allocation is also Pareto-improving if the former is dynamically inefficient, but even in the dynamically effcient case if the elasticity of output to capital is high enough. This intervention allows every subsequent generation to attain, as a competitive equilibrium outcome, the highest utility attainable at a steady state through the existing markets for the consumption good and the production factors. The active Þscal policy consists of taxing (or subsidizing, in the dynamically efficient case) linearly the returns to capital, while balancing the budget period by period through a lump-sum transfer (or tax, respectively) on second period income. This policy does not Þnance any public spending, since there is none in the model. The only purpose of the intervention is to decentralize as a competitive equilibrium the steady state allocation that maximizes the utility of the representative agent among all steady state allocations attainable through the existing markets.
    Keywords: taxation of capital, overlapping generations.
    JEL: E62 E21 E22 H21
    Date: 2008–12
  54. By: Pierre Villa
    Abstract: L’article aborde sous des angles multiples l’equivalence entre taxation et droits d’emission polluante : la premiere fixe les prix, les seconds les quantites. L’equivalence est plus formelle que substantielle. La fiscalite est le fait generateur. Le marche des droits n’existe pas spontanement et le prix y est instable parce que l’offre n’est pas independante de la demande. Il est manipulable aussi bien lors de la distribution des droits gratuits que lors des interventions au cours de la periode de conformite. Il ne peut exister qu’accompagne d’une fiscalite sur les emissions. Pour eviter ces inconvenients les droits doivent etre distribues par adjudication discriminante sans droits gratuits. La fiscalite ou le prix des droits sont une valeur reelle d’option correspondant au cout du changement de technique reduisant la pollution. Pour que ce cout conduise a une reduction de la pollution, il est necessaire de financer les activites d’innovation d’un montant superieur a la fiscalite environnementale afin de deplacer les facteurs de production vers cette activite. Comme la question de l’innovation est du meme ordre que pour l’extraction des energies fossiles, l’equivalence fiscale entre les taxes sur la pollution et l’energie est mediatisee par les taxes sur le capital qui operent les transferts de facteurs vers le secteur de la recherche qui peut etre non marchand. La decentralisation par le marche impose que la depollution ait un cout marchand.
    Keywords: Equivalence; droits d'emission echangeable; fiscalite de l'environnement
    JEL: E61 E62
    Date: 2009–03

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