nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒04‒18
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. What Can a New Keynesian Labor Matching Model Match? By Christopher Reicher
  2. The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed? By Christian Merkl
  3. On Determinacy and Learnability in a New Keynesian Model with Unemployment By Mewael F. Tesfaselassie; Eric Schaling
  4. Optimal Monetary Policy with Imperfect Unemployment Insurance By NAKAJIMA Tomoyuki
  5. Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model By Riccardo DiCecio; Edward Nelson
  6. Sticky prices versus monetary frictions: an estimation of policy trade-offs By S. Boragan Aruoba; Frank Schorfheide
  7. Sophisticated Monetary Policies By Andrew Atkeson; V. V. Chari; Patrick Kehoe
  8. The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation By Fabio Milani
  9. The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes By Riccardo DiCecio; Edward Nelson
  10. The great inflation in the United States and the United Kingdom: reconciling policy decisions and data outcomes By Riccardo DiCecio; Edward Nelson
  11. Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency By Katja Hanewald; Thomas Post; Helmut Gründl
  12. Rational Expectations Models with Anticipated Shocks and Optimal Policy: A General Solution Method and a New Keynesian Example By Hans-Werner Wohltmann; Roland Winkler
  13. Anticipated Alternative Instrument-Rate Paths in Policy Simulations By Stefan Laséen; Lars E.O. Svensson
  14. Wage Rigidity and Job Creation By Christian Haefke; Marcus Sonntag; Thijs van Rens
  15. Time-Varying Employment Risks and Consumption: A Quantitative General Equilibrium Study By Nirei, Makoto; Sarker, Sanjib
  16. Leader of the Pack? German Monetary Dominance in Europe Prior to EMU By J. James Reade; Ulrich Volz
  17. Sticky Rents and the Stability of Housing Cycles By Erdem Basci; Ismail Saglam
  18. "Recent Rise in Federal Government and Federal Reserve Liabilities--Antidote to a Speculative Hangover" By Dimitri B. Papadimitriou; Greg Hannsgen
  19. Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio? By Guido Ascari; Tiziano Ropele
  20. Monetary policy strategy in a global environment By Philippe Moutot; Giovanni Vitale
  21. Design and Evaluation of Core Inflation Measures for Turkey By Oguz Atuk; Mustafa Utku Ozmen
  22. Mortality modeling: Lee-Carter and the macroeconomy By Katja Hanewald
  23. The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa By Balázs Égert
  24. The Effectiveness of Fiscal Policy in Japan Using the Hodrick-Prescott Filter Deficits Revisited By Takao Fujii
  25. New Evidence, Old Puzzles: Technology Shocks and Labor Market Dynamics By Almut Balleer
  26. Housing over time and over the life cycle: a structural estimation By Wenli Li; Haiyong Liu; Rui Yao
  27. Financial Integration and Business Cycle Synchronization By Sebnem Kalemli-Ozcan; Elias Papaioannou; José Luis Peydró
  28. Markup variation and endogenous fluctuations in the price of investment goods By Max Floetotto; Nir Jaimovich; Seth Pruitt
  29. The Finnish Great Depression: From Russia with Love By Gorodnichenko, Yuriy; Mendoza, Enrique G.; Tesar, Linda L.
  30. Liquidity and the Business Cycle By Naes, Randi; Skjeltorp, Johannes; Odegaard, Bernt Arne
  31. Milton Friedman and U.K. economic policy: 1938-1979 By Edward Nelson
  32. The optimal tax treatment of housing capital in the neoclassical growth model By Essi Eerola; Määttänen; Niku
  33. Comparing GDP in Constant and in Chained Prices: Some New Results By Dumagan, Jesus C.
  34. The propagation of regional recessions By James D. Hamilton; Michael T. Owyang
  35. Income Risk, Consumption Inequality, and Macroeconomy in Japan By Tomoaki Yamada
  36. Aggregate Fluctuations of Discrete Investments By Nirei, Makoto
  37. Re-examining Symmetry of Shocks for East Asia: Results Using a VAR with Sign Restrictions By Vu Tuan Khai
  38. Wage Bargaining and Induced Technical Change in a Linear Economy: Model and Application to the US (1963-2003) By Tavani, Daniele
  39. Defending Against Speculative Attacks By Tijmen Daniëls; Henk Jager; Franc Klaassen
  40. Cross-country Variation in Factor Shares and its Implications for Development Accounting By Brad Sturgill
  41. Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective and Through Which Channel Does It Work? By Rasmus Fatum
  42. Explaining shifts in the unemployment rate with productivity slowdowns and accelerations: a co-breaking approach By Sven Schreiber
  43. Pension Reform in Chile Revisited: What Has Been Learned? By Augusto Iglesias-Palau
  44. Gasoline prices jump up on Mondays: An outcome of aggressive competition? By Foros, Øystein; Steen, Frode

  1. By: Christopher Reicher
    Abstract: A labor matching model with nominal rigidities can match short-run movements in labor’s share with some success. However, it cannot explain much of the behavior of employment, vacancies, and job flows in postwar US data without resorting to additional shocks beyond monetary policy and productivity shocks. In particular, the model suggests that monetary policy shocks can account for only a small portion of postwar fluctuations, except for the Volcker and late-1940s episodes. Productivity shocks can account for some of the pattern in labor’s share and in employment between the late 1960s and the early 1980s. Based on the timing of observed fluctuations in interest rates, inflation, and productivity, it appears that the vast majority of observed fluctuations in the real economy remain unexplained by standard real and nominal shocks
    Keywords: Unemployment, labor market search, job flows, labor share, inflation, productivity shocks, monetary shocks
    JEL: E24 E32 E52 J64
    Date: 2009–02
  2. By: Christian Merkl
    Abstract: In the standard New Keynesian sticky price model the central bank faces no contradiction between the stabilization of inflation and the stabilization of the welfare relevant output gap after a productivity shock hits the economy. When the standard model is enhanced by real wage rigidities or labor turnover costs, an endogenous short-run inflation-output tradeoff arises. This paper compares the implications of the two labor market rigidities. It argues that economists and policymakers alike should pay more attention to labor turnover costs for the following reasons. First, a model with labor turnover costs generates impulse response functions that are more in line with the empirical evidence than those of a model with real wage rigidities. Second, labor turnover costs are the dominant source for the inflation-output tradeoff when both rigidities are present in the model. And finally, there is stronger empirical evidence for the existence of labor turnover costs than for real wage rigidities
    Keywords: monetary policy, real wage rigidity, labor turnover costs, unemployment, tradeoff
    JEL: E24 E32 E52 J23
    Date: 2009–03
  3. By: Mewael F. Tesfaselassie; Eric Schaling
    Abstract: We analyze determinacy and stability under learning (E-stability) of rational expectations equilibria in the Blanchard and Galí (2006, 2008) New-Keynesian model of inflation and unemployment, where labor market frictions due to costs of hiring workers play an important role. We derive results for alternative specifications of monetary policy rules and alternative values of hiring costs as a percentage of GDP. Under low hiring costs – a typical part of the U.S. calibration – for policy rules based on current period inflation and unemployment our results are similar to those of Bullard and Mitra (2002). However, we find that the region of indeterminacy and E-instability in the policy space increases with the hiring costs. So, higher hiring costs – consistent with the European 'sclerotic' labor market institutions – seem to play an important part in explaining unemployment instability. Under lagged data based rules the area where monetary policy delivers both determinacy and E-stability shrinks. These rules perform worse according to these two dimensions when hiring costs go up. Finally, under expectations-based rules – unlike Bullard and Mitra (2002) – an additional explosive region is introduced. Here also the scope for determinacy and E-stability oriented monetary policy decreases. Interestingly – under the same rule and European 'sclerotic' labor market institutions – we find that responding too much to expected inflation and too little to expected unemployment may very well be self-defeating. When hiring costs are large, a central bank that follows such a policy rule could very easily end up in the worst-case scenario of both indeterminacy and E-instability
    Keywords: Monetary Policy Rules, Determinacy, Learning, E-Stability
    JEL: E52 E31 D84
    Date: 2009–03
  4. By: NAKAJIMA Tomoyuki
    Abstract: We consider an efficiency-wage model with the Calvo-type sticky prices and analyze the optimal monetary policy when the unemployment insurance is not perfect. With imperfect risk sharing, the strict zero-inflation policy is no longer optimal even when the steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earnings loss due to unemployment varies over business cycles. If the idiosyncratic income loss is acyclical, the optimal policy differs very little from the zero-inflation policy. However, if it varies countercyclically, as evidence suggests, the deviation of the optimal policy from the complete price-level stabilization becomes quantitatively signifficant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.
    Date: 2009–04
  5. By: Riccardo DiCecio; Edward Nelson
    Abstract: Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom’s monetary policy options using a structural open-economy model. We use the Erceg, Gust, and López-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending.
    JEL: E32 E42 E52
    Date: 2009–04
  6. By: S. Boragan Aruoba; Frank Schorfheide
    Abstract: We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. We document its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion against the distortion caused by taxing money and hence transactions in the decentralized market. We find that target rates of -1% or less are desirable, which contrasts with policy recommendations derived from a cashless New Keynesian model.
    Date: 2009
  7. By: Andrew Atkeson; V. V. Chari; Patrick Kehoe
    Abstract: In standard approaches to monetary policy, interest rate rules often lead to indeterminacy. Sophisticated policies, which depend on the history of private actions and can differ on and off the equilibrium path, can eliminate indeterminacy and uniquely implement any desired competitive equilibrium. Two types of sophisticated policies illustrate our approach. Both use interest rates as the policy instrument along the equilibrium path. But when agents deviate from that path, the regime switches, in one example to money; in the other, to a hybrid rule. Both lead to unique implementation, while pure interest rate rules do not. We argue that adherence to the Taylor principle is neither necessary nor sufficient for unique implementation with pure interest rate rules but is sufficient with hybrid rules. Our results are robust to imperfect information and may provide a rationale for empirical work on monetary policy rules and determinacy.
    JEL: E5 E52 E58 E6 E61
    Date: 2009–04
  8. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: Recent research has suggested that globalization may have transformed the U.S. Phillips curve by making inflation a function of global, rather than domestic, economic activity. This paper tests this view by estimating a structural model for the U.S., which incorporates a role of global output on the domestic demand and supply relations and on the formation of expectations. Expectations are modeled as near-rational and economic agents are allowed to learn about the economy's coefficients over time. The estimation reveals small and negative coefficients for the sensitivity of inflation to global output; moreover, the fit of the model improves when global output is excluded from the Phillips curve. Therefore, the evidence does not support altering the traditional closed-economy Phillips curve to include global output. The data suggest, instead, that global output may play an indirect role through the determination of domestic output. But the overall impact of global economic conditions on U.S. inflation remains negligible.
    Keywords: Globalization; Global output; Inflation dynamics; New Keynesian Phillips curve; Global slack hypothesis; Constant-gain learning
    JEL: E31 E50 E52 E58 F41
    Date: 2009–04
  9. By: Riccardo DiCecio; Edward Nelson
    Abstract: We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.
    JEL: E31 E52 E58
    Date: 2009–04
  10. By: Riccardo DiCecio; Edward Nelson
    Abstract: We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.
    Keywords: Inflation (Finance) ; Great Britain
    Date: 2009
  11. By: Katja Hanewald; Thomas Post; Helmut Gründl
    Abstract: Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index kt in the Lee-Carter model, we assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in our stochastic simulation framework are driven by a GDP-linked variant of the Lee-Carter mortality model. Furthermore, interest rates and stock prices are allowed to react to changes in GDP, which itself is modeled as a stochastic process. Our results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in GDP is incorporated.
    Keywords: Life insurance, asset-liability management, stochastic mortality, Lee-Carter model, business cycle
    JEL: G22 G23 G28 G32 E32 J11
    Date: 2009–03
  12. By: Hans-Werner Wohltmann; Roland Winkler
    Abstract: The purpose of this paper is to show how to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. Furthermore, we determine the optimal unrestricted and restricted policy responses to anticipated shocks. We demonstrate our solution method by means of a micro-founded hybrid New Keynesian model and show that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size
    Keywords: Anticipated Shocks, Optimal Monetary Policy, Rational Expectations, Generalized Schur Decomposition, Welfare Effects
    JEL: C61 C63 E52
    Date: 2009–04
  13. By: Stefan Laséen; Lars E.O. Svensson
    Abstract: This paper specifies how to do policy simulations with alternative instrument-rate paths in DSGE models such as Ramses, the Riksbank's main model for policy analysis and forecasting. The new element is that these alternative instrument-rate paths are anticipated by the private sector. Such simulations correspond to situations where the Riksbank transparently announces that it plans to implement a particular instrument-rate path and where this announcement is believed by the private sector. Previous methods have instead implemented alternative instrument-rate paths by adding unanticipated shocks to an instrument rule, as in the method of modest interventions by Leeper and Zha (2003). This corresponds to a very different situation where the Riksbank would nontransparently and secretly plan to implement deviations from an announced instrument rule. Such deviations are in practical simulations normally both serially correlated and large, which seems inconsistent with the assumption that they would remain unanticipated by the private sector. Simulations with anticipated instrument-rate paths seem more relevant for the transparent flexible inflation targeting that the Riksbank conducts. We provide an algorithm for the computation of policy simulations with arbitrary restrictions on nominal and real instrument-rate paths for an arbitrary number of periods after which a given policy rule, including targeting rules and explicit, implicit, or forecast-based instrument rules is implemented. When inflation projections are sufficiently sensitive to the real interest-rate path, restrictions on real interest-rate paths provide more intuitive and robust results, whereas restrictions on nominal interest-rate path may provide somewhat counter-intuitive results.
    JEL: E52 E58
    Date: 2009–04
  14. By: Christian Haefke; Marcus Sonntag; Thijs van Rens
    Abstract: Standard macroeconomic models underpredict the volatility of unemployment fluctuations. A common solution is to assume wages are rigid. We explore whether this explanation is consistent with the data. We show that the wage of newly hired workers, unlike the aggregate wage, is volatile and responds one-to-one to changes in labor productivity. In order to replicate these findings in a search model, it must be that wages are rigid in ongoing jobs but flexible at the start of new jobs. This form of wage rigidity does not affect job creation and thus cannot explain the unemployment volatility puzzle
    Keywords: Wage Rigidity, Search and Matching Model, Business Cycle
    JEL: E24 E32 J31 J41 J64
    Date: 2009–03
  15. By: Nirei, Makoto; Sarker, Sanjib
    Keywords: Time-varying idiosyncratic risk, employment risk, precautionary savings, regime-switching fiscal policy
    JEL: E21 E62
    Date: 2008–09
  16. By: J. James Reade; Ulrich Volz
    Abstract: In this paper, the monetary policy independence of European nations in the years before European Monetary Union (EMU) is investigated using cointegration techniques. Daily data is used to assess pairwise relationships between individual EMU nations and ‘lead’ nation Germany, to assess the hypothesis that Germany was the dominant European nation prior to EMU. By and large our econometric investigations support this hypothesis, and lead us to conclude that the only European nation to lose monetary policy independence in the light of monetary union was Germany.
    Keywords: Monetary policy independence, European monetary integration, Cointegrated VAR method
    JEL: E52 E58 F41 F42 C32
    Date: 2009
  17. By: Erdem Basci; Ismail Saglam
    Date: 2009
  18. By: Dimitri B. Papadimitriou; Greg Hannsgen
    Abstract: Federal government and Federal Reserve (Fed) liabilities rose sharply in 2008. Who holds these new liabilities, and what effects will they have on the economy? Some economists and politicians warn of impending inflation. In this new Strategic Analysis, the Levy Institute's Macro-Modeling Team focuses on one positive effect--a badly needed improvement of private sector balance sheets--and suggest some of the reasons why it is unlikely that the surge in Fed and federal government liabilities will cause excessive inflation.
    Date: 2009–04
  19. By: Guido Ascari; Tiziano Ropele
    Abstract: When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains
    Keywords: Disinflation, Sacrifice ratio, Non-linearities
    JEL: E31 E5
    Date: 2009–03
  20. By: Philippe Moutot; Giovanni Vitale
    Abstract: Since the mid-1980s the world economy has gone through profound transformations of which the sources and effects are probably not yet completely understood. The process of continuous integration in trade, production and financial markets across countries and economic regions--which is what is generally defined as "globalisation"--affects directly the conduct of monetary policy in a variety of respects. The aim of this paper is to present an overview of the structural implications of globalisation for the domestic economies of developed countries and to deduct from these implications lessons for the conduct of monetary policy, and in particular the assessment of risks to price stability.
    Keywords: Globalization ; Monetary policy ; Inflation (Finance) ; International finance ; International trade
    Date: 2009
  21. By: Oguz Atuk; Mustafa Utku Ozmen
    Date: 2009
  22. By: Katja Hanewald
    Abstract: Using data for six OECD countries, this paper studies the effect of macroeconomic conditions on the mortality index kt in the well-known Lee-Carter model. Significant correlations are found with real GDP growth rates in Australia, Canada, and the United States, and with unemployment rate changes in Japan, for the period 1950–2005. In recent years, the relationship between the state of the economy and mortality is found to change from procyclical to countercyclical in all six countries. Based on these findings, variants of the Lee-Carter model are proposed that capture a substantial fraction of the variation in the mortality index.
    Keywords: Demography, Lee-Carter, business cycle, time series model
    JEL: C32 E32 I12 J11
    Date: 2009–01
  23. By: Balázs Égert
    Abstract: This paper studies drivers of high-frequency (daily) dynamics of the South African rand vis-à-vis the dollar from January 2001 to July 2007. We find strong nonlinear effects of commodity prices, perceived country and emerging market risk premium and changes in the dollar-euro exchange rate on changes in daily returns of the rand-dollar exchange rate. We also identify a one-sided nonlinear mean reversion to the long-term monetary equilibrium. In addition we establish very short-lived effects on the exchange rate of selected macroeconomic surprises and central bank communication aimed at talking up the rand.<P>L’impact des fondamentaux monétaires et de matières premières, des nouvelles macroéconomiques et de la communication de la Banque centrale sur le taux de change : Le cas de l’Afrique du Sud<BR>Ce document étudie les facteurs qui peuvent expliquer la dynamique journalière du rand sud-africain vis-à-vis du dollar sur la période allant de janvier 2001 à juillet 2007. Nous trouvons que les prix des matières premières, la perception du risque par rapport à l’Afrique du Sud et aux pays émergents et les changements du taux de change dollar-euro influencent forcément les variations des rendements journalières du taux de change du rand par rapport au dollar de manière non linéaire. Nos résultats indiquent aussi que le rand s’ajuste vers son niveau d’équilibre monétaire de manière non linéaire lorsque le taux de change du marché est plus fort que le taux de change d’équilibre. De plus, il se trouve que certaines nouvelles macroéconomiques et la communication de banque centrale visant l’appréciation du rand exercent une influence de très court terme sur le cours du rand par rapport au dollar.
    Keywords: exchange rates, taux de change, South Africa, Afrique du Sud, commodity prices, central bank communication, communication de la Banque centrale, macroeconomic news, nouvelles macroéconomiques, nonlinearity, non-linéarité, monetary model, modèle monétaire, prix des commodités
    JEL: E31 F31 O11 P17
    Date: 2009–04–08
  24. By: Takao Fujii (Graduate School of Economics, Kobe University)
    Date: 2009–04
  25. By: Almut Balleer
    Abstract: Can the standard search-and-matching labor market model replicate the business cycle fluctuations of the job finding rate and the unemployment rate? In the model, fluctuations are prominently driven by productivity shocks which are commonly interpreted as technology shocks. I estimate different types of technology shocks from structural VARs and reassess the empirical performance of the standard model based on second moments that are conditional on technology shocks. Most prominently, the model replicates the conditional volatility of job finding and unemployment, so that the Shimer critique does not apply. Instead the model lacks non-technological disturbances to replicate the overall sample volatility. In addition, positive technology shocks lead to a fall in job finding and an increase in unemployment thereby opposing the dynamics in the standard model similar to the “hours puzzle” in Galí (1999)
    Keywords: labor market dynamics, technology shocks, structural VAR, search and matching, business cycle
    JEL: E24 E32 O33
    Date: 2009–03
  26. By: Wenli Li; Haiyong Liu; Rui Yao
    Abstract: We estimate a structural model of optimal life-cycle housing and consumption in the presence of realistic labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption, and explicitly incorporates a house adjustment cost. Our estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics quite well, and suggests an intra-temporal elasticity of substitution between housing and nonhousing consumption of 0.33 and a housing adjustment cost that amounts to about 15 percent of house value. Policy experiments with estimated preference parameters imply that households respond nonlinearly to house price changes with large house price declines leading to sizable decreases in both the aggregate homeownership rate and aggregate non-housing consumption. The average marginal propensity to consume out of housing wealth changes ranges from 0.4 percent to 6 percent. When lending conditions are tightened in the form of a higher down payment requirement, interestingly, large house price declines result in more severe drops in the aggregate homeownership rate but milder decreases in nonhousing consumption.
    Date: 2009
  27. By: Sebnem Kalemli-Ozcan; Elias Papaioannou; José Luis Peydró
    Abstract: Standard theory predicts that financial integration leads to a lower degree of business cycle synchronization. Surprisingly, cross-country studies find the opposite. Our contribution is to document the theoretically predicted negative effect of financial integration on business cycle synchronization as a robust regularity. We use a confidential dataset on banks' international bilateral exposure over the past three decades in a panel of twenty developed countries. The rich panel structure allows us to control for time-invariant country-pair factors and global trends that affect both financial integration and business cycle patterns. In contrast to previous empirical work we find that a higher degree of financial integration is associated with less synchronized output cycles. We also employ two distinct instrumental variable approaches to identify the one-way effect of integration on synchronization. These specifications reveal that the component of banking integration predicted by legislative-regulatory harmonization policies and the nature of the bilateral exchange rate regime has a negative effect on output synchronization.
    JEL: E32 F15 F36 G21 O16
    Date: 2009–04
  28. By: Max Floetotto; Nir Jaimovich; Seth Pruitt
    Abstract: The two sector model presented in this note suggests a simple structural decomposition of movements in the price of investment goods into exogenous and endogenous sources. The endogenous fluctuations arise in the presence of countercyclical markups which vary differently across the consumption and investment sectors. In turn, the movements in the markups are due to endogenous procyclical net business formation. The model, while being consistent with the countercyclicality of the price of investment goods, suggests that about a quarter of the movement in the price series can be attributed to this endogenous mechanism.
    Date: 2009
  29. By: Gorodnichenko, Yuriy (University of California, Berkeley); Mendoza, Enrique G. (University of Maryland); Tesar, Linda L. (University of Michigan)
    Abstract: During the period 1991-93, Finland experienced the deepest economic downturn in an industrialized country since the 1930s. We argue that the culprit behind this Great Depression was the collapse of Finnish trade with the Soviet Union, because it induced a costly restructuring of the manufacturing sector and a sudden, large increase in the cost of energy. We develop and calibrate a multi-sector dynamic general equilibrium model with labor market frictions, and show that the collapse of Soviet-Finnish trade can explain key features of Finland's Great Depression. We also show that Finland's Great Depression mirrors the macroeconomic dynamics of the transition economies of Eastern Europe. These economies experienced a similar trade collapse. However, as a western democracy with developed capital markets and institutions, Finland faced none of the large institutional adjustments that other transition economies experienced. Thus, by studying the Finnish experience we isolate the adjustment costs due solely to the collapse of Soviet trade.
    Keywords: business cycles, depression, trade, Soviet, reallocation, multi-sector model
    JEL: E32 F41 P2
    Date: 2009–04
  30. By: Naes, Randi (Ministry of Industry); Skjeltorp, Johannes (Norges Bank); Odegaard, Bernt Arne (University of Stavanger)
    Abstract: We show evidence of a contemporaneous relation between stock market liquidity and the business cycle. Stock market liquidity worsen when the economy is slowing down, and vice versa. This effect is most pronounced for small firms. Using data for both the US and Norway, we find strong evidence that stock market liquidity predict the current and future state of the economy. We also show some evidence that can shed light on the link between stock markets and the real economy. Using stock ownership data from Norway, we find that the portfolio compositions of investors change with the business cycle. Our results suggests a flight to quality during economic downturns where equity traders move from smaller/less liquid stocks to large/liquid stocks. Our results suggest that an important explanation for the equity premium in general, and the equity size premium in particular, may be related to time variation in stock market liquidity at business cycle frequencies.
    Keywords: Market Microstructure; Liquidity; Business Cycle
    JEL: E44 G10 G20
    Date: 2008–11–01
  31. By: Edward Nelson
    Abstract: This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into 1938-1946, 1946-1959, 1959-1970, and 1970-1979. For each of these subperiods, I consider Friedman's observations on and dealings with key events, issues, and personalities in U.K. monetary policy and in general U.K. economic policy.
    Keywords: Friedman, Milton ; Economic policy - Great Britain
    Date: 2009
  32. By: Essi Eerola; Määttänen; Niku
    Abstract: In a dynamic setting, housing capital is both an asset and a consumption good. But should it be taxed like other forms of consumption or like other forms of capital? We analyze this question by considering the taxation of housing capital in a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis-à-vis the tax treatment of both business capital and other forms of consumption allowing for relatively general preferences. We show that for a class of utility functions that includes the standard Cobb-Douglas function, the second-best optimum can be achieved with a simple tax structure where housing construction is taxed at the same rate as non-housing consumption and the tax rate on the imputed rent equals the tax rate on the return to business capital in every period. We also show how the optimal tax structure depends on the elasticities of substitution between housing, non-housing consumption, and leisure. Our numerical analysis shows that the optimal tax burden on housing capital is indeed very sensitive to household preferences.
    Keywords: Optimal taxation, dynamic Ramsey taxation, housing taxation
    JEL: E21 H21
    Date: 2009–03–30
  33. By: Dumagan, Jesus C.
    Abstract: This paper’s framework for GDP in chained prices yields GDP in constant prices as a special case of constant relative prices, i.e., these GDP measures differ only when relative prices change. The framework has a novel additive procedure, counter to the prevailing view that GDP in chained prices is non-additive. This procedure allows relative prices to change but when they are constant, components in chained and in constant prices are equal, implying consistency with the additivity of GDP in constant prices. Finally, GDP conversion from constant to chained prices removes the fixed base--by making the immediately preceding period the base, i.e., continuous updating--and allows relative prices to change and, thus, removes the base-period dependence and substitution bias of GDP in constant prices.
    Keywords: real GDP, constant prices, chained prices, Fisher index, additivity
    Date: 2009
  34. By: James D. Hamilton; Michael T. Owyang
    Abstract: This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. We hypothesize that there exists a small number of cluster designations, with individual states in a given cluster sharing certain business cycle characteristics. We find that although oil-producing and agricultural states can sometimes experience a separate recession from the rest of the United States, for the most part, differences across states appear to be a matter of timing, with some states entering recession or recovering before others.
    Keywords: Business cycles ; Recessions
    Date: 2009
  35. By: Tomoaki Yamada
    Abstract: In this paper, using an OLG model with heterogeneous households, we investigate economic inequality in the recent decades in Japan. We decompose the causes of economic inequality into macroeconomic factors and a demographic factor, and demonstrate that the earning inequality in the model replicates the actual evolution of inequality in Japan. Based on a counterfactual simulation, we demonstrate that time-varying macroeconomic factors play an important role in the evolution of economic inequality. In particular, we show that the low growth rate of total factor productivity in the 1990s in Japan limited the dispersion of economic inequality.
    Keywords: Income risk, Consumption inequality, Population aging
    JEL: E21 D11 D31 D91
    Date: 2009–03
  36. By: Nirei, Makoto
    Keywords: Lumpy investment, (S,s) economy, strategic complementarity, self-organized criticality, fat-tailed distribution
    JEL: E22 E32
    Date: 2008–12
  37. By: Vu Tuan Khai
    Abstract: I revisit the hotly debated topic regarding the possibility of introducing a common currency for East Asia from the point of view of shock symmetry. I first point out a serious problem of the existing studies which use the VAR method with long-run restrictions developed by Blanchard and Quah (1989) in that the signs of the impulse response functions to the same structural shock are not necessarily consistent across the countries. This means that the high (low) correlations of structural shocks do not necessarily imply low (high) costs of a common currency area. To overcome this problem, I apply the VAR method with sign restrictions developed by Uhlig (2005). I used the AD-AS model to impose sign restrictions on the responses of GDP and CPI to demand and supply shocks. One main finding is that demand shocks are significantly positively correlated among almost all East Asian countries. But overall, East Asia as a whole is not suitable for a common currency because correlations of supply shocks are low.
    Keywords: Structural VAR, Long run restriction, Sign restriction, Symmetry of Shocks, Common Currency, East Asia
    JEL: E32 F33 F41
    Date: 2009–03
  38. By: Tavani, Daniele
    Abstract: In a simple one-sector, two-class, fixed-proportions economy, wages are set through axiomatic bargaining a la Nash [1950]. As for choice of technology, firms choose the direction of factor augmentations to maximize the rate of unit cost reduction (Kennedy [1964], and more recently Funk [2002]). The aggregate environment resulting by self-interested decisions made by economic agents is described by a two-dimensional dynamical system in the employment rate and output/capital ratio. The economy converges cyclically to a long-run equilibrium involving a Harrod-neutral prole of technical change, a constant rate of employment of labor, and constant input shares. The type of oscillations predicted by the model matches the available data on the United States (1963-2003). Finally, institutional change, as captured by variations in workers' bargaining power, has a positive effect on the rate of output growth but a negative effect on employment.
    Keywords: Bargaining; Induced Technical Change; Factor Shares; Employment
    JEL: E25 E24 J52 O31
    Date: 2009–04–02
  39. By: Tijmen Daniëls; Henk Jager; Franc Klaassen
    Abstract: While virtually all currency crisismodels recognise that the fate of a currency peg depends on how tenaciously policy makers defend it, they seldom model how this is done. We incorporate themechanics of speculation and the interest rate defence against it in the model ofMorris and Shin (American Economic Review 88, 1998). Our model captures that the interest rate defence reduces speculators’ profits and thus postpones the crisis. It predicts that well before the fall of a currency interest rates are increased to offset the buildup of exchange market pressure, and this then unravels in a sharp depreciation. This pattern is at odds with predictions of standard models, but we show that it fits well with reality.
    Keywords: Exchange Market Pressure, Currency Crisis, Interest Rate Defence, Global Game
    JEL: E58 F31 F33 G15
    Date: 2009–02
  40. By: Brad Sturgill
    Abstract: The stability of factor shares has long been considered one of the “stylized facts” of macroeconomics. However, the relationship between cross-country factor shares and economic development is dependent on how factor shares are measured. Most factor share studies acknowledge only two factors of production: total capital and total labor. The failure to acknowledge more than two factors yields misleading results. Recent theoretical work predicts a systematic relationship between the stage of economic development and non-reproducible and reproducible factor shares. I disentangle physical capital’s share from natural capital’s share, and I disentangle human capital’s share from unskilled labor’s share. The results reveal that nonreproducible factor shares decrease with the stage of economic development, and reproducible factor shares increase with the stage of economic development. Studies relying on the macroeconomic paradigm of constant factor shares should be revisited. Development accounting nearly always assumes the constancy of factor shares. I perform the development accounting exercise but allow factor shares to vary and distinguish between reproducible and nonreproducible factors. My approach yields results that stand in stark contrast to those previously attained. The general consensus is that at least half of the cross-country variation in output per worker is attributable to cross-country variation in the TFP residual. With my approach, the majority of variation in output per worker accrues to factor shares, specifically physical capital’s share and natural capital’s share. TFP’s explanatory power decreases by more than 30 percentage points. This evidence does not, however, diminish the role of technical change. Rather, the evidence indicates the importance of acknowledging a new type of technical change, one that impacts factor shares. Key Words: Factor Shares, TFP residual
    JEL: E23 O30 O47
    Date: 2009
  41. By: Rasmus Fatum (University of Alberta)
    Abstract: This paper investigates whether official Japanese intervention in the JPY/USD exchange rate over the January 1999 to March 2004 time period is effective. By integrating the official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper also attempts to shed some light on through which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, effective Japanese intervention works. The results suggest that Japanese intervention is effective during the first 5 years of the sample and ineffective during the last 3 months of the sample, thereby providing an ex-post rationale for why Japan intervened as well as for why the interventions stopped. Moreover, the results suggest that when Japanese intervention is effective, it works through a portfolio-balance channel. The results do not rule out that effective intervention also works through signaling.
    Keywords: exchange rates; foreign exchange market intervention; channels of Transmission
    JEL: E52 F31 G14
    Date: 2009–01
  42. By: Sven Schreiber
    Abstract: We investigate the controversial issue whether unemployment is related to productivity growth in the long run, using U.S. data in a framework of infrequent mean shifts. Tests find (endogenously dated) shifts around 1974, 1986, and 1996, system techniques indicate that the shifts are common features, and the implied long-run link between the two variables is negative. Therefore the secular decline of unemployment since the mid 1990s indeed stemmed from higher average productivity growth. The initial and final regimes are essentially equal, thus supporting theories that explain the productivity slowdown by a slow adoption process of IT with associated learning costs
    Keywords: productivity slowdown, growth, NAIRU level, common shifts
    JEL: E24 C32 O40
    Date: 2009–03
  43. By: Augusto Iglesias-Palau
    Abstract: The paper describes Chile’s pension reform of 1980, which replaced the existing pay-as-you-go public pension programs by a new funded pension program managed by private companies (the “AFP´s”). It comments on the main results of this reform so far, and identifies the current challenges faced by the country’s pension system. The paper also describes the changes introduced to Chile’s pension system in March 2008 and assesses their potential impact. The Chilean case shows that parametric reforms preceding the creation of a funded program can reduce political resistance to structural pension reform. Chile’s experience also suggests that the consistency of opinions among the economic, social security and labor market authorities responsible of designing and conducting a pension reform process can help to sell the reform to the political authorities. If the decision is to replace an existing pension program by a new one, it also seems necessary to have specific rules that, in some particular circumstances and for a limited period of time, allow discontented workers to go back to their former pension program. Chile’s experience also shows that the quality of pension programs micro design is relevant since individual decisions and portfolio managers investments decisions are shaped by regulations. Results so far suggests that the reform has been successful in improving the long term sustainability of Chile’s pension system; in creating a more fair system; in promoting the development of capital markets; and in removing some distortions to the operation of labor markets. On the other side, there is some room for the new program operational costs and prices to go down, and expectations about an increase in second pillar coverage have not been met. While some regulatory changes could improve the extent and quality of the funded pension program coverage, the long-term solution to the economic problems of retirement involves the labor market. To improve future pensions more jobs in the formal sector of the economy should be created; unemployment must be reduced; and working lives should be extended.<BR>Le document décrit la réforme chilienne des pensions, qui a remplacé en 1980 les programmes publics de retraite par répartition par un système financé par capitalisation, géré par des entreprises privées (les “AFP”). Il commente les principaux résultats de cette réforme et recense les défis auxquels est actuellement confronté le nouveau régime. Le document décrit aussi les modifications qui y ont été apportées en mars 2008 et en évalue l’impact potentiel. Le cas chilien montre que les réformes paramétriques, qui avaient précédé la mise en place d’un système financé par capitalisation, peuvent atténuer les résistances politiques à une réforme structurelle des retraites. L’expérience du Chili donne aussi à penser que la cohérence des avis formulés par les autorités responsables de la politique économique, de la sécurité sociale et des marchés du travail, chargées de concevoir et de conduire le processus de réforme des retraites, peuvent aider à « vendre » la réforme aux autorités politiques. Lorsque l’on prend la décision de remplacer un régime de retraite par un autre, il semble également nécessaire de définir des règles spécifiques autorisant, dans certaines circonstances particulières et pendant une période limitée, les travailleurs mécontents à se réaffilier à leur régime de retraite antérieur. L’expérience du Chili montre aussi qu’il importe de veiller attentivement à la qualité de la conception des dispositions détaillées du système, car les décisions des particuliers et des gestionnaires des investissements de portefeuilles dépendent du cadre réglementaire mis en place. Les résultats observés jusqu’ ici laissent penser que la réforme a permis d’améliorer la viabilité à long terme du système chilien des retraites, d’instaurer un système plus équitable, de promouvoir le développement des marchés financiers et d’éliminer certains facteurs de distorsion du fonctionnement des marchés du travail. Par contre, il y existe une certaine marge de manoeuvre pour abaisser les coûts de fonctionnement du nouveau régime et les coûts d’affiliation. Les attentes quant à une extension de la couverture du second pilier ne se sont pas concrétisées. Si certaines modifications d’ordre réglementaire sont de nature à améliorer l’étendue et la qualité de la couverture du régime de pension capitalisé, à longterme la solution aux problèmes de financement des retraites est liée à la situation du marché du travail. Pour améliorer les retraites futures, il faudrait créer des emplois plus nombreux dans le secteur formel de l’économie, réduire le chômage et allonger la durée de la vie active.
    JEL: E62 G22 G23 G28 H53 H55
    Date: 2009–04–08
  44. By: Foros, Øystein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Steen, Frode (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper examines Norwegian gasoline pump prices using daily station-specific observations from March 2003 to March 2006. Whereas studies that have analyzed similar price cycles in other countries find support for the Edgeworth cycle theory (Maskin and Tirole, 1988), we demonstrate that Norwegian gasoline price cycles involve a form of coordinated behavior. Retail gasoline prices follow a fixed weekly pattern, where retail outlets all over Norway simultaneously increase their prices to the same level every Monday at noon. Consequently, the sharp price increase is tied to time rather than the current price level. The gasoline companies’ headquarters publish a recommended price that de facto is a RPM arrangement towards the retail outlets. The vertical arrangement is industry-wide adopted, and is used to coordinate the time and the level for retail price increases among the big four gasoline companies. Monday changed from being the low-price day to becoming the high-price day almost ‘overnight’ in April 2004, and we empirically establish that the change corresponds to a significant jump in the gross margin.
    Keywords: Gasoline Prices; Resale Price Maintenance
    JEL: E30 E32
    Date: 2009–04–14

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