nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒04‒25
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The role of labor markets for euro area monetary policy. By Kai Christoffel; Keith Kuester; Tobias Linzert
  2. Are ‘Intrinsic Inflation Persistence’ Models Structural in the Sense of Lucas (1976)? By Luca Benati
  3. Has Inflation Targeting Improved Monetary Policy? Evaluating Policy Effectiveness in Australia, Canada, and New Zealand By Pierre L. Siklos; Diana N. Weymark
  4. Inflation and Unemployment in the Long Run By Aleksander Berentsen; Guido Menzio; Randall Wright
  5. Inflation Risk Premia and Survey Evidence on Macroeconomic Uncertainty By Söderlind, Paul
  6. Euro membership as a U.K. monetary policy option: results from a structural model By Riccardo DiCecio; Edward Nelson
  7. Consumption, Land Prices and the Monetary Transmission Mechanism in Japan By Muellbauer, John; Murata, Keiko
  8. The external and domestic side of macroeconomic adjustment in China. By Roland Straub; Christian Thimann
  9. Does Government Ideology Matter in Monetary Policy? – A Panel Data Analysis for OECD Countries By Ansgar Belke; Niklas Potrafke
  10. Navigating the Trilemma: Capital Flows and Monetary Policy in China By Reuven Glick; Michael Hutchison
  11. Risk Matters: The Real Effects of Volatility Shocks By Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramirez, Juan Francisco; Uribe, Martín
  12. The Effects of Real Exchange Rate Shocks in an Economy with Extreme Liability Dollarization By Melander, Ola
  13. International Macroeconomic Fluctuations: A New Open Economy Macroeconomics Interpretation By Soyoung Kim; Jaewoo Lee
  14. Search in the Product Market and the Real Business Cycle. By Thomas Y. Mathä; Olivier Pierrard
  15. The Bank of Canada Needs to Nurture those Green Shoots of Recovery By David Laidler
  16. Expectations, learning and policy rule By Michael Artis; Christian Dreger; Konstantin Kholodilin
  17. Liquidity and welfare in a heterogeneous-agent economy By Yi Wen
  18. Cyclicality of Fiscal Policy: Permanent and Transitory Shocks By Strawczynski, Michel; Zeira, Joseph
  19. On the Non-Optimality of Information: An Analysis of the Welfare Effects of Anticipated Shocks in the New Keynesian Model By Hans-Werner Wohltmann; Roland Winkler
  20. Housing Finance in the Euro Area. By Francesco Drudi; Petra Köhler-Ulbrich; Marco Protopapa; Jiri Slacalek; Christoffer Kok Sørensen; Guido Wolswijk; Ramón Gómez Salvador; Ruth Magono; Nico Valckx; Elmar Stöss; Karin Wagner; Zoltan Walko; Marie Denise Zachary; Silvia Magri; Laura Bartiloro; Paolo Mistrulli; Yannis Asimakopoulos; Vasilis Georgakopoulos; Maria Kasselaki; Jorge Martínez Pagés; Romain Weber; Christiana Argyridou; Wendy Zammit; Nuno Ribeiro; Daniel Gabrielli; Nicola Doyle; Harri Hasko; Vesna Lukovic
  21. Assessing Inflation Persistence: Micro Evidence on an Inflation Targeting Economy By Babecký, Jan; Coricelli, Fabrizio; Horváth, Roman
  22. Inflation and the price of real assets By Monika Piazzesi; Martin Schneider
  23. Fundamentals, Macroeconomic Announcements and Asset Prices By Aymen Belgacem
  24. Technology shocks and aggregate fluctuations in an estimated hybrid RBC model By Jim Malley; Ulrich Woitek
  25. Estimating US Monetary Policy Shocks Using a Factor-Augmented Vector Autoregression: An EM Algorithm Approach By Bork, Lasse
  26. Oil price shocks and their short- and long-term effects on the Chinese economy By Tang, Weiqi; Wu, Libo; Zhang, ZhongXiang
  27. Re-specifying the Keynesian Income-Expenditure Model to Properly Account for Imports: Implications for Fiscal Policy By Thomas Palley
  28. Hong Kong Consumer Prices are Flexible By James Yetman
  29. Housing Finance in the Euro Area. By Ettore Dorrucci; Alexis Meyer-Cirkel; Daniel Santabárbara
  30. Multi-Factor Gegenbauer Processes and European Inflation Rates By Guglielmo Maria Caporale; Luis A. Gil-Alana
  31. Does Fed Funds Target Interest Rate Lead Bank of England’s Bank Rate and European Central Bank’s Key Interest Rate? By Çelik, Sadullah; Deniz, Pınar
  32. The role of the United States in the global economy and its evolution over time. By Stéphane Dées; Arthur Saint-Guilhem
  33. A Portfolio Model of Capital Flows to Emerging Markets By Michael B Devereux; Alan Sutherland
  34. Elasticity Optimism By Jean Imbs; Isabelle Mˆmjean
  35. Reply to "Generalizing the Taylor Principle: A Comment" By Troy Davig; Eric M. Leeper
  36. What Do Asset Prices Have to Say About Risk Appetite and Uncertainty? By Geert Bekaert; Marie Hoerova; Martin Scheicher
  37. Global Liquidity and Commodity Prices – A Cointegrated VAR Approach for OECD Countries By Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
  38. The GCC Monetary Union: Choice of Exchange Rate Regime By Mohsin S. Khan
  39. Emerging market fluctuations : what makes the difference ? By Hevia, Constantino
  40. Warfare, Liquidity Crises, and Coinage Debasements in Burgundian Flanders, 1384 - 1482: Monetary or Fiscal Remedies? By John H. Munro
  41. The Decline of Traditional Banking and Endogenous Money By Korkut Erturk and Gokcer Ozgur
  42. The single global currency - common cents for the world (2008 Edition) By Bonpasse, Morrison
  43. Current Account Imbalances and Financial Integration in the Euro Area By Schmitz, Birgit; von Hagen, Jürgen
  44. Fear of Fire Sales and the Credit Freeze By Douglas W. Diamond; Raghuram G. Rajan
  45. The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets By Philip R. Lane; Jay C. Shambaugh
  46. Inequality, Integration, and Policy: Issues and evidence from EMU By Bertola, Giuseppe
  47. Does higher openness cause more real exchange rate volatility ? By Calderon, Cesar; Kubota, Megumi
  48. Investment, Income, and Incompleteness By Björn Bick; Holger Kraft; Claus Munk
  49. Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008? By Hicks, Bruce; Kilian, Lutz
  50. Putting Up a Good Fight: The Galí-Monacelli Model versus “The Six Major Puzzles in International Macroeconomics” By Stefan Ried
  51. Trend and cycle in bond premia By Monika Piazzesi; Martin Schneider
  52. Listen Up Economists,Why Might History Matter for Development Policy? By Ravi Kanbur
  53. Credit Crunch, Creditor Protection, and Asset Prices By Galina Hale; Assaf Razin; Hui Tong
  54. Reducing Illegal Migrants in the U.S.: A Dynamic CGE Analysis By Peter B. Dixon; Martin Johnson; Maureen T. Rimmer
  55. Oil in Colombia: History, Regulation and Macroeconomic Impact By Juan Carlos Echeverry; Jaime Navas; Verónica Navas; María Paula Gómez
  56. Block Recursive Equilibria for Stochastic Models of Search on the Job By Guido Menzio; Shouyong Shi
  57. The Behaviour of the Irish Economy: Insights from the HERMES Macro-Economic Model By Bergin, Adele; Conefrey, Thomas; Fitz Gerald, John; Kearney, Ide
  58. The Three Horsemen of Growth: Plague, War and Urbanization in Early Modern Europe By Voigtländer, Nico; Voth, Hans-Joachim
  59. Fiscal Federalism in Germany: Stabilization and Redistribution Before and After Unification By Hepp, Ralf; von Hagen, Jürgen
  60. Credit Expansion and Banking Crises: The Role of Guarantees By Giorgio Calcagnini; Germana Giombini
  61. The mark-ups in the Spanish economy: international comparison and recent evolution By Ãngel Estrada
  62. Loans, Interest Rates and Guarantees: Is There a Link? By Giorgio Calcagnini; Fabio Farabullini; Germana Giombini
  63. Dutch disease in former Soviet Union: Witch-hunting? By Égert, Balázs
  64. Quantifying Quantitative Literacy: Age Heaping and the History of Human Capital By A'Hearn, Brian; Baten, Jörg; Crayen, Dorothee
  65. Pension Freezes and Household Saving Over the Life Cycle By David Love; Paul A. Smith
  66. No policy is an island - on the interaction between industrial and other policies By Valila, Timo
  67. Uncovered Interest Parity in a Partially Dollarized Developing Country: Does UIP Hold in Bolivia? (And If Not, Why Not?) By Melander, Ola
  68. Finance and Development: A Tale of Two Sectors By Francisco J. Buera; Joseph Kaboski; Yongseok Shin
  69. Covered Interest Rate Parity: The Case of the Czech Republic By Bednarik, Radek

  1. By: Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Keith Kuester (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behaviour and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy. JEL Classification: E32, E52, J64, C11.
    Keywords: Labor Market, wage rigidity, bargaining, Bayesian estimation.
    Date: 2009–03
  2. By: Luca Benati (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Following Fuhrer and Moore (1995), several authors have proposed alternative mechanisms to ‘hardwire’ inflation persistence into macroeconomic models, thus making it structural in the sense of Lucas (1976). Drawing on the experience of the European Monetary Union, of inflation-targeting countries, and of the new Swiss monetary policy regime, I show that, in the Phillips curve models proposed by Fuhrer and Moore (1995), Gali and Gertler (1999), Blanchard and Gali (2007), and Sheedy (2007), the parameters encoding the ‘intrinsic’ component of inflation persistence are not invariant across monetary policy regimes, and under the more recent, stable regimes they are often estimated to be (close to) zero. In line with Cogley and Sbordone (2008), I explore the possibility that the intrinsic component of persistence many researchers have estimated in U.S. post-WWII inflation may result from failure to control for shifts in trend inflation. Evidence from the Euro area, Switzerland, and five inflation-targeting countries is compatible with such hypothesis. JEL Classification: E30, E32.
    Keywords: New Keynesian models, inflation persistence, Bayesian estimation.
    Date: 2009–03
  3. By: Pierre L. Siklos (Department of Economics, Wilfrid Laurier University and Viessman Research Centre); Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: The degree to which explicit inflation targets contribute to the success of price stabilization policies has not been conclusively established. To assess the impact of announced inflation targets on the effectiveness of monetary policy, we construct indicators of inflation pressure that allow us to characterize the impact and effectiveness of monetary policy quantitatively. We examine the records of three inflation targeting economies, Australia, Canada, and New Zealand, and compare them to the US. We find that the inflation targeting countries have substantially lower inflation pressure and that inflation targeting reduces the size of interest rate changes needed to moderate inflation.
    Keywords: Inflation targeting, monetary policy, inflation pressure, stabilization policy
    JEL: E50 E58
    Date: 2009–04
  4. By: Aleksander Berentsen; Guido Menzio; Randall Wright
    Abstract: We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century
    JEL: E24 E52
    Date: 2009–03
  5. By: Söderlind, Paul
    Abstract: Nominal and real U.S. interest rates (1997Q1-2008Q2) are combined with inflation expectations from the Survey of Professional Forecasters to calculate time series of risk premia. It is shown that survey data on inflation and output growth uncertainty, as well as a proxy for liquidity premia can explain a large amount of the variation in these risk premia.
    Keywords: break-even inflation; liquidity premium; Survey of Professional Forecasters
    JEL: E27 E47
    Date: 2009–04
  6. 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 L¢pez-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.
    Keywords: Monetary policy - European Union countries ; Monetary policy - Great Britain ; Great Britain
    Date: 2009
  7. By: Muellbauer, John; Murata, Keiko
    Abstract: This paper documents the role of consumption in explaining the weak interest rate effect of monetary transmission in Japan. Economic theory suggests circumstances in which a rise in short term real interest rates can increase consumption, contrary to much conventional wisdom. This paper suggests that these circumstances are more likely to be prevalent in Japan and finds strong empirical evidence for a positive effect. Life-cycle theory also suggests that housing wealth effects on aggregate consumption including imputed rent are small and negative. Positive effects of the kind found in the UK and the US are due to the role of the credit channel. In countries where consumer access to credit is restricted, these restrictions can enhance the negative effect on consumption of higher house prices because saving for a housing deposit needs to be higher. Our evidence of a negative land price effect for Japan supports this hypothesis. We find no evidence of significant household credit market liberalization from a model for household debt in Japan. We also find evidence for a sizable negative effect on consumption from higher government deficits, suggesting fiscal policy also had limitations. These findings contribute to explanations of Japan's 'lost decade'.
    Keywords: interest rate effect on consumption; Japan's lost decade; Land prices and consumption; monetary transmission in Japan
    JEL: E21 E32 E44 E51
    Date: 2009–04
  8. By: Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christian Thimann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper sheds new light on the external and domestic dimension of China’s exchange rate policy. It presents an open economy model to analyse both dimensions of macroeconomic adjustment in China under both flexible and fixed exchange rate regimes. The model-based results indicate that persistent current account surpluses in China cannot be rationalized, under general circumstances, by the occurrence of permanent technology or labour supply shocks. As a result, the understanding of the macroeconomic adjustment process in China requires to mimic the effects of potential inefficiencies, which induce the subdued response of domestic absorption to permanent income shocks causing thereby the observed positive unconditional correlation of trade balance and output. The paper argues that these inefficiencies can be potentially seen as a by-product of the fixed exchange rate regime, and can be approximated by a stochastic tax on domestic consumption or time varying transaction cost technology related to money holdings. Our results indicate that a fixed exchange regime with financial market distortions, as defined above, might induce negative effects on GDP growth in the medium-term compared to a more flexible exchange rate regime. JEL Classification: E32, E62.
    Keywords: DSGE modelling, China, current account.
    Date: 2009–03
  9. By: Ansgar Belke; Niklas Potrafke
    Abstract: This paper examines the effect of government ideology on monetary policy in a quarterly data set of 15 OECD countries in the period 1980.1–2005.4. Our Taylor-rule specification focuses on the interactions of a new time-variant indicator for central bank independence and government ideology. The results suggest that leftist governments did not decrease short term nominal interest rates at all. In contrast, short term nominal interest rates were higher under leftist governments. A potential reason for this finding might be that leftist governments have sought to make a market-oriented policy shift by delegating monetary policy to conservative central bankers.
    Keywords: Monetary policy, Taylor rule, government ideology, partisan politics, central bank independence, panel data
    JEL: E52 E58 D72 C23
    Date: 2009–03
  10. By: Reuven Glick (Federal Reserve Bank of San Francisco); Michael Hutchison (University of California, Santa Cruz)
    Abstract: In recent years China has faced an increasing trilemma¡Xhow to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth lead to less inflation pressure even with a substantial buildup in international reserves.
    Date: 2008–12
  11. By: Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramirez, Juan Francisco; Uribe, Martín
    Abstract: This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy.
    Keywords: DSGE Models; Small Open Economy; Stochastic Volatility
    JEL: C32 C63 F32 F41
    Date: 2009–04
  12. By: Melander, Ola (Dept. of Economics, Stockholm School of Economics)
    Abstract: This paper studies the effects of real exchange rate (RXR) shocks in an economy with extreme liability dollarization using vector autoregression (VAR) methods. Bolivia's extreme liability dollarization makes it an interesting case for empirical testing of the contractionary-depreciations hypothesis. In contrast to the previous contractionary-depreciations literature, the paper uses identification assumptions which are inspired by modern macroeconomic theory and common in the empirical VAR literature on the effects of monetary policy. I find that a RXR depreciation has negligible effects on output, since a contractionary balance-sheet effect on investment is counteracted by the standard expansionary effect on net exports. Furthermore, I find that a RXR depreciation has inflationary effects.
    Keywords: Real exchange rate; VAR; liability dollarization; balance sheet effects; contractionary depreciation
    JEL: E44 F41 G15
    Date: 2009–04–17
  13. By: Soyoung Kim (Korea University); Jaewoo Lee (International Monetary Fund)
    Abstract: This paper investigates international macroeconomic fluctuations in light of NOEM (New Open Economy Macroeconomics) models. A model with four major economic disturbances (technology shocks, labor supply shocks, preference shocks, and nominal shocks) is analytically solved to derive theoretical long-run identification restrictions. These restrictions are used to estimate a structural VAR model for the three largest economies (the U.S., the Euro Area, and Japan) over the post Bretton Woods period. The main findings are: (1) the signs of the dynamic responses are mostly consistent with theoretical predictions; (2) supply-side shocks (technology and labor supply shocks) explain most of the fluctuations in cross-country output deviations; (3) preference shocks are the dominant source of real exchange rate fluctuations; and (4) productivity shocks played a prominent role in the recent global imbalances (large U.S. external deficit), while the current account has usually been influenced by all four shocks, with no single shock dominant in all periods.
    Keywords: New Open Economy Macroeconomics, Structural VAR
    JEL: F4
    Date: 2008–12
  14. By: Thomas Y. Mathä (Central Bank of Luxembourg, 2 bd. Royal, L-2983 Luxembourg.); Olivier Pierrard (Central Bank of Luxembourg, 2 bd. Royal, L-2983 Luxembourg.)
    Abstract: We develop a search-matching model, where firms search for customers (e.g. in form of advertising). Firms use long-term contracts and bargain over prices, resulting in a price mark up above marginal cost, which is procyclical and depends on firms’ relative bargaining power. Product market frictions decrease the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions. JEL Classification: E10, E31, E32.
    Keywords: Business cycle, Frictions, Product market, Price bargain.
    Date: 2009–03
  15. By: David Laidler (C.D. Howe Institute)
    Abstract: To encourage new growth in the Canadian economy, the Bank of Canada should be actively irrigating financial markets with a growing money supply. Recovery needs support from the continued credibility of the Bank’s 2 percent inflation target – but there are signs that this credibility is fading over short time horizons, dampening low interest rates’ positive effect on spending.
    Keywords: monetary policy, Bank of Canada, money supply growth
    JEL: E52 E58 E51
    Date: 2009–04
  16. By: Michael Artis; Christian Dreger; Konstantin Kholodilin
    Abstract: We examine real business cycle convergence for 41 euro area regions and 48 US states. Results obtained by a panel model with spatial correlation indicate that the relevance of common business cycle factors is rather stable over the past two decades in the euro area and the US. Ongoing business cycle convergence often detected in cross-country data is not confirmed at the regional level. The degree of synchronization across the euro area is similar to that to be found for the US states. Thus, the lack of conver-gence does not seem to be an impediment to a common monetary policy.
    Date: 2009
  17. By: Yi Wen
    Abstract: This paper reconsiders the welfare costs of inflation and the welfare gains from financial intermediation in a heterogeneous-agent economy where money is held as a store of value (as in Bewley, 1980). The dynamic stochastic general equilibrium model recaptures some essential features of the liquidity-preference theory of Keynes (1930, 1936). Because of heterogeneous liquidity demand, transitory lump-sum money injections can have persistent expansionary effects despite flexible prices, and such effects can be greatly amplified by the banking system through the credit channel. However, permanent money growth can be extremely costly: With log utility functions, consumers are willing to reduce consumption by 15% (or more) to avoid a 10% annual inflation. For the same reason, financial intermediation can significantly improve welfare: The welfare costs of a collapse of the banking system is estimated as about 10-68% of aggregate output. These welfare implications differ dramatically from those of the existing literature.
    Keywords: Liquidity (Economics)
    Date: 2009
  18. By: Strawczynski, Michel; Zeira, Joseph
    Abstract: This paper examines the optimal reaction of fiscal policy to permanent and transitory shocks to output in a model of tax and public consumption smoothing. The model predicts that optimal reaction of public expenditures and deficits to transitory shocks should be countercyclical, while optimal reaction to permanent shocks should be a-cyclical. Using the Blanchard and Quah (1989) methodology for identifying permanent and transitory shocks, we test these predictions for a sample of 22 OECD countries over the years 1963-2006. We find that both expenditures and deficits are countercyclical to transitory shocks, mainly through public transfers and mainly in recessions. We find that government investment is pro-cyclical with respect to permanent shocks, but total expenditures are not.
    Keywords: Business Cycles; Fiscal Policy; Permanent and Transitory Shocks
    JEL: E32 E61 E62
    Date: 2009–04
  19. By: Hans-Werner Wohltmann; Roland Winkler
    Abstract: This paper compares the welfare effects of anticipated and unanticipated cost-push shocks within the canonical New Keynesian model with optimal monetary policy. We find that, for empirically plausible degrees of nominal rigidity, the anticipation of a future cost-push shock leads to a higher welfare loss than an unanticipated shock. A welfare gain from the anticipation of a future cost shock may only occur if prices are sufficiently flexible. We show analytically that this result holds although unanticipated shocks lead to higher negative impact effects on welfare than anticipated shocks
    Keywords: Anticipated Shocks, Optimal Monetary Policy, Sticky Prices, Welfare Analysis
    JEL: E31 E32 E52
    Date: 2009–03
  20. By: Francesco Drudi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Petra Köhler-Ulbrich (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Protopapa (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Guido Wolswijk (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ramón Gómez Salvador (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ruth Magono (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nico Valckx (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Elmar Stöss (Deutsche Bundesbank,Taunusanlage 5, D-60329 Frankfurt am Main, Germany.); Karin Wagner (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1011 Vienna, Austria.); Zoltan Walko (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1011 Vienna, Austria.); Marie Denise Zachary (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Silvia Magri (Banca d'Italia, Via Nazionale 91, I - 00184 Rome, Italy.); Laura Bartiloro (Banca d'Italia, Via Nazionale 91, I - 00184 Rome, Italy.); Paolo Mistrulli (Banca d'Italia, Via Nazionale 91, I - 00184 Rome, Italy.); Yannis Asimakopoulos (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Vasilis Georgakopoulos (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Maria Kasselaki (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Jorge Martínez Pagés (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Romain Weber (Banque centrale du Luxembourg, 2 boulevard Royal, L - 2983 Luxembourg, Luxembourg.); Christiana Argyridou (Central Bank of Cyprus, 80, Kennedy Avenue, CY-1076 Lekosia, Cyprus.); Wendy Zammit (Bank of Malta, Castille Place, Valetta, CMR 01, Malta.); Nuno Ribeiro (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon, Codex, Portugal.); Daniel Gabrielli (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Nicola Doyle (Central Bank of Ireland, Dame Street, IE Dublin 2, Ireland.); Harri Hasko (Suomen Pankki, P. O. Box 160, FIN-00101 Helsinki, FI.); Vesna Lukovic (Banka Slovenije, Slovenska 35, SL-1505 Ljubljana, SL.)
    Abstract: This report analyses the main developments in housing finance in the euro area in the decade, covering the period from 1999 to 2007. It looks at mortgage indebtedness, various characteristics of loans for house purchase, the funding of such loans and the spreads between the interest rates on loans granted by banks and the interest rates banks had to pay on their funding, or the return they made on alternative investments. In addition, the report contains a comparison of key aspects of housing finance in the euro area with those in the United Kingdom and the United States. At the end, the report briefly discusses aspects of the transmission of monetary policy to the economy. JEL Classification: D14, E44, E5, G21, R21.
    Keywords: bank competition, bank funding, bankruptcy, banks, cost of funding (of banks), cost of housing loans, debt service, ECB monetary policy, foreclosure, household debt, household survey, housing finance, insolvency, loan maturity, loan-to-value ratio, monetary policy transmission, mortgage, mortgage covered bond, mortgage equity withdrawal, mortgage interest rate spread, redemption scheme, rental market, retail deposits, securitisation, taxation, US housing market crisis.
    Date: 2009–03
  21. By: Babecký, Jan; Coricelli, Fabrizio; Horváth, Roman
    Abstract: The paper provides an empirical analysis of inflation persistence in one of inflation targeting countries, the Czech Republic, using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994 to 2005. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence.
    Keywords: inflation dynamics; inflation targeting; persistence
    JEL: D40 E31
    Date: 2009–04
  22. By: Monika Piazzesi; Martin Schneider
    Abstract: In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Apart from tax effects, a new channel is that disagreement about inflation across age groups drives up collateral prices when credit is nominal. ; This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis.
    Date: 2009
  23. By: Aymen Belgacem
    Abstract: The aim of this paper is to study the impact of macroeconomic announcements on asset prices, with the objectives of both measuring the average response of stock returns to macroeconomic news surprises, and explaining the sources of such a reaction. To assess the importance of scheduled French and US macroeconomic announcements, Stock returns are analyzed on the French stock market. It is shown that, according to previous studies, there is little evidence of the reaction of the market to those surprises. News about inflation, U.S consumption and real economic activity are specially expected by investors. It confirms the leading role of the U.S. economy and in particular of U.S. consumers in determining the development of the world economy and the dynamics of stock markets. Results also show that unexpected positive surprise in the unemployment rate causes a cut on future excess returns and future dividends. The opposite reaction is observed from the housing starts indicator. The consumer price index appears to have an impact not only on future excess returns, but also on future real interest rates.
    Keywords: Asset Prices; Macroeconomic Announcements, Event-Study
    JEL: E44 G14 G12
    Date: 2009
  24. By: Jim Malley; Ulrich Woitek
    Abstract: This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy.
    Keywords: Real Business Cycle, Bayesian estimation, VARMA errors
    JEL: C11 C52 E32
    Date: 2009–04
  25. By: Bork, Lasse (Department of Business Studies, Aarhus School of Business)
    Abstract: Economy-wide e¤ects of shocks to the US federal funds rate are estimated in a state space model with 120 US macroeconomic and financial time series driven by the dynamics of the federal funds rate and a few dynamic factors. This state space system is denoted a factor-augmented VAR (FAVAR) by Bernanke et al. (2005). I estimate the FAVAR by the fully parametric one-step EM algorithm as an alternative to the two-step principal component method and the one-step Bayesian method in Bernanke et al. (2005). The EM algorithm which is an iterative maximum likelihood method estimates all the parameters and the dynamic factors simultaneously and allows for classical inference. I demonstrate empirically that the same impulse responses but better fit emerge robustly from a low order FAVAR with eight correlated factors compared to a high order FAVAR with fewer correlated factors, for instance four factors. This empirical result accords with one of the theoretical results from Bai & Ng (2007) in which it is shown that the information in complicated factor dynamics may be substituted by panel information
    Keywords: monetary policy; large cross-sections; factor-augmented vector autoregression; EM algorithm; state space
    Date: 2009–02–01
  26. By: Tang, Weiqi; Wu, Libo; Zhang, ZhongXiang
    Abstract: A considerable body of economic literature shows the adverse economic impacts of oil-price shocks for the developed economies. However, there has been a lack of empirical study of this kind on China and other developing countries. This paper attempts to fill this gap by answering how and to what extent oil-price shocks impact China’s economy, emphasizing on the price transmission mechanisms. To that end, we develop a structural vector auto-regressive model. Our results show that an oil-price increase negatively affects output and investment, but positively affects inflation rate and interest rate. However, with the differentiated price control policies for materials and intermediates on the one hand and final products on the other hand in China, the impact on real economy, represented by real output and real investment, lasts much longer than that to price/monetary variables. Our decomposition results also show that the short-term impact, namely output decrease induced by the cut of capacity-utilization rate, is greater in the first one to two years, but the portion of the long-term impact, defined as the impact realized through an investment change, increases steadily and exceeds that of short-term impact at the end of the second year. Afterwards, the long-term impact dominates, and maintains for quite some time.
    Keywords: Structural vector auto-regressive model; Unit root test; Error-correction model; Oil-price shocks; Price transmission mechanisms; Investment; Output; Producer/consumer price index; Census X-12 approach; China
    JEL: Q41 O53 Q48 E22 O13 E23 P22 Q43
    Date: 2009–03
  27. By: Thomas Palley (New School for Social Research, New York, NY)
    Keywords: income; expenditure model; multiplier; imports; fiscal policy
    Date: 2009–02
  28. By: James Yetman (Bank for International Settlements)
    Abstract: It is generally believed that prices in Hong Kong are flexible. If this received wisdom is correct then the Currency Board system, which precludes a nominal exchange rate adjustment in response to macroeconomic shocks, may have little macroeconomic cost. However, this belief in price flexibility is based on very little empirical evidence. In this paper, we seek to rectify this in a study the behaviour of sub-indices of the Hong Kong Consumer Price Index. We compare estimated moments in the data against the predictions of models based on flexible prices, capacity constraints, rational inattention, and menu costs. We find evidence in favour of flexible prices.
    Date: 2009–01
  29. By: Ettore Dorrucci (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alexis Meyer-Cirkel (Goethe-Universität Frankfurt am Main, Senckenberganlage 31, D-60325 Frankfurt am Main, Germany.); Daniel Santabárbara (Banco de Espana, Alcala 50, E-28014 Madrid, Spain.)
    Abstract: We construct, on the basis of an original methodology and database, composite indices to measure domestic financial development in 26 emerging economies, using mature economies as a benchmark. Twenty-two variables are used and grouped according to three broad dimensions: (i) institutions and regulations; (ii) size of and access to financial markets and (iii) market performance. This new evidence aims to fill a gap in the economic literature, which has not thus far developed comparable time series including both emerging and mature economies. In doing so, we provide a quantitative measure of the – usually considerable – scope for the selected emerging countries and regions to “catch up” in financial terms. Moreover, we find evidence that a process of financial convergence towards mature economies has already started in certain emerging economies. Finally, we conduct an econometric analysis showing that different levels of domestic financial development tend to be associated with the building up of external imbalances across countries. JEL Classification: F3, F4, G1, G2, E21, E22, C82.
    Keywords: Financial development, index construction, commodity and oil-exporting countries, G20, major emerging economies, financial catching up, global imbalances.
    Date: 2009–04
  30. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: In this paper we specify a multi-factor long-memory process that enables us to estimate the fractional differencing parameters at each frequency separately, and adopt this framework to model quarterly prices in three European countries (France, Italy and the UK). The empirical results suggest that inflation in France and Italy is nonstationary. However, while for the former country this applies both to the zero and the seasonal frequencies, in the case of Italy the nonstationarity comes exclusively from the long-run or zero frequency. In the UK, inflation seems to be stationary with a component of long memory at both the zero and the semi-annual frequencies, especially at the former.
    Keywords: Fractional Integration, Long Memory, Inflation
    JEL: C22 O40
    Date: 2009
  31. By: Çelik, Sadullah; Deniz, Pınar
    Abstract: It has been a long debate whether Fed Funds target interest rate (FFTR) has significant explanatory power on interest rates in other countries. In this paper, we analyze the effects of FFTR on Bank of England (BOE) bank rate and European Central Bank (ECB) key interest rate employing-the rather new and trustworthy technique of-Bounds testing developed by Pesaran (2001). Our empirical results are consistent with a priori expectations as BOE and ECB interest rates are highly dependent on FFTR. This finding can be interpreted as a clear signal of how globally tight-knit the world currencies have been. Moreover, it emphasizes the importance of US dollar as the world currency and rather serves as an argument against alternative global currency propositions.
    Keywords: Interest Rates; Monetary Policy; Bounds Testing
    JEL: E43 F15 F42 E52 F41 E44
    Date: 2009–03
  32. By: Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Arthur Saint-Guilhem (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper aims at assessing the role of the United States in the global economy and its evolution over time. The emergence of large economic players, like China, is likely to have weakened the role of the U.S. economy as a driver of global growth. Based on a Global VAR modelling approach, this paper shows first that the transmission of U.S. cyclical developments to the rest of the world tends to fluctuate over time but remains large overall. Second, although the size of the spillovers might have decreased in the most recent periods, the effects of changes in U.S. economic activity seem to have become more persistent. Actually, the increasing economic integration at the world level is likely to have fostered second-round and third-market effects, making U.S. cyclical developments more global. Finally, the slightly decreasing role of the U.S. has been accompanied by an increasing importance of third players. Regional integration might have played a significant role by giving more weights to non-U.S. trade partners in the sensitivity of the various economies to their international environment. JEL Classification: E32, E37, F41.
    Keywords: International transmission of shocks, Business cycle, Global VAR (GVAR).
    Date: 2009–03
  33. By: Michael B Devereux (University of British Columbia, Canada); Alan Sutherland (University of St Andrews, UK)
    Abstract: Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy.
    Keywords: Country Portfolios, Emerging Markets
    JEL: E52 E58 F41
    Date: 2009–02
  34. By: Jean Imbs (HEC Lausanne); Isabelle Mˆmjean (Ecole Polytechnique)
    Abstract: Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data, but substantially larger in disaggregated microeconomic studies. This may be an artifact of heterogeneity. We use disaggregated multilateral trade data to structurally identify elasticities of substitution in US goods. We spell out a partial equilibrium model to aggregate them adequately at the country level. We compare aggregate elasticities that impose equality across sectors, to estimates allowing for heterogeneity. The former are similar in value to conventional macroeconomic estimates; but they are more than twice larger -up to 5 - with heterogeneity. The parameter is central to calibrated models in most of international economics. We discuss the difference our corrected estimate makes in various areas of international economics, including the dynamics of external balances, the international transmission of shocks, international portfolio choice and optimal monetary policy.
    Keywords: Trade Elasticities, Aggregation, Calibration, Global Imbalances, International Transmission, International Portfolio, Monetary Policy
    JEL: F41 F32 F21
    Date: 2008–12
  35. By: Troy Davig; Eric M. Leeper
    Abstract: Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded solutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) conditions apply. FWZ's multiple solutions rely on special assumptions about the correlation structure between fundamental shocks and policy regimes, blurring the distinction between "deep" parameters that govern behavior and the parameters that govern the exogenous shock processes, and making it difficult to ascribe any economic interpretation to FWZ's solutions.
    JEL: C62 E31 E52
    Date: 2009–04
  36. By: Geert Bekaert (Columbia Business School, 3022 Broadway, New York, NY 10027, USA.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Martin Scheicher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Implied volatility indices should have information about risk parameters, once they are cleansed of the influence of normal volatility dynamics and macroeconomic uncertainty. Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the VIX and the credit spreads while controlling for realized volatility, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that implied volatilities contain a substantial amount of information regarding risk aversion whereas credit spreads have a lot to say about both risk aversion and uncertainty. Moreover, there is a significant comovement in the German and US risk aversion. JEL Classification: G12, E44.
    Keywords: Economic uncertainty, Risk aversion, Time variation in risk and return, Credit spread, Volatility dynamics.
    Date: 2009–03
  37. By: Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
    Abstract: This paper examines the interactions between money, consumer prices and commodity prices at a global level from 1970 to 2008. Using aggregated data for major OECD countries and a cointegrating VAR framework, we are able to establish long run and short run relationships among these variables while the process is mainly driven by global liquidity. According to our empirical findings, different price elasticities in commodity and consumer goods markets can explain the recently observed overshooting of commodity over consumer prices. Although the sample period is rather long, recursive tests corroborate that our CVAR fits the data very well.
    Keywords: Commodity prices, cointegration, CVAR analysis, global liquidity,inflation, international spillovers
    JEL: E31 E52 C32 F42
    Date: 2009–03
  38. By: Mohsin S. Khan (Peterson Institute for International Economics)
    Abstract: The creation of a monetary union has been the primary objective of the Gulf Cooperation Council (GCC) members since the early 1980s. Significant progress has already been made in regional economic integration: The GCC countries have largely unrestricted intraregional mobility of goods, labor, and capital; regulation of the banking sector is being harmonized; and in 2008 the countries established a common market. Further, most of the convergence criteria established for entry into a monetary union have already been achieved. In establishing a monetary union, however, the GCC countries must decide on the exchange rate regime for the single currency. The countries’ use of a US dollar peg as an external anchor for monetary policy has so far served them well, but rising inflation and differing economic cycles from the United States in recent years has raised the question of whether the dollar peg remains the best policy. Mohsin Khan considers the costs and benefits of alternative exchange rate regimes for the GCC. These include continued use of a dollar peg, a peg to a basket of currencies such as the SDR or simply the dollar and euro, a peg to the export price of oil, and a managed floating exchange rate. In light of the structural characteristics of the GCC countries, Khan considers the dollar peg the best option following the establishment of a GCC monetary union. The peg has proved credible and is easy to administer. If further international integration in trade, services, and asset markets makes a higher degree of exchange rate flexibility desirable in the future, implementing a basket peg could provide this flexibility. Regardless, the choice of exchange rate regime for the GCC countries need not be permanent: The countries could initially peg the single GCC currency to the US dollar and then move to a more flexible regime as their policy needs and institutions develop.
    Keywords: Exchange rate regimes, monetary unions, Gulf Cooperation Council
    JEL: F15 F31 F36
    Date: 2009–04
  39. By: Hevia, Constantino
    Abstract: Aggregate fluctuations in emerging countries are quantitatively larger and qualitatively different in key respects from those in developed countries. Using data from Mexico and Canada, this paper decomposes these differences in terms of shocks to aggregate efficiency and shocks that distort the decisions of households about how much to invest, consume, and work in a standard model of a small open economy. The decomposition exercise suggests that most of these differences are explained by fluctuations in aggregate efficiency, distortions in labor decisions over the business cycle, and, most importantly, fluctuations in country risk. Other distortions are quantitatively less important.
    Keywords: Economic Theory&Research,Political Economy,Emerging Markets,Currencies and Exchange Rates,Investment and Investment Climate
    Date: 2009–04–01
  40. By: John H. Munro
    Abstract: Coinage debasements were a prevalent and generally very harmful feature of most economies in late-medieval western Europe, and most certainly in Burgundian Flanders (1384-1482). Flanders also experienced several economic recessions or contractions from three related sources: warfare; the so-called ‘bullion famines’, with liquidity crises; and the irredeemable decline of its former mainstay, the woollen textile industries. Since many of my previous publications dealt with the Flemish cloth industry, this paper focuses on the other two major economic problems, of which warfare was the most important factor. The question posed therefore is simply this: did the Burgundian dukes undertake coinage debasements principally as a monetary or as a fiscal policy? In a recent and highly praised monograph, Sargent and Velde (The Big Problem of Small Change, 2002) have contended that almost all late-medieval and early-modern coinage debasements were undertaken to remedy not just coin shortages, but especially shortages of petty or billon coins. For the Burgundian era, one may make a strong prima facie case that Flanders (and all the Burgundian Low Countries) suffered from two major ‘bullion famines’, or certainly from severe coinage scarcities, including very severe scarcities of petty coins: from the 1390s to about 1415, and from the early 1440s to the early 1470s. In both periods, moreover, Flanders suffered from very severe deflations. In this paper, I contend that warfare was indeed, directly and indirectly, a primary cause of those monetary scarcities, especially in reducing the income velocity of money and thus in increasing hoarding – in my view, far more important than any supposed balance of payments deficits and ‘bullion outflows to the East’. Nevertheless, I can find no convincing evidence that the Burgundian rulers ever undertook coinage debasements to remedy these coinage scarcities and to combat deflation (with one minor exception, in 1457, for petty coins). Instead, the thesis of this paper is that the Burgundian rulers undertook coinage debasements primarily as aggressive fiscal policies, and primarily to finance warfare. Almost all medieval princes exacted a seigniorage tax on bullion minted. They sought to maximize these revenues both by increasing this tax rate and by enticing much larger quantities of bullion into their mints: by both the techniques of debasement and by auxiliary bullionist policies. The paper seeks to show that the Flemish coinage debasements were generally successful, by satisfying three conditions: (1) that merchants delivering bullion to the mints received in return a greater number and greater face value of coins than before (and a greater value than from any competing mints); (2) that the public continued to accept debased, or more debased, coins at nominal face value, receiving them by ‘tale’ rather than by weight and intrinsic value; and (3) that such merchants, also benefitting from asymmetric information, were able to spend their new coins before their gains were eroded by inflation. This paper demonstrates that the inflationary consequences from Flemish coinage debasements were always less than would be predicted from strictly mathematical formula for price changes – perhaps because the debasements did not counteract the prevailing forces of monetary contraction and deflation. At the same time, however, because so many principalities then pursued coinage debasements as veritable guerres monétaires, many princes undertook coinage debasements for purely defensive reasons: to protect their domestic mints from foreign competition and their realms from influxes of foreign debased and especially counterfeit imitations: i.e., to counteract Gresham’s Law. This study concludes with a striking anomaly in Spanish monetary history: Spanish monarchs, having agreed to abjure and forgo seigniorage taxes on coinage, did not engage in any debasements, of either the gold or silver coinages, from 1497 to 1686. But they had the luxury of alternative revenues from taxes on imports of vast quantities of silver from the Spanish Americas during most of this era. The Burgundian dukes had no such alternative sources of revenue to finance their wars.
    Keywords: debasements, gold, silver, billon, bullion, bullionist policies, mints, seigniorage, inflation, deflation, liquidity
    JEL: E E41 E42 E51 E52 E62 F33 H11 H27 N13 N23 N43
    Date: 2009–04–07
  41. By: Korkut Erturk and Gokcer Ozgur (New School for Social Research, New York, NY)
    Keywords: banking; endogenous money; financial intermediation
    Date: 2009–02
  42. By: Bonpasse, Morrison
    Abstract: Abstract This is the 2008 Edition of one of only two book in print in the world about the Single Global Currency, and is the only book in the world priced in 141 currencies (down from 147 in the 2006 edition.).This number is significant, as it's the number of currencies required among the 192 U.N. members to conduct local business, including the payment of taxes. The book describes the origins of the current worldwide foreign exchange system, and tells how to change it; and save the world - trillions. The multicurrency foreign exchange trading system was developed about 2,500 years ago to enable people of different currency areas to trade. That system has become far more sophisticated in the meantime and handles $3.8 trillion per day; but it is very expensive and risky. It is now time to replace that system with a single global currency. In a 3-G world with a Single Global Currency managed by a Global Central Bank within a Global Monetary Union: - Annual transaction costs of $400 billion will be eliminated. - Worldwide asset values will increase by about $36 trillion. - Worldwide GDP will increase by about $9 trillion. - Global currency imbalances will be eliminated. - All Balance of Payments problems will be eliminated. - Currency crises will be prevented. - Currency speculation will be eliminated. - The need for foreign exchange reserves, with a current annual opportunity cost of approximately $470 billion, will be eliminated. - Worldwide interest rates will be lower than the current average due to the elimination of currency risk. Such gains are realistic and attainable if the world decides to pursue them. The monetary unions of Europe, the Caribbean, Africa and Brunei/Singapore have shown the way. What the people of the world want is sound, stable money and the end to the obsolete multicurrency foreign exchange system. A Single Global Currency is no longer a utopian dream, but a realistic projection of what has been learned from current monetary unions, especially the euro. Each successive annual edition of this book will be priced in the remaining number of currencies until we reach, in the words of Nobel Prize winner, Robert Mundell, that odd number, preferably less than three: one The world needs to set the goal of a Single Global Currency, to be managed by a Global Central Bank, within a Global Monetary Union, and begin planning - now.
    Keywords: single global currency; money; currency; monetary union; currency union; global monetary union; global central bank; global imbalances; current account; balance of payments; transaction charges; transaction costs; foreign exchange derivatives; foreign exchange; foreign exchange reserves; monetary reserves; gold; international monetary fund; SDR; special drawing rights; optimal currency area; OCA; Robert Mundell; John Stuart Mill; dollar; U.S. Dollar; USD; European Monetary Union; euro; European Central Bank; Single Global Currency Association; Bretton Woods; John Maynard Keynes; bancor; DEY; Geo; globo; eartha; dollarization; euroization; exchange rate; exchange rate regime; peg; float; James Tobin; currency crisis; International Monetary Fund; World Bank; Eastern Caribbean Monetary Union; West African Monetary Union; Central African Monetary Union; accession countries; Maastricht criteria; Maastricht Treaty;
    JEL: F02 F3 F31 F33
    Date: 2009–04–19
  43. By: Schmitz, Birgit; von Hagen, Jürgen
    Abstract: While the current account of euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries and show that these net flows follow differences in per-capita incomes. Our results show that the elasticity with respect to per-capita incomes of net capital flows between euro-area countries and the euro area has increased. This is not the case for net capital flows between non-euro area countries and the euro area, nor for euro-area countries and the rest of the world. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has lead to some financial diversion.
    Keywords: Current Account Imbalances; European Monetary Union; Financial Integration
    JEL: F21 F33 F34 F36
    Date: 2009–04
  44. By: Douglas W. Diamond; Raghuram G. Rajan
    Abstract: In early 2009, the supply of credit markets in industrial countries appeared to be tightening substantially. Was this because credit quality had deteriorated tremendously outside or inside the financial system? Or was it because bank balance sheets were “clogged†with illiquid securities? If the latter, why did banks not attempt to sell these securities? We argue in this paper that the existence of an “overhang†of impaired banks may itself reduce the price of potentially illiquid securities sufficiently that banks have no interest in selling them. In turn, this creates high expected returns to holding cash or liquid securities across the financial system and an aversion to locking up money in term loans. We discuss what this means for policies to clean up the banking system.
    JEL: E44 G21
    Date: 2009–04
  45. By: Philip R. Lane; Jay C. Shambaugh
    Abstract: A major focus of the recent literature on the determination of optimal portfolios in open-economy macroeconomic models has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.
    JEL: F31 F32
    Date: 2009–04
  46. By: Bertola, Giuseppe
    Abstract: Economic integration fosters production efficiency by enhancing market competition, and makes it difficult for National governments to conduct independent fiscal policies and to enforce income redistribution schemes. Controlling for country-level income variation, available data suggest that Europe’s Economic and Monetary Union (EMU) was associated with a small but significant increase in disposable income inequality, reflecting less generous social policies.
    Keywords: Policy competition; Social policy
    JEL: E0
    Date: 2009–04
  47. By: Calderon, Cesar; Kubota, Megumi
    Abstract: The"New Open Economy Macroeconomics"argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis.
    Keywords: Emerging Markets,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Economic Conditions and Volatility
    Date: 2009–04–01
  48. By: Björn Bick; Holger Kraft; Claus Munk
    Abstract: The utility-maximizing consumption and investment strategy of an individual investor receiving an unspanned labor income stream seems impossible to nd in closed form and very difficult to nd using numerical solution techniques. We suggest an easy procedure for nding a specic, simple, and admissible consumption and investment strategy, which is near-optimal in the sense that the wealth equivalent loss compared to the unknown optimal strategy is very small. We first explain and implement the strategy in a simple setting with constant interest rates, a single risky asset, and an exogenously given income stream, but we also show that the success of the strategy is robust to changes in parameter values, to the introduction of stochastic interest rates, and to endogenous labor supply decisions.
    JEL: G11
    Date: 2009–03
  49. By: Hicks, Bruce; Kilian, Lutz
    Abstract: Recently developed structural models of the global crude oil market imply that the surge in the real price of oil between mid-2003 and mid-2008 was driven by repeated positive shocks to the demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging Asia. This note evaluates this proposition using an alternative data source and a different econometric methodology. Rather than inferring demand shocks from an econometric model, we utilize a direct measure of global demand shocks based on revisions of professional real GDP growth forecasts. We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline.
    Keywords: Demand; EIU; Forecast Revisions; Global Real Activity; News; Oil price; Shocks
    JEL: C42 C53 Q43
    Date: 2009–04
  50. By: Stefan Ried
    Abstract: In this paper, the following question is posed: Can the New Keynesian Open Economy Model by Galí and Monacelli (2005b) explain “Six Major Puzzles in International Macroeconomics”, as documented in Obstfeld and Rogoff (2000b)? The model features a small open economy with complete markets, Calvo sticky prices and monopolistic competition. As extensions, I explore the effects of an estimated Taylor rule and additional trade costs. After translating the six puzzles into moment conditions for the model, I estimate the five most effective parameters using simulated method of moments (SMM) to fit the moment conditions implied by the data. Given the simplicity of the model, its fit is surprisingly good: among other things, the home bias puzzles can easily be replicated, the exchange rate volatility is formidably increased and the exchange rate correlation pattern is relatively close to realistic values. Trade costs are one important ingredient for this finding.
    Keywords: International Macroeconomics, New Keynesian open economy model, trade costs, simulated method of moments (SMM)
    JEL: F41 F42 E52
    Date: 2009–04
  51. By: Monika Piazzesi; Martin Schneider
    Abstract: Common statistical measures of bond risk premia are volatile and countercyclical. This paper uses survey data on interest rate forecasts to construct subjective bond risk premia. Subjective premia are less volatile and not very cyclical; instead they are high, only around the early 1980s. The reason for the discrepancy is that survey forecasts of interest rates are made as if both the level and the slope of the yield curve are more persistent than under common statistical models. The paper then proposes a consumption based asset pricing model with learning to explain jointly the difference between survey and statistical forecasts, and the evolution of subjective premia. Adaptive learning gives rise to inertia in forecasts, as well as changes in conditional volatility that help understand both features. ; This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis.
    Date: 2009
  52. By: Ravi Kanbur
    Abstract: History matters, and it matters in important and interesting ways for policy today. But it is not just actual events in the past. It is how they are recorded, interpreted, and the interpretation transmitted, that matters. This is what determines the mental makeup, the preferences in economists’ terminology, of agents in the economy. That is the causal mechanism. It is the embedding of the past in the present’s perception of policy that is the transmission mechanism linking history to today’s development policy.
    Keywords: History, Economics, development policy, historical events, economic agents,
    Date: 2009
  53. By: Galina Hale (Federal Reserve Bank of San Francisco); Assaf Razin (Tel-Aviv University); Hui Tong (International Monetary Fund)
    Abstract: In a Tobin's q model with productivity and liquidity shocks, we study the mechanism through which strong creditor protection increases the level and lowers the volatility of stock market prices. There are two channels at work: (1) the Tobin's q value under a credit crunch regime increases with creditor protection; and, (2) the probability of a credit crunch falls for given stochastic processes of underlying shocks when creditor protection improves. We test these predictions by using cross-country panel regressions of the stock market price level and volatility, in 40 countries, over the period from 1984 to 2004, at annual frequency. We create indicators for liquidity shocks based on quantity and price measures. Estimated probabilities of big shocks to liquidity are used as forecasts of credit crunch. We find broad empirical support for the hypothesis that creditor protection increases the stock market price level and reduces its volatility directly and via its negative effect on the probability of credit crunch. Our empirical findings are robust to multiple specifications.
    Date: 2008–08
  54. By: Peter B. Dixon; Martin Johnson; Maureen T. Rimmer
    Abstract: We use an economy-wide model to analyze the effects of three broad programs to reduce illegal immigrants in U.S. employment: tighter border security; taxes on employers; and vigorous prosecution of employers. After looking at macroeconomic, industry and occupational effects, we decompose the welfare effect for legal residents into six parts covering changes in: producer surplus and illegal wage rates; skilled employment opportunities for natives; aggregate capital; aggregate legal employment; the terms of trade; and public expenditure. The type of program matters. Our analysis suggests a prima facie case in favor of taxes on employers.
    Keywords: Illegal immigration dynamic modeling U S immigration policy
    JEL: J61 C68
    Date: 2008–07
  55. By: Juan Carlos Echeverry; Jaime Navas; Verónica Navas; María Paula Gómez
    Abstract: Colombia’s oil history began in 1918 and reached its golden era at the end of the 1980s. Regulation in the oil industry changed several times since 1974, mainly responding to the discoveries made. Although agreed contract terms have been honored for oil fields allocated in the past, regulation instability has affected long term the relationships with private investors, since new conditions were imposed for future contracts. Once too onerous conditions, too low prices and international competition drove investors away from the country, regulation was softened. Recently, the Colombian government has improved contractual terms and made tributary and royalty conditions more attractive to private investors. The important discoveries made in the last two decades led Colombia to an expenditure spiral, paired with a huge fiscal deficit and a high public debt, drastically changing a seven decade long record of fiscal stability. The cycle of cheap-expensive oil has exhibited a full swing, and although exploration contracts and investment have increased, no important discoveries have been made, revealing a complicated geology that might pose a challenge to the country’s hydrocarbons’ self-sufficiency.
    Date: 2009–03–12
  56. By: Guido Menzio; Shouyong Shi
    Abstract: In this paper, we develop a general stochastic model of directed search on the job. Like in the analogous models of random search on the job, the state of the economy in our model includes the infinite-dimensional distribution of workers across different employment states (unemployment, and employment at different wages). Unlike the analogous models of random search on the job, our model admits an equilibrium in which the agents' value and policy functions do not depend on the distribution of workers. We refer to this type of equilibrium as a Block Recursive Equilibrium. Therefore, while solving the equilibrium of a random search model in a stochastic environment is a difficult task both analytically and computationally, solving the Block Recursive Equilibrium of our model is as easy as solving a representative agent model.
    JEL: E32 J64
    Date: 2009–04
  57. By: Bergin, Adele (ESRI); Conefrey, Thomas (ESRI); Fitz Gerald, John (ESRI); Kearney, Ide (ESRI)
    Date: 2009–04
  58. By: Voigtländer, Nico; Voth, Hans-Joachim
    Abstract: How did Europe overtake China? We construct a simple Malthusian model with two sectors, and use it to explain how European per capita incomes and urbanization rates surged ahead of Chinese ones. Productivity growth can only explain a small fraction of rising living standards. Population dynamics - changes of the birth and death schedules - were far more important drivers of the long-run Malthusian equilibrium. The Black Death raised wages substantially, creating important knock-on effects. Because of Engel’s Law, demand for urban products increased, raising urban wages and attracting migrants from rural areas. European cities were unhealthy, especially compared to Far Eastern ones. Urbanization pushed up aggregate death rates. This effect was reinforced by more frequent wars (fed by city wealth) and disease spread by trade. Thus, higher wages themselves reduced population pressure. We show in a calibration exercise that our model can account for the sharp rise in European urbanization as well as permanently higher per capita incomes in 1700, without technological change. Wars contributed importantly to the rise of Europe, even if they had negative short-run effects. We also examine intra-European growth, using a panel of European states in the period 1300-1700. Estimation results suggest that war frequency can explain a good share of divergent fortunes within Europe as well.
    Keywords: Demographic Regime; Epidemics; Great Divergence; Long-run Growth; Malthus to Solow
    JEL: E27 N13 N33 O14 O41
    Date: 2009–04
  59. By: Hepp, Ralf; von Hagen, Jürgen
    Abstract: We provide empirical estimates of the risk-sharing and redistributive properties of the German federal fiscal system based on data from 1970 until 2006, with special attention to the effects of German unification. We find that tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (Länderfinanzausgleich) together reduce differences in per-capita state incomes by 36.9 percent during period 1970 to 1994. After the full integration of East German states into the mechanism in 1995, the redistributive effects increase slightly to about 38.6 percent. With respect to the insurance effect of the German fiscal system, our results indicate that the federal fiscal system offsets 47 percent of an asymmetric shock to state per-capita incomes. This effect has significantly decreased after the inclusion of the East German states in 1995. Furthermore, we find that the German fiscal system provides almost perfect insurance for state government budgets against asymmetric revenue shocks; also, its redistributive effect with regard to the tax resources available to state governments is very strong.
    Keywords: Equalization; Fiscal Federalism; Regional Redistribution; Regional Risksharing
    JEL: E63 F42 H77
    Date: 2009–04
  60. By: Giorgio Calcagnini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Germana Giombini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))
    Abstract: This paper aims at analysing whether banking changes that occurred in Italy in the last fifteen years have mined the soundness of its financial system. We look for potential threats to financial stability as a result of the dynamic behaviour of Italian banks that progressively have been favouring consumer households at the expense of firms in the allocation of credit. The theme of financial instability is closely linked to the question of capital regulation, which is a centrepiece of government intervention because it affects banks’ soundness and risk taking incentives. After reviewing the literature on capital regulation, we first discuss the role of guarantees as a solution to banks’ potential instability in the case of credit default and, secondly, we estimate a bank interest rate model that explicitly includes collateral and personal guarantees as explanatory variables. We show that banks follow different lending policies according to the type of customer. In the case of firms banks seem to efficiently screen and monitor customers and guarantees (real and personal) are both used to reduce moral hazard problems. In the case of consumer households and sole proprietorships banks behave “lazily” by replacing screening and monitoring activities with personal guarantees; instead, collateral is used to separate good from bad customers (i.e., to mitigate adverse selection problems). These results, together with the large proportion of bad loans in case of unsecured loans, may indicate the existence of potential sources of financial instability because (a) personal guarantees are a small share of loans, especially in the case of consumer households, (b) a decline in the value of collateral held by banks in the event of a housing market weakening.
    Keywords: Banking Crisis; Household and Firm Credit Growth; Banking Regulation.
    JEL: E44 G21 G28
    Date: 2009
  61. By: Ãngel Estrada (Banco de España)
    Abstract: This paper estimates the steady state mark-ups of 23 branches of activity in seven developed countries (USA, Japan, Germany, France, UK, Italy and Spain). The empirical methodology departs from the Hall (1988) seminal approach and incorporates the possibility of non-competitive labour markets. Besides, it is used a time varying parameter (TVP) estimation technique in order to compute the evolution of steady state mark-ups. Looking at the constant parameter estimations, it emerges a clear dichotomy between two groups of countries: USA and UK, with the lowest mark-ups, and Japan and Germany, in the other side of the spectrum; Italy and Spain keep an intermediate position. With respect to the bargaining power of trade unions, the dichotomy between Anglo-Saxon countries, where it is almost inexistent, and Central European countries is even more marked. Allowing these parameters to evolve in time, the results are also interesting: there have been increases in mark ups in Italy, France and Germany; on the contrary, in USA, Japan, UK and Spain they have diminished. In the case of the bargaining power of the trade unions, all these countries have shown reductions since 1980, with the only exception of Germany. Finally, the paper finds a quite robust inverse relation between productivity growth, mark ups and the bargaining power of trade unions, although the quantitative effects are moderated.
    Keywords: Mark-ups, labour market, productivity
    JEL: E23 J51 L10
    Date: 2009–04
  62. By: Giorgio Calcagnini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Fabio Farabullini (Banca d'Italia (Italy)); Germana Giombini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))
    Abstract: This paper aims at shedding light on the influence of guarantees on the loan pricing. After reviewing the literature on the role of guarantees in bank lending decisions, we estimate a bank interest rate model that explicitly includes collateral and personal guarantees as explanatory variables. We show that banks follow different lending policies according to the type of customer. In the case of firms banks seem to efficiently screen and monitor customers, and guarantees (real and personal) are used to reduce moral hazard problems. In the case of consumer households and sole proprietorships banks behave “lazily” by replacing screening and monitoring activities with personal guarantees. Collateral, instead, is used to separate good from bad customers (i.e., to mitigate adverse selection problems).
    Keywords: Banking Crisis; Determination of Interest Rates, Banks, Asymmetric and Private Information.
    JEL: E43 G21 D82
    Date: 2009
  63. By: Égert, Balázs (BOFIT)
    Abstract: This study seeks to determine the extent to which countries of the former Soviet Union are “infected” by the Dutch Disease. We take a detailed look at the functioning of the trans-mission mechanism of the Dutch Disease, i.e. the chains that run from commodity prices to real output in manufacturing. We complement this with two econometric exercises. First, we estimate nominal and real exchange rate models to see whether commodity prices are correlated with the exchange rate. Second, we run growth equations to analyse the possible effects of commodity prices and the dependency of economic growth on natural resources.
    Keywords: Dutch disease; commodity prices; exchange rate; Commonwealth of Independent States
    JEL: E31 E32 F31 Q33
    Date: 2009–04–20
  64. By: A'Hearn, Brian; Baten, Jörg; Crayen, Dorothee
    Abstract: Age data frequently display excess frequencies at attractive numbers, such as multiples of five. We use this "age heaping" to measure cognitive ability in quantitative reasoning, or "numeracy". We construct a database of age heaping estimates with exceptional geographic and temporal coverage, and demonstrate a robust correlation of literacy and numeracy, where both can be observed. Extending the temporal and geographic range of our knowledge of human capital, we show that Western Europe had already diverged from the East and reached high numeracy levels by 1600, long before the rise of mass schooling or the onset of industrialization.
    Keywords: Age Heaping; Europe; Human Capital; Literacy; Long-term Growth
    JEL: E24 I20 N13 O14 O40
    Date: 2009–04
  65. By: David Love (Williams College); Paul A. Smith (Federal Reserve Board)
    Abstract: Defined benefit (DB) pension freezes in large healthy firms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free promises from the employee’s perspective. Indeed, the current turmoil in financial markets and difficult economic outlook for many firms suggest that many more pension plans could be frozen soon. In this preliminary paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with freezeprone DB pensions. The model incorporates important sources of uncertainty facing households, including asset returns, employment, income, and mortality, as well as pension freezes. Applying a compensating variation measure of welfare, we find that pension freezes reduce welfare by a maximum of about $6,000 for individuals with a high school degree and about $2,000 for individuals with a college degree. We close by highlighting a few important issues that are missing from our preliminary analysis, including a labor supply decision and the effects of market-clearing conditions in the labor market. We hope to address these issues in future work.
    Date: 2008–10
  66. By: Valila, Timo (European Investment Bank, Economic and Financial Studies)
    Abstract: Considering industrial policy from the perspective of other economic policies, this paper seeks to identify the sources and consequences of conflicts between industrial, competition, trade, and fiscal policies. The goals of industrial policy, even when economically justified in isolation, are in certain circumstances in an intrinsic conflict with especially competition and trade policy goals. Industrial policy also lacks its own independent instruments, and fiscal policy instruments are frequently used and often economically optimal to implement industrial policy, which can create a policy conflict even when the goals themselves are independent. For these reasons, the cost of industrial policy is often the sacrifice of some other policy goal. This interdependence narrows the scope for economically sensible industrial policy.
    Keywords: industrial policy; goal conflicts; instrument dependence
    JEL: E61 H11 L52
    Date: 2009–04–15
  67. By: Melander, Ola (Dept. of Economics, Stockholm School of Economics)
    Abstract: According to the Uncovered Interest Parity (UIP) condition, interest rate differentials compensate for expected exchange rate changes, equalizing the expected returns from holding assets which only differ in terms of currency denomination. In the previous literature, there are many tests of UIP for industrialized countries, and, more recently, some tests for emerging economies. However, due to data availability problems, poorer developing countries have not been studied. This paper tests UIP in a partially dollarized economy, Bolivia, where bank accounts only differ in terms of currency denomination (U.S. dollars or bolivianos). I find that UIP does not hold in Bolivia, but that the deviations are smaller than in most other studies of developed and emerging economies. Moreover, several factors seem to contribute to the deviations from UIP. The so-called peso problem could possibly account for the observed data, but there is also evidence of a time-varying risk premium, as well as deviations from rational expectations.
    Keywords: Uncovered interest parity; UIP; partial dollarization; time-varying risk premia; peso problems; rational expectations
    JEL: E43 F31 G15
    Date: 2009–04–17
  68. By: Francisco J. Buera; Joseph Kaboski; Yongseok Shin
    Abstract: Income differences across countries primarily reflect differences in total factor productivity (TFP). More disaggregated data show that the TFP gap between rich and poor countries varies systematically across industrial sectors of the economy: Poor countries are particularly unproductive in tradable and investment goods sectors. In this paper, we develop a quantitatively-oriented framework to explain such cross-country patterns in aggregate and sectoral TFP. We start by documenting that an important distinction between sectors is their average establishment size. For example, establishments in tradable and investment goods sectors operate at much larger scales than those in the non-tradable sector. In our model, sectors with larger scales of operation have more financing needs, and are hence disproportionately affected by financial frictions. Our quantitative exercises show that financial frictions account for a substantial part of the observed cross-country patterns in TFP, both at the aggregate and at the sectoral level. Our model also has novel implications for the impact of financial frictions on the relative scale between the tradable and the non-tradable sectors, which are shown to be consistent with the data.
    JEL: E44 O11 O16 O41
    Date: 2009–04
  69. By: Bednarik, Radek
    Abstract: This paper tries to find out, whether the Covered Interest Rate Parity (CIRP) theory was valid for exchange rate CZK/EUR during the period ranging from May 2001 to November 2007. As a main tool, a common OLS regression was chosen. It was augmented by MA(1) process of residuals and by ARCH (6) model of residuals’ variance. The results show, that the CIRP theory was not valid during selected period. However, it seems apparent, that the main factors for 3-month forward exchange rate CZK/EUR determination were an interest rate differential and a nominal spot exchange rate. This is fully consistent with the CIRP theory.
    Keywords: Covered interest rate parity; exchange rate; interest rate; foreign exchange markets
    JEL: E43 F31
    Date: 2008–01–05

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