nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒06‒03
forty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Policy, Stock Price Misalignments and Macroeconomic Instability By Bask, Mikael
  2. The Estimation of the New Keynesian Phillips Curve in Japan and Its Implication for the Inflation Response to a Monetary Policy Shock By Masahiko Shibamoto
  3. Trend inflation, Taylor principle and indeterminacy By Guido Ascari; Tiziano Ropele
  4. Central Bank Misperceptions and the Role of Money in Interest Rate Rules By Volker Wieland; Günter W. Beck
  5. Expectations, Learning, and the Changing Relationship between Oil Prices and the Macroeconomy By Fabio Milani
  6. Opting out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods By Andreas Beyer; Vítor Gaspar; Christina Gerberding; Otmar Issing
  7. Accountability and Transparency about Central Bank Preferences for Model Robustness. By Meixing Dai; Eleftherios Spyromitros
  8. A joint macroeconomic-yield curve model for Hungary By Zoltán Reppa
  9. Isolating a measure of inflation expectations for the South African financial market using forward interest rates By Monique Reid
  10. Financial Structure and the Impact of Monetary Policy on Asset Prices By Katrin Assenmacher-Wesche; Stefan Gerlach
  11. Analysing wage and price dynamics in New Zealand By Ashley Dunstan; Troy Matheson; Hamish Pepper
  12. The Effects of Monetary Policy on Unemployment Dynamics Under Model Uncertainty. Evidence from the US and the Euro Area By Carlo Altavilla; Matteo Ciccarelli
  13. Stabilizing Fiscal Policies with Capital Market Imperfections By Nicolas L. Dromel
  14. Learning, Endogenous Indexation and Disinflation in the New-Keynesian Model By Volker Wieland
  15. Measures of Trend Inflation in Hong Kong By Frank Leung; Kevin Chow; Simon Chan
  16. The Impact of Inflation Targeting on Unemployment in Developing and Emerging Economies By Jose Angelo Divino
  17. Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission By Silvio Colarossi; Andrea Zaghini
  18. Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance By WenShwo Fang; Stephen M. Miller; ChunShen Lee
  19. Do institutional changes affect business cycles? Evidence from Europe By Fabio Canova; Matteo Ciccarelli; Eva Ortega
  20. Endogenous Fluctuations of Investment and Output in a Model of Discrete Capital Adjustments By Nirei, Makoto
  21. Firm-Specific Capital, Productivity Shocks and Investment Dynamics By Francesco Giuli; Massimiliano Tancioni
  22. Composite indicators for monetary analysis By Andrea Nobili
  23. Does Trade Integration Alter Monetary Policy Transmission? By Tobias J. Cwik; Gernot J. Müller; Maik Wolters
  24. Analyzing Interest Rate Risk: Stochastic Volatility in the Term Structure of Government Bond Yields By Nikolaus Hautsch; Yangguoyi Ou
  25. Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles By Nicolas L. Dromel
  26. Economic Projections and Rules-of-Thumb for Monetary Policy By Athanasios Orphanides; Volker Wieland
  27. Revealing monetary policy preferences By Christie Smith
  28. Avaliando os Efeitos da Política Fiscal no Brasil: Resultados de um Procedimento de Identificação Agnóstica By Mário Jorge Mendonça; Luis Alberto Medrano; Adolfo Sachsida
  29. Monetary policy and exchange rate overshooting: Dornbusch was right after all By Hilde C. Bjørnland
  30. Are the Fed’s Inflation Forecasts Still Superior to the Private Sector’s? By Edward N. Gamber; Julie K. Smith
  31. Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy By Jouchi Nakajima; Munehisa Kasuya; Toshiaki Watanabe
  32. Comment to "Weak Instruments Robust tests in GMM and the New Keynesian Phillips curve" by Frank Kleibergen and Sophocles Mavroeidis By Fabio Canova
  33. Expectation Driven Business Cycles with Limited Enforcement By Walentin, Karl
  34. The UK Intranational Trade Cycle By Michael Artis; Toshihiro Okubo
  35. Interest Rate Convergence in the Euro-Candidate Countries: Volatility Dynamics of Sovereign Bond Yields By Gabrisch, Hurbert; Orlowski, Lucjan
  36. Capital-Labor Substitution, Equilibrium Indeterminacy, and the Cyclical Behavior of Labor Income By Jang-Ting Guo; Kevin J. Lansing
  37. A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries By Hubert Gabrisch; Lucjan T. Orlowski
  38. Fiscal policy and the global financial crisis By Torben M. Andersen
  39. Inflação e Nível de Atividade no Brasil: Estimativas Via Curva de Phillips By Leandro N. Brito; Elcyon C. R. Lima
  40. International Evidence On Sticky Consumption Growth By Christopher D. Carroll; Jirka Slacalek; Martin Sommer
  41. Planejamento Estratégico do Desenvolvimento e as Políticas Macroeconômicas By João Sicsú
  42. Current Account Imbalances and Structural Adjustment in the Euro Area : How to Rebalance Competitiveness By Holger Zemanek; Ansgar Belke; Gunther Schnabl
  43. What Do We Know About G-7 Macro Forecasts? By Herman O. Stekler
  44. Price Adjustment to News with Uncertain Precision By Nikolas Hautsch; Dieter Hess; Christoph Müller
  45. Banks' intraday liquidity management during operational outages: theory and evidence from the UK payment system By Merrouche, Ouarda; Schanz, Jochen
  46. On Growth and Development. By Mina Baliamoune-Lutz
  47. The short-run macroeconomic impact of foreign aid to small states: An agnostic time series analysis By Hansen, Henrik; Headey, Derek
  48. A Quantitative Analysis of Suburbanization and the Diffusion of the Automobile By Karen A. Kopecky; Richard M. H. Suen
  49. Evaluating Current Year Forecasts Made During the Year: A Japanese Example By H.O. Stekler; Kazuta Sakamoto

  1. By: Bask, Mikael (Hanken School of Economics)
    Abstract: We augment the standard New Keynesian model for  monetary policy design with stock prices in the  economy and stock traders wh use a mix of fundamental  and technical analyses. The central question in  this paper is whether macroeconomic stability can  be achieved by an appropriate policy by the central  ank? In contrast with most of previous literature,  we argue that the central bank should augment the  interest rate rule with a term for stock price  misalignments since a determiate and stable rational  expectations equilibrium in the economy is then easier  to achieve. This equilibrium is stable under least  squares learning as well. Another interesting finding is  that inertia in monetary policy does not promote macroeconomic  stability when technical analysis plays a major role  in stock trading. Even worse, if the central bank in its  policy only indirectly responds to stock price misalignments  via its effect on the inflation rate, a combination of strong  inertia in monetary policy and a significant role for  technical analysis in stock trading will lead to macroeconomic instability.  
    Keywords: Bubble Policy;  Fundamental Analysis;  Interest Rate Rule;  Least Squares Learning;  Macroeconomic Stability;  Stock Price Bubble;  Taylor Rule;  Technical Analysis
    Date: 2009–06–05
  2. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: The New Keynesian Phillips Curve (NKPC) is a key building block in many modern macroeconomic models. This study assesses the empirical fit of the NKPC in Japan by estimating a variety of its specifications. Some empirical results suggest that introducing nominal interest rates into the pure forward-looking NKPC, which implies the existence of a cost channel for monetary policy, helps improve their ability to explain Japanese inflation dynamics. In addition to the existence of the cost channel for monetary policy, these results show that the use of labor share (real unit labor costs) is an important factor in estimating the NKPC. As an implication of these findings, this study proposes that, in the context of the New Keynesian economics, both the existence of the cost channel for monetary policy and the sluggish adjustment of real unit labor costs can account for the fact that there is a long time lag between a monetary policy shock and its impact on inflation.
    Keywords: New Keynesian Phillips Curve, Cost Channel of Monetary Policy, Inflation Responses to a Monetary Policy Shock
    JEL: C3 E3 E5
    Date: 2009–01
  3. By: Guido Ascari (University of Pavia); Tiziano Ropele (Bank of Italy, Economic Research Unit, Genova Branch)
    Abstract: Even low levels of trend inflation substantially affect the dynamics of a basic new Keynesian DSGE model when monetary policy is conducted by a contemporaneous Taylor rule. Positive trend inflation shrinks the determinacy region. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that in the long run the nominal interest rate should be raised by more than the increase in inflation, is a sufficient condition for local determinacy of equilibrium. This finding holds for different types of Taylor rules, inertial policy rules and price indexation schemes. Therefore, regardless of the theoretical set up, the monetary literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.
    Keywords: sticky prices, Taylor rules, trend inflation
    JEL: E31 E52
    Date: 2009–05
  4. By: Volker Wieland (Goethe University Frankfurt, CEPR, CFS and SCID); Günter W. Beck (Goethe University Frankfurt and CFS)
    Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.
    Keywords: Taylor Rules, Money, Quantity Theory, Output Gap Uncertainty, Monetary Policy Under Uncertainty
    JEL: E32 E41 E43 E52 E58
    Date: 2008–01–08
  5. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper estimates a structural general equilibrium model to investigate the changing relationship between the oil price and macroeconomic variables. The oil price, through the role of oil in production and consumption, affects aggregate demand and supply in the model. The assumption of rational expectations is relaxed in favor of learning. Oil prices, therefore, affect the economy through an additional channel, i.e. through their effect on the formation of agents' beliefs. The estimated learning dynamics indicates that economic agents' perceptions about the effects of oil prices on the economy have changed over time: oil prices were perceived to have large effects on output and inflation in the 1970s, but only milder effects after the mid-1980s. Since expectations play a large role in the determination of output and inflation, the effects of oil price increases on expectations can magnify the response of macroeconomic variables to oil price shocks. In the estimated model, in fact, the implied responses of output and inflation to oil price shocks were much more pronounced in the 1970s than in 2008. Therefore, through the time variation in the impact of oil prices on beliefs, the paper can successfully explain the observed weakening of the effects of oil price shocks on real activity and inflation.
    Keywords: Oil price; Inflation expectations; Learning; Monetary policy, Effect of energy shocks; Bayesian estimation
    JEL: E31 E52 E58 F43
    Date: 2009–06
  6. By: Andreas Beyer (European Central Bank); Vítor Gaspar (Banco de Portugal); Christina Gerberding (Deutsche Bundesbank); Otmar Issing (Center for Financial Studies)
    Abstract: During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time.
    Keywords: Inflation, Price Stability, Monetary Policy, Monetary Targeting, Policy Rules
    JEL: E31 E32 E41 E52 E58
    Date: 2009–01–16
  7. By: Meixing Dai; Eleftherios Spyromitros
    Abstract: Using a New Keynesian model subject to misspecifications, we examine the accountability issue in a framework of delegation where government and private agents are uncertain about the central bank’s preference for model robustness. We show that, in the benchmark case of full transparency, the optimal inflation targeting weight (or penalty) is decreasing with the preference for robustness. Departing from the benchmark equilibrium, the central bank has then incentive to be less transparent in order to reduce the optimal inflation targeting weight and thus to become more independent vis-à-vis the government. We also find that greater opacity will increase the sensibility of inflation and model misspecification to the inflation shock but will decrease that of output-gap. Since macroeconomic volatility could be increased or decreased under more opacity, there could exist in some cases a trade-off between the level and the variability of inflation (and output gap). Persistent inflation shocks could be associated with a higher inflation targeting weight as well as a higher sensibility of inflation and output gap to the inflation shock but a lower sensibility of model misspecification.
    Keywords: Central bank accountability, model uncertainty, monetary policy transparency.
    JEL: E42 E52 E58
    Date: 2009
  8. By: Zoltán Reppa (Magyar Nemzeti Bank)
    Abstract: The main goal of this paper is to examine the relationship between macroeconomic shocks and yield curve movements in Hungary. To this end, we apply a Nelson-Siegel type dynamic yield curve model, where changes of the yield curve are driven by two latent factors and some key macro variables that follow a VAR(1) process. The structural macroeconomic shocks are identified by sign restrictions. According to the model, more than sixty percent of the variation of the yield curve factors can be explained by macro shocks. In particular, the monetary policy shock is the most important determinant of the level factor, while the slope factor is mainly driven by risk premium and demand shocks. As for the direction of the responses, monetary policy and supply shocks decrease long forward rates, while premium and demand shocks increase short forward rates. The effect of the premium and monetary policy shocks is strongest in the period when the shock occurs, while for the demand and supply shocks the responses reach their peak only after some delay.
    Keywords: yield curve, Nelson-Siegel, factor models, state space models, structural identification.
    JEL: C32 E43 E44 G12
    Date: 2009
  9. By: Monique Reid (Department of Economics, University of Stellenbosch)
    Abstract: The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and offers an additional method, which is market based. The methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.
    Keywords: South Africa, Inflation expectations, Monetary policy transmission mechanism, Implied forward rates, Term structure of interest rates
    JEL: E43 E44 E52 E58
    Date: 2009
  10. By: Katrin Assenmacher-Wesche (Swiss National Bank); Stefan Gerlach (IMFS, Goethe University Frankfurt, and CFS)
    Abstract: We study the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006, using single-country VARs and panel VARs in which we distinguish between groups of countries depending on their financial systems. The effect of monetary policy on property prices is about three times as large as its impact on GDP. Using monetary policy to guard against financial instability by offsetting asset-price movements thus has sizable effects on economic activity. While the financial structure influences the impact of policy on asset prices, its importance appears limited
    Keywords: Asset Prices, Monetary Policy, Panel VARComplementarity, Exchange Rate Pass-Through
    JEL: C23 E52
    Date: 2008–09–10
  11. By: Ashley Dunstan; Troy Matheson; Hamish Pepper (Reserve Bank of New Zealand)
    Abstract: This paper examines the relationship between wages and consumer prices in New Zealand over the last 15 years. Reflecting the open nature of the New Zealand economy, the headline CPI is disaggregated into non-tradable and tradable prices. We find that there is a joint causality between wages and disaggregate inflation. An increase in wage inflation forecasts an increase in non-tradable inflation. However, it is tradable inflation that drives wage inflation. While exogenous shocks to wages do not help to forecast inflation, the leading relationship from wages to non-tradable inflation implies that monitoring wages may prove useful for projecting the impact of other shocks on future inflation.
    JEL: C32 E24 E31
    Date: 2009–06
  12. By: Carlo Altavilla (University of Naples Parthenope and CSEF); Matteo Ciccarelli (European Central Bank)
    Abstract: This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small.
    Keywords: Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule
    JEL: C11 E24 E52 E58
    Date: 2009–06–07
  13. By: Nicolas L. Dromel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We analyze how investment subsidies can affect aggregate volatility and growth in economies subject to capital market imperfections. Within a model featuring both frictions on the credit market and unequal access to investment opportunities among individuals, we provide specific fiscal parameters able to reduce the probability of recessions, fuel the economy long-run growth rate and place it on a permanent-boom dynamic path. We analyze how conditions on the stabilizing fiscal parameters are modified when frictions in the economy evolve. Eventually, we show how this tax and transfer system can moderate persistence in the economy's response to temporary and permanent productivity shocks.
    Keywords: Endogenous business cycles, capital market imperfections, access to productive investment, fiscal policy, macroeconomic stabilization.
    Date: 2009–05
  14. By: Volker Wieland (Goethe University Frankfurt and CFS)
    Abstract: This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms’ expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank’s targets. As firms abandon backward-looking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation.
    Keywords: Learning, Monetary Policy, New-Keynesian Model, Indexation, Inflation Targeting, Disinflation, Recursive Least Squares
    JEL: E32 E41 E43 E52 E58
    Date: 2008–10–03
  15. By: Frank Leung (Research Department, Hong Kong Monetary Authority); Kevin Chow (Research Department, Hong Kong Monetary Authority); Simon Chan (Research Department, Hong Kong Monetary Authority)
    Abstract: The concept of trend inflation is crucial for macroeconomic analysis and policy formulation by central banks. In this paper, we compare measures of trend inflation in Hong Kong estimated by the exclusion and statistical methods. Our findings suggest that the trend inflation estimated by the exclusion method (by excluding basic food, energy and other volatile items) and the principal component technique have strong predictive power on future changes in headline CPI or PCE inflation. Evaluation results based on qualitative and quantitative criteria suggest that the two estimation methods have their own strengths and weaknesses, and none of the methods has clear absolute advantage over the other for measuring trend inflation.
    Keywords: Core inflation, trend inflation, co-integration
    JEL: E31 E37 C22
    Date: 2009–04
  16. By: Jose Angelo Divino (Catholic University of Brasilia)
    Abstract: Several countries around the world have adopted the inflation targeting regime for monetary policy. Despite the growing literature on the issue, it is not clear whether developing and emerging countries can improve their economic performance by adopting inflation targeting. This working paper examines the extent to which macroeconomic policies anchored to inflation targeting affect unemployment, economic growth and the output gap. The results show that inflation targeting causes no harm to employment in developing and emerging countries. On the contrary, it might reduce average unemployment and narrow the output gap. Given that the change in regime must be accompanied by institutional and economic reforms to fiscal and exchange rate policies, targeters might be better off than non-targeters. Hence there is no apparent reason to condemn the adoption of the inflation targeting regime by developing and emerging countries. (...)
    Keywords: The Impact of Inflation Targeting on Unemployment in Developing and Emerging Economies
    Date: 2009–06
  17. By: Silvio Colarossi (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: This paper proposes a possible way of assessing the effect on interest rate dynamics of changes in the decision-making approach, in the communication strategy and in the operational framework of a central bank. Through a GARCH specification we show that the US and the euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policy-making and found empirical evidence to show that the transmission of overnight volatility along the yield curve had entirely vanished.
    Keywords: monetary policy, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2009–05
  18. By: WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, las Vegas); ChunShen Lee (Feng Chia University)
    Abstract: Recent studies evaluate the effectiveness of inflation targeting through the average treatment effect and generally conclude the window-dressing view of the monetary policy for industrial countries. This paper argues that the evidence of irrelevance emerges because of a time-varying relationship (treatment effect) between the monetary policy and its effects on economic performance over time. Targeters achieve lower inflation immediately following the adoption of the policy as well as temporarily slower output growth and higher inflation and output growth variability. But these short-run effects will eventually disappear in the long run. This paper finds substantial empirical evidence for the existence of such intertemporal tradeoffs for eight industrial inflation-targeting countries. That is, targeting inflation significantly reduces inflation at the costs of a lower output growth and higher inflation and growth variability in the short-run, but no substantial effects in the medium to the long-run.
    Keywords: inflation targeting, time-varying treatment effects, short-run costs, long-run irrelevance
    JEL: C23 E52
    Date: 2009–06
  19. By: Fabio Canova; Matteo Ciccarelli; Eva Ortega
    Abstract: We study the effects that the Maastricht treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from ten European countries - seven from the Euro area and three outside of it. There are slow changes in the features of business cycles and in the transmission of shocks. Time variations appear to be unrelated to the three events of interest and instead linked to a process of European convergence and synchronization.
    Keywords: Business cycles, EuropeanMonetary Union, Panel VAR, Structural changes
    JEL: C15 C33 E32 E42
    Date: 2009–03
  20. By: Nirei, Makoto
    Abstract: This paper presents a model of endogenous fluctuations of investment and output at the business cycles frequencies. Aggregate investments fluctuate endogenously due to the strategic complementarity of micro-level lumpy investments. The investment fluctuations are transmitted to the output via variable utilization of capital. Simulations show that there is a range of parameter values under with the model economy exhibits a large magnitude of fluctuations and comovements in investment and output.
    Keywords: business cycles, lumpy investment, variable capacity utilization, nonlinear dynamics
    JEL: E32 E22
    Date: 2009–04
  21. By: Francesco Giuli; Massimiliano Tancioni
    Abstract: The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We first show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is firm-specific and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary effects on investment. Even if this result emerges in both the firm-specific and rental capital specifications, only with the former the estimated average price duration is in line with microeconometric evidence. In the firm-specific capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which firms change their prices.
    Keywords: firm-specific capital, NK-DSGE model, technology shocks, investment dynamics, Bayesian inference.
    JEL: E32 E22 C11
    Date: 2009–05
  22. By: Andrea Nobili (Bank of Italy)
    Abstract: The prominent role assigned to money by the ECB has been the subject of an intense debate because of the declining predictive power of the monetary aggregate M3 for inflation in recent years. This paper reassesses the information content of monetary analysis for future inflation using dynamic factors extracted from a new and richer cross-section of data including the monetary aggregate M3, its components and counterparts, and a detailed breakdown of deposits and loans at sectoral level. Weighting monetary and credit variables according to their signal to noise ratio allows us to downplay those that in recent times contributed significantly to the deterioration of the information content of the M3. Factor-model based inflation forecasts turn out to be more accurate than those produced by traditional competitor models at the relevant policy horizon of six-quarters ahead. All in all, our results support the view that an analysis based on a large set of monetary and credit variables is a more useful tool for assessing risks to price stability than one that simply focuses on the dynamic of the overall monetary aggregate M3.
    Keywords: monetary analysis, factor models, forecasting
    JEL: C22 E37 E50
    Date: 2009–05
  23. By: Tobias J. Cwik (Goethe Uniyversity Frankfurt); Gernot J. Müller (Goethe University Frankfurt); Maik Wolters (Goethe University Frankfurt)
    Abstract: This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.
    Keywords: Monetary Policy Transmission, Open Economy, Trade Integration, Exchange Rate Channel, Strategic Complementarity, Exchange Rate Pass-Through
    JEL: F41 F42 E32
    Date: 2008–08–18
  24. By: Nikolaus Hautsch (Humboldt-Universität zu Berlin); Yangguoyi Ou (Humboldt-Universität zu Berlin)
    Abstract: We propose a Nelson-Siegel type interest rate term structure model where the underlying yield factors follow autoregressive processes with stochastic volatility. The factor volatilities parsimoniously capture risk inherent to the term structure and are associated with the time-varying uncertainty of the yield curve’s level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the factor volatilities follow highly persistent processes. We show that slope and curvature risk have explanatory power for bond excess returns and illustrate that the yield and volatility factors are closely related to industrial capacity utilization, inflation, monetary policy and employment growth.
    Keywords: Term Structure Modelling, Yield Curve Risk, Stochastic Volatility, Factor Models, Macroeconomic Fundamentals
    JEL: C5 E4 G1
    Date: 2009–01–03
  25. By: Nicolas L. Dromel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Firms devote significant resources to maintain and repair thei existing capital. Within a real business cycle model featuring arguably small aggregate increasing returns, this paper assesses the stabilizing effects of fiscal policies with a maintenance expenditure allowance. In this setup, firms are authorized to deduct their maintenance expenditures from revenues in calculating pre-tax profits, as in many prevailing tax codes. While flat-rate taxation does not prove useful to insulate the economy from self-fulfilling beliefs, a progressive tax can render the equilibrium unique. However, we show that the required progressivity to protect the economy against sunspot-driven fluctuations is increasing in the maintenance-to-GDP ratio. Taking into account the maintenance and repair activity of firms, and the tax deductibility of the related expenditures, would then weaken the expected stabilizing properties of progressive fiscal schedules.
    Keywords: Business cycles, maintenance and repair allowances, capital utilization, progressive income taxes, local indeterminacy and sunspots.
    Date: 2009–05
  26. By: Athanasios Orphanides (Central Bank of Cyprus and CFS); Volker Wieland (Goethe University Frankfurt and CFS)
    Abstract: Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers' forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers' own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections.
    Keywords: Monetary Policy, Forecasts, FOMC, Policy Rules
    JEL: E52
    Date: 2008–01–02
  27. By: Christie Smith (Reserve Bank of New Zealand)
    Abstract: This paper uses multiple criteria decision making, also termed conjoint analysis,to reveal the preferences of central bank policy-makers at the Reserve Bank of New Zealand. Guided by the Policy Targets Agreement between the Governor of the Reserve Bank and the Minister of Finance, we identify policy-makers’ willingness to trade off inflation outcomes for reductions in volatility in GDP, the exchange rate, and interest rates. Using 1000Minds software, policy-makers are presented with a sequence of pairwise choices that ultimately quantify which macroeconomic attributes are most important to them. The paper also distinguishes between the preferences of senior management, and a broader cross-section of economists and other staff.
    JEL: E52 E58 D78
    Date: 2009–04
  28. By: Mário Jorge Mendonça; Luis Alberto Medrano; Adolfo Sachsida
    Abstract: Este artigo usa dados trimestrais do período janeiro/1995 a dezembro/2007 para investigar os efeitos de choques fiscais na economia brasileira. Nós seguimos o procedimento de identificação sugerido por Mountford e Uhlig (2005) para verificar o impacto de choques no consumo corrente do governo e na receita pública líquida sobre o produto interno bruto (PIB) e a taxa de inflação. A principal vantagem desse método é que ele permite isolar o choque fiscal de outros choques que ocorrem na economia (tais como o choque de ciclo de negócios e o choque monetário). Os resultados sugerem que em resposta a um aumento inesperado do gasto do governo: a) o consumo privado aumenta; b) com uma probabilidade de 77,1%, o PIB se reduz; e c) a taxa de juros aumenta. Isso pode indicar a ocorrência de efeito crowding out entre investimento público e privado. Em relação a um choque expansionário da receita pública: a) com uma probabilidade de 56,6% ocorre uma redução do PIB no curto prazo, mas no longo prazo existe a possibilidade de uma reação positiva do PIB; e b) com uma probabilidade de 76,1%, o consumo privado é reduzido. Com relação ao efeito de choque monetário contracionista: a) o PIB e o nível de preços respondem negativamente; e b) o PIB sofre uma retração com 70,0% de probabilidade, enquanto o Índice Nacional de Preços ao Consumidor Amplo (IPCA) apresenta um declínio de 0,04%. Por fim, considerando o efeito de um choque de ciclo de negócio, observa-se que o efeito sobre o gasto público é positivo, o que pode indicar uma política fiscal pró-cíclica. This article investigates the effects of fiscal policy shock in the Brazilian economy using quarterly data during the period between January/1995 and December/2007. We follow the agnostic procedure suggested by Mountford and Uhlig (2005) to verify separately the impact of the unexpected positive impulse of current government spending and the net public revenues on some economic variables such as gross domestic product (GDP) and price index. The main advantages of this method regard it allows to isolate the fiscal impulse from the movements that comes from business cycle and the management of monetary policy. We find that in response of an expansionary shock of public expenditures the private consumption increases surely. It can indicate that there is some kind of crowding out effect with a reduction of private investment because the GDP contemporaneous decreases with 77.1 percent probability. The GDP reacts negatively with 56.6 percent probability immediately after a positive shock of the public net revenues. But in long run the probability of this response to be positive rises strongly. With 76.1 percent probability the private consumption decreases after this shock. Finally, another distinctive feature of the agnostic identification used in this paper pertains to the assessment the business cycle and monetary shock. With a 70.0 percent probability the real GDP decreases immediately after a contractionary monetary shock on the Selic rate and this effect is negative and very persistent. Further, the most likely path of the price index (IPCA) indicates a drop of 0.4 percent in this variable during the first five months after a monetary shock. Considering the business cycle, government spending is not countercyclical in a view that during an economic boom the endogenous response of expenditure of government is positive.
    Date: 2009–02
  29. By: Hilde C. Bjørnland (Norwegian School of Management (BI), Norges Bank (Central Bank of Norway) and UC Berkeley)
    Abstract: Dornbusch's exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has been viewed by some researchers as a "stylized fact" to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them. In contrast, we achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of four open economies, we find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate, which appreciates on impact. The maximum effect occurs within 1-2 quarters, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.
    Keywords: Exchange rate, uncovered interest parity (UIP), Dornbusch overshooting, monetary policy, Structural VAR.
    JEL: E32 E52 F31 F41
    Date: 2009–06–05
  30. By: Edward N. Gamber (Department of Economics and Business, Lafayette College); Julie K. Smith (Department of Economics and Business,Lafayette College)
    Abstract: We examine the relative improvement in forecasting accuracy of the Federal Reserve (Greenbook forecasts) and private-sector forecasts (the Survey of Professional Forecasters and Blue Chip Economic Indicators) for inflation. Previous research by Romer and Romer (2000), and Sims (2002) shows that the Fed is more accurate than the private sector at forecasting inflation. In a separate line of research, Atkeson and Ohanian (2001) and Stock and Watson (2007) document changes in the forecastability of inflation since the Great Moderation. These works suggest that the reduced inflation variability associated with Great Moderation was mostly due to a decline in the variability of the predictable component inflation. We hypothesize that the decline in the variability of the predictable component of inflation has evened the playing field between the Fed and private sector and therefore led to a narrowing, if not disappearance, of the Fed’s relative forecasting advantage. We find that the Fed’s forecast errors remain significantly smaller than the private sector’s but the gap has narrowed considerable since the mid-1980s, especially after 1994.
    Keywords: forecasting inflation, Survey of Professional Forecasters, Blue Chip forecasts,Greenbook forecasts, naïve forecasts
    JEL: E37
    Date: 2007–11
  31. By: Jouchi Nakajima (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Munehisa Kasuya (Research and Statistics Department, Bank of Japan (E-mail:; Toshiaki Watanabe (Professor, Institute of Economic Research, Hitotsubashi University, and Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper analyzes the time-varying parameter vector autoregressive (TVP-VAR) model for the Japanese economy and monetary policy. The time-varying parameters are estimated via the Markov chain Monte Carlo method and the posterior estimates of parameters reveal the time-varying structure of the Japanese economy and monetary policy during the period from 1981 to 2008. The marginal likelihoods of the TVP-VAR model and other VAR models are also estimated. The estimated marginal likelihoods indicate that the TVP-VAR model best fits the Japanese economic data.
    Keywords: Bayesian inference, Markov chain Monte Carlo, Monetary policy, State space model, Structural vector autoregressive model, Stochastic volatility, Time-varying parameter
    JEL: C11 C15 E52
    Date: 2009–05
  32. By: Fabio Canova
    Abstract: I discuss the identifiability of a structural New Keynesian Phillips curve when it is embedded in a small scale dynamic stochastic general equilibrium model. Identification problems emerge because not all the structural parameters are recoverable from the semi-structural ones and because the objective functions I consider are poorly behaved. The solution and the moment mappings are responsible for the problems.
    Keywords: Identification, DSGE models, New Keynesian Phillips curve, Identification robust estimation methods
    JEL: C10 C52 E32 E50
    Date: 2009–01
  33. By: Walentin, Karl (Research Department, Central Bank of Sweden)
    Abstract: We explore the implications of shocks to expected future productivity in a setting with limited enforcement of financial contracts. As in Lorenzoni andWalentin (2007) optimal financial contracts under limited enforcement imply that to obtain external finance firms have to post collateral in terms of liquidation value of the firm. In contrast to earlier real one-sector models, we show that a model with this type of “collateral constraint” generates an increase in stock prices in response to positive news about future productivity, as well as the other properties of an expectation driven business cycle, that is, an increase in consumption, investment and hours. The positive stock price response is in line with Beaudry and Portier’s (2006) empirical results and the emerging standard view of expectation driven booms.
    Keywords: business cycles; news shocks; limited enforcement; stock prices
    JEL: E22 E32 E44 E51
    Date: 2009–04–01
  34. By: Michael Artis (University of Manchester and CEPR); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: The paper uses annual data on real GDP for the UK regions and 12 manufacturing sectors to derive regional and regional/sectoral business cycles using an H-P filter. The cohesion of the cycles is examined via cross-correlations and comparisons made with the regional cycles for Japan, the United States and the EuroArea. The UK emerges as especially cohesive and efforts to explain the overall cross-correlations of regional GDP not very successful owing to the low variance of the explicand; when attention is turned to the sectoral/regional cycles, with their greater variance it is possible to demonstrate that economic variables such as distance, dissimilarity in structure and level of output play a significant role in explaining the variance in the cross-correlations. A significant feature of the cross-correlations in relation to those of EU countries is that whilst they continue to provide support for the “UK idiosyncrasy†they no longer do so as strongly as they did in earlier data samples.
    Keywords: intranational business cycle, regional business cycles, income convergence, Hodrick-Prescott filter, Euro-sympathy
    JEL: E32 E41 R11
    Date: 2009–01
  35. By: Gabrisch, Hurbert (Halle Institute for Economic Research); Orlowski, Lucjan (John F. Welch College of Business, Sacred Heart University)
    Abstract: We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we test empirically volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001- January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
    Keywords: interest rate convergence, common currency area, new EU Member States, interest rate risk, GARCH
    JEL: E44 F36
    Date: 2009–04
  36. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Kevin J. Lansing (Federal Reserve Bank of San Francisco)
    Abstract: This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven áuctuations) in a one-sector growth model. Our analysis employs a ìnormalizedîversion of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that laborís share of income becomes pro-cyclical as the elasticity of substitution increases above unity, whereas laborís share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity.
    Keywords: Capital-Labor Substitution, Equilibrium Indeterminacy, Capital Utilization, Real Business Cycles, Labor Income
    JEL: E30 E32
    Date: 2008–04
  37. By: Hubert Gabrisch; Lucjan T. Orlowski
    Abstract: We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we empirically test volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001 untill January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
    Date: 2009–05
  38. By: Torben M. Andersen (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: The financial crisis raises demands for fiscal policy interventions. While a fall in aggregate demand is an important consequence of the crisis, it also reflects more underlying structural problems and changes. Hence, appropriate policy designs have to take account of the nature of the crisis and the underlying need for structural changes. While fiscal policy should mainly rely on automatic stabilizers in normal situations, a more active fiscal policy strategy is called for in the present situation. The effectiveness of various types of fiscal instruments and conceivable tensions between short and long-run objectives are discussed. Past experience shows that deep recessions become persistent due to marginalization of unemployed, and therefore labour market policies have to be considered as an integral part of policy packages. Finally the question of international policy coordination is addressed.
    Keywords: automatic stabilizers, discretionary policy, structural changes, labour market policy
    JEL: E3 E6 H2 H5
    Date: 2009–06–03
  39. By: Leandro N. Brito; Elcyon C. R. Lima
    Abstract: O presente artigo estima o nível do produto, em cada período de tempo, que manteria a inflação estável no Brasil – Nonaccelerating Inflation Level of Output (NAILO). Obtém ainda bandas de probabilidade (bayesianas) para o NAILO e para a sua taxa de crescimento, e investiga a relação entre os desvios do produto em relação ao NAILO e a aceleração da taxa de inflação. Como explicitado no artigo, para nós o NAILO não deve ser confundido com o produto potencial do país. O trabalho inova ao alterar a especificação da curva de Phillips, adotada por Gordon (1997 e 1998) e por Staiger, Stock e Watson (1997a, 1997b e 2002), para permitir que a taxa de crescimento do NAILO seja estocástica e permitir que a variância dos resíduos mude, ao longo do tempo, de acordo com a especificação de uma cadeia de Markov oculta. Estas alterações são essenciais para se lidar com a instabilidade defrontada pela economia brasileira em período recente. Estimamos que a taxa de crescimento anual do NAILO, no último trimestre de 2007, pertencia, com 68% de probabilidade, ao intervalo 2,5% - 4,4%, sendo 3,5% o valor mais provável. Um valor do Produto Interno Bruto (PIB) 1% acima do NAILO, por mais de quatro trimestres, provoca um acréscimo entre 0,5 e 0,7 ponto percentual (p.p.), com grau de confiança de 68% na taxa anual de inflação. Observamos ainda uma estreita relação entre as alterações no hiato do produto e as alterações na utilização da capacidade instalada calculadas tanto pela Fundação Getulio Vargas (FGV) quanto pela Confederação Nacional da Indústria (CNI). This paper estimates the Brazilian NAILO (Nonaccelerating Inflation Level of Output), obtains (Bayesian) probability bands for the Nailo and for its growth rate, and investigates the relationship between deviations of output with respect to the Nailo and the acceleration of inflation. As explained in the text, the NAILO should not be confused with the country’s potential output. This study innovates by changing the specification of the Phillips Curve, adopted by Gordon (1997 and 1998) and by Staiger, Stock and Watson (1997a, 1997b and 2002), to allow for a stochastic rate of growth of the NAILO and for a variance of residuals which changes over time according to a hidden Markov chain specification. These improvements are essential to deal with the instability of the Brazilian economy. Considering 68% probability bands, the annual growth rate of Nailo in the last quarter of 2007 was between 2.5 and 4.4% (3.5% being the most likely value). A value of GDP 1% higher than that of the NAILO, for more than four quarters and adopting 68% probability bands, generates an increase in the annual inflation rate between 0.5 and 0.7 pp (percentage points). We also observed a very close relationship between changes in the output gap and changes in the installed capacity utilization measured either by the Getulio Vargas Foundation (FGV) or by the National Confederation of the Industry (CNI).
    Date: 2008–11
  40. By: Christopher D. Carroll (Johns Hopkins University); Jirka Slacalek (European Central Bank); Martin Sommer (International Monetary Fund)
    Abstract: We estimate the degree of ‘stickiness’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.
    Keywords: Sticky Expectations, Consumption Dynamics, Habit Formation.
    JEL: E21 F41
    Date: 2008–03–03
  41. By: João Sicsú
    Abstract: Este artigo busca apresentar as bases de uma estratégia de desenvolvimento para o Brasil. Para tanto, parte de algumas premissas básicas. A primeira é a de que não haverá desenvolvimento sem mobilização social. A segunda é que o desenvolvimento é fruto do planejamento, no qual o Estado tem papel fundamental. Ademais, uma estratégia de desenvolvimento deve conter pelo menos três partes: a descrição do Brasil que queremos, a definição de uma política macroeconômica para atingi-lo, e um conjunto de políticas públicas para realizar objetivos sociais abrangentes. Por fim, o texto destaca algumas intervenções macroeconômicas necessárias para atingir os objetivos propostos: política monetária de juros baixos, política cambial de taxas competitivas e política fiscal de tipo keynesiana. This paper aims to outline the basis for a development strategy for Brazil. Therefore, it starts from some basic premises. First, there will be no development without social mobilization. Second, development is a planning result, in which the Government plays a key role. Besides, a development strategy must be consisted of three parts, at least: the description of the Brazil we want, the definition of a macroeconomic policy in order to reach it, and a set of public policies to accomplish broad social goals. Finally, the paper outlines some macroeconomic interventions necessary to achieve the proposed goals: low interest rate monetary policy, exchange rate policy to promote economic growth, and a fiscal policy in the Keynesian tradition.
    Date: 2008–08
  42. By: Holger Zemanek; Ansgar Belke; Gunther Schnabl
    Abstract: Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe.
    Keywords: Structural reforms, competitiveness, current account imbalances, euro area, European Monetary Union, dynamic panel estimation, interaction term
    JEL: E24 F15 F16 F32 F33
    Date: 2009
  43. By: Herman O. Stekler (Department of Economics The George Washington University)
    Abstract: Fildes and Stekler’s (2002) survey of the state of knowledge about the quality of economic forecasts focused primarily on US and UK data. This paper will draw on some of their findings but it will not examine any additional US forecasts. The purpose is to determine whether their results are robust by examining the predictions of other countries. The focus will be on (1) directional errors, (2) the magnitude of the errors made in estimating growth and inflation, (3) whether there were biases and systematic errors, (4) the sources of the errors and (5) whether there has been an improvement in forecasting ability.
    Keywords: G7 forecasts, evaluation techniques
    JEL: E37
    Date: 2008–08
  44. By: Nikolas Hautsch (School of Business and Economics as well as CASE – Center for Applied Statistics and Economics, Humboldt-Universit¨at zu Berlin); Dieter Hess (University of Cologne); Christoph Müller (University of Cologne)
    Abstract: Bayesian learning provides the core concept of processing noisy information. In standard Bayesian frameworks, assessing the price impact of information requires perfect knowledge of news’ precision. In practice, however, precision is rarely dis- closed. Therefore, we extend standard Bayesian learning, suggesting traders infer news’ precision from magnitudes of surprises and from external sources. We show that interactions of the different precision signals may result in highly nonlinear price responses. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and show that the effects are statistically and economically significant.
    Keywords: Bayesian Learning, Macroeconomic Announcements, Information Quality, Precision Signals
    JEL: E44 G14
    Date: 2008–06–01
  45. By: Merrouche, Ouarda (Bank of England); Schanz, Jochen (Bank of England)
    Abstract: We investigate how settlement banks in CHAPS, the United Kingdom's large-value payment system, deal with operational risk. In particular, we are interested in payments behaviour towards a bank that is, for operational reasons, unable to make but able to receive payments. If other banks did not sufficiently monitor their outgoing payments, operational shocks could impact the entire payment system because the affected bank may absorb liquidity from the system. We first build a game-theoretic model in which a bank's decision to make payments depends both on whether another bank experiences operational problems, and on the time of day at which the outage occurs. We then investigate these reactions empirically using a non-parametric method. Our theory predicts that banks stop paying to a bank which has been unable to make payments early in the day, when they are uncertain about the payment instructions they might have to execute. When this uncertainty has been resolved (later in the day), healthy banks make payments even to a bank experiencing the operational problem. Both predictions are supported by the data. We show that this behaviour effectively contains the disruption caused by the operational outage: payment flows between healthy banks are largely unaffected.
    Keywords: Payment system; operational outages; liquidity sink
    JEL: E50 G20
    Date: 2009–06–08
  46. By: Mina Baliamoune-Lutz
    Abstract: We examines how institutional and policy reforms affect the relationship between entreprene urship and growth. We perform Arellano-Bond GMM estimations on annual data (over the period 1990-2002) from a large group of developing countries and focus in particular on the interplay between policy and institutional reforms and entrepreneurship. We find that the joint effect of trade reform and entrepreneurship on growth is negative, suggesting that trade reform diminishes the positive effects of entrepreneurial ability on growth, while the joint effect of financial sector reform and entrepreneurship has a non- linear impact on growth. Financial sector reforms enhance the growth effects of entrepreneurship at initial levels and diminish it a high levels of reform. In addition, we find that the interplay of institutional reform and entrepreneurship does not seem to matter for the growth effects of entrepreneurship.
    Keywords: growth, entrepreneurship, institutions, policy reform
    JEL: E6 O1 O4
    Date: 2008–06
  47. By: Hansen, Henrik; Headey, Derek
    Abstract: "We herein investigate the short-run macroeconomic impact of aid in small developing countries (SDCs) by using a vector auto regression (VAR) model to study the impact of aid on net import (absorption) and domestic demand (spending). We focus on average country effects within two country sub-groups, and find substantial differences between ‘aid-dependent' SDCs and other SDCs that are more dependent on natural resources, tourism or financial services. In aid-dependent SDCs, aid absorption more or less equals spending, although only half of the aid flow is absorbed and spent. In the non-aid-dependent group, aid does not seem to be absorbed or spent in any systematic fashion." from authors' abstract
    Keywords: Foreign aid, Small states, Vector auto regression, Mean group estimator, Macroeconomic impacts, Development strategies, Public investment,
    Date: 2009
  48. By: Karen A. Kopecky (Department of Economics, The University of Western Ontario); Richard M. H. Suen (Department of Economics, University of California Riverside)
    Abstract: Suburbanization in the U.S. between 1910 and 1970 was concurrent with the rapid diffusion of the automobile. A circular city model is developed in order to access quantitatively the contribution of automobiles and rising incomes to suburbanization. The model incorporates a number of driving forces of suburbanization and car adoption, including falling automobile prices, rising real incomes, changing costs of traveling by car and with public transportation, and urban population growth. According to the model, 60 percent of postwar (1940-1970) suburbanization can be explained by these factors. Rising real incomes and falling automobile prices are shown to be the key drivers of suburbanization.
    Keywords: automobile; suburbanization; population density gradients; technological progress
    JEL: E10 O11 N12 R12
    Date: 2009–01
  49. By: H.O. Stekler (Department of Economics George Washington UniversityAuthor-Name: Kazuta Sakamoto); Kazuta Sakamoto (Department of Economics George WaExponential smoothing and non-negative datashington UniversityAuthor-Name: Kazuta Sakamoto)
    Abstract: Forecasts for the current year that are made sometime during the current year are not true annual forecasts because they include already known information for the early part of the year. The current methodology that evaluates these ¡°forecasts¡± does not take into account the known information. This paper presents a methodology for calculating an implicit forecast for the latter part of a year conditional on the known information. We then apply the procedure to Japanese forecasts for 1988-2003 and analyze some of the characteristics of those predictions.Length: 24 pages
    Keywords: Forecasting, Japanese forecasts, evaluation techniques
    JEL: E37
    Date: 2008–07

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