nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒06‒17
sixty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Precautionary Demand for Money in a Monetary Business Cycle Model By Telyukova, Irina A.; Visschers, Ludo
  2. Non-constant Hazard Function and Inflation Dynamics By Fang Yao
  3. Inflation dynamics with labour market matching: assessing alternative specifications. By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  5. The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence By Povoledo, Laura
  7. National prices and wage setting in a currency union. By Marcelo Sánchez
  8. "The Role of Monetary Policy under Financial Turbulence: What role did the quantitative easing policy play in Japan?"(in Japanese) By Shin-ichi Fukuda
  9. Finance in the Theory of Business Cycles By Indrajit, Mallick
  10. Labor Market Frictions and the International Propagation Mechanism By Lise Patureau
  11. Testing for the stability of money demand in italy: has the euro influenced the monetary transmission mechanism? By Salvatore Capasso; Oreste Napolitano
  12. Tassi di interesse reali, rischio di lungo periodo e cicli economici By Giorgio PIZZUTTO
  13. "Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics" By Giuseppe Fontana
  14. Stabilizing fiscal policies with capital market imperfections. By Nicolas L. Dromel
  15. The day-to-day interbank market, volatility, and central bank intervention in a developing economy By Sánchez-Fung, José R.
  16. Euro area private consumption: Is there a role for housing wealth effects? By Frauke Skudelny
  17. When does heterogeneity matter? By Yi Wen
  18. La politique monétaire et la crise By Landais, Bernard
  19. "New Consensus Macroeconomics: A Critical Appraisal" By Philip Arestis
  21. Causes of the Financial Crisis: an Assessment Using UK Data By Christopher Martin; Costas Milas;
  22. Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations By Diego A. Comin; Mark Gertler; Ana Maria Santacreu
  23. Inflation and the Stock Market:Understanding the "Fed Model" By Geert Bekaert; Eric Engstrom
  25. Vertical Production and Macroeconomic Persistence: The Case of an Emerging Market Economy By Mai Farid; ;
  26. Hot and Cold Seasons in the Housing Market By L. Rachel Ngai; Silvana Tenreyro
  27. The re-establishment of the Ethiopia’s monetary and banking systems By Arnaldo MAURI
  28. Macroeconomic of populism in Iran By Farzanegan, Mohammad Reza
  29. On the Macroeconomic and Welfare Effects of Illegal Immigration By Liu, Xiangbo
  30. Systemic Risk: Amplification Effects, Externalities, and Policy Responses. By Anton Korinek
  31. Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income By Yuriy Gorodnichenko; Klara Sabirianova Peter; Dmitriy Stolyarov
  32. A Model of a Systemic Bank Run By Harald Uhlig
  33. Is the US Demand for Money Unstable? By Rao, B. Bhaskara; Kumar, Saten
  34. Firm Heterogeneity and the Long-run Effects of Dividend Tax Reform By Francois Gourio; Jianjun Miao
  35. Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence By Robert B. Barsky; Eric R. Sims
  36. La crisi americana: appunti di viaggio By Massimo FLORIO
  37. Independent Central Banks: Some theoretical and empirical problems? By Peter Howells
  38. The (Mythical?) Housing Wealth Effect By Charles Calomiris; Stanley D. Longhofer; William Miles
  39. The Unemployment Volatility Puzzle: The Role of Matching Costs Revisited By Silva , José Ignacio; Toledo, Manuel
  40. An Overinvestment Cycle in Central and Eastern Europe? By Hoffmann, Andreas
  41. Costs of Housing Crises: International Evidence By Christian Aßmann; Jens Hogrefe; Nils Jannsen
  42. Financial Development and International Capital Flows By Haiping Zhang; Jurgen von Hagen
  43. Does legislative turnover adversely affect state expenditure policy? Evidence from Indian state elections By Uppal, Yogesh
  44. Term Structure Equations Under Benchmark Framework By El Qalli, Yassine
  45. A Life-Cycle Analysis of Social Security with Housing By Chen, Kaiji
  46. Estimaciones alternativas del PIB potencial en la República Dominicana By Cruz Rodriguez, Alexis; Francos Rodriguez, Martin
  47. Crisis Response in Latin America: Is the "Rainy Day" at Hand? By Eduardo Fernandez-Arias; Peter Montiel
  48. Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment By Jean-Baptiste Michau
  49. Wage Dispersion in the Search and Matching Model with Intra-Firm Bargaining By Dale T. Mortensen
  50. Land Policy: Founding Choices and Outcomes, 1781-1802 By Farley Grubb
  51. Comparative Advantage and Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim
  52. "Land Policy: Founding Choices and Outcomes, 1781-1802" By Farley Grubb
  53. Credit constraints and persistence of unemployment. By Nicolas L. Dromel; Elie Kolakez; Etienne Lehmann
  54. Crash Risk in Currency Markets By Emmanuel Farhi; Samuel Paul Fraiberger; Xavier Gabaix; Romain Ranciere; Adrien Verdelhan
  55. Mapping prices into productivity in multisector growth models By Ngai, Liwa Rachel; Samaniego, Roberto
  56. Low-Pass Filter Design using Locally Weighted Polynomial Regression and Discrete Prolate Spheroidal Sequences By Proietti, Tommaso; Luati, Alessandra
  57. The Romanian's loan agreement with IMF and EC By Mihai, Ilie
  58. An Analytical Review of Different Concepts of Riba (Interest) in the Sub-Continent By Aziz, Farooq; Mahmud, Muhammad; Karim, Emadul
  59. Mecanismos kaldorianos del crecimiento regional: Aplicación empírica al caso del ALADI (1980-2007) By Carton, Christine
  60. The Credit Rating Crisis By Efraim Benmelech; Jennifer Dlugosz

  1. By: Telyukova, Irina A.; Visschers, Ludo
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.
    Keywords: Precautionary Demand for Money; Business Cycles
    JEL: E32 E40 E41
    Date: 2009–06–08
  2. By: Fang Yao
    Abstract: This paper explores implications of nominal rigidity characterized by a non-constant hazard function for aggregate dynamics. I derive the NKPC under an arbitrary hazard function and parameterize it with the Weibull duration model. The resulting Phillips curve involves lagged inflation and lagged expectations. It nests the Calvo NKPC as a limiting case in the sense that the effects of both terms are canceled out under the constant-hazard assumption. Furthermore, I find lagged inflation always has negative coefficients, thereby making it impossible to interpret inflation persistence as intrinsic. The numerical evaluation shows that the increasing hazard function leads to hump-shaped impulse responses of ination to monetary shocks, and output leads inflation.
    Keywords: Hazard function, Weibull distribution, New Keynesian Phillips Curve
    JEL: E12 E31
    Date: 2009–05
  3. By: Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); James Costain (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Gregory de Walque (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Keith Kuester (Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574, USA.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stephen Millard (Bank of England, Threadneedle Street, London EC2R 8AH, UK.); Olivier Pierrard (Banque Centrale du Luxembourg, 2 boulevard Royal, L-2983 Luxembourg, Luxembourg.)
    Abstract: This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modeling setups - right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates. JEL Classification: E31, E32, E24, J64.
    Keywords: Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities.
    Date: 2009–05
  4. By: Richard Dennis
    Abstract: Model uncertainty has the potential to change importantly how monetary policy should be conducted, making it an issue that central banks cannot ignore. In this paper, I use a standard new Keynesian business cycle model to analyze the behavior of a central bank that conducts policy with discretion while fearing that its model is misspeci?fied. My main results are as follows. First, policy performance can be improved if the discretionary central bank implements a robust policy. This important result is obtained because the central bank's desire for robustness directs it to assertively stabilize inflation, thereby mit- igating the stabilization bias associated with discretionary policymaking. In effect, a fear of model uncertainty can act similarly to a commitment mechanism. Second, exploiting the connection between robust control and uncertainty aversion, I show that the central bank's fear of model misspeci?cation leads it to forecast future outcomes under the be- lief that inflation (in particular) will be persistent and have large unconditional variance, raising the probability of extreme outcomes. Private agents, however, anticipating the policy response, make decisions under the belief that in?ation will be more closely sta- bilized, that is, more tightly distributed, than under rational expectations. Third, as a technical contribution, I show how to solve an important class of linear-quadratic robust Markov-perfect Stackelberg problems.
    JEL: E52 E62 C61
    Date: 2008–08
  5. By: Povoledo, Laura
    Abstract: This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a "New Open Economy" model having prices sticky in the producer's currency can reproduce the observed fluctuations qualitatively. The answer is positive: both in the model and in the data the standard deviations of tradeable inflation, output and employment are significantly higher than the standard deviations of the corresponding nontradeable sector variables. A key role in generating this result is played by the greater responsiveness of tradeable sector variables to monetary shocks.
    Keywords: New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles.
    JEL: F41 E32
    Date: 2009–02
  6. By: Jan Libich; Petr Stehlik
    Abstract: The paper examines whether central banks should be committed to achieving price stability (a low-inflation target), and how strong (explicit) their long-term monetary commitment should be. For that purpose we propose a game theoretic framework that enables us to model various degrees of commitment, as well as its endogenous deter- mination. Our main policy contribution consists in showing that the socially optimal degree of long-term monetary commitment depends on: (i) the potential short-term cost in terms of reduced stabilization flexibility, (ii) the potential benefi?t in terms of better anchored expectations, (iii) the structure of the economy, (iv) agents' expectations for- mation, and (v) the degrees of the central bank's conservatism (strictness) and ambition. The latter point implies substitutability between explicit inflation targeting and central bank goal-independence, and offers a possible explanation for the fact that countries with originally low degrees of central bank goal-independence have tended to commit more explicitly to price stability (legislate a unitary or hierarchical mandate rather than a dual mandate).
    JEL: E52 C72 E61
    Date: 2009–01
  7. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Existing work on wage bargaining (as exemplified by Cukierman and Lippi, 2001) typically predicts more aggressive wage setting under monetary union. This insight has not been confirmed by the EMU experience, which has been characterised by wage moderation, thereby eliciting criticism from Posen and Gould (2006). The present paper formulates a model where, realistically, trade unions set wages with national prices in mind, deviating from Cukierman and Lippi (2001) who postulate that wages are set having area-wide prices in mind. For reasonable ranges of parameter values (and macroeconomic shocks), simulations show that a monetary union is found to elicit real wages that are broadly comparable to those obtained under monetary autonomy. The confidence bounds around these results are rather wide, in particular including scenarios of wage restraint. The paper also performs welfare comparisons concerning macroeconomic stabilisation in light of structural factors such as country size, the preference for price stability, aggregate demand slopes, labour substitutability across unions, the number of wage-setting institutions and the cross-country distribution of technology and demand shocks. JEL Classification: E50, E58, J50, J51.
    Keywords: Inflation, Trade Unions, Monetary Union, Strategic Monetary Policy, Unemployment, Wage Moderation.
    Date: 2009–05
  8. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo)
    Abstract: Under the financial turbulence, the Bank of Japan (BOJ) had launched a series of unprecedented monetary policies in the late 1990s and the early 2000s. The policies were not effective under liquidity trap from a view point of classical macroeconomics. However, they were powerful in providing ample liquidity to the short-term money market. In the first part, we investigate what role the BOJ played as the lender of last resort and as the lender of so-called Lombard lending facility. The BOJ had played an important role as the lender of last resort until the early 2000s but it lost its role under the quantitative easing policy. In the second part, we explore how effective the unprecedented monetary policies were in stabilizing intra-daily call market. Even under the zero interest rate policy, some overnight loans were transacted at the interest rates that were significantly higher than 0%. In contrast, risk premiums almost disappeared in the short-term financial market under the quantitative easing policy. This was particularly true when the BOJ intensified its quantitative easing policy. We show that the extreme monetary policy was useful in improving macroeconomic performance such as average stock prices.
    Date: 2008–10
  9. By: Indrajit, Mallick
    Abstract: Abstract The question of aggregate welfare over time makes business cycle studies important. Finance studies allocation of resources under uncertainty. Thus both these fields of study dwell on intertemporal resource allocation under uncertainty. This paper attempts to shed light on how finance can be integrated into business cycle theory to provide richer and deeper insights than the standard real business cycle theory. JEL Classification: E32, E44, G
    Keywords: Business Cycles; Finance
    JEL: G0 E3
    Date: 2008
  10. By: Lise Patureau (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise)
    Abstract: The paper investigates the determinants of international business cycle comovement in a two-country Dynamic Stochastic General Equilibrium (DSGE) model featured by monopolistic competition and nominal price rigidity, following so the New Open Economy Macroeconomy (NOEM) literature. Within this framework, we assess the role of labor market search and matching frictions in the international propagation of supply and monetary shocks. Our results show that labor market frictions improve the ability of the New Open Economy Macroeconomy framework to account for international business cycles comovement. In particular, the NOEM model with labor market search is consistent with the international propagation mechanism of monetary shocks identified in the data. Through their impact on labor market dynamics, labor market institutions affect the magnitude of international comovement. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.
    Keywords: International business cycles, Search, Labor market institutions, Wage bargaining, International transmission of shocks
    JEL: E24 E32 F41
    Date: 2009
  11. By: Salvatore Capasso; Oreste Napolitano (Department of Economic Studies, Parthenope University of Naples)
    Keywords: Money demand, ARDL model, Kalman filter
    Date: 2008–02
  12. By: Giorgio PIZZUTTO
    Abstract: Real interest rates, long run risks and business cycles. Standard theoretical model under power utility preferences generates time series for real yields and output that are not consistent with the cyclical properties of the macroeconomic data. In particular real interest rates of the model are highly procyclical, while measured real interest rates are countercyclical. Following recent developments in equity premium literature we explore this question in a long run risk environment with generalized isoleastic preferences. This approach explains equity premium puzzle, but it fails to fit real bond prices and their dynamics in relation to business cycles if we model exogenous consumption growth with a persistent component and time-varying volatility.
    Keywords: Asset pricing, long run risk, bond premium puzzle, business cycles
    JEL: G10 G12
    Date: 2008–02–29
  13. By: Giuseppe Fontana
    Abstract: In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. Given the size of the public sector and the increasing role of fiscal policy in modern economies, this simplifying assumption of the NCM model is difficult to defend. This paper maintains that conventional arguments used to support this controversial assumption--including historical reasons, theoretical propositions, and practical issues--do not have solid foundations. There is, in fact, nothing inherently monetary in the stabilization policies found in the model. Thus, fiscal policy could play a role at least as important as monetary policy in the NCM model.
    Date: 2009–05
  14. By: Nicolas L. Dromel (Centre d'Economie de la Sorbonne - Paris School of Economics)
    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.
    JEL: E22 E32 E44 E62 H20 H30
    Date: 2009–05
  15. By: Sánchez-Fung, José R.
    Abstract: This paper investigates banking system instability vis-à-vis the day-to-day interbank market and monetary policy effectiveness in the Dominican Republic. The analysis reveals a negative relationship among excess banking system reserves and the interbank interest rate, and shows that in crisis ‘news’ affect the interbank rate’s volatility asymmetrically and non-linearly. The paper also finds that the 2002-2003 banking crisis and the subsequent central bank intervention as a lender of last resort weakened monetary policy’s transmission mechanism. These events undermined the ensuing stabilization effort, stressing the pervasive short-run trade-off between preserving macroeconomic stability and safeguarding financial stability, and the pitfalls of monetary policymaking in a highly volatility setting.
    Keywords: interbank market; financial stability; monetary policy; IMF stabilisation programme; Dominican Republic.
    JEL: E43 E58 G21
    Date: 2008
  16. By: Frauke Skudelny (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper adds to the literature on wealth effects on consumption by disentangling financial wealth effects from housing wealth effects for the euro area. We use two macro-datasets for our estimations, one on the aggregate euro area for the period 1980-2006, and one on the individual euro area countries from1995-2006, using panel data techniques. The impact of all wealth variables on euro area consumption is significant and positive in most specifications for both datasets. The marginal propensity to consume (MPC) out of financial wealth is roughly in line with the literature, with 2.4 to 3.6 cents per euro of financial wealth spent on consumption according to the estimations with euro area aggregate data. However, the panel estimation yields somewhat lower results (0.6 to 1.1 cents). The MPC out of nominal housing wealth lies between 0.7 to 0.9 cents per euro for both datasets. When specifying housing wealth in real terms, i.e. when taking out the effect of volatile house prices, we find similar effects in the times series estimation while the MPC is larger in the panel estimation (2.5 cents). JEL Classification: E21
    Keywords: Housing wealth, financial wealth, consumption, euro area.
    Date: 2009–05
  17. By: Yi Wen
    Abstract: How do movements in the distribution of income affect the macroeconomy? Krusell and Smith (1998) analyzed this question in a neoclassical growth model, and their results show that the representative-agent assumption provides a good approximation for aggregate behaviors of heterogeneous agents. This paper extends their analysis to a cash-in-advance model with heterogeneous money demand. It is shown that movements in the distribution of monetary income can have significant impact on the macroeconomy. For example, the dynamic responses of aggregate output to monetary shocks behave very differently from those of a representative agent; the welfare costs of moderate inflation are much higher than previously thought, up to 20% of consumption when the inequality of cash distribution is sufficiently large. This is in sharp contrast to the findings of Cooley and Hansen (1989) and Lucas (2000) based on representative-agent models.
    Keywords: Liquidity (Economics) ; Money theory
    Date: 2009
  18. By: Landais, Bernard
    Abstract: This paper presents the interrelations between the economic and financial crisis and monetary policy. Its emphasizes three dimensions of the problem. First, monetary policy is partialy responsible of the financial and economics events of these last years. Second, strong monetary actions are needed and implemented with some success for curing the consequences of the crisis. Third, after the crisis, monetary policy may be never like before...
    Keywords: Politique monétaire ; crise financière ; récession ; déflation ; mesures non-orthodoxes
    JEL: E52
    Date: 2009–06
  19. By: Philip Arestis
    Abstract: This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. There are a few problems with this particular theoretical framework. We focus here on two important aspects closely related to NCM: the absence of banks and monetary aggregates from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework. The analysis is critical of NCM from a Keynesian perspective.
    Date: 2009–05
  20. By: Ian McDonald
    Abstract: This paper argues that the theory of wage and price setting in macroeconomics should be broadened to include insights from behavioural economics, in particular prospect theory and loss aversion. The paper shows how broader microeconomic foundations can explain the main features of a realistic Phillips curve, which are the concurrence of a steep SRPC at low unemployment, a flat SRPC at high unemployment and speed-limit effects. The resulting macroeconomic model has the benefits of consistency with important properties of natural rate models, especially a crucial role for inflation expectations and, in determining the economy’s macroeconomic potential, for supply factors, plus the benefit of consistency with the standard IS/LM model. The paper also shows that the behavioural aspects of these broader microeconomic foundations were alluded to by Keynes and Robinson in 1936 when macroeconomics was created.
    JEL: E12 E24 E31
    Date: 2008–08
  21. By: Christopher Martin (University of Bath (UK)); Costas Milas (Keele University (UK); Rimini Centre for Economic Analysis, Rimini, Italy);
    Abstract: We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis.
    Keywords: financial crisis, liquidity, monetary policy, global imbalances
    JEL: E44 E52
    Date: 2009–01
  22. By: Diego A. Comin; Mark Gertler; Ana Maria Santacreu
    Abstract: We develop a model in which innovations in an economy’s growth potential are an important driving force of the business cycle. The framework shares the emphasis of the recent "new shock" literature on revisions of beliefs about the future as a source of fluctuations, but differs by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive effect on current hours. As we show, the model also has reasonable implications for stock prices. We estimate our model for data post-1984 and show that the innovations shock accounts for nearly a third of the variation in output at business cycle frequencies. The estimated model also accounts reasonably well for the large gyration in stock prices over this period. Finally, the endogenous adoption mechanism plays a significant role in amplifying other shocks.
    JEL: E2 E3
    Date: 2009–06
  23. By: Geert Bekaert; Eric Engstrom
    Abstract: The Fed model postulates that the dividend or earnings yield on stocks should equal the yield on nominal Treasury bonds, or at least that the two should be highly correlated. In US data, there is indeed a strikingly high time series correlation between the yield on nominal bonds and the dividend yield on equities. This positive correlation is often attributed to the fact that both bond and equity yields commove strongly and positively with expected inflation. While inflation commoves with nominal bond yields for well-known reasons, the positive correlation between expected inflation and equity yields has long puzzled economists. We show that the effect is consistent with modern asset pricing theory incorporating uncertainty about real growth prospects and habit -- based risk version. In the US, high expected inflation has tended to coincided with periods of heightened uncertainty about real economic growth and unusually high risk aversion, both of which rationally raise equity yields. Our findings suggest that countries with high incidence of stagflation should have relatively high correlation between bond yields and equity yields and we confirm that this is true in a panel of international data
    JEL: E31 E44 G11 G12 G14
    Date: 2009–06
  24. By: Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte
    Abstract: This paper considers the “real-time” forecast performance of the Federal Reserve staff, time-series models, and an estimated dynamic stochastic general equilibrium (DSGE) model – the Federal Reserve Board’s new Estimated, Dynamic, Optimization-based (Edo) model. We evaluate forecast performance using out-of-sample predictions from 1996 through 2005 – thereby examining over 70 forecasts presented to the Federal Open Market Committee (FOMC). Our analysis builds on previous real-time forecasting ex- ercises along two dimensions. First, we consider time-series models, a structural DSGE model that has been employed to answer policy questions quite different from forecast- ing, and the forecasts produced by the staff at the Federal Reserve Board. In addition, we examine forecasting performance of our DSGE model at a relatively detailed level by separately considering the forecasts for various components of consumer expenditures and private investment. The results provide significant support to the notion that richly specified DSGE models belong in the forecasting toolbox of a central bank.
    Date: 2008–12
  25. By: Mai Farid; ;
    Abstract: Empirical studies reveal persistence of macroeconomic variables to nominal shocks. However, theoretical models fail to match the data. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with vertical input-output production, imperfect competition and staggered prices at each stage of production to reconcile theoretical models with empirical observations. We find that output response to stage-specific technological change and demand shock is more persistent the greater the number of production stages and the larger the share of intermediate goods in final good production. Depending on the source of technological change, we may either have contractionary or expansionary impact on macroeconomic variables.
    Keywords: Vertical production chain; Staggered price contracts; Persistence; Technological change.
    JEL: E31 O33
  26. By: L. Rachel Ngai; Silvana Tenreyro
    Abstract: Every year during the second and thirdquarters (the "hot season") housing markets in the UKand the US experience systematic above-trend increases in both prices and transactions.During the fourth and first quarters (the "cold season"), house prices and transactions fallbelow trend. We propose a search-and-matching framework that sheds new light on themechanisms governing housing market fluctuations. The model has a "thick-market" effectthat can generate substantial differences in the volume of transactions and prices acrossseasons, with the extent of seasonality in prices depending crucially on the bargaining powerof sellers. The model can quantitatively mimic the seasonal fluctuations in transactions andprices observed in the UK and the US.
    Keywords: housing market, thick-market effects, search-and-matching, seasonality, house price fluctuations
    JEL: E0
    Date: 2009–04
  27. By: Arnaldo MAURI
    Abstract: The study is concerned with a crucial period of the banking history of Ethiopia, almost untouched so far by the specializing literature, in which the banking industry was affected by important changes. The paper describes and analyses the reconstruction process of the banking system and the reorganization of the monetary setting in Ethiopia started in 1941, when the Italian colonial rule came to an end and the country regained independence, during World War II. The terminal date of the study is the beginning of 1964, when a one-tier banking system, based on a state-owned financial institution, the State Bank of Ethiopia, gave way to a two-tiers banking system. The monetary banking reform in Ethiopia after liberation in 1941 was an event logical, inevitable and predictable. Different paths, however could had be followed at that moment. The choice in money matter was to establish a national monetary unit, the Ethiopian dollar, instead of keeping the country inside the East African shilling area. On the other hand, as far as concerns banking, it was opted for establishing a state-owned financial institution enjoying a monopolistic position in the credit market rather than for setting up a system of private banks, possibly expatriate.
    Keywords: Ethiopia, African Banking, Banking History, Monetary Reform
    JEL: E42 G21 N27
    Date: 2008–05–16
  28. By: Farzanegan, Mohammad Reza
    Abstract: This paper uses the Dornbusch and Edwards (1990) analytical framework to investigate the macroeconomic populism in Iran under the Ahmadinejad government. My thesis endeavours to place the government of Ahmadinejad in a populist context and forecasts its fall mainly due to macroeconomic instabilities. The purpose of this study is to illustrate how closely Ahmadinejad’s government follows the model of Dornbusch and Edwards (1990).
    Keywords: Iran; Populism; Ahmadinejad; Economic Growth
    JEL: N45 H11 O53
    Date: 2009–06–03
  29. By: Liu, Xiangbo
    Abstract: This paper investigates the macroeconomic and welfare effects of illegal immigration on the native born within a dynamic general equilibrium framework with labor market frictions. A key feature of the model is that job competition is allowed for between domestic workers and illegal immigrants. We calibrate the model to match some key statistics of the postwar U.S. economy. The model predicts that in the long run illegal immigration is a boon, but the employment opportunities of domestic workers are strongly negatively affected. The model also predicts that the level of domestic consumption has a U-shaped relationship with the share of illegal immigrants.
    Keywords: Economic Growth; Immigration; Welfare; Search; Unemployment
    JEL: F22 O41 J64
    Date: 2009–05–28
  30. By: Anton Korinek (4118F Tydings Hall, University of Maryland, College Park, MD 20742,USA,)
    Abstract: The worst financial crises since the Great Depression has forced central bankers and policymakers across Europe and around the globe to take unprecedented policy measures to deal with systemic risk, i.e. the risk that the financial system ceases to perform its function of allocating capital to the most productive use because of financial difficulties among a significant number of financial institutions. This paper develops a parsimonious model of systemic risk in the form of amplification effects whereby adverse developments in financial markets and in the real economy mutually reinforce each other and lead to a feedback cycle of falling asset prices, deteriorating balance sheets and tightening financing conditions. The paper shows that the free market equilibrium in such an environment is generically inefficient because constrained market participants do not internalize that their actions entail amplification effects. Therefore they undervalue the social benefits of liquidity during crises and take on too much systemic risk. We use our framework to shed light on a number of current policy issues. We show that banks face socially insufficient incentives to raise more capital during systemic crises, that bailouts which are anticipated can be ineffective, and that expectational errors are considerably more costly during crises than in normal times. Furthermore we develop an analytical framework for macro-prudential capital adequacy requirements that take into account systemic risk. We also analyze a new channel of financial contagion and explain why private agents will take insufficient precautions against contagion from other sectors in the economy.
    Keywords: financial crises, amplification effects, liquidity, systemic risk, systemic externalities, social pricing kernel, macroprudential regulation.
    JEL: E31 E32 E24 J51
    Date: 2009–05–14
  31. By: Yuriy Gorodnichenko; Klara Sabirianova Peter; Dmitriy Stolyarov
    Abstract: We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994-2005. We analyze cross-sectional income and consumption inequality and find that inequality decreased during the 2000-2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Comparisons of RLMS data with official macroeconomic statistics reveal that national accounts may underestimate the extent of unofficial economic activity, and that the official consumer price index may overstate inflation and be prone to quality bias.
    JEL: E20 I30 J30 O15 P20
    Date: 2009–06
  32. By: Harald Uhlig
    Abstract: The 2008 financial crisis is reminiscent of a bank run, but not quite. In particular, it is financial institutions withdrawing deposits from some core financial institutions, rather than depositors running on their local bank. These core financial institutions have invested the funds in asset-backed securities rather than committed to long-term projects. These securities can potentially be sold to a large pool of outside investors. The question arises, why these investors require steep discounts to do so. I therefore set out to provide a model of a systemic bank run delivering six stylized key features of this crisis. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version. I conclude from that that the variant with uncertainty averse investors is more suitable to analyze policy implications. This paper therefore provides a model, in which the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities.
    JEL: E44 G21 G28
    Date: 2009–06
  33. By: Rao, B. Bhaskara; Kumar, Saten
    Abstract: The demand for money (M1) for the USA is estimated with annual data from 1960-2008 and its stability is analyzed with the extended Gregory and Hansen (1996b) test. In addition to estimating the canonical specification, alternative specifications are estimated which include a trend and additional variables to proxy the cost of holding money. Results with our extended specification showed that there has been a structural change in 1998 and the constraint that income elasticity is unity could not be rejected by subsample estimates. Short run dynamic adjustment equations are estimated with the lagged residuals from the fully modified OLS (FMOLS) estimates of cointegrating equation and also with the general to specific approach (GETS).
    Keywords: Demand for M1; USA; Structural Breaks; Income Elasticity; Cost of Holding Money
    JEL: E41
    Date: 2009–06–14
  34. By: Francois Gourio; Jianjun Miao
    Abstract: To study the long-run effect of dividend taxation on aggregate capital accumulation, we build a dynamic general equilibrium model in which there is a continuum of firms subject to idiosyncratic productivity shocks. We find that a dividend tax cut raises aggregate productivity by reducing the frictions in the reallocation of capital across firms. Our baseline model simulations show that when both dividend and capital gains tax rates are cut from 25 and 20 percent, respectively, to the same 15 percent level permanently, the aggregate long-run capital stock increases by about 4 percent.
    JEL: E22 E62 G31 G35 H32
    Date: 2009–06
  35. By: Robert B. Barsky; Eric R. Sims
    Abstract: Innovations to measures of consumer confidence convey incremental information about economic activity far into the future. Comparing the shapes of impulse responses to confidence innovations in the data with the predictions of a calibrated New Keynesian model, we find little evidence of a strong causal channel from autonomous movements in sentiment to economic outcomes (the "animal spirits" interpretation). Rather, these impulse responses support an alternative hypothesis that the surprise movements in confidence reflect information about future economic prospects (the "information" view). Confidence innovations are best characterized as noisy measures of changes in expected productivity growth over a relatively long horizon.
    JEL: E2 E3 E32
    Date: 2009–06
  36. By: Massimo FLORIO
    Abstract: This paper comments an invited opinion on the American crisis in the New York Times by Professor Casey Mulligan, University of Chicago. Accord-ing to Mulligan, the crisis is no more than a financial fluctuation, banks should not be bailed out, other financial actors can finance business in-vestments, the delay of investment and consumption is non a big problem, public intervention is unhelpful. This paper argues instead that the current crisis is not mainly of a financial nature, but it originates form a sustained shock that affected income distribution. The share of labour declined, while the share of capital increased. To sustain the returns to capital it was neces-sary to force lending to consumers. In the short term both monetary and fis-cal policy are needed, but in the mid-to-long run it is necessary to go back to a more balanced income distribution.
    Keywords: Financial and economic crisis, Banks bail-out, Income distribution
    JEL: E25 E62 E65
    Date: 2009–03–23
  37. By: Peter Howells (UWE, Bristol)
    Abstract: In little more than twenty years, it has become widely accepted that the optimal design of monetary policy should include provision for a central bank that is independent of government influence. This is a remarkably short period of time for any idea in economics to become so widely-accepted. But there are problems. In this paper we show that there are many confusions and even some contradictions associated with central bank independence. To begin with, it is not entirely clear what it is exactly that central banks need to be independent of. Furthermore, there is confusion over the mechanisms whereby independence is supposed to deliver its benefits. The literature which is commonly said to provide the rationale for independence is often misunderstood and the evidence that independence does in fact enhance policy outcomes is extremely weak.
    Keywords: independent central banks
    JEL: E52 E58
    Date: 2009–06
  38. By: Charles Calomiris; Stanley D. Longhofer; William Miles
    Abstract: Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non-housing consumption. We reexamine the impact of housing wealth on non-housing consumption, employing the Case-Quigley-Shiller data on U.S. housing wealth that have been used in prior studies to estimate a large housing wealth effect. Existing empirical work fails to control for the fact that changes in housing wealth may be correlated with changes in expected permanent income, biasing the resulting estimates. Once we control for the endogeneity bias resulting from the correlation between housing wealth and permanent income, we find that housing wealth has a small and insignificant effect on consumption. Additional analysis of time-series results provides further support for that view.
    JEL: E21 E32 R21 R31
    Date: 2009–06
  39. By: Silva , José Ignacio; Toledo, Manuel
    Abstract: Recently, Pissarides (2008) has argued that the standard search model with sunk fixed matching costs increases unemployment volatility without introducing an unrealistic wage response in new matches. We revise the role of matching costs and show that when these costs are not sunk and, therefore, can be partially passed on to new hired workers in the form of lower wages, the amplication mechanism of fixed matching costs is considerably reduced and wages in new hired positions become more sensitive to productivity shocks.
    Keywords: unemployment volatility puzzle; search and matching; matching costs
    JEL: E32 J32 J64
    Date: 2009–05–25
  40. By: Hoffmann, Andreas
    Abstract: Prior to the Asian crisis, benign liquidity conditions contributed to credit expansion and overinvestment in the East Asian economies until they were hit by a deep recession (Saxena and Wong 2002). Similarly to the developments in the tiger economies in the nineties, the CEE economies grew rapidly from 2001 to 2007, due to foreign capital inflows. But the current global financial turmoil and economic downswing also pulled the CEE economies into the maelstrom of the crisis. With the Asian experience in mind, the aim of this paper is to analyze whether overinvestment due to benign liquidity conditions possibly emerged and contributed to the crisis in CEE.
    Keywords: Overinvestment; Central and Eastern Europe; Boom-and-bust cycles; Financial Crisis
    JEL: E32 F59 F41 B53
    Date: 2009–06–05
  41. By: Christian Aßmann; Jens Hogrefe; Nils Jannsen
    Abstract: This analysis provides evidence for the costs housing crises induce in terms of GDP growth and under what circumstances these crises are particularly costly. Housing crises are often followed by recessions that are longer and deeper than other recessions. According to empirical estimates,a housing crisis reduces the GDP growth rate in the following year on average by 2.5 percentage points and has a further negative impact in the second year. One important channel transmitting the additional effect of housing crises works through the depression of the construction sector, while wealth effects play a minor role.
    Keywords: Housing Crisis, Panel Data
    JEL: E21 E32 C23
    Date: 2009–06
  42. By: Haiping Zhang (School of Economics, Singapore Management University); Jurgen von Hagen (Institut für Internationale Wirtschaftspolitik, University of Bonn)
    Abstract: We develop a general equilibrium model with financial frictions in which internal capital (equity capital) and external capital (bank loans) have dierent rates of return. Financial development raises the rate of return on external capital but has a non-monotonic effect on the rate of return on internal capital. We then show in a two-country model that capital account liberalization leads to out ow of financial capital from the country with less developed financial system. However, the direction of foreign direct investment (FDI, henceforth) depends on the exact degrees of financial development in the two countries as well as the specific capital controls policy. Our model helps explain the Lucas Paradox (Lucas, 1990). Countries with least developed financial system have the out ows of both financial capital and FDI; countries with most developed financial system witness two-way capital fl ows, i.e., the in ow of financial capital and the out ow of FDI; countries with intermediate level of financial development have the out ow of financial capital and the in ow of FDI. It is consistent with the fact that FDI ows not to the poorest countries but to the middle-income countries.
    Keywords: Capital account liberalization, Capital controls, Financial frictions,Foreign direct investment, Internal capital, External capital
    JEL: E32 E44 F41
    Date: 2007–09
  43. By: Uppal, Yogesh
    Abstract: I examine the effect of legislative turnover on the size and composition of government expenditures in Indian state elections during 1980-2000. The paper finds that excessive turnover in Indian state elections results in an inefficient government expenditure policy. First, the higher the turnover, the larger is the size of government. Second, excessive turnover affects the allocative efficiency of the government expenditure by skewing the composition of government spending towards pure consumption expenditure and away from more productive investment expenditure. The findings imply that a lack of a proper commitment mechanism in political markets could be a source of inefficiency in government policy.
    Keywords: Legislative turnover; Indian elections; government spending
    JEL: E62 H11 H7 H5
    Date: 2009–06–02
  44. By: El Qalli, Yassine
    Abstract: This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure equation coincides with the explicit formula obtained in Platen(2005). The resulting term structure equations are used to explain moves in bond and forward prices by introducing GOP as a factor and therefore constructing a hedge portfolio for bond consisting of units of the GOP and the saving account. The paper also derives an affine term structure equation for forward price in term of the GOP factor. In the case of stochastic short rate we restrict our selves to give only a term structure equation for the bond price.
    Keywords: Term structure; Benchmark approach; GOP; Forward price; bond.
    JEL: E43 G13
    Date: 2009
  45. By: Chen, Kaiji
    Abstract: This paper incorporates two features of housing in a life-cycle analysis of social security: housing as a durable good and housing market frictions. We find that with housing as a durable good unfunded social security substantially crowds out housing consumption throughout the life cycle. By contrast, aggregate non-durable consumption is higher when social security is present, although it is postponed until late in life. Moreover, in the presence of housing market frictions, social security lowers the aggregate home ownership rate and reduces the average size of owner-occupied housing. The effects of social security on housing position, furthermore, exhibit substantial heterogeneity across households of different income levels.
    Keywords: Durable Goods; Housing Market Frictions; Housing Tenure Choice; Social Security
    JEL: E62 H55 E21
    Date: 2009–05
  46. By: Cruz Rodriguez, Alexis; Francos Rodriguez, Martin
    Abstract: In this paper we apply different methods to calculate the potential output of the Dominican Republic. The estimates were made using two data sets. First, we use a quarterly data set covering the period 1980-2006 and then an annual data set for the period 1950-2006 is used. The results of the estimates for each method are compared based on growth rates and generate correlations between them. Growth rates are similar and found a high correlation between the different methods used. For the period 1950-2006 the country's potential output was around 4.8%, while for the period 1980-2006 it was around 4.0%. Additionally, these results allow for calculation the gap between actual and potential output.
    Keywords: output gap
    JEL: E32 E23
    Date: 2008–02–29
  47. By: Eduardo Fernandez-Arias; Peter Montiel
    Abstract: This paper examines the countercyclical policy options available to Latin American countries in the face of the current global economic crisis, concluding that most of the major countries in the region appear to possess the fiscal space (as measured by credible fiscal sustainability and debt headroom) to run prudent countercyclical fiscal deficits. Those countries should undertake a constrained fiscal expansion focused on productive public spending and financed by “rainy day” funds—large stocks of foreign exchange reserves that they have accumulated during recent years—rather than by market borrowing. The recent surge in multilateral financial activity to alleviate market illiquidity, whether intended for reserve or budget support, strengthens the case for this policy prescription: with multilateral support, the appropriate policy response is more expansionary, and its financing is less reliant on market borrowing.
    Keywords: countercyclical policy, fiscal space, international reserves, multilateral financial support
    JEL: E62 E63 F34
    Date: 2009–06
  48. By: Jean-Baptiste Michau
    Abstract: This paper emphasizes the two-way causality between the provision of unemployment insurance andthe cultural transmission of work ethic. Values affect the size of the moral-hazard problem and, hence,the policy to be implemented. Conversely, when parents rationally choose how much effort to exert toraise their children to work hard, they form expectations on the policy that will be implemented by thenext generation. In this context, I determine the dynamics of preferences across generations and showthat the different cultural traits, i.e. high and low work ethics, are complementary. The model couldgenerate a lag between the introduction of unemployment insurance and a deterioration of the workethic. Relying on a calibration, I argue that it can account for a substantial fraction of the history ofEuropean unemployment since World War II. As this explanation is compatible with the co- existenceof generous unemployment insurance and low unemployment in the 1950s and 1960s, it could be seenas an alternative to the dominant story that relies on the occurrence of large shocks since the 1970s.Supportive empirical evidence is provided.
    Keywords: cultural transmission, European unemployment, unemployment insurance, work ethic
    JEL: E24 H31 J65 Z10
    Date: 2009–06
  49. By: Dale T. Mortensen
    Abstract: Matched employer-employee data exhibits both wage and productivity dispersion across firms and suggest that a linear relationship holds between the average wage paid and a firm productivity. The purpose of this paper is to demonstrate that these facts can be explained by a search and matching model when firms are heterogenous with respect to productivity, are composed of many workers, and face diminishing returns to labor given the wage paid to identical workers is the solution to the Stole-Zwiebel bilateral bargaining problem. Helpman and Iskhoki (2008) show that a unique single wage (degenerate) equilibrium solution to the model exists in this environment. In this paper, I demonstrate that another equilibrium exists that can be characterized by a non-degenerate distribution of wages in which more productive firms pay more if employed workers are able to search. Generically this dispersed wage equilibrium is unique and exists if and only if firms are heterogenous with respect to factor productivity. Finally, employment is lower in the dispersed wage equilibrium than in the single wage equilibrium but this fact does not imply that welfare is higher in the single wage equilibrium.
    JEL: E24 J3 J64
    Date: 2009–06
  50. By: Farley Grubb
    Abstract: Victory in the War for Independence brought a vast amount of land within the grasp of the new American nation -- territory stretching from the Appalachian Mountains to the Mississippi River between the southern shores of the Great Lakes and Spanish Florida. These lands were initially claimed by several states. Pressure from states without land claims led to these lands being transferred to the national government. The land so transferred was to be used to pay for the revolution. By 1802 this national public domain totaled roughly 220 million acres of saleable land that was worth about $215 million dollars at constant-dollar long-run equilibrium land prices. A public finance approach is used to explain the choices facing the government regarding how to use its lands to pay for the revolution. The first choice -- directly swapping land for war debt -- was superseded by the second choice, namely "backing" the national debt with its land assets and pledging future proceeds from land sales to be used by law only to redeem the principal of the national debt and nothing else. This land policy helped stabilize the national government's financial position and put the U.S. on a sound credit footing by the mid-1790s.
    JEL: E61 E62 F34 G18 H60 H77 N21 N41 O13 O16 O23
    Date: 2009–06
  51. By: Mark Bils; Yongsung Chang; Sun-Bin Kim
    Abstract: We model unemployment allowing workers to differ by comparative advantage in market work. Workers with comparative advantage are identified by who works more hours when employed. This enables us to test the model by grouping workers based on their long-term wages and hours from panel data. The model captures the greater cyclicality of employment for workers with low comparative advantage. But the model fails to explain the magnitude of countercyclical separations for high-wage workers or the magnitude of procyclical findings for high-hours workers. As a result, it only captures the cyclicality of the extensive, employment margin for low-wage, low-hours workers.
    JEL: E24 E32
    Date: 2009–06
  52. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: Victory in the War for Independence brought a vast amount of land within the grasp of the new American nation—territory stretching from the Appalachian Mountains to the Mississippi River between the southern shores of the Great Lakes and Spanish Florida. These lands were initially claimed by several states. Pressure from states without land claims led to these lands being transferred to the national government. The land so transferred was to be used to pay for the revolution. By 1802 this national public domain totaled roughly 220 million acres of saleable land that was worth about $215 million dollars at constant-dollar long-run equilibrium land prices. A public finance approach is used to explain the choices facing the government regarding how to use its lands to pay for the revolution. The first choice—directly swapping land for war debt—was superseded by the second choice, namely “backing” the national debt with its land assets and pledging future proceeds from land sales to be used by law only to redeem the principal of the national debt and nothing else. This land policy helped stabilize the national government’s financial position and put the U.S. on a sound credit footing by the mid-1790s.
    Keywords: land policy; national debt, national net worth, national public finance, land history, land prices, public domain, early U.S. republic.
    JEL: E61 E62 F34 G18 H60 H77 N21 N41 O13 O16 O23
    Date: 2009
  53. By: Nicolas L. Dromel (Centre d'Economie de la Sorbonne - Paris School of Economics); Elie Kolakez (ERMES - TEPP, Université Paris 2 Panthéon-Assas); Etienne Lehmann (CREST-INSEE et IZA)
    Abstract: In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 19 OECD countries. Our results suggest that credit market imperfections would significantly increase the persistence of unemployment.
    Keywords: Credit markets, labor markets, unemployment, credit constraints, search frictions.
    JEL: E24 E44 J08 J64
    Date: 2009–05
  54. By: Emmanuel Farhi; Samuel Paul Fraiberger; Xavier Gabaix; Romain Ranciere; Adrien Verdelhan
    Abstract: How much of carry trade excess returns can be explained by the presence of disaster risk? To answer this question, we propose a simple structural model that includes both Gaussian and disaster risk premia and can be estimated even in samples that do not contain disasters. The model points to a novel estimation procedure based on currency options with potentially different strikes. We implement this procedure on a large set of countries over the 1996--2008 period, forming portfolios of hedged and unhedged carry trade excess returns by sorting currencies based on their forward discounts. We find that disaster risk premia account for about 25% of expected carry trade excess returns in advanced countries.
    JEL: E44 F31
    Date: 2009–06
  55. By: Ngai, Liwa Rachel; Samaniego, Roberto
    Abstract: Two issues related to mapping a multi-sector model into a reduced-form value-added model are often neglected: the composition of intermediate goods, and the distinction between the productivity indices for value added and for gross output. We illustrate their significance for growth accounting using the well known model of Greenwood, Hercowitz and Krusell (1997), who find that about 60% of economic growth can be attributed to investment-specific technical change (ISTC). When we recalibrate their model to account for the composition of intermediates, we find that ISTC accounts for an even greater share of post-war US growth.
    Keywords: growth accounting; Intermediate goods; investment-specific technical change; multisector growth models; value added
    JEL: E13 O30 O41 O47
    Date: 2009–06
  56. By: Proietti, Tommaso; Luati, Alessandra
    Abstract: The paper concerns the design of nonparametric low-pass filters that have the property of reproducing a polynomial of a given degree. Two approaches are considered. The first is locally weighted polynomial regression (LWPR), which leads to linear filters depending on three parameters: the bandwidth, the order of the fitting polynomial, and the kernel. We find a remarkable linear (hyperbolic) relationship between the cutoff period (frequency) and the bandwidth, conditional on the choices of the order and the kernel, upon which we build the design of a low-pass filter. The second hinges on a generalization of the maximum concentration approach, leading to filters related to discrete prolate spheroidal sequences (DPSS). In particular, we propose a new class of lowpass filters that maximize the concentration over a specified frequency range, subject to polynomial reproducing constraints. The design of generalized DPSS filters depends on three parameters: the bandwidth, the polynomial order, and the concentration frequency. We discuss the properties of the corresponding filters in relation to the LWPR filters, and illustrate their use for the design of low-pass filters by investigating how the three parameters are related to the cutoff frequency.
    Keywords: Trend filters; Kernels; Concentration; Filter Design.
    JEL: E32 C14 C22
    Date: 2009–06–01
  57. By: Mihai, Ilie (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: As it is very known, in the 2009 spring, Romania took the decision to take a loan, an important amount, from the international financial bodies, in order to support the currency and the local economy, overall. Further negotiations, which began unwieldy, rising controversies even between political parties which constitute the governance coalition (PDL and PSD), Romania is almost ready to sign the loan agreement, at the end of May current year, waiting that the first trenches to be available for being drawn.
    Keywords: loan agreement; IMF / International Monetary Fund; Romanian external debt; Exchange rate; Wages; Loans in foreign currency.
    JEL: E52 G28
    Date: 2009–05–28
  58. By: Aziz, Farooq; Mahmud, Muhammad; Karim, Emadul
    Abstract: The traditional concept of Riba (interest) is an excess amount on loan, which creditor receives from debtor on the repayment of loan. There is almost a consensus on the sprit of this concept that it is traditional thought or school; but along with that some other point of views also exist, which present Riba, in somewhat different ways, will be termed as non-traditional approach in this paper. Both of these schools are agreed on the point that, Riba is just restricted to debt, and the increment on it is Riba; but the main difference among these is that: former approach claims that, each and every addition on loan, regardless of purpose and time duration of loan is Riba; but, the later approach demand’s some room for that on different grounds. Actually both of them do not have any sound base. When the concept of unearned income (the income, which is not the result of human labor), is a recognized fact in Islamic economics in different forms, like: ijara (rent), Mudoraba and Mazara’a (Share Cropping); then definitely no logical reason is left to avoid excess income on loan. Both approaches are just unable to give a concrete concept of Riba.
    Keywords: Riba; Interest; Rent; Share Cropping
    JEL: E43 E51 P45 P59 P52
    Date: 2008–12–31
  59. By: Carton, Christine
    Abstract: According to Kaldor (1970), regional growth patterns arise from a cumulative causation process as broadly combining two substantial mechanisms i.e. a productivity regime, known as the “Kaldor-Verdoorn” law, and a demand regime due to the expansion of exportations. This paper attempts to assess empirically the Kaldor’s framework in characterizing economic growth for 11 ALADI countries from a panel data set over period 1980 to 2007. After having controlled industrial heterogeneity, the results are indicating the existence of two regional trends within member states, especially in terms of external demand constraint. It can be pointed out a group of countries for which the link between productivity gains and demand growth has become weaker, due to an increasing external dependence as well as a detrimental competitive position. Finally, findings are quite conclusive insofar as the existence of the Kaldorian mechanisms is corroborated in explaining trajectories of ALADI countries while both increasing returns to scale and demand led growth are seemingly playing a significant role in the region.
    Keywords: ALADI;causality;growth;exports;Kaldor'slaw;GMM;panel
    JEL: E12 O54 C33
    Date: 2009–05–18
  60. By: Efraim Benmelech; Jennifer Dlugosz
    Abstract: Since June 2007, the creditworthiness of structured finance products has deteriorated rapidly. The number of downgrades in November 2007 alone exceeded 2,000 and many downgrades were severe, with 500 tranches downgraded more than 10 notches. Massive downgrades continued in 2008. More than 11,000 of the downgrades affected securities that were rated AAA. This paper studies the credit rating crisis of 2007-2008 and in particular describes the collapse of the credit ratings of ABS CDOs. Using data on ABS CDOs we provide suggestive evidence that ratings shopping may have played a role in the current crisis. We find that tranches rated solely by one agency, and by S&P in particular, were more likely to be downgraded by January 2008. Further, tranches rated solely by one agency are more likely to suffer more severe downgrades.
    JEL: E44 G21 G24 G38
    Date: 2009–06

This nep-mac issue is ©2009 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.