nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒07‒03
sixty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. One Money and Fifteen Needs Inflation and Output Convergence in the European Monetary Union By Van Poeck A.
  2. "Business Cycle Implications of Internal Consumption Habit for New Keynesian Models" By Takashi Kano; James M. Nason
  3. Monetary policy rules in a small open economy: An application to Mexico By Villagómez, F. Alejandro; Orellana Polo, Javier
  4. Opting out of the great inflation: German monetary policy after the breakdown of Bretton Woods By Beyer, Andreas; Gaspar, Vítor; Gerberding, Christina; Issing, Otmar
  5. Public investment, distortionary taxes and monetary policy transparency By Dai, Meixing; Sidiropoulos, Moïse
  6. Strict and Flexible Inflation Forecast Targets: An Empirical Investigation By Glenn Otto; Graham Voss
  7. Ñ-STING: España Short Term INdicator of Growth By Maximo Camacho; Gabriel Perez-Quiros
  8. Fiscal policy challenges in oil-exporting countries – a review of key issues. By Michael Sturm; François Gurtner; Juan Gonzalez Alegre
  9. Financial Development and Velocity of Money in Bangladesh: A Vector Auto- Regression Analysis By Md. Akhtaruzzaman
  10. Understanding inflation dynamics : Where do we stand ? By Maarten Dossche
  11. Money and Endogenous Growth in a Cash-in-Advance Model with Social Status By Hung-Ju Chen; Jang-Ting Guo
  12. Credit Spread and Monetary Policy By Yuki Teranishi
  13. Inflationary Equilibrium in a Stochastic Economy with Independent Agents By John Geanakoplos; Ioannis Karatzas; Martin Shubik; William D. Sudderth
  14. Ramsey Policies in a Small Open Economy with Sticky Prices and Capital By Stéphane Auray; Beatriz de Blas; Aurélien Eyquem
  15. Monetary Policy and Housing Sector Dynamics in a Large-Scale Bayesian Vector Autoregressive Model By Rangan Gupta; Marius Jurgilas; Alain Kabundi; Stephen M. Miller
  16. Iran’s Banking and Monetary Problems By Naghshineh-Pour, Amir
  17. The Financial Crisis as an Overshooting Phenomenon By Fritz Breuss
  18. Equity Returns and Business Cycles in Small Open Economies By Jahan-Parvar, Mohammad R.; Liu, Xuan; Rothman, Philip
  19. Inflation and welfare in long-run equilibrium with firm dynamics By Janiak, Alexandre; Monteiro, Paulo Santos
  20. Price adjustments and inflation - evidence from Norwegian consumer price data 1975-2004 By Fredrik Wulfsberg
  21. Fiscal Policy and Economic Reforms By Y V Reddy
  22. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory, DE WALQUE; Olivier, PIERRARD; Abdelaziz, ROUABAH
  23. Survey measures of expected inflation and the inflation process By Bharat Trehan
  24. Regime Switching Interest Rates and Fluctuations in Emerging Markets By Bertrand Gruss; Karel Mertens
  25. Forecast accuracy and economic gains from Bayesian model averaging using time varying weight By Lennart Hoogerheide; Richard Kleijn; Francesco Ravazzolo; Herman K. van Dijk; Marno Verbeek
  26. The Rocky Ride of Break-even-inflation rates. By Cette, G.; De Jong, M.
  27. Analyzing Macroeconomic Forecastability By Ray C. Fair
  28. Search, Nash Bargaining and Rule of Thumb Consumers By José Emilio Boscá; Javier Ferri; Rafa Doménech
  29. Explaining the Great Moderation: Credit in the Macroeconomy Revisited By Bezemer, Dirk J
  30. An Interest Rate Peg Might Be Better than You Think By Andreas Schabert; Markus Hörmann
  31. Global Liquidity and Commodity Prices : A Cointegrated VAR Approach for OECD Countries By Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
  32. Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income By Gorodnichenko, Yuriy; Sabirianova Peter, Klara; Stolyarov, Dmitriy
  33. Negative Nominal Interest Rates: Three ways to overcome the zero lower bound By Willem H. Buiter
  34. Risk Allocation, Debt Fueled Expansion and Financial Crisis By Paul Beaudry; Amartya Lahiri
  35. Credit Constraints, Cyclical Fiscal Policy and Industry Growth By Philippe Aghion; David Hemous; Enisse Kharroubi
  36. Maintenance and investment : Complements or Substitutes ? A Reappraisal By Raouf, BOUCEKKINE; Giorgio, FABBRI; Fausto, GOZZI
  37. Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks By James Feyrer; Jay C. Shambaugh
  38. Ciklicki prilsgodeni proracunski saldo: primjer Hrvatske By Sandra Svakjek; Maruska Vizek; Andrea Mervar
  39. Capital misallocation and aggregate factor productivity By Azariadis, Costas; Kaas, Leo
  40. Macroeconomic risk and the size of government- do globalisation andinstitutions matter? By Fabrizio Carmignani; Emilio Colombo; Patrizio Tirelli
  41. The Impact of U.S. Central Bank Communication on European and Pacific Equity Markets By Bernd Hayo; Ali M. Kutan; Matthias Neuenkirch
  42. Money laundering - form in expansion of economic and financial infractionality By Nanes, Ovidiu
  43. Disaggregated Credit Flows and Growth in Central Europe By Bezemer, Dirk J
  44. Household Debt, Assets, and Income in Canada: A Microdata Study By Césaire A. Meh; Yaz Terajima; David Xiao Chen; Tom Carter
  45. Disentangling the Global Financial Crisis: A Review of the Global Response By H. N. Thenuwara
  46. Stepping Off the Wage Escalator: The Effects of Wage Growth on Equilibrium Employment By Michael W. L. Elsby; Matthew D. Shapiro
  47. Survey Data as Coicident or Leading Indicators By Cecilia Frale; Massimiliano Marcellino; Gian Luigi Mazzi; Tommaso Proietti
  48. Banks As Social Accountants: Credit and Crisis Through an Accounting Lens By Bezemer, Dirk J
  49. Empty Spaces By Mason Gaffney
  50. Getting Off the Rollercoaster: A Stable Funding Framework for the EI Program - EI Reform Part I By Colin Busby; Alexandre Laurin
  51. Understanding labour income share dynamics in Europe By Arpaia, Alfonso; Pérez, Esther; Pichelmann, Karl
  52. Household Responses to Individual Shocks: Disability and Labour Supply By Gallipoli, Giovanni; Turner, Laura
  53. Temptation and Social Security in a Dynastic Framework By Cagri Seda Kumru; Chung Tran
  54. Patience Cycles By Barnett, Richard C; Bhattacharya, Joydeep; Puhakka, Mikko
  55. The Distributive and Welfare Effects of Product and Labour Market Deregulation By Gabriele, CARDULLO
  56. Survey on Wage and Price Formation of Czech Firms By Dana Hajkova
  57. Endogenous Labor Force Participation and Firing Costs By Moon, Weh-Sol
  58. The Impact of Armed Civil Conflict on Household Welfare and Policy Responses By Patricia Justino
  59. Del cosmos al caos: la serie del PIB de Maluquer de Motes By Leandro Prados de la Escosura
  60. That's Where the Money Was: Foreign Bias and English Investment Abroad, 1866-1907 By Benjamin Chabot; Christopher J. Kurz
  61. Measuring Unemployment Insurance Generosity By Stéphane Pallage; Lyle Scruggs; Christian Zimmermann
  62. Evaluation of contagion or interdependence in the financial crises of asia and latin america, considering the Macroeconomic fundamentals By Pereira, Pedro L. Valls
  63. Exchange rate exposure: A nonparametric approach By Uluc Aysun; Melanie Guldi
  64. Market Valuation of Accrued Social Security Benefits By John Geanakoplos; Stephen P. Zeldes
  65. Public Sector Pension Policies and Capital Accumulation in Emerging Economies By Gerhard Glomm; Juergen Jung; Changmin Lee; Chung Tran

  1. By: Van Poeck A.
    Abstract: In January 1999 the Economic and Monetary Union was established. The member countries abandoned their national currencies and adopted a common currency, the euro, and a common monetary policy. Adopting a common currency is supposed to bring a number of advantages to the member states of a monetary union, such as deeper product and financial market integration, increased trade and capital flows and ultimately increased growth. But by joining a monetary union, a country forgoes the ability to use domestic monetary policy to respond to country-specific macroeconomic disturbances. Monetary policy in a monetary union is the responsibility of the central monetary authority, in this case the European Central Bank (ECB). This central authority pursues monetary policy taking into account the overall situation in the union. Hence, for an individual country, the more its macroeconomic position is in line with the union’s average, the less the costs for that country of belonging to the union. Put differently, the more similarity between the individual countries belonging to a monetary union, the easier the task of the union’s central bank. One could even argue that the long run success and political viability of a monetary union depends on it. In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. This assumption is confirmed by many researchers (see e.g. Breuss, 2002; Fourçans and Vranceanu, 2002, Sauer and Sturm, 2003, Ulrich, 2003). The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union.
    Date: 2009–02
  2. By: Takashi Kano (Faculty of Economics, University of Tokyo); James M. Nason (Research Department, Federal Reserve Bank of Atlanta)
    Abstract: This paper studies the implications of internal consumption habit for propagation and monetary transmission in new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian methods are employed to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to the nominal rigidity, to the choice of monetary policy rule, to the frequencies used for evaluation, and to spectra identified by permanent productivity shocks.
    Date: 2009–06
  3. By: Villagómez, F. Alejandro (Tecnológico de Monterrey, Campus Ciudad de México); Orellana Polo, Javier (McKinsey)
    Abstract: We estimate a small-scale macro model for the Mexican economy under the New Keynesian (NK) framework and alternative interest rate rules for Mexico. With these results we evaluate the performance of the Bank of Mexico against a set of optimality principles derived in the NK literature. We show that the Bank of Mexico holds a preference for stabilizing not only inflation around target, but also acts to achieve an output gap close to zero. Furthermore, we show the central bank responds non-linearly to real exchange rate depreciations. We also show that, although the central bank has attempted to contain inflation, it has not conclusively satisfied the Taylor principle, so moderate inflation during the period may be partly a consequence of a favorable macroeconomic environment, rather than active policy.
    Keywords: Taylor Rule, New Keynesian, Monetary Policy, Interest Rate Rules, Small Open Economy
    JEL: E52 E58
    Date: 2009–01
  4. By: Beyer, Andreas; Gaspar, Vítor; Gerberding, Christina; Issing, Otmar
    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 policymakers at the time.
    Keywords: Inflation, Price Stability, Monetary Policy, Monetary Targeting, Policy Rules
    JEL: E31 E32 E41 E52 E58
    Date: 2009
  5. By: Dai, Meixing; Sidiropoulos, Moïse
    Abstract: In a two-period model with distortionay tax and public investment, we reexamine the interaction between monetary policy transparency and fiscal bias. We find that the optimal decisions of tax and public investment allow eliminating the effects of fiscal bias and hence neutralizing the impact of monetary policy opacity (lack of political transparency) on the level and variability of inflation and output, independently of institutional quality. Our results are robust under alternative game structures between the private sector, the government and the central bank.
    Keywords: bank transparency; distortionay tax; public investment; fiscal bias
    JEL: E62 E58 E52 E63
    Date: 2009–06
  6. By: Glenn Otto (School of Economics, University of New South Wales); Graham Voss (Department of Economics, University of Victoria)
    Abstract: We examine whether models of inflation forecast targeting are consistent with the observed behaviour of the central banks of Australia, Canada, and the United States. The target criteria from these models restrict the conditionally expected paths of variables targeted by the central bank, in particular inflation and the output gap. We estimate various moment conditions, providing a description of monetary policy for each central bank under different maintained hypotheses. We then test whether these estimated conditions satisfy the predictions of models of optimal monetary policy. The overall objective is to examine the extent to which and the manner in which these central banks successfully balance inflation and output objectives over the near term. For all three countries, we obtain reasonable estimates for both the strict and flexible inflation forecast targeting models, though with some qualifications. Most notably, for Australia and the United States there are predictable deviations from forecasted targets, which is not consistent with models of inflation targeting. In contrast, the results for Canada lend considerable support to simple models of flexible inflation forecast targeting.
    Keywords: Monetary policy, inflation, inflation targeting, central banks
    JEL: E31 E58
    Date: 2009–06–16
  7. By: Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España)
    Abstract: We develop a dynamic factor model to compute short term forecasts of the Spanish GDP growth in real time. With this model, we compute a business cycle index which works well as an indicator of the business cycle conditions in Spain. To examine its real time forecasting accuracy, we use real-time data vintages from 2008.02 through 2009.01. We conclude that the model exhibits good forecasting performance in anticipating the recent and sudden downturn.
    Keywords: Business Cycles, Output Growth, Time Series
    JEL: E32 C22 E27
    Date: 2009–06
  8. By: Michael Sturm (European Central Bank, Directorate General International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); François Gurtner (European Central Bank, Directorate General International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Juan Gonzalez Alegre (Universidad Pablo de Olavide, Economics Department, Seville, Spain.)
    Abstract: Fiscal policy choices have a particularly significant impact on economic performance in oil-exporting countries, owing to the importance of the oil sector in the economy and the fact that in most countries oil revenues accrue to the government. At the same time, fiscal policy in oil-centred economies s facing specific challenges, both in the long run, as regards intergenerational equity and fiscal sustainability, and in the short run, as regards macroeconomic stabilisation and fiscal planning. Institutional responses to the specific fiscal challenges in oil-exporting countries involve conservative oil price assumptions in the budget, the establishment of oil stabilisation and savings funds and fiscal rules. Fiscal policy in most oil-exporting countries has been expansionary over the past years in the wake of high oil prices. Fiscal expansion has added to inflationary pressure, and monetary policy has been constrained in tackling inflation as a result of prevailing exchange rate regimes. While, in this context, fiscal policy is the major tool for macroeconomic stabilisation, it has faced competing objectives and considerations. Cyclical considerations would have warranted fiscal restraint, but, in times of high oil prices, pressures to increase public spending have been mounting. Such pressures stem from primarily distribution-related considerations, development-related spending needs (e.g. in the areas of physical and social infrastructure) and international considerations in the context of, for example, global imbalances. The sharp fall in oil prices since mid-2008 has brought to the fore a different question – whether oil exporters can sustain spending levels reached in previous years. JEL Classification: E62, E63, H30, H60, Q32, Q38.
    Keywords: Fiscal policy, oil-exporting countries, inflation, global imbalances.
    Date: 2009–06
  9. By: Md. Akhtaruzzaman
    Abstract: The study uses co-integration and vector auto-regression (VAR) techniques to identify the determinants of income velocity of money (VM) in Bangladesh, covering both narrow and broad money. The study observes that financial development affects VM negatively. The VAR estimates show that two variables, real GDP growth and financial development, jointly account for around half of the variance of speed of VM for both M1 and M2. The results show that it is important for the monetary authorities to take into account both stages of economic and financial development in forecasting VM for designing effective monetary policy in Bangladesh.[PAU WP no.0806]
    Keywords: velocity of narrow and broad money; safe limit to monetary expansion; financial development; inflation expectation; Cambridge equation of exchange; money multiplier; rate of monetization; co-integration; unit root test; VAR; forecast error variance.
    Date: 2009
  10. By: Maarten Dossche (National Bank of Belgium, Research Department; Ghent University)
    Abstract: I summarize recent progress made in the literature on inflation dynamics. This has been a very productive area of research due to the development of the so-called New Keynesian model and the availability of new macroeconomic and microeconomic evidence. Nevertheless, a number of problems still subsist. In particular the importance of temporary price markdowns to inflation dynamics and the characteristics of the information set price-setters use for their price adjustment decision currently constitute unresolved issues
    Keywords: Inflation dynamics, New Keynesian model, sticky prices
    JEL: E30 E50 E60
    Date: 2009–06
  11. By: Hung-Ju Chen (Department of Economics, National Taiwan University); Jang-Ting Guo (Department of Economics, University of California Riverside)
    Abstract: Motivated by the substantial increase of nominal money supply in the U.S. economy since late 2008, this paper examines the equilibrium growth effect of money/inflation within a standard one-sector AK model of endogenous growth with wealth-enhanced preferences for social status and the most generalized cash-in-advance constraint. We show that the sign for the correlation between money and output growth depends crucially on (i) the liquidity-constrained ratio of consumption to investment, and (ii) how the shadow price of physical capital responds to a change in the monetary growth rate. This money-growth correlation, as well as the growth effect of social status, turns out to be closely related to the local stability properties of the economy's balanced growth path(s).
    Keywords: Money, Endogenous Growth, Cash-in-Advance Constraint, Social Status, In- determinacy
    JEL: E52 O42
    Date: 2009–06
  12. By: Yuki Teranishi (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
    Keywords: Credit spread, optimal monetary policy
    JEL: E44 E52
    Date: 2009–06
  13. By: John Geanakoplos (Cowles Foundation, Yale University); Ioannis Karatzas (Columbia University and INTECH); Martin Shubik (Cowles Foundation, Yale University); William D. Sudderth (University of Minnesota)
    Abstract: We argue that even when macroeconomic variables are constant, underlying microeconomic uncertainty and borrowing constraints generate inflation. We study stochastic economies with fiat money, a central bank, one nondurable commodity, countably many time periods, and a continuum of agents. The aggregate amount of the commodity remains constant, but the endowments of individual agents fluctuate "independently" in a random fashion from period to period. Agents hold money and, prior to bidding in the commodity market each period, can either borrow from or deposit in a central bank at a fixed rate of interest. If the interest rate is strictly positive, then typically there will not exist an equilibrium with a stationary wealth distribution and a fixed price for the commodity. Consequently, we investigate stationary equilibria with inflation, in which aggregate wealth and prices rise deterministically and at the same rate. Such an equilibrium does exist under appropriate bounds on the interest rate set by the central bank and on the amount of borrowing by the agents. If there is no uncertainty, or if the stationary strategies of the agents select actions in the interior of their action sets in equilibrium, then the classical Fisher equation for the rate of inflation continues to hold and the real rate of interest is equal to the common discount rate of the agents. However, with genuine uncertainty in the endowments and with convex marginal utilities, no interior equilibrium can exist. The equilibrium inflation must then be higher than that predicted by the Fisher equation, and the equilibrium real rate of interest underestimates the discount rate of the agents.
    Keywords: Inflation, Economic equilibrium and dynamics, Dynamic programming, Consumption
    JEL: D5 D8 E31 E58
    Date: 2009–06
  14. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Beatriz de Blas (Universidad Autonoma de Madrid, Departamento de Analisis Economico); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France)
    Abstract: In this paper we study jointly optimal ¯scal and monetary policies in a small open economy framework with capital and sticky prices. We consider the case of distor- tionary taxes on labor and capital, and no public debt. As in a closed economy set{up, in the steady state, the optimal in°ation rate is zero, as well as the optimal tax on capital. The dynamic properties of optimal monetary and ¯scal policies in an open economy are qualitatively the same as those of a closed economy: the tax rate on capital income remains constant over the cycle, while both the nominal interest rate and the tax rate on labor income move although very smoothly, respectively to minimize the distortions implied by nominal rigidities and balance the budget.
    Keywords: small open economy, sticky prices, optimal monetary and ¯scal policies
    JEL: E52 E62 E63 F41
    Date: 2009–06–15
  15. By: Rangan Gupta (University of Pretoria); Marius Jurgilas (Bank of England); Alain Kabundi (University of Johannesburg); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: Our paper considers this channel whereby monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model that incorporates 143 monthly macroeconomic variables over the period of 1986:01 to 2003:12, including 21 variables relating to the housing sector at the national and four census regions. We find at the national level that housing starts, housing permits, and housing sales fall in response to the tightening of monetary policy. Housing sales reacts more quickly and sharply than starts and permits and exhibits more duration. Housing prices show the weakest response to the monetary policy shock. At the regional level, we conclude that the housing sector in the South drives the national data. The responses in the West differ the most from the other regions, especially for the impulse responses of housing starts and permits.
    Keywords: Monetary policy, Housing sector dynamics, Large-Scale BVAR models
    JEL: C32 R31
    Date: 2009–06
  16. By: Naghshineh-Pour, Amir
    Abstract: Iran has had many self-imposed economic crises. Many of which relate to the poorly managed banking system as well as flawed monetary and fiscal policy. Inefficiency of the banking-monetary system in Iran is a well known fact. A complete overhaul of the current system should be one of the essential priorities of any economic reformation and development. The banking-monetary system of any country has a key role in its economic efficiency and strength, price stability, production, and economic growth. The main functions of a banking-monetary system are to provide fiscal resources, to prepare ground for optimal allocation of capital in the economy, to distribute the wealth in the best possible way, and to ease economic development. This is particularly important in Iran because capital markets are underdeveloped.
    Keywords: Iran; Banking; Monetary Policy; Fiscal Policy
    JEL: F00 H0
    Date: 2009–06
  17. By: Fritz Breuss (WIFO)
    Abstract: Inspired by Dornbusch's model of exchange rate overshooting we develop a theory of stock market behaviour. The idea is that stock market prices overshoot and undershoot their long-run equilibrium values which are determined by the development in the real economy. The overshooting is fuelled primarily by a loose monetary policy. The simple macro model consists of three markets – the money market, the stock market and the goods market – interacting with different speeds of adjustment. The goods market slowly adjusts relative to the money and the asset market. This model can explain some of the major features of the global financial crisis, having its origin in the loose monetary policy in the USA and spreading its recession-plagued effects all over to the world economy. The model focuses primarily on the monetary interpretation of the present crisis leaving aside the complex interactions of the real estate bubble in the USA, followed by the innovation of new financial instruments which were sold all over the world, hoping to disperse the risks involved with it. Nor does this model deal with the institutional aspects of the financial crisis (the failed behaviour of banks, the banking crises, unregulated financial markets, etc.). These are questions of better international regulation of the financial industry touched upon by the G-20 summit in London.
    Keywords: Financial Crisis, Open Economy Macroeconomics, Stock Markets, Business Cycles
    Date: 2009–04–27
  18. By: Jahan-Parvar, Mohammad R.; Liu, Xuan; Rothman, Philip
    Abstract: This is the first paper in the literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing three modications to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the intertemporal marginal rate of substitution; (2) investment adjustment costs are assumed to make equity returns more volatile; and (3) GHH preferences are employed to smooth consumption. We also decompose the contributions of productivity, the world interest rate, and government expenditure shocks to the equity premium. Our results are based on data from Argentina, Brazil, and Chile.
    Keywords: Asset Pricing; Equity Returns; Dynamic Stochastic General Equilibrium Model; Real Business Cycle; Small Open Economy.
    JEL: G12 E32 G15 E44 F41
    Date: 2009–06–25
  19. By: Janiak, Alexandre (University of Chile and IZA); Monteiro, Paulo Santos (University of Warwick)
    Abstract: We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual infiation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous : it is responsible for about one half of the welfare cost of inflation.
    Date: 2009
  20. By: Fredrik Wulfsberg (Norges Bank (Central Bank of Norway))
    Abstract: I document price adjustments in both high and low inflation years from 14 milllion monthly price observations of 1,133 goods and services. The variation in the frequency of price changes explains all the variation in the inflation rate. On average, prices increase more often when inflation is high, and decrease more often when inflation is low. There is also substantial variation both in the duration and size of price changes within and between items.
    Keywords: Consumer prices, price rigidity
    JEL: E31 D40 C2
    Date: 2009–06–24
  21. By: Y V Reddy
    Abstract: The author has given practitioner’s perspective of fiscal policy, and economic reforms. Despite considerable improvement in the fiscal scenario, both at the centre and in the states, India’s combined fiscal deficit (centre and state), as a percentage of GDP, still continues to be one of the highest in the world. It is noteworthy that most of the risky elements were present in the Indian economy for several years, almost all through the reform period, and yet the economy exhibited macro-stability and impressive growth even while withstanding some significant domestic and global shocks. In view of this evidence, the author finds the need to explore the reasons for such risks not de-stabilising our economy so far; and the measures that are needed, in future, for insulating the economy from such destabilising effects, to the extent feasible.[NIPFP WP NO 2008 / 53]
    Keywords: RBI; Fiscal reforms; economic policy; Fiscal and Monetary Management; Fiscal and Financial Markets; Fiscal and the External Sector
    Date: 2009
  22. By: Gregory, DE WALQUE; Olivier, PIERRARD; Abdelaziz, ROUABAH
    Abstract: We develop a dynamic stochastic general equilibrium model with an heterogeneous banking sector. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the interactions between the banking sector and the rest of the economy, as well as the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real US data and used for simulations. We show that Based regulation reduces the steady state but improves the resilience of the economy to shocks, and that moving from Basel I to Basel II is procyclical. We also show that liquidity injections relieve financial instability but have ambiguous effects on output fluctuations
    Keywords: DGSE; Banking sector; Default risk; Supervision; Central Bank
    JEL: E13 E20 G21 G28
    Date: 2009–02–05
  23. By: Bharat Trehan
    Abstract: This paper uses data from surveys of expected inflation to learn how the expectations formation processes of households and professionals have changed following a change in the inflation process in the early part of this decade. Households do not appear to have recognized the change in the process, and are placing substantially more weight than appears warranted on recent inflation data when forming expectations about inflation over the next year. Professional forecasters do appear to have changed how they predict inflation in recent years, in a way that appears consistent, at first, with the finding that the ‘core’ inflation process has not changed as much as the ‘headline’ inflation process has. But the professionals appear to be placing too much weight on lagged core inflation data, and over recent sample periods professional forecasts of headline CPI inflation are noticeably worse than the alternatives. Some other evidence is consistent with the hypothesis that they are now focusing on the core CPI.
    Keywords: Inflation (Finance)
    Date: 2009
  24. By: Bertrand Gruss; Karel Mertens
    Abstract: We estimate regime switching models for emerging market interest rates and embed the obtained nonlinear dynamics in a small open economy model with a financial friction. We show that the presence of an infrequent regime characterized by high level/high volatility of interest rates and the tightening of financial constraints is key to account for the empirical regularities specific to emerging markets, including the high volatility of consumption relative to output and a strongly countercyclical trade balance-to-output ratio. The model accounts for the dynamics of sudden stops and matches the autocorrelation function of the trade balance-to-output ratio as well as the cross-correlations between the main macroeconomic aggregates and interest rates. Our findings suggest that interest rate shocks and financial frictions are essential for explaining emerging market fluctuations, but mostly because of their effects in crisis episodes.
    Keywords: regime switching model, peso problem, sudden stops, small open economy
    JEL: E32 F32 F41
    Date: 2009
  25. By: Lennart Hoogerheide; Richard Kleijn; Francesco Ravazzolo; Herman K. van Dijk; Marno Verbeek (Econometric and Tinbergen Institutes, Erasmus University Rotterdam; PGGM, Zeist; Norges Bank; Econometric and Tinbergen Institutes, Erasmus University Rotterdam; Rotterdam School of Management, Erasmus University Rotterdam)
    Abstract: Several Bayesian model combination schemes, including some novel approaches that simultaneously allow for parameter uncertainty, model uncertainty and robust time varying model weights, are compared in terms of forecast accuracy and economic gains using ¯nancial and macroeconomic time series. The results indicate that the proposed time varying model weight schemes outperform other combination schemes in terms of predictive and economic gains. In an empirical application using returns on the S&P 500 index, time varying model weights provide improved forecasts with substantial economic gains in an investment strategy including transaction costs. Another empirical example refers to forecasting US economic growth over the business cycle. It suggests that time varying combination schemes may be very useful in business cycle analysis and forecasting, as these may provide an early indicator for recessions.
    Keywords: Forecast combination, Bayesian model averaging, time varying model weights, portfolio optimization, business cycle
    Date: 2009–06–23
  26. By: Cette, G.; De Jong, M.
    Abstract: The correlation matrix between break-even inflation rate movements and real interest rate movements across several countries shows puzzling features. Correlation is significantly positive for nearly all cross-border pairs whereas it is nil, positive or negative unsystematically within countries. By means of a correlation matrix decomposition, we provide an explanation for this puzzle.
    Keywords: Inflation-linked bonds ; Break-even inflation rates
    JEL: E43 G15
    Date: 2009
  27. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper examines whether recessions and booms are forecastable under the assumption that equity prices, housing prices, import prices, exports, and random shocks are not. Each of the 214 eight-quarter periods within the overall 1954:1--2009:1 period is examined regarding predictions of output growth and inflation. The results for low output growth vary by recession -- there is no common pattern. Of the eight recessions, three are forecast well. For four of the five that are not, the main reason for each is not knowing: 1) the random shocks, 2) import prices and equity prices, 3) exports, and 4) exports and equity prices. For the fifth -- the last one -- all five components are large contributors, including housing prices: a perfect storm.
    Keywords: Macroeconomic forecasting, Recessions, Booms
    JEL: E17
    Date: 2009–06
  28. By: José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain); Rafa Doménech (BBVA Economic Research Department, Spain)
    Abstract: This paper analyses the effects of introducing typical Keynesian features, namely rule-of-thumb consumers and consumption habits, into a standard labour market search model. It is a well-known fact that labour market matching with Nash-wage bargaining improves the ability of the standard real business cycle model to replicate some of the cyclical properties featuring the labour market. However, when habits and rule-of-thumb consumers are taken into account, the labour market search model gains extra power to reproduce some of the stylised facts characterising the US labour market, as well as other business cycle facts concerning aggregate consumption and investment behaviour.
    Keywords: general equilibrium, labour market search, habits, rule-of-tumb consumers
    JEL: E24 E32 E62
    Date: 2009–06
  29. By: Bezemer, Dirk J
    Abstract: This study in recent history connects macroeconomic performance to financial policies in order to explain the decline in volatility of economic growth in the US since the mid-1980s, which is also known as the ‘Great Moderation’. Existing explanations attribute this to a combination of good policies, good environment, and good luck. This paper hypothesizes that before and during the Great Moderation, changes in the structure and regulation of US financial markets caused a redirection of credit flows, increasing the share of mortgage credit in total credit flows and facilitating the smoothing of volatility in GDP via equity withdrawal and a wealth effect on consumption. Institutional and econometric analysis is employed to assess these hypotheses. This yields substantial corroboration, lending support to a novel ‘policy’ explanation of the Moderation.
    Keywords: real estate; macro volatility
    JEL: E44 G21
    Date: 2009–05
  30. By: Andreas Schabert; Markus Hörmann
    Abstract: Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard NewKeynesian model,we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing:The minimum state variable solution and an autoregessive solution under a peg can lead to lower welfare losses than the unique solution under an active interest rate rule. Given that a peg is usually blamed to facilitate endogenous fluctuations, we further show that a peg can be implemented in a way that ensures equilibrium determinacy.
    Keywords: Interest rate rules, welfare losses, equilibrium determinacy, fundamental solutions
    JEL: E52 E51 E32
    Date: 2009–06
  31. By: Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
    Abstract: This paper examines the interactions between money, consumer prices and commodity prices at a global level from 1970 to 2008. Using aggregated data for major OECD countries and a cointegrating VAR framework, we are able to establish long run and short run relationships among these variables while the process is mainly driven by global liquidity. According to our empirical findings, different price elasticities in commodity and consumer goods markets can explain the recently observed overshooting of commodity over consumer prices. Although the sample period is rather long, recursive tests corroborate that our CVAR fits the data very well.
    Keywords: Commodity prices, cointegration, CVAR analysis, global liquidity, inflation, international spillovers
    JEL: E31 E52 C32 F42
    Date: 2009
  32. By: Gorodnichenko, Yuriy (University of California, Berkeley); Sabirianova Peter, Klara (Georgia State University); Stolyarov, Dmitriy (University of Michigan)
    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.
    Keywords: inequality, income, consumption, transition, Russia
    JEL: E20 J30 I30 O15 P20
    Date: 2009–06
  33. By: Willem H. Buiter
    Abstract: The paper considers three methods for eliminating the zero lower bound on nominal interest rates and thus for restoring symmetry to domain over which the central bank can vary its policy rate. They are: (1) abolishing currency (which would also be a useful crime-fighting measure); (2) paying negative interest on currency by taxing currency; and (3) decoupling the numéraire from the currency/medium of exchange/means of payment and introducing an exchange rate between the numéraire and the currency which can be set to achieve a forward discount (expected depreciation) of the currency vis-a-vis the numéraire when the nominal interest rate in terms of the numéraire is set at a negative level for monetary policy purposes.
    JEL: E31 E4 E41 E42 E43 E44 E5 E52 E58
    Date: 2009–06
  34. By: Paul Beaudry; Amartya Lahiri
    Abstract: In this paper we discuss how several macroeconomic features of the 2001-2009 period may have resulted from a process in which financial markets were trying to allocate risk between heterogeneous agents when productive investment opportunities are scarce. We begin by showing how heterogeneity in terms of risk tolerance can cause financial markets to propagate transitory shocks and induce higher output volatility, albeit with a higher mean. We then show how this simple heterogeneous agent framework can explain an expansion driven by the growth in consumer debt, and why the equilibrium path of such an economy is likely fragile. In particular, we demonstrate that the emergence of a small amount of asymmetric information can make the economy susceptible to changes in expectations that can induce large reversals of financial flows, the freezing of assets and a recession that can persist despite high productivity.
    JEL: E3 E4
    Date: 2009–06
  35. By: Philippe Aghion; David Hemous; Enisse Kharroubi
    Abstract: This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long-term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing firms' market size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long-term projects, and the more so in sectors that rely more on external financing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical fiscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external finance or lower asset tangibility.
    JEL: E32 E62
    Date: 2009–06
  36. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Giorgio, FABBRI; Fausto, GOZZI
    Abstract: A benchmark AK optimal growth model with maintenance expenditures and endogeneous utilization of capital is considered within an explicit vintage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expenditures. Among other findings, a closed-form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in contrast to the pre-existing literature, we study investment and maintenance co-movements without any postulated ad-hoc depreciation function. In particular, we find that optimal investment and maintenance do move together in the short-run in response to neutral technological shocks, which seems to be more consistent with the data
    Keywords: Maintenance; investment; optimal control; dynamic programming; infinite dimensional problem
    JEL: E22 E32 O40
    Date: 2009–04–18
  37. By: James Feyrer; Jay C. Shambaugh
    Abstract: This paper examines the effect of exogenous shocks to savings on world capital markets. Using the exogenous shocks to US tax policy identified by Romer & Romer, we trace the impact of an exogenous shock to savings through the income accounting identities of the US and the rest of the world. We find that exogenous tax increases are only partially offset by changes in private savings (Ricardian equivalence is not complete). We also find that only a small amount of the resulting change in US saving is absorbed by increased domestic investment (contrary to Feldstein & Horioka). Almost half of the fiscal shock is transmitted abroad as an increase in the US current account. Positive shocks to US savings generate current account deficits and increases in investment in other countries in the world. We cannot reject that the shock is uniformly transmitted across countries with different currency regimes and different levels of development. The results suggest highly integrated world capital markets with rapid adjustment. In short we find that the US acts like a large open economy and the world acts like a closed economy.
    JEL: E2 E21 E22 F15 F32 F36 F41 F42
    Date: 2009–06
  38. By: Sandra Svakjek (The Institute of Economics, Zagreb); Maruska Vizek (The Institute of Economics, Zagreb); Andrea Mervar (The Institute of Economics, Zagreb)
    Abstract: Cyclically adjusted government budget balance has often been used in the evaluation of fiscal stance. It indicates how much room fiscal authorities have to act anticyclically. The main idea is to separate temporary (cyclical) effects on the budget from those caused by discretionary measures of fiscal authorities. In this paper, after reviewing the concept, its applications and various methodological approaches, the size of cyclically adjusted budget balance is estimated in the case of Croatia for the period 1995:1q-2008:3q. Thereby, the ECB methodology is implemented and it is assumed that cyclically sensitive budget elements include income tax, profit tax, VAT, excise duties, social security contributions and unemployment benefits. The elasticities of cyclically sensitive budget components, with respect to their macroeconomic bases, are calculated with an error-correction model. The results of the exercise indicate that both periods of pro- and anticyclical fiscal policies have been present in the analyzed period with the restrictive and procyclical policy prevailing in the recent years.
    Keywords: fiscal policy, government budget, cyclical adjustment, Croatia
    JEL: E32 E60 E62
  39. By: Azariadis, Costas; Kaas, Leo
    Abstract: We propose a sectoral-shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki-Moore (1997), and also as unsecured reputational loans suggested in Bulow-Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk-adjusted equity yields across sectors. Economy-wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two-state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral.
    Keywords: TFP; misallocation; sectoral shocks; collateral; reputation
    JEL: E32 O47 D90
    Date: 2009–06–15
  40. By: Fabrizio Carmignani; Emilio Colombo; Patrizio Tirelli (School of Economics, The University of Queensland)
    Abstract: We present an empirical model where output growth volatility and government expenditure are jointly endogenous and both are affected by policies and institutions. We ¯nd that output volatility increases government expenditure, but higher expenditure, causes greater out-put volatility. This suggests that discretionary government intervention is destabilising. Trade openness drives both higher expenditure and greater output volatility. Financial openness instead disciplines the size of government. Political institutions that strengthen policymaker's ac-countability towards the electorate result in lower expenditure and, in-directly, contribute to output stabilisation. Institutional arrangements concerning the central bank are not neutral: a more independent centralbank calls for lower output volatility.
    Date: 2009
  41. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Ali M. Kutan (Southern Illinois University Edwardsville and the William Davidson Institute, Michigan); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: We examine the effects of federal funds target rate changes and all types of FOMC communication on European and Pacific equity market returns using a GARCH model. We show that both types of news have a significant statistical and economic impact, but that the effects are not symmetric: target rate changes exert a larger influence, although several communication variables are statistically significant. Third, Pacific markets react more strongly than do European markets to FOMC news, whereas the latter are influenced by a greater variety of communications.
    Keywords: Central Bank Communication, International Equity Markets, Federal Reserve Bank, U.S. Monetary Policy
    JEL: E52 G14 G15
    Date: 2009
  42. By: Nanes, Ovidiu (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The term money laundering comes from the alcohol prohibition in the U.S. when, in the 1920s, acquaintances groups Mafia leaders in Chicago, in particular, have opened public laundries, and to hide and blend funds with money from legitimate trade alcohol and other criminal activities. Although the term money laundering occurred in the twentieth century, the phenomenon has existed many centuries before: in some antique dealers hiding their wealth from more or less honest, investing them in other provinces or states, where they were not asked how they obtained, the medieval era, when usury was condemned by the Catholic Church, is considered capital murder and sin, all merchants and their camatarii mask interest on loans granted by various techniques, and the amounts obtained were invested in the business carried on.
    Keywords: money laundering; economic delinquency
    JEL: E52 H87
    Date: 2009–06–16
  43. By: Bezemer, Dirk J
    Abstract: The aim of this paper is to explore the link between credit and output in the context of a developed transition economy. Salient credit market features of these economies are (i) credit market imperfections leading to constraints on growth and (ii) the rapidly growing importance during transition of their financial sectors (the insurance, pension funds and real estate sectors). We develop a framework of credit and output including separate measures for credit to the real sector and financial sectors and for credit constraints, taking account of the role of trade credit. In our empirical work we focus on the Czech Republic because of the level of its financial development and data quality. In VAR and ARIMA analyses we find that our disaggregated measures for credit flows are better predictors of nominal growth than traditional, aggregate measures.
    Keywords: Credit; growth; transition; central Europe; Czech Republic
    JEL: E44
    Date: 2009–05
  44. By: Césaire A. Meh; Yaz Terajima; David Xiao Chen; Tom Carter
    Abstract: The authors use microdata from the 1999 and 2005 Surveys of Financial Security to identify changes in household debt, and discuss their potential implications for monetary policy and financial stability. They document an increase in the debt-income ratio, which rose from 0.75 to 0.95, on average. Rising debt ratios were driven by a 50 per cent increase in mortgage balances among the middle-aged, a doubling of credit card debt among households over 55, and a fourfold increase in home equity lines of credit among small business owners and households without high school diplomas. The authors identify rising debt-income ratios among households in the bottom income quintile as the most important development of the years 1999 through 2005, signalling greater sensitivity to rising interest rates or negative income shocks -- particularly among income-poor homeowners, whose 2005 mortgage obligations totalled 72 per cent of income. Meanwhile, an increase in the portfolio share for which real estate accounts, particularly among the middleaged, suggests that household balance sheets have become more sensitive to changes in the housing market. In addition to poor households, the authors identify former bankrupts, younger households, and the self-employed as more indebted and hence at greater risk.
    Keywords: Credit and credit aggregates; Sectoral balance sheet; Productivity; Financial stability
    JEL: E21 E24
    Date: 2009
  45. By: H. N. Thenuwara
    Abstract: At this moment, the world is undergoing the worst economic crisis since the Great Depression of 1930s. It is not clear exactly which factors instigated the crisis, but there are many candidates; the formation of an asset bubble in the US, and its subsequent crash, continued excessive consumption in the US, irresponsible lending and borrowing, non-recognition of risks in some asset classes, productivity slowdown, debt default, regulatory inaction, and some policy mistakes. The purpose of this paper is to evaluate the current economic and financial crisis, examine global responses and document lessons. [Central Bank of Srilanka]
    Keywords: Crises; economic crisis; debt; productivity; financial crisis; Latin American Crises; Japanese Crisis; Crisis in Europe; East Asian Crisis; Global Fiscal Policy Response; Global Regulatory Response; recovery
    Date: 2009
  46. By: Michael W. L. Elsby; Matthew D. Shapiro
    Abstract: This paper emphasizes the role of wage growth in shaping work incentives. It provides an analytical framework for labor supply in the presence of a return to labor market experience and aggregate productivity growth. A key finding of the theory is that there is an interaction between these two forms of wage growth that explains why aggregate productivity growth can affect employment rates in steady state. The model thus speaks to an enduring puzzle in macroeconomics by uncovering a channel from the declines in trend aggregate wage growth that accompanied the productivity slowdown of the 1970s to persistent declines in employment. The paper also shows that the return to experience for high school dropouts has fallen substantially since the 1970s, which further contributes to the secular decline in employment rates. Taken together, the mechanisms identified in the paper can account for all of the increase in nonemployment among white male high school dropouts from 1968 to 2006. For all white males, it accounts for approximately one half of the increase in the aggregate nonemployment rate over the same period.
    JEL: E24 J2 J3
    Date: 2009–06
  47. By: Cecilia Frale; Massimiliano Marcellino; Gian Luigi Mazzi; Tommaso Proietti
    Abstract: In this paper we propose a monthly measure for the euro area Gross Domestic Product (GDP) based on a small scale factor model for mixed frequency data, featuring two factors: the first is driven by hard data, whereas the second captures the contribution of survey variables as coincident indicators. Within this framework we evaluate both the in-sample contribution of the second survey-based factor, and the short term forecasting performance of the model in a pseudo-real time experiment. We find that the survey-based factor plays a significant role for two components of GDP: Industrial Value Added and Exports. Moreover, the two factor model outperforms in terms of out of sample forecasting accuracy the traditional autoregressive distributed lags (ADL) specifications and the single factor model, with few exceptions for Exports and in growth rates.
    Keywords: Survey data, Temporal Disaggregation. Multivariate State Space Models. Dynamic factor Models. Kalman filter and smoother. Chain-linking
    JEL: E32 E37 C53
    Date: 2009
  48. By: Bezemer, Dirk J
    Abstract: This paper probes the role of banks and credit in our socio-economic system using the metaphor of banks as social accountants (Stiglitz and Weiss 1988). It highlights the credit nature of money, and thus the fact that money is an accounting construct. This motivates the viewing of financial booms and crises through an accounting lens. By accounting necessity, credit creation in deposit-taking institutions implies debt creation. The analysis is that self-amortizing credit to the real sector grows apace with the size of the economy while credit to financial asset markets creates a net debt overhead on the real economy, as illustrated by dissection of long-term credit flows in the US economy. The long boom in credit to the financial sector so led to the growth of debt since the 1980s and onto the credit crisis. Turning to the behavioral aspects of credit and debt growth, the paper also discusses the role of banks and regulators in facilitating the boom. It identifies three ways in which debt growth was de-emphasized in monitoring and policy making.
    Keywords: credit; economic history; banks; accounting; crisis; regulation
    JEL: E42 E58 E65 E52 E44 G21
    Date: 2009–06–13
  49. By: Mason Gaffney (Department of Economics, University of California Riverside)
    Abstract: Construction is not the best use of capital when the objective is to make jobs, and loanable funds are scarce. Construction is more capital-intensive than labor-intensive. In addition, we presently have a glut of finished but unused buildings, the result of years of fiscal bias that has diverted investors from working capital to construction. Lenders have also been diverted by the use of soaring and volatile land values as collateral. The solution is to reverse the fiscal biases, which are identified, and apply selective credit controls to lenders, keeping them away from depending on real estate collateral.
    JEL: E22 H20
    Date: 2009–01
  50. By: Colin Busby (C.D. Howe Institute); Alexandre Laurin (C.D. Howe Institute)
    Abstract: While the public debate over reforms to Employment Insurance centres on regional fairness in eligibility requirements, it is critical that the EI program remain affordable in good times and bad. To avoid pro-cyclical EI premium decreases during booms and harmful premium increases during downturns, the challenge is to create a rate-setting mechanism that would balance the books over the ebbs and flows of economic cycles, and permit yearly EI account balances to vary. Ottawa also needs to introduce reforms that insulate the EI fund’s management from political interference – and protect that fund from governments that would dip into EI surpluses for general spending. One model is the Canada Pension Plan Investment Board.
    Keywords: employment insurance reform
    JEL: E24 J65 J68
    Date: 2009–06
  51. By: Arpaia, Alfonso; Pérez, Esther; Pichelmann, Karl
    Abstract: This paper seeks to understand labour share dynamics in Europe over the medium run. After documenting basic empirical regularities, we quantify the contribution of shifts in the sectoral and the employment composition of the economy to labour share movements. The findings from the shift-share analysis being on the descriptive side, we next identify the factors underlying labour share behaviour through a model-based approach. We proceed along the lines of Bentolila and Saint Paul (2003) but adopt a production function with capital-skill complementarity. We show that labour share movements are driven by a complex interplay of demand and supply conditions for capital and different skill categories of labour, the nature of technological progress and imperfect market structures. Based upon robust calibration, we show that most of the declining pattern in labour shares in nine EU15 Member States is governed by capital deepening in conjunction with capitalaugmenting technical progress and labour substitution across skill categories. Although institutional factors also play a significant role, they appear to be of somewhat less importance. To illustrate the relevance of the technological explanation we quantitatively assess the dynamic impact of a permanent reduction in the fraction of unskilled employment on the labour share. We find that, for a given elasticity of substitution between skilled and unskilled labour, the more skilled labour is complementary to capital, the more pronounced the decline in the labour share.
    Keywords: labour income share; medium term; two-level CES technology; labour market institutions.
    JEL: E25 J30
    Date: 2009–05–12
  52. By: Gallipoli, Giovanni; Turner, Laura
    Abstract: What are idiosyncratic shocks and how do people respond to them? This paper starts from the observation that idiosyncratic shocks are experienced at the individual level, but responses to shocks can encompass the whole household. Understanding and accurately modeling these responses is essential to the analysis of intra-household allocations, especially labour supply. Using longitudinal data from the Canadian Survey of Labour and Income Dynamics (SLID) we exploit information about disability and health status to develop a life-cycle framework which rationalizes observed responses of household members to idiosyncratic shocks. Two puzzling findings associated to disability onset motivate our work: (1) the almost complete absence of ‘added worker’ effects within households and, (2) the fact that single agents’ labour supply responses to disability shocks are larger and more persistent than those of married agents. We show that a first-pass, basic model of the household has predictions about dynamic labour supply responses which are at odds with these facts; despite such failure, we argue that these facts are consistent with optimal household behaviour when we account for two simple mechanisms: the first mechanism relates to selection into and out of marriage, while the second hinges on insurance transfers taking place within households. We show that these mechanisms arise naturally when we allow for three features: a linkage between human capital accumulation and life-cycle labour supply, endogenous marriage contracts and the possibility of time transfers between partners. We also report evidence that the extended model with endogenous marriage contracts can fit divorce patterns observed in Canadian data, as well as correlations between disability prevalence and marital status, providing an ideal framework to study intra-household risk-sharing with limited commitment.
    Keywords: Idiosyncratic Risk, Disability, Household Behaviour, Marriage, Insurance
    JEL: E20 I10 H31 J12
    Date: 2009–06–22
  53. By: Cagri Seda Kumru (School of Economics, University of New South Wales); Chung Tran (School of Economics, University of New South Wales)
    Abstract: We investigate welfare and aggregate implications of a pay as you go (PAYG) social security system in a dynastic framework in which agents have self-control problems. The presence of these two additional factors at the same time affects individuals’ intertemporal decision problems in two opposite directions. That is, on the one hand individuals prefer to save more because of their altruistic concerns, on the other hand, they prefer to save less because of their urge for temptation towards current consumption. Individuals’ efforts to balance between the long-term commitment (consumption smoothing and altruism) and the short-term urge for temptation result in self-control costs. In this environment the existence of social security system provides not only consumption smoothing and risk sharing mechanisms but also a channel that reduces the severity of temptation. We find that the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporates altruism and self control issues separately.
    Keywords: Temptation; Self-control preferences; Altruism; Social security; Dynamic general equilibrium; Overlapping generations; Welfare
    JEL: E21 E62 H55
    Date: 2009–06
  54. By: Barnett, Richard C; Bhattacharya, Joydeep; Puhakka, Mikko
    Abstract: There is a large body of evidence supporting the notion that a) those who grow up to be patient (forward-looking) do better in life compared to those who do not, and b) parents can inculcate the virtue of delayed gratification in their children by taking the right sort of actions. We study a dynamic model in which parents, for selfish reasons, invest resources to raise patient children. Patience raises the marginal return to human capital accumulation. The patient young do better in school, and hence, get more education but scrimp on investing in their own progeny's patience. This dynamic can generate intergenerational patience cycles. Generations coming of age with little patience will invest more in the productive capacity of their children, while those with greater patience invest more in their own productive capacity.
    Keywords: patience, delayed gratification, human capital
    JEL: E0
    Date: 2009–06–15
  55. By: Gabriele, CARDULLO
    Abstract: This paper studies the effects of product and labour market deregulation on wage inequality and welfare. By constructing an analytically tractable model in which the level of product market competition and the wages are endogenously distributed, I show that even though deregulation in labour markets raises the aggregate level of employment and the average real wage, the welfare of trade unions may decrease in sectors with a low level of competition. Moreover, removing barriers to entry in the goods market has mixed effects on inequality : the wage variance and the Gini index are lower, but the ratio of the highest over the lowest wage paid in the economy increases. Finally, an interesting result of the model concerns the wage density function. By parameterizing the rates of firms creation and destruction on the basis of Belgian data, the resulting shape of the wage distribution exhibits an empirically accurate form, unimodal and positively skewed.
    Keywords: Product market competition; wage distribution; barriers to entry
    JEL: E24 J5 L16
    Date: 2009–04–15
  56. By: Dana Hajkova
    Abstract: When the contribution of capital to aggregate production is to be quantified, a measure of capital services should be used. In this paper I present two experimental measures of capital services for the Czech economy using the OECD methodology. These measures use information on the structure of capital assets by asset type and by the industry in which the capital is used. They weight the contributions of different types of assets by their marginal product instead of by their price, which is the case when using the net capital stock. The analysis shows that growth in the net capital stock, if used as an input into the production function, underestimates the growth of capital input especially in periods of strong investment in highly productive capital assets.
    Keywords: Capital services, growth accounting, production function, total factor productivity.
    JEL: E23 O11 O12 O47
    Date: 2008–12
  57. By: Moon, Weh-Sol
    Abstract: I construct a matching model to explain the labor market transition between employment, unemployment and nonparticipation, and evaluate the quantitative effects of firing costs. The model has several features that are distinguished from previous studies: endogenous labor force participation, different job-search decisions and imperfect insurance markets. I find that the model is able to account for the U.S. labor market, especially the gross labor-force transition rates. I also find that firing costs as a type of firing tax have a negative effect on the layoff rate, the job-finding probability and the participation rate. In particular, the effect of a decrease in the job-finding probability is greater than the effect of a decrease in the layoff rate, and this results in an increase in the unemployment-to-population ratio. Finally, firing costs make individuals' job tenures longer and skew the asset distribution to the right.
    Keywords: Search and Matching; Labor Force Participation; Firing Costs
    JEL: E24 J21 J65 J64
    Date: 2009–05–21
  58. By: Patricia Justino (Institute of Development Studies)
    Abstract: This paper offers a framework for analysing the effects of armed conflicts on households and the ways in which households in turn respond to and cope with the conflicts. It distinguishes between direct and indirect effects, and shows that the indirect effects are channelled through (i) markets, (ii) political institutions, and (iii) social networks. Drawing upon the recent empirical literature, the paper portrays the processes running along these various channels and offers policy suggestions to be adopted at both national and international levels.
    Keywords: Armed conflict, civil conflict, household welfare, transmission mechanism, coping mechanism, remittances
    JEL: E2 I3 H5 H7 Z1
    Date: 2009
  59. By: Leandro Prados de la Escosura
    Abstract: Este ensayo examina el intento por parte de Jordi Maluquer de Motes de construir “una nueva y más sólida estimación del Producto Interior Bruto de España”. Para ello elabora una serie histórica del PIB a precios corrientes para 1850-1958. Además, extrapola retrospectivamente las series enlazadas de la contabilidad nacional con esta serie histórica a fin de obtener una nueva estimación del PIB a precios corrientes y constantes para 1850-2000. Errores de tipo estadístico y económico, como la utilización del IPC para reflactar el PIB en términos reales, invalidan su estimación. Además, debido al procedimiento aceptado para enlazar la contabilidad nacional, su propuesta de PIB a precios constantes da lugar a niveles de producto real por habitante que exageran la posición relativa internacional de la economía española.
    Keywords: Deflactores, Series enlazadas del PIB, Comparaciones internacionales del producto real per capita
    JEL: E01 N13 N14 O47
    Date: 2009–06
  60. By: Benjamin Chabot (Yale University and NBER); Christopher J. Kurz (Board of Governors of the Federal Reserve System)
    Abstract: Why did Victorian Britain invest so much capital abroad? We collect over 500,000 monthly returns of British and foreign securities trading in London and the United States between 1866 and 1907. These heretofore-unknown data allow us to better quantify the historical benefits of international diversification and revisit the question of whether British Victorian investor bias starved new domestic industries of capital. We find no evidence of bias. A British investor who increased his investment in new British industry at the expense of foreign diversification would have been worse off. The addition of foreign assets significantly expanded the mean-variance frontier and resulted in utility gains equivalent to a meaningful increase in lifetime consumption.
    Keywords: Capital markets, Home bias, History, Victorian overseas investment
    JEL: E44 F22 G11 G15 N21 N23 O16
    Date: 2009–06
  61. By: Stéphane Pallage; Lyle Scruggs; Christian Zimmermann
    Abstract: Unemployment insurance policies are multidimensional objects. They are typically defined by waiting periods, eligibility duration, benefit levels and asset tests when eligible, which make intertemporal or international comparisons difficult. To make things worse, labor market conditions, such as the likelihood and duration of unemployment matter when assessing the generosity of different policies. In this paper, we develop a methodology to measure the generosity of unemployment insurance programs with a single metric. We build a first model with such complex characteristics. Our model features heterogeneous agents that are liquidity constrained but can self-insure. We then build a second model that is similar, except that the unemployment insurance is simpler: it is deprived of waiting periods and agents are eligible forever with constant benefits. We then determine which level of benefits in this second model makes agents indifferent between both unemployment insurance policies. We apply this strategy to the unemployment insurance program of the United Kingdom and study how its generosity evolved over time.
    Keywords: Social policy, generosity, unemployment insurance, measurement
    JEL: E24 J65
    Date: 2009
  62. By: Pereira, Pedro L. Valls
    Abstract: This article investigates the existence of contagion between countries on the basis of an analysis of returns for stock indices over the period 1994-2003. The economic methodology used is that of multivariate GARCH family volatility models, particularly the DCC models in the form proposed by Engle and Sheppard (2001). The returns were duly corrected for a series of country-specific fundamentals. The relevance of this procedure is highlighted in the literature by the work of Pesaran and Pick (2003). The results obtained in this paper provide evidence favourable to the hypothesis of regional contagion in both Latin America and Asia. As a rule, contagion spread from the Asian crisis to Latin America but not in the opposite direction.
    Date: 2009–01–26
  63. By: Uluc Aysun (University of Connecticut); Melanie Guldi (Mount Holyoke College)
    Abstract: The typical conclusion reached when researchers examine exchange rate exposure using a linear model is that only a few firms are exposed. This finding is puzzling since institutional knowledge and basic finance theory points to a larger effect. In this paper, we compare results obtained using a linear approach with those from nonlinear, partially parametric and nonparametric models. Our data consist of nonfinancial firms in five emerging market countries and the US. Among firms that were not found to have a linear exposure, we find that a considerable proportion of these are exposed when nonlinear, partially parametric or nonparametric models are used. The increase in exposure is most striking when a nonparametric model is used. We also find evidence that firms' hedging activities decrease linear exposure but do not affect nonparametric exposure.
    Keywords: nonparametric, exchange rate exposure, hedging.
    JEL: E44 F31 F41
    Date: 2009–06
  64. By: John Geanakoplos (Cowles Foundation, Yale University); Stephen P. Zeldes (Graduate School of Business, Columbia University)
    Abstract: One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach -- the approach currently used by the Social Security Administration in generating its most widely cited numbers -- ignores risk and instead simply discounts "expected" future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value. Effectively, market valuation uses a discount rate that incorporates a risk premium. Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is "wage-indexed": future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits. We find that the difference between market valuation and "actuarial" valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits is only 4/5 of that implied by the actuarial approach. Ignoring cohorts over age 60 (for whom the valuations are the same), market value is only 70% as large as that implied by the actuarial approach.
    Keywords: Social security, Market value, Risk adjustment, Actuarial value, Wage bonds, Unfunded obligations
    JEL: E6 H55 D91 G1 G12
    Date: 2009–06
  65. By: Gerhard Glomm (Department of Economics, Indiana University, Bloomington); Juergen Jung (Department of Economics, Towson University); Changmin Lee (Department of Economics, Indiana University, Bloomington); Chung Tran (School of Economics, University of New South Wales)
    Abstract: In many emerging economies pension programs of public sector workers are more generous than pension programs of private sector workers. In this paper we investigate public pension reforms that improve efficiency and welfare by reallocating government resources from non-productive public pensions to productive public education and infrastructure investments. We argue that the opportunity costs of running generous public pension schemes for civil servants are potentially large in emerging economies that often suffer from low public investments in education and infrastructure. In addition, we quantitfy the savings distortions as well as the tax distortions from running a generous public pension program. Calculating transitions to the post-reform steady state, we find that welfare losses for the generation born before the reform are offset by welfare gains by the generations born after the reform.
    Keywords: Social Security Reform; Generous Public Sector Pensions; Capital Accumulation; Public Education and Infrastructure Investments
    JEL: E62 H41 H55
    Date: 2009–06

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