nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒07‒11
fifty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes By Felix Geiger; Oliver Sauter
  2. The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics By Demary, Markus
  3. Inflation expectations, uncertainty, the Phillips Curve, and monetary policy By Michael T. Kiley
  4. The High Cross-Country Correlations of Prices and Interest Rates By Espen Henriksen; Finn E. Kydland; Roman Sustek
  5. Monetary-Fiscal Policy Interactions and Fiscal Stimulus By Troy Davig; Eric M. Leeper
  6. Input-output connections between sectors and optimal monetary policy By Engin Kara
  7. The US Inflation-Unemployment Tradeoff: Methodological Issues and Further Evidence By Karanassou, Marika; Sala, Hector
  8. WHAT MOVES BOND YIELDS IN CHINA? By Fan, Longzhen; Johansson, Anders C.
  9. Emerging Contours of Financial Regulation: Challenges and Dynamics By Rakesh Mohan
  10. Is there a Role for International Trade Costs in Explaining the Central Bank Behavior? By Yilmazkuday, Hakan
  11. Impact of Monetary Policy Changes in a Semi-Global Economy: Evidence from Bangladesh By Sayera Younus
  12. Modeling Inflation in India: The Role of Money By Kishor, N. Kundan
  13. Reset price inflation and the impact of monetary policy shocks By Mark Bils; Peter J. Klenow; Benjamin A. Malin
  14. Financial Sophistication and the Distribution of the Welfare Cost of Inflation By Paola Boel; Gabriele Camera
  15. Inflation in Bangladesh: Does the Changing Consumption Pattern Affect its Measurement ? By Md. Akhtaruzzaman
  16. Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models By Dimitris Korobilis
  17. Strict and Flexible Inflation Forecast Targets: An Empirical Investigation By Glenn Otto; Graham Voss
  18. Relative Effectiveness of Monetary and Fiscal Policies on Output Growth in Bangladesh: A VAR Approach By Md. Habibur Rahman
  20. News Shocks and Learning-by-doing By Hammad Qureshi
  21. Monetary Policy and Housing Sector Dynamics in a Large-Scale Bayesian Vector Autoregressive Model By Rangan Gupta; Marius Jurgilas; Alain Kabundi; Stephen M. Miller
  22. Bank liquidity, interbank markets, and monetary policy By Xavier Freixas; Antoine Martin; David Skeie
  23. Measuring Inflationary Pressure in Bangladesh: The P-Star Approach By Mustafa. K. Mujeri
  24. Evaluating the stresses from ECB monetary policy in the euro area By Lee , Jim; Crowley, Patrick M
  25. Introducing the Euro-STING: Short-Term Indicator of Euro Area Growth By Camacho, Maximo; Pérez-Quirós, Gabriel
  26. The communication policy of the European Central Bank: An overview of the first decade By Jakob de Haan; David-Jan Jansen
  27. Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy By Jouchi Nakajima; Munehisa Kasuya; Toshiaki Watanabe
  28. Structural Break, Stability and Demand for Money in India By Prakash Singh; Manoj K. Pandey
  29. Monetary Policy Inertia: More a Fiction than a fact? By Consolo, Agostino; Favero, Carlo A
  30. Government Investment and Fiscal Stimulus in the Short and Long Runs By Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang
  31. International Monies, Special Drawing Rights, and Supernational Money By Pietro Alessandrini; Michele Fratianni
  33. The welfare consequences of monetary policy By Federico Ravenna; Carl E. Walsh
  34. Cyclical Skill-Biased Technological Change By Balleer, Almut; van Rens, Thijs
  35. The Theory of the Fiscal Stimulus: How Will a Debt-Financed Stimulus Affect the Future? By W. Max Corden
  36. A Study on the Transmission of Money Market Tensions in EMEAP Economies During the Credit Crisis of 2007 - 2008 By Laurence Fung; Ip-wing Yu
  37. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts By Emmanuel Farhi; Jean Tirole
  38. Sobre a Determinação da Taxa de Juros e os Ciclos de Comércio em Marshall By Sérgio Fornazier Meyrelles Filho
  39. Revisiting the Shocking Aspects of Asian Monetary Unification By Hans Genberg; Pierre L. Siklos
  40. Managing East Asia's macroeconomic volatility By Olaberria, Eduardo; Rigolini, Jamele
  41. Lenders of Last Resort in a Globalized World By Obstfeld, Maurice
  42. The Keynesian Multiplier Effect Reconsidered By Yoshiyasu Ono
  43. Reply to "Generalizing the Taylor principle": a comment By Troy Davig; Eric Leeper
  44. Productivity and job flows: Heterogeneity of new hires and continuing jobs in the business cycle By Kilponen , Juha; Vanhala, Juuso
  45. Stochastic Volatility and DSGE Models By Martin M. Andreasen
  46. Should Financial Flows Be Regulated? Yes By Gerald Epstein
  47. Real Exchange Rate, Output and Oil: Case of Four Large Energy Producers By Korhonen, Iikka; Mehrotra, Aaron
  48. Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning By Rose, Andrew K; Spiegel, Mark
  49. Vicious and virtuous circles--The political economy of unemployment By patrick Minford; Ruthira Naraidoo
  50. Public infrastructures, public consumption and welfare in a new open economy macro model By Ganelli , Giovanni; Tervala, Juha
  51. THE AUTOMATIC FISCAL STABILIZERS By Dinga, Ene; Padurean, Elena
  52. Euler consumption equation with non-separable preferences over consumption and leisure and collateral constraints By Kilponen, Juha
  53. Debt Portfolios By Thomas Hintermaier; Winfried Koeniger
  54. Inequality and Specialization: The Growth of Low-Skill Service Jobs in the United States By David H. Autor; David Dorn
  55. Reverse Charging Purchases to Intra-transportation Means in the Context of New Tax Regulations By Ecobici, Nicolae; Busan, Gabriela

  1. By: Felix Geiger; Oliver Sauter
    Abstract: We expand a standard New-Keynesian model by allowing for a special role of money in the inflation and expectations building process. Motivated by the two-pillar Phillips curve, we introduce heterogeneous expectations. Thereby a fraction of agents forms inflation expectations by observing trend money growth. We show that in the presence of these monetary believers, contractive shocks to the economy produce smoother dynamics for inflation and output. We also find that monetary policy should follow a conventional Taylor rule with contemporaneous inflation and output data, if it is uncertain about the fraction of monetary believers.
    Keywords: New-Keynesian model, monetary policy, two-pillar Phillips curve, heterogeneous expectations, monetary believes
    JEL: E31 E41 E47 E52
    Date: 2009–06
  2. By: Demary, Markus
    Abstract: This study analyses empirically the link between real house prices and key macro variables like prices, output and interest rates for ten OECD countries. We find out that a monetary policy shock lowers real house prices in all ten countries, where the interest rate shock explains between 12 and 24 percent of the fluctuations in house prices. Impulse responses indicate that house prices rise after an output shock in nine of ten countries. But we also find evidence that real estate prices have a large impact on these key macroeconomic variables. We find out that the house price shock is a germane aggregate demand shock because it raises output and prices and leads to increasing money market rates in all countries. The story behind this finding is that increasing house prices lead to an increase in households' net worth which leads to increasing consumption expentitures and thereby stimulates aggregate demand. This stimulus on aggregate demand leads to increasing output and inflationary pressures on which the central bank reacts by tightening monetary policy. We find out that 12 to 20 percent of output fluctuations and around 10 to 20 percent of price fluctuations can be traced back to the housing demand shock. Moreover, we find that these housing demand shocks are a key driver of money market rates. We conclude that this channel is empirically relevant.
    Keywords: Inflation; Monetary Policy; Housing Prices; Vectorautoregressions
    JEL: C32 E32 E31 E44
    Date: 2009–05–08
  3. By: Michael T. Kiley
    Abstract: Inflation expectations play a central role in models of the Phillips curve. At long time horizons inflation expectations may reflect the credibility of a monetary authority's commitment to price stability. These observations highlight the importance of inflation expectations for monetary policy. These comments touch on three issues regarding inflation expectations: The evolving treatment of inflation expectations in empirical Phillips curve models; three recent models of information imperfections and inflation expectations; and potential policy implications of different models.
    Date: 2009
  4. By: Espen Henriksen; Finn E. Kydland; Roman Sustek
    Abstract: We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.
    JEL: E31 E32 E43 F42
    Date: 2009–07
  5. By: Troy Davig; Eric M. Leeper
    Abstract: Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model's predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act's implied path for government spending under alternative monetary-fiscal policy combinations.
    JEL: E31 E52 E6 E62
    Date: 2009–07
  6. By: Engin Kara (National Bank of Belgium, Research Department)
    Abstract: This paper considers the monetary policy implications of a model that features input-output connections between stages of production, so that a distinction between CPI inflation and PPI inflation arises. More specifically, this paper addresses the policy conclusion by K. Huang and Z. Liu [2005, "Inflation targeting: What inflation rate to target", Journal of Monetary Economics 52], which states that central banks should use an optimal inflation index that gives substantial weight to stabilising both CPI and PPI. This paper argues that these authors' findings rely on the assumption that producer prices are as sticky as consumer prices and it also shows that, once empirically relevant frequencies of price adjustment are used to calibrate the model, CPI inflation receives substantial weight in the optimal inflation index. Moreover, this rule is remarkably robust to uncertainty regarding the model parameters, whereas the policy rule proposed by Huang and Liu can result in heavy welfare losses
    Keywords: Inflation targeting, Optimal Monetary Policy
    JEL: E32 E52 E58
    Date: 2009–06
  7. By: Karanassou, Marika (University of London); Sala, Hector (Universitat Autònoma de Barcelona)
    Abstract: This paper addresses the various methodological issues surrounding vector autoregressions, simultaneous equations, and chain reactions, and provides new evidence on the long-run inflation-unemployment tradeoff in the US. It is argued that money growth is a superior indicator of the monetary environment than the federal funds rate and, thus, the focus is on the inflation/unemployment responses to money growth shocks. SVAR (structural vector autoregression) and GMM (generalised method of moments) estimations confirm earlier findings in Karanassou, Sala and Snower (2005, 2008b) obtained from chain reaction structural models: the slope of the US Phillips curve is far from vertical, even in the long-run, which implies that the nominal and real sides of the economy are symbiotic. In the light of the significant and robust long-run inflation-unemployment tradeoffs, policy makers should reconsider the classical dichotomy thesis.
    Keywords: inflation, unemployment, money growth, SVAR, GMM, structural modelling, chain reactions
    JEL: E24 E31 E51
    Date: 2009–06
  8. By: Fan, Longzhen (School of Management, Fudan University); Johansson, Anders C. (China Economic Research Center)
    Abstract: This paper analyzes the joint dynamic processes of macroeconomic and monetary variables and bond yields in China. We show that macroeconomic variables as well as monetary policy variables have a significant impact on two factors that capture the variation in yields. An increase in the inflation rate and economic growth result in a rise in the yield curve. Similarly, an increase in the money supply causes a rise in the yield curve, albeit with a delayed effect. Finally, when official rates are raised, the long yield shows signs of a delayed decline. Overall, the long yield is more sensitive to most changes in macroeconomic and monetary variables. These results differ from an earlier study on bond yields by Ang and Piazzesi (2003), who show that the U.S. short-term rate is more sensitive to changes in macroeconomic variables. Possible explanations for the difference include certain unique structural features in the domestic financial system and the way monetary policy is conducted in China.
    Keywords: China; yield curve; macroeconomic factors; monetary policy
    JEL: E43 E44 E52 E58 G12
    Date: 2009–06–01
  9. By: Rakesh Mohan
    Abstract: The paper attempts to analyse the emerging contours of regulation of financial institutions with an emphasis on the emerging challenges and dynamics. [Paper prepared for Financial Stability Review of Bank of France].
    Keywords: financial, stability, institutions, challenges, dynamics, Evolution of Crisis, macroeconomic, monetary policy, US, liquidity, inflation, commodity prices, India, goods, services, imports, china, government securities, mortgage entities, interest rates, advanced economies,
    Date: 2009
  10. By: Yilmazkuday, Hakan
    Abstract: This paper develops an open-economy DSGE model to analyze the effects of international trade costs on monetary policy of open economies. The implications of this micro-founded New-Keynesian model are tested on a prototype small economy that is open to international trade costs shocks, Canada. When a utility-based expected loss function is considered, the central bank is found to be far from being optimal in its actions, independent of international trade costs. When an ad hoc expected loss function considering the volatilities in inflation, output and interest rate is considered, it is found that the actions of the central bank are explained best when international trade costs in fact exist but the central bank ignores them. Given the ad hoc loss function, the actions of the central bank are best explained when 70% of weight is assigned to inflation, 15% of weight to interest rate and 15% of weight to output.
    Keywords: DSGE Model, Monetary Policy Rule, International Trade Costs, Inflation Targeting
    JEL: E58 E52 F41
    Date: 2009–06
  11. By: Sayera Younus
    Abstract: The study examines the impact of changes in monetary policy in Bangladesh. Specifically, the study examines the impact of domestic and foreign monetary shocks on Bangladesh’s major economic aggregates.In the context of a semi-global economy such as Bangladesh, the conduct of monetary policy becomes increasingly more difficult as globalization proceeds. It becomes important to examine the impact of changes in relevant 'foreign' variables (e.g., interest rate, money supply, exchange rate)while formulating domestic monetary policy. The empirical results of the present analysis show that innovations to foreign money supply have significant impacts on Bangladesh's real exchange rate,interest rate,land output.[Bangladesh Bank WP NO 0902]
    Keywords: Monetary Policy; Macroeconomic Variables
    Date: 2009
  12. By: Kishor, N. Kundan
    Abstract: This paper studies the role of the real money gap- the deviation of real money balance from its long-run equilibrium level- for predicting inflation in India. Using quarterly data on manufacturing inflation from 1982 to 2007, we find that the real money gap is a significant predictor of inflation in India. Our results show that this variable is a better predictor of future inflation at quarterly horizon than the deviation of broad money growth from its target for the whole sample period. We also document a break in the overall predictability of inflation in the last quarter of 1995. We find that except for the real money gap, the forecasting power of other predictors under study has declined considerably after 1995.
    Keywords: Inflation. Monetary Policy; Indian Economy
    JEL: E31 E58 E52
    Date: 2009–07
  13. By: Mark Bils; Peter J. Klenow; Benjamin A. Malin
    Abstract: A standard state-dependent pricing model implies very limited scope for using active monetary policy to stabilize real activity. Two modeling strategies which expand the role of monetary policy are time-dependent pricing and strategic complementarities between price-setting firms. These mechanisms have telltale implications for the persistence and volatility of "reset price inflation." Reset price inflation is the rate of change of all desired prices (including for goods that have not changed price in the current period). Using the micro data underpinning the CPI, we construct an empirical measure of reset price inflation and use this measure to assess the validity of the modeling approaches. We find that time-dependent models imply unrealistically high persistence and stability of reset price inflation. This discrepancy is exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the CPI data.
    Date: 2009
  14. By: Paola Boel; Gabriele Camera
    Abstract: The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.
    Keywords: money, heterogeneity, friedman rule, trade frictions, calibration
    JEL: E4 E5
    Date: 2009–06
  15. By: Md. Akhtaruzzaman
    Abstract: Ensuring price stability is one of the prime objectives of the monetary policy in Bangladesh, whereby the latest monetary policy statement aims at rapid growth with price stability. This note examines how changes in the consumption patterns as derived from the household income and expenditure surveys (HIES) of 1995/96 and 2005 affect the average weights of goods in the CPI and consequently the level of inflation in the economy. The note also makes a brief assessment of the implications of using average weights in the consumption basket rather than using specific weights representing different expenditure groups. The study shows that it is important to capture the changing structure of household consumption and ensure the use of representative weights in constructing CPI inflation. This generates a more realistic picture of price changes in the economy. Such changes have significant implications and should be effectively used to adjust the distribution of CPI weights in measuring inflation, so as to provide more accurate estimates of inflation in Bangladesh. [BB PP no.0802]
    Keywords: inflation; Bangladesh; consumption pattern; expenditure; price stability; monetary policy; consumer price index (CPI); CPI inflation; household income and expenditure surveys (HIES); CPI weights; commodity- specific weights
    Date: 2009
  16. By: Dimitris Korobilis (Department of Economics, University of Strathclyde)
    Abstract: The evolution of monetary policy in the U.S. is examined based on structural dynamic factor models. I extend the current literature which questions the stability of the monetary transmission mechanism, by proposing and studying time-varying parameters factor-augmented vector autoregressions (TVP-FAVAR), which allow for fast and efficient inference based on hundreds of explanatory variables. Different specifcations are compared where the factor loadings, VAR coefficients and error covariances, or combinations of those, may change gradually in every period or be subject to small breaks. The model is applied to 157 post-World War II U.S. quarterly macroeconomic variables. The results clearly suggest that the propagation of the monetary and non-monetary (exogenous) shocks has altered its behavior, and speciffically in a fashion which supports smooth evolution rather than abrupt change. The most notable changes were in the responses of real activity measures, prices and monetary aggregates, while other key indicators of the economy remained relatively unaffected.
    Keywords: Structural FAVAR, time varying parameter model, monetary policy
    JEL: C11 C32 E52
    Date: 2009–05
  17. By: Glenn Otto (University of New South Wales, Australia); Graham Voss (University of Victoria, Canada, Hong Kong Institute for Monetary Research)
    Abstract: We examine whether standard theoretical 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.
    JEL: E31 E58
    Date: 2009–05
  18. By: Md. Habibur Rahman
    Abstract: This paper investigates the relative importance of monetary and fiscal policies in altering real output of Bangladesh. An unrestricted vector auto regression (VAR) framework based on the St. Louis equations, is used to compute variance decompositions (VDCs)and impulse response function (IRF) through 1000 Monte Carlo Simulations. A 'Monetary— Fiscal Game' under oligopolistic framework is also used to justify the co-ordination and co-operation between the monetary and fiscal authorities. The outcomes of this study imply that monetary policy is relatively more effective than fiscal policy in stimulating real economic activity. The results also confirm the presence of interactions between monetary and fiscal policies. [BB WP no.0601]
    Keywords: monetary policy; fiscal policy; Bangladesh; vector auto regression (VAR); variance decompositions (VDCs); impulse response function (IRF); Monetary— Fiscal Game; St. Louis equations.
    Date: 2009
  19. By: Ljungwall, Christer (China Economic Research Center); Gao, Xu (World Bank, China Group, Beijing Office)
    Abstract: This paper investigates the sources of business cycle fluctuations in China and India since 1978/81. Under the framework of a standard neoclassical open economy model with time-varying frictions (wedges), we study the relative importance of efficiency, labor, investment and government consumption wedges on the business cycle phenomenon. This enables us to contrast and compare the two countries’ experience in a way remarkably different from previous studies. The results for both China and India show that efficiency wedge is the main source of economic fluctuations, while the investment wedge and government consumption wedge played minor roles in generating business cycles.
    Keywords: Business cycle fluctuations; Business cycle accounting; China; India
    JEL: E32 E37 O47 O53
    Date: 2009–05–01
  20. By: Hammad Qureshi (Department of Economics, Ohio State University)
    Abstract: The idea that expectations about future economic fundamentals can drive business cycles dates back to the early twentieth century. However, the standard real business cycle (RBC) model fails to generate positive comovement in output, consumption, labor-hours and investment in response to news shocks. This paper proposes a simple and intuitive solution to this puzzling feature of the RBC model, based on a mechanism that has strong empirical support: learning-by-doing (LBD). First, we show that the one-sector RBC model augmented by LBD can generate aggregate comovement in response to news shock about technology. Second, we show that in the two-sector RBC model, LBD along with an intratemporal adjustment cost can generate sectoral comovement in response to news about three types of shocks: i) neutral technology shock, ii) consumption technology shock, and iii) investment technology shock. We show that these results hold for contemporaneous technology shocks and for different specifications of LBD.
    Keywords: News Shocks, Learning-by-Doing, Pigou Cycles
    JEL: E3
    Date: 2009–06
  21. By: Rangan Gupta (Department of Economics, University of Pretoria); Marius Jurgilas (Financial Stability Directorate, Bank of England); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg); Stephen M. Miller (College of Business, University of Las Vegas, Nevada)
    Abstract: Our paper considers the 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
  22. By: Xavier Freixas; Antoine Martin; David Skeie
    Abstract: A major lesson of the recent financial crisis is that the ability of banks to withstand liquidity shocks and to provide lending to one another is crucial for financial stability. This paper studies the functioning of the interbank lending market and the optimal policy of a central bank in response to both idiosyncratic and aggregate shocks. In particular, we consider how the interbank market affects a bank's choice between holding liquid assets ex ante and acquiring such assets in the market ex post. We show that a central bank should use different tools to manage different types of shocks. Specifically, it should respond to idiosyncratic shocks by lowering the interest rate in the interbank market and address aggregate shocks by injecting liquid assets into the banking system. We also show that failure to adopt the optimal policy can lead to financial fragility.
    Keywords: Interbank market ; Banks and banking, Central ; Bank liquidity ; Interest rates
    Date: 2009
  23. By: Mustafa. K. Mujeri
    Abstract: The paper estimates the P* model for Bangladesh economy and test its forecasting ability through generating recursive forecasts. The empirical result shows that the model performs relatively well and contains additional information regarding future rates of inflation. The price and output gap models fare consistently better then the velocity gap model which brings out the importance of non-monetary factors in explaining inflation dynamics in Bangladesh. The P* model can have wide applications in policy analysis. With financial sector liberalization and reforms, it is likely that the scope for the P* model to play a more proactive role would be ramified in Bangladesh. [BB WP no.0901]
    Keywords: inflation; Bangladesh; P* approach; forecasts; velocity gap model; price gap model; output gap model; financial sector; monetary targeting policy.
    Date: 2009
  24. By: Lee , Jim (Texas A&M University- Corpus Christi); Crowley, Patrick M (Texas A&M University - Corpus Christi)
    Abstract: This paper investigates the extent to which euro area monetary policy has responded to evolving economic conditions in individual member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behaviour of the ECB under alternative hypothetical scenarios: (1) the euro member states make individual policy decisions, and (2) the ECB responds to the economic conditions of individual members. Stress measures are then constructed to evaluate the degree of divergence of member state economies under these two hypothetical scenarios. The results we obtain reflect the extent of heterogeneity among the national economies in the monetary union, indicating that euro area policy rates have been particularly close to the ‘counterfactual’ interest rates of the largest euro members and countries with similar economic conditions, namely Germany, Austria, Belgium and France.
    Keywords: European Central Bank; monetary policy reaction; Taylor rule; counterfactual analysis
    JEL: C53 E52
    Date: 2009–04–07
  25. By: Camacho, Maximo; Pérez-Quirós, Gabriel
    Abstract: We set out a model to compute short-term forecasts of the euro area GDP growth in real-time. To allow for forecast evaluation, we construct a real-time data set that changes for each vintage date and includes the exact information that was available at the time of each forecast. With this data set, we show that our simple factor model algorithm, which uses a clear, easy-to-replicate methodology, is able to forecast the euro area GDP growth as well as professional forecasters who can combine the best forecasting tools with the possibility of incorporating their own judgement. In this context, we provide examples showing how data revisions and data availability affect point forecasts and forecast uncertainty.
    Keywords: Business cycle; Forecasting; Time Series
    JEL: C22 E27 E32
    Date: 2009–06
  26. By: Jakob de Haan; David-Jan Jansen
    Abstract: Since its inception, the European Central Bank (ECB) has regarded communication as anintegral part of its monetary policy. This paper describes and evaluates ECB communications during the first decade of its operation.We conclude that, overall, ECB communication has contributed to the effectiveness of its monetary policy. Our review of the literature shows that ECB communications affect the level and volatility of financial prices - suggesting that private sector expectations reacted to ECB communication. In addition, there is evidence that communication has improved the predictability of interest rate decisions. 
    Keywords: communication; European Central Bank; transparency; monetary policy
    JEL: E44 E52 E58
    Date: 2009–06
  27. By: Jouchi Nakajima; Munehisa Kasuya; Toshiaki Watanabe
    Abstract: This paper analyzes the time-varying parameter vector autoregressive (TVP-VAR) model for the Japanese economy and monetary policy. The time-varying parameters are estimated via the Markov chain Monte Carlo method and the posterior estimates of parameters reveal the time-varying structure of the Japanese economy and monetary policy during the period from 1981 to 2008. The marginal likelihoods of the TVP-VAR model and other VAR models are also estimated. The estimated marginal likelihoods indicate that the TVP-VAR model best fits the Japanese economic data.
    Keywords: Bayesian inference, Markov chain Monte Carlo, Monetary policy, State space model, Structural vector autoregressive model, Stochastic volatility, Time-varying parameter
    Date: 2009–05
  28. By: Prakash Singh; Manoj K. Pandey
    Abstract: This paper attempts to take a meticulous look on stability of money demand in India Using annual data for period 1953-2007 and the Hansen (1992) and Gregory Hansen (1996) co-integration approaches with structural break. Results of the Gregory Hansen (1996) cointegration analysis show the presence of cointegration in demand for money, real GDP and nominal interest rate with structural break at 1965. Further, study also suggests for downward shift of about 0.33% around 1965 in the demand for money function and put forward that demand for money is stable except for the period of 1975-1998.
    Keywords: Money demand, Cointegration with structural break, Stability, Choice of monetary instrument
    JEL: E41 E52
    Date: 2009
  29. By: Consolo, Agostino; Favero, Carlo A
    Abstract: Empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia. This evidence is very hard to reconcile with the alternative evidence of low predictability of monetary policy rates. In this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by Taylor (1993). After appropriately diagnosing and taking care of the weak instruments problem, we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules.
    Keywords: Monetary Policy Rulkes; Weak Identification
    JEL: E52 E58 G12
    Date: 2009–06
  30. By: Eric M. Leeper; Todd B. Walker; Shu-Chun Susan Yang
    Abstract: This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional neoclassical growth models. The analysis focuses on two dimensions of fiscal policy that are critical for understanding the effects of government investment: implementation delays associated with building public capital projects and expected future fiscal adjustments to debt-financed spending. Implementation delays can produce small or even negative labor and output responses in the short run; anticipated fiscal financing adjustments matter both quantitatively and qualitatively for long-run growth effects. Taken together, these two dimensions have important implications for the short-run and long-run impacts of fiscal stimulus in the form of higher government infrastructure investment. The analysis is conducted in several models with features relevant for studying government spending, including utility-yielding government consumption, time-to-build for private investment, and government production.
    JEL: E6 E62 H54
    Date: 2009–07
  31. By: Pietro Alessandrini (Universita Politecnica delle Marche); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: The current international monetary system (IMS) is fragile because the dollar standard is rapidly deteriorating. The dual role the dollar as the dominant international money and national money cannot be easily reconciled because the US monetary authorities face a conflict between pursuing domestic objectives of employment and inflation and maintaining the international public good of a stable money. To strengthen the IMS, China has advocated the revitalization of the Special Drawing Rights (SDRs). But SDRs are neither money nor a claim on any international institution; are issued exogenously without any consideration to countries’ financing needs; and can activate international monies only though bilateral transactions. The historical record of SDRs as international reserves is altogether unimpressive. We propose instead the creation of a supernational bank money (SBM) within the institutional setting of a clearing union. This union would be a full-fledged agreement by participating central banks on specific rules of the game, such as size and duration of overdrafts, designation of countries that would have to bear the burden of external adjustment, and coordination of monetary policies objectives and at expense of the maintenance of the international public good. We also discuss structural changes that would make SDRs converge to SBMs.
    Keywords: international money, international monetary system, Special Drawing Right, supernational bank money
    JEL: E42 E52 F33 F36
    Date: 2009–07
  32. By: Ljungwall, Christer (China Economic Research Center); Xiong, Yi (Peking University National School of Development, China Center for Economic Research); Zou, Yutong (Peking University National School of Development, China Center for Economic Research)
    Abstract: This paper investigates the current monetary policy regime of China’s Central Bank, the People’s Bank of China (PBoC). This is done from the specific viewpoint of PBoC financial strength and the cost of its monetary policy instruments. The result shows that PBoC is constrained by the costs of its monetary policy instruments. PBoC tend to use less costly but market-distorting instruments such as deposit interest rate cap and reserve-ratio requirements, rather than more market-oriented but more costly instruments such as central bank note issuance. These costs remain under control today, but may rise in the future as PBoC accumulates more foreign assets. This, in turn, will jeopardize the Chinese monetary authority’s capability to maintain price stability.
    Keywords: Central banking; Monetary policy; China
    JEL: E51 E52 E58 E63 O53
    Date: 2009–05–01
  33. By: Federico Ravenna; Carl E. Walsh
    Abstract: We explore the distortions in business cycle models arising from inefficiencies in price setting and in the search process matching firms to unemployed workers, and the implications of these distortions for monetary policy. To this end, we characterize the tax instruments that would implement the first best equilibrium allocations and then examine the trade-offs faced by monetary policy when these tax instruments are unavailable. Our findings are that the welfare cost of search inefficiency can be large, but the incentive for policy to deviate from the inefficient flexible-price allocation is in general small. Sizable welfare gains are available if the steady state of the economy is inefficient, and these gains do not depend on the existence of an inefficient dispersion of wages. Finally, the gains from deviating from price stability are larger in economies with more volatile labor flows, as in the U.S.
    Keywords: Labor market
    Date: 2009
  34. By: Balleer, Almut (University of Bonn); van Rens, Thijs (CREI and Universitat Pompeu Fabra)
    Abstract: Over the past two decades, technological progress has been biased towards making skilled labor more productive. What does skill-biased technological change imply for business cycles? To answer this question, we construct a quarterly series for the skill premium from the CPS and use it to identify skill-biased technology shocks in a VAR with long run restrictions. We find that hours worked fall in response to skill-biased, but not in response to skill-neutral improvements in technology. Skill-biased technology shocks are associated with increases in the relative price of investment, indicating that capital and skill are substitutes in aggregate production.
    Keywords: skill-biased technology, skill premium, VAR, long-run restrictions, capital-skill complementarity, business cycle
    JEL: E24 E32 J24 J31
    Date: 2009–06
  35. By: W. Max Corden (Department of Economics, The University of Melbourne)
    Abstract: Conservative critics of Keynesian fiscal stimulus policies usually criticise such policies because of the increase in public debt that results. Hence a burden on future taxpayers would be imposed. But there are qualifications. Firstly, if there is an initial output gap that cannot be eliminated with monetary policy, fiscal expansion will increase current output, and this will lead not only to higher current consumption but also to higher savings. These savings will yield a benefit for the future. Secondly, if at least some of the stimulus finances public investment, for example in infrastructure, there are also likely to be benefits for the future. The paper also discusses moneyfinancing of the deficit, the automatic stabilisers, and exchange rate effects of a fiscal stimulus. Finally, it underlines the need for a unified policy that produces both fiscal surpluses in a boom and deficits in a slump.
    Date: 2009–06
  36. By: Laurence Fung (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority)
    Abstract: The recent tension in the interbank markets following the global financial crisis has raised concerns about the turbulence in interbank markets. This paper utilises two widely used indicators for measuring interbank stress (the interbank rate less the Overnight Index Swap rate and the interbank rate less the yield of government securities) to examine the transmission of interbank tension from the US dollar to nine interbank markets in the EMEAP economies. Using a vector autoregression model, we show that during the credit crisis of 2007 - 2008, the distress in the US dollar money market had a material impact with durations of seven to 13 days on the interbank markets for the Hong Kong dollar, Japanese yen, Australian dollar and New Zealand dollar. Moreover, based on a bivariate regime switching ARCH model, we also find evidence of volatility co-movement between the interbank stress indicator of the US dollar and that of the Hong Kong dollar, Japanese yen, Australian dollar, New Zealand dollar, Korean won and Singapore dollar during the crisis. The expected duration when two money markets are both in a high-volatility state is estimated to be as long as seven days. The short-lived impact on the EMEAP economies from a shock in the US dollar money market can be attributed to the policy actions taken by central banks and monetary authorities in the region and the coordinated efforts by policy makers worldwide to contain the credit crisis.
    Keywords: Interbank stress; Vector autoregression; Regime-switching ARCH
    JEL: E50 E58 G15
    Date: 2009–05
  37. By: Emmanuel Farhi; Jean Tirole
    Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, there is a role for macro-prudential supervision. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts.
    JEL: E44 E52 G28
    Date: 2009–07
  38. By: Sérgio Fornazier Meyrelles Filho (Curso de Ciencias Economicas, Universidade Federal de Goiás)
    Abstract: This essay presents a brief review of Alfred Marshall’s contributions in three main theoretical fields: first of all, we focus on the Marshallian interest rate theory; following, his analysis about the determination of the aggregate price level is considered. Finally, we approach Marshall’s ideas concerning the nature of business cycles. In our view this kind of recovering has great relevance for an adequate understanding of the evolution of economic thought since the classics, and for accurately appreciating the theoretical elements subsequently developed by Pigou and Robertson in the context of a loanable funds theory of interest determination and in their respective explanations about the nature of cycles. This conception, subsequently opposed by Keynes in his General Theory, emerged where aggregate demand failures viewed as persistent phenomena does not constitute relevant theoretical possibility in a context where there is a clear dichotomy between the short and the long run in the economic processes.
    Keywords: interest rates, money, cycles
    Date: 2009–07
  39. By: Hans Genberg (Hong Kong Institute for Monetary Research, Hong Kong Monetary Authority); Pierre L. Siklos (Wilfrid Laurier University, Viessmann European Research Centre, Hong Kong Institute for Monetary Research)
    Abstract: This paper revisits the question whether economies in Asia are likely to be good candidates for pursuing similar exchange rate policies and ultimately joining together in a monetary union. A number of authors have investigated this question before typically using some variant of the methodology originally used by Bayoumi and Eichengreen (BE) to study the same question for countries that were potential candidates to form common currency area in Europe. It is the contention of this paper that this methodology is flawed because it fails to identify properly the aggregate demand and aggregate supply shocks in each economy and hence cannot adequately address one of the central issues in determining the suitability of two or more countries joining a monetary union. To remedy this deficiency in the existing literature we propose an alternative methodology to identify structural shocks. We will therefore be able to revisit the debate about monetary integration in Asia based on more solid empirical foundations. The results show that these modifications do matter for the cross-country correlation of these shocks. In particular, aggregate demand shocks among the relatively smaller economies of Asia appear to be more highly correlated with the larger or more advanced economies in the regions such as Korea, Hong Kong, Singapore, and Japan, than they are amongst themselves when we rely on the standard BE methodology. When an alternative approach is used we conclude, for example, that aggregate supply shocks remain most highly correlated between China, Hong Kong and the remainder of the economies in our sample while Japan and Singapore, most notably, seem more ¡¥disconnected¡¦ with the rest of the region. Taking explicit account of foreign shocks not only prevents them from erroneously being confounded with domestic shocks as in the conventional methodology, it also makes it possible to evaluate the desirability of a common monetary policy response to common external shocks. Our results show that this can have an important bearing on assessing the desirability of forming a monetary union among the economies in the region. With respect to the implications for monetary unification in Asia our results do not clearly identify a group of countries for which shocks are unambiguously highly correlated and which therefore would be able to perform well with a common monetary policy.
    Date: 2009–05
  40. By: Olaberria, Eduardo; Rigolini, Jamele
    Abstract: East Asia has experienced a dramatic decrease in output growth volatility over the past 20 years. This is good news, as output growth volatility affects poor households because of coping strategies that have long-term, harmful consequences, and the overall economy through its negative impact on economic growth. This paper investigates the factors behind this long decline in volatility, and derives lessons about ways to mitigate renewed upward pressure in face of the financial crisis. The authors show that if, on the one hand, high trade openness has sustained economic growth in the past several decades, on the other hand, it has made countries more vulnerable to external fluctuations. Although less frequent terms of trade shocks and more stable growth rates of trading partners have helped to reduce volatility in the past, the same external factors are now putting renewed pressure on volatility. The way forward seems therefore to be to counterbalance the external upward pressure on volatility by improving domestic factors. Elements under domestic control that can help countries deal with high volatility include more accountable institutions, better regulated financial markets, and more stable fiscal and monetary policies.
    Keywords: Economic Conditions and Volatility,Emerging Markets,Achieving Shared Growth,Fiscal&Monetary Policy,Currencies and Exchange Rates
    Date: 2009–07–01
  41. By: Obstfeld, Maurice
    Abstract: The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last-resort lender that channels central bank liquidity where it is needed. The IMF’s effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.
    Keywords: central banking; financial crisis; International Monetary Fund; international monetary system; Lender of last resort
    JEL: E58 F33 F36
    Date: 2009–07
  42. By: Yoshiyasu Ono
    Abstract: The Keynesian multiplier effect is reinterpreted and several issues that may have misled assessments of the effect of fiscal spending are discussed. It is shown that even in the textbook Keynesian framework some transfer policy 'reduces' aggregate demand and that publ works spending may completely crowd out private consumption. Useless public works are found to be equivalent to transfers although they increase accounting national income more than transfers do. The net effect of fiscal spending on national benefits is explored and shown to equal only the direct benefit created by the spending.
    Date: 2009–01
  43. By: Troy Davig; Eric Leeper
    Abstract: Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded solutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) conditions apply. In addition, FWZ impose cross-equation restrictions between behavioral relations and the exogenous driving process. This rather special assumption undermines the traditional sharp distinction in micro-founded general equilibrium models between 'deep' parameters and the parameters governing the exogenous processes.
    Date: 2009
  44. By: Kilponen , Juha (Bank of Finland Research); Vanhala, Juuso (Bank of Finland Research)
    Abstract: This paper focuses on productivity dynamics of a firm-worker match as a potential explanation for the ‘unemployment volatility puzzle’. We let new matches and continuing jobs differ in terms of productivity level and sensitivity to aggregate productivity shocks. As a result, new matches have a higher destruction rate and lower, but more volatile, wages than old matches, as new hires receive technology associated with the latest vintage. In our model, an aggregate productivity shock generates a persistent productivity difference between the two types of matches, creating an incentive to open new productive vacancies and to destroy old matches that are temporarily less productive. The model produces a well behaved Beveridge curve, despite endogenous job destruction and more volatile vacancies and unemployment, without needing to rely on differing wage setting mechanisms for new and continuing jobs.
    Keywords: matching; productivity shocks; new hires; continuing jobs; job flows; Beveridge curve; vintage structure
    JEL: E24 E32 J64
    Date: 2009–07–01
  45. By: Martin M. Andreasen (Bank of England and CREATES)
    Abstract: This paper argues that a specification of stochastic volatility commonly used to analyze the Great Moderation in DSGE models may not be appropriate, because the level of a process with this specification does not have conditional or unconditional moments. This is unfortunate because agents may as a result expect productivity and hence consumption to be inifinite in all future periods. This observation is followed by three ways to overcome the problem.
    Keywords: Great Moderation, Productivity shocks, and Time-varying coe¢ cients
    JEL: E10 E30
    Date: 2009–07–07
  46. By: Gerald Epstein
    Abstract: As the international financial crisis spreads, some governments are using “unconventional tools” of monetary and financial policy to protect themselves. Should policies to control international capital flows be part of the government “toolkit” in these difficult times? This essay answers: YES. It describes the economic arguments for and against using capital controls, prudential regulations and other “capital management techniques” to manage international financial flows, presents empirical evidence on their impacts, and describes the variety of policies that many countries have successfully applied to enhance macroeconomic and financial stability, create policy space, and achieve other national development goals.
    Keywords: Sub-sovereign bonds, infrastructure finance, issuers, investors, financial sector, municipal finance
    JEL: E5 F3 F4 O1 O16 O19
    Date: 2009–07
  47. By: Korhonen, Iikka (BOFIT); Mehrotra, Aaron (BOFIT)
    Abstract: We assess the effects of oil price shocks on real exchange rate and output in four large energy-producing countries: Iran, Kazakhstan, Venezuela, and Russia. We estimate four-variable structural vector autoregressive models using standard long-run restrictions. Not surprisingly, we find that higher real oil prices are associated with higher output. However, we also find that supply shocks are by far the most important driver of real output in all four countries, possibly due to ongoing transition and catching-up. Similarly, oil shocks do not account for a large share of movements in the real exchange rate, although they are clearly more significant for Iran and Venezuela than for the other countries.
    Keywords: structural VAR model; oil price; Iran; Kazakhstan; Russia; Venezuela
    JEL: E31 E32 F31
    Date: 2009–07–01
  48. By: Rose, Andrew K; Spiegel, Mark
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring cross-country "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly-cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing.
    Keywords: country;; credit;; cross-section; data; empirical; international;; MIMIC.; model;; stock;
    JEL: E65 F30
    Date: 2009–07
  49. By: patrick Minford (Cardiff Business School, Aberconway Building, Cardiff University, Colum Drive, Cardiff, Wales, United Kingdom, CF 10 3EU); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: We develop an empirical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The model here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of shocks and the institutional structure of the economy; the channel through which these two forces feed on each other is a political economy process whereby voters with 'limited information' on the natural rate of unemployment react to shocks by demanding more or less social protection. The reduced form results from a dozen OECD economies give support to the model prediction of a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks and the model specification is superior in forecasting performance out of sample to alternative models of `generalised hysteresis'.
    Keywords: Equilibrium unemployment, political economy, vicious and virtuous circles, bootstrapping, forecasting
    JEL: E24 E27 P16
    Date: 2009–06
  50. By: Ganelli , Giovanni (International Monetary Fund, IMF Institute); Tervala, Juha (Bank of Finland Research)
    Abstract: This paper focuses on the trade-off faced by governments in deciding the allocation of public expenditures between productivity-enhancing public infrastructures and utility-enhancing public consumption in a two-country model. The results show that a permanent increase in the domestic stock of public capital financed by a reduction in public consumption raises domestic welfare if the productivity of public capital is high and the weight of public consumption in private utility is low compared with private consumption. The effect on foreign welfare is negative in the short run, but positive in the long run. This implies that, if foreign authorities care not only about the present discounted value of welfare but also about welfare dynamics, a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.
    Keywords: public spending composition; welfare; imperfect competition; nominal rigidities
    JEL: E62 F41 H42 H54
    Date: 2009–03–03
  51. By: Dinga, Ene (Centrul de Cercetari Financiare si Monetare Victor Slavescu); Padurean, Elena (Centrul de Cercetari Financiare si Monetare Victor Slavescu)
    Abstract: The study is focused on identifying of the features of the concept of automatic fiscal stabilizers as well as on logic and economic assessment of them. The result of these steps is developing the definition of automatic fiscal stabilizer. Based on the definition, the sufficient predicates (attributes) of the automatic fiscal stabilizer (i.e. those characteristics that, once verified, ensure the quality of automatic fiscal stabilizer) are identified and, based on the last, are also identified the necessary predicates (attributes) of it. A particularly important aspect is the formal description of the generic action of the automatic fiscal stabilizer in different assumptions of the variation rate action, and of the variation of the base action of this special institutional tool. The study ends with analyzing the portfolio problem of the automatic fiscal stabilizers that could be designed and implemented under a non-discretionary fiscal policy framework.
    Keywords: automatic; fiscal; stabilizers
    JEL: E62 E63 H30
    Date: 2009–07–01
  52. By: Kilponen, Juha (Bank of Finland Research)
    Abstract: This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest that during a severe financial distress both non-separability and collateral constraints are needed to capture excess sensitivity of consumption to current economic conditions. During more tranquil times, evidence on collateral effects is more limited and non-separability is sufficient to make the Euler consumption equation agree well with the data.
    Keywords: housing; financial distress; excess sensitivity of consumption
    JEL: E21 E32 E44
    Date: 2009–03–24
  53. By: Thomas Hintermaier (Institute for Advanced Studies (IHS), Vienna); Winfried Koeniger (Queen Mary, University of London, and IZA)
    Abstract: We provide a model with endogenous portfolios of secured and unsecured household debt. Secured debt is collateralized by durables whereas unsecured debt can be discharged in bankruptcy procedures. We show that the model matches the main quantitative characteristics of observed wealth and debt portfolios in the US and some of the observed changes over time. Furthermore, we establish two quantitative results. Firstly, modest levels of risk aversion are necessary to match observed debt portfolios. Secondly, durables do not improve consumers' access to unsecured credit, and plausible variations of durable exemptions in bankruptcy procedures have very small effects on the equilibrium.
    Keywords: Household debt portfolios, Durables, Collateral, Income risk, Bankruptcy
    JEL: E21 D91
    Date: 2009–06
  54. By: David H. Autor; David Dorn
    Abstract: After a decade in which wages and employment fell precipitously in low-skill occupations and expanded in high-skill occupations, the shape of U.S. earnings and job growth sharply polarized in the 1990s. Employment shares and relative earnings rose in both low and high-skill jobs, leading to a distinct U-shaped relationship between skill levels and employment and wage growth. This paper analyzes the sources of the changing shape of the lower-tail of the U.S. wage and employment distributions. A first contribution is to document a hitherto unknown fact: the twisting of the lower tail is substantially accounted for by a single proximate cause--rising employment and wages in low-education, in-person service occupations. We study the determinants of this rise at the level of local labor markets over the period of 1950 through 2005. Our approach is rooted in a model of changing task specialization in which `routine' clerical and production tasks are displaced by automation. We find that in labor markets that were initially specialized in routine-intensive occupations, employment and wages polarized after 1980, with growing employment and earnings in both high-skill occupations and low-skill service jobs.
    JEL: E24 J24 J31 J62 O33
    Date: 2009–07
  55. By: Ecobici, Nicolae; Busan, Gabriela
    Abstract: New tax rules with effect from 1 May 2009 with a series of changes on the tax deductibility of the value added acquisitions related to transport and fuel use. The measure is very obvious nature of politics in order to bring the state budget amounts as required under the current government crisis in the financial world. The book focuses on not commenting policy modifications as required on the implications that they bring in on the accounting chargeback. Therefore, in the paper we will address the resolution of these legal provisions in the economic accounts.
    Keywords: reverse charging; intra-transportation means; new tax regulations; the accounting chargeback; transport and fuel use; deductibility
    JEL: E62 H8 M41
    Date: 2009–04–26

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