nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒07‒17
forty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Estimating Central Bank Preferences under Commitment and Discretion. By Gregory E. Givens
  2. The Impact of the European Monetary Union on Ination Persistence in the Euro Area By Barbara Meller; Dieter Nautz
  3. Asset price misalignments and the role of money and credit. By Dieter Gerdesmeier; Barbara Roffia; Hans-Eggert Reimers
  4. Monetary Policy and Inflationary Shocks Under Imperfect Credibility. By Matthieu Darracq Pariès; Stéphane Moyen
  5. Monetary rules and the spillover of regional fiscal policies in a federation. By Cooper, R.; Kempf, H.; Peled, D.
  6. Monetary Transmission in three Central European Economies: Evidence from Time-Varying Coefficient Vector Autoregressions By Zsolt Darvas
  7. Welfare-based optimal monetary policy with unemployment and sticky prices: a linear-quadratic framework By Federico Ravenna; Carl E. Walsh
  8. Identification of slowdowns and accelerations for the euro area economy. By Darné, O.; Ferrara, L.
  9. A small open economy model for Nigeria: a BVAR-DSGE approach By Olayeni, Olaolu Richard
  10. Using Seasonal Models to Forecast Short-Run Inflation in Mexico. By Carlos Capistrán; Christian Constandse; Manuel Ramos Francia
  11. The dynamic effects of shocks to wages and prices in the United States and the Euro Area. By Rita Duarte; Carlos Robalo Marques
  12. Does money matter in inflation forecasting? By Jane M. Binner; Peter Tino; Jonathan Tepper; Richard G. Anderson; Barry Jones; Graham Kendall
  13. Determination of Inflation in an Open Economy Phillips Curve Framework-- The Case of Developed and Developing Asian Countries By Pami Dua; Upasna Gaur
  14. International Monies, Special Drawing Rights, and Supernational Money By Pietro Alessandrini; Michele Fratianni
  15. Structural Inflation Models with Real Wage Rigidities: The Case of Canada By Jean-Marie Dufour; Lynda Khalaf; Maral Kichian
  16. Variantes en Univers Incertain. By Adjemian, S.; Cahn, C.; Devulder, A.; Maggiar, N.
  17. The role of banks in monetary policy transmission: Empirical evidence from Russia By Juurikkala, Tuuli; Solanko, Laura; Karas, Alexei
  18. Search, Nash Bargaining and Rule of Thumb Consumers By José Emilio Boscá; Javier Ferri; Rafa Doménech
  19. Examining the Decoupling Hypothesis for India By Shruthi Jayaram
  20. Non-price Competition, Real Rigidities and Inflation Dynamics By Francesco Turino
  21. Inflation and Growth: New Evidence From a Dynamic Panel Threshold Analysis By Stephanie Kremer; Alexander Bick; Dieter Nautz
  22. Technological Change and the Roaring Twenties: A Neoclassical Perspective By Sharon Harrison; Mark Weder
  23. The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting By INABA Masaru; NUTAHARA Kengo
  24. Credit Constraints, Cyclical Fiscal Policy and Industry Growth By Aghion, Philippe; Hemous, David; Kharroubi, Enisse
  25. "Fiscal Policy and the Economics of Financial Balances" By Gennaro Zezza
  26. Fiscal Stimulus: A Neoclassical Perspective By Strulik, Holger; Trimborn, Timo
  27. No-arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth. By Jardet, C.; Monfort, A.; Pegoraro, F.
  28. The Evolution of Paper Money By Levintal, Oren; Zeira, Joseph
  29. Time-varying (S, s) band models: empirical properties and interpretation By Gautier, E.; Le Bihan, H.
  30. A study of U.S. monetary policy implementation: demand for reserves on a period average basis By Ruth Judson; Elizabeth Klee
  31. The Banking Crisis - A Rational Interpretation By Minford, Patrick
  33. The impact of macroeconomic announcements on real time foreign exchange rates in emerging markets By Fang Cai; Hyunsoo Joo; Zhiwei Zhang
  35. Child Benefit and Fiscal Burden: OLG Model with Endogenous Fertility By Kazumasa, Oguro; Junichiro , Takahata; Manabu, Shimasawa
  36. Is there a revolution in American saving? By Tatom, John
  37. Macro stress testing with a macroeconomic credit risk model: Application to the French manufacturing sector. By Avouyi-Dovi, S.; Bardos, M.; Jardet, C.; Kendaoui, L.; Moquet , J.
  38. A Bank for All Seasons: The Bank of Canada and the Regulatory Challenge By John Crow
  39. Hong Kong's Financial Market Interactions with the US and Mainland China in Crisis and Tranquil Times By Dong He; Zhiwei Zhang; Honglin Wang
  40. Econometric Approach to Early Warnings of Vulnerability in the Banking System and Currency Markets for Hong Kong and Other EMEAP Economies By Matthew S. Yiu; Alex Ho; Lu Jin
  41. La crisi 2007-?: Fatti, ragioni e possibili conseguenze By Andrea Filippo Presbitero
  43. Inequality and Specialization: The Growth of Low-Skill Service Jobs in the United States By Autor, David; Dorn, David
  44. A Study on Financial Deficit and Declining Birthrate — From the Viewpoint of “Children as a Social Security Revenue Source” —- By Kazumasa, Oguro; Shoichiro, Yuyama
  45. Inequality and Unemployment in a Global Economy By Helpman, Elhanan; Itskhoki, Oleg; Redding, Stephen J

  1. By: Gregory E. Givens
    Abstract: This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model.
    Keywords: Optimal Monetary Policy, Commitment, Discretion, Policy Preferences
    JEL: E52 E58 E61 C32 C61
    Date: 2009–06
  2. By: Barbara Meller; Dieter Nautz
    Abstract: This paper uses the European Monetary Union (EMU) as a natural experiment to investigate whether more effective monetary policy reduces the persistence of inflation. Taking into account the fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area probably as a result of the more effective monetary policy of the ECB.
    Keywords: Monetary Policy Effectiveness and Inflation Persistence, Panel Test for Fractional Integration, Change in Inflation Persistence
    JEL: C22 C23 E31
    Date: 2009–07
  3. By: Dieter Gerdesmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Hans-Eggert Reimers (Hochschule Wismar, Postfach 1210, D-23952 Wismar, Germany.)
    Abstract: This paper contributes to the literature on the properties of money and credit indicators for detecting asset price misalignments. After a review of the evidence in the literature on this issue, the paper discusses the approaches that can be considered to detect asset price busts. Considering a sample of 17 OECD industrialised countries and the euro area over the period 1969 Q1 – 2008 Q3, we construct an asset price composite indicator which incorporates developments in both the stock price and house price markets and propose a criterion to identify the periods characterised by asset price busts, which has been applied in the currency crisis literature. The empirical analysis is based on a pooled probit-type approach with several macroeconomic monetary, financial and real variables. According to statistical tests, credit aggregates (either in terms of annual changes or growth gap), changes in nominal long-term interest rates and investment-to-GDP ratio combined with either house prices or stock prices dynamics turn out to be the best indicators which help to forecast asset price busts up to 8 quarters ahead. JEL Classification: E37, E44, E51.
    Keywords: Asset prices, house prices, stock prices, financial crisis, asset price busts, probit models, monetary aggregates, credit aggregates.
    Date: 2009–07
  4. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (Deutsche Bundesbank, Taunusanlage 5, D-60329 Frankfurt am Main, Germany.)
    Abstract: This paper quantifies the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where price and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4.
    Keywords: Monetary policy; Imperfect credibility; Signal extraction.
    Date: 2009–06
  5. By: Cooper, R.; Kempf, H.; Peled, D.
    Abstract: This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modelled here as reserve requirements. When capital markets are integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.
    Keywords: Monetary Union ; Inflation tax ; Seigniorage ; monetary rules ; public debt.
    JEL: E31 E42 E58 E62
    Date: 2009
  6. By: Zsolt Darvas (Bruegel, Institute of Economics of the Hungarian Academy of Sciences and Corvinus University of Budapest)
    Abstract: This paper studies the transmission of monetary policy to macroeconomic variables in three new EU Member States in comparison with that in the euro area with structural time-varying coefficient vector autoregressions. In line with the Lucas Critique reduced-form models like standard VARs are not invariant to changes in policy regimes. The countries we study have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that in the euro area the impact on output of a monetary shock have decreased in time while in the new member states of the EU both decreases and increases can be observed. At the last observation of our sample, the second quarter of 2008, monetary policy was the most powerful in Poland and comparable in strength to that in the euro area, the least powerful responses were observed in Hungary while the Czech Republic lied in between. We explain these results by the credibility of monetary policy, openness and the share of foreign currency loans.
    Keywords: monetary transmission, time-varying coefficient vector autoregressions, Kalman-filter
    JEL: C32 E50
    Date: 2009–07–02
  7. By: Federico Ravenna; Carl E. Walsh
    Abstract: In this paper, we derive a linear-quadratic model for monetary policy analysis that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how the costs of fluctuations are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We use the model to analyze optimal monetary policy under commitment and discretion and to show that the structural characteristics of the labor market have important implications for optimal policy.
    Keywords: Monetary policy ; Econometric models
    Date: 2009
  8. By: Darné, O.; Ferrara, L.
    Abstract: In addition to quantitative assessment of economic growth using econometric models, business cycle analyses have been proved to be helpful to practitioners in order to assess current economic conditions or to anticipate upcoming fluctuations. In this paper, we focus on the acceleration cycle in the euro area, namely the peaks and troughs of the growth rate which delimitate the slowdown and acceleration phases of the economy. Our aim is twofold: First, we put forward a reference turning point chronology of this cycle on a monthly basis, based on gross domestic product and industrial production index. We consider both euro area aggregate level and country specific cycles for the six main countries of the zone. Second, we come up with a new turning point indicator, based on business surveys carefully watched by central banks and short-term analysts, in order to follow in real-time the fluctuations of the acceleration cycle. Classification-JEL : C22, C52, E32.
    Keywords: Acceleration cycle, Euro area, Dating chronology, Turning point indicator, Business surveys.
    Date: 2009
  9. By: Olayeni, Olaolu Richard
    Abstract: Motivated by the way a small open economy should react to business cycles, we have estimated a small open economy (SOE) model for Nigeria. This is with a view to understanding how the Nigerian economy should be managed in the face of a cycle such as the current global meltdown. Our SOE model is used to generate dummy observation priors for the VAR in line with the BVAR-DSGE technique. We consider four monetary policy rules and estimate each of the resulting models using DYNARE 4.0.2. We find that the Central Bank of Nigeria (CBN) places little weight on the exchange rate behaviour in reacting to the cycles, resulting in overshooting and persistence in the exchange rate but strongly reacts to the behaviour of inflation and, to a lesser degree, of output, output gap or its growth following the shocks. We conclude that it will be important for the CBN to pursue a guided exchange rate policy by actively responding to the exchange rate movement to avoid overshooting and persistence, that the terms of trade must be endogenize and that there is scope for the CBN to learn from past policy outcome by building a much stronger feedback.
    Keywords: BVAR-DSGE; SOE; Nigeria
    JEL: D58 C11 C01
    Date: 2009–06–08
  10. By: Carlos Capistrán; Christian Constandse; Manuel Ramos Francia
    Abstract: Since the adoption of inflation targeting, the seasonal appears to be the component that explains the major part of inflation's total variation in Mexico. In this context, we study the performance of seasonal time series models to forecast short-run inflation. Using multi-horizon evaluation techniques, we examine the real-time forecasting performance of four well-known seasonal models using data on 16 indices of the Mexican Consumer Price Index (CPI), including headline and core inflation. These models consider both, deterministic and stochastic seasonality. After selecting the best forecasting model for each index, we apply and compare two methods that aggregate hierarchical time series, the bottom-up method and an optimal combination approach. The best forecasts are able to compete with those taken from surveys of experts.
    Keywords: Aggregated forecasts, bottom-up forecasting, forecast combination, hierarchical time series, inflation targeting, multi-horizon evaluation, seasonal unit roots.
    JEL: C22 C52 C53 E37
    Date: 2009–07
  11. By: Rita Duarte (Banco de Portugal, Research Department, 148 Rua do Comercio, P-1101 Lisbon Codex, Portugal.); Carlos Robalo Marques (Banco de Portugal, Research Department, 148 Rua do Comercio, P-1101 Lisbon Codex, Portugal.)
    Abstract: This paper investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent productivity shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the paper. JEL Classification: C32, C51, E31, J30.
    Keywords: structural error-correction model, impulse response function, persistence.
    Date: 2009–07
  12. By: Jane M. Binner; Peter Tino; Jonathan Tepper; Richard G. Anderson; Barry Jones; Graham Kendall
    Abstract: This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s. We explore a wide range of different definitions of money, including different methods of aggregation and different collections of included monetary assets. In our forecasting experiment we use two non-linear techniques, namely, recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics. Recurrent neural networks operate with potentially unbounded input memory, while the kernel regression technique is a finite memory predictor. The two methodologies compete to find the best fitting US inflation forecasting models and are then compared to forecasts from a naive random walk model. The best models were non-linear autoregressive models based on kernel methods. Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation.
    Keywords: Forecasting ; Inflation (Finance) ; Monetary theory
    Date: 2009
  13. By: Pami Dua (Department of Economics, Delhi School of Economics, Delhi, India); Upasna Gaur (Global Research Group, ICICI Bank Mumbai)
    Abstract: This paper investigates the determination of inflation in the framework of an open economy forward-looking as well as conventional backward-looking Phillips curve for eight Asian countries - Japan, Hong Kong, Korea, Singapore, Philippines, Thailand, China Mainland and India. Using quarterly data from the 1990s to 2005 and applying the instrumental variables estimation technique, we find that the output gap is significant in explaining the inflation rate in almost all the countries. Furthermore, at least one measure of international competitiveness has a statistically significant influence on inflation in all the countries. The differences in the developed and developing world are highlighted by the significance of agriculture related supply shocks in determining inflation in the case of developing countries. For all countries, the forward-looking Phillips curve provides a better fit compared to the backward looking variant.
    Date: 2009–04
  14. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR)
    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: Special Drawing Right, international monetary system, international money, supernational bank money
    JEL: E42 E52 F33 F36
    Date: 2009–07
  15. By: Jean-Marie Dufour; Lynda Khalaf; Maral Kichian
    Abstract: Real wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent illustrative structural models, we evaluate empirically the importance of real wage rigidities in the data and the extent to which such models provide useful information regarding price stickiness. Structural estimation and testing is carried out using Canadian data and identification-robust methods. <br><br> Results based on one of the models are relatively uninformative. Our tests reveal important identification difficulties and considerable estimate uncertainty, as can be seen from the wide projections for the estimates. However, we obtain economically reasonable ranges for estimates of average frequency of price changes and some evidence for rigidity in real wages (as measured by a rigidity index) based on the other model we examine. In addition, our specification for the latter model yields significant [at usual levels] and correctly-signed reduced-form coefficient estimates, showing a trade-off between unemployment and inflation in the New Keynesian Phillips curve. From a methodological perspective, these results derive from our treatment of the productivity term as observable although with error, which seems to capture vital information and improve overall identification. From a substantive perspective, our findings suggest that wage-rigidity based New Keynesian Phillips Curves hold promise empirically and provide interesting research directions.
    Keywords: Inflation and prices; Labour markets; Econometric and statistical methods
    JEL: C13 C52 E31
    Date: 2009
  16. By: Adjemian, S.; Cahn, C.; Devulder, A.; Maggiar, N.
    Abstract: In this paper, we try to illustrate the interest of the Bayesian approach for the evaluation of economic policies, often realised by analysing the response of the economy to a standard shock. We present a Stochastic Dynamic General Equilibrium model for the euro area. The Bayesian estimation gives a measure of the uncertainty on the parameters, from which we can derive the uncertainty of the responses to standard shocks. As an illustration, we simulate the effects of a fiscal shock (announced VAT increase).
    Keywords: DSGE, Euro zone, Nominal rigidities, Bayesian estimation.
    JEL: E4 E5
    Date: 2009
  17. By: Juurikkala, Tuuli (BOFIT); Solanko, Laura (BOFIT); Karas, Alexei (BOFIT)
    Abstract: This paper focuses on the role of the banking sector in monetary policy transmission in an emerging economy with a rapidly developing financial system. Specifically, we exam whether the central bank's monetary policy stance affects banks' lending behaviour. Based on a comprehensive quarterly dataset on all Russian banks from 1Q1999 to 1Q2007, we find evidence for the existence of a bank lending channel in Russia. Contrary to several studies on developed economies, the level of a bank's capitalization matters for the transmission process. Better capitalized banks are less likely to adjust their lending practices following a change in the monetary policy stance.
    Keywords: monetary policy transmission; bank lending; Russia
    JEL: C23 E44 E52 G21
    Date: 2009–07–06
  18. 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
  19. By: Shruthi Jayaram
    Abstract: This paper examines the decoupling hypothesis for India. This paper analyses business cycle synchronization between India and a set of industrial economies, particularly the United States, over the period 1992 to 2008. The evidence suggests that the Indian business cycle exhibits increasing co-movement with business cycles in industrial economies over this period. Indian business cycle synchronization is stronger with industrial countries as a whole as opposed to the co-movement found with the US.
    Keywords: Business cycles, synchronization, decoupling, trade, dynamic correlation
    Date: 2009
  20. By: Francesco Turino (Universidad de Alicante)
    Abstract: In the last decade, the analytical progress achieved in the New Keynesian literature has been remarkable. Many of the early assumptions have been relaxed, leading to medium-scale macroeconomic models that are now able to capture many features of real-world data. Nevertheless, modern-day New Keynesian models still assume, as did their early counterparts, that firms compete in the market with no tools other than their relative prices. In particular, this literature has so far neglected the consequences of extending competition between firms to the non-price dimension. This paper tries to fill this gap by enriching the canonical New Keynesian framework to include both price and non-price competition. This has important consequences for the analysis of inflation dynamics, modifying in particular the inflation-marginal cost relationship. As a general result, we show that any activity by firms that boosts demand for their products, without directly affecting their prices, dampens the overall degree of real rigidities in price-setting.
    Keywords: Non-price competition, inflation dynamics, real rigidity
    JEL: E31 L11
    Date: 2009–07
  21. By: Stephanie Kremer; Alexander Bick; Dieter Nautz
    Abstract: We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries.
    Keywords: Inflation Thresholds, Inflation and Growth, Dynamic Panel Threshold Model
    JEL: E31 C23 O40
    Date: 2009–07
  22. By: Sharon Harrison (Barnard College, Columbia University); Mark Weder (University of Adelaide)
    Abstract: Annualized output growth in the United States was highest during the 1920s, as compared to any other of Fields (2003, 2009) growth cycles. This motivates us to address the causes of the Roaring Twenties in the United States. In particular, we use a version of the real business cycle model to test the hypothesis that an extraordinary pace of productivity growth was the driving factor. Our motivation comes from the abundance of evidence of signi…cant technological progress during this period, fed by innovations in manufacturing and the widespread introduction of electricity. Our estimated total factor productivity series generate arti…cial model output that shows high conformity with the data: the model economy successfully replicates the boom years from 1922-1929.
    Keywords: Real Business Cycles, Roaring Twenties.
    JEL: E32 N12
    Date: 2009–04
  23. By: INABA Masaru; NUTAHARA Kengo
    Abstract: Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of the representative models with investment frictions. Based on our findings, BCA leads us to conclude that models with investment wedges are not promising according to the criteria of BCA, even though the true model contains investment frictions.
    Date: 2009–06
  24. By: Aghion, Philippe; Hemous, David; Kharroubi, Enisse
    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.
    Keywords: counter-cyclicality; financial dependence; fiscal policy; growth
    JEL: E32 E62
    Date: 2009–07
  25. By: Gennaro Zezza
    Abstract: This paper presents the main features of the macroeconomic model being used at The Levy Economics Institute of Bard College, which has proven to be a useful tool in tracking the current financial and economic crisis. We investigate the connections of the model to the "New Cambridge" approach, and discuss other recent approaches to the evolution of financial balances for all sectors of the economy. We will finally show the effects of fiscal policy in the model, and its implications for the proposed fiscal stimulus on the U.S. economy. We show that the New Cambridge hypothesis, which claimed that the private sector financial balance would be stable relative to income in the short run, does not hold for the short term in our model, but it does hold for the medium/long term. This implies that the major impact of the fiscal stimulus in the long run will be on the external imbalance, unless other measures are taken.
    Date: 2009–07
  26. By: Strulik, Holger; Trimborn, Timo
    Abstract: Can a large-scale defcit spending program speed up recovery after recession? To answer that question we calibrate a standard neoclassical growth model with US data and assume that an exogenous shock has driven aggregate output far below steady-state level. We calibrate the model such that a permanent increase of government expenditure is effective in raising output. We then show that "fiscal stimulus", i.e. a temporary increase of government expenditure is not only ineffective but detrimental. Even before the spending program expires, aggregate output is lower than it could be without fiscal stimulus. We show the generality of this result w.r.t. size and persistence of the shock, size of the government spending multiplier, and the scale and duration of the stimulus program. Using a phase diagram we provide the economic intuition for our unpleasant finding and explain why, generally, private capital stock reaches its lowest level when a deficit spending program expires. We also show how an accompanying temporary cut of capital income taxes helps to prevent the negative repercussion of deficit spending on economic recovery.
    Keywords: deficit spending, government spending multiplier, economic recovery, economic growth
    JEL: E60 H30 H50 O40
    Date: 2009–07
  27. By: Jardet, C.; Monfort, A.; Pegoraro, F.
    Abstract: Macroeconomic questions involving interest rates generally require a reliable joint dynamics of a large set of variables. More precisely, such a dynamic modelling must satisfy two important conditions. First, it must be able to propose reliable predictions of some key variables. Second, it must be able to propose a joint dynamics of some macroeconomic variables, of the whole curve of interest rates, of the whole set of term premia and, possibly, of various decompositions of the term premia. The first condition is required if we want to disentangle the respective impacts of, for instance, the expectation part of the term premium of a given long-term interest rate on some macroeconomic variable. The second condition is necessary if we want to analyze the interactions between macro-variables with some global features of the yield curve (short part, long part, level, slope and curvature) or with, for instance, term premia of various maturities. In the present paper we propose to satisfy both requirements by using a Near-Cointegrated modelling of basic observables variables, in order to meet the first condition, and the no-arbitrage theory, in order to meet the second one. Moreover, the dynamic interactions of this large set of variables is based on the statistical notion of New Information Response Function, recently introduced by Jardet, Monfort and Pegoraro (2009). This technical toolkit is then used to propose a new approach to two important issues: the "conundrum" episode and the puzzle of the relationship between the term premia on long-term yields and future economic activity.
    Keywords: Near-Cointegrated VAR(p) model ; Term structure of interest rates ; Term premia ; GDP growth ; No-arbitrage affine term structure model ; New Information Response Function.
    JEL: C51 E43 E44 E47 G12
    Date: 2009
  28. By: Levintal, Oren; Zeira, Joseph
    Abstract: This paper tells the story of how paper money evolved as a result of lending by banks. While lending commodity money requires holding large reserves of commodity money to ensure liquidity, issuing convertible paper money reduces these costs significantly. The paper also examines the possibility of issuing inconvertible notes and shows that while they further reduce the cost of borrowing they also have adverse effects on the stability of the banking system. As a result, governments often intervened, either outlawing the issuance of such notes, or monopolizing them for themselves by issuing fiat money. The paper examines the process of creation of paper money, but also sheds light on more general issues, like the relation between money and financial intermediation.
    Keywords: Banks; Convertibility; Fiat Money; Financial Intermediation; Liquidity; Paper Money
    JEL: E4 E5 N1 N2
    Date: 2009–07
  29. By: Gautier, E.; Le Bihan, H.
    Abstract: . A recent strand of empirical work uses (S; s) models with time-varying stochastic bands to describe infrequent adjustments of prices and other variables. The present paper examines some properties of this model, which encompasses most micro-founded adjustment rules rationalizing infrequent changes. We illustrate that this model is also flexible enough to fit data characterized by infrequent adjustment and variable adjustment size. We show that, to the extent that there is variability in the size of adjustments (e.g. if both small and large price changes are observed), i) a large band parameter is needed to fit the data and ii) the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment. The paper thus provides a rationalization of a recurrent empirical result: very large estimated values for the parameters measuring the band of inaction.
    Keywords: (S; s) models ; adjustment costs ; menu costs.
    JEL: E31 D43 L11
    Date: 2009
  30. By: Ruth Judson; Elizabeth Klee
    Abstract: This paper provides new estimates of banks' demand for excess reserve balances on a period average basis. Consistent with theoretical work, we find that the demand for excess depends critically on uncertainty of flows in and out of reserve accounts. We also document the variability of demand for excess reserve balances by institution size, evaluate different models for forecasting demand for excess on a period average basis, and report the forecasting performance of each of these models. Finally, we present analysis of the period of financial turmoil seen over the year since August, 2007.
    Date: 2009
  31. By: Minford, Patrick (Cardiff Business School)
    Abstract: Modern macroeconomic models have been widely criticised as relying too much on rationality and market efficiency. However, basically their predictions about this crisis are being borne out by events. 'Crashes' are an integral part of an 'efficient market' capitalism and are brought on by swings in the news about productivity growth; this time nearly two decades of strong computer-based productivity growth were brought to a crashing halt by raw material shortages. This presages a slow recovery until innovation in material use frees growth up again as it did in the 1990s after the shortages of the 1970s.
    Keywords: Macroeconomic models; Banking Crisis
    JEL: E0
    Date: 2009–07
  32. By: James Ang
    Abstract: This paper examines the role of financial sector policies in determining private investment in the economies of India and Malaysia. The results suggest that the presence of significant directed credit programs favoring certain priority sectors in the economies appear to be harmful for private capital formation in both countries. Interest rate controls seem to have a positive impact on investment in the private sector, and the effect is found to be stronger in India. While high reserve and liquidity requirements exert a negative influence on private investment in India, the effect is found to be positive in Malaysia.
    Keywords: Private investment; financial sector policies; India; Malaysia.
    JEL: E22 O16 O53
    Date: 2009–06
  33. By: Fang Cai; Hyunsoo Joo; Zhiwei Zhang
    Abstract: This paper utilizes a unique high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the returns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies systematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news.
    Date: 2009
  34. By: Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India)
    Abstract: In a two-sector model, where one of the sectors is monopolistically competitive and subject to increasing returns to scale but without love for variety, we analyze the effects of a balanced budget fiscal expansion. Such an expansion could increase the welfare of the representative individual, if elasticities of substitution in production and consumption are low. A reorganization of production takes place--increasing returns enabling a rise in real income.
    Keywords: New-Keynesian Models, Monopolistic Competition
    JEL: E1 E2 L1
    Date: 2008–09
  35. By: Kazumasa, Oguro; Junichiro , Takahata; Manabu, Shimasawa
    Abstract: In this paper, we present an OLG simulation model with endogenous fertility in order to analyze the relationship between child benefit and fiscal burden in Japan. Our simulation results show that expansion of the child benefit will improve the welfare of current and future generations. On the other hand, our findings show that we cannot expect a significant long-term improvement in welfare solely from implementing a policy of increasing the consumption tax. If both the sustainability of the fiscal budget and the improvement of the welfare of current and future generations are requirements, we will need to promote a strategy consisting of such components as a policy-mix that includes both child benefit expansion and additional fiscal reform, i.e. increasing the consumption tax. Implementation of such a policy-mix could be expected to yield a higher economic level in the welfare of current and future generations than could be expected solely from consumption tax reform.
    Keywords: Computable general equilibrium (CGE) model; overlapping generations (OLG); child benefit; endogenous fertility
    JEL: E62 J13 H55 E17 D61 J11
    Date: 2009–07
  36. By: Tatom, John
    Abstract: The personal saving rate spiked up to an unusually high level in 2008 and spring 2009, prompting many observers to suggest that the financial crisis has created a new thrift ethic, reversing decades of decline in U.S. saving to near zero. The depth of the recent financial and economic crisis has prompted many to believe that there has been a sea change in attitudes toward regulation, independence and personal responsibility and that a permanent rise in saving behavior has taken place. There are many reasons for personal saving to have surged recently, however, and most of them are very temporary, especially the Obama tax cut, so it is not likely that the personal saving rate will persist at a higher level. Betting on fundamental changes in behavior is a risky, dare we say foolish, business in the absence of more fundamental change in the economic environment or incentives.
    Keywords: Saving; Financial crisis; Personal saving rate
    JEL: E62 E21
    Date: 2009–05
  37. By: Avouyi-Dovi, S.; Bardos, M.; Jardet, C.; Kendaoui, L.; Moquet , J.
    Abstract: The aim of this paper is to build and estimate a macroeconomic model of credit risk for the French manufacturing sector. This model is based on Wilson's CreditPortfolioView model (1997a, 1997b); it enables us to simulate loss distributions for a credit portfolio for several macroeconomic scenarios. We implement two simulation procedures based on two assumptions relative to probabilities of default (PDs): in the first procedure, firms are assumed to have identical default probabilities; in the second, individual risk is taken into account. The empirical results indicate that these simulation procedures lead to quite different loss distributions. For instance, a negative one standard deviation shock on output leads to a maximum loss of 3.07% of the financial debt of the French manufacturing sector, with a probability of 99%, under the identical default probability hypothesis versus 2.61% with individual default probabilities.
    Keywords: macro stress test ; credit risk model ; loss distribution.
    JEL: G32 C22 C53
    Date: 2009
  38. By: John Crow (Bank of Canada (formerly))
    Abstract: The Bank of Canada must come to play a recognized, central leadership role in shaping policy if Canada is to better manage risks to financial sector stability. This can be accomplished by giving the Bank a clearly acknowledged oversight and investigative mandate regarding financial stability – which would not require statutory change – linked with the responsibility to report independently on the same.
    Keywords: financial services, Bank of Canada, financial sector stability
    JEL: E58 E62 E63
    Date: 2009–06
  39. By: Dong He (Research Department, Hong Kong Monetary Authority); Zhiwei Zhang (Research Department, Hong Kong Monetary Authority); Honglin Wang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper studies how financial markets in the US and Mainland China affected equity, money and foreign exchange markets in Hong Kong on daily basis during the current financial crisis, and how these financial linkages have changed compared with the experience in 2001. In the equity markets, the influence of the Mainland on Hong Kong has increased substantially in the current financial crisis, but it is still less important than that of the US. In the money market, correlation between HIBOR and LIBOR has picked up from the low levels observed during the tranquil period before the crisis, to almost the same level of correlation as observed during the IT bubble burst. In the foreign exchange market, the daily movements of the Hong Kong dollar/US dollar exchange rate have been rather small and mainly influenced by the short-term interest rates. Fund flows in different directions might have neutralised the impact of other markets on the foreign exchange market. A broad interpretation of these findings is that Hong Kong financial markets appear to be more aligned with the US markets in turbulent times, but relatively more integrated with the Mainland markets during the tranquil periods.
    Keywords: Financial markets interactions, Financial crisis
    JEL: E44 F36 C22
    Date: 2009–06
  40. By: Matthew S. Yiu (Research Department, Hong Kong Monetary Authority); Alex Ho (Research Department, Hong Kong Monetary Authority); Lu Jin (Research Department, Hong Kong Monetary Authority)
    Abstract: This study adopts an econometric approach to develop an early warning system of the vulnerability in the banking system and currency markets for the 11 EMEAP economies over the period from1990 to 2008. We identify a set of leading indicators of banking distress and currency pressure and investigate the causal and contemporaneous linkages between them by using separate panel probit models and a simultaneous probit equation system. Asset-price misalignments, default risk of commercial banks and the non-financial corporate sector, and growth of real credit to the private sector are found to be significant leading indicators for both banking distress and currency pressure. Economic growth, inflation and the ratio of short-term external debt to international reserves are found to be important determinants of banking distress, whereas growth of M2 relative to international reserves, total trade balance over GDP, real effective exchange rate over-valuation and trade integration with China are identified to be crucial indicators of currency pressure. Currency market pressure is shown to have strong leading and contemporaneous impacts on banking distress for the EMEAP economies but not vice versa. These findings imply that the policy measures aimed at sustaining exchange rate stability will have the additional benefit of lowering the likelihood of banking distress in the region. Lastly, China is found to play a stabilising role in the region, i.e. the greater the trade with China, the lower the chance of experiencing currency pressure.
    Keywords: Banking distress, Currency crises, Twin crises, Asia Pacific economies, econometric model
    JEL: E44 F31 F42 F47 G21
    Date: 2009–06
  41. By: Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: Come Š stato possibile che la crisi di un settore marginale della finanza statunitense si sia propagata cosi' rapidamente non solo alle altre economie avanzate, ma anche alle economie emergenti e in via di sviluppo, e abbia determinato conseguenze tanto gravi da indurre molti paesi a ripensare il ruolo dello Stato nell'economia? Questo lavoro prova a rispondere a questa domanda fornendo una chiave di lettura della situazione attuale, traendo spunto da una letteratura molto vasta ed in continua espansione. Vengono messe in luce le diverse cause della crisi e si confronta l'esperienza corrente con le crisi del passato per desumerne utili indicazioni sulle possibili conseguenze negli anni a venire. In particolare, l'intensita' e la scala globale della crisi hanno evidenziato alcune debolezze nel funzionamento dell'economia capitalistica che hanno radici sia in fenomeni strettamente economici, sia in altre trasformazioni della nostra societa' che hanno meno a che vedere con l'economia e piu' con aspetti culturali.
    Keywords: Crisi finanziaria, Disuguaglianze, Mutui subprime
    JEL: E44 G20 G21
    Date: 2009–07
  42. By: James Ang; Kunal Sen
    Abstract: In this paper, we provide a comparative account of the evolution of private saving in India and Malaysia, and analyze how policy changes in the financial sectors and pension systems help explain differences in their saving performance. Using the ARDL bounds estimation procedure, we find a fairly robust long-run relationship between private saving and its determinants in both countries. Consistent with the predictions made in the life cycle model, our results indicate that higher income growth stimulates private saving and an increase in age dependency retards private saving. The results provide some support for the hypothesis that financial liberalization results in lower private saving in both countries. The evidence also indicates that expected pension benefits tend to stimulate private saving in India, but that the reverse is found in Malaysia.
    Keywords: private savings; pension saving; financial liberalization; India; Malaysia.
    JEL: C22 O16 O53
    Date: 2009–06
  43. By: Autor, David (MIT); Dorn, David (CEMFI, Madrid)
    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.
    Keywords: skill demand, job tasks, inequality, polarization, technological change, occupational choice
    JEL: E24 J24 J31 J62 O33
    Date: 2009–07
  44. By: Kazumasa, Oguro; Shoichiro, Yuyama
    Abstract: While social security systems in the developed countries including Japan are taking pay-as-you-go system based on the cooperation between generations, the fertility number as a tax base of social security is decreasing and the low fertility tendency is common in the developed countries. And if each generation behaves with considering life-cycle and chooses the fertility level rationally, it is considered that there is a possibility that the existence of coverage for social security by fiscal deficit may affect the fertility to some extent. Hence, in this paper, if regarding children as a tax base of social security, we consider the following analysis; 1) from a macro viewpoint, by constructing a dynamic overlapping generation model, how the coverage for social security by fiscal deficit affects on fertility, 2) from a micro viewpoint, in case that there is no relationship between social security transfer and fertility of each household, how the fertility number in the whole economy affects. As a result, to 1), we get an implication that there is a possibility fiscal deficit may affect negatively on fertility from the time series analysis with using 17 countries panel data. Moreover, to 2), from a micro viewpoint, by simplified Nash equilibrium game, in case that there is no relationship between social security benefit and fertility number, there is a negative impact as compared to a social optimal fertility level. In this paper, it is shown that, if children are regarded as a tax base, in order to avoid the negative relationship, it is necessary to consider the following policies; 1) the coverage for social security by fiscal deficit should be set to zero, 2) and a system such that the payment schedule is depending on the number of household children should be introduced, considering the balance of benefit and burden.
    Keywords: Finacial deficit: endogenous fertility: child investment: social security system
    JEL: E62 H4 J13 H55 J1
    Date: 2008–07
  45. By: Helpman, Elhanan; Itskhoki, Oleg; Redding, Stephen J
    Abstract: This paper develops a new framework for examining the distributional consequences of international trade that incorporates firm and worker heterogeneity, search and matching frictions in the labor market, and screening of workers by firms. Larger firms pay higher wages and exporters pay higher wages than non-exporters. The opening of trade enhances wage inequality and raises unemployment, but expected welfare gains are ensured if workers are risk neutral. And while wage inequality is larger in a trade equilibrium than in autarky, reductions of trade impediments can either raise or reduce wage inequality.
    Keywords: International Trade; Risk; Unemployment; Wage Inequality
    JEL: E24 F12 F16
    Date: 2009–07
  46. By: Koi Nyen Wong; Tuck Cheong Tang
    Abstract: Manufacturing and services have been regarded as the “twin engines†of growth for Singapore economy. As the economy is moving up the value chain from downstream to upstream activities, a significant proportion of FDI (foreign direct investment) has been attracted to the manufacturing and services sectors. This paper examines the causal relationships between inward FDI and the host country’s employment in these two sectors using tri-variate VAR (vector autoregressive) framework. The main findings show evidence of unidirectional causality, running from employment in manufacturing and services to FDI inflows. Furthermore, there is evidence showing strong employment linkages, predominantly from the manufacturing to services. The present study provides useful policy implications towards promoting foreign investment in emerging areas of and manpower development in both sectors of the economy.
    Keywords: Causality; foreign direct investment; employment; Singapore.
    JEL: E24 F21
    Date: 2009–06

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