nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒07‒28
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Design of a ‘Two-Pillar’ Monetary Policy Strategy By Dai, Meixing
  2. "Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey" By James Butkiewicz
  3. Housing Finance and Monetary Policy. By Alessandro Calza; Tommaso Monacelli; Livio Stracca
  4. The sensitivity of South African inflation expectations to surprises By Monique Reid
  5. Monetary Policy Activism and Price Responsiveness to Aggregate Shocks under Rational Inattention By Paciello, Luigi
  6. Oil and the Euro Area Economy By G. PEERSMAN; I. VAN ROBAYS
  7. Insulation Impossible: Fiscal Spillovers in a Monetary Union By Russell Cooper; Hubert Kempf; Dan Peled
  8. Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data By Yinusa, D. Olalekan
  9. Policy Responses to Exchange-Rate Movements By Laurence M. Ball
  10. Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap By Ryu-ichiro Murota; Yoshiyasu Ono
  11. The impact of monetary policy on the yield curve in the Brazilian economy By Aranha, Marcel Z.; Moura, Marcelo L.
  12. Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia By Jean-Pierre Allegret; Kosta Josifidis; Emilija Beker Pucar
  13. Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts By John B. Donaldson; Natalia Gershun; Marc P. Giannoni
  14. Forecasting Inflation Using Dynamic Model Averaging By Gary Koop; Dimitris Korobilis
  15. Küreselleşme ve Enflasyon:Küresel Çıktı Açığı Hipotezi-Türkiye Örneği By Ercan Eren; Serkan Çiçek
  16. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts By Jean Tirole; Emmanuel Farhi
  17. The Bank Lending Channel of Monetary Transmission in Brazil: A VECM Approach By Luiz de Mello; Mauro Pisu
  18. Empirical estimates of changing inflation dynamics By Jeff Fuhrer; Giovanni Olivei; Geoffrey M. B. Tootell
  19. Search in the ProductMarket and the Real Business Cycle By Thomas, Y. MATH€; Olivier, PIERRARD
  20. Monetary Policy Committees: meetings and outcomes. By Jan Marc Berk; Beata K. Bierut
  21. Coinage and Monetary Policies in Burgundian Flanders during the late-medieval 'Bullion Famines',. 1384 - 1482 By John H. Munro
  22. Heterogeneity and Cyclical Unemployment By Mark Bils; Yongsung Chang; Sun-Bin Kim
  23. Inventory Investment and the Real Interest Rate By Junayed, Sadaquat; Khan, Hashmat
  24. Endogenous income taxes in OLG economies By Zhang, Yan; Chen, Yan
  25. Rebalancing Growth in Asia By Eswar S. Prasad
  26. Estimation of DSGE Models When the Data are Persistent By Yuriy Gorodnichenko; Serena Ng
  27. On the Establishment Dynamics in the United States and Japan By Toshihiko Mukoyama
  28. Equipping Ourselves in Tough times: Canada's Improved Business Investment Performance By Colin Busby; William P.B. Robson
  29. The Location of Financial Activities: The Impact of New Technologies and the Financial Crisis By Gunther Capelle-Blancard; Yamina Tadjeddine
  30. The Role of Convenience and Risk in Consumers' Means of Payment By Carlos Arango; Varya Taylor
  31. The Determinants of International Reserves in the Emerging Countries: a Non-Linear Approach By Delatte, Anne-Laure; Fouquau, Julien
  32. Sectoral R&D Intensity and Exchange Rate Volatility: A Panel Study for OECD Countries By Prashanth Mahagaonkar; Rainer Schweickert; Aditya S. Chavali
  33. The impact of the increase in food prices on child poverty and the policy response in Mali By Sami Bibi; John Cockburn; Luca Tiberti; Massa Coulibaly
  34. Is this Risk Insurable? A Response to Sebastian Schich By Todd, Walker F.

  1. By: Dai, Meixing
    Abstract: In this paper, it is argued that money supply in a narrow sense and repo interest rate are two independent monetary policy instruments when the effect of interest rate policy cannot be efficiently transmitted to the economy through the monetary and financial markets. In this case, the control of money supply is necessary to reduce the discrepancy between the repo interest rate and the interest rates at which private agents lend and borrow. Using a simple macro-economic model, this study shows how a twopillar monetary policy strategy as practiced by the European central bank (ECB) can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary targeting. Well conceived monetary targeting with a commitment to a long-run money growth rate corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, an inflation-targeting regime associated with Friedman’s money supply rule can generate dynamic instability in output, inflation and money demand. Three feedback monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability of warranting macroeconomic stability.
    Keywords: Two-pillar monetary policy strategy, inflation targeting, monetary targeting, macroeconomic stability, Friedman’s k-percent rule
    JEL: E44 E52 E58
    Date: 2009
  2. By: James Butkiewicz (Department of Economics,University of Delaware)
    Abstract: Turkey experienced a financial crisis in 2000-2001 which led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy’s output effects have been strengthened considerable by the reforms. In the pre-crisis period monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy.
    Keywords: monetary transmission mechanism, central bank independence, inflation targeting.
    JEL: E42
    Date: 2009
  3. By: Alessandro Calza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tommaso Monacelli (IGIER, Università Bocconi, Via Sarfatti, 25 Milano, Italy.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We study how the structure of housing finance affects the transmission of monetary policy shocks. We document three main facts: first, the features of residential mortgage markets differ markedly across industrialized countries; second, and according to a wide range of indicators, the transmission of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility/development of mortgage markets; third, the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable-rate type. We build a two-sector DSGE model with price stickiness and collateral constraints and analyze how the response of consumption and residential investment to monetary policy shocks is affected by alternative values of two institutional features: (i) down-payment rate; (ii) interest rate mortgage structure (variable vs. fixed rate). In line with our empirical evidence, the sensitivity of both variables to monetary policy shocks increases with lower values of the down-payment rate and is larger under a variable- rate mortgage structure. JEL Classification: E21, E44, E52.
    Keywords: Housing finance, mortgage markets, collateral constraint, monetary policy.
    Date: 2009–07
  4. By: Monique Reid (Department of Economics, University of Stellenbosch)
    Abstract: Price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack, Sack and Swanson (2005a) is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa’s results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged inflation expectations to be relatively insensitive to macroeconomic surprises, and offers support for the inflation targeting framework as a means to help anchor inflation expectations.
    Keywords: South Africa, Inflation targeting, Macroeconomic surprises, Sensitivity of inflation expectations
    JEL: E31 E52 E58
    Date: 2009
  5. By: Paciello, Luigi
    Abstract: This paper presents a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. The model of this paper builds on recent work by Mackowiak and Wiederholt (2009), who show that models of endogenous attention allocation deliver prices to be more responsive to more volatile shocks as, everything else being equal, firms pay relatively more attention to more volatile shocks. In fact, according to the U.S. data, aggregate technology shocks are more volatile than monetary policy shocks inducing in this paper, firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by showing that the ability of the model of this paper to account for observed price dynamics crucially depends on monetary policy. In particular, this paper shows how interest rate feedback rules affect the incentives faced by firms in allocating attention. A policy rate responding more actively to expected inflation and output fluctuations induces firms to pay relatively more attention to more volatile shocks. This new mechanism of transmission of monetary policy helps rationalizing the observed behavior of prices in response to technology and monetary policy shocks, and implies novel predictions about the impact of changes in Taylor rules coefficients on economic fluctuations.
    Keywords: Rational inattention; monetary policy; technology shocks; prices
    JEL: E5 E3
    Date: 2009–07–18
    Abstract: We examine the macroeconomic effects of different types of oil shocks and the oil transmission mechanism in the Euro area. A comparison is made with the US and across individual member countries. First, we find that the underlying source of the oil price shift is crucial to determine the repercussions on the economy and the appropriate monetary policyreaction. Second, the transmission mechanism is considerably different compared to the US. In particular, inflationary effects in the US are mainly driven by a strong direct passthrough of rising energy prices and indirect effects of higher production costs. In contrast, Euro area inflation reacts sluggishly and is much more driven by second-round effects of increasing wages. Third, there are also substantial asymmetries across member countries. These differences are due to different labour market dynamics which are further aggravated by a common monetary policy stance which does not fit all.
    Date: 2009–04
  7. By: Russell Cooper; Hubert Kempf; Dan Peled
    Abstract: This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be influenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.
    JEL: E61 E63 F15 H77
    Date: 2009–07
  8. By: Yinusa, D. Olalekan
    Abstract: The role played by macroeconomic fluctuations in stimulating deposit dollarization in developing countries have been a subject of intense debate in the last few decades especially in Latin America and transition economies of Eastern Europe with little attention on African economies. Apart from this, most of the studies on African economies are country case studies with little scope for generalisation. This article examines the effect of macroeconomic fluctuations on deposit dollarization in 18 selected Sub-Saharan Africa for the period 1980 to 2004. Using the standard money demand model accounting for dollarization in small open economies, the article finds that inflation, expectations about exchange rate changes coupled with interaction between capital account restrictions and domestic inflation plays dominant roles in explaining deposit dollarization in Sub-Sahara Africa. Given the consequences of deposit dollarization on the vulnerability of the domestic banking system, lack of independent monetary policy and optimal exchange rate choices, the article concludes that macroeconomic instability must be adequately brought under control in other to reduce deposit dollarization in these economies.
    Keywords: Macroeconomic Fluctuations; Demand for Money; Deposit Dollarization; Panel Data and Sub-Saharan Africa
    JEL: E31 C21
    Date: 2009
  9. By: Laurence M. Ball
    Abstract: This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model’s prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
    JEL: E52 F41
    Date: 2009–07
  10. By: Ryu-ichiro Murota; Yoshiyasu Ono
    Abstract: We present a dynamic and monetary model that consistently explains such various phenomena as unemployment, deflation, zero nominal interest rates and excess reserves held by commercial banks. These phenomena are commonly observed during the Great Depression in the United States, the recent long-run stagnation in Japan, and the worldwide financial crisis triggered by the US subprime loan problem of 2008. We show that an excessive liquidity preference leads to a liquidity trap and thereby generates the phenomena.
    Date: 2009–07
  11. By: Aranha, Marcel Z.; Moura, Marcelo L.
    Date: 2009–10
  12. By: Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Kosta Josifidis (Faculty of Economics Subotica - Novi Sad University); Emilija Beker Pucar (Faculty of Economics Subotica - Novi Sad University)
    Abstract: The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.
    Keywords: Exchange rate targeting; Inflation targeting; Intermediate exchange rate regimes; Monetary transmission channels
    Date: 2009
  13. By: John B. Donaldson; Natalia Gershun; Marc P. Giannoni
    Abstract: We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. Delegation gives rise to a generic conflict of interest mediated by a convex (option-like) compensation contract which is able to align the interests of managers and their shareholders. With such a compensation contract, a given increase in the firm's output generated by an additional unit of physical investment results in a more than proportional increase in the manager's income. We find that incentive contracts of this form can easily result in an indeterminate general equilibrium, with business cycles driven by self-fulfilling fluctuations in the manager's expectations. These expectations are unrelated to fundamentals. Arbitrarily large fluctuations in macroeconomic variables may possibly result.
    JEL: E32 J33
    Date: 2009–07
  14. By: Gary Koop (Department of Economics, University of Strathclyde and RCEA); Dimitris Korobilis (Department of Economics, University of Strathclyde and RCEA)
    Abstract: There is a large literature on forecasting inflation using the generalized Phillips curve (i.e. using forecasting models where inflation depends on past inflation, the unemployment rate and other predictors). The present paper extends this literature through the use of econometric methods which incorporate dynamic model averaging. These not only allow for coefficients to change over time (i.e. the marginal effect of a predictor for inflation can change), but also allows for the entire forecasting model to change over time (i.e. different sets of predictors can be relevant at different points in time). In an empirical exercise involving quarterly US inflation, we fi…nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark approaches (e.g. random walk or recursive OLS forecasts) and more sophisticated approaches such as those using time varying coefficient models.
    Keywords: Option Pricing; Modular Neural Networks; Non-parametric Methods
    JEL: E31 E37 C11 C53
    Date: 2009–01
  15. By: Ercan Eren (Department of Economics, Yildiz Technical University); Serkan Çiçek
    Abstract: The aim of paper to search whether there is a change in relationship between inflation rate and domestic economic activity in Turkey and to test whether an increase in the level of globalization has an impact on this changing. The findings point out that the slope of Phillips Curve has declined in Turkey. The effect of globalization that is foreseen the reason of flattening, is tested by global output gap hypothesis. The results show that globalization has an impact on domestic inflation rate -especially on traded goods inflation rate. özet Çalışmanın amacı Türkiye’de enflasyon oranı ile yurtiçi ekonomik aktivite arasındaki ilişkinin seyri noktasında bir değişimin olup olmadığını araştırmak ve küreselleşme düzeyinde yaşanan artışın bu değişim üzerinde etkili olup olmadığını sınamaktır. Elde edilen bulgular Türkiye’de Phillips eğrisinin eğiminin azaldığına işaret etmektedir. Azalışın nedeni olarak öngörülen küreselleşmenin etkisi, küresel çıktı açığı hipotezi çerçevesinde sınanmıştır. Tahmin sonuçları küreselleşmenin Türkiye’deki enflasyon oranı üzerinde –özellikle ticarete konu olan malların enflasyon oranı üzerinde– etkili olduğunu göstermiştir.
    Keywords: Central Banks, Monetary Policy, Globalization, Inflation
    JEL: E52 E58
    Date: 2009
  16. By: Jean Tirole (Toulouse School of Economics); Emmanuel Farhi (Department of Economics Harvard and TSE)
    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, macro-prudential supervision is called for. 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.
    Keywords: Monetary Policy, Funding Liquidity Risk, Strategic Complementarities, Macro-Prudential Supervision
    JEL: E44 E52 G28
    Date: 2009–07
  17. By: Luiz de Mello; Mauro Pisu
    Abstract: This paper tests for the existence of a bank lending channel in the transmission of monetary policy in Brazil using monthly aggregate data for the period 1995:12 through 2008:6. The test is carried out in a VECM setting that allows for multiple cointegrating relationships among the variables of interest. We find evidence of two cointegrating vectors, which we identify as bank loan demand and supply functions by testing for a number of exclusion and exogeneity restrictions on the cointegrating relationships. Loan supply is negatively related to the interbank deposit certificate rate in the long term, which confirms the existence of a lending channel for monetary transmission. The VECM’s short-term dynamics show that loan demand is equilibrium-correcting. But short-term disequilibria in the supply of loans are corrected through changes in the interbank deposit certificate rate, suggesting that monetary policy plays a role in restoring equilibrium in the credit market by affecting the borrowing rate faced by banks to raise non-deposit funds. This Working Paper relates to the 2009 OECD Economic Survey of Brazil (<P>Le crédit bancaire comme canal de transmission de la politique monétaire au Brésil : Un modèle à correction d’erreur<BR>Ce document teste l’hypothèse de l’existence du crédit bancaire comme canal de transmission de la politique monétaire au Brésil à l’aide de données mensuelles agrégées pour la période allant de décembre 1995 à juin 2008. Le test est effectué dans le cadre d’un modèle à correction d’erreur (VECM) qui permet plusieurs vecteurs de cointégration parmi les variables d’intérêt. L’analyse empirique révèle l’existence de deux vecteurs de cointégration, que nous identifions comme la demande et l’offre de crédit bancaire sur la base d’un certain nombre de restrictions d’exclusion et d’exogénéité imposées sur les vecteurs de cointégration. L’offre des prêts bancaires est inversement liée au taux de long terme des certificats de dépôt interbancaire, ce qui confirme l’existence du crédit bancaire comme canal de transmission de la politique monétaire. La dynamique de court terme du VECM montre que la demande des prêts s’ajuste à l’équilibre de long terme. Mais à court terme, les déséquilibres dans l'offre des prêts sont corrigés par des changements dans le taux des certificats de dépôt interbancaire, ce qui suggère que la politique monétaire joue un rôle dans le rétablissement de l’équilibre sur le marché du crédit en affectant le taux d’emprunt des banques. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Brésil, 2009 (ésil).
    Keywords: monetary transmission mechanism, mécanisme de transmission monétaire, vector error-correction model, modèle à correction d’erreur, bank lending channel, canal du crédit bancaire
    JEL: E10 E44 E52
    Date: 2009–07–10
  18. By: Jeff Fuhrer; Giovanni Olivei; Geoffrey M. B. Tootell
    Abstract: This paper provides an array of empirical evidence bearing on potentially important changes in the dynamics of U.S. inflation. We examine the overall performance of Phillips curves relative to some well-known benchmarks, the efficiency with which the Federal Reserve's Greenbook forecasts of inflation use real activity information, and shifts in the key determinants of the reduced-form "triangle model" of inflation. We develop a structural model-based interpretation of observed reduced-form shifts and conduct a reduced-form assessment of the relationship between core and headline measures of inflation, centering on the persistent "pass-through" of relative price changes into core and headline inflation measures, and a parallel exercise that examines the pass-through of key relative price changes into wage and compensation measures.
    Keywords: Inflation (Finance)
    Date: 2009
  19. By: Thomas, Y. MATH€ (CENTRAL BANK OF LUXEMBOURG, Economics and Research Department); Olivier, PIERRARD (CENTRAL BANK OF LUXEMBOURG, Economics and Research Department and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Empirical evidence suggests thatmost firms operate in imperfectly competitivemarkets. We develop a search-matching model between wholesalers and retailers. Firms face search costs and formlong-termrelationships. Price bargain results in both wholesaler and retailer markups, depending on firmsÕ relative bargaining power. We simulate themodel to explore the role of product market search frictions in business cycles. We show that the way search costs are modelled is crucial to provide a realistic picture of firmsÕ business environment and improve the cyclical properties of an otherwise standard real business cycle model.
    Keywords: Business cycle, Frictions, Product market, Price bargain
    JEL: E10 E31 E32
    Date: 2009–07
  20. By: Jan Marc Berk (De Nederlandsche Bank, Statistics & Information Division, PO Box 98, 1000AB Amsterdam, the Netherlands.); Beata K. Bierut (De Nederlandsche Bank, Economics & Research Division, PO Box 98, 1000AB Amsterdam, the Netherlands)
    Abstract: Monetary Policy Committees differ in the way the interest rate proposal is prepared and presented in the policy meeting. In this paper we show analytically how different arrangements could affect the voting behaviour of individual MPC members and therefore policy outcomes. We then apply our results to the Bank of England and the Federal Reserve. A general finding is that when MPC members are not too diverse in terms of expertise and experience, policy discussions should not be based on pre-repared policy options. Instead, interest rate proposals should arise endogenously as a majority of views expressed by the members, as is the case at the Bank of England and appears to be the case in the FOMC under Chairman Bernanke. JEL Classification: E58, D71, D78.
    Keywords: monetary policy committee, voting, Bank of England, Federal Open Market Committee.
    Date: 2009–07
  21. By: John H. Munro
    Abstract: This paper seeks to answer two questions: were the coinage debasements in Burgundian Flanders (1384-1482) undertaken principally as monetary or fiscal policies; and were they beneficial or harmful? In a recent monograph, Sargent and Velde (Big Problem of Small Change: 2002) contend that monetary objectives governed almost all medieval, early-modern debasements, especially to remedy the chronic shortages of petty coins. Despite overwhelming evidence that Burgundian Flanders, along with most of north-west Europe in the later 14th and 15th centuries, experienced severe monetary scarcities and liquidity crises, especially in the periods ca. 1390 - ca. 1415 and ca. 1440 - ca. 1470, both periods of severe deflations, eras commonly known as ‘bullion famines’, there is no compelling evidence that the Burgundian rulers debased their coinages on the basis of any such monetary policies. My thesis is that the Burgundian rulers of Flanders, in competition with neighboring princes, undertook their debasements primarily as aggressive fiscal policies, specifically to finance warfare. Their goal was to increase their seigniorage revenues, the tax imposed on bullion brought to their mints, by two means: by increasing the tax rate itself, and by enticing an increased influx of bullion into their mints, both by the debasement techniques themselves and by auxiliary bullionist policies. Those policies were successful so long as three conditions were met: (1) that merchants supplying bullion received more coins of the same face value and thus with a greater aggregate money-of-account value than before (or than from other mints); (2) that the public accepted such debased coins at the same face value, by tale; and (3) that the merchants spent their increased supply of coins quickly, before any ensuing inflation eroded those gains. This study further demonstrates that the inflationary consequences of debasements were always less than those predicted by mathematical formulae – possibly because those debasements failed to counteract the prevailing forces of monetary contraction and deflation. Because so many princes pursued similar fiscal policies, many others engaged in debasement for purely defensive reasons: to protect their mints from foreign competition and to protect their domestic money supplies from influxes of debased and also counterfeit imitations: i.e., to counteract Gresham’s Law. If many debasements were retaliatory measures against a neighbour’s bullionist policies, those policies in general, and not just debasements, were also products of late-medieval warfare, which was also the primary culprit responsible for periodic monetary contractions: by impeding coinage circulations and bullion flows, and by provoking increased hoarding. The answer to the final question is that debasements were usually far more harmful than beneficial. Note that this is an extensively revised and shortened version of an earlier working paper (no. 355), correcting some errors in that paper (concerning Spanish coinage): with the same tables, but with a new set of graphs,
    Keywords: debasements; gold; silver; bullionist policies; mints; seigniorage; inflation; deflation; ‘bullion famines'
    JEL: E E41 E42 E51 E52 E62 F33 H11 H27 N13 N23 N43
    Date: 2009–06–26
  22. By: Mark Bils; Yongsung Chang; Sun-Bin Kim
    Abstract: We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off--it cannot produce both realistic dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment.
    JEL: E2 E32
    Date: 2009–07
  23. By: Junayed, Sadaquat; Khan, Hashmat
    Abstract: The relationship between inventory investment and the real interest rate has been difficult to assess empirically. Recent work has proposed a linear-quadratic inventory model with time-varying discount factor to identify the effects of real interest rate on inventory investment. The authors show that this framework does not separately identify the effects of real interest rate on inventory investment from variables that determine the expected marginal cost of production. Consequently, understanding the relationship between inventory investment and the real interest rate continues to be a challenge for macroeconomists.
    Keywords: Inventory investment, real interest rate
    JEL: E11
    Date: 2009
  24. By: Zhang, Yan; Chen, Yan
    Abstract: This paper introduces fiscal increasing returns, through endogenous labor income tax rates as in Schmitt-Grohe and Uribe (1997), into the overlapping generations model with endogenous labor and consumption in both periods of life (for example, Cazzavillan and Pintus (2004)). We show that under numerical calibrations of the parameters, in particular a reasonable share of first period consumption over the wage income, local indeterminacy can easily occur with small distortionary taxes, provided that the elasticity of capital-labor substitution is less than the share of capital in total income and the wage elasticity of the labor supply is large enough. More important is the fact that increasing the size of tax distortions enlarges the range of values of the consumption--to--wage ratio associated with multiple equilibria, because of two conflicting effects on savings that operate through wage and interest rate.
    Keywords: Indeterminacy; Endogenous labor income tax rate.
    JEL: E32 C62
    Date: 2009–07–22
  25. By: Eswar S. Prasad
    Abstract: Rebalancing growth patterns of Asian economies is an important component of the overall rebalancing effort that will be required in the world economy. In this paper, I provide an empirical characterization of the composition of GDP levels and growth rates for the key emerging markets and other developing economies in Asia. China has by far the lowest share of private consumption to GDP in Asia and, during this decade, has recorded the lowest rate of employment growth relative to GDP growth. Investment growth has dominated GDP growth in China during this decade but is also important in the cases of India and Vietnam. <br> <br>To examine the global implications of domestic growth patterns in Asia, I analyze saving-investment balances, the composition of national savings, and the determinants of the evolution of household saving rates. During 2000-08, household saving rates (relative to household income) have risen gradually in China and India but fallen sharply in Korea. Corporate savings have surged across Asia during this period, becoming the main component of gross national savings in the region. In terms of sheer magnitudes, China’s national savings and current account surpluses dominate the region’s saving-investment balances. China accounts for just under half of GDP in Asia ex-Japan, but accounts for 60 percent of total gross national savings and nearly 90 percent of the current account surplus of the region. Finally, I discuss some policy implications that come out of the analysis on how to shift the patterns of growth, especially in China, from a welfare-enhancing perspective.
    JEL: E2 F3 F4
    Date: 2009–07
  26. By: Yuriy Gorodnichenko; Serena Ng
    Abstract: Dynamic Stochastic General Equilibrium (DSGE) models are often solved and estimated under specific assumptions as to whether the exogenous variables are difference or trend stationary. However, even mild departures of the data generating process from these assumptions can severely bias the estimates of the model parameters. This paper proposes new estimators that do not require researchers to take a stand on whether shocks have permanent or transitory effects. These procedures have two key features. First, the same filter is applied to both the data and the model variables. Second, the filtered variables are stationary when evaluated at the true parameter vector. The estimators are approximately normally distributed not only when the shocks are mildly persistent, but also when they have near or exact unit roots. Simulations show that these robust estimators perform well especially when the shocks are highly persistent yet stationary. In such cases, linear detrending and first differencing are shown to yield biased or imprecise estimates.
    JEL: E3 F4 O4
    Date: 2009–07
  27. By: Toshihiko Mukoyama (University of Virginia and CIREQ (E-mail: tm5hs@
    Abstract: This paper compares the establishment-level dynamics of the United States and Japan. I find that there are substantial differences in entry and exit behavior, the average size of establishments, and the amount of job reallocation. First, entry and exit rates are much lower in Japan. Second, the average size of establishments is much smaller in Japan, while the average size of opening/closing establishments are similar in the U.S. and Japan. Third, the amount of job creation and job destruction is much smaller in Japan, especially for continuing establishments. I first examine whether these differences are accounted for by sectoral compositions, and find that the differences in sectoral composition do not explain these facts. Then I construct a general equilibrium industry dynamics model and explore the roles of various frictions in generating these differences. The model experiments suggest that in Japan, there may be important impediments for establishment entry/exit and there may be factors impeding productive establishments from growing larger.
    Keywords: Establishment Dynamics, Sectoral Composition, Industry Dynamics Model, Reallocation
    JEL: E23 H25 J62 L25
    Date: 2009–07
  28. By: Colin Busby (C.D. Howe Institute); William P.B. Robson (C.D. Howe Institute)
    Abstract: After trailing the average performance of G7 countries for 15 years, Canada’s relative business investment performance stands out in a promising light for 2009 and 2010. Amid the recession, new capital spending on tools for workers, in the form of machinery, equipment or buildings, has held up better in Canada than in many other countries, and particularly the United States. Investment per worker in Canada for 2010 should surpass that in other G7 and OECD countries.
    Keywords: economic growth and innovation, business investment, capital investment
    JEL: E2 E22 O51
    Date: 2009–07
  29. By: Gunther Capelle-Blancard; Yamina Tadjeddine
    Abstract: The location of financial activities is traditionally characterized by a great deal of inertia. However, the boom in new information and communication technologies, the globalization of economies and the 2007-08 financial crisis have considerably modified the geography of finance. Financial globalization has, first of all, had a heavy impact on the level of spatial concentration / dispersion of activities. The dynamics have not acted in a uniform way – schematically speaking three levels can be distinguished. On the urban scale, financial activities have been spread out (suburbanization), while on the regional scale or the national scale, due to financial globalization, financial activities have been more tightly grouped. Lastly, on the international scale, a movement of dispersion has mainly been observed, along with a specialization of financial centers. The 2007-08 financial crisis might well accentuate this last effect and cause an upheaval in world hierarchy. Actually, the financial centers that are most elastic to the economic situation – London, New York and tax havens – are massively losing jobs, while the stock markets in Shanghai, Hong Kong and Bombay are now upstaging them as major players.
    Keywords: Financial Geography, International Financial Centers, Globalization, Informational Externalities
    JEL: E44 G2 R1
    Date: 2009
  30. By: Carlos Arango; Varya Taylor
    Abstract: Using data from a 2004 survey of the Canadian public, the authors study the role of convenience and risk in consumers' use of cash relative to debit and credit cards. The authors find that consumers who perceive debit cards and credit cards to be more convenient and less risky than cash use them more frequently. Even at low levels of perceived risk, consumers shift substantially away from cash and towards alternative payment methods. However, the authors' results reveal that there exists a lower bound for which cards can substitute for cash. Also, as other studies have shown, the relative use of cash is higher among older, less-educated, lower-income consumers.
    Keywords: Bank notes
    JEL: E41 L2
    Date: 2009
  31. By: Delatte, Anne-Laure; Fouquau, Julien
    Abstract: In this paper we adopt a non linear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a panel smooth transition model, that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a non linear behavior in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables- out of seven candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.
    Keywords: International Reserves; Precautionary Demand; Mercantilist; Global Imbalances; Panel Smooth Threshold Regression Models.
    JEL: E58 C23 F41 F31
    Date: 2009–06
  32. By: Prashanth Mahagaonkar; Rainer Schweickert; Aditya S. Chavali
    Abstract: A recent literature has pointed at potential negative effects of exchange rate volatility on innovation. In this paper, we propose that there may be a direct effect as well as an indirect effect via export activity. We test these hypotheses for sectoral R&D intensities using OECD panel data for manufacturing and services sectors for 14 OECD economies and the years 1987 - 2003. We find that the direct negative effect of volatility is pronounced in manufacturing sector but is dominated by the indirect effect via the export channel. Services do not face any effects of volatility on R&D intensities. While it is not clear which channel dominates our results confirm that there is a negative volatility affect related to openness on a sectoral level
    Keywords: R&D intensity, Innovation, Real Exchange Rate, Volatility, Exports, OECD-Countries
    JEL: E32 F31 O32
    Date: 2009–07
  33. By: Sami Bibi; John Cockburn; Luca Tiberti; Massa Coulibaly
    Abstract: Since 2006, Mali has experienced the full effects of the global food crisis, with price increases of up to 67%. This study presents simulations of the impacts of this crisis and a number of policy responses with respect to the welfare of children. The impacts are analyzed in terms of monetary (food) poverty, nutrition, education, child labor and access to health services of children. According to simulations, food poverty among children would have increased from 41% to 51%, with a corresponding rise in caloric insufficiency from 32% to 40%, while the impacts on school participation, work and access to health services would have been relatively weak.
    Keywords: child education; child health; child labour; child poverty; economic crisis; food crises; nutrition;
    JEL: E39
    Date: 2009
  34. By: Todd, Walker F.
    Abstract: In his paper “Challenges Associated with the Expansion of Deposit Insurance Coverage during Fall 2008” Sebastian Schich of the OECD has written an excellent overview of the current situation of bank deposit insurance in the industrial economies of the world. He finds that, facing a crisis of confidence leading to visible bank runs, bank supervisors nearly everywhere resorted to raising deposit insurance limits, in some cases to “unlimited” status. Some of these changes have limitations of scope or duration, but some of the political changes of recent years (expansion of the European Union, for example) call into question whether any limits will be observed or whether recently granted expansions of deposit insurance will be recalled in due time. There are, however, important lessons to be learned from the American experience with deposit insurance, which has been present in the United States since 1933 but only in recent decades in numerous other developed economies. Alternatives to deposit insurance do exist and still could be tried anywhere, taking regional differences into account, as long as an adequate institutional structure is in place first. In any case, the alternatives would be cheaper and more efficient than the fairly explicit subsidy of the banking industry that present systems of deposit insurance entail.
    Keywords: International cooperation, discount window, deposit insurance, insurance coverage, moral hazard, risk assessment
    JEL: E61 G22
    Date: 2009

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