nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒08‒16
fifty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Habit Formation, Interest-Rate Control and Equilibrium Determinacy By Seiya Fujisaki
  2. Global slack and domestic inflation rates: a structural investigation for G-7 countries By Fabio Milani
  3. Monetary policy response to oil price shocks By Jean-Marc Natal
  4. Government Spending Shocks in Quarterly and Annual U.S. Time-Series By Benjamin Born; Gernot J. Müller
  5. Has globalization transformed U.S. macroeconomic dynamics? By Fabio Milani
  6. Common and Spatial Drivers in Regional Business Cycles By Michael Artis; Christian Dreger; Konstantin Kholodilin
  7. Fiscal stabilization with partial exchange rate pass-through By Erasmus K. Kersting
  8. Bank risk and monetary policy By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  9. Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation By Fujisaki, Seiya; Mino, Kazuo
  10. Estimation of a Time Varying Natural Interest Rate for Peru By Humala, Alberto; Rodríguez, Gabriel
  11. Using A Forward-Looking Phillips Curve to Estimate the Output Gap in Peru By Rodríguez, Gabriel
  12. Financial Frictions and Monetary Transmission By Uluc Aysun; Ryan Brady; Adam Honig
  13. Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty By Yu-Fu Chen; Michael Funke
  14. Search, Nash Bargaining and Rule of Thumb Consumers By J.E. Boscá; R. Doménech; J. Ferri
  15. Forecast Accuracy and Economic Gains from Bayesian Model Averaging using Time Varying Weights By Lennart Hoogerheide; Richard Kleijn; Francesco Ravazzolo; Herman K. van Dijk; Marno Verbeek
  16. What lessons from the 1930s? By Alcidi, Cinzia; Gros, Daniel
  17. The main recessions in Italy: a retrospective comparison By Andrea Brandolini; Antonio Bassanetti; Martina Cecioni; Andrea Nobili; Giordano Zevi
  18. Inflation Targeting and Inflation Convergence within Turkey By Yilmazkuday, Hakan
  19. The stability of the inflation rate in the Euro area: the role of Globalization and labour market By Forte, Antonio
  20. Estimating Output Gap, Core Inflation, and the NAIRU for Peru By Rodríguez, Gabriel
  21. A Parsimonious Macroeconomic Model for Asset Pricing By Fatih Guvenen
  22. Should monetary policy "lean or clean"? By William R. White
  23. Price Inflation and Income Distribution By Jennings, Anne; Lyons, Seán; Tol, Richard S. J.
  24. Imperfect Information, Lagged Labor Adjustment And The Great Moderation By Tim Willems; Sweder van Wijnbergen
  25. Resource Price Turbulence and Macroeconomic Adjustment for a Resource Exporter: a conceptual framework for policy analysis By Harvie, Charles; Cox, Grant M
  26. Trending Current Accounts By Horag Choi; Nelson C. Mark
  27. The Determinants of Stock and Bond Return Comovements By Lieven Baele; Geert Bekaert; Koen Inghelbrecht
  28. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Hernandez-Verme, Paula; Wang, Wen-Yao
  29. The UK Intranational Trade Cycle By Michael Artis; Toshihiro Okubo
  30. Comparing forecasts of Latvia's GDP using simple seasonal ARIMA models and direct versus indirect approach By Bušs, Ginters
  31. A Three State Model of Worker Flows in General Equilibrium By Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
  32. Entrepreneurship and the Business Cycle By P.D. Koellinger; A.R. Thurik
  33. Aggregate Labor Market Outcomes: The Role of Choice and Chance By Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
  34. Necessary and sufficient attributes of an automatic fiscal stabilizator. Mechanisms of impulse stabilization transmission By Dinga, Ene; Padurean, Elena; Baltaretu, Camelia; Leonida, Ionel
  35. Tax Reforms and Labour-market Performance: An Evaluation for Spain using REMS By J.E. Boscá; R. Doménech; J. Ferri
  36. Consumption and Labor Supply with Partial Insurance: An Analytical Framework By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  37. On the Size Distribution of Macroeconomic Disasters By Robert J. Barro; Tao Jin
  38. An assessment of financial sector rescue programmes By Fabio Panetta; Thomas Faeh; Giuseppe Grande; Corrinne Ho; Michael King; Aviram Levy; Federico M. Signoretti; Marco Taboga; Andrea Zaghini
  39. The Canadian Manufacturing Sector: Adapting to Challenges By Baldwin, John R.; Macdonald, Ryan
  40. Risk, Volatility, and the Global Cross-Section of Growth Rates By Craig Burnside; Alexandra Tabova
  41. Modelo de Proyección Trimestral del BCRP By Departamento de Modelos Macroeconómicos
  42. Reforma de las pensiones y política fiscal: algunas lecciones de Chile By Angel Muñoz; Angel Melguizo; David Tuesta; Joaquín Vial
  43. Pension reform and fiscal policy: some lessons from Chile By Angel Melguizo; Angel Muñoz; David Tuesta; Joaquín Vial
  44. Accounting for Incomplete Pass-Through By Emi Nakamura; Dawit Zerom
  45. Revisiting Indonesia’s Sources of Economic Growth and Its Projection Towards 2030 By Armida Alisjahbana
  46. Macroeconomical data By Ullrich Heilemann
  47. Costly Portfolio Adjustment By Yosef Bonaparte; Russell Cooper
  48. Disasters implied by equity index options By David Backus; Mikhail Chernov; Ian Martin
  49. Do re-election probabilities influence public investment? By Jon H. Fiva; Gisle James Natvik
  50. Back to Basics: Restoring Equity and Efficiency in the EI Program - EI Reform Part II By Colin Busby; Alexandre Laurin; David Gray

  1. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: We examine macroeconomic stability of a monetary economy with habit formation in consumption. We assume that monetary authority controls the rate of nominal interest in response to inflation and output gap. We show that in the presence of habit persistence not only active but also passive monetary policy can generate equilibrium determinacy under empirically plausible values of the elasticity of intertemporal substitution in felicity.
    Keywords: equilibrium determinacy, habit formation, Taylor rule, endogenous labor.
    JEL: E21 E52 O42
    Date: 2009–08
  2. By: Fabio Milani
    Abstract: Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of "global," rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.
    Keywords: Globalization ; Inflation (Finance) ; Group of Seven countries ; Monetary policy ; Banks and banking, Central ; Phillips curve
    Date: 2009
  3. By: Jean-Marc Natal
    Abstract: How should monetary authorities react to an oil price shock? This paper argues that a meaningful trade-off between stabilizing inflation and the welfare relevant output gap arises in a distorted economy once one recognizes (1) that oil (energy) cannot be easily substituted by other factors, (2) that monopolistic competition implies that production is suboptimally low in the steady state, and (3) that increases in oil prices also directly affect consumption by raising the price of fuel, heating oil, and other energy sources. While the first two conditions are necessary to introduce a microfounded monetary policy trade-off, the third one makes it quantitatively significant. ; The optimal precommitment monetary policy relies on unobservables and is therefore hard to implement. To address this concern, I derive a simple interest rate feedback rule that mimics the optimal plan for all practical purposes but that depends only on observables, namely core inflation, oil price inflation, and the growth rate of output.
    Keywords: Monetary policy ; Petroleum products - Prices
    Date: 2009
  4. By: Benjamin Born; Gernot J. Müller
    Abstract: Government spending shocks are frequently identi?ed in quarterly time-series data by ruling out a contemporaneous response of government spending to other macroeconomic aggregates. We provide evidence that this assumption may not be too restrictive for U.S. annual time-series data.
    Keywords: Government spending shocks, Annual Data, Identi?cation
    JEL: E62
    Date: 2009–08
  5. By: Fabio Milani
    Abstract: This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model--such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to "global" output, and so forth--are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed economy specification still appears to provide a substantially better fit of U.S. data than various open economy specifications with timevarying degrees of openness. Some time variation in the model coefficients over the postwar sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization.
    Keywords: Globalization ; Macroeconomics - Econometric models ; Inflation (Finance) ; Monetary policy ; Banks and banking, Central ; Phillips curve
    Date: 2009
  6. By: Michael Artis; Christian Dreger; Konstantin Kholodilin
    Abstract: We examine real business cycle convergence for 41 euro area regions and 48 US states.Results obtained by a panel model with spatial correlation indicate that the relevance ofcommon business cycle factors is rather stable over the past two decades in the euro area andthe US. Ongoing business cycle convergence often detected in cross-country data is notconfirmed at the regional level. The degree of synchronization across the euro area is similarto that to be found for the US states. Thus, the lack of convergence does not seem to be animpediment to a common monetary policy.
    Keywords: Business cycle convergence, spatial correlation, spatial panel model
    JEL: E32 C51 E37
    Date: 2009–04
  7. By: Erasmus K. Kersting
    Abstract: This paper examines the role of fiscal stabilization policy in a two-country framework that allows for a general degree of exchange rate pass-through. I derive analytical solutions for optimal monetary and fiscal policy which are shown to depend on the degree of pass-through. In the case of partial pass-through, an optimizing policy maker uses countercyclical fiscal stabilization in addition to monetary stabilization. However, in the extreme cases of complete or zero pass-through, the fiscal stabilization instrument is not employed. There is also no additional gain from the fiscal instrument in the case of coordination between the two countries. These results are due to the specific way the optimal fiscal policy rule affects marginal costs: Rather than being a substitute for monetary policy, fiscal policy complements it by increasing the correlation of the marginal cost terms within and across countries. This in turn makes monetary policy more effective at stabilizing them.
    Keywords: Economic stabilization ; Monetary policy ; Fiscal policy
    Date: 2009
  8. By: Yener Altunbas (University of Wales, Bangor, Gwynedd LL57 2DG, Wales, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We find evidence of a bank lending channel for the euro area operating via bank risk. Financial innovation and the new ways to transfer credit risk have tended to diminish the informational content of standard bank balance-sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e. size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess a bank’s ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes. JEL Classification: E44, E55.
    Keywords: bank, risk, bank lending channel, monetary policy.
    Date: 2009–07
  9. By: Fujisaki, Seiya; Mino, Kazuo
    Abstract: This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the rate of capital depreciation is endogenously determined. It is assumed that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance spending. Money is introduced via a cash in advance constraint that may apply to the maintenance expenditure as well as to consumption and investment spending. We find that the long-run effects of inflation tax are more complex than those obtained in the monetary Ak growth model with a fixed capital depreciation rate. In particular, the relation between inflation and growth is highly sensitive to the specifications of the capital depreciation technology as well as to the forms of cash-in-advance constraint.
    Keywords: cash-in-advance constraint; AK growth model; endogenous capital depreciation; maintenance expenditures
    JEL: E22
    Date: 2009–07–13
  10. By: Humala, Alberto (Central Reserve Bank of Peru); Rodríguez, Gabriel (Central Reserve Bank of Peru and Pontificia Universidad Católica del Perú)
    Abstract: Following the approach of Mésonnier and Renne (2007), we estimate a Natural Rate of Interest (NRI) using quarterly Peruvian data for the period 1996:3 - 2008:3. The model has six equations and it is estimated using the Kalman filter with output gap and NRI as unobservable variables. Estimation results indicate a more stable NRI in period 2001:3 - 2008:3 than in period 1996:3 - 2001:2 and also more stable than the observed real interest rate. Real interest rate gap (difference between real and natural rates), which measures monetary policy stance, indicates a restrictive policy for 1996-2001 and for 2003. Results also suggest a real interest rate greater than NRI for 2002 and for 2004-2008.
    Keywords: Interest rate, natural interest rate, Kalman filter, output gap, unobservable components
    JEL: C32 E32 E43 E52
    Date: 2009–03
  11. By: Rodríguez, Gabriel (Central Reserve Bank of Peru and Pontificia Universidad Católica del Perú)
    Abstract: This paper identifies the output gap using the theoretical definition of the gap within a Phillips curve. The results show that the output gap is large and persistent. Furthermore, the output gap is not correlated with the stochastic trend which is similar to the asumption used in the unobserved components model. The model is extended to include information coming from the unemployment rate. The results are very similar to those obtained without this variable indicating poor additional information in the unemployment rate to identify the output gap. Other estimations of the output gap are performed. I use the procedures of Hodrick and Prescott (1997), Baxter and King (1999), Beveridge and Nelson (1981), Morley, Nelson and Zivot (2003), the unobserved components model of Clark (1987) and a simple quadratic trend. The results show strong di¤erences between our measure of output gap and the other measures. The closer measure is the one obtained using the unobserved component model and the simple quadratic trend.
    Keywords: Business Cycles, Phillips Curve, Output Gap, Inflation, Unemployment, Filters
    JEL: C22 C52 E31 E32
    Date: 2009–04
  12. By: Uluc Aysun (University of Connecticut); Ryan Brady (Unites States Naval Academy); Adam Honig (Amherst College)
    Abstract: This paper examines the effect of financial frictions on the strength of the credit channel of monetary policy. First, we use a DSGE model characterized by financial frictions as in Bernanke, Gertler, and Gilchrist (1999), and calibrate it using parameter values for countries with different levels of financial frictions. We find that the credit channel is stronger in countries with high levels of financial frictions. The intuition is that in these countries, external finance premiums are more sensitive to firms' financial leverage. By affecting asset prices, therefore, monetary policy has greater impact on external finance premiums and output. Second, we provide empirical evidence for this relationship. We use cross-country data in SVAR models to generate indicators for credit channel strength. We then show that there is a positive relationship between financial frictions, captured by bankruptcy recovery rates, and credit channel strength, confirming the predictions of the model.
    Keywords: credit channel, financial frictions, bankruptcy costs
    JEL: E44 F31 F41
    Date: 2009–08
  13. By: Yu-Fu Chen; Michael Funke
    Abstract: The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.
    Keywords: Business Cycles, Real Options, Investment, Markov Switching, Tobin’s q, Uncertainty
    JEL: D81 D92 E32
    Date: 2009–06
  14. By: J.E. Boscá; R. Doménech; J. Ferri
    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-thumb consumers
    JEL: E24 E32 E62
    Date: 2009–06
  15. By: Lennart Hoogerheide (Erasmus University Rotterdam); Richard Kleijn (PGGM, Zeist); Francesco Ravazzolo (Norges Bank); Herman K. van Dijk (Erasmus University Rotterdam); Marno Verbeek (Erasmus University Rotterdam)
    Abstract: Several Bayesian model combination schemes, including some novel approaches that simultaneously allow for parameter uncertainty, model uncertainty and robust time varying model weights, are compared in terms of forecast accuracy and economic gains using financial and macroeconomic time series. The results indicate that the proposed time varying model weight schemes outperform other combination schemes in terms of predictive and economic gains. In an empirical application using returns on the S&P 500 index, time varying model weights provide improved forecasts with substantial economic gains in an investment strategy including transaction costs. Another empirical example refers to forecasting US economic growth over the business cycle. It suggests that time varying combination schemes may be very useful in business cycle analysis and forecasting, as these may provide an early indicator for recessions.
    Keywords: forecast combination; Bayesian model averaging; time varying model weights; portfolio optimization; business cycle
    JEL: C11 C15 C22 C53 G11
    Date: 2009–07–16
  16. By: Alcidi, Cinzia; Gros, Daniel
    Abstract: This paper explores three areas in which the experience of the Great Depression might be relevant today: monetary policy, fiscal policy and the systemic stability of the banking system. We confirm the consensus on monetary policy: deflation must be avoided. With regard to fiscal policy, the picture is less clear. We cannot confirm a widespread opinion according to which fiscal policy did not work because it was not tried. We find that fiscal policy went to limit of what was possible under the conditions as they existed then. Our investigation of the US banking system shows a surprising resilience of the sector: commercial banking operations (deposit taking and lending) remained profitable even during the worst years. This suggests one policy conclusion: At present the authorities, in both the US and Europe, have little choice but to make up for the losses on ‘legacy’ assets and wait for banks to earn back their capital. But to prevent future crisis of this type one should make sure that losses from the investment banking arms cannot impair commercial banking operations. At least a partial separation of commercial and investment banking seems thus justified by the greater stability of commercial banking operations.
    Keywords: Great depression; Monetary policy; Fiscal policy; Commercial banks
    JEL: B22 E60
    Date: 2009–05
  17. By: Andrea Brandolini; Antonio Bassanetti (Banca d'Italia); Martina Cecioni (Banca d'Italia); Andrea Nobili (Banca d'Italia); Giordano Zevi (Banca d'Italia)
    Abstract: This paper proposes a comparative analysis of the main macroeconomic aggregates (both real and credit aggregates), and the monetary policy response during the most severe recessions experienced by the Italian economy. This descriptive study focuses mainly on the last forty years, a period for which there is ample and detailed information available. In particular, the paper contrasts the data on the current deep recession with those in 1974-75 and 1992-93, at the times of the oil crisis and the currency crisis respectively. For a selected list of variables, a comparison is made with the dynamics of the recession of the 1930s.
    Keywords: gcyclical fluctuations, recession, credit supply, monetary policy
    JEL: E20 E32 E50 N14
    Date: 2009–07
  18. By: Yilmazkuday, Hakan
    Abstract: Using a disaggregated level CPI data, this paper compares bilateral convergence properties of Turkish regional inflation rates between pre-inflation-targeting and inflation-targeting periods. Rather than using an ad hoc date for the introduction of inflation-targeting regime, structural break dates are estimated for Turkish national inflation rate as well as the standard deviation of Turkish regional inflation rates. The first moment of Turkish national inflation rate has an estimated break at the beginning of explicit inflation-targeting regime in January 2002, and the second moment of Turkish regional inflation rates has an estimated break at the financial crisis in February 2001 after which Turkey adopted a flexible exchange rate. It is found that during the inflation-targeting period, Turkish regional inflation rates have converged to each other in terms of CPI groups with relatively non-tradable components, and they have diverged from each other in terms of CPI groups with relatively tradable components.
    Keywords: Inflation Targeting; Inflation Rate Convergence; Regional Analysis; Turkey
    JEL: E31 E52 E50 R12
    Date: 2009
  19. By: Forte, Antonio
    Abstract: In this paper I present a statistical analysis of some macroeconomic data that can shed more light on the causes of the low inflation rate that we registered in the Euro area during the last years. I focus on both the globalization and the labour market for their importance, as external and internal factor respectively, in influencing the domestic inflation. The main finding of this study, in which I also present an international comparison, is that the firms’ behaviour can help explain the stable trend of the inflation rate in the Euro area. This result can be interpreted as a signal of the redistribution, in favour of the firms, of the positive features of the globalization process
    Keywords: Inflation rate; Euro area; Exchange rate; Labour cost
    JEL: L25 E31 F14
    Date: 2009
  20. By: Rodríguez, Gabriel (Central Reserve Bank of Peru and Pontificia Universidad Católica del Perú)
    Abstract: Following Doménech and Gómez (2006), and using quarterly Peruvian data for 1970:1-2007:4, I estimate a model that exploits the information contained in the inflation, unemployment and private investment rates in order to estimate non-observable variables as output gap, the NAIRU and the core inflation. The unknown parameters are esti- mated by maximun likelihood using a Kalman filter initialized with a partially difuse prior, and the unobserved components are estimated using a smoothing algorithm. The results suggest that only the infla- tion rate contains useful information in order to estimate the output gap. Estimates suggest poor performance for the unemployment and private investment rates. I explain this issue as related to the poor quality of the construction of these variables. In order to perform a sensitivity analysis, I estimate the output gap using other alternative methods. The correlations are very different and very far away from the estimates obtained in this paper. It is clear that estimates obtained from simple statistical filters give poor approximations.
    Keywords: Potential Output, Core Inflation, NAIRU, Latent Variables, Investment
    JEL: C22 C32 C52 E31 E32
    Date: 2009–04
  21. By: Fatih Guvenen
    Abstract: In this paper, I study asset prices in a two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices that have been documented in the literature, such as a high equity premium; relatively smooth interest rates; procyclical variation in stock prices; and countercyclical variation in the equity premium, in its volatility, and in the Sharpe ratio. While the model also reproduces the long-horizon predictability of the equity premium, the extent of predictability is smaller than in the data. In this model, the risk-free asset market plays a central role by allowing the non-stockholders (who have low EIS) to smooth the fluctuations in their labor income. This process concentrates nonstockholders’ aggregate labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model’s ability to generate a countercyclical equity premium. Finally, when it comes to business cycle performance the model’s progress has been more limited: consumption is still too volatile compared to the US data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.
    JEL: E21 E32 E44 G12
    Date: 2009–08
  22. By: William R. White
    Abstract: It has been contended by many in the central banking community that monetary policy would not be effective in "leaning" against the upswing of a credit cycle (the boom) but that lower interest rates would be effective in "cleaning" up (the bust) afterwards. In this paper, these two propositions (can't lean, but can clean) are examined and found seriously deficient. In particular, it is contended in this paper that monetary policies designed solely to deal with short term problems of insufficient demand could make medium term problems worse by encouraging a buildup of debt that cannot be sustained over time. The conclusion reached is that monetary policy should be more focused on "preemptive tightening" to moderate credit bubbles than on "preemptive easing" to deal with the after effects. There is a need for a new macrofinancial stability framework that would use both regulatory and monetary instruments to resist credit bubbles and thus promote sustainable economic growth over time.
    Keywords: Monetary policy ; Financial crises
    Date: 2009
  23. By: Jennings, Anne (ESRI); Lyons, Seán (ESRI); Tol, Richard S. J. (ESRI)
    Date: 2009–08
  24. By: Tim Willems (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: This paper first documents the increase in the time lag with which labor input reacts to output fluctuations ("the labor adjustment lag") that is visible in US data since the mid-1980s. We show that a lagged labor adjustment response is optimal in a setting where there is uncertainty about the persistence of shocks and where labor input is costly to adjust. We then present evidence that both the nature of shocks as well as labor adjustment costs may have changed during the 1980s in a direction that could explain the observed increase in the lag. Finally, we argue that the increased labor adjustment lag has the potential to explain some macroeconomic puzzles that characterize post-1984 US data, such as the reduced procyclicality of labor productivity and the reduction in output volatility (known as the Great Moderation).
    Keywords: imperfect information; labor adjustment; jobless growth; option value of waiting; Great Moderation
    JEL: E24 E32 J23 J24
    Date: 2009–07–17
  25. By: Harvie, Charles (University of Wollongong); Cox, Grant M (University of Wollongong)
    Abstract: Increased global demand for energy and other resources, particularly from the rapidly developing economies of China and India and the opening up of global resource markets to global investors and speculative activity, has resulted in considerable recent turbulence in resource prices. The recent magnitude of change in resource prices, both positive and negative, and their macroeconomic implications is of considerable contemporary importance to both resource importing and exporting economies. For a resource exporting economy, such as that of Australia, the recent resource price boom has resulted in: increased government taxation revenue, increased employment and wages in the resource and resource related sectors, increased spending in the domestic economy that contributed to buoyant economic growth, increased resource exports to the booming economies of China and India and contributed to a stronger domestic currency with beneficial effects upon inflation. On the other hand these developments have had adverse effects on the non resource sector by: subjecting it to more intense competition for limited resources, contributing to a loss of international competitiveness and reduced exports arising from a stronger exchange rate, reducing employment in the relatively more labour intensive non resource sector, and contributing to an eventual slow down in the overall economy. These positive and negative effects, and the overall impact of a resource price boom, require a fundamentally closer analysis of the structure of the economy under scrutiny. In this context the policy response by government is likely to be pivotal in determining the overall macroeconomic outcomes from a resource price boom. The aim of this paper is to develop a generic analytical framework to appraise economic outcomes in the wake of a resource price boom for a resource producing and exporting economy. To this end a dynamic long run macroeconomic model is developed, emphasising the important role and contribution of government fiscal policy in influencing subsequent macroeconomic outcomes. The adjustment process in the model arising from a resource price shock emphasises a spending (or wealth) effect, an income effect, a revenue effect, a current account effect and an exchange rate effect, which facilitate a robust analysis of subsequent macroeconomic outcomes from such a shock as well as related policy responses.
    Keywords: Resource price shock, dynamic macroeconomic model, simulation analysis, macroeconomic adjustment, policy analysis
    JEL: E27 E60 E62 Q48
    Date: 2009
  26. By: Horag Choi; Nelson C. Mark
    Abstract: Trending current accounts pose a challenge for intertemporal open-economy macro models. This paper shows that a two-country representative-agent business cycle model is able to explain the historical time-paths of the US and Japanese current accounts, both of which display trends but in opposite directions. Households have a state-dependent subjective discount factor such that they become relatively impatient (patient) when societal consumption is abnormally high (low). We present agents in the model with historical observations on the exogenous state variables, run the economy, and compare the current account implied by the model with the data. We find that the model generates national saving behavior that matches the current account's trend. Investment dynamics are important for explaining current account fluctuations around the trend, but not for the trend itself. The model also accounts for the timing of cyclical current account fluctuations around the trend.
    JEL: F3 F41
    Date: 2009–08
  27. By: Lieven Baele; Geert Bekaert; Koen Inghelbrecht
    Abstract: We study the economic sources of stock-bond return comovements and its time variation using a dynamic factor model. We identify the economic factors employing a semi-structural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors. We find that macro-economic fundamentals contribute little to explaining stock and bond return correlations, but that other factors, especially liquidity proxies, play a more important role. The macro factors are still important in fitting bond return volatility; whereas the "variance premium" is critical in explaining stock return volatility. However, the factor model primarily fails in fitting covariances.
    JEL: E43 E44 G11 G12 G14
    Date: 2009–08
  28. By: Hernandez-Verme, Paula; Wang, Wen-Yao
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.
    Keywords: Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.
    JEL: G14 E43 F34 E31 O53 E44 G33 F33 O11 F32 E58 E42 O16 E52 E65 F41 F31 G21
    Date: 2009–03–05
  29. By: Michael Artis; Toshihiro Okubo
    Abstract: The paper uses annual data on real GDP for the UK regions and 12 manufacturing sectors toderive regional and regional/sectoral business cycles using an H-P filter. The cohesion of thecycles is examined via cross-correlations and comparisons made with the regional cycles forJapan, the United States and the EuroArea. The UK emerges as especially cohesive andefforts to explain the overall cross-correlations of regional GDP are not very successfulowing to the low variance of the explicand; when attention is turned to the sectoral/regionalcycles, with their greater variance it is possible to demonstrate that economic variables suchas distance, dissimilarity in structure and level of output play a significant role in explainingthe variance in the cross-correlations. A significant feature of the cross-correlations inrelation to those of EU countries is that whilst they continue to provide support for the "UKidiosyncrasy" they no longer do so as strongly as they did in earlier data samples
    Keywords: intranational business cycle, regional business cycles, income convergence,Hodrick-Prescott filter, Euro-sympathy
    JEL: E32 E41 R11
    Date: 2009–04
  30. By: Bušs, Ginters
    Abstract: This paper contributes to the literature by comparing predictive accuracy of one-period real-time simple seasonal ARIMA forecasts of Latvia's Gross Domestic Product (GDP) as well as by comparing a direct forecast of Latvia's GDP versus three kinds of indirect forecasts. Four main results are as follows. Direct forecast of Latvia's Gross Domestic Product (GDP) seems to yield better precision than an indirect one. AR(1) model tends to give more precise forecasts than the benchmark moving-average models. An extra regular differencing appears to help better forecast Latvia's GDP in an economic downturn. Finally, only AR(1) gives forecasts with better precision compared to a naive Random Walk model.
    Keywords: real-time forecasting; seasonal ARIMA; Direct versus indirect forecasting; Latvia's GDP
    JEL: C13 C53 C22 C15
    Date: 2009–08–06
  31. By: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
    Abstract: We develop a simple model featuring search frictions and a nondegenerate labor supply decision along the extensive margin. The model is a standard version of the neoclassical growth model with indivisible labor with idiosyncratic shocks and frictions characterized by employment loss and employment opportunity arrival shocks. We argue that it is able to account for the key features of observed labor market flows for reasonable parameter values. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories.
    JEL: E24 J22 J64
    Date: 2009–08
  32. By: P.D. Koellinger (Erasmus School of Economics, Erasmus University Rotterdam); A.R. Thurik (Erasmus School of Economics, Erasmus Universiteit Rotterdam)
    Abstract: We study the cyclical pattern of entrepreneurial activity. Results across 22 OECD countries for the period 1972-2007 show that entrepreneurial activity is a leading indicator of the business cycle in a Granger-causality sense. This contradicts existing theoretical hypotheses which predict that entrepreneurship is pro-cyclical or not cyclical. We discuss possible causes and implications of this finding.
    Keywords: Entrepreneurship; business cycle
    JEL: L26 E32
    Date: 2009–06–30
  33. By: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
    Abstract: Commonly used frictional models of the labor market imply that changes in frictions have large effects on steady state employment and unemployment. We use a model that features both frictions and an operative labor supply margin to examine the robustness of this feature to the inclusion of a empirically reasonable labor supply channel. The response of unemployment to changes in frictions is similar in both models. But the labor supply response present in our model greatly attenuates the effects of frictions on steady state employment relative to the simplest matching model, and two common extensions. We also find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes.
    JEL: E24 J22 J64
    Date: 2009–08
  34. By: Dinga, Ene (Romanian Academy, Centre of Financial and Monetary Research Victor Slavescu); Padurean, Elena (Romanian Academy, Centre of Financial and Monetary Research Victor Slavescu); Baltaretu, Camelia (Romanian Academy, Centre of Financial and Monetary Research Victor Slavescu); Leonida, Ionel (Romanian Academy, Centre of Financial and Monetary Research Victor Slavescu)
    Abstract: The study is focused on identifying of the features of the concept of automatic fiscal stabilizers as well as on logic and economic assessment of them. The result of these steps is developing the definition of automatic fiscal stabilizer. Based on the definition, the sufficient predicates (attributes) of the automatic fiscal stabilizer (i.e. those characteristics that, once verified, ensure the quality of automatic fiscal stabilizer) are identified and, based on the last, are also identified the necessary predicates (attributes) of it. A particularly important aspect is the formal description of the generic action of the automatic fiscal stabilizer in different assumptions of the variation rate action, and of the variation of the base action of this special institutional tool. The study ends with analyzing the portfolio problem of the automatic fiscal stabilizers that could be designed and implemented under a non-discretionary fiscal policy framework.
    Keywords: automatic; fiscal; stabilizers
    JEL: E62 E63 H30
    Date: 2009–08–09
  35. By: J.E. Boscá; R. Doménech; J. Ferri
    Abstract: This paper uses REMS, a Rational Expectations Model of the Spanish economy designed by Boscá et al (2007) to analyse the effects of lowering the overall tax edge to the level prevailing in the US. Our results partially confirm previous findings in the literature: a reduction in the overall tax wedge of 19.5 points, in order to reach the US levels, has a positive effect in the long run, increasing total hours by about 7 per cent and GDP by about 8 percentage points. In terms of GDP per adult, these results account for ¼ of the gap with respect to the US, but imply a reduction of only one percentage point in the labour productivity gap. The rise in total hours per adult is explained by a similar increase in both hours per employee and the employment rate of about 3.5 percentage points, allowing hours per adult to converge to levels only slightly lower than those in the US.
    Keywords: General equilibrium, tax wedge, tax reforms, fiscal policy, labour market.
    JEL: E32 E62
    Date: 2009–05
  36. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and cross-sectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.
    JEL: E21 J22 J31
    Date: 2009–08
  37. By: Robert J. Barro; Tao Jin
    Abstract: In the rare-disasters setting, a key determinant of the equity premium is the size distribution of macroeconomic disasters, gauged by proportionate declines in per capita consumption or GDP. The long-term national-accounts data for up to 36 countries provide a large sample of disaster events of magnitude 10% or more. For this sample, a power-law density provides a good fit to the distribution of the ratio of normal to disaster consumption or GDP. The key parameter of the size distribution is the upper-tail exponent, alpha, estimated to be near 5, with a 95% confidence interval between 3-1/2 and 7. The equity premium involves a race between alpha and the coefficient of relative risk aversion, gamma. A higher alpha signifies a thinner tail and, therefore, a lower equity premium, whereas a higher gamma implies a higher equity premium. The equity premium is finite if (alpha-1>gamma). To accord with an observed average unlevered equity premium of around 5%, we get a point estimate for gamma close to 3, with a 95% confidence interval of roughly 2 to 4.
    JEL: E20 E32 G12
    Date: 2009–08
  38. By: Fabio Panetta (Banca d'Italia); Thomas Faeh (Bank for International Settlements); Giuseppe Grande (Banca d'Italia); Corrinne Ho (Bank for International Settlements); Michael King (Bank for International Settlements); Aviram Levy (Banca d'Italia); Federico M. Signoretti (Banca d'Italia); Marco Taboga (Banca d'Italia); Andrea Zaghini (Banca d'Italia)
    Abstract: We analyse the wide array of rescue programmes adopted in several countries, following Lehman Brothers’ default in September 2008, in order to support banks and other financial institutions. We first provide an overview of the programmes, comparing their characteristics, magnitudes and participation rates across countries. We then consider the effects of the programmes on banks’ risk and valuation, looking at the behaviour of CDS premia and stock prices. We then proceed to analyse the issuance of government guaranteed bonds by banks, examining their impact on banks’ funding and highlighting undesired effects and distortions. Finally, we briefly review the recent evolution of bank lending to the private sector. We draw policy implications, in particular as regards the way of mitigating the distortions implied by such programmes and the need for an exit strategy.
    Keywords: bank asset guarantees, capital injection, banks, financial sector, financial crisis, bank consolidation, bank mergers and acquisitions, event studies, government guaranteed bonds, credit crunch, exit strategy
    JEL: E58 E65 G14 G18 G21 G28 G32 G34
    Date: 2009–07
  39. By: Baldwin, John R.; Macdonald, Ryan
    Abstract: This paper examines the challenges that the manufacturing sector has faced over the last half century focusing on both long- and short-term performance. It first examines whether there is evidence that this sector is in long-term decline. The paper also investigates how the industry has responded to specific shocks during this period from exchange-rate movements, trade liberalization and business cycles. It finds little evidence of long-term decline. Rather it describes how manufacturing has adapted to varying challenges, whether from demand shifts due to business cycles, relative price shifts associated with exchange rate shocks or changes in tariff regimes.
    Keywords: International trade, Manufacturing, Business performance and ownership, Business cycles
    Date: 2009–07–28
  40. By: Craig Burnside; Alexandra Tabova
    Abstract: We reconsider the empirical links between volatility and growth between 1970 and 2007. There is a strong and significant correlation between individual country growth rates and global factors that are arguably exogenous with respect to their economies. The amount of volatility driven by these external factors is highly correlated, cross-sectionally, with the overall amount of volatility in GDP growth. There is also a strong correlation between a country's average growth rate and the magnitude and sign of its exposure to global factors. We interpret our findings as a partial answer to the question "Why doesn't capital flow from rich to poor countries?" We argue that low-income countries that grow slowly are riskier from the perspective of the marginal international investor.
    JEL: E32 E44 F21 F43 O40
    Date: 2009–08
  41. By: Departamento de Modelos Macroeconómicos (Central Bank of Peru)
    Abstract: El documento describe el Modelo de Proyección Trimestral (MPT) utilizado por el Banco Central de Reserva del Perú (BCRP) para fines de simulación de política monetaria y de proyección de las principales variables macroeconómicas. La estructura básica del modelo es una aproximación a la representación lineal de un modelo de equilibrio general dinámico para una economía pequeña y abierta con dolarización parcial. El modelo incorpora expectativas racionales y posee un fundamento neo-keynesiano (rigidez de precios) que permite un rol de la política monetaria sobre las variables reales en el corto plazo. El documento presenta también ejercicios de simulación de momentos y de funciones impulsorespuesta generados con el MPT, así como algunas consideraciones adicionales sobre el sistema de proyecciones macroeconómicas del BCRP.
    Keywords: Modelo semiestructural, Proyecciones macroeconómicas, Perú
    JEL: E37 E52 E58 F41
    Date: 2009–04
  42. By: Angel Muñoz; Angel Melguizo; David Tuesta; Joaquín Vial
    Abstract: En este documento analizamos los costes fiscales a corto y medio plazo derivados de la reforma estructural del sistema de pensiones, tomando a Chile como ejemplo. El sistema de pensiones chileno, basado en cuentas de capitalización individual gestionadas por el sector privado está funcionando desde hace casi 30 años, lo que permite analizar con garantías el impacto de los sistemas de pensiones privados en las cuentas públicas. Además, en la actualidad se está implementando una reforma que cambia radicalmente el pilar solidario. En este documento sostenemos que aunque los costes de la transición fiscal son mucho menores que sus beneficios, suelen ser altos y persistentes, por lo que es aconsejable una consolidación fiscal antes de embarcarse en el proceso. Esto también permite solventar la falta de cobertura que provoca la informalidad del mercado de trabajo, como se demuestra para Chile, Colombia, México y Perú. Finalmente, en términos más generales, la posibilidad de “exportar” este tipo de reforma de las pensiones no solo depende de su diseño específico, si no de la calidad las instituciones públicas y de regulación del mercado.
    Keywords: "Reforma de las pensiones, deuda implícita, costes fiscales, pilar solidario, pensión mínima, Chile"
    JEL: E62 H55 H68
    Date: 2009–07
  43. By: Angel Melguizo; Angel Muñoz; David Tuesta; Joaquín Vial
    Abstract: In this paper we analyze the short and medium term fiscal costs stemming from structural pension reform, taking Chile as workhorse. The Chilean pension system, based on individual capital accounts managed by the private sector, has been in operation for almost 30 years, providing a rich evidence of the impact of pension systems on public accounts. Besides, a recent reform that crucially changes the solidarity pillar is being implemented now. In the paper we argue that although much lower than its benefits, fiscal transition costs tend to be high and persistent, so a fiscal consolidation prior to the reform is advisable. This also allows filling the coverage holes that labour market informality generates, as illustrated for Chile, Colombia, Mexico and Peru. Finally, in more general terms, the exportability of this type of pension reform depends not only on its specific design, but on the quality of market and public institutions.
    Keywords: Pension reform, implicit debt, fiscal costs, solidarity pillar, minimum pension, Chile
    JEL: E62 H55 H68
    Date: 2009–07
  44. By: Emi Nakamura; Dawit Zerom
    Abstract: Recent theoretical work has suggested a number of potentially important factors in causing incomplete pass-through of exchange rates to prices, including markup adjustment, local costs and barriers to price adjustment. We empirically analyze the determinants of incomplete pass-through in the coffee industry. The observed pass-through in this industry replicates key features of pass-through documented in aggregate data: prices respond sluggishly and incompletely to changes in costs. We use microdata on sales and prices to uncover the role of markup adjustment, local costs, and barriers to price adjustment in determining incomplete pass-through using a structural oligopoly model that nests all three potential factors. The implied pricing model explains the main dynamic features of short and long-run pass-through. Local costs reduce long-run pass-through (after 6 quarters) by a factor of 59% relative to a CES benchmark. Markup adjustment reduces pass-through by an additional factor of 33%, where the extent of markup adjustment depends on the estimated "super-elasticity'' of demand. The estimated menu costs are small 0.23% of revenue) and have a negligible effect on long-run pass-through, but are quantitatively successful in explaining the delayed response of prices to costs. The estimated strategic complementarities in pricing do not, therefore, substantially delay the response of prices to costs. We find that delayed pass-through in the coffee industry occurs almost entirely at the wholesale rather than the retail level.
    JEL: E30 F10 L11 L16
    Date: 2009–08
  45. By: Armida Alisjahbana (Department of Economics, Padjadjaran University)
    Abstract: This paper revisits Indonesia’s sources of economic growth using the Growth Accounting Framework with education adjusted employment for period 1971-2007. The study estimates contribution of growth in capital stock, human capital and Total Factor Productivity (TFP) during the period before and after the crisis. TFP played positive but minor role in Indonesia’s economic growth before the crisis. Growth in capital stock had been the main driver, attributing between 50-70% of growth. Growth in human capital accounted for another 30%. The pattern of sources of growth has changed substantially post crisis. TFP growth has played a more significant role, whereas capital stock growth has been increasing but at a meager pace. Human capital has consistently contributed about 30% to the overall growth. The roles of capital stock growth, human capital growth and TFP have been on a more equal footing after post-crisis. If this trend persists, it will have profound implication on the driver of Indonesian economy’s growth in the future and its trajectory projection towards 2030.
    Keywords: Economic growth, Total Factor Productivity, Indonesia 2030
    JEL: E37
    Date: 2009–07
  46. By: Ullrich Heilemann
    Abstract: The following look on the current state and the future of macroeconomic data is likely to fail. For one thing, researchers will be disappointed to find that their claims for more and “better” data are not adequately supported; the Amtliche Statistik [(Official Statistics (OS)], while to some degree perhaps sharing this disappointment, may miss suggestions and specific comments on old and new data needs. In a material sense, the situation does not appear lamentable and no case can be made requiring immediate action. In addition, few of the following remarks are new or unique. Indeed, as an empirical macroeconomist, and as a member of various statistical advisory bodies, the present author is impressed by the progress made in numerous areas of research infrastructure that were inconceivable only a decade ago. Within the triad of data, methods, and theory, for an increasing number of areas of the social and behavioural sciences, “data” no longer appear to be the limiting factor (so here appetite comes with eating, too) - especially not when also looking at cost, returns, and setting negative priorities. It is true that improvements to the macroeconomic informational infrastructure over the last two decades were much smaller than the progress made in microeconomics and many of its sub-categories (for labour economics, e.g., Bender and Möller 2009; Schneider 2009). However, these other areas were only catching up with the state of macroeconomic data, which had experienced a similar jump with the launch of the National Accounts (NA) in Germany some 50 years ago. Given the breadth of the topic, at least in the context of this volume, the following remarks will be cursory and the references rather general.
    Date: 2009
  47. By: Yosef Bonaparte; Russell Cooper
    Abstract: This paper studies the dynamic optimization problem of a household when portfolio adjustment is costly. The analysis is motivated by the observation that on a monthly basis, less than 10% of stockholders typically adjust their portfolio of common stocks. We use this, and related observations, to estimate the parameters of household preferences and portfolio adjustment costs. We find significant adjustment costs, beyond the direct costs of buying and selling assets. These adjustment costs imply that inferences drawn about household risk aversion and the elasticity of intertemporal substitution are biased: household risk aversion is lower compared to other estimates and it is not equal to the inverse of the elasticity of intertemporal substitution.
    JEL: E21 E44 G11
    Date: 2009–08
  48. By: David Backus; Mikhail Chernov; Ian Martin
    Abstract: We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order cumulants are quantitatively important in both representative-agent models with disasters and in a statistical pricing model estimated from equity index options. Option prices thus provide independent confirmation of the impact of extreme events on asset returns, but they imply a more modest distribution of them.
    JEL: E44 G12
    Date: 2009–08
  49. By: Jon H. Fiva (University of Oslo); Gisle James Natvik (Norges Bank (Central Bank of Norway))
    Abstract: We identify exogenous variation in incumbent policymakers' re-election probabilities and explore empirically how this variation affects the incumbents' investment in physical capital. Our results indicate that a higher re-election probability leads to higher investments, particularly in the purposes preferred more strongly by the incumbents. This aligns with a theoretical framework where political parties disagree about which public goods to produce using labor and predetermined public capital. Key for the consistency between data and theory is to account for complementarity between physical capital and flow variables in government production.
    Keywords: Political economics, Strategic capital accumulation, Identifying popularity shocks
    JEL: E62 H40 H72
    Date: 2009–08–11
  50. By: Colin Busby (C.D. Howe Institute); Alexandre Laurin (C.D. Howe Institute); David Gray (University of Ottawa)
    Abstract: Regionally based entry requirements and benefit durations prolong the persistence of unemployment and reduce economic incentives to adjust to labour-market conditions. Reforms aimed at equity are overdue. Regionally based criteria should be replaced by uniform, countrywide, employment insurance entrance requirements and benefit durations.
    Keywords: employment insurance reform
    JEL: E24 J65 J68
    Date: 2009–08

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