nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒08‒30
fifty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Disagreement among forecasters in G7 countries. By Jonas Dovern; Ulrich Fritsche; Jiri Slacalek
  2. Productivity and Job Flows: Heterogeneity of New Hires and Continuing Jobs in the Business Cycle. By Juha Kilponen; Juuso Vanhala
  6. The reception of public signals in financial markets - what if central bank communication becomes stale? By Michael Ehrmann; David Sondermann
  7. Labor Turnover Costs, Workers' Heterogeneity and Optimal Monetary Policy By Ester Faia; Wolfgang Lechthaler; Christian Merkl
  8. Monetary policy strategy in a global environment By Philippe Moutot; Giovanni Vitale
  9. Housing market heterogeneity in a monetary union By Margarita Rubio
  10. Inflation and Inflation Uncertainty in the Euro Area By Guglielmo Maria Caporale; Luca Onorante; Paolo Paesani
  11. How large are the effects of tax changes? By Carlo Favero; Francesco Giavazzi
  12. Does the ECB Rely on a Taylor Rule?: Comparing Ex-post with Real Time Data By Ansgar Belke; Jens Klose
  13. Macro modelling with many models By Ida Wolden Bache; James Mitchell; Francesco Ravazzolo; Shaun P. Vahey
  14. Credit Spreads and Monetary Policy By Vasco Cúrdia; Michael Woodford
  15. How Should Monetary Policy Respond to Exogenous Changes in the Relative Price of Oil? By MICHAEL PLANTE
  16. VARMA models for Malaysian Monetary Policy Analysis By Mala Raghavan; George Athanasopoulos; Param Silvapulle
  18. Long-Run Impacts of Inflation Tax in the Presence of Maintenance Expenditures By Seiya Fujisaki; Kazuo Mino
  19. Fiscal and Monetary Policy Responses to Oil Price Shocks in Oil Importing Low Income Countries. By Micheal Plante
  20. The Impact of the Crisis on Budget Policy in Central and Eastern Europe By Zsolt Darvas
  21. Growth, Fiscal Policy and the Informal Sector in a Small Open Economy By Gui Pedro de Mendonça
  22. Fiscal Policy Cyclicality and Growth within the U.S. States By Ayako Kondo; Justin Svec
  23. U.S. Commercial Bank Lending through 2008:Q4: New Evidence from Gross Credit Flows By Silvio Contessi; Johanna Francis
  25. The Role of "Determinacy" in Monetary Policy Analysis By Bennett T. McCallum
  26. High-growth Recoveries, Inventories and the Great Moderation By Maximo Camacho; Gabriel Perez-Quiros; Hugo Rodríguez Mendizábal
  27. The Cyclical Properties of Disaggregated Capital Flows By Silvio Contessi; Pierangelo De Pace; Johanna Francis
  28. Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB By Jan-Egbert Sturm; Jakob de Haan
  29. Inflation, Liquidity Risk and Long-run TFP - Growth By Evers, Michael; Niemann, Stefan; Schiffbauer, Marc
  30. Exchange Rates, Oil Price Shocks, and Monetary Policy in an Economy with Traded and Non-Traded Goods. By Micheal Plante
  31. Lenders of Last Resort in a Globalized World By Maurice Obstfeld
  32. Calibration and Resolution Diagnostics for Bank of England Density Forecasts By John Galbraith; Simon van Norden
  33. Evaluating microfoundations for aggregate price rigidities: evidence from matched firm-level data on product prices and unit labor cost. By Mikael Carlsson; Oskar Nordström Skans
  34. Residential Rents and Price Rigidity: Micro structure and macro consequences By SHIMIZU Chihiro; NISHIMURA Kiyohiko G.; WATANABE Tsutomu
  35. Temporal aggregation in political budget cycles By Jorge M. Streb; Daniel Lema
  36. On the non-causal link between volatility and growth By Olaf Posch; Klaus Wälde
  37. Macroeconomic Factors and Swedish Small and Medium-Sized Manufacturing Firm Failure By Salman, A. Khalik; von Friedrichs, Yvonne; Shukur, Ghazi
  38. "Financial and Monetary Issues as the Crisis Unfolds" By James K. Galbraith
  39. Economic thought at the European Commission and the creation of EMU (1957-1991) By Ivo Maes
  40. Fiscal stimulus for debt intolerant countries? By Reinhart, Carmen; Reinhart, Vincent
  41. Fiscal Federalism in Germany: Stabilization and Redistribution Before and After Unification By Ralf Hepp; Jürgen von Hagen
  42. Internal vs. External Habit Formation in a Growing Economy with Overlapping Generations By Masako Ikefuji; Kazuo Mino
  43. Policy Responses during the Depth of the 2007- 09 Financial Crisis: Instrument Innovations, Executive Reconfigurations, and Legacies for U.S. Governance By George M. von Furstenberg
  44. A Simple Model of the Financial Crisis of 2007-9 with Implications for the Design of a Stimulus Package By Kaushik Basu
  45. Term Structure Equations Under Benchmark Framework By El Qalli Yassine
  46. CBO Projects More Severe Downturn By Dean Baker
  47. What - or Who - Started the Great Depression? By Lee E. Ohanian
  48. The Swedish System of Payment 995-1534 By Edvinsson, Rodney; Franzén, Bo; Söderberg, Johan
  49. When Everyone Runs for the Exit By Lasse Heje Pedersen
  50. Sovereign bond market integration: the euro, trading platforms and financial crises By Schulz, Alexander; Wolff, Guntram B.
  51. Political Economy of Ramsey Taxation By Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
  52. Economic Shocks and Exchange Rate as a Shock Absorber in Indonesia and Thailand By Goo, Siwei; Siregar, Reza Y. Siregar
  53. Economic Conditions and U.S. National Security in the 1930s and Today By Martin S. Feldstein
  54. Early intervention and prompt corrective action in Europe By Mayes, David G
  55. Creative Destruction and Fiscal Institutions: A Long-Run Case Study of Three Regions By Jan Schnellenbach; Thushyanthan Baskaran; Lars P. Feld

  1. By: Jonas Dovern (Kiel Economics Research & Forecasting, Fraunhoferstr. 13, D-24118 Kiel, Germany.); Ulrich Fritsche (University of Hamburg, Edmund-Siemers-Allee 1, D-20146 Hamburg, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Using the Consensus Economics dataset with individual expert forecasts from G7 countries we investigate determinants of disagreement (crosssectional dispersion of forecasts) about six key economic indicators. Disagreement about real variables (GDP, consumption, investment and unemployment) has a distinct dynamic from disagreement about nominal variables (inflation and interest rate). Disagreement about real variables intensifies strongly during recessions, including the current one (by about 40 percent in terms of the interquartile range). Disagreement about nominal variables rises with their level, has fallen after 1998 or so (by 30 percent), and is considerably lower under independent central banks (by 35 percent). Cross-sectional dispersion for both groups increases with uncertainty about the underlying actual indicators, though to a lesser extent for nominal series. Country-by-country regressions for inflation and interest rates reveal that both the level of disagreement and its sensitivity to macroeconomic variables tend to be larger in Italy, Japan and the United Kingdom, where central banks became independent only around the mid-1990s. These findings suggest that more credible monetary policy can substantially contribute to anchoring of expectations about nominal variables; its effects on disagreement about real variables are moderate. JEL Classification: E31, E32, E37, E52, C53.
    Keywords: disagreement, survey expectations, monetary policy, forecasting.
    Date: 2009–08
  2. By: Juha Kilponen (Bank of Finland, Monetary Policy and Research Department, P.O. Box 160, FI-00101 Helsinki, Finland); Juuso Vanhala (Bank of Finland, Monetary Policy and Research Department, P.O. Box 160, FI-00101 Helsinki, Finland)
    Abstract: This paper focuses on tenure driven productivity dynamics of a firm-worker match as a potential explanation of "unemployment volatility puzzle". We let new matches and continuing jobs differ by their productivity levels and by their sensitivity to aggregate productivity shocks. As a result, new matches have a higher destruction rate and lower, but more volatile, wages than old matches, as new hires receive technology associated with the latest vintage. Our contribution is to produce model driven stickiness of old jobs’ wages which does not rely on ad hoc assumptions on wage rigidity. In our model, an aggregate productivity shock generates a persistent productivity difference between the two types of matches, creating an incentive to open new productive vacancies and to destroy old matches that are temporarily less productive. The model produces a well behaving Beveridge curve, despite endogenous job destruction, and more volatile vacancies and unemployment, without a need to rely on differing wage setting mechanisms of new and continuing jobs. Price rigidities do not alter the basic mechanism and the transmission of monetary policy shock is very similar to the standard New Keynesian model with search frictions. JEL Classification: E24, E32, J64.
    Keywords: Matching, productivity shocks, job flows, Beveridge curve, vintage structure, nominal rigidities, monetary policy shock, tenure.
    Date: 2009–08
  3. By: Troy Davig, Eric Leeper (Federal Reserve Bank of Kansas City, Indiana University Bloomington)
    Abstract: Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the econ- omy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes cre- ate a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between ac- tive and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model’s predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act’s implied path for government spending under alternative monetary-fiscal policy combina- tions.
    Date: 2009–06
  4. By: Eric M. Leeper (Indiana University)
    Abstract: In this lecture, I argue that there are remarkable parallels between how monetary and fiscal policies operate on the macro economy and that these parallels are sufficient to lead us to think about transforming fiscal policy and fiscal institutions as many countries have transformed monetary policy and monetary institutions. Making fiscal transparency comparable to monetary transparency requires fiscal authorities to discuss future possible fiscal policies explicitly. Enhanced fiscal transparency can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective. As advanced economies move into a prolonged period of heightened fiscal activity, anchoring fiscal expectations will become an increasingly important aspect of macroeconomic policy.
    Date: 2009–08
  5. By: Troy Davig, Eric Leeper (Federal Reserve Bank of Kansas City, Indiana University Bloomington)
    Abstract: Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the econ- omy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes cre- ate a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between ac- tive and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model’s predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act’s implied path for government spending under alternative monetary-fiscal policy combina- tions.
    Date: 2009–05
  6. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); David Sondermann (University of Münster, Schlossplatz 2, D-48149 Münster, Germany.)
    Abstract: How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to macroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses. JEL Classification: E58, E43, G12, G14.
    Keywords: public signals, inflation reports, monetary policy, interest rates, announcement effects, co-ordination of beliefs, Bank of England.
    Date: 2009–08
  7. By: Ester Faia; Wolfgang Lechthaler; Christian Merkl
    Abstract: We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms’ counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation
    Keywords: optimal monetary policy, hiring and firing costs, labor market frictions, policy trade-off
    JEL: E52 E24
    Date: 2009–07
  8. By: Philippe Moutot (European Central Bank, Directorate Monetary Policy, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Giovanni Vitale (European Central Bank, Directorate Monetary Policy, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper discusses the structural implications of real and financial globalisation, with the aim of drawing lessons for the conduct of monetary policy and, in particular, for the assessment of risks to price stability. The first conclusion of the paper is that globalisation may have played only a limited role in reducing inflation and output volatility in developed economies. Central banks should remain focused on their mandate to preserve price stability. However, the globalisation of financial markets over the last 25 years has had major implications for the conduct of monetary policy. Four elements characterise the new financial landscape: the decline in the “home bias”; the increase in the size of international financial transactions relative to transactions in goods and services; the increase in the number of countries adopting inflation targeting and currency peg monetary regimes; and the transformation of financial market microstructure. The paper argues that in this new environment monetary policy should systematically incorporate financial analysis into its assessment of the risks to price stability. Monetary policy should “lean against the wind” of asset price bubbles that could burst at a high cost and hinder the maintenance of macroeconomic and financial stability. Further, in view of the interlinkages among financial markets worldwide, macro-financial surveillance at the international level needs to be strengthened and monetary policymakers need to cooperate and exchange information on a wider scale and at a deeper level with financial supervisors. Finally, the paper reviews the rationale for a central bank to act (in concert with other central banks) as the ultimate provider of liquidity to financial markets in situations of extreme instability and market malfunctioning. A sudden and sharp liquidity drought in the market should be tackled with appropriate measures that could even go beyond the extraordinary refinancing of monetary and financial institutions. In these circumstances, the central bank should clearly communicate that the aim of its liquidity provision measures is to support the proper functioning of financial markets, and that they do not indicate a change in the monetary policy stance (“separation principle”). JEL Classification: E44, E58, F33, F42.
    Keywords: Globalisation, Monetary policy, Asset prices, Financial markets.
    Date: 2009–08
  9. By: Margarita Rubio (Banco de España)
    Abstract: This paper studies the implications of cross-country housing market heterogeneity for a monetary union, also comparing the results with a flexible exchange rate and independent monetary policy setting. I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. Results show that in a monetary union, consumption reacts more strongly to monetary policy shocks in countries with high loan-to-value ratios (LTVs), a high proportion of borrowers or variable-rate mortgages. As for asymmetric technology shocks, output and house prices increase by more in the country receiving the shock if it can conduct monetary policy independently. I also fi nd that after country-specific housing price shocks consumption does not only increase in the country where the shock takes place, there is an international transmission. From a normative perspective, I conclude that housing-market homogenization in a monetary union is not beneficial per se, only when it is towards low LTVs or predominantly fixed-rate mortgages. Furthermore, I show that when there are asymmetric shocks but identical housing markets, it is beneficial to form a monetary union with respect to having a flexible exchange rate regime. However, for the examples I consider, net benefits decrease substantially if there is LTV heterogeneity and are negative under different mortgage contracts.
    Keywords: Housing market, collateral constraint, monetary policy, monetary union
    JEL: E32 E44 F36
    Date: 2009–08
  10. By: Guglielmo Maria Caporale; Luca Onorante; Paolo Paesani
    Abstract: This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates the linkages between them in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, implying that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.
    Keywords: Inflation, inflation uncertainty, time-varying parameters, GARCH models, ECB, EMU
    JEL: E31 E52 C22
    Date: 2009
  11. By: Carlo Favero; Francesco Giavazzi
    Abstract: We use the time series of shifts in U.S. Federal tax liabilities constructed by Romer and Romer to estimate tax multipliers. Differently from the single-equation approach adopted by Romer and Romer, our estimation strategy (a Var that includes output, government spending and revenues, inflation and the nominal interest rate) does not rely upon the assumption that tax shocks are orthogonal to each other as well as to lagged values of other macro variables. Our estimated multiplier is much smaller: one, rather than three at a three-year horizon. When we split the sample in two sub-samples (before and after 1980) we find, before 1980, a multiplier whose size is never greater than one, after 1980 a multiplier not significantly different from zero. Following the findings in Bohn (1998), we also experiment with a model that includes debt and the non-linear government budget constraint. We find that, while in general not very important, the non-linearity that arises from the budget constraint makes a difference after 1980, when the response of fiscal variables to the level of the debt becomes stronger.
    JEL: E62 H60
    Date: 2009–08
  12. By: Ansgar Belke; Jens Klose
    Abstract: We assess the differences that emerge in Taylor rule estimations for the ECB when using ex-post data instead of real time forecasts and vice versa. We argue that previous comparative studies in this field mixed up two separate effects. First, the differences resulting from the use of ex-post and real time data per se and, second, the differences emerging from the use of non-modified real time data instead of real-time data based forecasted values and vice versa. Since both effects can influence the reaction to inflation and the output gap either way, we use a more clear-cut approach to disentangle the partial effects. Our estimation results indicate that using real time instead of ex post data leads to higher estimated inflation coefficients while the opposite is true for the output gap coefficients. If real time data forecasts for the current period are used (since actual data become available with a lag), this empirical pattern is even strengthened in the sense of even increasing the inflation response but lowering the reaction to the output gap while the reverse is true if "true" forecasts of real time data for several periods are employed.
    Keywords: European Central Bank, monetary policy, real time data, Taylor rule
    JEL: E43 E58
    Date: 2009
  13. By: Ida Wolden Bache (Norges Bank (Central Bank of Norway)); James Mitchell (National Institute of Economic and Social Research); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Shaun P. Vahey (Melbourne Business School)
    Abstract: We argue that the next generation of macro modellers at Inflation Targeting central banks should adapt a methodology from the weather forecasting literature known as `ensemble modelling'. In this approach, uncertainty about model specifications (e.g., initial conditions, parameters, and boundary conditions) is explicitly accounted for by constructing ensemble predictive densities from a large number of component models. The components allow the modeller to explore a wide range of uncertainties; and the resulting ensemble `integrates out' these uncertainties using time-varying weights on the components. We provide two examples of this modelling strategy: (i) forecasting inflation with a disaggregate ensemble; and (ii) forecasting inflation with an ensemble DSGE.
    Keywords: Ensemble modelling, Forecasting, DSGE models, Density combination
    JEL: C11 C32 C53 E37 E52
    Date: 2009–08–17
  14. By: Vasco Cúrdia; Michael Woodford
    Abstract: We consider the desirability of modifying a standard Taylor rule for a central bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor [2008] and by McCulley and Toloui [2008]) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al. [2007]). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in Curdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Taylor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even the right sign) of the response to credit is less robust to alternative assumptions about the nature and persistence of disturbances.
    JEL: E44 E52
    Date: 2009–08
  15. By: MICHAEL PLANTE (Indiana University, Ball State University)
    Abstract: This paper examines welfare maximizing optimal monetary policy and simple mon- etary policy rules in a New Keynesian model that incorporates oil as an intermediate input and as a consumption good. I show under several dierent assumptions that the optimal policy focuses on stabilizing some combination of nominal wage and core ination while allowing for signicant movements in value added and CPI (headline) in- ation. Wage indexation to headline ination does not change this result. The optimal response of the nominal rate is sensitive to the assumptions of the model. For all cases examined the optimal policy is well approximated, in welfare terms, by a simple policy rule that suciently stabilizes core ination. Empirical evidence using data from after 1986 supports the hypothesis that the Federal Reserve has been responding to real oil price changes in a manner similar to what the model says is optimal.
    Date: 2009–08
  16. By: Mala Raghavan; George Athanasopoulos; Param Silvapulle
    Abstract: This paper establishes vector autoregressive moving average (VARMA) models for Malaysian monetary policy analysis by efficiently identifying and simultaneously estimating the model parameters using full information maximum likelihood. The monetary literature is largely dominated by vector autoregressive (VAR) and structural vector autoregressive (SVAR).models, and to the best of our knowledge, this is the first paper to use VARMA modelling to investigate monetary policy. Malaysia is an interesting small open economy to study because of the capital control measures imposed by the government following the 1997 Asian financial crisis. A comparison of the impulse responses generated by these three models for the pre- and post-crisis periods indicates that the VARMA model impulse responses are consistent with prior expectations based on economic theories and policies pursued by the Malaysian government, particularly in the post-crisis period. Furthermore, uncovering the way in which various intermediate channels work would help Bank Negara Malaysia to steer the economy in the right direction so that monetary policy can still remain an effective policy measure in achieving sustainable economic growth and price stability.
    Keywords: VARMA models, Identification, Impulse responses, Open Economy, Transmission mechanism
    JEL: C32 E52 F41
    Date: 2009–08
  17. By: ERIC M. LEEPER, TODD B. WALKER, AND SHU-CHUN S. YANG (Indiana University Bloomington, Indiana University, Congressional Budget Office)
    Abstract: This paper contributes to the debate about fiscal multipliers by studying the impacts of government investment in conventional neoclassical growth models. The analysis focuses on two dimensions of fiscal policy that are critical for understanding the effects of government investment: implementation delays associated with building public capital projects and expected future fiscal adjustments to debt-financed spending. Implementation delays can produce small or even negative labor and output responses in the short run; anticipated fiscal financing adjustments matter both quantitatively and qualitatively for long-run growth effects. Taken together, these two dimensions have important implications for the short-run and long-run impacts of fiscal stimulus in the form of higher government infrastructure investment. The analysis is conducted in several models with features relevant for studying government spending, including utility-yielding government consumption, time- to-build for private investment, and government production.
    Date: 2009–06
  18. By: Seiya Fujisaki (Graduate School of Economics, Osaka University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    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. We assume that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance expenditures. Money is introduced via a cash-in-advance constraint that may apply to the maintenance expenditures as well as to consumption and investment spendings. 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 specification of the capital depreciation technology as well as to the forms of cash-in-advance constraints.
    Keywords: maintenance expenditures, endogenous growth, inflation tax, cash-in-advance constraints
    JEL: E31 E52 O42
    Date: 2009–08
  19. By: Micheal Plante (Indiana University, Ball State University)
    Abstract: This paper considers monetary and scal policy responses to oil price shocks in low income oil importing countries. I examine the dynamic properties and the welfare implications of a set of ination targeting policies and a group of policies where the government provides a subsidy on household purchases of oil products and nances this subsidy through some combination of printing money and raising non-distortionary lump sum taxes. Even in the case where lump sum taxes nance the subsidy, it distorts household behavior in important ways leading to over consumption of oil products, increased trade decits, and distortions to the labor supply. Resorting to the ination tax to nance the subsidy leads to signicant macroeconomic issues when exchange rates are exible. The welfare gains from a policy that nances the subsidy through lump sum taxation are small compared to the policy with full pass through. For most calibrations the losses from nancing the policy through the ination tax are substantial. The welfare generated by the ination targeting policies is close to the baseline policy with full pass through so long as the response to ination is strong enough.
    Date: 2009–08
  20. By: Zsolt Darvas (Bruegel, Institute of Economics of the Hungarian Academy of Sciences and Corvinus University of Budapest)
    Abstract: This paper describes the particular impacts of the financial and economic crisis on central and eastern European (CEE) countries, studies pro-cyclicality of fiscal policies, discusses the impact of the crisis on fiscal policy, and the policy response of various governments. After drawing some lessons for fiscal policy from previous emerging market crises, the paper concludes with some thoughts on the appropriate policy response from a more normative perspective. The key message of the paper is that the crisis should be used as an opportunity to introduce reforms to avoid future pro-cyclical fiscal policies, to increase the quality of budgeting and to increase credibility. These reforms should include fiscal responsibility laws comprising medium-term fiscal frameworks, fiscal rules, and independent fiscal councils. When fiscal consolidation is accompanied by fiscal reforms that increase credibility, non-Keynesian effects may offset to some extent the contraction caused by the consolidation.
    Keywords: eastern Europe, crisis, fiscal reform, pro-cyclical fiscal policy
    JEL: C32 E62 H60
    Date: 2009–08–18
  21. By: Gui Pedro de Mendonça
    Abstract: We discuss the implications of informality on growth and fiscal policy by considering an informal sector based on low tech firms, in an open economy model of endogenous growth, where labour supply is elastic and increasing returns arise from public spending. We allow for both labour and capital to allocate between sectors and examine the dynamic and policy issues that arise in an economy, where long run outcomes are still dominated by formal activities, but long macroeconomic transitions arise as a result of informal microeconomic activities, which take advantage of both government taxation and limited fiscalization.
    Keywords: Endogenous Growth Theory; Optimal Fiscal Policy; Informal Sector; Public Capital.
    JEL: C61 E62 F43 O17 O41
    Date: 2009–08–16
  22. By: Ayako Kondo (Institute for Social and Economic Research, Osaka University); Justin Svec (Department of Economics, College of the Holy Cross)
    Abstract: We exploit differences in the stringency of balanced budget rules across US states to estimate the effect of fiscal policy cyclicality on state GDP growth. While most states have passed laws restricting deficits, the nature and strictness of these laws vary greatly. States with more stringent balanced budget restrictions run more procyclical fiscal policy. We use the diversity in these laws as an instrument for the cyclicality of state government spending. We find modest evidence that more counter-cyclical public expenditure increases a state's average growth rate per capita. Further, our point estimates suggest that a state could increase its annual growth rate by 0.4% by relaxing the "ex-post" balanced budget restriction. This estimated effect is statistically significant at the 10% level in our basic specification, but loses its significance when we control for the initial debt to GDP ratio.
    Keywords: growth, fiscal policy, cyclicality
    JEL: E32 E62 H72
    Date: 2009–08
  23. By: Silvio Contessi (Federal Reserve Bank of St. Louis); Johanna Francis (Fordham University, Department of Economics)
    Abstract: What was hiding behind the aggregate commercial bank loans through the end of 2008? We use balance sheet data for every insured U.S. commercial bank from 1999:Q1 to 2008:Q4 to construct credit expansion and credit contraction series and provide new evidence on changes in lending. Until 2008:Q3 net credit growth was not dissimilar to the 1980 and 2001 recessions. However, between the third and fourth quarter credit contraction grew larger than credit expansion across all types of loans and for the largest banks. With the inclusion of 2008:Q4 data our series most resemble the intensification of the Savings and Loan crisis.
    Keywords: Credit Market, Reallocation, Aggregate Restructuring, Business Cycle, Financial crisis
    JEL: E44 E51 G21
    Date: 2009
  24. By: ERIC M. LEEPER, MICHAEL PLANTE, NORA TRAUM (Indiana University Bloomington, Indiana University and Ball State University, Indiana University Office)
    Abstract: Dynamic stochastic general equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to U.S. data under a variety of specifica- tions of fiscal policy rules. We obtain several results. First, the best fitting model allows a rich set of fiscal instruments to respond to stabilize debt. Second, responses of aggregate variables to fiscal policy shocks under rich fiscal rules can vary considerably from responses that allow only non-distortionary fiscal instruments to finance debt. Third, based on esti- mated policy rules, transfers, capital tax rates, and government spending have historically responded strongly to government debt, while labor taxes have responded more weakly. Fourth, all components of the intertemporal condition linking debt to expected discounted surpluses—transfers, spending, tax revenues, and discount factors—display instances where their expected movements are important in establishing equilibrium. Fifth, debt-financed fiscal shocks trigger long lasting dynamics so that short-run multipliers can differ markedly from long-run multipliers, even in their signs.
    Date: 2009–07
  25. By: Bennett T. McCallum (Professor, Carnegie Mellon University and National Bureau of Economic Research (E-mail:
    Abstract: It is well known that the concept of "determinacy"-a single stable solution-plays a major role in contemporary monetary policy analysis. But while determinacy is desirable, other things equal, it is not necessary for a solution to be plausible and is not sufficient for a solution to be desirable. There is a related but distinct criterion of "learnability" that seems more crucial. This paper argues that recognition of information feasibility requires that a candidate solution must, to be plausible, be quantitatively learnable on the basis of information generated by the economy itself. Since a prominent least- squares(LS) learning process is highly "biased" toward learnability, it is reasonable to regard it as a necessary condition for any specific solution to be relevant. This implies that determinacy is not necessary for policy analysis; there may be more than one stable solution but only one that is LS learnable. Also, determinacy is not sufficient for satisfactory policy analysis; explosive solutions pertaining to nominal variables will not be eliminated by transversality conditions. For these and other reasons, the role of determinacy in monetary policy analysis should be reconsidered and substantially de-emphasized.
    Keywords: Determinacy, Learnability, Rational Expectations, Multiple Solutions, Monetary Policy
    JEL: C62 E4 E5 E52
    Date: 2009–08
  26. By: Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España); Hugo Rodríguez Mendizábal (Instituto de Análisis Económico (CSIC))
    Abstract: We present evidence about the loss of the so-called "plucking effect", that is, a high-growth phase of the cycle typically observed at the end of recessions. This result matches the belief, presented informally by different authors, that recession may have now permanent effects, or recession have now an L shape versus old-time recessions that always had a V shape. We also show that the loss of the "plucking effect" can explain part of the Great Moderation. We postulate that these two phenomena may be due to changes in inventory management brought about by improvements in information and communications technologies.
    Keywords: Business cycle features, Great Moderation, High-growth recovery
    JEL: E32 F02 C22
    Date: 2009–08
  27. By: Silvio Contessi (Federal Reserve Bank of St. Louis); Pierangelo De Pace (Johns Hopkins University); Johanna Francis (Fordham University, Department of Economics)
    Abstract: We describe the second-moment properties of the components of international capital flows and their relationship to business cycle variables for 22 industrial and emerging countries. Inward flows are procyclical. Outward and net flows are countercyclical for most industrial and emerging countries, except for the G7. Results for individual flows are ambiguous except for inward FDI flows that are procyclical in industrial countries, but countercyclical in emerging countries. Using formal statistical tests, we find mixed evidence of changes in the covariance and correlation of capital flows with a set of macroeconomic variables in the G7 countries. We detect significant increases in the variance of all flows.
    Keywords: Capital Flows, International Business Cycles, Second Moments
    JEL: E32 F21 F32 F36
    Date: 2009
  28. By: Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jakob de Haan (Faculty of Economics and Business, University of Groningen, The Netherlands)
    Abstract: Nowadays, it is widely believed that greater disclosure and clarity over policy may lead to greater predictability of central bank actions. We examine whether communication by the European Central Bank (ECB) adds information compared to the information provided by a Taylor rule model in which real time expected inflation and output are used. We use five indicators of ECB communication that are all based on the ECB President’s introductory statement at the press conference following an ECB policy meeting. Our results suggest that even though the indicators are sometimes quite different from one another, they add information that helps predict the next policy decision of the ECB. Furthermore, also when the interbank rate is included in our Taylor rule model, the ECB communication indicators remain significant.
    Keywords: ECB, central bank, communication, Taylor rule
    JEL: E52 E53 E3
    Date: 2009–08
  29. By: Evers, Michael; Niemann, Stefan; Schiffbauer, Marc (ESRI)
    Abstract: This paper demonstrates a negative relation between inflation and long-run productivity growth. Inflation generates long-run real effects due to a link from the short-run nominal and financial frictions to a firm's qualitative investment portfolio. We develop an endogenous growth model whose key ingredients are (i) a nominal short-run portfolio choice for households, (ii) an agency problem which gives rise to financial market incompleteness, (iii) a firm-level technology choice between a return-dominated but secure and a more productive but risky project. In this framework, inflation increases the costs of corporate insurance against productive but risky projects and hence a firm's choice of technology. It follows that each level of inflation is associated with a different long-run balanced growth path for the economy as long as financial markets are incomplete. Finally, we apply U.S. industry and firm level data to examine the relevance of our specific microeconomic mechanism. We find that (i) firms insure systematically against risky R&D investments by means of corporate liquidity holdings, (ii) periods of higher inflation restrain firm-level R&D investments by reducing corporate liquidity holdings.
    Date: 2009
  30. By: Micheal Plante (Indiana University, Ball State University)
    Abstract: This paper examines monetary policy responses to oil price shocks in a small open economy that produces traded and non-traded goods. When only labor and oil are used in production and prices are sticky in the non-traded sector the behavior of ination, the nominal exchange rate, and the relative price of the non-traded good depends crucially upon whether the ratio of the cost share of oil to the cost share of labor is higher for the traded or non-traded sector. If the ratio is smaller (higher) for the traded sector then a policy that fully stabilizes non-traded ination causes the nominal exchange rate to appreciate (depreciate) and the relative price of the non-traded good to rise (fall) when there is a surprise rise in the price of oil. Similar results can hold for a policy that stabilizes CPI ination. Under a policy that xes the nominal exchange rate, non-traded ination rises (falls) if the ratio is smaller (larger) for the traded sector. Analytical results show that a policy of xing the exchange rate always produces a unique solution and that a policy of stabilizing non-traded ination produces a unique solution so long as the nominal interest rate is raised more than one-for-one with rises in non-traded ination. A policy that stabilizes CPI ination, however, produces multiple equilibria for a wide range of calibrations of the policy rule.
    Date: 2009–08
  31. By: Maurice Obstfeld (Professor, University of California, Berkeley (E-mail:
    Abstract: The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last- resort lender that channels central bank liquidity where it is needed. The IMF's effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.
    Keywords: Lender of Last Resort, Financial Crisis, Central Banking, International Monetary System, International Monetary Fund
    JEL: E58 F33 F36
    Date: 2009–08
  32. By: John Galbraith; Simon van Norden
    Abstract: This paper applies new diagnostics to the Bank of England’s pioneering density forecasts (fan charts). We compute their implicit probability forecast for annual rates of inflation and output growth that exceed a given threshold (in this case, the target inflation rate and 2.5% respectively.) Unlike earlier work on these forecasts, we measure both their calibration and their resolution, providing both formal tests and graphical interpretations of the results. These results both reinforce earlier evidence on some of the limitations of these forecasts and provide new evidence on their information content. <P>Cet étude développe et applique des nouvelles techniques pour diagnostiquer les prévisions de densité de la Banque d’Angleterre (leur “fan charts”). Nous calculons leurs probabilités implicites pour des taux d’inflation et de croissance du PIB qui dépassent des seuils critiques (soit le taux d’inflation ciblé, soit 2.5%.) En contraste avec des travaux antérieurs sur ces prévisions, nous gaugeons leur calibration aussi bien que leur résolution, en donnant des tests formels et des interprétations graphiques. Les résultats renforcent des conclusions déjà existant sur les limites de ces prévisions et ils donnent de nouvelles évidences sur leurs valeurs ajoutées.
    Keywords: calibration, density forecast, probability forecast, resolu, calibration, prévisions de densité, probabilités implicites, résolution.
    Date: 2009–08–01
  33. By: Mikael Carlsson (Research Department, Sveriges Riksbank, SE-103 37, Stockholm, Sweden.); Oskar Nordström Skans (Research Department, Sveriges Riksbank, SE-103 37, Stockholm, Sweden.)
    Abstract: Using data on product-level prices matched to the producing firm's unit labor cost, we reject the hypothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not fit the predictions of the Maćkowiak and Wiederholt (2009) version of the Rational Inattention Model. Neither do we find that firms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky Information Model. We find that, in line with Staggered Contracts models, firms consider both the current and future expected marginal cost when setting prices with a sum of coefficients not significantly different from unity. JEL Classification: D8, E3, L16.
    Keywords: Price Setting, Business Cycles, Information, Micro Data.
    Date: 2009–08
  34. By: SHIMIZU Chihiro; NISHIMURA Kiyohiko G.; WATANABE Tsutomu
    Abstract: Why was the Japanese consumer price index for rents so stable even during the period of the housing bubble in the 1980s? To address this question, we use a unique micro price dataset which we have compiled from individual listings (or transactions) in a widely circulated real estate advertisement magazine. This dataset contains more than 700 thousand listings of housing rents over the last twenty years. We start from the analysis of microeconomic rigidity and then investigate its implications for aggregate price dynamics, closely following the empirical strategy proposed by Caballero and Engel (2007). We find that 90 percent of the units in our dataset had no change in rents per year, indicating that rent stickiness is three times as high as in the United States. We also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level, suggesting that rent adjustments are not state dependent but time dependent. These two results indicate that both the intensive and extensive margins of rent adjustments are small, resulting in a slow response of the CPI for rent to aggregate shocks. We show that the CPI inflation rate would have been higher by 1 percentage point during the bubble period, and lower by more than 1 percentage point during the period following the burst of the bubble, if Japanese housing rents were as exible as those in the United States.
    Date: 2009–08
  35. By: Jorge M. Streb; Daniel Lema
    Abstract: While existing cross-country studies on political budget cycles rely on annual data, we build a panel with quarterly and monthly data from Latin American and OECD countries over the 1980-2005 period. Disaggregated data allow to center the electoral year more precisely, and show the effects are concentrated in a three-quarter window around elections. Cycles are statistically significant only in Latin America, but the pattern is similar to OECD countries: the budget surplus/GDP ratio falls in the election period and rises in the post-election period. In line with the logic of rational opportunistic manipulation, these effects cancel out.
    Keywords: temporal aggregation, electoral window, pre- and post-electoral effects, political budget cycles, rational opportunistic cycles
    JEL: D72 D78 H60
    Date: 2009–08
  36. By: Olaf Posch (School of Economics and Management, University of Aarhus, Denmark); Klaus Wälde (University of Mainz)
    Abstract: A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels dier both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.
    Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models
    JEL: E32 E62 H3 C65
    Date: 2009–08–18
  37. By: Salman, A. Khalik (CAFO, Växjö University); von Friedrichs, Yvonne (CAFO, Växjö University); Shukur, Ghazi (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper employs a time series cointegration approach to evaluate the relationship between manufacturing firm failure and macroeconomic factors for the Swedish manufacturing sector in the period 1986 – 2006. It uses quarterly data for this period. We found that in long run a firms’ failure is negatively related to the level of industrial activity, money supply, GNP and economic openness rate, and positively related to the real wage. Time series Error Correction Model (ECM) estimates suggest that macroeconomic risk factors impinge on firm failures on the same direction in both the short run and the long run and that adjustment to stabilise the relationship is quite slow.
    Keywords: firm failure; macroeconomic factors; cointegration analysis; diagnostic tests
    JEL: D01 D02
    Date: 2009–08–26
  38. By: James K. Galbraith
    Abstract: A group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment. Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.
    Date: 2009–08
  39. By: Ivo Maes (National Bank of Belgium, Robert Triffin Chair, Universit‚ catholique de Louvain and ICHEC Brussels Management School.)
    Abstract: To understand macroeconomic and monetary thought at the European Commission, two elements are crucial: firstly, the Rome Treaty, as it determined the mandate of the Commission and, secondly, the economic ideas in the different countries of the Community, as economic thought at the Commission was to a large extent a synthesis and compromise of the main schools of thought in the Community. The Rome Treaty transformed economic and legal rules in the countries of the Community. It comprised the creation of a common market, as well as several accompanying policies. Initially, economic thought at the Commission was to a large extent a synthesis of French and German ideas, with a certain predominance of French ideas. Later, Anglo-Saxon ideas would gain ground. At the beginning of the 1980s, the Commission?s analytical framework became basically medium-term oriented, with an important role for supply-side and structural elements and a more cautious approach towards discretionary stabilization policies. This facilitated the process of European integration, also in the monetary area, as the consensus on stability oriented policies was a crucial condition for EMU. Trough time, the Commission has taken seriously its role as guardian of the Treaties and initiator of Community policies, also in the monetary area. The Commission always advocated a strengthening of economic policy coordination and monetary cooperation. In this paper, we first focus on the different schools which have been shaping economic thought at the Commission. This is followed by an analysis of the Rome Treaty, especially the monetary dimension. Thereafter we go into the EMU process and the initiatives of the Commission to further European monetary integration. We will consider three broad periods: the early decades, the 1970s, and the Maastricht process.
    Date: 2009–02
  40. By: Reinhart, Carmen; Reinhart, Vincent
    Abstract: Fashions are hard to resist, and it is now fashionable in much of the North to rely on a fiscal engine of growth. As for emerging markets, however, boosting spending at a time in which revenues are contracting or, in many cases, collapsing for an uncertain period of time is an more complicated matter. Policymakers would do well to keep four risks in mind. Fiscal multipliers: North and South; Emerging markets and global crowding out; Domestic debt is no panacea; and Above all--remember debt intolerance!
    Keywords: fiscal stimulus; debt; financial crises; procyclical policies
    JEL: F00 E50 E60
    Date: 2009–08
  41. By: Ralf Hepp (Fordham University, Department of Economics); Jürgen von Hagen (University of Bonn, Indiana University, and CEPR)
    Abstract: We provide empirical estimates of the risk-sharing and redistributive properties of the German federal fiscal system based on data from 1970 until 2006, with special attention to the effects of German unification. We find that tax revenue sharing between the states and the federal government and the fiscal equalization mechanism (Länderfinanzausgleich) together reduce differences in per-capita state incomes by 36.9 percent during period 1970 to 1994. After the full integration of East German states into the mechanism in 1995, the redistributive effects increase slightly to about 38.6 percent. With respect to the insurance effect of the German fiscal system, our results indicate that the federal fiscal system offsets 47 percent of an asymmetric shock to state per-capita incomes. This effect has significantly decreased after the inclusion of the East German states in 1995. Furthermore, we find that the German fiscal system provides almost perfect insurance for state government budgets against asymmetric revenue shocks; also, its redistributive effect with regard to the tax resources available to state governments is very strong.
    Keywords: Regional Risk-sharing, Fiscal Federalism, Monetary Union
    JEL: H77 E63 F42
    Date: 2009
  42. By: Masako Ikefuji (Institute of School and Economic Research, Osaka University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper explores the roles of internal and external habit formation in a simple model of endogenous growth with overlapping generations. Unlike the representative agent settings in which the distinction between internal and external habits may not yield significant qualitative differences in working of the model economy, we show that the internal and external habit persistence in overlapping generations economies may have qualitatively different effects on the steady-state characterization as well as on the dynamic behavior of the economy. We also confirm that in an overlapping generations framework, whether the habits in the utility function takes subtractive or multiplicative forms may be critical both for long-run growth and for transitional dynamics.
    Keywords: internal habits formation, external habit formation, overlapping generations economy, long-run growth
    JEL: E32 J24 O40
    Date: 2009–08
  43. By: George M. von Furstenberg (Indiana University Bloomington)
    Abstract: The period September 2008 - March 2009 encompassed that part of the long-festering financial crisis severe enough to leave troubling legacies for the conduct of economic policies. Executive discretion in economic governance hurriedly expanded and centralized to address the depth of the crisis. The U.S. Department of the Treasury (i.e., the Treasury), the Board of Governors of the Federal Reserve System (the Fed), and the Federal Deposit Insurance Corporation (FDIC) acting in tandem, freely exercised emergency authority to prop up the financial system. This paper shows these interventions to have short-run benefits and long-run costs for market efficiency and stability.
    Date: 2009–06
  44. By: Kaushik Basu
    Abstract: The financial crisis of 2007-09 began as a local problem in the mortgage finance market in the United States and Europe but, within months, escalated into a general global financial crisis, resulting in collapsing investment not just in developed nations but also in Shanghai, Rio and Mumbai, and has led to a general recession worldwide. The paper builds a rational-expectations, microeconomic model of why the local crisis escalated into a general freeze in credit flows. It then isolates two very different kinds of interventions needed to restore the economy back to health, arguing that government stimulus policy has not had enough impact because a failure to understand the need for the dual intervention.
    Keywords: United states, financial crisis, recession, multiple equilibria, credit markets, credit ratings, mortgage finance, finance, Mumbai, developed nations, Shanghai, Rio, microeconmic, economy, health, government, credit, investment, market,
    Date: 2009
  45. By: El Qalli Yassine
    Abstract: This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure equation coincides with the explicit formula obtained in Platen(2005). The resulting term structure equations are used to explain moves in bond and forward prices by introducing GOP as a factor and therefore constructing a hedge portfolio for bond consisting of units of the GOP and the saving account. The paper also derives an affine term structure equation for forward price in term of the GOP factor. In the case of stochastic short rate we restrict our selves to give only a term structure equation for the bond price.
    Keywords: Term structure, Benchmark approach, GOP, Forward price, bond.
    JEL: E43 G13
    Date: 2009–08–13
  46. By: Dean Baker
    Abstract: The new economic projections from the Congressional Budget Office show the economy remaining well below its potential level of output until 2014. The projections show the unemployment rate averaging 10.2 percent in 2010 and gradually edging down to the long-term sustainable rate of 4.8 percent by 2014. Over this 4 year period, the workforce will face a substantially higher risk of unemployment or underemployment due to insufficient demand in the economy. This paper highlights some of the main implications of CBO’s new economic projections.
    Keywords: right to rent, foreclosures, housing
    JEL: E E1 E12 E2 E20 E21 E22 E23 E5 E6 H H6 H61 H62
    Date: 2009–08
  47. By: Lee E. Ohanian
    Abstract: Herbert Hoover. I develop a theory of labor market failure for the Great Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.
    JEL: E3 N1
    Date: 2009–08
  48. By: Edvinsson, Rodney (Dept. of Economic History, Stockholm University); Franzén, Bo (Dept. of Economic History, Stockholm University); Söderberg, Johan (Dept. of Economic History, Stockholm University)
    Abstract: The medieval system of payment in Sweden was complex. This paper aims at clarifying some essential features of it in a way that may facilitate further study of medieval Swedish economic history by international researchers. For instance, the presentation of the exchange rate between the silver mark and the mark penningar provides information that is indispensable to anyone who wishes to convert nominal Swedish prices into silver prices, which in turn is necessary for international comparisons. Part of the complexity of the monetary system is due to the lack of a country-wide monetary standard for most of the medieval era. Several currencies existed alongside the mark penning. In addition, various foreign gold coins circulated at a floating rate. The exchange rates between these various currencies are sometimes not known with any precision. We have, however, tried to summarize the available information in several tables.
    Keywords: monetary history; mark; silver; gold; Middle Ages; exchange
    JEL: E42 N13 N23
    Date: 2009–08–17
  49. By: Lasse Heje Pedersen
    Abstract: The dangers of shouting "fire" in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade when the dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.
    JEL: E44 E52 G1 G12 G18 G2
    Date: 2009–08
  50. By: Schulz, Alexander; Wolff, Guntram B.
    Abstract: We disentangle different driving factors of sovereign bond market integration by studying yield co-movements of EMU countries, the UK, the US and 16 German states (Länder) since 1992. At a low frequency bond market integration has increased gradually in the course of the last 15 years in EMU countries, as well as the UK, the US and the German Länder. The current financial turmoil has abated low frequency euroarea sovereign bond bond market integration, while it has had little effect on the integration with the US and UK. Bond market integration at a high frequency band remains relatively low until October 2000, when a sharp increase in integration can be observed in all samples. The increase in high frequency integration can be attributed to electronic trading platforms becoming functional. The financial crisis does not effect high frequency integration, as no technology shock occurs.
    Keywords: sovereign bond market; bond market integration; EMU; electronic trading
    JEL: E42 G15 E44 F33
    Date: 2009
  51. By: Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
    Abstract: We study the dynamic taxation of capital and labor in the Ramsey model under the assumption that taxes and public good provision are decided by a self-interested politician who cannot commit to policies. We show that, as long as the discount factor of the politician is equal to or greater than that of the citizens, the Chamley-Judd result of zero long-run taxes holds. In contrast, if the politician is less patient than the citizens, the best (subgame perfect) equilibrium from the viewpoint of the citizens involves long-run capital taxation.
    JEL: E6 E62 H21
    Date: 2009–08
  52. By: Goo, Siwei; Siregar, Reza Y. Siregar
    Abstract: This study investigates the requirement for the exchange rate to be a shock absorber in Indonesia and Thailand from 1986 to 2007. In general, we find that the economic shocks have predominantly been asymmetric relative to the US and the Japanese economies. Yet, the weights attached to the US dollar remain respectably high in the exchange rate management of the rupiah and the baht, in particular for the latter currency, during the post-1997 crisis. Hence, relinquishing the role of exchange rate as a shock absorber has been costly during both the pre-and the post-1997 crisis periods for these Southeast Asian countries. Furthermore, it is arguably more costly for Thailand during the post-1997, and for Indonesia during the pre-1997 crisis.
    Keywords: Economic Shocks; Shock Absorber; Exchange Rate; Structural Vector Autoregression; Indonesia; Thailand
    JEL: E52 C22 F31
    Date: 2009–08–19
  53. By: Martin S. Feldstein
    Abstract: This paper comments on the experience of the U.S. economy in the 1930s, its lessons for managing the current economic downturn, and the relation of U.S. economic conditions to our future national security. Some of the conclusions are: (1) Although the current recession will be long and very damaging, it is not likely to deteriorate into conditions similar to the Depression of the 1930s. Policy makers now understand better than they did in the 1930s what needs to be done and what needs to be avoided. (2) The focus on domestic economic policies in the 1930s and the desire to remain militarily neutral delayed the major military buildup that eventually achieved the economic recovery. (3) A well-functioning system of bank lending is necessary for economic expansion. We have yet to achieve that in the current situation. (4) Raising taxes, even future taxes, can depress economic activity. The administration's budget proposes to raise tax rates on higher income individuals, on dividends and capital gains, on corporate profits and on all consumers through the cap and trade system of implicit CO2 taxes. (5) Inappropriate trade policies and domestic policies that affect the exchange rate can hurt our allies, leading to conflicts that spill over from economics to impair national security cooperation. Reducing long-term U.S. fiscal deficits would reduce the risk of inflation and thereby reduce the fear among foreign investors that their dollar investments will lose their purchasing power. (6) The possibilities for domestic terrorism and of cyber attacks creates risks that did not exist in the 1930s or even in more recent decades. The scale and funding of the FBI and the Department of Homeland Security is not consistent with these new risks.
    JEL: E6 H0 H56
    Date: 2009–08
  54. By: Mayes, David G (Bank of Finland and University of Auckland)
    Abstract: The present crisis has revealed that, as expected, much of the safety net for handling failures in the banking system is deficient, particularly for cross-border banks, and the present problems had to be handled by a range of ad hoc measures. The principal new measure that needs to be undertaken in most countries is the implementation of a satisfactory special resolution regime for banks. This paper, however, deals with two further steps that could assist the operation of the safety net. The first is to ensure earlier intervention so there is more time to put a satisfactory rescue or resolution in place. The second is to implement a regime of prompt corrective action (structured early intervention and resolution, SEIR) so that both supervisors and banks know that a regime of increasing intensity will take place according to a strict timetable that will end in the authorities stepping into the bank while it still has positive capital, if the earlier stages are not effective. The paper evaluates the means of doing this in a European environment making use of the experience in the United States. It concludes that, while a lot can be done even within the current framework of national supervision, particularly through pre-positioning, cross-border banks can be better treated either by revising the home-host responsibilities or by moving to a supranational level of responsibility for SEIR for those banks whose continued operation is considered necessary for financial stability in any member state.
    Keywords: early intervention; prompt corrective action; cross-border banks; pre-positioning; bank resolution
    JEL: E58 F15 F23 G21 G28 G33
    Date: 2009–08–11
  55. By: Jan Schnellenbach; Thushyanthan Baskaran; Lars P. Feld
    Abstract: We analyze the rise and decline of the steel and mining industries in the regions of Saarland, Lorraine und Luxemburg over a long period, from the mid-19th century to 2003. Our main focus in on the period of structural decline in these industries after the second world war. Differences in the institutional framework of these regions are exploited to analyze how the broader fiscal constitution sets incentives for governments to either obstruct or to encourage structural change in the private sector. Our main result is that fiscal autonomy of a region subjected to structural change in its private sector is associated with a relatively faster decline of employment in the sectors affected. Contrary to the political lore, fiscal transfers are not used to speed up the destruction of old sectors, but rather to stabilize incomes.
    Keywords: structural change; fiscal federalism; grants in aid; creative destruction Length 31 pages
    JEL: E63 E64 H54 H77
    Date: 2009–08

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