nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒09‒11
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience By Daniel L. Thornton
  2. Monetary Policy Transmission and House Prices: European Cross Country Evidence By Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
  3. The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks By Daniel L. Thornton
  4. The Struggle Over the Real Wage In the Monetary Production Economy By Hernando Matallana
  5. Flow-of-funds analysis at the ECB – framework and applications By Louis Bê Duc; Gwenaël Le Breton
  6. Do Remittances Impact the Economy? Some Empirical Evidences from A Developing Economy By Hrushikesh Mallick
  7. Bank of Canada Communication and the Predictability of Canadian Monetary Policy By Bernd Hayo; Matthias Neuenkirch
  8. Structural Change and Counterfactual Inflation-Targeting in Hong Kong By Paul D. McNelis
  9. Visualizing the Invisible: Estimating The New Keynesian Output Gap Via A Bayesian Approach By Tim Willems
  10. Nature of Oil Price Shocks and Monetary Policy By Junhee Lee; Joonhyuk Song
  11. Inflation dynamics with labour market matching: assessing alternative specifcations By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  12. A parsimonious macroeconomic model for asset pricing By Fatih Guvenen
  13. Money talks By Marie Hoerova; Cyril Monnet; Ted Temzelides
  14. The impact of the global financial crisis on business cycles in Asian emerging economies By Korhonen, Iikka; Fidrmuc , Jarko
  15. Stationarity without Degeneracy in a Model of Commodity Money By de O. Cavalcanti, Ricardo; Puzzello, Daniela
  16. Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production By Aurélien Eyquem; Gunes Kamber
  17. Methods versus substance: measuring the effects of technology shocks on hours By José-Víctor Ríos-Rull; Frank Schorfheide; Cristina Fuentes-Albero; Raul Santaeulalia-Llopis; Maxym Kryshko
  18. Credit Frictions and Labor Market Dynamics By Atanas Hristov
  19. Fundamentals, Financial Factors and The Dynamics of Investment in Emerging Markets By Tuomas A. Peltonen; Ricardo M. Sousa; Isabel S. Vansteenkiste
  20. Macro-Prudential Monitoring Indicators for CEMAC Banking System By Kamgna, Severin Yves; Tinang, Nzesseu Jules; Tsombou, Kinfak Christian
  21. Growing Up in a Recession: Beliefs and the Macroeconomy By Paola Giuliano; Antonio Spilimbergo
  22. Crowding Out Effect of Public Borrowing: A Case of Pakistan By Khan, Rana Ejaz Ali; Gill, Abid Rashid
  23. Asset prices, Credit and Investment in Emerging Markets By Tuomas A. Peltonen; Ricardo M. Sousa; Isabel S. Vansteenkiste
  24. On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals By Philippe Bacchetta; Eric van Wincoop
  25. Vulnerabilities in Central and Eastern European countries: Dynamics of asymmetric shocks By Aleksandra Zdzienicka-Durand
  26. Sources of exchange rate fluctuations: are they real or nominal? By Luciana Juvenal
  27. Optimal policy and consumption smoothing effects in the time-to-build AK model By Bambi, Mauro; Fabbri, Giorgio; Gozzi, Fausto
  28. U.K. World War I and interwar data for business cycle and growth analysis By Manuel Adelino; Kristopher Gerardi; Paul S. Willen
  29. An Alternative Explanation for the Resource Curse: The Income Effect Channel By Arezki, Rabah; Alichi, Ali
  30. Asset-Price Collapse and Market Disruption - A model of financial crises - By KOBAYASHI Keiichiro
  31. The Macroeconomic Effects of European Financial Development: A Heterogenous Panel Analysis By Sean Holly; Mehdi Raissi
  32. LOLA 1.0 : Luxembourg OverLapping generation model for policy Analysis By Olivier Pierrard; Henri R. Sneessens
  33. "Some Simple Observations on the Reform of the International Monetary System" By Jan Kregel
  34. Rigidity, Dispersion and Discreteness in Chain Prices By Benjamin Eden; Matthew Jaremski
  35. EMU and European Government Bond Market Integration. By Pilar Abad; Helena Chuliá; Marta Gomez-Puig
  36. One Instrument, Many Targets: Timor-Leste?s Macroeconomic Policy Challenge By Rui A. Gomes; Degol Hailu
  37. Business Cycle Effects on Labour Force Transitions for Older People in Spain By Sergi Jiménez Martín; Judit Vall Castello
  38. The Impact of the Global Financial Crisis on The Economy of Sierra Leone By John Weeks
  39. Patterns of non-employment, and of disadvantage, in a recession By Berthoud R
  40. Can Low-Income Countries Adopt Counter-Cyclical Policies? By Degol Hailu; John Weeks
  41. The Real and Financial Implications of the Global Saving Glut: A Three-Country Model By Jean-Baptiste Gossé
  42. Do Re-election Probabilities Influence Public Investment? By Fiva, Jon H.; Natvik, Gisle James
  43. Lessons for China from Financial Liberalization in Scandinavia By Hongyi Chen; Lars Jonung; Olaf Unteroberdoerster
  44. Human Capital and Economic Growth in Spain, 1850-2000 By Leandro Prados de la Escosura; Joan R. Roses

  1. By: Daniel L. Thornton
    Abstract: This paper advances the hypothesis that the transition from there-is-little-central-banks-can-do-to-control-inflation to inflation targeting occurred because central banks, especially the Federal Reserve, demonstrated that central banks can control inflation rather than a consequence of marked improvement in the professions understanding of how monetary policy controls inflation. As consequence, monetary theorists and central bankers have returned to a Phillips curve framework for formulating and evaluating the monetary policy. I suggest that the return to the Phillips curve framework endangers the continued effectiveness, and perhaps even viability, of inflation targeting, recommend three steps that inflation-targeting central banks should take to preserve and strengthen inflation targeting.
    Keywords: Monetary policy ; Phillips curve ; Inflation targeting
    Date: 2009
  2. By: Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: This paper explores the importance of housing and mortgage market heterogeneity in 13 European countries for the transmission of monetary policy. We use a pooled VAR model which is estimated over the period 1995-2006 to generate impulse responses of key macroeconomic variables to a monetary policy shock. We split our sample of countries into two disjoint groups according to the impact of the monetary policy shock on real house prices. Our results suggest that in countries with a more pronounced reaction of real house prices the propagation of monetary policy shocks to macroeconomic variables is amplified.
    Keywords: Pooled VAR model, house prices, monetary policy transmission, country clusters, sign restrictions
    JEL: C32 C33 E52
    Date: 2009
  3. By: Daniel L. Thornton
    Abstract: It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this "joint-response bias." The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.
    Keywords: Prices ; Monetary policy ; Federal funds rate
    Date: 2009
  4. By: Hernando Matallana
    Abstract: Keynes contents in General Theory that the monetary market logic of the aggregate real wage in the monetary production economy conveys: (i) the determination of the average real wage rate, the level of employment, and the possibility of involuntary unemployment through the interaction of the monetary markets and the goods markets; and (ii) the determination of the money wage rate through the bargains of the firms and the workers as a market-theoretical stability condition of the economic system. Accordingly, (iii) the money wage claims of labour (in conformity with changes of the average labour productivity) do not alter the distribution of income between capital and labour; and (iv) the struggle about the money wages by different groups of workers is actually a zerosum game over the distribution of the aggregate real wage between the different fractions of the working class. The paper discusses Keynes’s contention in the context of the monetary-keynesian theory of the endogenous-money monetary production economy.
    Date: 2009–01–08
  5. By: Louis Bê Duc (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Gwenaël Le Breton (European Central Bank, Directorate Economic Developments, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The financial crisis has enhanced the need for close monitoring of financial flows in the economy of the euro area and at the global level focusing, in particular, on the development of financial imbalances and financial intermediation. In this context flow-of-funds analysis appears particularly useful, as flow-of-funds data provide the most comprehensive and consistent set of macro-financial information for all sectors in the economy. This occasional paper presents different uses of flow-of-funds statistics for economic and monetary analysis in the euro area. Flow-of-funds data for the euro area have developed progressively over the past decade. The first data were published in 2001, and fully-fledged quarterly integrated economic and financial accounts by institutional sector have been published since 2007. The paper illustrates how flow-of-funds data enable portfolio shifts between money and other financial assets to be assessed and trends in bank intermediation to be monitored, in particular. Based on data (and first published estimates) on financial wealth over the period 1980-2007, the paper analyses developments in the balance sheet of households and non-financial corporations in euro area countries over the last few decades and looks at financial soundness indicators using flow-of-funds data, namely debt and debt service ratios, and measures of financial wealth. Interactions with housing investment and saving are also analysed. In addition, the paper shows how flow-of-funds data can be used for assessing financial stability. Finally, the paper presents the framework for and use of flow-of-funds projections produced in the context of the Eurosystem staff macroeconomic projection exercises, and reports the outcome of a sensitivity analysis that considers the impact of interest rate changes on the interest payments and receipts of households and non-financial corporations. JEL Classification: E44, E47, E51.
    Keywords: Flow of funds, financial account, saving, sector balance sheet, financial projections.
    Date: 2009–08
  6. By: Hrushikesh Mallick
    Abstract: The study attempts to examine the impact of remittances on macroeconomic activities (private consumption and investment) and its implications on economic growth in India for the period from 1966-67 to 2003-04. Estimating a general consumption model, the results indicate that remittances along with debt, money supply (net of bank demand deposits) and income, consistently have a positive influence on private consumption. [WP no. 407].
    Keywords: income, emigrant workers, economy, debt, money supply, bank, demand deposits, bank, bank demand deposits, Remittances, consumption, Investment, Growth, Interest Rates, Government Borrowings, Openness of the economy, macroeconomic activities, consumption, investment, private consumption,
    Date: 2009
  7. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps-University Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps-University Marburg)
    Abstract: We explain changes in the Canadian target rate using macroeconomic variables and Bank of Canada (BOC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 60 target rate decisions between 1998 and 2006. We find that BOC communication is forward-looking, with a horizon that goes beyond the next meeting. Speeches and testimonies by Governing Council members have a statistically significant impact, whereas the less frequent monetary policy reports are insignificant. These communication variables significantly explain target rate changes but have no additional explanatory power over a standard Taylor rule. Prior to the introduction of Fixed Announcement Dates, BOC communication contained more information on upcoming policy moves. Communications by the U.S. Federal Reserve Bank (Fed)—which are much more frequent—outperform our Canadian communication indicators in predicting Canadian target rate decisions. We conclude that if the BOC is interested in improving the predictability of its monetary policy decisions, it should follow the Fed and use informal types of communication more frequently.newswire reports of Fed communications.
    Keywords: Bank of Canada, Central Bank Communication, Interest Rate Decision, Monetary Policy, Ordered Probit Model, Taylor Rule
    JEL: E43 E52 E58
    Date: 2009
  8. By: Paul D. McNelis (Hong Kong Institute for Monetary Research, Fordham University)
    Abstract: This paper evaluates structural change and adjustment in Hong Kong with Bayesian estimation of a small open economy with a fixed exchange rate show little or no change in the structural parameters or volatility estimates of the structural shocks before and after the Asian crisis and the experience of deflation. Terms of trade shocks are the most important sources of volatility for inflation in both periods. A counterfactual simulation shows that the dispersion of consumption and inflation volatility may have slightly decreased with an inflation-targeting regime with no uncertainty, but interest-rate volatility would have increased by factors of 50 to 100 percent.
    Keywords: Bayesian Estimation, Structural Change, Inflation Targeting
    JEL: E62 F41
    Date: 2009–07
  9. By: Tim Willems (University of Amsterdam)
    Abstract: As both the natural level of output and the New Keynesian output gap cannot be observed in practice, there is quite some debate on the question how these variables look like in practice. Rather than taking the standard approach of using a time trend or the HP-filter to obtain estimates of these two objects, this paper takes a theoretically more sound route by separating trend from cycle via Bayesian estimation of a New Keynesian model, augmented with an unobserved components model for output. This delivers us with model consistent estimates of both the natural level of output and the New Keynesian output gap. These estimates are then compared with the dominant output gap proxies used in the literature. It turns out that the benefits of using the model-based approach taken in this paper mainly emerge in real time, thereby making this method potentially useful for the conduct of monetary policy.
    Keywords: Key words: Bayesian estimation; unobserved components model; New Keynesian model; output gap; New Keynesian Phillips curve
    JEL: C53 E32 E37 E52
    Date: 2009–08–21
  10. By: Junhee Lee; Joonhyuk Song
    Abstract: We investigate the nature of oil price shocks to the Korean economy in recent years and find that the recent hike in oil price is induced by the increase in oil demand in contrast to the previous years when oil price run-up is mostly from supply disruptions. We also study how monetary responses to oil price shocks affect economic stability and find that an accommodative policy yields more stable outcomes.
    JEL: E32 E52 E58
    Date: 2009–09
  11. By: Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
    Abstract: This paper reviews recent approaches to modeling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behavior. In a search and matching environment, we consider the following modeling setups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.
    Date: 2009–05
  12. By: Fatih Guvenen
    Abstract: I study asset prices in a two-agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium; relatively smooth interest rates; procyclical stock prices; and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk-free asset market plays a central role by allowing non-stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non-stockholders' 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. When it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.
    Keywords: Wealth ; Stock market
    Date: 2009
  13. By: Marie Hoerova; Cyril Monnet; Ted Temzelides
    Abstract: The authors study credible information transmission by a benevolent central bank. They consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the central bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the central bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy.
    Keywords: Banks and banking, Central ; Information theory
    Date: 2009
  14. By: Korhonen, Iikka (BOFIT); Fidrmuc , Jarko (BOFIT)
    Abstract: We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.
    Keywords: financial crisis; business cycles; decoupling; trade; dynamic correlation
    JEL: E32 F15 F41
    Date: 2009–08–04
  15. By: de O. Cavalcanti, Ricardo; Puzzello, Daniela
    Abstract: We develop a model of macroeconomic heterogeneity inspired by the Kiyotaki-Wright (1989) formulation of commodity money, with the addition of linear utility and idiosyncratic shocks to savings. We consider two environments. In the benchmark case, the consumer in a meeting is chosen randomly. In the auctions case, the individual holding more money can be selected to be the consumer. We show that in both environments socially optimal trading decisions (that are individually acceptable) are stationary and solve a tractable static op- timization problem. Savings decisions in the benchmark case are re- markably invariant to mean-preserving changes in the distribution of shocks. This result is overturned in the auctions case.
    Keywords: Macroeconomics with heterogeneous savings; commodity money with linear adjustments; mechanism design; auctions
    JEL: C00 E00
    Date: 2009–03
  16. By: Aurélien Eyquem (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Gunes Kamber (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, C - centre d'Etudes des Politiques Economiques de l'université d'Evry - Université d'Evry-Val d'Essonne)
    Abstract: This paper shows that internationalized production, modelled as trade in intermediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices affect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermediate goods is taken into account. Finally, trade in intermediate goods affects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson (2000).
    Keywords: Small open economy ; internationalized production ; macroeconomic volatility ; exchange rate pass-through
    Date: 2009
  17. By: José-Víctor Ríos-Rull; Frank Schorfheide; Cristina Fuentes-Albero; Raul Santaeulalia-Llopis; Maxym Kryshko
    Abstract: In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches.
    Keywords: Business cycles ; Technology - Economic aspects
    Date: 2009
  18. By: Atanas Hristov
    Abstract: We outline the case for credit frictions and a demand side aspect to labor market fluctuations. To illustrate the above proposition, we present a simple framework to analyze the joint dependence between a labor search problem in the labor market and a costly state verification problem in the credit market in the presence of price rigidities. Credit market imperfections amplify volatility of labor market variables to both supply and demand shocks, but to a much higher extent to demand shocks under rigid prices. The reason is that demand disturbances provide for a strong incentive to demand-constrained firms to adjust production and thereby labor factor.
    Keywords: Credit and search frictions, unemployment, monetary policy
    JEL: J64 G24 E51
    Date: 2009
  19. By: Tuomas A. Peltonen (European Central Bank); Ricardo M. Sousa (Universidade do Minho - NIPE); Isabel S. Vansteenkiste (European Central Bank)
    Abstract: The paper uses a Panel Vector Auto-Regression (PVAR) approach to analyze the shortrun adjustment of private investment to shocks to fundamental and financial factors in emerging market economies. By relying on a panel of 31 emerging economies and quarterly frequency data for the period 1990:1-2008:3, we show that: (i) investment sluggishly adjusts to its own shocks; (ii) GDP and equity price shocks have a positive and sizeable impact on investment; (iii) unexpected variation in the cost of capital and the lending rate has a negative (although economically small) effect on investment; and (iv) the response of investment to credit market developments seems to be driven by the demand side. In addition, the empirical evidence suggests that the effects of equity price shocks are similar for emerging Asia and Latin America, but credit shocks are more important in Latin America. Moreover, shocks to the lending rate have a very pronounced and negative impact in emerging European markets. Finally, we show that the stock market bubbles may have encouraged real investment during the nineties.
    Keywords: fundamentals, financial factors, investment, emerging markets, panel VAR.
    JEL: E22 E44 D24
    Date: 2009
  20. By: Kamgna, Severin Yves; Tinang, Nzesseu Jules; Tsombou, Kinfak Christian
    Abstract: The main purpose of this paper is to determine the macro-prudential indicators of financial stability that can be used for supervising the banking system in the CEMAC zone. Going by a set of indicators drawn from similar works on macro-prudential supervision, and, more specifically, aggregate microeconomic variables of the banking sector, macroeconomic variables and combinations of the two, we were able to identify those that are relevant in analysing an imminent deterioration of the banking system in the subregion. At the end of this study, it was realised that claims on the private sector, foreign direct investments and the combination of exports and credits to the private sector, increase the risk of degradation of the banking system, while this risk is reduced by an increase in the exchange rate, increase in the internal resources of the banking system and inflation rate. The regulator should therefore bear this set of indicators in mind in order to facilitate a quick response to offset any potential banking crisis in the CEMAC region.
    Keywords: Banking System; Macro-Prudential Indicators; Weakness; Degradation; Monetary Policy; CEMAC; BEAC; Africa;
    JEL: C13 E58 C12 G28 G21
    Date: 2009–08
  21. By: Paola Giuliano; Antonio Spilimbergo
    Abstract: Do generations growing up during recessions have different socio-economic beliefs than generations growing up in good times? We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, we show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.
    JEL: E60 P16 Z13
    Date: 2009–09
  22. By: Khan, Rana Ejaz Ali; Gill, Abid Rashid
    Abstract: To meet the public deficit, Government of Pakistan has been disproportionately borrowing from the scheduled banks and general public which are also the source of funding for private investment. Even the public sector corporations are doing the same. From the crowding out perspective borrowing and public expenditure are the same, as borrowing is mainly undertaken for financing expenditures. The issue of crowding out or crowding in effect of public borrowing on private investment needs considerable attention. The current study has investigated the crowding-out effect of public borrowing on private investment in the country. An investment function of three independent variables, i.e. public borrowing, GDP and lending rate has been estimated through unit root test, co-integration test and vector error correction model. The time series data of 34 years, i.e. fiscal year of 1971-72 to 2005-06, taken from Federal Bureau of Statistics and Finance Division, Government of Pakistan has been used. The results do not corroborate the crowding-out hypothesis in Pakistan explaining the market imperfections and substantial amount of excess liquidity. The results provide the evidence of crowding-in effect, which explains the direction of public expenditures towards private sector through contractors, politicians and bureaucrats, instead of public projects. The provision of subsidy, transfer payments, and substantial amount of micro-credit also explain the phenomenon of crowding-in. The evidence has important implications for fiscal management. To avoid unnecessary inflation and external indebtedness associated with deficit financing, government should rely on domestic sources. As long as excess liquidity prevails in financial system, the domestic resources, other than State Bank of Pakistan may be used to meet the deficit without hurting private investment.
    Keywords: Public Borrowing; Private Investment; Interest Rate; Subsidies; Transfer Payments;
    JEL: E51 E22 H2 G28 E4
    Date: 2009–01
  23. By: Tuomas A. Peltonen (European Central Bank); Ricardo M. Sousa (Universidade do Minho - NIPE); Isabel S. Vansteenkiste (European Central Bank)
    Abstract: We build a panel of 31 emerging economies to uncover the determinants of private investment growth in emerging markets. Using several econometric techniques and quarterly data for the period 1990:1-2008:3, we show that: (i) the GDP and the cost of capital are among the fundamental determinants of private investment; (ii) the equity price impacts positively and significantly on investment; (iii) financial factors (such as, credit and lending rate) play an important role on the dynamics of investment, in particular, for Asian and Latin American countries; (iv) investment growth exhibits substantial persistence and responds sluggishly to shocks; and (v) crises episodes magnify the negative response of investment.
    Keywords: investment, credit, asset prices, emerging markets.
    JEL: E22 E44 D24
    Date: 2009
  24. By: Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research, Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research, Hong Kong Institute for Monetary Research)
    Abstract: It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample.
    Date: 2009–08
  25. By: Aleksandra Zdzienicka-Durand (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this work, we use the VAR and space-state methodology to analyze how the recent developments in 20 European countries have modified the dynamics of structural shocks. Our results confirm a visible progress in (predominated output fluctuations) supply shocks convergence between the CEECs and the euro zone, but also corroborate a positive initial impact of EMU creation and EU enlargement supply shocks correlation. In particular, we find that Croatia, Poland, Slovakia and Slovenia are good candidates to the euro adoption under condition of greater fiscal policy alignment.
    Keywords: Structural Shocks; CEECs; VAR model; Kalman filter; Euro Adoption
    Date: 2009
  26. By: Luciana Juvenal
    Abstract: I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 23% and 38% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.
    Keywords: Foreign exchange rates ; Vector autoregression
    Date: 2009
  27. By: Bambi, Mauro; Fabbri, Giorgio; Gozzi, Fausto
    Abstract: In this paper the dynamic programming approach is exploited in order to identify the closed loop policy function, and the consumption smoothing mechanisms in an endogenous growth model with time to build, linear technology and irreversibility constraint in investment. Moreover the link among the time to build parameter, the maximum capital reproduction rate, and the magnitude of the smoothing effect is deeply investigated and compared with what happens in a vintage capital model characterized by the same technology and utility function. Finally we have analyzed the effect of time to build on the speed of convergence of the main aggregate variables.
    Keywords: Time-to-build; AK model; Dynamic programming; optimal strategies; closed loop policy.
    JEL: E32 E22 O40
    Date: 2009–08–27
  28. By: Manuel Adelino; Kristopher Gerardi; Paul S. Willen
    Abstract: This article contributes new time series for studying the U.K. economy during World War I and the interwar period. The time series are per capita hours worked and average tax rates of capital income, labor income, and consumption. Uninterrupted time series of these variables are provided for an annual sample that runs from 1913 to 1938. We highlight the usefulness of these time series with several empirical applications. We use per capita hours worked in a growth accounting exercise to measure the contributions of capital, labor, and productivity to output growth. The average tax rates are employed in a Bayesian model averaging experiment to reevaluate the Benjamin and Kochin (1979) regression.
    Date: 2009
  29. By: Arezki, Rabah; Alichi, Ali
    Abstract: The paper provides an alternative explanation for the “resource curse” based on the income effect resulting from high government current spending in resource rich economies. Using a simple life cycle framework, we show that private investment in the non-resource sector is adversely affected if private agents expect extra government current spending financed through resource sector revenues in the future. This income channel of the resource curse is stronger for countries with lower degrees of openness and forward altruism. We empirically validate these findings by estimating non-hydrocarbon sector growth regressions using a panel of 25 oil-exporting countries over 1992–2005.
    Keywords: resource curse; fiscal policy; investment and growth
    JEL: O11 O41 C81 C01 Q30
    Date: 2009–05
  30. By: KOBAYASHI Keiichiro
    Abstract: We construct a search-theoretic model à la Lagos and Wright (2005), that has multiple steady-state equilibria, one of which may be interpreted as a state of financial crisis. The key ingredient is the collateral-secured loan in the decentralized matching market, in which the borrowers must put up their own land as collateral. They borrow debt for intertemporal smoothing of the consumption stream and also for factor payment in production. In the crisis state, the land price is low and the debt for factor payment, i.e., liquidity, dries up. Facing a liquidity shortage, all sellers choose not to participate in the matching market and the market is shut down due to the search externality. This market disruption lowers the aggregate productivity, while the low productivity justifies the low asset price in turn. We may be able to derive a policy implication that collective debt reduction by government intervention may solve the coordination failure and bring the economy out of the crisis equilibrium.
    Date: 2009–09
  31. By: Sean Holly; Mehdi Raissi
    Abstract: This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union.
    Date: 2009
  32. By: Olivier Pierrard; Henri R. Sneessens
    Abstract: We build on the DSGE literature to propose an overlapping generation model for Luxembourg.By way of illustration, the model is then used to study the consequences of the ageing of the population and the potential effects of alternative macroeconomic policies.
    Date: 2009–04
  33. By: Jan Kregel
    Abstract: The demand for reform of the financial system has focused on the dollar's loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances. In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the U.S. consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.
    Date: 2009–08
  34. By: Benjamin Eden (Department of Economics, Vanderbilt University); Matthew Jaremski (Department of Economics, Vanderbilt University)
    Abstract: This paper studies price setting within a chain of grocery stores, using a scanner database that contains observations of retail prices for 435 products within 75 stores over 121 weeks. We find price dispersion within the chain. Although price dispersion is pervasive 75% of the prices are equal to the modal price. The mode changes frequently: 35% of the modes change in an average week. This suggests that the distribution of prices may react relatively fast to aggregate shocks. Stores differentiate themselves by the prices of relatively few items. Typically most prices in the store are at the mode of the cross sectional price distribution, some are above the mode and some are below the mode. The probability of a price change is 3.6% when the price is at the mode and 76.2% when the price is not at the mode. We explain the apparent attraction to the mode in terms of a model in which price discreteness plays an important role but there is no inertia. We also find that the probability of a price change is higher when the deviation from the mean of the cross sectional price distribution is large. But unlike conventional wisdom, the probability of a price change is higher for young prices.
    Keywords: Price discreteness, price dispersion, price changes, price rigidity
    JEL: E00 L11
    Date: 2009–06
  35. By: Pilar Abad (Fundamentos del Análisis Económico, Paseo Artilleros, E-28032 Madrid, Spain.); Helena Chuliá (Universitat Oberta de Catalunya, E-08035 Barcelona, Spain.); Marta Gomez-Puig (University of Barcelona, Av. Diagonal 690, E-08034 Barcelona, Spain.)
    Abstract: The main objective of this paper is to study whether the introduction of the euro had an impact on the degree of integration of European Government bond markets. We adopt the CAPM-based model of Bekaert and Harvey (1995) to compare, from the beginning of Monetary Union until June 2008, the differences in the relative importance of two sources of systemic risk (world and Eurozone risk) on Government bond returns, in the two groups of countries (EMU and non-EMU) in EU-15. Our empirical evidence suggests that the impact of the introduction of the euro on the degree of integration of European Government bond markets was important. The markets of the countries that share a monetary policy are less vulnerable to the influence of world risk factors, and more vulnerable to EMU risk factors. However, euro markets are only partially integrated, since they are still segmented and present differences in market liquidity or default risk. For their part, the countries that decided to stay out of the Monetary Union present a higher vulnerability to external risk factors. JEL Classification: E44, F36, G15.
    Keywords: Monetary integration, sovereign securities markets, bond markets integration.
    Date: 2009–08
  36. By: Rui A. Gomes (UNDP Timor-Leste); Degol Hailu (UNDP SURF)
    Abstract: It is difficult to be sanguine about Timor-Leste?s progress towards achieving the localized Millennium Development Goals (MDGs). The share of people living under the national poverty line increased from 36 per cent in 2001 to 50 per cent in 2007. The maternal mortality ratio remains unacceptably high. About half of the children are underweight. In Dili, the capital, 58 per cent of the youth have no jobs (Government of Timor Leste and UN, 2009). Can Timor-Leste scale-up MDG-related investments? (?)
    Keywords: One Instrument, Many Targets: Timor-Leste?s Macroeconomic Policy Challenge
    Date: 2009–08
  37. By: Sergi Jiménez Martín; Judit Vall Castello
    Abstract: This paper analyses the determinants of observed exits from employment for people aged 45-59 years old in the context of the Spanish labour market in 1981-2006. The main aim of the paper is to identify the effect of the business cycle (BC) on the timing and the type of exit route out of the labour force. We proceed in two stages. In the first stage, we study the determinants of exits from employment to non-employment. In the second, we take into account the fact that there are several competing exit routes (unemployment, disability or inactivity) and estimate a competing risk model to evaluate how important BC conditions are in determining the respective exit probabilities. We make use of the recently released Muestra Continua de Vidas Laborales to estimate discrete time hazard regression models. We match this information with a number of variables constructed with macroeconomic data derived from the Instituto Nacional de Estadistica to measure growth and employability performance of different economic sectors and regions in Spain in order to capture the variation in the business cycle between times, sectors and regions. Time-varying covariates are also included in the analysis to model the monetary incentives provided by the system. We find that both BC conditions and a number of special schemes included in the unemployment and disability legislation affect the exit timing and also the choice of the route out of the labour market.
    Date: 2009–07
  38. By: John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London)
    Abstract: GLOBAL CRISIS AND POVERTY PREVENTION Most recent statistics indicate that the global financial crisis will cause a fall in export earnings in Sierra Leone of approximately fifteen percent in 2009 compared to 2008. A regression-based model estimates that this decline in exports earnings could result in a fall in national income of almost ten percent. Based on the income distribution in the 2003 household survey, a ten percent decline in national income would increase poverty by twelve percent of the population, or about 600,000 people. A fiscal stimulus of two percent of GDP could stabilise the economy at the level of 2008, preventing this disastrous increase in poverty. A stimulus package consisting of employment intensive public works programmes could be designed to return the economy to its pre-shock level with a reduction in poverty. (...)
    Keywords: The Impact of the Global Financial Crisis on The Economy of Sierra Leone
    Date: 2009–09
  39. By: Berthoud R (Institute for Social and Economic Research)
    Abstract: This short paper aims to contribute to the live debate about the current recession in the United Kingdom by analysing the impact of the recessions of the early 1980s and 1990s on non-employment patterns among people in the main range of working ages. The implication is that the effects observed in earlier business cycles are likely to be repeated now. The paper shows the impact of cyclical factors on overall patterns of non-employment and which social groups are most affected. A key question is whether types of people who are already disadvantaged are especially sensitive to a down-turn.
    Date: 2009–08–13
  40. By: Degol Hailu (UNDP SURF); John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London)
    Abstract: The current global recession reconfirms low-income countries? vulnerability to external shocks. The exposure is a direct result of integration into the world economy. Declines in export earnings, remittances, tourism and capital flows are some of the transmission mechanisms. The developed and middle-income countries have responded with a series of stimulus packages. More to the point, they are able to adopt counter-cyclical policies. Can low-income economies do the same? (?)
    Keywords: Can Low-Income Countries Adopt Counter-Cyclical Policies?
    Date: 2009–08
  41. By: Jean-Baptiste Gossé (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: The model presented in this paper has two objectives. First, it models global imbalances in a simple way while conserving real and - nancial approaches. This double approach is necessary because Global Imbalances are due to the conjunction of nancial and real phenomena: the increase in the price of commodities, the accumulation of foreign reserves by the Asian central banks, the limited absorption capacity of the OPEC countries, the insucient development of the Asian nancial system and the perception of better returns in the US. The second objective is to model the global saving glut hypothesis and to show its implications. We start with a model which consists of three identical countries and then we replicate the current pattern of global imbalances in introducing three asymmetries: a xed exchange rate between Asia and the United States, a limited absorption capacity in Asia and endogenous propensity to spend in the United States. In order to avoid the recession linked to the increase of their propensity to import, the United States increase their propensity to spend. This adjustment has a cost: (i) the Global Imbalances grow quickly with an increase of current account imbalances and net foreign assets in both the US and Asia ; (ii) the euro area supports an appreciation of its exchange rate which put it in a long depression.
    Keywords: International Macroeconomics, Global Imbalances, Balance of Payments, International Finance , Simulation and Forecast
    Date: 2009–08–26
  42. By: Fiva, Jon H. (Dept. of Economics, University of Oslo); Natvik, Gisle James (Norges Bank)
    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: 2009–08–15
  43. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Lars Jonung (DG ECFIN, European Commission, Brussels, Hong Kong Institute for Monetary Research); Olaf Unteroberdoerster (International Monetary Fund, Washington DC)
    Abstract: This report identifies a set of policy lessons for China today drawn from the experience of financial deregulation, financial crisis and recovery in Scandinavia during the period 1985-2000. Although there are considerable differences between the huge Chinese economy and the small Nordic countries, there are enough similarities to make lesson-drawing a worthwhile exercise. Based on the Scandinavian experience and the added complexity of China¡¦s status as a transition economy, financial reforms should strike a proper balance between being gradual (to avoid costly mistakes) and substantive (to secure efficiency gains in the longer term) with due consideration being given to initial conditions concerning regulation, taxes and exchange rate arrangements. A well managed process of financial deregulation requires that policy-makers and market participants fully understand the interlinkages between financial reforms and the rest of the economy. In addition, the supervisory and management systems in the financial sector should move in step with the liberalization process.
    Keywords: Financial Liberalization, Financial Crisis, Transition, Financial Regulation, Banking, Boom-Bust, China, Scandinavia, the Nordics
    JEL: E52 E58 F31 F32 G21 G28 G32 P52
    Date: 2009–07
  44. By: Leandro Prados de la Escosura; Joan R. Roses
    Abstract: We investigate human capital accumulation in Spain using alternative approaches based on the concept of ‘labor quality’ and on the idea of education. We, then, assess the effect of human capital accumulation on labor productivity growth and discuss the implications of the different measures for TFP growth. While long-run trends in human capital are similar with either measure, the skill premium approach fits better Spanish historical experience. Human capital provided a positive albeit small contribution to labor productivity growth facilitating technological innovation. Broad capital accumulation and efficiency gains appear complementary in Spain’s long-term growth.
    Keywords: Human Capital, Growth, Labor Productivity, Total Factor
    JEL: E24 J24 O47 N33 N34
    Date: 2009–08

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