nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒09‒19
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Evaluating a monetary business cycle model with unemployment for the euro area By Nicolas Groshenny
  2. Resurrecting the Role of Real Money Balance Effects By José Dorich
  3. Identifying a Forward-Looking Monetary Policy in an Open Economy By Rokon Bhuiyan
  4. On the informational role of term structure in the US monetary policy rule By María-Dolores, Ramon; Vázquez, Jesús; Londoño, Juan M.
  5. On the informational role of term structure in the U.S. monetary policy rule By Jesús Vázquez; Ramón María-Dolores; Juan-Miguel Londoño
  6. On the (de)stabilizing effects of news shocks By Winkler, Roland C.; Wohltmann, Hans-Werner
  7. Money and monetary policy transmission in the euro area: evidence from FAVAR- and VAR approaches By Blaes, Barno
  8. The (Ir)relevance of Inflation Persistence for Inflation Targeting Policy Design By Sevim Kosem-Alp
  9. The debt brake: business cycle and welfare consequences of Germany's new fiscal policy rule By Mayer, Eric; Stähler, Nikolai
  10. Extending the New Keynesian Monetary Model with Information Revision Processes: Real-time and Revised Data By María-Dolores, Ramon; Vazquez, Jesus; Londoño, Juan M.
  11. News Shocks By Robert B. Barsky; Eric R. Sims
  12. Economic Crises, Stabilisation Policy and Output in Emerging Market Economies By Leon du Toit
  13. Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model By Christian R. Proano
  14. Rational expectations models with anticipated shocks and optimal policy: a general solution method and a new Keynesian example By Wohltmann, Hans-Werner; Winkler, Roland
  15. A Critical Assessment of Existing Estimates of Core Inflation By Bermingham, Colin
  16. Macroeconomic Effects of Financial Shocks By Urban Jermann; Vincenzo Quadrini
  17. Effectiveness and Commitment to Inflation Targeting Policy: Evidences from Indonesia and Thailand By Siregar, Reza.Y.; Goo, Siwei
  18. Industry Effects of Monetary Policy: Evidence from India By Ghosh, Saibal
  19. More or less aggressive?: robust monetary policy in a New Keynesian model with financial distress By Gerke, Rafael; Hammermann, Felix; Lewis, Vivien
  20. A Theory of Minsky Super-Cycles and Financial Crises By Thomas I. Palley
  21. Bank risk and monetary policy By Yener Altunbas; Leonardo Gambacorta; David Marqués-Ibáñez
  22. The cross-section of firms over the business cycle: new facts and a DSGE exploration By Bachmann, Ruediger; Bayer, Christian
  23. Are Mortgage Rates Bubbling Up Trouble for Canadas Metropolitan Housing Sector? By Louis, Rosmy J; Brown, Ryan; Balli, Faruk
  24. The fiscal multiplier: positive or negative? By Juha Tervala
  25. A Robust Assessment of the Romanian Business Cycle By Moisa Altar; Ciprian Necula; Gabriel Bobeica
  26. "A Financial Sector Balance Approach and the Cyclical Dynamics of the U.S. Economy" By Paolo Casadio; Antonio Paradiso
  27. Firm-specific productivity risk over the business cycle: facts and aggregate implications By Bachmann, Ruediger; Bayer, Christian
  28. It Takes Two to Tango: Lobbies and the Political Business Cycle By Horgos, Daniel; Zimmermann, Klaus W.
  29. The quest for monetary integration – the Hungarian experience By Zoican, Marius Andrei
  30. Overconsumption, Credit Rationing and Bailout Monetary Policy: A Minskyan Perspective By Matthieu Charpe; Peter Flaschel; Christian R. Proano; Willi Semmler
  31. Inside Debt and Economic Growth: A Cambridge - Kaleckian Analysis By Thomas I. Palley
  32. Technological Growth and Asset Pricing By Nicolae B. Gârleanu; Stavros Panageas; Jianfeng Yu
  33. Performance of Monetary Institutions : Comparative Evidence By Bilin Neyapti
  34. Are Recessions Good for Everyone's Health? The Association Between Mortality and the Business Cycle by Race in the U.S. By Matias Fontenla; Fidel Gonzalez; Troy Quast
  35. Russia’s Real National Income: The Great War, Civil War, and Recovery, 1913 to 1928 By Markevich, Andrei; Harrison, Mark
  36. How Far Are We From The Slippery Slope? The Laffer Curve Revisited By Mathias Trabandt; Harald Uhlig
  37. The wrath of god : macroeconomic costs of natural disasters By Raddatz, Claudio
  38. Growth Accounting By Charles R. Hulten
  39. A theoretical foundation for the Nelson and Siegel class of yield curve models By Leo Krippner
  40. Long Run Loans and Industrial Policy in Italy in the 1960s By Rota, Mauro
  41. Spatial Development By Klaus Desmet; Esteban Rossi-Hansberg
  42. The Price-Marginal Cost Markup and its Determinants in U.S. Manufacturing By Mazumder, Sandeep

  1. By: Nicolas Groshenny (Reserve Bank of New Zealand)
    Abstract: This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price markup shocks emerge as the main source of business-cycle fluctuations in the euro area. Key for the propagation of these disturbances are a high degree of inflation ndexation and a persistent response of monetary policy to deviations of inflation from the target.
    JEL: E32 C51 C52
    Date: 2009–09
  2. By: José Dorich
    Abstract: I present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period. Moreover, I show three additional implications of the econometric estimates for monetary policy analysis. First, by including real money balance effects into the standard sticky price model, two stylized facts can be explained: the modestly procyclical real wage response to a monetary policy shock and the supply side effects of monetary policy. Second, the existence of real money balance effects causes higher volatility of output and lower volatility of interest rates under the optimal monetary policy. Third, the reduction in the size of real money balance effects can account for a significant decline in macroeconomic volatility.
    Keywords: Business fluctutations and cycles, Monetary aggregates, Transmission of monetary policy
    JEL: E31 E32 E52
    Date: 2009
  3. By: Rokon Bhuiyan (QED)
    Abstract: I identify a forward-looking monetary policy function in a structural VAR model by using forecasts of macroeconomic variables, in addition to the realized variables used in a standard VAR. Both impulse responses and variance decompositions of the monetary policy variable of this forecast-augmented VAR model suggest that forecasted variables play a greater role than realized variables in a central bank’s policy decisions. I also find that a contractionary policy shock instantaneously increases the market interest rate as well as the forecast of the market interest rate. The policy shock also appreciates both the British pound and the forecast of the pound on impact. On the other hand, the policy shock lowers expected inflation immediately, but affects realized inflation with a lag. When I estimate the standard VAR model encompassed in the forecast-augmented model, I find that a contractionary policy shock raises the inflation rate and leads to a gradual appreciation of the domestic currency. However, the inclusion of inflation expectations reverses this puzzling response of the inflation rate, and the inclusion of both the market interest rate forecast and the exchange rate forecast removes the delayed overshooting response of the exchange rate. These findings suggest that a standard VAR may incorrectly identify the monetary policy function.
    JEL: C32 E52 F37
    Date: 2009–09
  4. By: María-Dolores, Ramon; Vázquez, Jesús; Londoño, Juan M. (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)
    Abstract: The term spread may play a major role in a monetary policy rule whenever data revisions of output and inflation are not well behaved. In this paper we use a structural approach based on the indirect inference principle to estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread becomes a significant determinant of the U.S. estimated monetary policy rule when revised and real-time data of output and inflation are both considered.
    Keywords: NKM model, term structure, Indirect Inference, real-time and revised data, monetary policy rule
    JEL: D12 R23
    Date: 2009–06
  5. By: Jesús Vázquez (Universidad del País Vasco); Ramón María-Dolores (Universidad de Murcia); Juan-Miguel Londoño (Universidad del País Vasco)
    Abstract: The term spread may play a major role in a monetary policy rule whenever data revisions of output and inflation are not well behaved. In this paper we use a structural approach based on the indirect inference principle to estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread becomes a significant determinant of the U.S. estimated monetary policy rule when revised and real-time data of output and inflation are both considered.
    Keywords: NKM model, term structure, monetary policy rule, indirect inference, real-time and revised data
    JEL: C32 E30 E52
    Date: 2009–09
  6. By: Winkler, Roland C.; Wohltmann, Hans-Werner
    Abstract: This paper analyzes the impacts of news shocks on macroeconomic volatility. Whereas in any purely forward-looking model, such as the baseline New Keynesian model, anticipation amplifies volatility, we obtain ambiguous results when including a backward-looking component. In addition to these theoretical findings, we use the estimated model of Smets and Wouters (2003) to provide numerical evidence that news shocks increase the volatility of key macroeconomic variables in the euro area when compared to unanticipated shocks.
    Keywords: Anticipated shocks,business cycles,volatility
    JEL: E32
    Date: 2009
  7. By: Blaes, Barno
    Abstract: This paper investigates the transmission of monetary policy in the euro area based on the factor augmented vector autoregressive approach of Bernanke, Boivin and Eliasz (2005) as well as on a standard VAR model. We focus on the reaction of monetary aggregates to a one-off monetary policy shock. We find that - as theory suggests - money growth is dampened by a restrictive monetary policy stance in the longer term. In the short-run, however, M3 growth may increase due to portfolio shifts caused by the rise in the short-term interest rate. This has consequences for the interpretation of money growth as an input for monetary policy decisions.
    Keywords: Monetary policy transmission,FAVAR,VAR,money stock,euro area.
    JEL: C32 E40 E52
    Date: 2009
  8. By: Sevim Kosem-Alp
    Date: 2009
  9. By: Mayer, Eric; Stähler, Nikolai
    Abstract: In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.
    Keywords: Fiscal policy,debt brake,welfare,dsge
    JEL: E32 E62
    Date: 2009
  10. By: María-Dolores, Ramon; Vazquez, Jesus; Londoño, Juan M. (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)
    Abstract: This paper proposes an extended version of the New Keynesian Monetary (NKM) model which contemplates revision processes of output and inflation data in order to assess the influence of data revisions on the estimated monetary policy rule parameters. In line with the evidence provided by Aruoba (2008), by using the indirect inference principle, we observe that real-time data are not rational forecasts of revised data. This result along with the differences observed when estimating a model restricted to white noise revision processes provide evidence that policymakers decisions could be determined by the availability of data at the time of policy implementation.
    Keywords: NKM model, Monetary Policy Rule, Indirect Inference, Real-time Data, Rational Forecast Errors
    JEL: D12 R23
    Date: 2009–06
  11. By: Robert B. Barsky; Eric R. Sims
    Abstract: We implement a new approach for the identification of "news shocks" about future technology. In a VAR featuring a measure of aggregate technology and several forward-looking variables, we identify the news shock as the shock orthogonal to technology innovations that best explains future variation in technology. In the data, news shocks account for the bulk of low frequency variation in technology. News shocks are positively correlated with consumption, stock price, and consumer confidence innovations, and negatively correlated with inflation innovations. The disinflationary nature of news shocks is consistent with the implications of sensibly modified versions of a New Keynesian model.
    JEL: E0 E00 E1 E10 E2 E20 E3 E30 E31 E32
    Date: 2009–09
  12. By: Leon du Toit (Bureau for Economic Research, University of Stellenbosch)
    Abstract: The recent macroeconomic history of emerging market economies is coloured with economic crises of all kinds, ranging from debt-crises, through hyperinflationary periods to currency crises to name but a few. Much of the empirical literature notes that alongside fast-paced structural change this has resulted in volatile business cycles and a difficult environment for stabilisation policy. Both short- and long-run output dynamics are shaped by the multidimensional exposure of EMEs to economic shocks. The paper uses an SVAR analysis and finds that in spite of high degrees of output volatility, the conduct of stabilisation policy has sometimes been successful in dampening short-run output fluctuations. However, even when stabilisation has been successful, the effect on overall output volatility has been negligible when compared to supply-side shocks. The results show that economic crises are associated with large negative supply shocks which are only counteracted by stabilisation policy to a very small extent. These crisis-related supply shocks, in turn, have large negative effects on potential GDP growth, which are only reversible when positive supply shocks regain lost ground. Given the institutional origin of the economic crises, the paper suggests that for stabilisation policy to become more effective in lowering output volatility and maintaining long-term growth potential, it must be supported by appropriate supply-side measures which insulate EMEs against large negative supply shocks and help them to recover in the wake of economic crises.
    Keywords: Economic crises, Stabilisation policy, Emerging Market Economies, Business Cycles, Potential output
    JEL: C32 E32 E61 E63
    Date: 2009
  13. By: Christian R. Proano (IMK at the Hans Boeckler Foundation)
    Abstract: In this paper the role of behavioral forecasting rules of chartist and fun-damentalist type for the dynamic macroeconomic stability of a two-country system is investigated both analytically and numerically. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but the entire macroeconomic system is destabilized. This takes place despite of the presence of monetary policy rules in both countries which satisfy the Taylor Principle.
    Keywords: (D)AS-AD, monetary policy, behavioral heterogenous expectations, FX market dynamics.
    JEL: E12 E31 E32 F41
    Date: 2009
  14. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The purpose of this paper is to show how to solve linear dynamic rational expectations models with anticipated shocks by using the generalized Schur decomposition method. Furthermore, we determine the optimal unrestricted and restricted policy responses to anticipated shocks. We demonstrate our solution method by means of a micro-founded hybrid New Keynesian model and show that anticipated cost-push shocks entail higher welfare losses than unanticipated shocks of equal size.
    Keywords: Anticipated Shocks,Optimal Monetary Policy,Rational Expectations,Generalized Schur Decomposition,Welfare Effects
    JEL: C61 C63 E52
    Date: 2009
  15. By: Bermingham, Colin (Central Bank and Financial Services Authority of Ireland)
    Abstract: Core inflation rates are widely calculated. The perceived benefit of core inflation rates is that they help to inform monetary policy. This is achieved by uncovering the underlying trend in inflation or by helping to forecast inflation. Studies which compare core inflation rates frequently assess candidate core rates on these two criteria. Using U.S. data, the two standard tests of core inflation - the ability to track trend inflation and the ability to forecast inflation -are applied to a more comprehensive set of core inflation rates than has been the case in the literature to date. Furthermore, the tests are applied in a more rigorous fashion. A key difference in this paper is the inclusion of benchmarks to the tests, which is non-standard in the literature. Two problems with core inflation rates emerge. Firstly, it is very difficult to distinguish between different core rates according to these tests, as they tend to perform to a very similar level. Secondly, once the benchmarks are introduced to the tests, the core inflation rates fail to outperform the benchmarks. This failure suggests that core inflation rates are of less practical usefulness than previously thought.
    Date: 2009–08
  16. By: Urban Jermann; Vincenzo Quadrini
    Abstract: In this paper we document the cyclical properties of U.S. firms' financial flows. Equity payouts are procyclical and debt payouts are countercyclical. We develop a model with explicit roles for debt and equity financing and explore how the observed dynamics of real and financial variables are affected by `financial shocks', that is, shocks that affect the firms' capacity to borrow. Standard productivity shocks can only partially explain the movements in real and financial variables. The addition of financial shocks brings the model much closer to the data. The recent events in the financial sector show up clearly in our model as a tightening of firms' financing conditions causing the GDP decline in 2008-09. Our analysis also suggests that the downturns in 1990-91 and 2001 were strongly influenced by changes in credit conditions.
    JEL: E32 G10
    Date: 2009–09
  17. By: Siregar, Reza.Y.; Goo, Siwei
    Abstract: The chief objective of our paper is to highlight basic features of the IT policies adopted by Indonesia and Thailand, and to evaluate the commitment of the monetary authorities and the overall performances of the IT regime. The results demonstrate that the IT regime in these two economies has had some success, but not during the immediate aftermath of the Lehman Brothers’ collapse in the last quarter of 2008. Furthermore, the implementations of the IT policy in these two Southeast Asian economies have largely been “flexible” during the stable period, seeking the balance between narrowing output gap, managing exchange rate volatility, and anchoring inflationary pressure. However during the turbulent period, there had been a heightened focus in anchoring inflationary expectation.
    Keywords: Inflationary Expectation; Output Gap; Inflation Targeting; Pass-through; Monetary Policy Rule.
    JEL: E58 E52 F31 F33
    Date: 2009–09–13
  18. By: Ghosh, Saibal
    Abstract: The study exploits 2-digit level industry data for the period 1981-2004 to ascertain the interlinkage between a monetary policy shock and industry value added. Accordingly, we first estimate a Vector Auto Regression (VAR) model to ascertain the magnitude of a monetary policy shock on industrial output. Subsequently, we try to explain the observed heterogeneity in terms of industry characteristics. The findings indicate that (a) industries exhibit differential response to a monetary tightening and (b) both interest rate and financial accelerator variables tend to be important in explaining the differential response.
    Keywords: industry; monetary policy; interest rate channel; financial accelerator; vector auto regression; cross section regression
    JEL: E52 L60
    Date: 2009–01
  19. By: Gerke, Rafael; Hammermann, Felix; Lewis, Vivien
    Abstract: This paper investigates the optimal monetary policy response to a shock to collateral when policymakers act under discretion and face model uncertainty. The analysis is based on a New Keynesian model where banks supply loans to transaction constrained consumers. Our results confirm the literature on model uncertainty with respect to a cost-push shock. Insuring against model misspecification leads to a more aggressive policy response. The same is true for a shock to collateral. A preference for robustness leads to a more aggressive policy. Increasing the weight attached to interest rate smoothing raises the degree of aggressiveness. Our results indicate that a preference for robustness crucially depends on the way different types of disturbances affect the economy: in the case of a shock to collateral the policymaker does not need to be as much worried about model misspecification as in the case of a conventional cost-push shock.
    Keywords: Optimal monetary policy,discretion,model uncertainty,banking,collateral
    JEL: E44 E58 E32
    Date: 2009
  20. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC)
    Abstract: This paper argues that Hyman Minsky's financial instability hypothesis weaves together a medium term Keynesian approach to the business cycles in the spirit of Samuelson (1936) and Hicks (1950) with long cycle thinking of economists such as Schumpeter (1939) and Kondratieff. Post Keynesians have devoted considerable attention to the medium term dimension of Minsky's thinking. The current paper concentrates on the long swing dimension and introduces the idea of "Minsky super-cycles." It is the supercycle that ultimately permits financial crisis. Whereas financially driven business cycles occur every decade, financial crises occur over longer durations reflecting the longer phase of the super-cycle.
    Keywords: Minsky, business cycles, financial instability hypothesis
    Date: 2009
  21. By: Yener Altunbas (University of Wales); Leonardo Gambacorta (Bank for International Settlements); David Marqués-Ibáñez (European Central Bank)
    Abstract: We find evidence of a bank lending channel for the euro area operating via bank risk. Financial innovation and the new ways to transfer credit risk have tended to diminish the informational content of standard bank balance-sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e. size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess a bankÂ’s ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes.
    Keywords: Bank, Risk, Bank Lending Channel, Monetary Policy
    JEL: E44 E52
    Date: 2009–05
  22. By: Bachmann, Ruediger; Bayer, Christian
    Abstract: Using a unique German firm-level data set, this paper is the first to jointly study the cyclical properties of the cross-sections of firm-level real value added and Solow residual innovations, as well as capital and employment adjustment. We find two new business cycle facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow residual, value added and employment is robustly and significantly countercyclical. 2) The cross-sectional standard deviation of firm-level investment is procyclical. We show that a heterogeneousfirm RBC model with quantitatively realistic countercyclical innovations in the firm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investment dispersion that positively comoves with the cycle, with a correlation coefficient of 0.65, compared to 0.61 in the data. We argue more generally that the cross-sectional business cycle dynamics impose tight empirical restrictions on structural parameters and stochastic properties of driving forces in heterogeneousfirmmodels, and are therefore paramount in the calibration of these models.
    Keywords: Ss model,RBC model,cross-sectional firm dynamics,lumpy investment,countercyclical risk,aggregate shocks,idiosyncratic shocks,heterogeneous firms.
    JEL: E20 E22 E30 E32
    Date: 2009
  23. By: Louis, Rosmy J; Brown, Ryan; Balli, Faruk
    Abstract: This paper determines how mortgage rate and income shocks affect new and resale housing prices, housing starts, and housing sales in Canadas metropolitan areas. We assess the variance decompositions and impulse response results to mortgage rate and income shocks. An additional set of VARs is estimated to document whether the stock price, as an alternative source of investment, reduces the importance of the mortgage rate. Our results show that the importance of the mortgage rate and income varies significantly by metropolitan area and to a lesser degree, by the component of the housing market examined. More precisely, we find that: 1) two of BCs major metropolitan areas housing markets, Vancouver and Victoria, are vulnerable to interest rate bubble;. 2) Mortgage rates, and by extension the Bank of Canada monetary policy, seems to have little direct impact on Albertas major metropolitan housing markets, Calgary and Edmonton, while income can be expected to have a drastic effect; and 3) The housing markets of Ontarios major metropolitan area and Canadas Capital Region are prone to mortgage rate bubbles, but the impact is dampened due to their connectedness to national financial markets. What these results mean in terms of policy-making decision is that close attention needs to be paid to housing markets in Canada that are vulnerable to spikes in mortgage rates as we are coming out of the recession provoked by the housing market meltdown in the United States. Although it is true that Banking regulations in Canada have helped weather the storm, with the massive fiscal stimulus implemented in both Canada and the United States, eventually strong aggregate demand may build up pressure on prices to rise and interest rate will have to increase in order to maintain price stability, thereby causing troubles for mortgagees.
    Keywords: Housing Markets; Metropolitan Areas in Canada; Monetary Policy; Stock Prices; Provincial Income; Variance Decomposition
    JEL: E42 E31 L85
    Date: 2009
  24. By: Juha Tervala
    Abstract: This study examines whether the fiscal multiplier can be negative for certain types of government spending. The key result is that the fiscal multiplier can be negative if there is a high degree of substitutability between private and government consumption and government consumption is complementary to leisure.
    Keywords: fiscal policy, fiscal multiplier, effectiveness of fiscal policy
    JEL: E62 H31 H42
    Date: 2009–09
  25. By: Moisa Altar (Faculty of Finance and Banking, Bucharest University of Economics); Ciprian Necula (Faculty of Finance and Banking, Bucharest University of Economics); Gabriel Bobeica (Faculty of Finance and Banking, Bucharest University of Economics)
    Abstract: The paper provides potential output and output gap estimates for the Romanian economy in the period 1998 - 2008. Our approach consists in combining the structural method of the production function with several non-structural statistical detrending methods: Hodrick-Prescott, Kalman, band-pass, and wavelet transform filters. In this way, the obtained results benefit both from the economic foundations the production function method is relying on, as well as from the flexibility of the detrending techniques. The contribution of our analysis to the scarce literature dealing with the estimation of the cyclical position of the Romanian economy is twofold. First, we identify the contribution of the production factors to the potential output growth. Second, we aggregate the results obtained through filtering techniques in a consensus estimate ascribing to each method a weight inversely related to its revision stability. Our results suggest for the period 2000-2008 an average annual growth rate of the potential output equal to 5.8%, but on a descendant slope at the end of the analyzed period, due to the adverse developments in the macroeconomic context.
    Keywords: potential GDP, output gap, NAIRU, business cycle
    JEL: C32 E24 E32
    Date: 2009–09
  26. By: Paolo Casadio; Antonio Paradiso
    Abstract: This paper investigates the relationship between asset markets and business cycles with regard to the United States economy. We consider the Goldman Sachs approach (2003) developed to study the dynamics of financial balances. By means of a small econometric model we find that asset market dynamics are fundamental to determining the long-run financial sector balance dynamics. The gap between long-run equilibrium values and the actual values of the financial balances help to explain the cyclical path of the economy. Among all financial sectors balances, the financing gap in the corporate sector shows a leading effect on business cycles, in a Minskyan spirit. The last results appear innovative with respect to Goldman Sachs's findings. Furthermore, our econometric results are robust and quite stable.
    Date: 2009–09
  27. By: Bachmann, Ruediger; Bayer, Christian
    Abstract: Is time-varying firm-level uncertainty a major cause or amplifier of the business cycle? This paper investigates this question in the context of a heterogeneousfirm RBC model with persistent firm-level productivity shocks and lumpy capital adjustment, where cyclical changes in uncertainty correspond naturally to cyclical changes in the cross-sectional dispersion of firm-specific Solow residual innovations. We use a unique German firm-level data set to investigate the extent to which firm-level uncertainty varies over the cycle. This allows us to put empirical discipline on our numerical simulations. We find that, while firm-level uncertainty is indeed countercyclical, it does not fluctuate enough to significantly alter the dynamics of an RBC model with only first moment shocks. The mild changes we do find are mainly caused by a bad news effect: higher uncertainty today predicts lower aggregate Solow residuals tomorrow. This effect dominates the real option value effect of time-varying uncertainty, highlighted in the literature.
    Keywords: Ss model,RBC model,lumpy investment,countercyclical risk,aggregate shocks,idiosyncratic shocks,heterogeneous firms,news shocks,uncertainty shocks.
    JEL: E20 E22 E30 E32
    Date: 2009
  28. By: Horgos, Daniel (Helmut Schmidt University, Hamburg); Zimmermann, Klaus W. (Helmut Schmidt University, Hamburg)
    Abstract: With interest groups significantly affecting economic performance (according to Mancur Olson) and a vital interest of governments in economic growth and low unemployment in order to win elections, there should be a link between political business cycles and the evolution of lobbies over time which has totally been ignored in the literature up to now. In modeling this link in a theoretical and empirical way we try to answer two questions: Is it possible to interpret Olson´s Law of Interest Groups not only as a long run phenomenon but also in a short-run perspective, integrating it into the theory of political business cycles? And: is there any empirical evidence that a typical pattern of lobby behavior and macroeconomic status exists which is consistent over a couple of election periods? In order to investigate these issues, we first analyze some literature that is usually ignored in the more technical contributions evaluating Olson´s law, but proves to be highly important as background for answering the above mentioned questions. We then illustrate how a model consisting of Olson´s interest-groups theory and the endeavors of governments to win the majority of votes in elections could look like, before we perform a time-series-analysis based on the lobby-list of the German Bundestag in order to gain some more insights into the relationships between lobbies, governments and voters. As a result we discover a consistent behavior of the lobbies over the cycle that boils down to some kind of non-aggression pact between the lobbies and the governments irrespective of their political alignments.
    Keywords: interest groups; political business cycles; growth; unemployment; inflation
    JEL: D72 D78
    Date: 2009–09–07
  29. By: Zoican, Marius Andrei
    Abstract: From 1990 onwards, Eastern European countries have had as a primary economic goal the convergence with the traditionally capitalist states in Western Europe. The usage of various exchange rate regimes to accomplish the convergence of inflation and interest rates, in order to create a fully functional macroeconomic environment has been one of the fundamental characteristics of states in Eastern Europe for the past 20 years. Among these countries, Hungary stands out as having tried a number of exchange rate regimes – from the adjustable peg in 1994‐1995 to free float since 2008. In the first part, this paper analyses the macroeconomic performance of Hungary during the past 15 years as a function of the exchange rate regime used. I also compare this performance, where applicable, with two similar countries which have used the most extreme form of exchange rate regime: Estonia (with a currency board) and Romania, who never officialy pegged its currency and used a managed float even since 1992. The second part of this paper analyzes the overall Hungarian performance from the perspective of the Optimal Currency Area theory, therefore trying to establish if, after 20 years of capitalism, and a large variety of monetary policies, Hungary is indeed prepared to join the European Monetary Union.
    Keywords: exchange rate regimes; free float; Eastern Europe; Optimal Currency Area Theory
    JEL: F15 E42 F41 F31
    Date: 2009–04–05
  30. By: Matthieu Charpe (International Labor Organization Geneve, Switzerland); Peter Flaschel (Bielefeld University, Germany); Christian R. Proano (IMK at the Hans Boeckler Foundation); Willi Semmler (New School Univeristy New York, USA)
    Abstract: We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with marginal propensity significantly larger than one. They therefore need credit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of credit rationing into a devastating bust. In such a situation the Central Bank may prevent the worst by acting as creditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.
    Keywords: mortgage loans, booms, debt default, busts, creditor of last resort.
    JEL: E24 E31 E32
    Date: 2009
  31. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC)
    Abstract: Inside debt is a fundamental feature of capitalist economies. This paper examines the growth effects of consumer and corporate debt using a Cambridge - Kaleckian growth framework. According to the Cambridge - Kaleckian model inside debt has an ambiguous effect on growth. This is counter to the intuition of static short-run macro models in which higher debt levels lower economic activity and shows intuitions derived from short run macroeconomics do not always carry over to growth theory. Growth is faster in endogenous money economies than in pure credit economies, ceteris paribus. That is because lending in endogenous money economies creates money wealth that increases spending and lowers saving. Interest payments from debtors to creditors are a critical channel whereby debt affects growth. In the consumer debt model this interest transfer mechanism exerts a negative influence on growth. However, in the corporate debt model the transfer can raise growth if the marginal propensity to consume of creditor households exceeds the marginal propensity to invest of firms.
    Keywords: Growth, Debt, Interest transfers, Cambridge distribution theory, Kaleckian growth theory.
    JEL: E12 O40
    Date: 2009
  32. By: Nicolae B. Gârleanu; Stavros Panageas; Jianfeng Yu
    Abstract: In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: "small", frequent, and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. While the former affect the economy on impact, the latter affect the economy with lags, since firms need to first adopt the new technologies through investment. The process of adoption leads to cycles in asset valuations and risk premia as firms convert the growth options associated with the new technologies into assets in place. This process can help provide a unified, investment-based view of some well documented phenomena such as the asset-valuation patterns around major technological innovations, the countercyclical behavior of returns, the lead-lag relationship between the stock market and output, and the increasing patterns of consumption-return correlations over longer horizons.
    JEL: E22 G12
    Date: 2009–09
  33. By: Bilin Neyapti
    Date: 2009
  34. By: Matias Fontenla (Department of Economics, University of New Mexico); Fidel Gonzalez (Department of Economics and International Business, Sam Houston State University); Troy Quast (Department of Economics and International Business, Sam Houston State University)
    Abstract: In this paper we study the effect of the business cycle on the mortality rate of the major racial groups in the U.S. Using county-level data from 1999 to 2005, we find that the unemployment rate is negatively related to mortality for whites and latinos but that there is not a statistically significant relationship for blacks. Moreover, the magnitude of this relationship is larger for latinos than for whites. Finally, the relationship becomes more pronounced for latinos and whites as the proportion of population of that race increases. Taken together, these findings suggest that the procyclical association between mortality and the business cycle identified in previous studies of the general U.S. population may vary by race.
  35. By: Markevich, Andrei (New Economic School, Moscow and Department of Economics, University of Warwick); Harrison, Mark (Department of Economics, University of Warwick ; Centre for Russian and East European Studies, University of Birmingham ; Hoover Institution on War, Revolution, and Peace, Stanford University)
    Abstract: We are working towards filling the last remaining gap in the historical national accounts of Russia and the USSR in the twentieth century. The gap includes the Great War (1914 to 1917), the Bolshevik Revolution, the Civil War and War Communism (1918 to 1921), and postwar recovery under the New Economic Policy of a mixed economy (1921 to 1928). Our work builds on our predecessors and also returns to a number of original sources. We find that the economic performance of the Russian Empire in wartime was somewhat better than previously thought; that of War Communism was correspondingly worse. We confirm the persistence of losses associated with the Civil War into the postwar period, or the failure of the New Economic Policy to achieve full recovery, or some mixture of both. We conclude that the Great War and Civil War produced the deepest economic trauma of Russia’s troubled twentieth century.
    Keywords: Civil War ; GDP, Russia ; Soviet Union ; World War I
    JEL: E20 N14 N44 O52
    Date: 2009
  36. By: Mathias Trabandt; Harald Uhlig
    Abstract: We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring â€constant Frisch elasticity†(CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.
    JEL: E0 E60 H0
    Date: 2009–09
  37. By: Raddatz, Claudio
    Abstract: The process of global climate change has been associated with an increase in the frequency of climatic disasters. Yet, there is still little systematic evidence on the macroeconomic costs of these episodes. This paper uses panel time-series techniques to estimate the short and long-run impact of climatic and other disasters on a country's GDP. The results indicate that a climate related disaster reduces real GDP per capita by at least 0.6 percent. Therefore, the increased incidence of these disasters during recent decades entails important macroeconomic costs. Among climatic disasters, droughts have the largest average impact, with cumulative losses of 1 percent of GDP per capita. Across groups of countries, small states are more vulnerable than other countries to windstorms, but exhibit a similar response to other types of disasters; and low-income countries responds more strongly to climatic disasters, mainly because of their higher response to droughts. However, a country's level of external debt has no relation to the output impact of any type of disaster. The evidence also indicates that, historically, aid flows have done little to attenuate the output consequences of climatic disasters.
    Keywords: Natural Disasters,Disaster Management,Hazard Risk Management,Pollution Management&Control,Population Policies
    Date: 2009–09–01
  38. By: Charles R. Hulten
    Abstract: Incomes per capita have grown dramatically over the past two centuries, but the increase has been unevenly spread across time and across the world. Growth accounting is the principal quantitative tool for understanding this phenomenon, and for assessing the prospects for further increases in living standards. This paper sets out the general growth accounting model, with its methods and assumptions, and traces its evolution from a simple index-number technique that decomposes economic growth into capital-deepening and productivity components, to a more complex account of the growth process. In the more complex account, capital and productivity interact, both are endogenous, and quality change in inputs and output matters. New developments in micro-level productivity analysis are also reviewed, and the long-standing question of net versus gross output as the appropriate indicator of economic growth is addressed.
    JEL: E01 O47
    Date: 2009–09
  39. By: Leo Krippner (Reserve Bank of New Zealand)
    Abstract: This article establishes that most models within the popular and widely used Nelson and Siegel (1987, hereafter NS) class, with one notable exception being the Svensson (1995) variant, are effectively reduced-form representations of the generic Gaussian affine term structure model outlined in Dai and Singleton (2002). That fundamental theoretical foundation provides a compelling case for applying certain NS models as standard tools for yield curve analysis in economics and finance: users get the well-established pragmatic benefits of NS models along with an assurance that they correspond to a well-accepted set of principles and assumptions for modelling the yield curve and its dynamics.
    JEL: E43 G12
    Date: 2009–09
  40. By: Rota, Mauro
    Abstract: In the II postwar phase of intensive growth, Italian policy makers, controlling banking system, used credit deepening as the leading instrument for policy targets: the industrialization of the country and reduction of regional disparities. This work presents a reconstruction of territorial long run loans to the manufacturing industries, outlining some aspects of the Italian development path summarized by a strategy of industrialization which was different across areas and branches. Moreover, it suggests a positive effect of credit deepening on product per worker in a cross section time series analysis, looking at eleven branches of manufacturing industries in the two Italian macro-regions: the Centre-North and the Mezzogiorno.
    Keywords: Industrial policy; Credit; Cross-Section Time Series Analysis;
    JEL: E51 H81 N44 N14
    Date: 2009–09
  41. By: Klaus Desmet; Esteban Rossi-Hansberg
    Abstract: We present a theory of spatial development. A continuum of locations in a geographic area choose each period how much to innovate (if at all) in manufacturing and services. Locations can trade subject to transport costs and technology diffuses spatially across locations. The result is an endogenous growth theory that can shed light on the link between the evolution of economic activity over time and space. We apply the model to study the evolution of the U.S. economy in the last few decades and find that the model can generate the reduction in the employment share in manufacturing, the increase in service productivity in the second part of the 1990s, the increase in land rents in the same period, as well as several other spatial and temporal patterns.
    JEL: E32 O11 O18 O33 R12
    Date: 2009–09
  42. By: Mazumder, Sandeep
    Abstract: This paper estimates the price-marginal cost markup for US manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on Hall's (1988) framework involving the manipulation of the Solow Residual. However this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption, we are able to derive a generalized markup index, which when estimated using manufacturing data is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.
    Keywords: Markup; Marginal Cost
    JEL: E32 D40 D24
    Date: 2009–09

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