nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒09‒26
58 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Price level targeting and stabilization policy By Aleksander Berentsen; Christopher J. Waller
  2. How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience By Daniel L. Thornton
  3. Oligopolistic Competition and Optimal Monetary Policy By Ester Faia
  4. Evaluating Monetary Policy By Lars E.O. Svensson
  5. Nonconvex Margins of Output Adjustment and Aggregate Fluctuations By Sustek, Roman
  6. Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? By Salem M. Abo-Zaid
  7. Monetary Aggregates and the Business Cycle By Sustek, Roman
  8. The Cost of Tractability and the Calvo Pricing Assumption By Fang Yao
  9. Disagreement among Forecasters in G7 Countries By Jonas Dovern; Ulrich Fritsche; Jiri Slacalek
  11. Real-time inflation forecasting in a changing world By Groen, J.J.J.; Paap, R.
  12. Nominal Rigidities, Monetary Policy and Pigou Cycles By Stephane Auray; Paul Gomme; Shen Guo
  13. Real-time inflation forecasting in a changing world By Jan J. J. Groen; Richard Paap; Francesco Ravazzolo
  14. Public investment, distortionary taxes and monetary policy transparency. By Meixing Dai; Moïse Sidiropoulos
  15. Asset Prices and Monetary Policy By Ichiro Fukunaga; Masashi Saito
  16. Monetary and fiscal policy under deep habits By Campbell Leith; Ioana Moldovan; Raffaele Rossi
  17. Micro data on nominal rigidity, inflation persistence and optimal monetary policy By Engin Kara
  18. Monetary Policy, Inflation Expectations and the Price Puzzle By Efrem Castelnuovo; Paolo Surico
  19. Money demand in the euro area: new insights from disaggregated data By Setzer, Ralph; Wolff, Guntram B.
  20. The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks By Daniel L. Thornton
  21. Credit Crises, Money and Contractions: an historical view By Michael D. Bordo; Joseph G. Haubrich
  22. Greenspan’s Legacy and Bernanke’s attitude to the Financial Crisis By John Ryan; Adam Koronowski
  23. A Historical Analysis of Central Bank Independence in Latin America: The Colombian Experience, 1923-2008 By Adolfo Meisel; Juan David Barón
  24. Optimal stabilization policy with endogenous firm entry By Aleksander Berentsen; Christopher J. Waller
  25. A new measure of fiscal shocks based on budget forecasts and its implications By Pereira, Manuel C
  26. Productivity Shocks and the New Keynesian Phillips Curve: Evidence from US and Euro Area By Gene Ambrocio; Tae-Seok Jang
  27. Money and the Transmission of Monetary Policy By Seth Carpenter; Selva Demiralp
  28. Credit spreads and monetary policy By Vasco Cúrdia; Michael Woodford
  29. Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements By David O. Lucca; Francesco Trebbi
  30. Macroeconomic Differentials and Adjustment in the Euro Area By Siedschlag, Iulia; Economic and Social Research Institute (ESRI)
  31. Unemployment and inflation in Western Europe: solution by the boundary element method By Ivan Kitov; Oleg Kitov
  32. Euro area money demand: empirical evidence on the role of equity and labour markets. By Gabe J. de Bondt
  33. Monetary Policy and the Dollar By Peter L. Rousseau
  34. Macroeconomic Effects from Government Purchases and Taxes By Robert J. Barro; Charles J. Redlick
  35. The Economic and Policy Consequences of Catastrophes By Robert S. Pindyck; Neng Wang
  36. Extensive and Intensive Investment Over the Business Cycle By Boyan Jovanovic; Peter L. Rousseau
  37. Towards a Common European Monetary Union Risk Free Rate By Sergio Mayordomo; Juan Ignacio Peña; Eduardo S. Schwartz
  38. Inflation, Finance, and Growth: A Trilateral Analysis By Peter L. Rousseau; Hakan Yilmazkuday
  39. Why the nature of oil shocks matters By Elisaveta Archanskaïa; Jerome Creel; Paul Hubert
  40. Liquidity risk, credit risk, and the Federal Reserve's responses to the crisis By Asani Sarkar
  41. Adjustment in EMU: Is Convergence Assured? By Sebastian Dullien; Ulrich Fritsche; Ingrid Groessl; Michael Paetz
  42. The formation of inflation expectations: an empirical analysis for the UK By David G. Blanchflower; Conall MacCoille
  43. Firing Costs in a New Keynesian Model with Endogenous Separations By Dennis Wesselbaum
  44. Disaggregated Credit Flows and Growth in Central Europe By Bezemer, Dirk J; Werner, Richard A
  45. Emerging Asia: Decoupling or Recoupling By Kim, Soyoung; Lee, Jong-Wha; Park, Cyn-Young
  46. Evidence on Unemployment, Market Work and Household Production By Michael C. Burda; Daniel S. Hamermesh
  47. Trading companies as financial intermediaries in Japan By Ono, Masanori
  48. Macroeconomic Phase Transitions Detected from the Dow Jones Industrial Average Time Series By Wong Jian Cheng; Lian Heng; Cheong Siew Ann
  49. Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning By Andrew K. Rose; Mark M. Spiegel
  50. What is Happening to the Impact of Financial Deepening on Economic Growth? By Peter L. Rousseau; Paul Wachtel
  51. Polarisation, Populism and Hyperinflation[s]: Some Evidence from Latin America By Manoel Bittencourt
  52. MIDAS vs. mixed-frequency VAR: Nowcasting GDP in the Euro Area By Vladimir Kuzin; Massimiliano Marcellino; Christian Schumacher
  53. Financial Crises and Economic Activity By Stephen G. Cecchetti; Marion Kohler; Christian Upper
  54. Building social business models: lessons from the Grameen experience By Moingeon, Bertrand; Yunus, Muhammad; Lehmann-Ortega, Laurence
  55. The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Conceptual Foundations By Bitros, George
  56. Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure By Andrew K. Rose; Mark M. Spiegel
  57. Systemic Risk and the Refinancing Ratchet Effect By Amir E. Khandani; Andrew W. Lo; Robert C. Merton
  58. Pricing caps with HJM models: the benefits of humped volatility By Jury Falini

  1. By: Aleksander Berentsen; Christopher J. Waller
    Abstract: We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states.
    Keywords: Monetary policy ; Econometric models
    Date: 2009
  2. 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
  3. By: Ester Faia
    Abstract: The literature has shown that product market frictions and firms dynamic play a crucial role in reconciling standard DSGE with several stylized facts. This paper studies optimal monetary policy in a DSGE model with sticky prices and oligopolistic competition. In this model firms’ monopolistic rents induce both intra-temporal and intertemporal time-varying wedges which induce inefficient fluctuations of employment and consumption. The monetary authority faces a trade-off between stabilizing inflation and reducing inefficient fluctuations, which is resolved by using consumer price inflation as a state contingent sale subsidy. An analysis of the welfare gains of alternative rules show that targeting mark-ups and asset prices might improve upon a strict inflation targeting
    Keywords: product market frictions, oligopolistic competition, optimal monetary policy
    JEL: E3 E5
    Date: 2009–09
  4. By: Lars E.O. Svensson
    Abstract: Evaluating inflation-targeting monetary policy is more complicated than checking whether inflation has been on target, because inflation control is imperfect and flexible inflation targeting means that deviations from target may be deliberate in order to stabilize the real economy. A modified Taylor curve, the forecast Taylor curve, showing the tradeoff between the variability of the inflation-gap and output-gap forecasts can be used to evaluate policy ex ante, that is, taking into account the information available at the time of the policy decisions, and even evaluate policy in real time. In particular, by plotting mean squared gaps of inflation and output-gap forecasts for alternative policy-rate paths, it may be examined whether policy has achieved an efficient stabilization of both inflation and the real economy and what relative weight on the stability of inflation and the real economy has effectively been applied. Ex ante evaluation may be more relevant than evaluation ex post, after the fact. Publication of the interest-rate path also allows the evaluation of its credibility and the effectiveness of the implementation of monetary policy.
    JEL: E52 E58
    Date: 2009–09
  5. By: Sustek, Roman
    Abstract: In most manufacturing industries output is adjusted in a lumpy way along three margins: shiftwork, weekend work, and closing a plant temporarily down. We incorporate such decisions into a dynamic general equilibrium model and study: (i) if such micro-level nonconvexities magnify business cycles; and (ii) if the aggregate effects of changes in firms' borrowing costs due to monetary policy shocks vary over the cycle. Calibrated to industrial observations, the model implies that aggregate output is in fact 25% less volatile than in an economy without such features, and monetary policy shocks have similar effects on output in recessions as in expansions.
    Keywords: Nonconvexities; business cycles; capacity utilization; monetary policy; asymmetries
    JEL: E32 E22 E23 E52
    Date: 2009–09–01
  6. By: Salem M. Abo-Zaid
    Abstract: This paper studies monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the consumer price index (CPI) rather than the Domestic Price Index (DPI). When pass-through is high, an economy with high degrees of nominal wage rigidity and wage indexation should either target the CPI or fully stabilize nominal wages. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be following the right monetary policy rules.
    Keywords: Monetary policy rules; Inflation Targeting ; Consumer Price Index; Domestic Price Index; Exchange rate pass-through; Nominal wage rigidity; Open economy.
    JEL: E31 E52 E58 E61 F31
    Date: 2009–09–23
  7. By: Sustek, Roman
    Abstract: In the U.S. business cycle, a monetary aggregate consisting predominantly of sight deposits strongly leads output, time deposits strongly lag output, and a monetary aggregate consisting of both types of deposits tends to be coincident with the cycle. Such movements are observed both before and after the 1979 monetary policy change. Similar dynamics are obtained in a model with multi-stage production and purchase-size heterogeneity when agents optimally choose their mix of cash, checkable, and time deposits used in transactions. The causality in the model runs from real activity to money, rather than the other way around.
    Keywords: Monetary aggregates; business cycle; general equilibrium
    JEL: E32 E51 E41
    Date: 2009–09–02
  8. By: Fang Yao
    Abstract: This paper demonstrates that tractability gained from the Calvo pricing assumption is costly in terms of aggregate dynamics. I derive a generalized New Keynesian Phillips curve featuring a generalized hazard function, non-zero steady state inflation and real rigidity. An- alytically, I find that important dynamics in the NKPC are canceled out due to the restrictive Calvo assumption. I also present a general result, showing that, under certain conditions, this generalized Calvo pricing model generates the same aggregate dynamics as the gen- eralized Taylor model with heterogeneous price durations. The richer dynamic structure introduced by the non-constant hazards is also quantitatively important to the inflation dy- namics. Incorporation of real rigidity and trend inflation strengthen this effect even further. With reasonable parameter values, the model accounts for hump-shaped impulse responses of inflation to the monetary shock, and the real effects of monetary shocks are 2-3 times higher than those in the Calvo model.
    Keywords: Hazard function, Nominal rigidity, Real rigidity, New Keynesian Phillips curve
    JEL: E12 E31
    Date: 2009–09
  9. By: Jonas Dovern (Kiel Economics); Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Jiri Slacalek (European Central Bank)
    Abstract: Using the Consensus Economics dataset with individual expert forecasts from G7 countries we investigate determinants of disagreement (crosssectional dispersion of forecasts) about six key economic indicators. Disagreement about real variables (GDP, consumption, investment and unemployment) has a distinct dynamic from disagreement about nominal variables (in ation and interest rate). Disagreement about real variables intensifes strongly during recessions, including the current one (by about 40 percent in terms of the interquartile range). Disagreement about nominal variables rises with their level, has fallen after 1998 or so (by 30 percent), and is considerably lower under independent central banks (by 35 percent). Cross-sectional dispersion for both groups increases with uncertainty about the underlying actual indicators, though to a lesser extent for nominal series. Countryby- country regressions for inflation and interest rates reveal that both the level of disagreement and its sensitivity to macroeconomic variables tend to be larger in Italy, Japan and the United Kingdom, where central banks became independent only around the mid-1990s. These findings suggest that more credible monetary policy can substantially contribute to anchoring of expectations about nominal variables; its eects on disagreement about real variables are moderate.
    Keywords: disagreement, survey expectations, monetary policy, forecasting
    JEL: E31 E32 E37 E52 C53
    Date: 2009–09
  10. By: Ankita Mishra; Vinod Mishra
    Abstract: This article looks at the preconditions that an emerging economy needs to fulfill, before it can adopt inflation targeting as a monetary policy regime. The study is conducted using the Indian economy as a case study. We conduct an in-depth sector-wise analysis of the Indian economy to evaluate the independence of India's monetary policy from fiscal, external, structural and financial perspectives. Dominance from any of these sectors may divert monetary policy from the objective of maintaining price stability in the economy. Our analysis suggests that among the four dominance issues, the issue of 'structural dominance??? is the most acute for India. Supply shocks, hitting the economy due to structural bottlenecks, pose a major threat to the independent conduct of monetary policy. This study concludes that inflation band targeting with a wide target range would be a feasible monetary policy option for India.
    Keywords: India, Inflation Targeting, Monetary policy, Fiscal Dominance, VAR, GFVD
    JEL: E52 E58 E47
    Date: 2009–05–01
  11. By: Groen, J.J.J.; Paap, R. (Erasmus Econometric Institute)
    Abstract: This paper revisits inflation forecasting using reduced form Phillips curve forecasts, i.e., inflation forecasts using activity and expectations variables. We propose a Phillips curve-type model that results from averaging across different regression specifications selected from a set of potential predictors. The set of predictors includes lagged values of inflation, a host of real activity data, term structure data, nominal data and surveys. In each of the individual specifications we allow for stochastic breaks in regression parameters, where the breaks are described as occasional shocks of random magnitude. As such, our framework simultaneously addresses structural change and model certainty that unavoidably affects Phillips curve forecasts. We use this framework to describe PCE deflator and GDP deflator inflation rates for the United States across the post-WWII period. Over the full 1960-2008 sample the framework indicates several structural breaks across different combinations of activity measures. These breaks often coincide with, amongst others, policy regime changes and oil price shocks. In contrast to many previous studies, we find less evidence for autonomous variance breaks and inflation gap persistence. Through a \textit{real-time} out-of-sample forecasting exercise we show that our model specification generally provides superior one-quarter and one-year ahead forecasts for quarterly inflation relative to a whole range of forecasting models that are typically used in the literature.
    Keywords: inflation forecasting;Phillips correlations;real-time data;structural breaks;model uncertainty;Bayesian model averaging
    Date: 2009–09–10
  12. By: Stephane Auray (EQUIPPE (EA 4018), Universités Lille Nord de France (ULCO), GREDI, Université de Sherbrooke and CIRP\Eacute;E.); Paul Gomme (Concordia University and CIREQ); Shen Guo (China Academy of Public Finance and Public Policy, Central University of Finance and Economics, Beijing, China)
    Abstract: A chief goal of the Pigou cycle literature is to generate a boom in response to news of a future increase in productivity, and a bust if this improvement does not in fact take place. We find that monetary policy can generate Pigou cycles in a two sector model with durables and non-durables, and nominal price rigidities -- even when the Ramsey-optimal policy displays no such cycles. Estimated interest rate rules are a good fit to data simulated under the Ramsey policy, implying that policymakers could come close to replicating the Ramsey-optimal policy.
    Keywords: Pigou cycles; monetary policy
    JEL: E3 E5 E4
    Date: 2009–07–02
  13. By: Jan J. J. Groen; Richard Paap; Francesco Ravazzolo
    Abstract: This paper revisits inflation forecasting using reduced-form Phillips curve forecasts, that is, inflation forecasts that use activity and expectations variables. We propose a Phillips-curve-type model that results from averaging across different regression specifications selected from a set of potential predictors. The set of predictors includes lagged values of inflation, a host of real-activity data, term structure data, nominal data, and surveys. In each individual specification, we allow for stochastic breaks in regression parameters, where the breaks are described as occasional shocks of random magnitude. As such, our framework simultaneously addresses structural change and model uncertainty that unavoidably affect Phillips-curve-based predictions. We use this framework to describe personal consumption expenditure (PCE) deflator and GDP deflator inflation rates for the United States in the post-World War II period. Over the full 1960-2008 sample, the framework indicates several structural breaks across different combinations of activity measures. These breaks often coincide with policy regime changes and oil price shocks, among other important events. In contrast to many previous studies, we find less evidence of autonomous variance breaks and inflation gap persistence. Through a real-time out-of-sample forecasting exercise, we show that our model specification generally provides superior one-quarter-ahead and one-year-ahead forecasts for quarterly inflation relative to an extended range of forecasting models that are typically used in the literature.
    Keywords: Inflation (Finance) ; Forecasting ; Phillips curve ; Regression analysis
    Date: 2009
  14. By: Meixing Dai; Moïse Sidiropoulos
    Abstract: In a two-period model with distortionay taxes and public investment, we re-examine the interaction between monetary policy transparency and fiscal bias. We find that the optimal choices of tax rate and public investment allow eliminating the effects of fiscal bias and hence neutralize the impact of monetary policy opacity (lack of political transparency) on the level and variability of inflation and output, independently of the institutional quality. Our results are robust to alternative specifications of the game between the private sector, the government and the central bank.
    Keywords: Central bank transparency, distortionay taxes, public investment, fiscal bias.
    JEL: E52 E58 E62 E63 H21 H30
    Date: 2009
  15. By: Ichiro Fukunaga (Director, Research and Statistics Department, Bank of Japan (E-mail:; Masashi Saito (Deputy Director, Research and Statistics Department, Bank of Japan (E-mail:
    Abstract: How should central banks take into account movements in asset prices in the conduct of monetary policy? We provide an analysis to address this issue using a dynamic stochastic general equilibrium model incorporating both price rigidities and financial market imperfections. Our findings are twofold. First, in the presence of these two sources of distortion in the economy, central banks face a policy tradeoff between stabilizing inflation and the output gap. With this tradeoff, central banks could strike a better balance between both objectives if they took variables other than inflation, such as asset prices, into consideration. Second, these benefits decrease when central banks rely on limited information about the underlying sources of asset price movements and cannot judge which part of the observed asset price movements reflects inefficiencies in the economy.
    Keywords: asset prices, monetary policy, financial frictions, policy tradeoffs
    JEL: E44 E52
    Date: 2009–09
  16. By: Campbell Leith; Ioana Moldovan; Raffaele Rossi
    Abstract: Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of mark-ups this implies can result in government spending crowding-in private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple (but potentially nonlinear) policy rules to mimic fully optimal policy.
    Keywords: Monetary Policy, Fiscal Policy, Deep Habits, New Keynesian
    JEL: E21 E63 E61
    Date: 2009–09
  17. By: Engin Kara (National Bank of Belgium, Research Department)
    Abstract: The popular Calvo model with indexation (Christiano, Eichenbaum and Evans, 2005) and sticky information (Mankiw and Reis, 2002) model have guided much of the monetary policy discussion. The strength of these approaches is that they can explain the persistence of inflation. However, both of these theories are inconsistent with the micro data on prices. In this paper, I evaluate the consequences of implementing policies that are optimal from the perspective of models that overlook the micro-data. To do so, I employ a Generalized Taylor Economy (GTE) (Dixon and Kara, 2007). While there is no material difference between the GTE and its popular alternatives in terms of inflation persistence, a difference arises when it comes to the micro-data: the GTE is consistent with the micro-data. The findings reported in the paper suggest that policy conclusions are significantly affected by whether persistence arises in a manner consistent with the micro-data and that policies that are optimal from the perspective of the models that are inconsistent with the microdata can lead to large welfare losses in the GTE
    Keywords: Inflation persistence, DSGE models, Optimal Monetary Policy
    JEL: E1 E3 E52
    Date: 2009–09
  18. By: Efrem Castelnuovo (University of Padua); Paolo Surico (London Business School)
    Abstract: This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the U.S. economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.
    JEL: E30 E52
    Date: 2009–09
  19. By: Setzer, Ralph; Wolff, Guntram B.
    Abstract: Conventional money demand specifications in the euro area have become unstable since 2001. We specify a money demand equation in deviations of individual euro area Member States variables from the euro area average and show that the income elasticity as well as the interest rate semi-elasticity remain stable. The corresponding deep parameters of the utility function have not changed. Aggregate money demand instability does therefore not result from altered standard factors determining the preference for holding money. Instead, other factors determine the aggregate monetary overhang. Since monetary developments cannot easily be explained by changing preferences, they should be closely monitored and might be a sign of imbalances.
    Keywords: Money demand; M3; national contributions; euro area
    JEL: E51 E52 E41
    Date: 2009–03–05
  20. 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
  21. By: Michael D. Bordo; Joseph G. Haubrich
    Abstract: The relatively infrequent nature of major credit distress events makes an historical approach particularly useful. Using a combination of historical narrative and econometric techniques, we identify major periods of credit distress from 1875 to 2007, examine the extent to which credit distress arises as part of the transmission of monetary policy, and document the subsequent effect on output. Using turning points defined by the Harding-Pagan algorithm, we identify and compare the timing, duration, amplitude and co-Âmovement of cycles in money, credit and output. Regressions show that financial distress events exacerbate business cycle downturns both in the nineteenth and twentieth centuries and that a confluence of such events makes recessions even worse.
    JEL: E32 E50 G21
    Date: 2009–09
  22. By: John Ryan (Hult International Business School); Adam Koronowski (Warsaw University)
    Abstract: The Federal Reserve System or the Fed is one of the most prestigious institutions in the world. Founded by the Federal Reserve Act in 1913, the Fed has the responsibility of setting the monetary policy of the U.S. The Fed’s actions affect the money supply in the U.S. market which has a direct influence on interest rates, growth and inflation. To better understand the role of the Fed we will first describe its structure and organization. We will then see who is really behind the central bank’s actions and who holds the reins of power inside the institution that plays the most important role in financial markets throughout the world. The monetary policy implemented by the Fed is closely monitored by major financial markets and institutions as it affects directly investments and security prices. We will explain clearly how the Fed conducts its monetary policy using three major tools to either decrease or increase money supply: open market operations, adjusting the discount rate and adjusting the reserve requirement ratio. We examine the main objectives of the Fed’s monetary policies and how those objectives maintain a “conflict of interest” relationship. A special interest we devote to a possible negative role that monetary policy may play in fuelling excessive asset price booms and we ask whether monetary policy should contradict the growth of asset price bubbles. Finally we examine the policies of the former chairman of the Fed Alan Greenspan (1987-2006) which contributed to the current crisis. We also assess the reaction to the crisis of the monetary policy of Ben Bernanke.
    Keywords: Federal Reserve, Monetary Policy, Alan Greenspan, Ben Bernanke, Wall Street, financial crisis, Asset price inflation
    JEL: E32 E44 E50 E51 E52 E58 E61 G18
    Date: 2009
  23. By: Adolfo Meisel; Juan David Barón
    Abstract: This paper explores the relationship between central bank independence and inflation in Latin America, using as a case study the experience of Colombia (1923-2008). Since its creation, in 1923, Colombia’s central bank has undergone several reforms that have changed its objectives and degree of independence. Between 1923 and 1951, it was private and independent, with a legal commitment to price stability. In 1962 monetary responsibilities were divided between a government-dominated Monetary Board, in charge of monetary policy, and the central bank, which carried them out. In the early 1990s, the bank recovered its independence and its focus on price stability. Inflation varied substantially during these subperiods. The analysis shows that central bank independence, combined with a commitment to price stability, renders the best results in terms of price stability.
    Date: 2009–09–06
  24. By: Aleksander Berentsen; Christopher J. Waller
    Abstract: We study optimal monetary stabilization policy in a dynamic stochastic general equilibrium model where money is essential for trade and firm entry is endogenous. We do so when all prices are flexible and also when some are sticky. Due to an externality affecting firm entry, the central bank deviates from the Friedman rule. Calibration exercises suggest that the nominal interest rate should have been substantially smoother than the data if preference shocks were the main disturbance and much more volatile if productivity was the driving shock. This result is a direct consequence of policy actions to control entry.
    Keywords: Monetary policy ; Econometric models
    Date: 2009
  25. By: Pereira, Manuel C
    Abstract: This paper develops a new measure of US fiscal policy shocks that intends to avoid the anticipation problem affecting conventional measures, being also arguably free from endogeneity. The shocks are intended to capture changes to the component of anticipated fiscal policy that is exogenous to economic developments. Key economic variables such as output and interest rates respond quickly and significantly to a realization of the estimated shock and, in the first part of the sample, 1969-1988, in a way consistent with the Keynesian prior. In contrast, over the period 1989-2008 the effects are at odds with that prior, with fiscal loosening producing contractionary impacts.
    Keywords: fiscal policy; budget forecasts; macroeconomic stabilization; interest rate determination
    JEL: E43 E62 E32
    Date: 2009–09
  26. By: Gene Ambrocio; Tae-Seok Jang
    Abstract: This paper seeks to understand dynamics of inflation and marginal cost (labor share) in models that account for the inclusion of productivity shocks in standard New Keynesian Phillips Curve (NKPC). The question of interest is on the empirical importance of and whether productivity shocks shift the Phillips curve using U.S. and Euro area data. Highlighting the inclusion of productivity growth, we employ a hybrid model specification augmented with a productivity term. The model is estimated using the Generalized Method of Moments (GMM) following Gali and Gertler (1999). Our main finding is that a simple extension of the baseline and hybrid models using more recent data (2006:Q4 for the US and 2005:Q4 for the Euro area) yield less convincing results than the previous literature. Furthermore, our estimation results provide some support for the inclusion of productivity growth particularly for the US. We conclude that a better understanding of the inflation-unemployment tradeoff requires accounting for shifts in the Phillips Curve due to productivity shocks
    Keywords: New Keynesian, Phillips Curve, Productivity Growth, GMM
    JEL: E24 E31 J3
    Date: 2009–09
  27. By: Seth Carpenter (Board of Governors of the Federal Reserve System); Selva Demiralp
    Abstract: The transmission mechanism of monetary policy has received extensive treatment in the macroeconomic literature. Most models currently used for macroeconomic analysis exclude money or else model money demand as entirely endogenous. Nevertheless, academic research and many textbooks continue to use the money multiplier concept in discussions of money. We explore the institutional structure of the transmission mechanism beginning with open market operations through to money and loans to document that the mechanism does not work through the standard multiplier model or the bank lending channel. Our analysis, however, does not reflect on the existence of a broader credit channel
    Keywords: Monetary transmission mechanism, money multiplier, lending channel
    JEL: E51 E52
    Date: 2009–09
  28. By: Vasco Cúrdia; Michael Woodford
    Abstract: We consider the desirability of modifying a standard Taylor rule for a central bank's interest rate policy to incorporate either an adjustment for changes in interest rate spreads (as proposed by Taylor [2008] and McCulley and Toloui [2008]) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al. [2007]). We then examine how, under those adjustments, policy would respond to various types of economic disturbances, including those originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using a simple DSGE model with credit frictions (Curdia and Woodford 2009), comparing the equilibrium responses to various disturbances under the modified Taylor rules with those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve on the standard Taylor rule, but the optimal size of the adjustment is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of variation in credit spreads. A response to credit is less likely to be helpful, and its desirable size (and even sign) is less robust to alternative assumptions about the nature and persistence of economic disturbances.
    Keywords: Taylor's rule ; Interest rates ; Monetary policy ; Credit
    Date: 2009
  29. By: David O. Lucca; Francesco Trebbi
    Abstract: We present a new automated, objective and intuitive scoring technique to measure the content of central bank communication about future interest rate decisions based on information from the Internet and news sources. We apply the methodology to statements released by the Federal Open Market Committee (FOMC) after its policy meetings starting in 1999. Using intra-day financial quotes, we find that short-term nominal Treasury yields respond to changes in policy rates around policy announcements, whereas longer-dated Treasuries mainly react to changes in policy communication. Using lower frequency data, we find that changes in the content of the statements lead policy rate decisions by more than a year in univariate interest rate forecasting and vector autoregression (VAR) models. When we estimate Treasury yield responses to the shocks identified in the VAR, we find communication to be a more important determinant of Treasury rates than contemporaneous policy rate decisions. These results are consistent with the view that the FOMC releases information about future policy rate actions in its statements and that market participants incorporate this information when pricing longer-dated Treasuries. Finally, we decompose realized policy rate decisions using a forward-looking Taylor rule model. Based on this decomposition, we find that FOMC statements contain significant information regarding both the predicted rule-based interest rate and the Taylor-rule residual component, and that content of the statements leads the residual by a few quarters.
    JEL: E43 E52 E58
    Date: 2009–09
  30. By: Siedschlag, Iulia (Economic and Social Research Institute (ESRI)); Economic and Social Research Institute (ESRI)
    Date: 2009–09
  31. By: Ivan Kitov; Oleg Kitov
    Abstract: Using an analog of the boundary element method in engineering and science, we analyze and model unemployment rate in Austria, Italy, the Netherlands, Sweden, Switzerland, and the United States as a function of inflation and the change in labor force. Originally, the model linking unemployment to inflation and labor force was developed and successfully tested for Austria, Canada, France, Germany, Japan, and the United States. Autoregressive properties of neither of these variables are used to predict their evolution. In this sense, the model is a self-consistent and completely deterministic one without any stochastic component (external shocks) except that associated with measurement errors and changes in measurement units. Nevertheless, the model explains between 65% and 95% of the variability in unemployment and inflation. For Italy, the rate of unemployment is predicted at a time horizon of nine years with pseudo out-of-sample root-mean-square forecasting error of 0.55% for the period between 1973 and 2006. One can expect that the u nemployment will be growing since 2008 and will reach 11.4% near 2012. After 2012, unemployment in Italy will start to descend.
    Date: 2009–03
  32. By: Gabe J. de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study presents empirical evidence on the long-run motives for holding euro area money by focusing on the role of equity and labour markets. Equity positively affects money demand through wealth effects, as equities are a significant store of household wealth and thus part of a financial transaction motive. Negative substitution effects through the expected return on equity reflect a speculative motive from the equity market. A precautionary motive from the labour market is captured by the annual change in the unemployment rate. The main conclusion is that equity and labour markets do matter for money. All three new elements, in particular housing and financial wealth, have been found statistically and economically significant in explaining M3 since 1983. These findings are robust across different proxies for the augmented motives and a shorter sample period starting in 1994. JEL Classification: E41, G11, C32.
    Keywords: euro area money demand, wealth, equity return, precautionary motive.
    Date: 2009–09
  33. By: Peter L. Rousseau (Department of Economics, Vanderbilt University)
    Abstract: In this essay I propose that the adoption of the U.S. dollar as a common currency shortly after the ratification of the Federal Constitution and the accompanying transition from a fiat to specie standard was a pivotal moment in the nationÕs early history and marked an improvement over the monetary systems of colonial America and under the Articles of Confederation. This is because the dollar and all that came with it monetized the modern sector of the U.S. economy and tied the supply of money more closely to the capital market and the provision of creditø feats that were not possible in an era when colonial legislatures were unable to credibly commit to controlling paper money emissions. The switch to a specie standard was at the time necessary to promote domestic and international confidence in the nascent financial system, and paved the way for the long transition to the point when the standard was no longer required.
    Keywords: Colonial money, early US growth, quantity theory of money, backing theory, monetization
    JEL: N11 N21 E42 E44
    Date: 2009–09
  34. By: Robert J. Barro; Charles J. Redlick
    Abstract: For U.S. annual data that include WWII, the estimated multiplier for defense spending is 0.6-0.7 at the median unemployment rate. There is some evidence that this multiplier rises with the extent of economic slack and reaches 1.0 when the unemployment rate is around 12%. Multipliers for non-defense purchases cannot be reliably estimated because of the lack of good instruments. For samples that begin in 1950, increases in average marginal income-tax rates (measured by a newly constructed time series) have a significantly negative effect on real GDP. Increases in taxes seem to reduce real GDP with mainly a one-year lag due to income effects and mostly a two-year lag due to substitution (tax-rate) effects. Since the defense-spending multiplier is typically less than one, greater spending tends to crowd out other components of GDP. The largest effects are on private investment, but non-defense purchases and net exports tend also to fall. The response of private consumer expenditure differs insignificantly from zero.
    JEL: E2 E62 H2 H3 H5
    Date: 2009–09
  35. By: Robert S. Pindyck; Neng Wang
    Abstract: What is the likelihood that the U.S. will experience a devastating catastrophic event over the next few decades -- something that would substantially reduce the capital stock, GDP and wealth? What does the possibility of such an event imply for the behavior of economic variables such as investment, interest rates, and equity prices? And how much should society be willing to pay to reduce the probability or likely impact of such an event? We address these questions using a general equilibrium model that describes production, capital accumulation, and household preferences, and includes as an integral part the possible arrival of catastrophic shocks. Calibrating the model to average values of economic and financial variables yields estimates of the implied expected mean arrival rate and impact distribution of catastrophic shocks. We also use the model to calculate the tax on consumption society would accept to reduce the probability or impact of a shock.
    JEL: E20 H56
    Date: 2009–09
  36. By: Boyan Jovanovic (Department of Economics, New York University); Peter L. Rousseau (Department of Economics, Vanderbilt University)
    Abstract: Investment of U.S. firms responds asymmetrically to Tobin's Q: Investment of established firms -- `intensive' investment -- reacts negatively to Q whereas investment of new firms -- `extensive' investment -- responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. A composite-capital version of the model fits the data well using aggregates since 1900 and our new database of firm-level Qs that extend back to 1920.
    Keywords: Compatibility costs, composite capital, vintage capital, Tobin's Q, 20th century investment
    JEL: E3 N1 O3
    Date: 2009–09
  37. By: Sergio Mayordomo; Juan Ignacio Peña; Eduardo S. Schwartz
    Abstract: A common European bond would yield a common European Monetary Union risk free rate. We present tentative estimates of this common risk free for the European Monetary Union countries from 2004 to 2009 using variables motivated by a theoretical portfolio selection model. First, we analyze the determinants of EMU sovereign yield spreads and find significant effects of the credit quality, macro, correlation, and liquidity variables. However, their effects are different before and after the current financial crisis, being stronger in the latter period. Robustness tests with different data frequencies, benchmarks, liquidity variables, cross section regressions and balanced panels confirm the initial results. We propose four different estimates of the common risk free rate and show that, in most cases, this common rate could imply savings in borrowing costs for all the countries involved.
    JEL: E43 E44 G15
    Date: 2009–09
  38. By: Peter L. Rousseau (Department of Economics, Vanderbilt University); Hakan Yilmazkuday (Department of Economics, Temple University)
    Abstract: A large body of evidence links financial development to economic growth, yet the channels through which inflation affects this relationship and its stability have been less thoroughly explored. We take an econometric and graphical approach to analyzing these channels, and find that higher levels of financial development, combined with low inflation, are related to higher rates of economic growth, especially in developing countries, but that financial development loses much of its explanatory power in the presence of high inflation. In particular, small increases in the price level seem able to wipe out relatively large efficiency gains achieved through financial deepening when the annual rate of inflation lies between 4 and 19 percent, whereas the operation of the finance-growth link is less affected by higher inflation rates. Growth is generally much lower, however, in such high inflation settings where financial development is typically repressed.
    Keywords: Financial development, economic growth, inflation, cross-country analysis
    JEL: E31 E44 O3
    Date: 2009–09
  39. By: Elisaveta Archanskaïa (Observatoire Français des Conjonctures Économiques); Jerome Creel (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques)
    Abstract: This article studies the impact of oil shocks on the macroeconomy in two ways insofar unexploited in the literature. The analysis is conducted at the global level, and it explicitly accounts for the potentially changing nature of oil shocks. Based on an original world GDP series and a grouping of oil shocks according to their nature, we find that oil supply shocks negatively impact world growth, contrary to oil demand shocks, procyclical in their nature. This result is robust at the national level for the US. Furthermore, endogenous monetary policy is shown to have no countercyclical effects in the context of an oil demand shock.
    Keywords: Oil shocks, Oil demand shocks, Oil supply shocks, Causality
    JEL: E32 Q43
    Date: 2009
  40. By: Asani Sarkar
    Abstract: In responding to the severity and broad scope of the financial crisis that began in 2007, the Federal Reserve has made aggressive use of both traditional monetary policy instruments and innovative tools in an effort to provide liquidity. In this paper, I examine the Fed's actions in light of the underlying financial amplification mechanisms propagating the crisis--in particular, balance sheet constraints and counterparty credit risk. The empirical evidence supports the Fed's views on the primacy of balance sheet constraints in the earlier stages of the crisis and the increased prominence of counterparty credit risk as the crisis evolved in 2008. I conclude that an understanding of the prevailing risk environment is necessary in order to evaluate when central bank programs are likely to be effective and under what conditions the programs might cease to be necessary.
    Keywords: Credit ; Liquidity (Economics) ; Risk ; Federal Reserve Bank of New York ; Bank supervision
    Date: 2009
  41. By: Sebastian Dullien (HTW Berlin -- University of Applied Sciences); Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Ingrid Groessl (Department for Socioeconomics, Department for Economics, University of Hamburg); Michael Paetz (Department for Economics, University of Hamburg)
    Abstract: Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades.
    Keywords: EMU, convergence, stability, inflation
    JEL: E32 E61 C32
    Date: 2009–09
  42. By: David G. Blanchflower; Conall MacCoille
    Abstract: This paper uses micro-data from three surveys for the UK to consider how individuals form inflation expectations. Generally, we find significant non-response bias in all surveys, with non-respondents especially likely to be young, female, less educated and with lower incomes. A number of demographic generalizations can be made based on the surveys. Inflation expectations rise with age, but the more highly educated and home owners tend to have lower inflation expectations. These groups are also more likely to be accurate in their estimates of official inflation twelve months ahead, and have less backward-looking expectations.
    JEL: E4 E5
    Date: 2009–09
  43. By: Dennis Wesselbaum
    Abstract: This paper introduces productivity dependent firing costs in an endogenous separation New Keynesian model. By strictly respecting the bonding critique, we show that firing costs tend to increase the performance of the model along the labor market dimension but fail along the persistence dimension. Furthermore, we show that on the one hand the model needs high - unrealistic high - values of the firing costs to generate the Beveridge curve while on the other hand we are not able to find this relation in the data
    Keywords: Beveridge Curve, Productivity Dependent Firing Costs
    JEL: E24 E62 J64
    Date: 2009–09
  44. By: Bezemer, Dirk J; Werner, Richard A
    Abstract: The aim of this paper is to explore the link between credit and output in the context of a developed transition economy. Salient credit market features of these economies are (i) credit market imperfections leading to constraints on growth and (ii) the rapidly growing importance during transition of their financial sectors (the insurance, pension funds and real estate sectors). We develop a framework of credit and output including separate measures for credit to the real sector and financial sectors and for credit constraints, taking account of the role of trade credit. In our empirical work we focus on the Czech Republic because of the level of its financial development and data quality. In VAR and ARIMA analyses we find that our disaggregated measures for credit flows are better predictors of nominal growth than traditional, aggregate measures.
    Keywords: Credit; growth; transition; central Europe; Czech Republic
    JEL: E44
    Date: 2009–05
  45. By: Kim, Soyoung (Korea University); Lee, Jong-Wha (Asian Development Bank); Park, Cyn-Young (Asian Development Bank)
    Abstract: In this paper, we investigate the degree of real economic interdependence between emerging Asia and major industrial countries to shed light on the heated debate over the “decoupling” of emerging Asia. We first document the evolution of macroeconomic interdependence for emerging Asian economies through changing trade and financial linkages at both the regional and global levels. Then, by employing a panel vector autoregression (VAR) model, we estimate the degree of real economic interdependence before and after the 1997/98 Asian financial crisis. Empirical findings show that real economic interdependence increased significantly in the post-crisis period, suggesting “recoupling”, rather than decoupling, in recent years. Output shocks from major industrial countries have a significant positive effect on emerging Asian economies. More interestingly, the reverse is also true. Output shocks from emerging Asia (and the People’s Republic of China [PRC]) have a significant positive effect on output in major industrial countries. The result suggests that macroeconomic interdependence between emerging Asia and industrial countries has become “bi-directional,” defying the traditional notion of the “North–South relationship” as one of “uni-directional" dependence.
    Keywords: Regional integration; decoupling; macroeconomic interdependence; trade and financial market linkages; VAR
    JEL: E32 F15 F36 F42
    Date: 2009–06–01
  46. By: Michael C. Burda; Daniel S. Hamermesh
    Abstract: Time-diary data from four countries suggest that differences in market time between the unemployed and employed represent additional leisure and personal maintenance rather than increased household production. U.S. data for 2003-2006 show that almost none of the reduction in market work in areas of long-term high unemployment is offset by additional work at home. In contrast, in those areas where unemployment has risen cyclically, reduced market work is largely substituted by additional time in household production.
    Keywords: unemployment, time use, household production, paid work
    JEL: E24 J22 D13
    Date: 2009–09
  47. By: Ono, Masanori
    Abstract: This paper explores a financial role of Japanese general trading companies (GTCs), which act as a central point in a distribution network among group firms. I examine Meltzer’s conjecture, which holds that financially strong companies like GTCs increase trade receivables and reduce trade payables to shield their trading partners from a monetary squeeze. First, I investigate the trade credit granted to each other by GTCs and all its trade partners. The panel estimation demonstrates that both trade receivables and trade payables decrease during periods of monetary tightness and increase during those of monetary ease. In response to a change in a bank-lending indicator, there is little difference between trade receivables and payables. Thus GTCs become neither net-credit providers nor net-credit takers from this behavior. In other words, interfirm financing passing through a GTC’s balance sheet positively correlates with banking financing. Therefore, the Meltzer hypothesis does not hold for transactions between GTCs and all their trade partners. Instead, gross trade credit functions as a complement to macroeconomic bank lending. Second, I examine trade credit by dividing GTCs’ trading partners into related companies (i.e., subsidiaries and associate firms) and non-related companies. In terms of the reactions of trade credit to market financial indicators, I did not find statistically significant evidence that the Meltzer hypothesis works in either case. No matter with whom a GTC trades, interfirm financing passing through the GTC’s balance sheet moves positively in concert with banking financing. A major difference between related and non-related companies lies in the way in which trade receivables react to a GTC’s individual financial situation (that is, a firm’s individual interest expense rate minus a market’s interest rate). An increase in the interest gap induces a GTC to incur extra expenses over the market rate. In this situation, a GTC reduces trade receivables to non-related firms, but not those to related firms. This behavior eventually works as a shield, protecting their related companies from sharing the parent company’s interest costs.
    Keywords: Trade credit; bank lending; corporate financing
    JEL: E52 E44 G32
    Date: 2009–09–16
  48. By: Wong Jian Cheng; Lian Heng; Cheong Siew Ann
    Abstract: In this paper, we perform statistical segmentation and clustering analysis of the Dow Jones Industrial Average time series between January 1997 and August 2008. Modeling the index movements and log-index movements as stationary Gaussian processes, we find a total of 116 and 119 statistically stationary segments respectively. These can then be grouped into between five to seven clusters, each representing a different macroeconomic phase. The macroeconomic phases are distinguished primarily by their volatilities. We find the US economy, as measured by the DJI, spends most of its time in a low-volatility phase and a high-volatility phase. The former can be roughly associated with economic expansion, while the latter contains the economic contraction phase in the standard economic cycle. Both phases are interrupted by a moderate-volatility market, but extremely-high-volatility market crashes are found mostly within the high-volatility phase. From the temporal distribution of various phases, we see a high-volatility phase from mid-1998 to mid-2003, and another starting mid-2007 (the current global financial crisis). Transitions from the low-volatility phase to the high-volatility phase are preceded by a series of precursor shocks, whereas the transition from the high-volatility phase to the low-volatility phase is preceded by a series of inverted shocks. The time scale for both types of transitions is about a year. We also identify the July 1997 Asian Financial Crisis to be the trigger for the mid-1998 transition, and an unnamed May 2006 market event related to corrections in the Chinese markets to be the trigger for the mid-2007 transition.
    Date: 2009–04
  49. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring cross-country “contagion†effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly-cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of “early warning†systems of potential crises, which must also predict their timing.
    JEL: E65 F30
    Date: 2009–09
  50. By: Peter L. Rousseau (Department of Economics, Vanderbilt University); Paul Wachtel (Department of Economics & Sten School of Business, New York University)
    Abstract: Although the finance-growth relationship is now firmly entrenched in the empirical literature, we show that it is not as strong in more recent data as it was in the original studies with data for the period from 1960 to 1989. We consider several explanations. First, we find that the incidence of financial crises is related to the dampening of the effect of financial deepening on growth. Excessive financial deepening or too rapid growth of credit may have led to both inflation and weakened banking systems which in turn gave rise to growth-inhibiting financial crises. Excessive financial deepening may also be a result of widespread financial liberalizations in the late 1980s and early 1990s in countries that lacked the legal or regulatory infrastructure to exploit financial development successfully. However, we find little indication that liberalizations played an important direct in reducing the effect of finance. Similarly, there is little evidence that the growth of equity markets in recent years has substituted for debt financing and led to a reduced role of financial deepening on growth.
    Keywords: Finance-growth nexus, rolling regression, robustness, cross-country growth
    JEL: E44 G10 O40
    Date: 2009–09
  51. By: Manoel Bittencourt (Department of Economics, University of Pretoria)
    Abstract: We test for the populist view of state capture in Latin America be- tween 1970 and 2003. The empirical results-based on the relatively novel panel time-series data and analysis - confirm the prediction that recently-elected governments coming into power after periods of po- litical dictatorship, and which are faced with high economic inequal- ity and demand for redistribution, end up pursuing unfunded populist [re] distributive policies. These policies, in turn, lead to bursts of hyper- in?ation and therefore macroeconomic instability in the region. All in all, we suggest that the implementation of democracy as such requires not only the 'right political context'- or a constrained executive-to work well, but it also must come with certain economic institutions, (e.g. central bank independence and a credible and responsible fiscal authority), institutions which would raise the costs of pursuing populist policies in the first place.
    Keywords: Polarisation, populism, hyperinflation, Latin America
    JEL: E31 E65 N16 O23 O54
    Date: 2009–09
  52. By: Vladimir Kuzin; Massimiliano Marcellino; Christian Schumacher
    Abstract: This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model speci.cation in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coe¢ cients, whereas MF-VAR does not restrict the dynamics and therefore can su¤er from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is di¢ cult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons.
    Keywords: nowcasting, mixed-frequency data, mixed-frequency VAR, MIDAS
    JEL: E37 C53
    Date: 2009
  53. By: Stephen G. Cecchetti; Marion Kohler; Christian Upper
    Abstract: We study the output costs of 40 systemic banking crises since 1980. Most, but not all, crises in our sample coincide with a sharp contraction in output from which it took several years to recover. Our main findings are as follows. First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.
    JEL: E32 E44
    Date: 2009–09
  54. By: Moingeon, Bertrand; Yunus, Muhammad; Lehmann-Ortega, Laurence
    Abstract: The social business idea borrows some concepts from the capitalist economy, and therefore the implementation of social businesses can likewise borrow some concepts from conventional business literature. As an illustration, the notion of business model, which is currently attracting much attention from researchers, can be revisited so as to enable the building of social businesses. Social business models are needed alongside conventional ones. After defining what a social business is, the authors will describe the first endeavors to create such businesses within the Grameen Group. This in turn will lead to a discussion of the social business model.
    Keywords: Social business; business model; social business model; Grameen; Danone
    JEL: E20
    Date: 2009–02–01
  55. By: Bitros, George
    Abstract: It is ascertained that the theorem of proportionality, which maintains that replacement investment is a constant proportion of the outstanding capital stock, has several fundamental shortcomings. It derives from a model founded on assumptions that are highly restrictive and unlikely to hold in reality. It is alien to the thinking of researchers in industrial organization and other neighboring fields to economics that treat the durability of capital goods as a choice variable. It ignores several thorny conceptual and methodological issues and, perhaps most important, it may have restrained seriously the progress towards developing models based on more realistic approaches of production. However, despite its shortcomings, the theorem continues to dominate mainstream capital theory, most probably because of: a) its simplicity, and b) the lack of a model that might yield a better theorem in terms of standard criteria, like explanatory and predictive power, simplicity, fruitfulness, etc. For this reason attention is drawn to recent research which shows that a model centered on the heterogeneous structure of capital and the useful lives of its components is both feasible and exceedingly rich in theoretical and empirical implications.
    Keywords: Capital longevity; replacement; depreciation; scrappage; maintenance; utilization; obsolescence.
    JEL: E22
    Date: 2009–07–29
  56. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 85 countries; we focus on international linkages that may have allowed the crisis to spread across countries. Our model of the cross-country incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. The causes we consider are both national (such as equity market run-ups that preceded the crisis) and, critically, international financial and real linkages between countries and the epicenter of the crisis. We consider the United States to be the most natural origin of the 2008 crisis, though we also consider six alternative sources of the crisis. A country holding American securities that deteriorate in value is exposed to an American crisis through a financial channel. Similarly, a country which exports to the United States is exposed to an American downturn through a real channel. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to find strong evidence that international linkages can be clearly associated with the incidence of the crisis. In particular, countries heavily exposed to either American assets or trade seem to behave little differently than other countries; if anything, countries seem to have benefited slightly from American exposure.
    JEL: E65 F30
    Date: 2009–09
  57. By: Amir E. Khandani; Andrew W. Lo; Robert C. Merton
    Abstract: The confluence of three trends in the U.S. residential housing market---rising home prices, declining interest rates, and near-frictionless refinancing opportunities---led to vastly increased systemic risk in the financial system. Individually, each of these trends is benign, but when they occur simultaneously, as they did over the past decade, they impose an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a "ratchet" effect in which homeowner leverage is maintained or increased during good times without the ability to decrease leverage during bad times. If refinancing-facilitated homeowner-equity extraction is sufficiently widespread---as it was during the years leading up to the peak of the U.S. residential real-estate market---the inadvertent coordination of leverage during a market rise implies higher correlation of defaults during a market drop. To measure the systemic impact of this ratchet effect, we simulate the U.S. housing market with and without equity extractions, and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages. Our simulations generate loss estimates of $1.5 trillion from June 2006 to December 2008 under historical market conditions, compared to simulated losses of $280 billion in the absence of equity extractions.
    JEL: E17 E37 E47 E6 F47 G12 G13 G18 R15 R21
    Date: 2009–09
  58. By: Jury Falini
    Abstract: In this paper we compare different multifactor HJM models with humped volatility structures, to each other and to models with strictly decreasing volatility. All the models are estimated on Euribor and swap rates panel data. We develop the analysis in two steps: first we study the in-sample properties of the estimated models, then we study the pricing performance on caps. We find the humped volatility specification to greatly improve the model estimation and to provide sufficiently accurate cap prices, although the models has been calibrated on interest rates data and not on cap prices. Moreover we find the two factor humped volatility model to outperform the three factor models in pricing caps
    Keywords: Finance, interest rates, humped volatility, Kalman filter, cap and floor pricing
    JEL: E43 G12 G13
    Date: 2009–08

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