nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒10‒03
twenty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets. By Abo-Zaid, Salem
  2. Monetary Business Cycle Accounting By Sustek, Roman
  3. New Keynesian versus Old Keynesian Government Spending Multipliers. By John F. Cogan; Tobias Cwik; John B. Taylor; Volker Wieland
  4. The impact of the European Monetary Union on inflation persistence in the euro area By Meller, Barbara; Nautz, Dieter
  5. Inflation and output volatility under asymmetric incomplete information. By Giacomo Carboni; Martin Ellison
  6. Inflation and unemployment in the long run By Aleksander Berentsen; Guido Menzio; Randall Wright
  7. Testing the Monetary Policy Rule in the US: A Reconsideration of the Fed's Behaviour By Minford, Patrick; Ou, Zhirong
  8. Recovery Rates and Macroeconomic Conditions: The Role of Loan Covenants By Zhang, Zhipeng
  9. The Quantitative Importance of News Shocks in Estimated DSGE Models By Hashmat Khan; John Tsoukalas
  10. Price discovery on traded inflation expectations: does the financial crisis matter? By Schulz, Alexander; Stapf, Jelena
  11. Firm entry and monetary policy transmission under credit rationing By Kobayashi, Teruyoshi
  12. Fear of depression - Asymmetric monetary policy with respect to asset markets By Hoffmann, Andreas
  13. Inflation and growth: new evidence from a dynamic panel threshold analysis By Kremer, Stephanie; Bick, Alexander; Nautz, Dieter
  14. Possible Macroeconomic Consequences of Large Future Federal Government Deficits By Ray C. Fair
  15. A Note on the Anchoring Effect of Explicit Inflation Targets By Jan Libich
  16. Impact of tax policy in Romania on budget revenues. By Dobrota, Gabriela; Chirculescu, Felicia Maria
  17. The Monetary Policy Implications of Behavioral Asset Bubbles By ap Gwilym, Rhys
  18. Türkiye'de ve Yükselen Piyasa Ekonomilerinde Is Çevrimleri (Business Cycles in Turkey and in Emerging Market Economies) By Sumru Altug
  19. Inflation Targeting in Latin America: Toward a Monetary Union? By Marc Hofstetter
  20. Endogenous income taxes and indeterminacy in dynamic models: When Diamond meets Ramsey again. By Zhang, Yan; Chen, Yan
  21. Saving and growth under borrowing constraints explaining the "high saving rate" puzzle By Yi Wen
  22. Outside versus inside bonds: A Modigliani-Miller type result for liquidity constrained economies By Aleksander Berentsen; Christopher Waller
  23. Credit Constraints and Consumer Spending By Kimberly Beaton
  24. Has Macro Progressed? By Ray C. Fair
  25. Reforms and Counter-Reforms in Bolivia By Luis Carlos Jemio; Fernando Candia; José Luis Evia
  26. Global rebalancing in a three-country model By Engler, Philipp

  1. By: Abo-Zaid, Salem
    Abstract: Recent empirical evidence suggests that nominal wages in the U.S. are downwardly rigid. This paper studies optimal monetary policy in a labor search and matching framework under the presence of Downward Nominal Wage Rigidity (DNWR). The study shows that when nominal wages are downwardly rigid, optimal monetary policy targets a positive inflation rate; the annual long-run inflation rate is around 2 percent. Positive inflation in this environment “greases the wheels” of the labor market by facilitating real wage adjustments, and hence it eases job creation and prevents excessive increase in unemployment. In addition, there is an asymmetry in the response of the economy to positive and negative productivity shocks, particularly those of large sizes. Finally, the optimal long-run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets, suggesting that the nature of the labor market in which DNWR is studied can matter for policy recommendations.
    Keywords: Downward Nominal Wage Rigidity; Optimal Monetary Policy; Long Run Inflation Rate; Labor Market Frictions; Labor Search and Matching.
    JEL: E5 E4 E3
    Date: 2009–09–24
  2. By: Sustek, Roman
    Abstract: This paper investigates the quantitative importance of various types of frictions for inflation and nominal interest rate dynamics by extending business cycle accounting to monetary models. Representing a variety of real and nominal frictions as `wedges' to standard equilibrium conditions allows a quantitative assessment of those frictions. Decomposing the data into movements due to these wedges shows that frictions that are equivalent to wedges in TFP and equilibrium conditions for asset markets are essential. In contrast, wedges in equilibrium conditions for capital accumulation and the resource constraint, and wedges capturing distortionary effects of sticky prices, play only a secondary role.
    Keywords: Business cycle accounting; inflation; nominal interest rate
    JEL: E43 E32 E31 E52
    Date: 2009–09–25
  3. By: John F. Cogan (Stanford University - The Hoover Institution on War, Revolution and Peace, HHMB Rm 347, Stanford, CA 94305, USA.); Tobias Cwik (Goethe University Frankfurt, Grüneburgplatz 1, Uni-Pf. 77, D-60323 Frankfurt am Main, Germany.); John B. Taylor (Stanford University, Stanford, CA 94305, USA.); Volker Wieland (University of Frankfurt, P.O. Box 94, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany.)
    Abstract: Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large. JEL Classification: C52, E62.
    Keywords: Fiscal Multiplier, New Keynesian Model, Fiscal Stimulus, Government Spending, Macroeconomic Modeling.
    Date: 2009–09
  4. By: Meller, Barbara; Nautz, Dieter
    Abstract: This paper uses the European Monetary Union (EMU) as a natural experiment to investigate whether more effective monetary policy reduces the persistence of inflation. Taking into account the fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area probably as a result of the more effective monetary policy of the ECB.
    Keywords: Monetary Policy Effectiveness and Inflation Persistence,Panel Test for Fractional Integration,Change in Inflation Persistence
    JEL: C22 C23 E31
    Date: 2009
  5. By: Giacomo Carboni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Ellison (Department of Economics, University of Oxford, Manor Road Building, Oxford, OX1 2UQ, United Kingdom.)
    Abstract: The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility. JEL Classification: E32, E37, E52.
    Keywords: Imperfect credibility, Asymmetric information, Signal extraction.
    Date: 2009–09
  6. By: Aleksander Berentsen; Guido Menzio; Randall Wright
    Abstract: We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first document in the data a positive relation between these variables at low frequencies. We then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory, providing a unified theory for analyzing labor and goods markets. The calibrated model shows that money can account for a sizable fraction of trends in unemployment. We argue it matters, qualitatively and quantitatively, whether one uses monetary theory based on search and bargaining, or an alternative ad hoc specification.
    Date: 2009–09
  7. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy - an optimal timeless rule, a Taylor Rule and another with interest rate smoothing - with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor Rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.
    Keywords: Monetary policy; Kew Keynesian model; the 'target rule'; Taylor-type rules; Bootstrap simulation; VAR; Indirect inference; Wald statistic
    JEL: E12 E17 E42 E52 E58
    Date: 2009–09
  8. By: Zhang, Zhipeng
    Abstract: For U.S. firms from 1988 to 2007, firms with stricter loan covenants had higher firm-level default recovery rates. Covenants were stricter, moreover, when set during downturns in the business cycle. This implies a negative dependence of recovery rates on lagged macroeconomic conditions. That is, bank loan contracts established in economic recessions have tight covenants, leading later to higher recovery rates. My empirical evidence suggests that private creditors have significant influence on firms' bankruptcy decisions through the channel of covenants in debt contracts.
    Keywords: Recovery rate; Bankruptcy; Loan covenant; Creditor control; Business cycle
    JEL: E32 G32 G33 G21
    Date: 2009–09–02
  9. By: Hashmat Khan (Department of Economics, Carleton University); John Tsoukalas (Department of Economics, University of Nottingham)
    Abstract: We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and shocks, including news shocks to total factor productivity (TFP) and investment-specic (IS) technology, using quarterly US data from 1954-2004 and Bayesian methods. When all types of shocks are considered, TFP news and IS news compete with other atemporal and intertemporal shocks and account for less than 1.5% and 0.15% of the unconditional variance of output growth, respectively. In the fleexible price-wage environment, the contributions of the two shocks are 2.4% and 0%, respectively. When we exclude an atemporal (price markup) shock, the role for TFP news rises but the t of that model is substantially poorer relative to the benchmark model. Based on the variance decompositions and impulse responses, our ndings suggest that news shocks are likely to be less important in estimated sticky price-wage DSGE models relative to perfectly competitive models.
    Keywords: News shocks, Business cycles, DSGE models
    JEL: E2 E3
    Date: 2009–09–22
  10. By: Schulz, Alexander; Stapf, Jelena
    Abstract: We analyze contributions of different markets to price discovery on traded inflation expectations and how it changed during the financial crisis. The quicker information is processed on one market and the less one market is disrupted by the financial crisis the more valuable is its information for central banks and market participants. We use a new high frequency data set on inflation-indexed and nominal government bonds as well as inflation swaps to calculate information shares of break-even inflation rates in the euro area and the US. For maturities up to 5 years new information comes from both the swap and the bond markets. For longer maturities the swap market provides less and less information in the euro area. In the US where the market volume of inflation-linked bonds is large the bond market dominates the price discovery process for all maturities. The severe financial crisis that spread out in Autumn 2008 drove a wedge between bond and swap break-even inflation rates in both currencies. Price discovery ceased to take place on the swap market. Disruptions coming from the short-end of the market even separated price formation on both segments for maturities of up to 6 years in the US. Against the backdrop of the most severe financial crisis in decades contributions to price formation concentrated a lot more on the presumably safest financial instrument: government bonds.
    Keywords: Inflation-linked bonds,inflation swaps,price discovery,financial crisis
    JEL: E43 F37 G15
    Date: 2009
  11. By: Kobayashi, Teruyoshi
    Abstract: This paper presents an additional credit channel for monetary policy that would arise in the presence of credit rationing. I formally examine a situation in which new entry firms have no choice but to borrow funds from a financial intermediary to cover entry costs, taking into account the fact that most of the small and young firms are bank dependent in practice. It turns out that the presence of nominal debt contracts allows the central bank to influence firm entry and thereby aggregate output through its effect on the severity of credit rationing even in the absence of price stickiness. This is because a decrease in the nominal interest rate reduces the cost of funds for lending, which enables financial intermediaries to extend credit to less creditworthy firms. This ``credit rationing effect" is absent in the conventional balance-sheet channel, where loan rates are determined such that credit demand is equal to credit supply.
    Keywords: credit channel; credit rationing; firm entry; monetary policy transmission.
    JEL: E32 E52 E44
    Date: 2009–09–28
  12. By: Hoffmann, Andreas
    Abstract: The paper suggests that during Greenspan’s incumbency the fear of depression caused the Federal Reserve to lower interest rates rapidly when asset price developments suggested a crisis potential. Whereas, when asset markets were growth-supporting, it did not raise interest rates. This asymmetry contributed to a downward-trend in interest rates which pushed US interest rates down to zero in the current crisis.
    Keywords: Fear of depression; Monetary policy; Taylor rule; Asset prices
    JEL: E58 E52 D82
    Date: 2009–09–15
  13. By: Kremer, Stephanie; Bick, Alexander; Nautz, Dieter
    Abstract: We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries.
    Keywords: Inflation Thresholds,Inflation and Growth,Dynamic Panel Threshold Model
    JEL: E31 C23 O40
    Date: 2009
  14. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper uses a macroeconometric model of the U.S. economy to analyze possible macroeconomic consequences of the large future federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. The results are bleak. Assuming no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. These estimates are in line with other estimates. If the dollar depreciates in response to the deficits, inflation increases but the effect on the debt/GDP ratio is modest. It does not appear that the United States can inflate its way out of its deficit problem. If in addition U.S. stock prices fall, this makes matters worse by lowering output. Large personal tax increases or transfer payment decreases solve the deficit problem, but at a cost of considerable lost output over a decade. The Fed's ability to offset these losses is modest according to the model. Introducing a national sales tax is more contractionary than is increasing personal income taxes or decreasing transfer payments.
    Keywords: Federal deficit, Federal debt
    JEL: E17
    Date: 2009–09
  15. By: Jan Libich
    Abstract: Empirical literature provided convincing evidence that explicit (ie legislated) inflation targets anchor expectations. We propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework we identify several factors that influence whether and how strongly expectations are anchored, namely: (i) the public’s cost of decision-making, (ii) the public’s inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.
    JEL: E61 E63
    Date: 2009–08
  16. By: Dobrota, Gabriela; Chirculescu, Felicia Maria
    Abstract: Using the state fiscal levers in order to influence the economic system and the macroeconomic variables is known from the ancient times. Fiscal policy decisions reflect the related tax system and ensure its functionality in order to obtain the aimed economic effects. Analysis of fiscal policy measures and their effects should follow the level of taxation, the budget deficit, the level of the general consolidated budget revenues in line with GDP. The paper work presents practical aspects of fiscal policy and measures which should be adopted in the Romanian economy.
    Keywords: Fiscal policy budget revenues global domestic product taxation degree
    JEL: E62 E6
    Date: 2009
  17. By: ap Gwilym, Rhys
    Abstract: I introduce behavioral asset pricing rules into a wider dynamic stochastic general equilibrium framework. Asset price bubbles emerge endogenously within the model. I find that in this model the only monetary policy that would be likely to enhance welfare is a counter-intuitive 'running with the wind' policy. I conclude that the optimal policy is highly dependent on the nature of the behavioral rules that are stipulated. Given that monetary authorities have limited information about the ways in which agents actually behave, a systematic monetary policy response to asset price misalignments is unlikely to enhance welfare.
    Date: 2009–09
  18. By: Sumru Altug (Koc University and Centre for Economic Policy Research)
    Abstract: Is çevrimlerinin tanim ve özelliklerinin arastirilmasi modern makroekonomi kuraminda önemli bir yer tutmaktadir. Bu çalismamizda Türkiye’de ve yükselen piyasa ekonomilerinde is çevrimlerinin gerek ampirik gerekse teorik yönden ele alip ilk olarak tarih ve süre araliklarinin belirlenmesi için kullanilan yöntemleri ve Türkiye açisindan uygulamalarini inceleyecegiz. Ikincisi, Türkiye gibi diger yükselen piyasa ekonomilerinde yasanan is çevrimlerinin ayirtedici özelliklerini (stylized facts) ve kaynaklarini ele alacagiz. Bu baglamda yükselen piyasa ekonomilerideki iktisadi dalgalanmalari Reel Is Çevrim modelleri çerçevesinde soklar ve aktarim mekanizmalari açisindan inceleyecegiz. Trend büyümedeki meydana gelen soklarin ve özellikle kriz dönemlerinde ortaya çikan faiz soklarinin önemini arastiracagiz. The analysis of business cycles and their characteristics constitutes an important area of research in the modern economics literature. In this study, we will examine business cycles in Turkey and in emerging market economies both from an empirical and a theoretical perspective. First, we will discuss the methods used for determining business cycle turning points and their applications in the context of Turkey. Second, we will consider the stylized facts of business cycles and their determinants for emerging market economies. Specifically, we will analyze the shocks and propagation mechanisms of business cycles in emerging market economies based on Real Business Cycle modeling, and investigate the importance of shocks to trend growth and the role of interest rate shocks, especially during crisis periods.
    Keywords: Yükselen piyasa ekonomileri, iktisadi dalgalanmalarin tarih ve süre araliklarinin belirlenmesi, soklarin kaynagi, kalici ve geçici soklar, faiz soklari
    JEL: E32 F32 F41
    Date: 2009
  19. By: Marc Hofstetter
    Abstract: In recent years, five of the main economies in Latin America —Brazil, Chile, Mexico, Colombia and Peru— have adopted Inflation Targeting regimes. In the context of these converging monetary strategies, would the IT nations in the region be better o adopting a common currency? Would they be better o if they dollarize? Would a common currency be a better alternative than dollarization? The answers to these questions are yes, yes and maybe.
    Date: 2009–08–04
  20. By: Zhang, Yan; Chen, Yan
    Abstract: This paper introduces fiscal increasing returns, through endogenous labor income tax rates as in Schmitt-Grohe and Uribe (1997), into the overlapping generations model with endogenous labor, consumption in both periods of life and homothetic preferences (e.g., Lloyd-Braga, Nourry and Venditti, 2007). We show that under numerical calibrations of the parameters, local indeterminacy can occur for distortionary tax rates that are empirically plausible for the U.S. economy, provided that the elasticity of capital-labor substitution and the wage elasticity of the labor supply are large enough, and the elasticity of intertemporal substitution in consumption is slightly greater than unity. These indeterminacy conditions are similar to those obtained within infinite horizon models and from this point of view, Diamond meets Ramsey again.
    Keywords: Indeterminacy; Endogenous labor income tax rate.
    JEL: E32 C62
    Date: 2009–10–01
  21. By: Yi Wen
    Abstract: Fast-growing economies tend to have extremely high saving rates. Empirical evidence suggests that this positive correlation holds largely because high growth leads to high saving, not the other way around. Such empirical evidence is inconsistent with the permanent-income hypothesis, but consistent with standard neoclassical growth theory, since high productivity growth raises the rate of returns to investment, hence stimulating saving through high real interest rates. However, fast-growing economies have not just high saving rates, but also low interest rates. Why would households save excessively to finance firms? investment when the interest rate on their savings is so low? This paper shows that precautionary saving under borrowing constraints can solve the puzzle. Borrowing constraints make an individual?s marginal propensity to consume negatively dependent on her permanent income, so that high growth can lead to substantially increased saving without high interest rates. In other words, precautionary saving is able to support a large spread between the deposit rate and the rate of returns to capital; consequently, fast-growing economies can exhibit not only astonishingly high saving rates despite low deposit rates, but also undiminished rates of return to capital despite large investment-to-output ratios.
    Keywords: Saving and investment ; Consumer behavior
    Date: 2009
  22. By: Aleksander Berentsen; Christopher Waller
    Abstract: When agents are liquidity constrained, two options exist — sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government bonds (outside bonds) and in the other they can borrow (issue inside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.
    Keywords: Liquidity, financial markets, monetary policy, search
    JEL: E4 E5
    Date: 2009–09
  23. By: Kimberly Beaton
    Abstract: This paper examines the relationship between aggregate consumer spending and credit availability in the United States. The author finds that consumer spending falls (rises) in response to a reduction (increase) in credit availability. Moreover, she provides a formal assessment of the possibility that credit availability is particularly important for consumer spending when it undergoes large changes. In this respect, she estimates a consumption function in which only large expansions and contractions in credit affect spending. She concludes that large changes in credit availability are particularly important for consumers' spending decisions. As should be expected, these periods tend to be associated with periods of high economic uncertainty. These results show that credit availability should be taken into account when modeling and forecasting consumer spending.
    Keywords: Credit and credit aggregates; Domestic demand and components; Recent economic and financial developments
    JEL: E21 E27 E44 E51 E58
    Date: 2009
  24. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: There have been a number of recent papers arguing that there has been considerable convergence in macro research and to the good. This paper considers the question whether what has been converged to is good. Has progress been made in understanding how the macro economy works?
    Keywords: Macro process
    JEL: E10
    Date: 2009–09
  25. By: Luis Carlos Jemio (Institute for Advanced Development Studies); Fernando Candia (EFECE & Asociados); José Luis Evia (Bolivian Catholic University)
    Abstract: This paper analyzes the process of reforms and counter-reforms witnessed in Bolivia over the last two and a half decades, and the effects these processes have had on productivity. In addition, the paper discusses the changing nature of the policy- making processes underlying the reform and counter-reform processes, in terms of the actors who participated in the PMP, policy domains, and arenas where the PMP was shaped, and the currencies used by different actors in order to press for their demands. Moreover, the paper analyzes the factor underlying the changes which took place in the support given by the population to the reform process.
    Keywords: Reforms, Productivity, Political Economy, Bolivia
    JEL: E60
    Date: 2009–06
  26. By: Engler, Philipp
    Abstract: This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main finding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the Bretton-Woods-II regime of unilaterally fixed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US deficit closes. The flip side of this result is that Europe will face a huge real appreciation and an enormous current account deficit. With floating exchange rates worldwide, the impact on Europe will be limited while Asia´s tradables sector will shrink.
    Keywords: Global imbalances,US current account deficit,dollar adjustment,sectoral adjustment
    JEL: E2 F32 F41
    Date: 2009

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