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

  1. The Gambia: Demand for Broad Money and Implications for Monetary Policy Conduct By Subramanian S. Sriram
  2. Forecasting Inflation in Sudan By Kenji Moriyama; Abdul Naseer
  3. Requirements for Using Interest Rates as an Operating Target for Monetary Policy:The Case of Tunisia By Alexandre Chailloux; Alain Durré; Bernard Laurens
  4. Macroeconomic Responses to Terms-of-Trade Shocks: A Framework for Policy Analysis for the Argentine Economy By Pelin Berkmen
  5. Deteriorating Public Finances and Rising Government Debt: Implications for Monetary Policy By Lillian Cheung; Chi-Sang Tam; Jessica Szeto
  6. Euro Area Monetary Policy in Uncharted Waters By Emil Stavrev; Martin Cihák; Thomas Harjes
  7. Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model By Adolfson, Malin; Laseén, Stefan; Lindé, Jesper; Svensson, Lars E.O.
  8. The Instability in the Monetary Policy Reaction Function and the Estimation of Monetary Policy Shocks By Kishor, N. Kundan; Newiak, Monique
  9. "What Should Inflation Targeting Countries Do When Oil Prices Rise and Drop Fast?" By Nicoletta Batini; Eugen Tereanu
  10. Monetary Policy and the Central Bank in Jordan By Samar Maziad
  11. Measures of Underlying Inflation in Sri Lanka By Magnus Saxegaard; Souvik Gupta
  12. Macroeconomic Fluctuations in the Caribbean: the Role of Climatic and External Shocks By Sebastian Sosa; Paul Cashin
  13. International Evidence on Recovery from Recessions By Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena
  14. Optimal Monetary and Fiscal Policy with Limited Asset Market Participation By Sven Jari Stehn
  15. Identification of Macroeconomic Factors in Large Panels By Lasse Bork; Hans Dewachter; Romain Houssa
  16. When is the government spending multiplier large? By Lawrence Christiano; Martin Eichenbaum; Sergio Rebelo
  17. Monetary Policy and Real Wage Cyclicality By Chandarath Amarasekara; George Bratsiotis
  18. Broad Money Demand and Asset Substitution in China By Ge Wu
  19. Disasters Risk and Business Cycles By François Gourio
  20. The Role of Transparency in the Conduct of Monetary Policy By Makoto Minegishi; Boris Cournède
  21. Monetary Policy and Asset Prices in a Small Open Economy: A Factor-Augmented VAR Analysis for Singapore By Hwee Kwan Chow; Keen Meng Choy
  22. What Drives China's Interbank Market? By Nathaniel John Porter; TengTeng Xu
  23. Capital Requirements and Business Cycles with Credit Market Imperfections By Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
  24. Balance of Payments Anti-Crises By Michael Kumhof; Isabel K. Yan
  25. An Extended Macro-Finance Model with Financial Factors By Dewachter, Hans; Iania, Leonardo
  26. How large are the effects of tax changes? By Carlo Favero; Francesco Giavazzi
  27. Panacea, Curse, or Nonevent? Unconventional Monetary Policy in the United Kingdom By André Meier
  28. In Search of Successful Inflation Targeting: Evidence from an Inflation Targeting Index By Yanliang Miao
  29. The Drivers of Housing Cycles in Spain By Pau Rabanal; Oriol Aspachs-Bracons
  30. Country Experiences with the Introduction and Implementation of Inflation Targeting By Inci Ötker; Charles Freedman
  31. Fiscal Cycles in the Caribbean By Juliana Dutra Araujo
  32. Interest Rate Liberalization in China By Nathaniel John Porter; Elöd Takáts; Tarhan Feyzioglu
  33. How Effective is Fiscal Policy Response in Systemic Banking Crises? By Carlos Mulas-Granados; Emanuele Baldacci; Sanjeev Gupta
  34. India’s Experience with Fiscal Rules: An Evaluation and The Way Forward By Alejandro Simone; Petia Topalova
  35. Modeling with Macro-Financial Linkages: Credit and Policy Shocks in Emerging Markets By Inci Ötker; Jaromir Benes; David Vávra
  36. The Macroeconomic Performance of the Inflation Targeting Policy: An Approach Based on the Evolutionary Co-spectral Analysis By Zied Ftiti
  37. Banking Crises and the Rules of the Game By Charles Calomiris
  38. The Unemployment Volatility Puzzle: The Role of Matching Costs Revisited By Silva , José Ignacio; Toledo, Manuel
  39. UK Macroeconomic Forecasting with Many Predictors: Which Models Forecast Best and When Do They Do So? By Gary Koop; Dimitris Korobilis
  40. The Life-Cycle and the Business-Cycle of Wage Risk: A Cross-Country Comparison By Bayer, Christian; Juessen, Falko
  41. Improving Unemployment Rate Forecasts Using Survey Data By Österholm, Pär
  42. Employment, Wages, and the Economic Cycle: Differences between Immigrants and Natives By Dustmann, Christian; Glitz, Albrecht; Vogel, Thorsten
  43. Banks and Real Estate Prices By Hott, Christian
  44. A bayesian estimation of a DSGE model with financial frictions By Rossana Merola
  45. Capacity Utilisation, Constraintes and Price Adjustments under the Microscope By Lein, Sarah M.; Köberl, Eva
  46. Macroeconomic Fundamentals, Price Discovery and Volatility Dynamics in Emerging Markets By Jochen R. Andritzky; Andreas Jobst; Sylwia Barbara Nowak; Natalia T. Tamirisa
  47. Firing Tax vs. Severance Payment - An Unequal Comparison By Wesselbaum, Dennis
  48. The Consumption Response to Income Changes By Tullio Jappelli; Luigi Pistaferri
  49. Power Fluctuations and Political Economy By Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
  50. Credit rationing and credit view: empirical evidence from loan data By Leonardo Becchetti; Melody Garcia; Giovanni Trovato
  51. External scale economies in manufacturing sector of Pakistan: a comparison of large scale manufacturing sector of Sindh and Punjab By Zafar, Sohail; Ahmed, Vaqar
  52. Supply-side effects of strong energy price hikes in German industry and transportation By Knetsch, Thomas A.; Molzahn, Alexander
  53. Economic Literacy: An International Comparison By Tullio Jappelli

  1. By: Subramanian S. Sriram
    Abstract: This paper evaluates the demand for broad money (M2) in The Gambia for January 1988-June 2007. There appears to be a long-run relationship for demand for real M2, but the relationship is not stable. Exogenous output shocks, financial innovation, changes in income velocity, and inadequate data quality contribute to the instability. The authorities may need to apply the monetary targeting regime flexibly in the overall objective of preserving price stability. A possible option for The Gambia is to become an inflation targeter lite.
    Keywords: Central bank policy , Commercial banks , Demand for money , Economic growth , Economic models , Financial sector , Gambia, The , Inflation targeting , Interest rates on deposits , Liquidity , Monetary policy , Price stabilization , Sub-Saharan Africa , Time series ,
    Date: 2009–09–10
  2. By: Kenji Moriyama; Abdul Naseer
    Abstract: This paper forecasts inflation in Sudan following two methodologies: the Autoregressive Moving Average (ARMA) model and by looking at the leading indicators of inflation. The estimated ARMA model remarkably tracks the actual inflation during the sample period. The Granger causality test suggests that private sector credit and world wheat prices are the leading indicators explaining inflation in Sudan. Inflation forecasts based on both approaches suggest that inflationary pressures for 2009 and 2010 will be modest and that inflation will remain in single-digits, assuming that prudent macroeconomic policies are maintained.
    Keywords: Central banks , Commodity price fluctuations , Credit expansion , Data analysis , External shocks , Forecasting models , Inflation , Inflation targeting , Monetary policy , Money supply , Private sector , Sudan , Wheat ,
    Date: 2009–06–24
  3. By: Alexandre Chailloux; Alain Durré; Bernard Laurens
    Abstract: This paper discusses the use of interest rates as the operating target for monetary policy in Tunisia and the roadmap for establishing the other building blocks of an inflation targeting framework. It argues that strengthening the effectiveness of the current monetary policy framework will facilitate the adoption of inflation targeting over time.
    Keywords: Economic models , Economic reforms , Financial sector , Inflation targeting , Interest rates , Liquidity management , Monetary operations , Monetary policy , Money markets , Tunisia ,
    Date: 2009–07–16
  4. By: Pelin Berkmen
    Abstract: This paper presents a version of the global integrated monetary fiscal (GIMF) model adapted and calibrated to the Argentine economy. The model replicates the effect of the strong improvement in Argentina's terms of trade stemming from higher world commodity prices as well as other key economic trends in Argentina during the period 2003-2007. The model can be used to assess the potential impact of different combinations of monetary and fiscal policies on output, inflation, and the external trade.
    Keywords: Argentina , Commodity prices , Demand , Economic models , External shocks , Fiscal policy , Inflation , International trade , Monetary policy , Price increases , Revenues , Terms of trade , Time series ,
    Date: 2009–05–29
  5. By: Lillian Cheung (Research Department, Hong Kong Monetary Authority); Chi-Sang Tam (Research Department, Hong Kong Monetary Authority); Jessica Szeto (Research Department, Hong Kong Monetary Authority)
    Abstract: The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper uses an error-correction model to assess the effect of growing government debt on long-term real interest rates by drawing on empirical evidence from the US. The results show that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points. We also discuss the economic consequences of a rise in the world long-term interest rates, and draw implications for longer-term growth and the conduct of monetary policy in the Asian economies.
    Keywords: Public debt, fiscal policy, monetary policy, long term interest rate, real interest rate, error-correction model
    JEL: E43 E47 E52 E62 H63
    Date: 2009–08
  6. By: Emil Stavrev; Martin Cihák; Thomas Harjes
    Abstract: We analyze the European Central Bank's (ECB's) response to the global financial crisis. Our results suggest that even during the crisis, the core part of ECB's monetary policy transmission-from policy rates to market rates-has continued to operate, but at a decreased efficiency. We also find some evidence that the ECB's non-standard measures, namely the lengthening of the maturity of monetary policy operations and the provision of funds at the fixed rate, reduced money market term spreads, facilitating the pass-through from policy to market rates. Furthermore, the results imply that the substantial increase in the ECB's balance sheet may have contributed to a reduction in government bond term spreads.
    Keywords: Central bank policy , Deflation , Economic models , European Monetary System , European Union , Financial crisis , Inflation , Liquidity controls , Monetary policy , Monetary transmission mechanism ,
    Date: 2009–08–31
  7. By: Adolfson, Malin (Monetary Policy Department, Central Bank of Sweden); Laseén, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Division of International Finance); Svensson, Lars E.O. (Executive Board)
    Abstract: This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank’s empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
    Keywords: Optimal monetary policy; instrument rules; open-economy DSGE models; propagation of shocks; impulse responses; output gap; potential output
    JEL: E52 E58
    Date: 2009–08–01
  8. By: Kishor, N. Kundan; Newiak, Monique
    Abstract: This paper uses the conventional wisdom about the shift in the monetary policy stance in 1979 to compute monetary policy shocks by estimating different monetary policy reaction functions for the pre-1979 and post-1979 time periods. We use the information from the internal forecasts of the Federal Reserve to derive monetary policy shocks. The results in this paper show that a monetary policy shock in the pre-1979 period affects output and prices much more strongly and quickly than what has been reported in the literature for the full sample. Our findings suggest that the dynamic response of output and prices to a monetary policy shock declined significantly between 1980-2001. We argue that this diminished response to the monetary policy shock is the result of a successful monetary policy that has led to a less volatile economy.
    Keywords: Monetary Policy Shocks; Greenbook data; Reaction Function
    JEL: E32 E58 E52
    Date: 2009–06–18
  9. By: Nicoletta Batini; Eugen Tereanu
    Abstract: After a long period of global price stability, in 2008 inflation increased sharply following unprecedented increases in the price of oil and other commodities, notably food. Although inflation remained lower and growth higher in inflation targeting countries than elsewhere, almost everywhere price stability seemed in jeopardy as consumer prices kept surging and central banks struggled to maintain expectations anchored. The rapid drop in energy and food prices that later accompanied the world slowdown helped avert the worse, but inflation stayed high in many inflation targeting countries. This paper uses a small open-economy DSGE model to design the correct monetary policy response to a protracted supply shock of the kind observed today, and explains how to choose optimal policy horizons under such shock. Using a version of the model with Kalman learning, the paper also evaluates the implications of a loss of target credibility, showing how rules must be adjusted when the authorities' commitment to low inflation has been eroded. The appropriate response to future evolutions of the price of oil, including to a large downward correction as recently observed, is also evaluated.
    Keywords: Agricultural commodities , Agricultural prices , Central banks , Commodity price fluctuations , Consumer prices , Demand , Economic models , External shocks , Inflation , Inflation targeting , Monetary policy , Oil prices , Price stabilization ,
    Date: 2009–05–28
  10. By: Samar Maziad
    Abstract: The Central Bank of Jordan (CBJ) and its operational independence changed over time in line with the evolution of the monetary policy framework and as a result of the currency crisis in the late 1980s. The paper examines the developments of the CBJ, its independence in conducting monetary policy and the various instruments at its disposal, with special focus on the certificates of deposit (CDs) market, the main monetary policy instrument, and the treasury bill market. The paper also examines the issue of the autonomy of monetary policy in Jordan given the influence of world interest rates. Although, Jordan operates an exchange rate peg, which has been fixed to the USD since 1995, there is some room for flexibility in operating monetary policy in the short-run, where the CBJ has some autonomy in determining the spread between domestic and US interest rates. VAR and VECM results suggest that the response of the policy rate in Jordan to innovations in the US Federal Fund's rate is less than one-for-one. In the short-run, the CBJ appears to conduct monetary policy in response to domestic inflation and a measure of the domestic output gap.
    Keywords: Central bank autonomy , Central bank role , Central banks , Economic models , Exchange rate regimes , Jordan , Monetary policy , Monetary policy instruments ,
    Date: 2009–09–09
  11. By: Magnus Saxegaard; Souvik Gupta
    Abstract: During the first half of 2008, Sri Lanka witnessed significantly higher inflation than most other emerging Asian countries. Inflation has since declined amid declining world commodity prices and tight monetary policy. Given the sensitivity to global commodity prices, a core inflation measure could be useful for monetary policy. The purpose of this paper is to compare the performance of Sri Lanka's existing official measure of core inflation against alternative measures. Our findings suggest that the existing measure does contain information about the future path of headline information, but may be inadequate as a communication tool for the Central Bank.
    Keywords: Central bank policy , Consumer price indexes , Economic models , Inflation , Monetary policy , Performance indicators , Price structures , Sri Lanka ,
    Date: 2009–08–10
  12. By: Sebastian Sosa; Paul Cashin
    Abstract: This paper develops country-specific VAR models with block exogeneity restrictions to analyze how exogenous factors affect business cycles in the Eastern Caribbean. It finds that external shocks play a key role, explaining more than half of macroeconomic fluctuations in the region. Domestic business cycles are especially vulnerable to changes in climatic conditions, with a natural disaster leading to an immediate and significant fall in output-but the effects do not appear to be persistent. Oil price and external demand shocks also contribute significantly to domestic macroeconomic fluctuations. An increase in oil prices (external demand) is contractionary (expansionary), and the effects dissipate up to three years after the shock.
    Keywords: Business cycles , Caribbean , Climatic changes , Cross country analysis , Economic models , External shocks , Regional shocks ,
    Date: 2009–07–28
  13. By: Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena
    Abstract: Although negative shocks have persistent effects on output on average, this paper shows that macroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence of the shock. Indeed, monetary and fiscal stimulus and foreign aid can spur a rebound, with impacts that are asymmetrically stronger than in nonrecovery years. Real depreciation and the exchange rate regime also have asymmetric growth effects in a recovery year relative to other years of expansion. Recoveries are more sluggish in open economies, partly because fiscal policy is less effective than in closed economies.
    Keywords: Banking crisis , Business cycles , Concessional aid , Developed countries , Economic growth , Economic recession , Economic recovery , Emerging markets , Exchange rate regimes , External shocks , Fiscal policy , Monetary policy , Real effective exchange rates , Trade policy ,
    Date: 2009–08–05
  14. By: Sven Jari Stehn
    Abstract: This paper characterises the jointly optimal monetary and fiscal stabilisation policy in a new Keynesian model that allows for consumers who lacking access to asset markets consume their disposable income each period. With full asset market participation, the optimal policy relies entirely on the interest rate to stabilise cost-push shocks and government expenditure is not changed. When asset market participation is limited, there is a case for fiscal stabilisation policy. Active use of public spending raises aggregate welfare because it enables a more balanced distribution of the stabilisation burden across asset-holding and non-asset-holding consumers. The optimal response of government expenditure is sensitive to the financing scheme and whether the policymaker has access to a targeted transfer that can directly redistribute resources between consumers.
    Keywords: Capital markets , Economic models , Financial assets , Fiscal policy , Government expenditures , Monetary policy , Stabilization measures ,
    Date: 2009–07–08
  15. By: Lasse Bork (Finance Research Group, Aarhus School of Business, University of Aarhus and CREATES); Hans Dewachter (CES, University of Leuven, RSM Rotterdam and CESIFO.); Romain Houssa (CRED and CEREFIM, University of Namur, CES, University of Leuven)
    Abstract: This paper presents a dynamic factor model in which the extracted factors and shocks are given a clear economic interpretation. The eco- nomic interpretation of the factors is obtained by means of a set of over- identifying loading restrictions, while the structural shocks are estimated following standard practices in the SVAR literature. Estimators based on the EM algorithm are developped. We apply this framework to a large panel of US monthly macroeconomic series. In particular, we identify nine macroeconomic factors and discuss the economic impact of monetary pol- icy stocks. The results are theoretically plausible and in line with other findings in the literature.
    Keywords: Monetary policy, Business Cycles, Factor Models, EM Algorithm
    JEL: E3 E43 C51 E52 C33
    Date: 2009–09–01
  16. By: Lawrence Christiano; Martin Eichenbaum; Sergio Rebelo
    Abstract: When the nominal interest rate is constant.
    JEL: E62
    Date: 2009–10
  17. By: Chandarath Amarasekara; George Bratsiotis
    Abstract: Several recent studies highlight the potential bias that may arise in measuring real wage cyclicality. This paper points to the important role of monetary policy in determining the latter. Using a simple model that diverts its focus from relative nominal price and wage rigidities, we show that other things kept equal, the degree and direction of real wage cyclicality is determined by the interaction of (i) the returns to scale in production, (ii) the nature of aggregate shocks, and (iii) monetary policy. Given that production technology is fairly constant in the short run, we suggest that variations in the real wage-output covariance depend largely on the latter two. Empirical evidence from eight major OECD countries appears to be consistent with this claim.
    Date: 2009
  18. By: Ge Wu
    Abstract: Recent changes to China's financial system, in particular ongoing interest rate liberalization, gradual movement toward a more flexible exchange rate regime, and rapid development of capital markets, have changed substantially the environment in which monetary policy operates. In light of these changes, we estimate an error correction model using a General-to-Specific methodology and confirm that a stable broad money demand function exists taking proper account of asset substitution, with an income elasticity of less than unity. Current inflation is found to have a significant negative impact on the real money demand. However, money demand does not appear very sensitive to interest rates, possibly reflecting their partial liberalization. Changes in the exchange rate also do not affect money demand significantly, but expectations of a further renminbi appreciation since 2005 appears to induce more money demand. Stock prices are statistically insignificant despite recent investors' interest in equity markets.
    Keywords: Capital markets , Central bank policy , China, People's Republic of , Demand for money , Economic models , Exchange rate regimes , Exchange rates , Financial assets , Financial systems , Interest rates , Monetary policy , Private investment ,
    Date: 2009–06–23
  19. By: François Gourio
    Abstract: To construct a business cycle model consistent with the observed behavior of asset prices, and study the effect of shocks to aggregate uncertainty, I introduce a small, time-varying risk of economic disaster in a standard real business cycle model. The paper establishes two simple theoretical results: first, when the probability of disaster is constant, the risk of disaster does not affect the path of macroeconomic aggregates - a "separation theorem" between macroeconomic quantities and asset prices in the spirit of Tallarini (2000). Second, shocks to the probability of disaster, which generate variation in risk premia over time, are observationally equivalent to preference shocks. An increase in the perceived probability of disaster leads to a collapse of investment and a recession, an increase in risk spreads, and a decrease in the yield on safe assets. To assess the empirical validity of the model, I infer the probability of disaster from observed asset prices and feed it into the model. The variation over time in this probability appears to account for a significant fraction of business cycle dynamics, especially sharp downturns in investment and output such as 2008-IV.
    JEL: E32 E44 G12
    Date: 2009–10
  20. By: Makoto Minegishi; Boris Cournède
    Abstract: In contrast to the once prevailing norm of secrecy and opaqueness, transparency has now become one of the main features characterising the conduct of monetary policy. Detailed analysis of eleven OECD central banks shows that communication practices have converged markedly in the direction of ever greater transparency. Empirical evidence is consistent with the hypothesis that transparency contributes to the successful conduct of monetary policy: higher transparency is a typical element of monetary frameworks that are associated with better anchored inflation expectations and more stable inflation outcomes. Despite this general trend toward increased transparency, however, central banks differ in actual communication practices. There is a particular divergence with respect to transparency in the decision-making process and communication regarding future policy inclination. Although the appropriate degree of transparency in these areas is an unsettled issue, the fact that financial dislocation is impairing conventional monetary transmission makes these two areas critical for policy implementation.<BR>À rebours des habitudes de secrets et d’opacité qui ont pu prévaloir par le passé, la transparence constitue désormais un moyen essentiel de mise en œuvre de la politique monétaire. Une étude approfondie des pratiques de onze banques centrales de la zone OCDE confirme la convergence vers toujours plus de transparence. Les résultats empiriques sont cohérents avec l’hypothèse selon laquelle la transparence contribue à l’efficacité de la politique monétaire : en moyenne, les cadres de politique monétaire qui fournissent un meilleur ancrage des anticipations d’inflation et une inflation plus stable s’appuient sur un niveau plus élevé de transparence. Malgré une tendance générale vers davantage de transparence, les pratiques de communication diffèrent encore sensiblement d’une banque centrale à l’autre. Les divergences sont particulièrement marquées s’agissant de la transparence à propos des procédures de décision et de l’orientation future de la politique monétaire. Bien que le degré optimal de transparence sur ces deux sujets demeure un objet de débat, le fait que les troubles financiers actuels obèrent les canaux traditionnels de transmission de la politique monétaire donne à ces deux questions une importance toute particulière.
    Keywords: transparency, transparence, monetary policy, politique monétaire, inflation expectation, anticipation d'inflation, communication, communication
    JEL: E31 E50 E52 E58
    Date: 2009–09–25
  21. By: Hwee Kwan Chow (School of Economics, Singapore Management University); Keen Meng Choy (School of Humanities and Social Sciences, Nanyang Technological University)
    Abstract: The ongoing global financial turmoil has revived the question of whether central bankers ought to tighten monetary policy preemptively in order to head off asset price misalignments before a sudden crash triggers financial instability. This study explores the issue of the appropriate monetary policy response to asset price swings in the small open economy of Singapore. Empirical analysis of monetary policy based on standard VAR models, unfortunately, is often hindered by the use of sparse information sets. To better reflect the extensive information monitored by Singapore’s central bank, including global economic indicators, we augment a monetary VAR model with common factors extracted from a large panel dataset spanning 122 economic time series and the period 1980q1 to 2008q2. The resulting FAVAR model is used to assess the impact of monetary policy shocks on residential property and stock prices. Impulse response functions and variance decompositions suggest that monetary policy can potentially be used to lean against asset price booms in Singapore.
    Keywords: Monetary Policy; Asset Prices; Dynamic Factors; Vector Autoregression
    JEL: C33 E52
    Date: 2009–10
  22. By: Nathaniel John Porter; TengTeng Xu
    Abstract: Interest rates in China comprise a mix of both market determined interest rates (interbank rates and bond yields), and regulated interest rates (lending and deposit rates), reflecting China's gradual process of interest rate liberalization. We argue, using a theoretical model and empirical analysis, that the regulation of key retail interest rates diminishes the ability of the market determined rates to act as independent price signals, or as benchmarks for use in asset pricing and monetary policy. Further interest rate liberalization should, therefore, strengthen the information conveyed by movements in interest rates, allowing for the better pricing of risk and capital.
    Keywords: Asset prices , Bank regulations , Banking sector , Bond markets , Capital markets , Central bank policy , China, People's Republic of , Economic models , Interest rates , Interest rates on deposits , Interest rates on loans , Liquidity , Monetary policy , Pricing policy ,
    Date: 2009–09–08
  23. By: Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
    Abstract: The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. A key feature of the model is that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Numerical simulations show that, depending on the elasticities that relate the repayment probability to its micro and macro determinants, and the elasticity of the risk weight (under Basel II) with respect to the repayment probability, Basel I may be more procyclical than Basel II in response to adverse supply and demand shocks.
    Date: 2009
  24. By: Michael Kumhof; Isabel K. Yan
    Abstract: Several emerging economies have, until recently, experienced large government surpluses and accelerating foreign exchange reserve accumulation. This has been accompanied by economic booms, exchange rate appreciations and in some cases increases in domestic inflation. We show that one way to understand these episodes is as manifestations of balance of payments anti-crises, as reflecting the perception that the government intends to discontinue its accumulation of reserves in the near future. The end-phase of such crises is characterized by nominal interest rates approaching their zero lower bound in accelerating fashion and, if the government targets CPI inflation, by fast increasing domestic inflation.
    Keywords: Balance of payments , Current account surpluses , Data analysis , Economic models , Emerging markets , Exchange rate appreciation , Fiscal policy , Foreign exchange reserves , Inflation , Monetary policy , Reserves accumulation ,
    Date: 2009–07–06
  25. By: Dewachter, Hans; Iania, Leonardo
    Abstract: This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return forecasting (risk premium) factor is extracted by imposing a single factor structure on the one-period expected excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms significantly most structural and non-structural Macro-Finance yield curve models in terms of cross-sectional fit of the yield curve. Second, we find that financial shocks, either in the form of liquidity or risk premium shocks have a statistically and economically significant impact on the yield curve. The impact of financial shocks extends throughout the yield curve and is most pronounced at the high- and intermediate frequencies.
    Keywords: Term structure; Macro-finance; TED spread; Interbank lending rates
    JEL: E43 G12 E44 C11
    Date: 2009–10–02
  26. By: Carlo Favero; Francesco Giavazzi
    Abstract: We use the time series of shifts in U.S. taxes constructed by Romer and Romer to estimate tax multipliers. Differently from the single-equation approach adopted by Romer and Romer, our estimation strategy (a Var that includes output, government spending and revenues, inflation and the nominal interest rate) does not rely upon the assumption that tax shocks are orthogonal to each other as well as to lagged values of other macro variables. Our estimated multiplier is much smaller: one, rather than three at a three-year horizon. When we split the sample in two sub-samples (before and after 1980) we find, before 1980, a multiplier whose size is never greater than one, after 1980 a multiplier not significantly different from zero. Following the findings in Bohn (1998), we also experiment with a model that includes debt and the non-linear government budget constraint. We find that, while in general not very important, the non-linearity that arises from the budget constraint makes a difference after 1980, when the response offiscal variables to the level of the debt becomes stronger.
    Date: 2009
  27. By: André Meier
    Abstract: The Bank of England's current "quantitative easing" strategy has given rise to a controversial debate about the effects and risks of unconventional monetary policy. The present paper makes two contributions to this debate. First, it provides a systematic overview of unconventional policy options, drawing from existing theoretical and empirical studies. Against this backdrop, it then analyzes the BoE's specific policies, discussing their effectiveness so far and putting them into a cross-country context. Tentative evidence on the BoE's quantitative easing is moderately encouraging, although the strategy is neither guaranteed to succeed nor as perilous as some of its detractors claim.
    Keywords: Asset management , Bonds , Capital markets , Central bank policy , Credit controls , Credit risk , Cross country analysis , Financial risk , Inflation , Interest rate policy , Liquidity management , Monetary policy , Risk management , United Kingdom ,
    Date: 2009–08–05
  28. By: Yanliang Miao
    Abstract: In a first attempt to treat inflation targeting (IT) as a continuous variable, we construct IT subindices for 21 full-fledged ITers on three dimensions: flexibility, transparency, and explicitness. Comparing flexibility and transparency we find that (1) the impact of flexibility on both the mean and variation of inflation is more quadratic than that of transparency; (2) after adding the transparency index, the impact of flexibility is no longer significant. The significant and negative association between transparency and the level and variation of inflation is confirmed when we check for robustness by controlling for disinflation stage, subsampling, instrumental variable estimation, and principal component analysis (PCA).
    Keywords: Cross country analysis , Economic models , Inflation , Inflation rates , Inflation targeting , Monetary policy , Transparency ,
    Date: 2009–07–16
  29. By: Pau Rabanal; Oriol Aspachs-Bracons
    Abstract: Since Spain joined the EMU, two main important factors behind the housing boom appear to be the decrease of nominal interest rates and demographic factors. In this paper we estimate a New Keynesian model of a currency area, using data for Spain and the rest of the EMU to study the importance of those factors. We also examine the role of different rigidities and find that labor market frictions are crucial to explain main features of the data. On the other hand, financial frictions that impose a collateral constraint on borrowing do not appear to be relevant.
    Date: 2009–09–21
  30. By: Inci Ötker; Charles Freedman
    Abstract: This is the tenth chapter of a forthcoming monograph entitled, "On Implementing Full- Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It describes the experiences of a number of countries with the introduction and implementation of inflation targeting regimes. It discusses their motivation for introducing IT; how they fared in meeting the various conditions that some have argued are needed in advance of introducing IT; how they transitioned to a full-fledged IT framework and coordinated their preparations with other economic policies and reforms; the benefits they gained by adopting IT; the challenges they faced in implementation; and the lessons from their experiences.
    Keywords: Cross country analysis , Economic policy , Economic reforms , Inflation , Inflation targeting , Monetary policy ,
    Date: 2009–07–30
  31. By: Juliana Dutra Araujo
    Abstract: The sharp increase in debt in the Caribbean since the mid-1990s has focused attention on the conduct of fiscal policy in the region. This paper aims to diagnose how fiscal policy has behaved during this period by looking at three main cycles of the economy: the business, election, and natural disaster cycles. Our main findings suggest that fiscal policy has been mostly procyclical in the region, while disasters have been heavily "insured" by foreign transfers. The "when it rains, it pours" phenomena suggested by Kaminsky, Reinhart and Vegh (2004) seems to take place in the Caribbean.
    Keywords: Business cycles , Capital flows , Capital inflows , Caribbean , Climatic changes , Cross country analysis , Fiscal analysis , Fiscal policy , Political economy , Regional shocks ,
    Date: 2009–07–28
  32. By: Nathaniel John Porter; Elöd Takáts; Tarhan Feyzioglu
    Abstract: What might interest rate liberalization do to intermediation and the cost of capital in China? China's most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.
    Keywords: Banking , Banking sector , Banks , Capital markets , China, People's Republic of , Credit controls , Credit demand , Cross country analysis , Economic models , Financial intermediation , Interest rates , Loans , Monetary policy ,
    Date: 2009–08–12
  33. By: Carlos Mulas-Granados; Emanuele Baldacci; Sanjeev Gupta
    Abstract: This paper studies the effects of fiscal policy response in 118 episodes of systemic banking crisis in advanced and emerging market countries during 1980-2008. It finds that timely countercyclical fiscal measures contribute to shortening the length of crisis episodes by stimulating aggregate demand. Fiscal expansions that rely mostly on measures to support government consumption are more effective in shortening the crisis duration than those based on public investment or income tax cuts. But these results do not hold for countries with limited fiscal space where fiscal expansions are prevented by funding constraints. The composition of countercyclical fiscal responses matters as well for output recovery after the crisis, with public investment yielding the strongest impact on growth. These results suggest a potential trade-off between short-run aggregate demand support and medium-term productivity growth objectives in fiscal stimulus packages adopted in distress times.
    Keywords: Banking crisis , Banking sector , Banks , Cross country analysis , Developed countries , Developing countries , Economic models , External shocks , Financial crisis , Fiscal analysis , Fiscal policy , Time series ,
    Date: 2009–07–29
  34. By: Alejandro Simone; Petia Topalova
    Abstract: This paper examines India's experience with fiscal rules with a view to inform the design of a possible successor fiscal framework to the FRBMA. Among several proposals to strengthen the FRBMA, a framework that focuses medium-term fiscal policy on debt sustainability by the use of a medium term debt target, and annual nominal expenditure growth rules is proposed. This approach tackles the deficit bias at its core and enables countercyclical fiscal policy through automatic stabilizers. Numerical targets should be supported by structural reform measures for both revenues and expenditures, while the coverage of the fiscal rules should be expanded.
    Keywords: Debt sustainability , Fiscal management , Fiscal policy , Fiscal reforms , Fiscal sustainability , India , Public debt ,
    Date: 2009–08–13
  35. By: Inci Ötker; Jaromir Benes; David Vávra
    Abstract: This paper develops a stylized, small, open economy macro model that incorporates an explicit and non-trivial role for financial intermediation. It illustrates how such a model could be used for policy analysis in an emerging market economy where policymakers are concerned about risks associated with rapid credit growth, financial dollarization, and foreign borrowing, while lacking traditional tools to effect monetary policy transmission, and hence could resort to more direct instruments, such as foreign exchange market intervention and regulatory and administrative measures. Calibrating the model to a stylized emerging European economy, the paper simulates real and financial sector implications of various external and policy-related shocks that could be used as input for monetary policy making.
    Keywords: Banks , Central banks , Credit controls , Credit expansion , Credit risk , Dollarization , Economic models , Emerging markets , External borrowing , External shocks , Financial intermediation , Financial sector , Loans , Monetary policy ,
    Date: 2009–06–08
  36. By: Zied Ftiti (GATE-CNRS/ENS LSH, University of Lyon, France)
    Abstract: This paper proposes a new methodology to check the economic performance of a monetary policy and in particular the inflation targeting policy (ITP). The main idea of this work is to consider the ITP as economically efficient when it generates a stable monetary environment. The latter is considered as stable when a long-run equilibrium exists to which the paths of economic variables (inflation rate, interest rate and GDP growth) converge. The convergence of the variables’ paths implies that these variables are more predictable and implies a lower degree of uncertainty in the economic environment. To measure the degree of convergence between economic variables, we propose, in this paper, a dynamic time-varying variable presented in the frequency approach named cohesion. This variable is estimated from the evolutionary co-spectral theory as deï¬ned by Priestley and Tong (1973) and Priestley (1988-1996). We apply this theory to the measure of cohesion presented by Croux et al (2001) to obtain a dynamic time-varying measure. In the last step of the study, we apply the Bai and Perron test (1998-2003b) to determine the change in the cohesion path. The results show that the implementation of the ITP generates a high degree of convergence between economic series that implies less uncertainty into the monetary environment. We conclude that the inflation targeting generates a stable monetary environment. This result allows us to conclude that the ITP is relevant in the case of industrialized countries.
    Keywords: segregation, Inflation Targeting, Co-Spectral Analysis, Cohesion, Stability Environment, Economic Performance and Structural Change
    JEL: C16 E52 E63
    Date: 2009
  37. By: Charles Calomiris
    Abstract: When and why do banking crises occur? Banking crises properly defined consist either of panics or waves of costly bank failures. These phenomena were rare historically compared to the present. A historical analysis of the two phenomena (panics and waves of failures) reveals that they do not always coincide, are not random events, cannot be seen as the inevitable result of human nature or the liquidity transforming structure of bank balance sheets, and do not typically accompany business cycles or monetary policy errors. Rather, risk-inviting microeconomic rules of the banking game that are established by government have always been the key additional necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures. Some risk-inviting rules took the form of visible subsidies for risk taking, as in the historical state-level deposit insurance systems in the U.S., Argentina’s government guarantees for mortgages in the 1880s, Australia’s government subsidization of real estate development prior to 1893, the Bank of England’s discounting of paper at low interest rates prior to 1858, and the expansion of government-sponsored deposit insurance and other bank safety net programs throughout the world in the past three decades, including the generous government subsidization of subprime mortgage risk taking in the U.S. leading up to the recent crisis. Other risk-inviting rules historically have involved government-imposed structural constraints on banks, which include entry restrictions like unit banking laws that constrain competition, prevent diversification of risk, and limit the ability to deal with shocks. Another destabilizing rule of the banking game is the absence of a properly structured central bank to act as a lender of last resort to reduce liquidity risk without spurring moral hazard. Regulatory policy often responds to banking crises, but not always wisely. The British response to the Panic of 1857 is an example of effective learning, which put an end to the subsidization of risk through reforms to Bank of England policies in the bills market. Counterproductive responses to crises include the decision in the U.S. not to retain its early central banks, which reflected misunderstandings about their contributions to financial instability in 1819 and 1825, and the adoption of deposit insurance in 1933, which reflected the political capture of regulatory reform.
    JEL: E5 E58 G2 N2
    Date: 2009–10
  38. By: Silva , José Ignacio; Toledo, Manuel
    Abstract: Recently, Pissarides (2008) has argued that the standard search model with sunk fixed matching costs increases unemployment volatility without introducing an unrealistic wage response in new matches. We revise the role of matching costs and show that when these costs are not sunk and, therefore, can be partially passed on to new hired workers in the form of lower wages, the amplication mechanism of fixed matching costs is considerably reduced and wages in new hired positions become more sensitive to productivity shocks.
    Keywords: unemployment volatility puzzle; search and matching; matching costs
    JEL: E32 J32 J64
    Date: 2009–05–25
  39. By: Gary Koop (Department of Economics, University of Strathclyde); Dimitris Korobilis (Department of Economics, University of Strathclyde)
    Abstract: Block factor methods offer an attractive approach to forecasting with many predictors. These extract the information in these predictors into factors reflecting different blocks of variables (e.g. a price block, a housing block, a financial block, etc.). However, a forecasting model which simply includes all blocks as predictors risks being over-parameterized. Thus, it is desirable to use a methodology which allows for different parsimonious forecasting models to hold at different points in time. In this paper, we use dynamic model averaging and dynamic model selection to achieve this goal. These methods automatically alter the weights attached to different forecasting models as evidence comes in about which has forecast well in the recent past. In an empirical study involving forecasting output growth and inflation using 139 UK monthly time series variables, we find that the set of predictors changes substantially over time. Furthermore, our results show that dynamic model averaging and model selection can greatly improve forecast performance relative to traditional forecasting methods.
    Keywords: Bayesian, state space model, factor model, dynamic model averaging
    JEL: E31 E37 C11 C53
    Date: 2009–08
  40. By: Bayer, Christian (Bocconi University); Juessen, Falko (University of Dortmund)
    Abstract: This paper provides a cross-country comparison of life-cycle and business-cycle fluctuations in the dispersion of household-level wage innovations. We draw our inference from household panel data sets for the US, the UK, and Germany. First, we find that household characteristics explain about 25% of the dispersion in wages within an age group in all three countries. Second, the cross-sectional variance of wages is almost linearly increasing in household age in all three countries, but with increments being smaller in the European data. Third, we find that wage risk is procyclical in Germany while it is countercyclical in the US and acyclical in the UK, pointing towards labor market institutions being pivotal in determining the cyclical properties of labor market risk.
    Keywords: business cycle, uncertainty fluctuations, life-cycle risk, heterogeneity, wages
    JEL: E20 D31 D91 J31
    Date: 2009–09
  41. By: Österholm, Pär (National Institute of Economic Research)
    Abstract: This paper investigates whether forecasts of the Swedish unemployment rate can be improved by using business and household survey data. We conduct an out-of-sample forecast exercise in which the performance of a Bayesian VAR model with only macroeconomic data is compared to that when the model also includes survey data. Results show that the forecasting performance at short horizons can be improved. The im-provement is largest when forward-looking data from the manufacturing industry is employed.
    Keywords: Bayesian VAR; Labour market
    JEL: E17 E24 E27
    Date: 2009–06–01
  42. By: Dustmann, Christian (University College London); Glitz, Albrecht (Universitat Pompeu Fabra); Vogel, Thorsten (Humboldt University, Berlin)
    Abstract: In this paper, we analyse differences in the cyclical pattern of employment and wages of immigrants and natives for two large immigrant receiving countries, Germany and the UK. We show that, despite large differences in their immigrant populations, there are similar and significant differences in cyclical responses between immigrants and natives in both countries, even conditional on education, age, and location. We decompose changes in outcomes into a secular trend and a business cycle component. We find significantly larger unemployment responses to economic shocks for low-skilled workers relative to high-skilled workers and for immigrants relative to natives within the same skill group. There is little evidence for differential wage responses to economic shocks. We offer three explanations for these findings: an equilibrium search model, where immigrants experience higher job separation rates, a model of dual labour markets, and differences in the complementarity of immigrants and natives to capital.
    Keywords: immigration, unemployment, business cycle
    JEL: E32 F22 J31
    Date: 2009–09
  43. By: Hott, Christian (Swiss National Bank)
    Abstract: The willingness of banks to provide funding for real estate purchases depends on the creditworthiness of their borrowers. Beside other factors, the creditworthiness of borrowers depends on the development of real estate prices. Real estate prices, in turn, depend on the demand for homes which is influenced by the willingness of banks to provide funding for real estate purchases. In this paper I develop a theoretical model which describes and explains this circular relationship. Using this model, I show how different kinds of expectation formations can lead to fluctuations of real estate prices. Furthermore, I show that banks make above average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns.
    Keywords: Credit Cycle; Real Estate Prices; Bubbles
    JEL: E51 G12 G21
    Date: 2009–09–01
  44. By: Rossana Merola (Université Catholique de Louvain la neuve)
    Abstract: Episodes of crises that have recently plagued many emerging market economies have lead to a wide-spread questioning of the two traditional generations of models of currency crises. Distressed banking system and adverse credit-markets conditions have been pointed as sources of serious macroeconomics contractions, so introducing these imperfections into standard economic models can help to explain the more recent crises. This paper introduces financial frictions à la Bernanke Gertler and Gilchrist in a two-sector small open economy, suited to analyze an emerging country. The model is estimated on simulated data applying both Bayesian techniques and maximum likelihood method and comparing the results under the two di¤erent estimation procedures. First, I analyze the influence of the prior on the estimation outcomes. Results seems to confirm that one of the main advantages of Bayesian approach is the ability of providing a framework for evaluating fundamentally mis-specified models. Second, I test the sensitivity of estimation outcomes to the sample size, showing how, for large samples, results under Bayesian estimation converges asymptotically to those obtained applying maximum likelihood. A further extension would be to perform the estimation on historical data for an emerging economy that have recently experienced a financial crisis.
    Keywords: DSGE models, Bayesian estimation, financial accelerator
    JEL: E30 E44 F34 F41
    Date: 2009–10–01
  45. By: Lein, Sarah M. (Swiss National Bank); Köberl, Eva (KOF)
    Abstract: This paper analyses the interplay of capacity utilisation, capacity constraints, demand constraints and price adjustments, employing a unique firm-level data set for Swiss manufacturing firms. Theoretically, capacity constraints limit the ability of firms to expand production in the short run and lead to increases in prices. Our results show that, on the one hand, price increases are more likely during periods when firms are faced with capacity constraints. Constraints due to the shortage of labour, in particular, lead to price increases. On the other hand, we also find evidence that firms are not reluctant to reduce prices in response to demand constraints. At the macro level, the implied capacity-utilisation Phillips curve has a convex shape during periods of excess demand and a concave shape during periods of excess supply. Our results are robust to the inclusion of proxies for changes in costs and the competitive position of firms.
    Keywords: price setting; capacity utilisation; capacity constraints; demand constraints; non-linear Phillips curve; Switzerland
    JEL: E31 E32 E53
    Date: 2009–07–13
  46. By: Jochen R. Andritzky; Andreas Jobst; Sylwia Barbara Nowak; Natalia T. Tamirisa
    Abstract: This study characterizes volatility dynamics in external emerging bond markets and examines how prices and volatility respond to news about macroeconomic fundamentals. As in mature bond markets, macroeconomic surprises in external emerging bond markets are found to a¤ect both conditional returns and volatility, with the e¤ects on volatility being more pronounced and longer lasting than those on prices. Yet the process of information absorption tends to be more drawn out than in mature bond markets. International and regional macroeconomic news is at least as important as local news for both asset valuations and volatility dynamics in external emerging bond markets.
    Keywords: Asset prices , Bond markets , Bonds , Economic models , Emerging markets , Private investment , Public information , Sovereign debt ,
    Date: 2009–07–14
  47. By: Wesselbaum, Dennis
    Abstract: The effects of firing costs crucially depend on the extend to which the additional costs can be shifted to the worker, which refers to the so called "bonding critique". In the recent literature about firing costs, these costs are assumed to be a wasteful tax, such that they can not be shifted to the worker. In this paper, we analyze the eects from respecting and non-respecting the bonding critique. We consistently show, that firing costs have to be introduced in a different way as severance payments. If they are introduced in a similar way, results are likely to be different, in particular for fluctuations of vacancies, unemployment and wages.
    Keywords: Bonding Critique, Endogenous Separations, Firing Costs, Severance Payments
    JEL: E32 E24 J64
    Date: 2009–10–02
  48. By: Tullio Jappelli (University of Napoli "Federico II", CSEF and CEPR); Luigi Pistaferri (Stanford University, NBER, CEPR and SIEPR)
    Abstract: We review different empirical approaches that researchers have taken to estimate how consumption responds to income changes. We critically evaluate the empirical evidence on the sensitivity of consumption to predicted income changes, distinguishing between the traditional excess sensitivity tests, and the effect of predicted income increases and income declines. We also review studies that attempt to estimate the marginal propensity to consume out of income shocks, distinguishing between three different approaches: identifying episodes in which income changes unexpectedly, relying on the covariance restrictions that the theory imposes on the joint behavior of consumption and income growth, and combining realizations and expectations of income or consumption in surveys where data on subjective expectations are available.
    Keywords: Consumption smoothing, marginal propensity to consume
    JEL: E21 D91
    Date: 2009–09–16
  49. By: Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
    Abstract: We study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. We show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another). For low discount factors, the economy converges to an invariant stochastic distribution in which distortions do not disappear and labor supply and consumption levels fluctuate over time. The labor supply of groups that are not in power are taxed in order to reduce the deviation payoff of the party in power and thus relax the political economy/sustainability constraints. We also show that the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power. This result contradicts a common conjecture that there will be fewer distortions when the political system creates a “stable ruling groupâ€. In contrast, political economy distortions are less important when there are frequent changes in power (because this encourages compromise between social groups). Despite this result, it remains true that distortions decrease along sample paths where a particular group remains in power for a longer span of time.
    JEL: E61 H11 P16
    Date: 2009–10
  50. By: Leonardo Becchetti (Faculty of Economics, University of Rome "Tor Vergata"); Melody Garcia (Faculty of Economics, University of Rome "Tor Vergata"); Giovanni Trovato (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: The empirical literature tries to identify credit rationing and its determinants by using balance sheet data or evidence from corporate surveys. Observational equivalence, identification problems, and interview biases are serious problems in these studies. We analyse the determinants of credit rationing directly on credit files by looking at the difference between the amount demanded and supplied to each borrower from official bank records. Our findings provide microeconomic evidence in support of the credit view hypothesis showing that the European Central Bank refinancing rate is significantly and positively related to partial (but not total) credit rationing. This finding is consistent with the hypothesis that such variable affects the total volume of commercial bank loans.
    Keywords: credit rationing, credit view, loan data.
    JEL: E51 G21
    Date: 2009–09–30
  51. By: Zafar, Sohail; Ahmed, Vaqar
    Abstract: This study investigates the external economies of scale in the manufacturing sector of Pakistan. The Return to scale is a property of the production function that indicates the relationship between proportionate change, in all inputs and resulting change in output. Returns to scale are applicable only in the long run, since all inputs are being changed. The estimated value of the coefficient of returns to scale at aggregate level is 1.017. It means that one percentage point change in all input quantities results in 1.017 percent change in output. It turns out that manufacturing sector of Pakistan is characterized by almost constant returns to scale at aggregates and disaggregate level.
    Keywords: Economies of Scale; Distortion; Efficiency; Pakistan;
    JEL: E23 R32 D51
    Date: 2009–10–04
  52. By: Knetsch, Thomas A.; Molzahn, Alexander
    Abstract: The paper studies the short-term effects of energy price hikes on the supply of industrial goods and transport services including the repercussions on remuneration of input factors. While industry had suffered more strongly from the oil price shock of the late 1970s compared with the one of the early 1970s and the 2004-08 upsurge, evidence is reverse for transportation. Regarding the impact on the income distribution, both sectors share the pattern that in the recent episode rising energy costs were more than compensated by falling unit labor costs while in the 1970s cost structures had been strained by expansive wage policy in addition to the oil price shocks.
    Keywords: Energy prices,supply of goods and services,income distribution
    JEL: E23 E25 Q43
    Date: 2009
  53. By: Tullio Jappelli (University of Napoli "Federico II", CSEF and CEPR)
    Abstract: Many studies show that most people are not financially literate and are unfamiliar with even the most basic economic concepts. However, the evidence on the determinants of economic literacy is scant. This paper uses international panel data on 55 countries, merging indicators of economic literacy with a large set of macroeconomic and institutional variables. Results show that there is substantial heterogeneity of financial and economic competence across countries, and that human capital indicators (PISA test scores and college attendance) are positively correlated with economic literacy. Furthermore, inhabitants of countries with more generous social security systems are generally less literate, lending support to the hypothesis that the incentives to acquire economic literacy are related to the amount of resources available for private accumulation.
    Keywords: Economic Literacy, Human Capital, Social Security
    JEL: E2 D8 G1
    Date: 2009–10–06

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