nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒10‒31
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary tightening cycles and the predictability of economic activity By Arturo Estrella; Tobias Adrian
  2. Taylor-type rules and permanent shifts in productivity growth By William T. Gavin; Benjamin D. Keen; Michael R. Pakko
  3. The effects of monetary policy on unemployment dynamics under model uncertainty: Evidence from the US and the euro area. By Carlo Altavilla; Matteo Ciccarelli
  4. Testing the structural interpretation of the price puzzle with a cost channel model By Castelnuovo, Efrem
  5. How robust are popular models of nominal frictions? By Benjamin D. Keen; Evan F. Koenig
  6. Financial intermediaries and monetary economics By Tobias Adrian; Hyun Song Shin
  7. Evaluating inflation determinants with a money supply rule in four Central and Eastern European EU member states By Mehrotra, Aaron; Slacik, Tomas
  8. Credit crises, money, and contractions: A historical view By Michael D. Bordo; Joseph G. Haubrich
  9. Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters. By Magnus Andersson; Boris Hofmann
  10. Emerging Market Concerns: An Indian Perspective By D Subbarao
  11. Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices By Olivier J. Blanchard; Marianna Riggi
  12. Optimal Monetary Policy When Asset Markets are Incomplete By R. Anton BRAUN; NAKAJIMA Tomoyuki
  13. The Dual Stickiness Model and Inflation Dynamics in Spain By Torres Torres, Diego José
  14. Money Talks. By Marie Hoerova; Cyril Monnet; Ted Temzelides
  15. Efectos del incremento del precio del petróleo en la economía española: Análisis de cointegración y de la política monetaria mediante reglas de Taylor By Hernandez Martinez, Fernando
  16. Inflation and monetary regimes By Gerald P. Dwyer; Mark Fisher
  17. Inflation Expectations: Does the Market Beat Professional Forecasts? By Makram El-Shagi
  18. Monetary and fiscal policy aspects of indirect tax changes in a monetary union. By Anna Lipińska; Leopold von Thadden
  19. Can Learnability Save New-Keynesian Models? By John H. Cochrane
  20. Prices and quantities in the monetary policy transmission mechanism By Tobias Adrian; Hyun Song Shin
  21. Monetary policy implementation frameworks: a comparative analysis By Antoine Martin; Cyril Monnet
  22. Evaluation of Nonlinear time-series models for real-time business cycle analysis of the Euro area By Monica Billio; Laurent Ferrara; Dominique Guegan; Gian Luigi Mazzi
  23. Constructing Forecast Confidence Bands During the Financial Crisis By Ondra Kamenik; Marianne Johnson; Kevin Clinton; Huigang Chen; Douglas Laxton
  24. Factor Demand Linkages, Technology Shocks and the Business Cycle By Holly, Sean; Petrella, Ivan
  25. Causes of the Financial Crisis: An Assessment using UK Data By Martin, Christopher; Milas, C
  26. Inflation Dynamics in the New EU Member States: How Relevant Are External Factors? By Alexander Mihailov; Fabio Rumler; Johann Scharler
  27. Time-varying capital requirements in a general equilibrium model of liquidity dependence By Francisco Covas; Shigeru Fujita
  28. Identifying Government Spending Shocks: It's All in the Timing By Valerie A. Ramey
  29. Interest rates, distribution and capital accumulation – A Post-Kaleckian perspective on the US and Germany By Hein, Eckhard; Schoder, Christian
  30. Market Wide Liquidity Instability in Business Cycles By Chatterjee, Sidharta
  31. On the non-causal link between volatility and growth By Olaf POSCH; Klaus W€LDE
  32. Household inflation experiences in the U.S.: a comprehensive approach By Bart Hobijn; Kristin Mayer; Carter Stennis; Giorgio Topa
  33. New classical/real business cycle macroeconomics. The anatomy of a revolution By Michel DE VROEY
  34. Capacity Utilisation, Constraints and Price Adjustments under the Microscope By Sarah M. Lein; Eva Köberl
  35. Does government spending spur economic growth in Nigeria? By Maku, Olukayode E.
  36. China and the Reserve Currency Question By RYAN, JOHN
  37. Overborrowing and systemic externalities in the business cycle By Javier Bianchi
  38. A Theory of Banks, Bonds, and the Distribution of Firm Size By Katheryn N. Russ; Diego Valderrama
  39. Attention Allocation Over the Business Cycle By Marcin Kacperczyk; Stijn Van Nieuwerburgh; Laura Veldkamp
  40. Macroeconomic forecasting with real-time data: an empirical comparison By Heij, C.; Dijk, D.J.C. van; Groenen, P.J.F.
  41. The Marshallian roots of KeynesÕs General Theory By Michel DE VROEY
  42. Four Myths and a Financial Crisis By Vranceanu, Radu

  1. By: Arturo Estrella; Tobias Adrian
    Abstract: Eleven of fourteen monetary tightening cycles since 1955 were followed by increases in unemployment; three were not. The term spread at the end of these cycles discriminates almost perfectly between subsequent outcomes, but levels of nominal or real interest rates, as well as other interest rate spreads, generally do not.
    Keywords: Monetary policy ; Business cycles ; Unemployment ; Interest rates
    Date: 2009
  2. By: William T. Gavin; Benjamin D. Keen; Michael R. Pakko
    Abstract: This paper examines the impact of a permanent shock to the productivity growth rate in a New Keynesian model when the central bank does not immediately adjust its policy rule to that shock. Our results show that inflation and productivity growth are negatively correlated at business cycle frequencies when the central bank follows a Taylor-type policy rule that targets the output gap. We then demonstrate that inflation is more stable after a permanent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). As for the welfare implications, both the output growth and price-level path rules generate much less volatility in output and inflation after a productivity shock than occurs with the Taylor rule.
    Keywords: Taylor's rule ; Productivity ; Inflation (Finance)
    Date: 2009
  3. By: Carlo Altavilla (University of Naples Parthenope, Via Medina, 40 - 80133 Naples, Italy.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small. JEL Classification: C11, E24, E52, E58.
    Keywords: Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule.
    Date: 2009–09
  4. By: Castelnuovo, Efrem (University of Padua)
    Abstract: We estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.
    Keywords: cost channel; inflation dynamics; price puzzle; trend inflation
    JEL: E30 E52
    Date: 2009–09–07
  5. By: Benjamin D. Keen; Evan F. Koenig
    Abstract: This paper analyzes three popular models of nominal price and wage frictions to determine which best fits post-war U.S. data. We construct a dynamic stochastic general equilibrium (DSGE) model and use maximum likelihood to estimate each model's parameters. Because previous research finds that the conduct of monetary policy and the behavior of inflation changed in the early 1980s, we examine two distinct sample periods. Using a Bayesian, pseudo-odds measure as a means for comparison, a sticky price and wage model with dynamic indexation best fits the data in the early-sample period, whereas either a sticky price and wage model with static indexation or a sticky information model best fits the data in the late-sample period. Our results suggest that price- and wage-setting behavior may be sensitive to changes in the monetary policy regime. If true, the evaluation of alternative monetary policy rules may be even more complicated than previously believed.
    Keywords: Econometric models - Evaluation ; Business cycles - Econometric models ; Monetary policy ; Price levels ; Wages
    Date: 2009
  6. By: Tobias Adrian; Hyun Song Shin
    Abstract: We reconsider the role of financial intermediaries in monetary economics. We explore the hypothesis that financial intermediaries drive the business cycle by way of their role in determining the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and hence of the "risk-taking channel" of monetary policy. We document evidence that the balance sheets of financial intermediaries reflect the transmission of monetary policy through capital market conditions. We find short-term interest rates to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and we suggest the importance of tracking balance sheet quantities for the conduct of monetary policy.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Risk ; Business cycles
    Date: 2009
  7. By: Mehrotra, Aaron (BOFIT); Slacik, Tomas (BOFIT)
    Abstract: We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available.
    Keywords: determinants of inflation; McCallum rule; Phillips curve; Bayesian model averaging; Central and Eastern Europe
    JEL: C11 C22 E31 E52 O52
    Date: 2009–10–21
  8. By: Michael D. Bordo; Joseph G. Haubrich
    Abstract: The relatively infrequent nature of major credit distress events makes a historical approach particularly useful. Using a combination of historical narrative and econometric techniques, we identify major periods of credit distress from 1875 to 2007, examine the extent to which credit distress arises as part of the transmission> of monetary policy, and document the subsequent effect on output. Using turning points defined by the Harding-Pagan algorithm, we identify and compare the timing, duration, amplitude, and comovement of cycles in money, credit, and output. Regressions show that financial distress events exacerbate business cycle downturns both in the nineteenth and twentieth centuries and that a confluence of such events makes recessions even worse.
    Keywords: Monetary policy ; Credit ; Business cycles
    Date: 2009
  9. By: Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper conducts a comparative analysis of the performances of the forward guidance strategies adopted by the Reserve Bank of New Zealand, the Norges Bank and the Riksbank, with the aim to gauge whether forward guidance via publication of an own interest rate path enhances a central bank’s ability to steer market expectations. Two main results emerge. First, we find evidence that all three central banks have been highly predictable in their monetary policy decisions and that long-term inflation expectations have been well anchored in the three economies, irrespective of whether forward guidance involved publication of an own interest rate path or not. Second, for New Zealand, we find weak evidence that a publication of a path could potentially enhance a central bank’s leverage on the medium term structure of interest rates. JEL Classification: E40, E43, E52.
    Keywords: Monetary policy, transparency, central bank communication, forward guidance, term structure of interest rates.
    Date: 2009–10
  10. By: D Subbarao
    Abstract: From the perspective of Emerging Market Economies (EMEs) and particularly for that of India, five concerns are expressed. These are: first, timing of exit from the accommodative monetary policy in the context of rising food price-led inflation but still weak growth; second, the possibility of another surge in capital flows, especially if we turn out to be an outlier in withdrawal of monetary stimulus; third, monetary transmission mechanism as it is evolving from the crisis period; fourth, return to fiscal consolidation and quality of fiscal adjustment; and finally, the implications of the efforts towards financial stability on financial inclusion and growth. [Remarks by Dr. D. Subbarao, Governor, Reserve Bank of India at G-30 International Banking Seminar in Istanbul on organized on the occasion of the IMF-World Bank Annual Meetings 2009].
    Keywords: India, emerging markets, monetary policy, capital flows, fiscal, adjustments, reserve bank India, financial stability, inclusion, growth, food price, inflation, consolidation
    Date: 2009
  11. By: Olivier J. Blanchard; Marianna Riggi
    Abstract: In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, and at least until the end of 2007, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach Blanchard and Gali (2007a) argued that this has reflected in large part a change in the causal relation from the price of oil to output and inflation. In order to shed light on the possible factors behind the decrease in the macroeconomic effects of oil price shocks, we develop a new-Keynesian model, with imported oil used both in production and consumption, and we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of the two samples (pre and post 1984), the distance between the empirical SVAR-based impulse response functions and those implied by the model. Our results point to two relevant changes in the structure of the economy, which have modified the transmission mechanism of the oil shock: vanishing wage indexation and an improvement in the credibility of monetary policy. The relative importance of these two structural changes depends however on how we formalize the process of expectations formation by economic agents.
    JEL: E3 E52
    Date: 2009–10
  12. By: R. Anton BRAUN; NAKAJIMA Tomoyuki
    Abstract: his paper considers the properties of an optimal monetary policy when households are subject to counter-cyclical uninsured income shocks. We develop a tractable incomplete-markets model with Calvo price setting. In our model the welfare cost of business cycles is large when the variance of income shocks is counter-cyclical. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  13. By: Torres Torres, Diego José
    Abstract: We estimate a model that integrates sticky prices and sticky information using Spanish data following Dupor et. al (2008). The model yields three empircal facts: a-) the frequency of price changes (around one year), b-) the firm's report that sticky information is no too important for nominal rigidities and c-) the inflation's persistence, the latter with more microfoundations than the Hybrid Model. We found that both types of stickiness are present in Spain, but the most important is the stickiness in prices.
    Keywords: Sticky Prices; Sticky Information; Spain; Inflation Dynamics
    JEL: E31
    Date: 2009–09–21
  14. By: Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cyril Monnet (Federal Reserve Bank of Philadelphia, Research Department, Ten Independence Mall, Philadelphia, PA 19106-1574, USA.); Ted Temzelides (Rice University, Department of Economics, P.O. Box 1892, Houston, TX 77251-1892, USA.)
    Abstract: We study credible information transmission by a benevolent Central Bank. We consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the Central Bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the Central Bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus, lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy. JEL Classification: D80, E40, E52.
    Keywords: Information, Interest rates, Monetary policy.
    Date: 2009–09
  15. By: Hernandez Martinez, Fernando
    Abstract: The main purpose of this paper is to show evidence about the negative impact of oil price shocks in the economy of Spain. Since oil demand is continuously increasing all around the world and OPEC countries use to act having certain power to raise them, it is necessary to study how these price levels affect to inflation rate and output growth. Oil prices, inflation and interest rates and Gross Domestic Product historical data are collected for contegration analysis. Forward-looking and Backward-looking Taylor Rules are also estimated to compare their trend with respect to official interest rates and finally conclude if the European Central Banks takes these rules patterns into account.
    Keywords: Oil prices; interest rates; inflation; Gross Direct Product; cointegration; Taylor rules
    JEL: C32 E58 E52 Q43
    Date: 2009–02
  16. By: Gerald P. Dwyer; Mark Fisher
    Abstract: Correlations of inflation with the growth rate of money increase when data are averaged over longer time periods. Correlations of inflation with the growth of money also are higher when high-inflation as well as low-inflation countries are included in the analysis. We show that serial correlation in the underlying inflation rate ties these two observations together and explains them. We present evidence that averaging increases the correlation of inflation and money growth more when the underlying inflation rate has higher serial correlation.
    Date: 2009
  17. By: Makram El-Shagi
    Abstract: The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
    Keywords: Inflation Expectations,Rational Expectations,Inflation Forecasting
    JEL: E31 E37
    Date: 2009–10
  18. By: Anna Lipińska (Bank of England, Monetary Analysis,Monetary Assessment and Strategy Division, Threadneedle Street, London EC2R 8AH, United Kingdom.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In recent years a number of European countries have shifted their tax structure more strongly towards indirect taxes, motivated, inter alia, by the intention to foster competitiveness. Against this background, this paper develops a tractable two-country model of a monetary union, characterised by national fiscal and supranational monetary policy, with price-setting firms and endogenously determined terms of trade. The paper discusses a number of monetary and fiscal policy questions which emerge if one of the countries shifts its tax structure more strongly towards indirect taxes. Qualitatively, it is shown that the long-run effects of such a unilateral policy shift on output and consumption within and between the two countries depend sensitively on whether indirect tax revenues are used to lower direct taxes or to finance additional government expenditures. Moreover, short-run dynamics are shown to depend significantly on the speed at which fiscal adjustments take place, on the choice of the inflation index stabilised by the central bank, and on whether the tax shift is anticipated or not. Quantitatively, the calibrated model version indicates that only if the additional indirect tax revenues are used to finance a cut in direct taxes there is some, though limited scope for non-negligible spillovers between countries. JEL Classification: E61, E63, F42.
    Keywords: Fiscal regimes, Monetary policy, Currency union.
    Date: 2009–10
  19. By: John H. Cochrane
    Abstract: Bennett McCallum (2009), applying Evans and Honkapohja's (2001) results, argues that "learnability" can save New-Keynesian models from their indeterminacies. He claims the unique bounded equilibrium is learnable, and the explosive equilibria are not. However, he assumes that agents can directly observe the monetary policy shock. Reversing this assumption, I find the opposite result: the bounded equilibrium is not learnable and the unbounded equilibria are learnable. More generally, I argue that a threat by the Fed to move to an "unlearnable" equilibrium for all but one value of inflation is a poor foundation for choosing the bounded equilibrium of a New-Keynesian model.
    JEL: E0
    Date: 2009–10
  20. By: Tobias Adrian; Hyun Song Shin
    Abstract: Central banks have a variety of tools for implementing monetary policy, but the tool that has received the most attention in the literature has been the overnight interest rate. The financial crisis that erupted in the summer of 2007 has refocused attention on other channels of monetary policy, notably the transmission of policy through the supply of credit and overall conditions in the capital markets. In 2008, the Federal Reserve put into place various lender-of-last-resort programs under section 13(3) of the Federal Reserve Act in order to cushion the strains on financial intermediaries' balance sheets and thereby target the unusually wide spreads in a variety of credit markets. While classic monetary policy targets a price (for example, the federal funds rate), the liquidity facilities affect balance-sheet quantities. The financial crisis forcefully demonstrated that the collapse of the financial sector's balance-sheet capacity can have powerful adverse effects on the real economy. We reexamine the distinctions between prices and quantities in monetary policy transmission.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Credit ; Liquidity (Economics)
    Date: 2009
  21. By: Antoine Martin; Cyril Monnet
    Abstract: The authors compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, while the second framework relies only on open market operations. They show that the Friedman rule cannot be implemented when the central bank uses standing facilities, while it can be implemented with open market operations. For a given rate of inflation, the authors show that standing facilities unambiguously achieve higher welfare than just conducting open market operations. They conclude that elements of both frameworks should be combined. Also, their results suggest that any monetary policy implementation framework should remunerate both required and excess reserves.
    Keywords: Monetary policy ; Open market operations ; Banks and banking, Central
    Date: 2009
  22. By: Monica Billio (Università Ca' Foscari di Venezia - Dipartimento di Scienze Economiche); Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, DGEI-DAMEP - Banque de France); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Gian Luigi Mazzi (Eurostat - Office Statistique des Communautés Européennes)
    Abstract: In this paper, we aim at assessing Markov-switching and threshold models in their ability to identify turning points of economic cycles. By using vintage data that are updated on a monthly basis, we compare their ability to detect ex-post the occurrence of turning points of the classical business cycle, we evaluate the stability over time of the signal emitted by the models and assess their ability to detect in real-time recession signals. In this respect, we have built an historical vintage database for the Euro area going back to 1970 for two monthly macroeconomic variables of major importance for short-term economic outlook, namely the Industrial Production Index and the Unemployment Rate.
    Keywords: Business cycle, Euro zone, Markov switching model, SETAR model, unemployment, industrial production.
    Date: 2009–08
  23. By: Ondra Kamenik; Marianne Johnson; Kevin Clinton; Huigang Chen; Douglas Laxton
    Abstract: We derive forecast confidence bands using a Global Projection Model covering the United States, the euro area, and Japan. In the model, the price of oil is a stochastic process, interest rates have a zero floor, and bank lending tightening affects the United States. To calculate confidence intervals that respect the zero interest rate floor, we employ Latin hypercube sampling. Derived confidence bands suggest non-negligible risks that U.S. interest rates might stay near zero for an extended period, and that severe credit conditions might persist.
    Keywords: Bank credit , Credit restraint , Economic forecasting , Economic models , European Union , Inflation targeting , Interest rates , Japan , Monetary policy , Oil prices , United States ,
    Date: 2009–09–30
  24. By: Holly, Sean; Petrella, Ivan
    Abstract: This paper argues that factor demand linkages are crucial in the transmission of both sectoral and aggregate shocks. We show this using a panel of highly disaggregated manufacturing sectors together with sectoral structural VARs. When sectoral interactions are explicitly accounted for, a contemporaneous technology shock to all manufacturing sectors implies a positive response in both output and hours at the aggregate level. Otherwise, there is a negative correlation as in much of the existing literature. Furthermore, we find that technology shocks are important drivers of business cycles.
    Keywords: Multisectors; Technology shocks; Business cycles; Long-run restrictions; Cross Sectional Dependence.
    JEL: E32 C31 E20
    Date: 2009–09
  25. By: Martin, Christopher; Milas, C
    Abstract: We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis.
    Keywords: financial crisis; liquidity; monetary policy; global imbalances
    Date: 2009
  26. By: Alexander Mihailov; Fabio Rumler; Johann Scharler
    Abstract: In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Galí and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
    Keywords: New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation
    JEL: C32 C52 E31 F41 P22
    Date: 2009–10
  27. By: Francisco Covas; Shigeru Fujita
    Abstract: This paper attempts to quantify business cycle effects of bank capital requirements. The authors use a general equilibrium model in which financing of capital goods production is subject to an agency problem. At the center of this problem is the interaction between entrepreneurs' moral hazard and liquidity provision by banks as analyzed by Holmstrom and Tirole (1998). They impose capital requirements on banks and calibrate the regulation using the Basel II risk-weight formula. Comparing business cycle properties of the model under this procyclical regulation with those under hypothetical countercyclical regulation, the authors find that output volatility is about 25 percent larger under procyclical regulation and that this volatility difference implies a 1.7 percent reduction of the household's welfare. Even with more conservative parameter choices, the volatility and welfare differences under the two regimes remain nonnegligible.
    Keywords: Bank capital ; Business cycles ; Bank reserves
    Date: 2009
  28. By: Valerie A. Ramey
    Abstract: Do shocks to government spending raise or lower consumption and real wages? Standard VAR identification approaches show a rise in these variables, whereas the Ramey-Shapiro narrative identification approach finds a fall. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news. Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model. Motivated by the importance of measuring anticipations, I construct two new variables that measure anticipations. The first is based on narrative evidence that is much richer than the Ramey-Shapiro military dates and covers 1939 to 2008. The second is from the Survey of Professional Forecasters, and covers the period 1969 to 2008. All news measures suggest that most components of consumption fall after a positive shock to government spending. The implied government spending multipliers range from 0.6 to 1.1.
    JEL: E62 H3 H56
    Date: 2009–10
  29. By: Hein, Eckhard; Schoder, Christian
    Abstract: We analyse the effects of interest rate variations on the rates of capacity utilisation, capital accumulation and profit in a simple post-Kaleckian distribution and growth model. This model gives rise to different potential accumulation regimes depending on the values of the parameters in the investment, saving and distribution function. Estimating these core behavioural equations for the US and Germany in the period 1960-2007, we find significant and robust effects of interest payments with the expected sign in each of the equations. Our estimation results imply, both for the US and for Germany, that the effects of changes in the real long-term rate of interest on the equilibrium rates of capacity utilisation, capital accumulation and profits are characterised by the ‘normal regime’: Rising long-term real rates of interest cause falling rates of capacity utilisation, capital accumulation and profits, as well as redistribution at the expense of labour income and hence an increasing profit share in both countries.
    Keywords: Interest rate; distribution; demand; capital accumulation; Kaleckian model
    JEL: E12 E25 E22 E21
    Date: 2009–10–15
  30. By: Chatterjee, Sidharta
    Abstract: This paper deals with an existing question; does market liquidity disequilibrium leads to stock market bubble burst? Contemporary research has shown that liquidity is the key driving force behind capital market growth and its sustenance. Stock markets usually react to changes in market-wide liquidity, whose supply-demand cycle fluctuates with investor behavior actions. Market illiquidity due to supply shocks or sudden redemption, does exert strain on the financial markets as of when if too much untenable, lead to market crash. In this paper, we investigate how market-wide fluctuations in liquidity result in return volatilities and stock market return asymmetries as also to prove the notion whether liquidity per se, is the sole driver of stock market growth.
    Keywords: Liquidity; business cycles; investor behavior; returns asymmetry
    JEL: C32 E44
    Date: 2009–10–24
  31. By: Olaf POSCH (Aarhus University and CREATES, CESifo); Klaus W€LDE (University of Mainz, CESifo, and UCL Louvain la Neuve)
    Abstract: A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels differ both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.
    Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models
    JEL: E32 E62 H3 C65
    Date: 2009–08–27
  32. By: Bart Hobijn; Kristin Mayer; Carter Stennis; Giorgio Topa
    Abstract: We present new measures of household-specific inflation experiences based on comprehensive information from the Consumer Expenditure Survey (CEX). We match households in the Interview and the Diary Surveys from the CEX to produce both complete and detailed pictures of household expenditures. The resulting household inflation measures are based on a more accurate and detailed description of household expenditures than those previously available. We find that our household-based inflation measures track aggregate measures such as the CPI-U quite well and that the addition of Diary Survey data induces small but significant differences in the measurement of household inflation. The distribution of inflation experiences across households exhibits a large amount of dispersion over the entire sample period. In addition, we uncover a significantly negative relationship between mean inflation and inflation inequality across households.
    Keywords: Inflation (Finance) ; Households - Economic aspects
    Date: 2009
  33. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: The aim of the present paper is to assess the new classical/real business cycle revolution, which dethroned Keynesian macroeconomics. In its first part, I critically discuss the microfoundations requirement that constitutes a cornerstone of the new approach and suggest an alternative, softer, formulation of it. The conclusion of this discussion is that the new classical/real business cycle revolution marked a transition from a soft to a demanding understanding of the microfoundations requirement. In the second part of the paper, I present additional salient traits of the new classical and the real business cycle stages of the revolution. While each of these stages brought a specific contribution to the revolution, I emphasize the decisive role played by Kydland and Prescott in re-orienting the type of work in which macroeconomists were engaged. Finally, in part three, I ponder upon the causes of this revolution. After presenting and assessing PrescottÕs and LucasÕs accounts of the factors which gave rise to the new approach, I venture into muddier waters by raising the question of whether a political agenda underpinned the NC/RBC revolution.
    Date: 2009–08–01
  34. By: Sarah M. Lein (Swiss National Bank Zurich, Switzerland); Eva Köberl (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    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 forms 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 E52
    Date: 2009–10
  35. By: Maku, Olukayode E.
    Abstract: This study examines the link between government spending and economic growth in Nigeria over the last three decades (1977-2006) using time series data to analyze the Ram (1986) model. Three variants of Ram (1986) model were developed-regressing Real GDP on Private investment, Human capital investment, Government investment and Consumption spending at absolute levels, regressing it as a share of real output and regressing the growth rate real output to the explanatory variable as share of real GDP. Result showed that private and public investments have insignificant effect on economic growth during the review period the review period. An attempt to test for presence of stationary using Augmented Dickey Fuller (ADF) unit root test reveals that all variables incorporated in the model were non-stationary at their levels. In an attempt to establish long-run relationship between public expenditure and economic growth, the result reveals that the variables are cointegrated at 5% and 10% critical level. With the use of error correction model to detect short run behaviour of the variables, the result shows that for any distortion in the short-run, the error term restore the relationship back to its original equilibrium by a unit. A number of suggestions were however made on how government spending should be channel in order to influence economic growth significantly and positively in Nigeria.
    Keywords: Government spending; public infrastructure; economic growth; human capital investment; Government investment.
    JEL: E2 H5
    Date: 2009–06–04
  36. By: RYAN, JOHN
    Abstract: China’s concern about its U.S. Dollar reserves is being amplified by the low returns of some of China’ investments in the U.S. which leads to a broader concern about how the current reserve system basically entails China lending to the U.S. at very low interest rates. A two-currency reserve system would potentially be even more unstable than the existing one, because of speculation moves in and out of the U.S. Dollar and the Euro depending on their return, increasing volatility. U.S. Policymakers have started to realize that large external deficits, the dominance of the dollar, and the large capital inflows that necessarily accompany deficits and currency dominance are no longer in the U.S. national interest. The U.S. has to consider initiatives put forward over the past year by China and others to begin a serious discussion of reforming the international monetary system. This chapter will examine four scenarios regarding the global currency regime of the future and the Chinese influence in this most important policy arena. It will focus on the U.S. Dollar decline as the Reserve Currency, on the Euro gaining strength slowly in a turbulent world, on the potential of the Renminbi to become a Reserve Currency, and on the future of the Super-Sovereign Reserve Currency, the IMF’s Special Drawing Rights (SDRs). Before that it will examine the role of the Renminbi in the Asian Financial Crisis in 1997 and its role in the global financial markets at that time and lessons learnt from the crisis. The crisis had significant macro-level effects, including sharp reductions in values of currencies, stock markets, and other asset prices of several Asian countries.
    JEL: E42 E58 F02 E44 A10 E40 F31 E41
    Date: 2009–10–26
  37. By: Javier Bianchi
    Abstract: Credit constraints that link a private agent’s debt to market-determined prices embody a credit externality that drives a wedge between competitive and constrained socially optimal equilibria, inducing private agents to overborrow. The externality arises because agents fail to internalize the debt-deflation effects of additional borrowing when negative income shocks trigger the credit constraint. We quantify the effects of this inefficiency in a two-sector dynamic stochastic general equilibrium model of a small open economy calibrated to emerging markets. The credit externality increases the probability of financial crises by a factor of seven and causes the maximum drop in consumption to increase by 10 percentage points.
    Date: 2009
  38. By: Katheryn N. Russ; Diego Valderrama
    Abstract: We draw on stylized facts from the finance literature to build a model where altering the relative costs of bank and bond financing changes the entire distribution of firm size, with implications for the aggregate capital stock, output, and welfare. Reducing transactions costs in the bond market increases the output and profits of mid-sized firms at the expense of both the largest and smallest firms. In contrast, reducing the frictions involved in bank lending promotes the expansion of the smallest firms while all other firms shrink, even as it increases the profitability of both small and mid-size firms. Although both policies increase aggregate output and welfare, they have opposite effects on the extensive margin of production---promoting bond issuance causes exit while cheaper bank credit induces entry. When reducing transactions costs in one market, the resulting increase in output and welfare are largest when transactions costs in the other market are very high.
    JEL: E10 F4 G32 L11 L16
    Date: 2009–10
  39. By: Marcin Kacperczyk; Stijn Van Nieuwerburgh; Laura Veldkamp
    Abstract: The invisibility of information precludes a direct test of attention allocation theories. To surmount this obstacle, we develop a model that uses an observable variable -- the state of the business cycle -- to predict attention allocation. Attention allocation, in turn, predicts aggregate investment patterns. Because the theory begins and ends with observable variables, it becomes testable. We apply our theory to a large information-based industry, actively managed equity mutual funds, and study its investment choices and returns. Consistent with the theory, which predicts cyclical changes in attention allocation, we find that in recessions, funds' portfolios (1) covary more with aggregate payoff-relevant information, (2) exhibit more cross-sectional dispersion, and (3) generate higher returns. The results suggest that some, but not all, fund managers process information in a value-maximizing way for their clients and that these skilled managers outperform others.
    JEL: E3 G2
    Date: 2009–10
  40. By: Heij, C.; Dijk, D.J.C. van; Groenen, P.J.F. (Erasmus Econometric Institute)
    Abstract: Macroeconomic forecasting is not an easy task, in particular if future growth rates are forecasted in real time. This paper compares various methods to predict the growth rate of US Industrial Production (IP) and of the Composite Coincident Index (CCI) of the Conference Board, over the coming month, quarter, and half year. It turns out that future IP growth rates can be forecasted in real time from ten leading indicators, by means of the Composite Leading Index (CLI) or, even somewhat better, by principal components regression. This amends earlier negative findings for IP by Diebold and Rudebusch. For CCI, on the other hand, simple autoregressive models do not provide significantly less accurate forecasts than single-equation and bivariate vector autoregressive models with the CLI. This amends some of the more positive results for CCI recently reported by the Conference Board. Not surprisingly, all forecast methods improve considerably if `ex post' data are used, after possible data updates and revisions.
    Keywords: vintage date;leading indicators;forecast evaluation;recessions;industrial production;composite coincident index
    Date: 2009–10–19
  41. By: Michel DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: The aim of this paper is to elucidate Keynes's Marshallian lineage. I argue that the result of bringing out the Marshallian antecedents of the General Theory highlights KeynesÕs failure to achieve the theoretical project he was striving at, namely to demonstrate an involuntary unemployment result in the arising of which nominal wage rigidity would play no role. In the first part of the paper, I reexamine MarshallÕs theory of value. This sectionÕs main conclusion is that no theory of unemployment is to be found in MarshallÕs writings. In section two, I study the literature spanning from Marshall to Keynes, focusing on Beveridge, Hicks and Pigou, in order to see whether the lacuna present in MarshallÕs writings happened to be filled. Documenting the emergence of the notion of frictional unemployment, I come to the conclusion that its arising went along with little theoretical elaboration. The third and last part of the paper is a critical reflection on the General Theory. I start by making the point that KeynesÕs theory of effective demand ought to be viewed as an extension of MarshallÕs analysis of firmsÕ short-period production decisions. This enables me to bring out the decisive role played by the wage rigidity assumption in KeynesÕs reasoning. I claim that, except for this assumption, the differences between Ôeffective demand ˆ la MarshallÕ and Ôeffective demand ˆ la KeynesÕ are minor. I close my analysis of KeynesÕs reasoning by showing that no real removal of the nominal rigidity assumption is to be found in chapter 19 of the General Theory.
    Date: 2009–06–30
  42. By: Vranceanu, Radu (ESSEC Business School)
    Abstract: The main driving force of the financial crisis of 2007-2009 was a rapid deterioration of the trust of private agents in the quality of financial institutions. In turn, this loss of confidence entailed the collapse of several key asset markets and a sharp decline in the other asset prices. This paper surveys the critical moments of the crisis, puts forward some of the shock amplifying mechanisms and comments on the effectiveness of various policy measures. The conclusion opens the debate on what structural changes in the existing financial architecture are required to contain such crises in the future.
    Keywords: Banking Sector; Economic Myths; Economic Policy; Financial Crisis; Trust
    JEL: E65 G20
    Date: 2009–09

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