nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒11‒14
24 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Determination of the real exchange rate of rouble and assessment of long-rum policy of real exchange rate targeting By Sossounov, Kirill; Ushakov, Nikolay
  2. How to herd cats: economic policy coordination in the Euro zone in tough times By Jacques LE CACHEUX
  3. OCA cubed: Mundell in 3D By Michaela Krčílková; Jan Zápal
  4. A New World Monetary System: Keynes' view revisited By Mohammed, Shehu Tijjani
  5. "Minsky Moments, Russell Chickens, and Gray Swans--The Methodological Puzzles of the Financial Instability Analysis" By Alessandro Vercelli
  6. A Theory of Banks, Bonds, and the Distribution of Firm Size By Russ, Katheryn; Vladerrama, Diego
  7. Internationale Währungsmarktstabilität durch eine Globalwährung? By Menkhoff, Lukas
  8. Bubbly Liquidity By Farhi, Emmanuel; Tirole, Jean
  9. Testing for Convergence in Stock Markets: A Non-linear Factor Approach By Guglielmo Maria Caporale; Burcu Erdogan; Vladimir Kuzin
  10. Cross-Country Differences in Productivity: The Role of Allocation and Selection By Eric J. Bartelsman; John C. Haltiwanger; Stefano Scarpetta
  11. Marital Risk, Family Insurance, and Public Policy By Hans Fehr; Manuel Kallweit; Fabian Kindermann
  12. Endogenous Technological Progress and the Cross Section of Stock Returns By Xiaoji Lin
  13. Felemás magyar modernizáció By Tamás Mellár
  14. ‘Financialisation’, distribution, capital accumulation and productivity growth in a Post-Kaleckian model By Hein, Eckhard
  15. A Forecasting Model Incorporating Replacement Purchase: Mobile Handsets in South Korea¡¯s Market By Jongsu Lee; Chul-Yong
  16. Tax collection in Spain in the 18th century: the case of the “décima” By Fernández de Pinedo Echevarría, Nadia
  17. Diagnostics of Rational Expectation Financial Bubbles with Stochastic Mean-Reverting Termination Times By Li Lin; Didier Sornette
  18. Constructing a GDP-based Index for Use as Benchmark By Cohen, Ruben D
  19. Approximating Closed Form Solutions to a Class of Feedback Policies By Sandal, Leif K.
  20. Financial Constraints, Inflated Home Prices, and Borrower Default during the Real-Estate Boom By Ben-David, Itzhak
  21. International Portfolio Balance – Modeling the External Adjustment Process By Holinski Nils; Kool Clemens; Muysken Joan
  22. Optimal taxes and pensions in a society with myopic agents By Kerstin Roeder
  23. Bonds with volatilities proportional to forward rates By Michal Baran; Jerzy Zabczyk
  24. On Revenue and Welfare Dominance of Ad Valorem Taxes in Two-Sided Markets By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm

  1. By: Sossounov, Kirill; Ushakov, Nikolay
    Abstract: The equilibrium real exchange rate of Russian ruble is estimated for the period from the beginning of 1995 to the beginning of 2008. According to the methodological approach proposed by Edwards (1988) the equilibrium real exchange rate is a function of a set of fundamental variables (so-called “reduced form equation”). In order to estimate an equilibrium real exchange rate a set of fundamentals was selected: terms of trade, productivity differential, fiscal policy variable. Estimation was performed in a cointegrated VAR framework using the Johansen cointegration test. The speed of adjustment of the actual real exchange rate to the equilibrium real exchange rate as well as the influence of monetary policy and private capital flows on the short-run dynamics of real exchange rate is explored.
    Keywords: macroeconomics; real exchange rate; Russia
    JEL: C51 E00
    Date: 2009–05–01
  2. By: Jacques LE CACHEUX
    Abstract: How to herd cats: economic policy coordination in the Euro zone in tough times
    Date: 2009–11
  3. By: Michaela Krčílková (Czech University of Life Sciences Prague,Faculty of Economics and Management); Jan Zápal (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; London School of Economics and Political Science)
    Abstract: This paper intends to fill two gaps in the Optimal Currency Area literature. First of all, Mundell's original idea has very little formalmodel theoretical underpinning. Second, it almost exclusively views countries contemplating monetary unification as single economies. We question this view and expand the model to incorporate the division of an economy into three sectors. In the empirical part of the paper, we follow recent OCA empirici literature and investigate the correlation of shocks between the individual new EU member countries and the `EU-core'. Treating the whole economy as one sector this is a standard exercise. However, since the three-sector version of our model provides a natural metric on which to assess the appropriateness of unification, we are able to repeat the exercise treating each country's economy as a collection of three distinct sectors. In the paper we test for the different reactions of stock markets to the current financial crisis. We focus on Central European stock markets, namely the Czech, Polish and Hungarian ones, and compare them to the German and U.S. benchmark stock markets. Using wavelet analysis, we decompose a time series into frequency components called scales and measure their energy contribution. The energy of a scale is proportional to its wavelet variance. The decompositions of the tested stock markets show changes in the energies on the scales during the current financial crisis. The results indicate that each of the tested stock markets reacted differently to the current financial crisis. More important, Central European stock markets seem to have strongly different behaviour during the crisis.
    Keywords: OCA, supply and demand shocks, VAR decomposition, new EU member states
    JEL: E32 F15 F40
    Date: 2009–10
  4. By: Mohammed, Shehu Tijjani
    Abstract: This essay critically examines the view of Keynes on the reform of the international monetary system. We then apply modern monetary and banking theory, where money is redefined as a pure numerical vehicle in contrast to money being defined as a net asset, to appraise those elements that are required for a functioning and efficient international monetary system. It is suggested that Keynes’ view are still very much relevant today if the world is to move from the present non-system of international monetary arrangements to a system where currencies would no longer be perceived as net assets and countries would no longer be grouped as key and non-key currency countries.
    Keywords: Monetary System; Bank Money; Absolute Exchange Rate
    JEL: F33
    Date: 2009–11–07
  5. By: Alessandro Vercelli
    Abstract: The recent revival of Hyman P. Minsky's ideas among policymakers, economists, bankers, financial institutions, and the mass media, synchronized with the increasing gravity of the subprime financial crisis, demands a reappraisal of the meaning and scope of the "financial instability hypothesis" (FIH). We argue that we need a broader approach than that conventionally pursued, in order to understand not only financial crises but also the periods of financial calm between them and the transition from stability to instability. In this paper we aim to contribute to this challenging task by restating the strictly financial part of the FIH on the basis of a generalization of Minsky's taxonomy of economic units. In light of this restatement, we discuss a few methodological issues that have to be clarified in order to develop the FIH in the most promising direction.
    Keywords: Financial Instability; Financial Fragility; Financial Fluctuations; Subprime Crisis; Minsky Moments; Minsky Meltdown; Speculative Units; Hedge Units; Ponzi Units; Business Cycles
    JEL: B50 E E32 E44 G
    Date: 2009–11
  6. By: Russ, Katheryn (University of California, Davis); Vladerrama, Diego (Federal Reserve Bank of San Francisco)
    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. 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.
    Date: 2009
  7. By: Menkhoff, Lukas
    Abstract: In our current time the idea of a global currency seems to be pathbreaking. However, the introduction of such a currency requires a uniform governance which implicates that countries lose national autonomy. Presently, countries prefer national monetary policy and national financial regulation. Moreover, it is not obvious that integration of the world economy is already advanced enough to justify a global currency (if one takes criteria applied to regional currencies as a benchmark). With increasing economic integration and succesful international coooperation, howver, this scenario may change in the future.
    Keywords: exchange rates; international monetary arrangements; global currency
    JEL: F31 F33
    Date: 2009–11–05
  8. By: Farhi, Emmanuel (Harvard University); Tirole, Jean (Toulouse School of Economics)
    JEL: E2 E44
    Date: 2009–10
  9. By: Guglielmo Maria Caporale; Burcu Erdogan; Vladimir Kuzin
    Abstract: This paper applies the Phillips and Sul (2007) method to test for convergence in stock returns to an extensive dataset including monthly stock price indices for five EU countries (Germany, France, the Netherlands, Ireland and the UK) as well as the US over the period 1973-2008. We carry out the analysis on both sectors and individual industries within sectors. As a first step, we use the Stock and Watson (1998) procedure to filter the data in order to extract the long-run component of the series; then, following Phillips and Sul (2007), we estimate the relative transition parameters. In the case of sectoral indices we find convergence in the middle of the sample period, followed by divergence, and detect four (two large and two small) clusters. The analysis at a disaggregate, industry level again points to convergence in the middle of the sample, and subsequent divergence, but a much larger number of clusters is now found. Splitting the cross-section into two subgroups including Euro area countries, the UK and the US respectively, provides evidence of a global convergence/divergence process not obviously influenced by EU policies.
    Keywords: Stock Market, Financial Integration, European Monetary Union Convergence, Factor Model
    JEL: C32 C33 G11 G15
    Date: 2009
  10. By: Eric J. Bartelsman; John C. Haltiwanger; Stefano Scarpetta
    Abstract: This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, but this covariance varies significantly across countries and is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.
    JEL: L11 L16 L2 L25 O4 O57
    Date: 2009–11
  11. By: Hans Fehr; Manuel Kallweit; Fabian Kindermann
    Abstract: The present paper aims to quantify the growth and welfare consequences of changing family structures in western societies. For this reason we develop a dynamic general equilibrium model with both genders which takes into account changes of the marital status as a stochastic process. Individuals respond to these shocks by adjusting savings and labor supply. Our quantitative results indicate that the declining number of marriages coupled with increasing divorce rates had a profound effect on macroeconomic variables and long-run welfare. We find a significant increase in aggregate capital accumulation and a rising labor market participation of women. In addition, our simulations indicate that the change in the marital structure had significant negative welfare consequences for women who lost between 0.4 and 2.2 percent of aggregate resources. The impact on men’s welfare, however, could be positive or negative depending on the specific calibration.
    Keywords: family formation, stochastic general equilibrium, life cycle model
    JEL: J12 J22
    Date: 2009
  12. By: Xiaoji Lin
    Abstract: I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is endogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between in- tangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not affect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.
    Date: 2009–11
  13. By: Tamás Mellár (Department of Economics and Regional Studies, University of Pécs)
    Keywords: Transition, economic policy, modernization
    JEL: E65 P20 N14
    Date: 2009–05
  14. By: Hein, Eckhard
    Abstract: Focussing on the long-run effects of ‘financialisation’ and increasing shareholder power in a simple Post-Kaleckian endogenous growth model, we examine the effects of increasing shareholder power on the demand regime, on the productivity regime, and on the overall regime of the model. Under special conditions increasing shareholder power may have positive effects on capital accumulation and productivity growth and hence on potential growth of the economy. However, such a regime does not only require directly positive – or under certain conditions only weakly negative – effects of increasing shareholder power on the productivity regime. It also requires expansive – or under special circumstances only weakly contractive – effects of increasing shareholder power on capital accumulation via the demand regime of the economy. Both conditions have recently been questioned on empirical grounds, so that an overall long-run ‘contractive’ regime seems to be the most likely outcome of ‘financialisation’, rising shareholder power and pronounced shareholder value orientation.
    Keywords: Financialisation; distribution; capital accumulation; productivity growth; Kaleckian model
    JEL: E12 E25 O41 E22 O16 E21
    Date: 2009–11–11
  15. By: Jongsu Lee; Chul-Yong (Technology Management, Economics and Policy Program(TEMEP), Seoul National University)
    Abstract: The paper introduces a replacement forecasting model that operates at the brand level and overcomes limitations of existing models. The model (1) consists of a diffusion model and a time series model; (2) separately identifies the diffusion of first-time purchases and that of replacement purchases; (3) reflects brands¡¯ competitive factors affecting product diffusion; and (4) characterizes consumers¡¯ different replacement cycles.The model is applied to South Korea¡¯s mobile handset market. The model performs well in terms of its fit and forecasting when compared with other forecasting models incorporating replacement and repeat purchases. The usefulness of the model stems from its ability to describe complicated environments and its flexibility in including multiple factors that drive diffusion in the regression analysis.
    Keywords: Replacement, Diffusion model, Mobile handset market
    Date: 2009–04
  16. By: Fernández de Pinedo Echevarría, Nadia (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid)
    Abstract: If we compare the Castilian fiscal system with English, French or Dutch, two basic differences are apparent: in one hand, in England, France and Holland the fiscal system was a mixture of indirect taxes and direct taxes and in the other hand, the financial revolution had been carried out in the 16th century in Castilia (central Spain), when for different reasons national short-term debt was turned into juros - or long-term debt. But the Dutch Republic in the 16th century and England by the end of 17th century and the beginning of 18th century were able to finance wars thanks to an efficient financial revolution. Traditionally, wars have been the excuse to impose new taxes or to reorganize public funds in order to obtain greater economic resources for financing the deficit originated by the war. Since most of the monarchies’ tax expenses stemmed from war, it is no surprise that the conflict known as the Jenkins´ Ear (1739) contributed to increase the deficit and fuelled a debate regarding a tax reform that would augment income and would be collected in a more egalitarian way. The Castilian tax system was based almost exclusively on indirect taxes. The taxation (alcabalas, millones, cientos, tobacco monopolies, customs…) of consumables ensured that whilst some taxes affected primarily rich consumers (for example tobacco), most taxes targeted the masses. Increasing the fiscal charge via indirect taxes seemed like an unfeasible and damaging option for trade and craftwork. This is the reason why there was an attempt to create a direct tax, similar to the Catalan cadastre. One of these attempts prior to the Marquis of the Ensenada’s cadastre was la décima. It was devised as a direct tax but its manner of collection ultimately depended on the willingness of the local cabildos.
    Keywords: Taxation, Spain, Madrid, Indirect/Direct Taxes, 18th Century Tax Collection, War Expenses, Jenkin’s Ear War, The “Décima”
    JEL: N33 E62 H71
    Date: 2009–10
  17. By: Li Lin; Didier Sornette
    Abstract: We propose two rational expectation models of transient financial bubbles with heterogeneous arbitrageurs and positive feedbacks leading to self-reinforcing transient stochastic faster-than-exponential price dynamics. As a result of the nonlinear feedbacks, the termination of a bubble is found to be characterized by a finite-time singularity in the bubble price formation process ending at some potential critical time $\tilde{t}_c$, which follows a mean-reversing stationary dynamics. Because of the heterogeneity of the rational agents' expectations, there is a synchronization problem for the optimal exit times determined by these arbitrageurs, which leads to the survival of the bubble almost all the way to its theoretical end time. The explicit exact analytical solutions of the two models provide nonlinear transformations which allow us to develop novel tests for the presence of bubbles in financial time series. Avoiding the difficult problem of parameter estimation of the stochastic differential equation describing the price dynamics, the derived operational procedures allow us to diagnose bubbles that are in the making and to forecast their termination time. The tests performed on three financial markets, the US S&P500 index from 1 February 1980 to 31 October 2008, the US NASDAQ composite index from 1 January 1980 to 31 July 2008 and the Hong Kong Hang Seng index from 1 December 1986 to 30 November 2008, suggest the feasibility of advance bubble warning.
    Date: 2009–11
  18. By: Cohen, Ruben D
    Abstract: The gross domestic product [GDP] is a fundamental economic indicator that is frequently used as a benchmark for local equity indices. The widespread appeal of this association is understandable because an equity index, especially if broad, could, like the GDP, also manifest the state of the economy. At the same time, however, the validity of a direct relation between the two is debatable since the GDP is known to be characteristically different from the typical equity index, however broad. In this work, we review some of the key elements that separate the GDP from a typical broad equity index in order to explain why the two cannot be compared directly with each other. We then incorporate a readily available mapping technique to create a GDP-based index that circumvents their inherent disparities and, thus, enable us to benchmark one against the other.
    Keywords: GDP; equity index; benchmark; relative valuation; duration;
    JEL: G00
    Date: 2009–10
  19. By: Sandal, Leif K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Dynamic optimization problems cover a large class of problems in theoretical and applied economics. A simple iterative algorithm with fast convergence is proposed. It is demonstrated that the algorithm in a few steps produce excellent analytic (closed form) approximations including error bounds to a class of nonlinear problems. The algorithmic scheme is also well suited to produce numerical solutions. The notions of dynamic and potential rents are operationalized. The algorithm is utilizing a relation balancing these concepts. The result is particularly strong in the case of zero discounting where the exact CU-optimal policy is determined in a single step. Applying a particular seed in the general convergent scheme reproduces in a simple way results (formulas) published in the last decade in bioeconomics.
    Keywords: Closed form approximations; Contraction algorithm; Renewable resource economics; Capital dynamic modeling; Zero discounting and optimality
    JEL: A12 C61 C63 E10 Q00
    Date: 2009–09–15
  20. By: Ben-David, Itzhak (Ohio State University)
    Abstract: During the housing boom, many subprime home buyers were not able to make a mort- gage down payment and therefore were at risk of being rationed from the market. To resolve the issue, some buyers, sellers and intermediaries artificially expanded the scope of transactions by including items that cannot be collateralized. As a result, observed house prices were higher and mortgages larger, ultimately relaxing buyers' financial constraints. I estimate that between 2005 and 2008, up to 16% of highly leveraged (greater than 95% loan-to-value) transactions in Cook County, Illinois were inflated (with prices higher by 6% to 15%). Inated transactions are more likely in low-income neighborhoods and when intermediaries have a high stake in the transaction. Although borrowers were twice as likely to default, their mortgage rates were not higher.
    JEL: D12 D18 G21 L85
    Date: 2009–06
  21. By: Holinski Nils; Kool Clemens; Muysken Joan (METEOR)
    Abstract: Unprecedented growth in private cross-border asset trade and asymmetric internationalbalance sheets are well-documented stylized facts of financial integration. Moreover, weobserve that current accounts are no longer the number one determinant of external balances. Advancing the work of Blanchard et al. (2005), this paper develops a portfolio-balance model that recognizes these stylized facts and shows how they influence the joint dynamics of the current account, the exchange rate and relative asset prices. Calibrating the model to the external adjustment process of the US, the model produces results that are broadly consistent with recent empirical trends. In particular, we find that the composition of its international balance sheet helps the US to better cope with external shocks.
    Keywords: international economics and trade ;
    Date: 2009
  22. By: Kerstin Roeder (Universität Augsburg)
    Abstract: This paper derives the optimal pension and tax parameters in a society where individuals differ in two characteristics: rationality and productivity. Rational agents, if not liquidity constrained, smooth consumption over their life-cycle. Myopic agents, by contrast, have ex ante a strong preference for the present and undertake no savings, even though, ex post they regret their decision. Given a paternalistic social objective aiming at maximizing the sum over ex post utilities, this paper shows how both transfer systems interact in their degree of redistribution and generosity. Moreover, it reveals how the optimal policy parameters change if capital markets are imperfect, implying that agents cannot borrow against their retirement benefits. Analytical and numerical results show that in some cases only one transfer system prevails.
    Keywords: Social security, redistributive taxation, myopia, credit constraints
    JEL: H21 H55 D91
    Date: 2009
  23. By: Michal Baran; Jerzy Zabczyk
    Abstract: The problem of existence of solution for the Heath-Jarrow-Morton equation with linear volatility and purely jump random factor is studied. Sufficient conditions for existence and non-existence of the solution in the class of bounded fields are formulated. It is shown that if the first derivative of the Levy-Khinchin exponent grows slower then logarithmic function then the answer is positive and if it is bounded from below by a fractional power function of any positive order then the answer is negative. Numerous examples including models with Levy measures of stable type are presented.
    Date: 2009–11
  24. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Koethenbuerger, Marko (Department of Economics, University of Copenhagen); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: A benchmark result in public economics is that it is possible to increase both tax revenue and welfare by making a monopoly subject to ad valorem taxes rather than unit taxes. We show that such revenue and welfare dominance does not hold in two-sided markets.
    Keywords: Ad Valorem Taxes; Unit Taxes; Two-Sided Markets; Revenue-Dominance; Welfare-Dominance; Monopoly
    JEL: D40 H20 L10
    Date: 2009–09–15

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