nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒11‒21
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Expectations, deflation traps and macroeconomic policy By Evans , George W; Honkapohja, Seppo
  2. Monetary-fiscal policy interactions and fiscal stimulus By Troy Davig; Eric M. Leeper
  3. Nominal Wage Adjustment, Demand Shortage and Economic Policy By Yoshiyasu Ono; Junichiro Ishida
  4. The market-perceived monetary policy rule By James D. Hamilton; Seth Pruitt; Scott C. Borger
  5. Credit Crunch in a Small Open Economy By Brzoza-Brzezina, Michal; Makarski, Krzysztof
  6. Fiscal Policy during the current Crisis By Bunea-Bontas, Cristina Aurora; Petre, Mihaela Cosmina
  7. Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle By Eric M. Leeper
  8. A Banking Explanation of the US Velocity of Money: 1919-2004 By Benk, Szilárd; Gillman, Max; Kejak, Michal
  9. Indeterminacy and business-cycle fluctuations in a two-sector monetary economy with externalities By Stefano Bosi; Kazuo Nishimura; Alain Venditti
  10. Inflation persistence in New EU Member States: Is it different than in the Euro Area Members? By Maria Popa
  11. Macroeconomic Forecasting and Structural Change By D'Agostino, Antonello; Gambetti, Luca; Giannone, Domenico; Giannone, Domenico
  12. The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank By Gebhard Kirchgässner; Jürgen Wolters
  13. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008 By Moritz Schularick; Alan M. Taylor
  14. Conventional and unconventional monetary policy By Vasco Cúrdia; Michael Woodford
  15. What Triggers Prolonged Inflation Regimes? A Historical Analysis. By Isabel Vansteenkiste
  16. By How Much Does GDP Rise if the Government Buys More Output? By Robert E. Hall
  17. On Quality Bias and Inflation Targets By Stephanie Schmitt-Grohe; Martin Uribe
  18. What fiscal policy is effective at zero interest rates? By Gauti B. Eggertsson
  19. Fiscal Policy for Recovery By Fitz Gerald, John
  20. Credit Spreads and Monetary Policy By Vasco Cúrdia; Michael Woodford
  21. Input and Output Inventories in the UK By Tsoukalas, John
  22. Foreign Demand for Domestic Currency and the Optimal Rate of Inflation By Stephanie Schmitt-Grohé; Martín Uribe
  23. Business cycle fluctuations and learning-by-doing externalities in a one-sector model By Hippolyte D'Albis; Emmanuelle Augeraud-Véron; Alain Venditti
  24. A note on US excess bank reserves and the credit contraction By Khemraj, Tarron
  25. Taylor-Regel und Subprime-Krise - Eine empirische Analyse der US-amerikanischen Geldpolitik By Erler, Alexander; Krizanac, Damir
  26. The Credit Spread Cycle with Matching Friction By Kevin E. Beaubrun-Diant; Fabien Tripier
  27. An Empirical Evaluation of the Long-Run Risks Model for Asset Prices By Ravi Bansal; Dana Kiku; Amir Yaron
  28. How Stable Are Monetary Models of the Dollar-Euro Exchange Rate?: A Time-varying Coefficient Approach By Joscha Beckmann; Ansgar Belke; Michael Kühl
  29. El mercado de crédito comercial y las restricciones de endeudamiento en Colombia. By Adriana María Corredor-Waldron; David Pérez-Reyna
  30. Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities By Tsoukalas, John
  31. Managing expectations and fiscal policy By Anastasios G. Karantounias with Lars Peter Hansen; Thomas J. Sargent
  32. A multivariate approach for identification of optimal locations with in Ethiopia’s wheat market to tackle soaring inflation on food price By Mezgebo, Taddese
  33. Banking Deregulations, Financing Constraints, and Firm Entry Size By William Kerr; Ramana Nanda
  34. Financing Constraints and Entrepreneurship By William Kerr; Ramana Nanda
  35. Communication in a monetary policy committee: a note By Jan Marc Berk; Beata Bierut
  36. Promarket Reforms and Allocation of Capital in India By Desai, Sameeksha; Eklund, Johan E.; Högberg, Andreas
  37. Private Sector "Employer of Last Resort". By Musgrave, Ralph S.

  1. By: Evans , George W (University of Oregon, University of St. Andrews); Honkapohja, Seppo (Bank of Finland)
    Abstract: We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja, European Economic Review (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero lower bound, temporary increases in government spending can effectively insulate the economy from deflation traps.
    Keywords: adaptive learning; monetary policy; fiscal policy; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2009–09–22
  2. By: Troy Davig; Eric M. Leeper
    Abstract: Increases in government spending trigger substitution effects both inter- and intra-temporal and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model's predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act's implied path for government spending under alternative monetary-fiscal policy combinations.
    Date: 2009
  3. By: Yoshiyasu Ono; Junichiro Ishida
    Abstract: We formulate nominal wage adjustment by incorporating various concepts of fairness. By applying it into a continuous-time money-in-utility model we examine macroeconomic dynamics with and without a liquidity trap and obtain the condition for persistent unemployment, and that for temporary unemployment, to occur. These conditions turn out to be critical, since policy implications significantly differ between the two cases. A monetary expansion raises private consumption under temporary unemployment but does not under persistent unemployment. A fiscal expansion may or may not increase short-run private consumption but crowds out long-run consumption under temporary unemployment. Under persistent unemployment, however, it always increases private consumption.
    Date: 2009–11
  4. By: James D. Hamilton; Seth Pruitt; Scott C. Borger
    Abstract: We introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and our estimation links the two effects. This enables us to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. We find evidence that between 1994 and 2007 the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. In a standard model we show that output smoothing caused by a larger inflation response magnitude is offset by the more measured pace of response. Our response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.
    Date: 2009
  5. By: Brzoza-Brzezina, Michal; Makarski, Krzysztof
    Abstract: We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by a little over one percent.
    Keywords: credit crunch; monetary policy; DSGE with banking sector
    JEL: E32 E52 E44
    Date: 2009–11
  6. By: Bunea-Bontas, Cristina Aurora; Petre, Mihaela Cosmina
    Abstract: Fiscal policy is an important government tool for managing the economy, having the ability to affect the total amount of output produced - GDP. Changes in the level and composition of government spending, taxation or other instruments of fiscal policy have impact on aggregate demand, the pattern of resource allocation, and the distribution of income. The article shows the mechanisms through which fiscal policy stabilizes the business cycle, and the specific requirements for fiscal policy during recession; the practical problems that may occur in implementing an effective fiscal policy are emphasized. Regarding the circumstances of the current financial and economic crises, the revival of the fiscal policy as a macroeconomic policy faces high expectations as to what it can accomplish. The paper highlights the composition of fiscal stimulus package, and reviews the specific fiscal stimulus plans adopted so far by different countries and their objectives. The final section contains an overview of the Romanian government response to the current crises, regarding fiscal policy. The conclusion is that Romania has conducted an inconsistent and ineffective fiscal policy, which has contributed to macro-economic and fiscal imbalances and to an increased fiscal pressure on business. Therefore, a medium-term fiscal framework has to be implemented, in order to ensure effectiveness and fiscal sustainability.
    Keywords: fiscal policy; automatic stabilizers; discretionary fiscal policy; fiscal stimulus; government spending; taxation
    JEL: E62 E65 E63
    Date: 2009–11–13
  7. By: Eric M. Leeper
    Abstract: Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its "fiscal limit" at some point in the future--after which further tax revenues are not forthcoming--it may no longer be possible for monetary policy behavior that obeys the Taylor principle to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems confronting monetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored. In light of this theory, the paper contrasts monetary-fiscal policy frameworks in the United States and Chile.
    JEL: E31 E52 E62
    Date: 2009–11
  8. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.
    Keywords: Volatility; business cycle; credit shocks; velocity
    JEL: E13 E32 E44
    Date: 2009–11
  9. By: Stefano Bosi (EQUIPPE - Université de Lille I); Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We consider a two-sector economy with money-in-the-utility-function and sector-specific externalities. We provide conditions on technologies leading to the existence of local indeterminacy for any value of the interest rate elasticity of money demand, provided the elasticity of intertemporal substitution in consumption is large enough. Moreover, we show that the occurrence of multiple equilibria is intimately linked with the existence of a flip bifurcation and period-two cycles.
    Keywords: Money-in-the-utility-function ; two-sector economy ; sector-specific externalities ; indeterminacy ; period-two cycles ; sunspot equilibria
    Date: 2009–11–15
  10. By: Maria Popa
    Abstract: Is inflation persistence in the New Member States comparable to that in the Euro Area? We argue that persistence may not be as different between the two groups as one might expect. The paper provides a structural measure for the inflation persistence in the New Member States: New Hybrid Phillips Curve. The data set used includes samples for five new member of the EU. We describe the dynamics of inflation using the New Hybrid Phillips Curve as framework. Structural measures show that backward-looking behavior may be a more important component in explaining inflation persistence in the New Member States than in the Euro Area.
    Keywords: inflation persistence, Hybrid Phillips Curve
    Date: 2009–10
  11. By: D'Agostino, Antonello (Central Bank and Financial Services Authority of Ireland); Gambetti, Luca (Universitat Autonoma de Barcelona); Giannone, Domenico (ECARES, Université Libre de Bruxelles); Giannone, Domenico
    Abstract: The aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts. We produce real time out-of-sample forecasts for inflation, the unemployment rate and the interest rate using a Time-Varying Coefficients VAR with Stochastic Volatility (TV-VAR) for the US. The model generates accurate predictions for the three variables. In particular for inflation the TVVAR outperforms, in terms of mean square forecast error, all the competing models: fixed coefficients VARs, Time-Varying ARs and the na¨ýve random walk model. These results are also shown to hold over the most recent period in which it has been hard to forecast inflation.
    JEL: C32 E37 E47
    Date: 2009–10
  12. By: Gebhard Kirchgässner; Jürgen Wolters
    Abstract: Using Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011.
    Keywords: Stability of Money Demand, Monetary Aggregates and Inflation
    JEL: E41 E52
    Date: 2009–11
  13. By: Moritz Schularick; Alan M. Taylor
    Abstract: The crisis of 2008–09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870– 2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are “credit booms gone wrong” and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly.
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  14. By: Vasco Cúrdia; Michael Woodford
    Abstract: We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy--variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves--alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not.
    Keywords: Banks and banking, Central ; Monetary policy ; Interest rates
    Date: 2009
  15. By: Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper empirically assesses which factors trigger prolonged periods of inflation for a sample of 91 countries over the period 1960-2006. The paper employs pooled probit analysis to estimate the contribution of the key factors to inflation starts. The empirical results suggest that for all cases considered a more fixed exchange rate regime and lower real policy rates increase the probability of an inflation start. For developing countries, other relevant factors include food price inflation, the degree of trade openness, the level of past inflation, the ratio of external debt to GDP and the durability of the political regime. For advanced economies, these factors turn out to be statistically insignificant but instead a positive output gap, higher global inflation and a less democratic environment were seen to be detrimental for triggering inflation starts. Finally, oil prices, M2 growth and government spending were never statistically significant. JEL Classification: E31, E58.
    Keywords: Panel Probit, Inflation, emerging markets.
    Date: 2009–11
  16. By: Robert E. Hall
    Abstract: During World War II and the Korean War, real GDP grew by about half the amount of the increase in government purchases. With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0, a range generally supported by research based on vector autoregressions that control for other determinants, but higher values are not ruled out. New Keynesian macro models have multipliers in that range as well. On the other hand, neoclassical models have a much lower multiplier, because they predict that consumption falls when purchases rise. The key features of a model that delivers a higher multiplier are (1) the decline in the markup ratio of price over cost that occurs in those models when output rises, and (2) the elastic response of employment to an increase in demand. These features alone deliver a fairly high multiplier and they are complementary to another feature associated with Keynes, the linkage of consumption to current income. Multipliers are higher—perhaps around 1 .7—when the nominal interest rate is at its lower bound of zero, as it was during 2009.
    JEL: E24 E62
    Date: 2009–11
  17. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: A policy issue central banks are confronted with is whether inflation targets should be adjusted to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that in the context of a Ramsey equilibrium the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the Ramsey plan predicts that the inflation target should not be corrected. If, on the other hand, quality-adjusted (or hedonic) prices are assumed to be sticky, then the Ramsey plan calls for raising the inflation target by the magnitude of the bias.
    JEL: E52 E6
    Date: 2009–11
  18. By: Gauti B. Eggertsson
    Abstract: Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.
    Keywords: Fiscal policy ; Interest rates ; Taxation ; Government spending policy
    Date: 2009
  19. By: Fitz Gerald, John
    Keywords: Policy
    Date: 2009–10
  20. By: Vasco Cúrdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We consider the desirability of modifying a standard Taylor rule for a cen- tral bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor, 2008, and by McCulley and Toloui, 2008) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al., 2007). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in C¶urdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Tay- lor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even sign) of response to credit is less robust to alternative assumptions about the nature and persistence of the disturbances to the economy.
    Date: 2009
  21. By: Tsoukalas, John
    Abstract: What is the role of inventories in UK manufacturing? We present and estimate a model of inventories that considers separately finished goods and input (i.e. the sum of raw materials and work-in-process) inventories. We estimate structural parameters which allows us to make inferences on the role of inventories in cyclical frequencies. Our results suggest that both types of inventories are used for production level (from demand shocks) and production cost (from cost shocks) smoothing. We identify a small but significant negative relationship between inventories and the real interest rate thus providing support for one of the textbook channels of the monetary policy transmission mechanism. Variance decompositions indicate that technology shocks are the dominant driving factor behind cyclical changes in inventories. These shocks account for over 35% of the forecast error variance at these frequencies.
    Keywords: Inventories; Linear-quadratic model; Interest rates
    JEL: E22 E23 C11
    Date: 2009–04
  22. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: More than half of U.S. currency circulates abroad. As a result, much of the seignorage income of the United States is generated outside of its borders. In this paper we characterize the Ramsey-optimal rate of inflation in an economy with a foreign demand for its currency. In the absence of such demand, the model implies that the Friedman rule—deflation at the real rate of interest—maximizes the utility of the representative domestic consumer. We show analytically that once a foreign demand for domestic currency is taken into account, the Friedman rule ceases to be Ramsey optimal. Calibrated versions of the model that match the range of empirical estimates of the size of foreign demand for U.S. currency deliver Ramsey optimal rates of inflation between 2 and 10 percent per annum. The domestically benevolent government finds it optimal to impose an inflation tax as a way to extract resources from the rest of the world in the form of seignorage revenue.
    JEL: E41 E5
    Date: 2009–11
  23. By: Hippolyte D'Albis (LERNA - Economie des Ressources Naturelles - INRA : UR1081 - CEA : DPG - Université des Sciences Sociales - Toulouse I); Emmanuelle Augeraud-Véron (MIA - Mathématiques, Image et Applications - Université de La Rochelle : EA3165); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We consider a one-sector Ramsey-type growth model with inelastic labor and learning-by-doing externalities based on cumulative gross investment (cumulative production of capital goods), which is assumed, in accordance with Arrow [5], to be a good index of experience. We prove that a slight memory effect characterizing the learning-by-doing process is enough to generate business cycle fluctuations through a Hopf bifurcation. This is obtained for reasonable parameter values, notably for both the elasticity of output with respect to the externality and the elasticity of intertemporal substitution. Hence, contrary to all the results available in the literature on aggregate models, we show that endogenous fluctuations are compatible with a low (in actual fact, zero) wage elasticity of the labor supply.
    Keywords: One-sector infinite-horizon model, learning-by-doing externalities, inelastic labor, business cycle fluctuations, Hopf bifurcation
    Date: 2009–11–15
  24. By: Khemraj, Tarron
    Abstract: This paper reports aggregate bank excess liquidity preference curves for the pre-crisis and crisis periods. It is argued that the flat curve reflects a threshold lending rate at which point banks accumulate reserves passively. Moreover, the expansion of reserves – when the lending rate threshold is binding – does not lead to credit expansion. The latter would require policies that directly increase the demand for loans, particularly by the business sector.
    Keywords: bank reserves; minimum loan interest rate; credit crunch
    JEL: E40 E41 G21
    Date: 2009–10
  25. By: Erler, Alexander; Krizanac, Damir
    Abstract: This paper examines the impact of the U.S. monetary policy on the Subprime mortgage crisis using a modified taylor rule. The main finding is that during the pre-crisis period the short term rate deviated significantly from the estimated taylor rate. This deviation may have been a cause of the ongoing financial crisis. However, the evidence also suggests that other factors were certainly at play.
    Keywords: Geldpolitik; Taylor-Regel; Subprime-Krise; Fed
    JEL: E58 E52
    Date: 2009–11–13
  26. By: Kevin E. Beaubrun-Diant (LEDA-SDFi - LEDA-SDFi - Université Paris Dauphine - Paris IX); Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: We herein advance a contribution to the theoretical literature on financial frictions and show the significance of the matching mechanism in explaining the countercyclical behavior of interest rate spreads. We demonstrate that when matching friction is associated with a Nash bargaining solution, it provides a satisfactory explanation of the credit spread cycle in response to shocks in production technology or in the cost of banks' resources. During periods of expansion, the credit spread experiences a tightening for two reasons. Firstly, as a result of easier access to loans, entrepreneurs have better opportunities outside a given lending relationship and can negotiate lower interest rates. Secondly, the less selective behavior of entrepreneurs and banks results in the occurrence of fewer productive matches, a fall in the average productivity of matches, and a tightening of the credit spread. Our results also underline the amplification and propagation properties of matching friction, which represent a powerful financial accelerator mechanism.
    Date: 2009–11–10
  27. By: Ravi Bansal; Dana Kiku; Amir Yaron
    Abstract: We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.
    JEL: E0 G0 G1 G12 G14
    Date: 2009–11
  28. By: Joscha Beckmann; Ansgar Belke; Michael Kühl
    Abstract: This paper examines the significance of different fundamental regimes by applying various monetary models of the exchange rate to one of the politically most important exchange rates, the exchange rate of the US dollar vis-à-vis the euro (the DM). We use monthly data from 1975:01 to 2007:12. Applying a novel time-varying coefficient estimation approach, we come up with interesting properties of our empirical models. First, there is no stable long-run equilibrium relationship among fundamentals and exchange rates since the breakdown of Bretton Woods. Second, there are no recurring regimes, i.e. across different regimes either the coefficient values for the same fundamentals differ or the significance differs. Third, there is no regime in which no fundamentals enter. Fourth, the deviations resulting from the stepwise cointegrating relationship act as a significant error-correction mechanism. In other words, we are able to show that fundamentals play an important role in determining the exchange rate although their impact differs significantly across different sub-periods.
    Keywords: Structural exchange rate models, cointegration, structural breaks, switching regression, time-varying coefficient approach
    JEL: E44 F31 G12
    Date: 2009
  29. By: Adriana María Corredor-Waldron; David Pérez-Reyna
    Abstract: En este trabajo se estudian los determinantes de la oferta y demanda de la cartera comercial en Colombia, tanto a nivel macroeconómico como usando información por empresas, por medio de un modelo de desequilibrio que permite analizar posibles restricciones de crédito. Para esto se usa información a nivel de firma de desembolsos de crédito, al igual que otras variables del balance y del estado de resultados, disponibles desde 1998 hasta 2008. Las estimaciones indican que el nivel de actividad de las empresas tiene una relación positiva con la demanda de crédito, y que el valor del colateral y la percepción de riesgo que se tenga de la firma influyen sobre la oferta.
    Keywords: Modelo de desequilibrio; restricciones de crédito; Mercado de crédito comercial; Sistema financiero colombiano. Classification JEL: C31; E32; G32.
  30. By: Tsoukalas, John
    Abstract: A large body of empirical work has established the signi¯cance of cash flow in explain- ing investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, using a perfect capital markets model, that time-to-build for capital projects creates an investment cash flow sensitivity as found in empiri- cal studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-q equations under time-to-build investment. In addition, time aggregation error can give rise to cash flow effects inde- pendently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. We provide implications and recommendations for empirical work.
    Keywords: Investment; Capital market imperfections; Time-to-build
    JEL: E32 G31 E22
    Date: 2009
  31. By: Anastasios G. Karantounias with Lars Peter Hansen; Thomas J. Sargent
    Abstract: This paper studies an optimal fiscal policy problem of Lucas and Stokey (1983) but in a situation in which the representative agent's distrust of the probability model for government expenditures puts model uncertainty premia into history-contingent prices. This situation gives rise to a motive for expectation management that is absent within rational expectations and a novel incentive for the planner to smooth the shadow value of the agent's subjective beliefs to manipulate the equilibrium price of government debt. Unlike the Lucas and Stokey (1983) model, the optimal allocation, tax rate, and debt become history dependent despite complete markets and Markov government expenditures.
    Date: 2009
  32. By: Mezgebo, Taddese
    Abstract: Two surplus markets of Bale Robe and Shashimiene and one deficit market of Jimma are observed to fix long run price. However the system is observed to have better capacity to process demand side than supply side shocks. Therefore for efficient stabilization the focus should be in Jimma. For equity and political feasibility it would be preferable if poor deficit centers are provided with subsidized supply of grain, too. Though distance did not seem to be an important factor for border of one price but only for strength of cointegration, the methodology used by early papers is observed to work.
    Keywords: Inflation cointegration ethiopia food price grain market
    JEL: E31 Q13 D4 P44
    Date: 2009–11–14
  33. By: William Kerr; Ramana Nanda
    Abstract: We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
    JEL: E44 G21 L26 L43 M13
    Date: 2009–11
  34. By: William Kerr; Ramana Nanda
    Abstract: Financing constraints are one of the biggest concerns impacting potential entrepreneurs around the world. Given the important role that entrepreneurship is believed to play in the process of economic growth, alleviating financing constraints for would-be entrepreneurs is also an important goal for policymakers worldwide. We review two major streams of research examining the relevance of financing constraints for entrepreneurship. We then introduce a framework that provides a unified perspective on these research streams, thereby highlighting some important areas for future research and policy analysis in entrepreneurial finance.
    JEL: E44 G21 L26 M13
    Date: 2009–11
  35. By: Jan Marc Berk; Beata Bierut
    Abstract: This paper models monetary policy decisions as being taken by an interacting group of heterogeneous policy makers, organized in a committee. Disclosing the premises on which an individual view on the interest rate is based is likely to provide value added in terms of the quality of the collective decision over-and-above simultaneous voting on interest rates. However, this is not generally true, as communication also involves a trade-off in the quality of views of committee members, which can lead to a reduction in the quality of collective decisions below the outcome achieved under simple majority voting. Still, communication is a relatively effective way to implement the 'knowledge pooling' argument pro-collective decision-making, compared to expanding the size of the MPC.
    Keywords: committees; deliberations; correlated votes; simple majority voting.
    JEL: E58 D71 D78
    Date: 2009–11
  36. By: Desai, Sameeksha (University of Missouri Kansas City); Eklund, Johan E. (Ratio Institute); Högberg, Andreas (Jönköping International Business School)
    Abstract: The government of India initiated pro-market reforms in the 1990s, after almost five decades of socialist planning. These and subsequent policy reforms are credited as the drivers of India’s radical economic transformation. Prior to reforms, private investment was strictly regulated and restricted to certain areas and sectors. There have since been numerous changes in sectors important for investment, which should lead to changes in outcomes of firm-level strategic decision making and investment behavior. By most estimates, India will continue to grow. The purpose of this paper is to investigate changes in investment behavior from the introduction of reforms to current conditions. Reforms changed several institutional frameworks for firm operations, allowing firms to pursue more competitive strategies. Given the importance of ownership in determining firm efficiency and access to capital, we examine the effect of ownership on the performance of Indian firms for the period 1991-2006. We also examine industry differences in capital allocation. We compute a measure of investment efficiency derived from the accelerator principle: Elasticity of capital with respect to output. We examine the effect of various ownership structures on investment behavior and the efficiently of capital allocation across different sectors of the economy. We find that the allocation of capital has been slow to respond to reforms, indicating similar pace of firm responses.
    Keywords: allocation of capital; India; institutional reforms; ownership
    JEL: E22 E23 E44 G18 G20 L50
    Date: 2009–11–18
  37. By: Musgrave, Ralph S.
    Abstract: Those advocating “government as employer of last resort schemes” (ELR) nearly always assume, first, that “ELR employers” should be specially set up to employ those out of work, i.e. that these projects or “employers” should be separate from existing public sector employers. A second almost universal assumption is that, as already intimated, the work involved should be public sector type work rather than private sector commercial type work. This paper puts an argument which demolishes or weakens both the above two assumptions. That is, it is argued, first, that ELR work should be with EXISTING employers. Second, it is argued that this work should be in BOTH public and private sectors, not just the public sector. I actually argued against the above two assumptions in a paper in 1991 (Musgrave (1991)) but for different reasons. The argument below complements these “1991” reasons, rather than renders them obsolete in any way. These 1991 reasons are set out below in abbreviated form, and begin after the heading “Marginal Employment Subsidy” below. The argument that is new in this paper centres around the other factors of production (OFP) that need to be employed alongside the relatively unskilled ELR employees (these factors of production are skilled labour, materials and equipment). If ELR involves little or no OFP, then output will be hopeless. On the other hand if ELR involves anywhere near the usual ratios of different factors of production, then the ELR scheme amounts to much the same thing as a normal employer. This suggests that ELR employees should be placed with existing public sector employers. Second, traditional ELR advocates normally claim that public sector ELR is not inflationary. This claim is based on the assumption that no OFP need be withdrawn from the private sector to make ELR work. Once this false assumption is rectified, it turns out there is no difference in the inflationary impact as between public and private sector ELR, thus there is no reason to confine ELR to the public sector.
    Keywords: Government as employer of last resort; workfare; private sector; marginal employment subsidy.
    JEL: E24 J68
    Date: 2009–11–13

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