nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒12‒05
33 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Monetary Policy during Endogenous Housing-Market Boom-Bust Cycles By Hajime Tomura
  2. Lending Relationships and Monetary Policy By Yunus Aksoy; Henrique S. Basso; Javier Coto-Martinez
  3. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008 By Schularick, Moritz; Taylor, Alan M.
  4. ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis By Filippo COSSETTI; Francesco GUIDI
  5. Bagehot for beginners: The making of lending of last resort operations in the mid-19th century By Vincent Bignon; Marc Flandreau; Stefano Ugolini
  6. Can the Fiscal Theory of the price Level explain UK inflation in the 1970s? By Fan, Jingwen; Minford, Patrick
  7. Testing the Monetary Policy Rule in the US: a Reconsideration of the Fed’s Behaviour By Minford, Patrick; Ou, Zhirong
  8. Aggregate Comovements, Anticipation, and Business Cycles. By David R.F. Love
  9. Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound By Levin, Andrew; López-Salido, J David; Nelson, Edward; Yun, Tack
  10. The historical connection between short term output and prices in a small open economy By ola Grytten; Arngrim Hunnes
  11. An Extended Macro-Finance Model with Financial Factors By Dewachter, Hans; Iania, Leonardo
  12. Unconventional monetary policies: an appraisal By Claudio Borio; Piti Disyatat
  13. Price stability and inflation persistence during the international gold standard: The Scandinavian case By ola Grytten; Arngrim Hunnes
  14. Financial (in)stability, supervision and liquidity injections: a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  15. International spillover effects and monetary policy activism By Lipinska, Anna; Spange, Morten; Tanaka, Misa
  16. From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons By Almunia, Miguel; Bénétrix, Agustín; Eichengreen, Barry; O Rourke, Kevin H.; Rua, Gisela
  17. Asymmetric Standing Facilities: An Unexploited Monetary Policy Tool By Gabriel Pérez Quirós; Hugo Rodríguez Mendizábal
  18. A Note on the Predictive Content of PPI over CPI Inflation: The Case of Mexico By José Julián Sidaoui; Carlos Capistrán; Daniel Chiquiar; Manuel Ramos Francia
  19. Money supply and Greek history monetary statistics: definition, construction, sources and data By Sophia Lazaretou
  20. An Optimum-Currency-Area Odyssey By Harris Dellas; George S.Tavlas
  21. Ten propositions about liquidity crises By Claudio Borio
  22. Fiscal adjustments and asset price movements By Athanasios Tagkalakis
  23. Union Monétaire en Afrique de l'Ouest: Quelles Réponses à l'Hétérogénéité des Chocs ? By Sampawende Jules TAPSOBA
  24. Risk premia in general equilibrium By Olaf Posch
  25. Employment and Asset Prices By Gylfi Zoega
  26. The new relations between global economy, international trade and financial system By Popa, Catalin C.
  27. Intervenciones cambiarias y política monetaria en Colombia. Un análisis de VAR estructural By Juan José Echavarría; Enrique López E.; Martha Misas A.
  28. Long-Run Growth in Open Economies: Export-Led Cumulative Causation or a Balance-of-Payments Constraint? By Robert A. Blecker
  29. Cross Sectional Facts for Macroeconomists By Krueger, Dirk; Perri, Fabrizio; Pistaferri, Luigi; Violante, Giovanni L
  30. How Debt Markets have Malfunctioned in the Crisis By Arvind Krishnamurthy
  31. Accuracy of Deterministic Extended-Path Solution Methods for Dynamic Stochastic Optimization Problems in Macroeconomics By David R.F. Love
  32. A Formal Test of Assortative Matching in the Labor Market By John M. Abowd; Francis Kramarz; Sébastien Pérez-Duarte; Ian Schmutte
  33. Do Oil Windfalls Improve Living Standards? Evidence from Brazil By Caselli, Francesco; Michaels, Guy

  1. By: Hajime Tomura
    Abstract: This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur. The model shows that boom-bust cycles in house prices emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. These boom-bust cycles replicate the stylized features of housing-market boom-bust cycles in industrialized countries. In an environment where mortgage borrowers are occasionally over-optimistic, the central bank should be less responsive to inflation, more responsive to output, and slower to adjust the nominal policy interest rate. This optimal monetary policy rule dampens endogenous boom-bust cycles in house prices, but prolongs inflation target horizons due to weak policy reactions to inflation fluctuations after fundamental shocks.
    Keywords: Credit and credit aggregates; Financial stability; Inflation targets
    JEL: E44 E52
    Date: 2009
  2. By: Yunus Aksoy; Henrique S. Basso; Javier Coto-Martinez (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.
    Date: 2009–10
  3. By: Schularick, Moritz; Taylor, Alan M.
    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
    Keywords: banking; central banking; financial stability; liquidity; monetary policy
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  4. By: Filippo COSSETTI (Universita' Politecnica delle Marche, Dipartimento di Economia); Francesco GUIDI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: This paper aims to explore the effects of the ECB monetary policy on the Euro area yield curve. Using cointegration techniques, this paper investigates the long-run relationships among the EONIA and Euro area money market interest rates. Results show that presence of cointegration was rejected for maturities longer than six years, implying that European Central Bank monetary policy actions do not exert significant impact on the entire spectrum of the yield curve. In addition, we also consider the transmission of EONIA interest rate volatility to the money market interest rates using EGARCH models. We find that EONIA volatility is transmitted to short and medium-period interest rates, whereas longer-term rates are not affected.
    Keywords: EGARCH models, Monetary policy, cointegration, term structure of interest rates
    JEL: E42 E43 E58
    Date: 2009–11
  5. By: Vincent Bignon (Graduate Institute, Geneva); Marc Flandreau (Graduate Institute, Geneva and CEPR, London); Stefano Ugolini (Graduate Institute, Geneva)
    Abstract: According to a Keynesian view, short term output fluctuations are normally demand side led. Since prices reflect demand, they should mirror output fluctuations. Thus, prices and output are expected to move in the same direction in the short run. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830-2006. We find little evidence of a positive relationship. On the contrary, we rather find negative correlations between the two variables, indicating that supply side shocks through the foreign sector were more important for historical business cycles in Norway than assumed hitherto.
    Keywords: Lending of last resort, Bagehot, Bank of England, financial crises, history of monetary policy
    JEL: E58 N13
    Date: 2009–10–05
  6. By: Fan, Jingwen (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We investigate whether the Fiscal Theory of the Price Level can deliver a reasonable explanation for UK inflation in the 1970s, a period in which the government greatly increased public spending without raising taxes and monetary policy was accommodative. The model is tested using the method of indirect inference, under which the model's simulated behaviour is compared with the inflation time-series process. We find that the two are consistent.
    Keywords: UK Inflation; Fiscal Theory of the Price Level; Bootstrap simulation; Indirect inference; Wald statistic
    JEL: E31 E37 E62 E65
    Date: 2009–11
  7. By: Minford, Patrick; Ou, Zhirong
    Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy- an optimal timeless rule, a Taylor rule and another with interest rate smoothing- with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.
    Keywords: bootstrap simulation; indirect inference; Monetary policy; New Keynesian model; Taylor-type rules; the 'target rule'; VAR; Wald statistic
    JEL: E12 E17 E42 E52 E58
    Date: 2009–11
  8. By: David R.F. Love (Department of Economics, Brock University)
    Abstract: This paper shows that negative comovements between major macroeconomic variables at business-cycle frequencies are commonly observed, but that standard Real Business Cycle (RBC) theory fails to predict this feature of the data. We show that allowing for ``anticipation effects'' in response to ``news shocks'' enables standard RBC models to predict both the observed patterns of negative comovement and overall positive correlations. Anticipation also improves magnification of shocks in the model without harming predictions for the other second moments central to RBC studies. Anticipation effects improve on standard RBC frameworks by offering an empirically plausible explanation for the nontrivial fraction of time that aggregate variables are observed to comove negatively.
    Keywords: Comovements, Anticipation, News, Real Business Cycles, Equilibrium Dynamics
    JEL: E10 E30 E37
    Date: 2009–11
  9. By: Levin, Andrew; López-Salido, J David; Nelson, Edward; Yun, Tack
    Abstract: The recent literature on monetary policy in the presence of a zero lower bound on interest rates has shown that forward guidance regarding the path of interest rates can be very effective in preserving macroeconomic stability in the face of a contractionary demand shock; moreover, that literature apparently leaves little scope for any further improvements in stabilization performance via nontraditional monetary policies. In this paper, we characterize optimal policy under commitment in a prototypical New Keynesian model and examine whether those conclusions are sensitive to the specification of the shock process and to the interest elasticity of aggregate demand. Although forward guidance is effective in offsetting natural rate shocks of moderate size and persistence, we find that the macroeconomic outcomes are much less appealing for larger and more persistent shocks, especially when the interest elasticity parameter is set to values widely used in the literature. Thus, while forward guidance could be sufficient for mitigating the effects of a 'Great Moderation'-style shock, a combination of forward guidance and other monetary policy measures - such as large-scale asset purchases - might well be called for in responding to a 'Great Recession'-style shock.
    Keywords: Forward Guidance; Optimal Policy under Commitment; Zero Lower Bound
    JEL: E32 E43 E52
    Date: 2009–11
  10. By: ola Grytten (Norwegian School of Economics and Business Administration (NHH)); Arngrim Hunnes (University of Agder (UiA))
    Abstract: According to a Keynesian view, short term output fluctuations are normally demand side led. Since prices reflect demand, they should mirror output fluctuations. Thus, prices and output are expected to move in the same direction in the short run. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830-2006. We find little evidence of a positive relationship. On the contrary, we rather find negative correlations between the two variables, indicating that supply side shocks through the foreign sector were more important for historical business cycles in Norway than assumed hitherto.
    Keywords: Business cycles; Output; Small open economy; Price fluctuations.
    JEL: E31 E32 N10 N13 N14
    Date: 2009–10–29
  11. By: Dewachter, Hans; Iania, Leonardo
    Abstract: This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms Macro-Finance benchmark models in fitting the yield curve. Second, financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve.
    Keywords: Term structure, Macro-finance, TED spread, Interbank lending rates
    JEL: E43 G12 E44 C11
    Date: 2009–10–02
  12. By: Claudio Borio; Piti Disyatat
    Abstract: The recent global financial crisis has led central banks to rely heavily on "unconventional" monetary policies. This alternative approach to policy has generated much discussion and a heated and at times confusing debate. The debate has been complicated by the use of different definitions and conflicting views of the mechanisms at work. This paper sets out a framework for classifying and thinking about such policies, highlighting how they can be viewed within the overall context of monetary policy implementation. The framework clarifies the differences among the various forms of unconventional monetary policy, provides a systematic characterisation of the wide range of central bank responses to the crisis, helps to underscore the channels of transmission, and identifies some of the main policy challenges. In the process, the paper also addresses a number of contentious analytical issues, notably the role of bank reserves and their inflationary consequences.
    Keywords: unconventional monetary policy, balance sheet policy, credit policy, quantitative easing, credit easing, monetary policy implementation, transmission mechanism, interest rates
    Date: 2009–11
  13. By: ola Grytten (Norwegian School of Economics and Business Administration (NHH)); Arngrim Hunnes (University of Agder (UiA))
    Abstract: In the 1870s the three Scandinavian countries Denmark, Norway and Sweden formed the Scandinavian Currency Union. Both the adoption of gold and the monetary union were supposed to lead to price stability in and between these countries. By drawing on new indices of consumer prices the present paper offers an examination of inflation dynamics, defined as price stability and inflation persistence, in the periphery of Scandinavia during the heyday of the international gold standard.
    Keywords: Currency union, Gold Standard, Inflation persistence, Price stability, Scandinavia
    JEL: E31 E42 N13
    Date: 2009–11–11
  14. By: Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between a heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  15. By: Lipinska, Anna (Bank of England); Spange, Morten (Danmarks Nationalbank); Tanaka, Misa (Bank of England)
    Abstract: This paper examines how the preferences of a large economy’s central bank affect the trade-off between output and inflation volatility faced by the central bank of a small open economy by analysing the impact of a global cost-push shock. We demonstrate that under the assumption of producer currency pricing, the trade-off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilisation relative to inflation stabilisation; but the opposite is true in the case of local currency pricing.
    Keywords: Open economy; policy trade-offs; producer versus local currency pricing
    JEL: E58 F41 F42
    Date: 2009–11–27
  16. By: Almunia, Miguel; Bénétrix, Agustín; Eichengreen, Barry; O Rourke, Kevin H.; Rua, Gisela
    Abstract: The Great Depression of the 1930s and the Great Credit Crisis of the 2000s had similar causes but elicited strikingly different policy responses. It may still be too early to assess the effectiveness of current policy responses, but it is possible to analyze monetary and fiscal policies in the 1930s as a 'natural experiment' or 'counterfactual' capable of shedding light on the impact of recent policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for a panel of 27 countries in the period 1925-1939. The results suggest that monetary and fiscal stimulus was effective - that where it did not make a difference it was not tried. The results also shed light on the debate over fiscal multipliers in episodes of financial crisis. They are consistent with multipliers at the higher end of those estimated in the recent literature, consistent with the idea that the impact of fiscal stimulus will be greater when banking system are dysfunctional and monetary policy is constrained by the zero bound.
    Keywords: credit crisis; Great Depression; multipliers
    JEL: E63 N10
    Date: 2009–11
  17. By: Gabriel Pérez Quirós; Hugo Rodríguez Mendizábal
    Abstract: This paper analyzes the role of standing facilities in the determination of the demand for reserves in the overnight money market. In particular, we study how the asymmetric nature of the deposit and lending facilities could be used as a powerful policy tool for the simultaneous control of prices and quantities in the market for daily funds.
    Keywords: Monetary policy implementation; standing facilities; overnight interest rates; fine-tuning operations.
    JEL: E52 E58 E43
    Date: 2009–11–29
  18. By: José Julián Sidaoui; Carlos Capistrán; Daniel Chiquiar; Manuel Ramos Francia
    Abstract: This note studies the causal relationship that may exist between the producer price index (PPI) and the consumer price index (CPI). In contrast with previous international studies, the results suggest that, in the case of Mexico, information on the PPI seems to be useful to improve forecasts of CPI inflation. In particular, CPI inflation responds significantly to disequilibrium errors with respect to the long-run relationship between consumer and producer prices. These results are based on in-sample and out-of-sample tests of Granger causality, in the context of an error correction model.
    Keywords: Cointegration, forecast evaluation, Granger causality, vector error correction.
    JEL: C32 C53 E31 E37
    Date: 2009–11
  19. By: Sophia Lazaretou (Bank of Greece)
    Abstract: This paper attempts to provide, for the first time, a survey of the construction of estimates of the quantity of money in Greece since the inception of the National Bank of Greece in 1842 until the eve of WWII. Specifically, we describe in detail the methods of construction and the sources of data used in building these aggregates. We discuss the data collection procedure and publication practices. The end product is presented in a data appendix.
    Keywords: money; monetary aggregates; data; sources
    JEL: E51 N24
    Date: 2009–10
  20. By: Harris Dellas (University of Bern); George S.Tavlas (Bank of Greece)
    Abstract: The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally- tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum currency- area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman’s work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell’s classic formulation of an optimal currency area was aimed, in part, at refuting Friedman’s ‘‘strong’’ case for floating exchange rates; and Friedman’s work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country’s characteristics can be used to determine its optimal exchange-rate regime
    Keywords: Optimum-currency-areas; Exchange-rate regimes; New Keynesian models
    JEL: F33 F41
    Date: 2009–09
  21. By: Claudio Borio
    Abstract: What are liquidity crises? And what can be done to address them? This short paper brings together some personal reflections on this issue, largely based on previous work. In the process, it questions a number of commonly held beliefs that have become part of the conventional wisdom. The paper is organised around ten propositions that cover the following issues: the distinction between idiosyncratic and systematic elements of liquidity crises; the growing reliance on funding liquidity in a market-based financial system; the role of payment and settlement systems; the need to improve liquidity buffers; the desirability of putting in place (variable) speed limits in the financial system; the proper role of (retail) deposit insurance schemes; the double-edged sword nature of liquidity provision by central banks; the often misunderstood role of "monetary base" injections in addressing liquidity disruptions; the need to develop principles for the provision of central bank liquidity; and the need to reconsider the preventive role of monetary (interest rate) policy.
    Keywords: market and funding liquidity, liquidity crises, deposit insurance, central bank operations, monetary base
    Date: 2009–11
  22. By: Athanasios Tagkalakis (Bank of Greece)
    Abstract: This paper examines the links between asset price movements and fiscal adjustments. Our findings suggest that a pick up in asset prices increases the probability of initiating a fiscal adjustment, but it does not necessarily lead to a sustainable correction of fiscal imbalances. However, higher real equity prices increase the probability of success.
    Keywords: Asset prices; fiscal adjustments
    JEL: E61 E62 H61 H62 E32
    Date: 2009–10
  23. By: Sampawende Jules TAPSOBA (Ministère de l'Economie et des Finances [France])
    Abstract: Since the independences, having a single currency is an official policy objective of West African countries. In April 2000, West African decisions-makers decided to accelerate the integration of the region by creating a second monetary zone in addition to the WAEMU (West African Economic and Monetary Union). On economic grounds, several academics argue that a monetary union in West Africa would be costly because of the predominance of asymmetric shocks. When shocks are divergent, a common monetary policy is inappropriate and ineffective. This conclusion is however static and does not include structural changes that happen after the creation of a monetary union. The launch of monetary union helps countries to cope with asymmetric shocks. This article proposes the analysis of mechanisms that a West African Monetary Union could develop in order to alleviate the costs of asymmetric shocks. The results suggest that a West African currency could be OCA (Optimal Currency Areas) compliant by the intensification of regional trade and the development of regional credit markets which facilitate the risk-sharing strategies.
    Keywords: Asymmetric shocks, International Risk-sharing, Optimal Currency Area, Trade Integration, West Africa
    Date: 2009
  24. By: Olaf Posch (Aarhus University, School of Economics and Management and CREATES)
    Abstract: This paper shows that non-linearities can generate time-varying and asymmetric risk premia over the business cycle. These (empirical) key features become relevant and asset market implications improve substantially when we allow for non-normalities in the form of rare disasters. We employ explicit solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. We find that the curvature of the policy functions affects the risk premium through controlling the individual's effective risk aversion.
    Keywords: Risk premium, Continuous-time DSGE, Optimal stochastic control
    JEL: E21 G11 O41
    Date: 2009–11–01
  25. By: Gylfi Zoega (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: A medium-term relationship exists between share prices, normalised by labour productivity, and the rate of unemployment in the OECD countries. A similar relationship appears to exist between unemployment and house prices. This helps explain decadal changes in mean unemployment, such as the shift to higher mean unemployment in the Continental European countries in the 1970s and 1980s that coincided with a fall in the level of share prices, as well as differences in mean unemployment between countries.
    Date: 2009–11
  26. By: Popa, Catalin C.
    Abstract: The new tendencies of global economy can be more efficiently detailed, explained and understood, on the base of those internal functional relations established in contemporary economical global dimension, between economy, international trade and monetary-financial system. Starting with the idea of a new economies’ typology will be clearly possible to analyze the mechanism of international outturn results in relation with trade dynamics connected to the new particularities of international monetary-financial system. This paperwork brings into discussion the equilibrium principles regarding the global economy functionality in the presence of integration and globalization phenomena. Continuing an old author’s theory, the paperwork studies in a synthetic manner the interstitial ties between a new typology of economies (as has been treated in previous scientific papers) and financial system as being the main way in harmonizing the global equilibrium.
    Keywords: global economy; financial system; international trade
    JEL: E0 G15 G18 G32
    Date: 2009–11–12
  27. By: Juan José Echavarría; Enrique López E.; Martha Misas A.
    Abstract: Se utiliza la metodología VAR estructural para evaluar el impacto conjunto de las intervenciones cambiarias y de la política monetaria convencional sobre la tasa de cambio, la tasa de interés y las demás variables del sistema. Se encuentra que las compras netas de divisas devalúan significativamente la tasa de cambio nominal durante un período cercano a 1 mes, en parte debido a que las compras no han sido esterilizadas en su totalidad, y a que han anunciado una política monetaria expansiva en el futuro (el llamado canal de signaling). Ello plantea conflictos potenciales de política en un régimen de inflación objetivo. La tasa de cambio nominal aparece determinada con igual fuerza por variables nominales y reales. No se encuentra evidencia de la paridad no cubierta, quizá por la incapacidad de capturar adecuadamente variables como el riesgo y las expectativas de tasa de cambio y de precios.
    Date: 2009–11–17
  28. By: Robert A. Blecker
    Abstract: The post-Keynesian tradition contains two different models of long-run growth in open economies -- the model of export-led cumulative causation (ELCC) originally conceived by Nicholas Kaldor and the model of balance-of-payments-constrained growth (BPCG) developed by A.P. Thirlwall. These models diverge significantly in their core underlying assumptions. For example, they disagree about whether long-term gains in relative price competitiveness are possible and whether import demand constrains long-run growth. The two modeling approaches also yield conflicting policy implications. For example, some ELCC models imply that a domestic demand stimulus can boost long-run growth by sparking a virtuous circle of cumulative causation (including an endogenous increase in productivity growth), while most BPCG models imply that only policies that raise the income elasticity of export demand or lower the income elasticity of import demand can permit faster growth in the long run. The fact that both models have found econometric support suggests that each contains empirically supported elements, but the tests that have been conducted to date have not had sufficient power to distinguish between them. This paper will present both models in a common analytical framework to compare their theoretical differences and policy implications. The paper will argue that a generalized BPCG model that allows for financial flows and relative price effects can incorporate the cumulative causation feedbacks from the ELCC approach while also imposing the balance of payments equilibrium condition that is missing from the latter. The paper will also explore under what conditions different versions of the models apply.
    Date: 2009–08
  29. By: Krueger, Dirk; Perri, Fabrizio; Pistaferri, Luigi; Violante, Giovanni L
    Abstract: This paper provides an introduction to the special issue of the Review of Economic Dynamics on "Cross Sectional Facts for Macroeconomists''. The issue documents, for nine countries, the level and the evolution, over time and over the life cycle, of several dimensions of economic inequality, including wages, labor earnings, income, consumption, and wealth. After describing the motivation and the common methodology underlying this empirical project, we discuss selected results, with an emphasis on cross-country comparisons. Most, but not all, countries experienced substantial increases in wages and earnings inequality, over the last three decades. While the trend in the skill premium differed widely across countries, the experience premium rose and the gender premium fell virtually everywhere. At a higher frequency, earnings inequality appears to be strongly counter-cyclical. In all countries, government redistribution through taxes and transfers reduced the level, the trend and the cyclical fluctuations in income inequality. The rise in income inequality was stronger at the bottom of the distribution. Consumption inequality increased less than disposable income inequality, and tracked the latter much more closely at the top than at the bottom of the distribution. Measuring the age-profile of inequality is challenging because of the interplay of time and cohort effects.
    Keywords: consumption; income; long-run trends in inequality; wages; wealth
    JEL: D31 D91 E21
    Date: 2009–11
  30. By: Arvind Krishnamurthy
    Abstract: This article explains how debt markets have malfunctioned in the crisis, with deleterious consequences for the real economy. I begin with a quick overview of debt markets. I then discuss three areas that are crucial in all debt markets decisions: risk capital and risk aversion, repo financing and haircuts, and counterparty risk. In each of these areas, feedback effects can arise, so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral. I document the remarkable rise in the premium that investors placed on liquidity during the crisis. Next, I show how these issues caused debt markets to break down: fundamental values and market values seemed to diverge across several markets and products that were far removed from the “toxic” subprime mortgage assets at the root of the crisis. Finally, I discuss briefly four steps that the Federal Reserve took to ease the crisis, and how each was geared to a specific systemic fault that arose during the crisis.
    JEL: E43 E44 E52
    Date: 2009–11
  31. By: David R.F. Love (Department of Economics, Brock University)
    Abstract: The deterministic extended-path method for solving dynamic stochastic optimization problems approximates conditional expectations instead of approximating a model's complex non-linear dynamics. We show that this straightforward approach provides similar accuracy to the best results reported for alternative methods, and gives uniform performance across the entire state space. Our implementation requires roughly 4 fold more computer time than Galerkin projection, but the method has offsetting simplicity and generality that make it an attractive choice.
    Keywords: Dynamic stochastic equilibrium, computational methods, non-linear solutions
    JEL: E10 E30 E37
    Date: 2009–11
  32. By: John M. Abowd; Francis Kramarz; Sébastien Pérez-Duarte; Ian Schmutte
    Abstract: We estimate a structural model of job assignment in the presence of coordination frictions due to Shimer (2005). The coordination friction model places restrictions on the joint distribution of worker and firm effects from a linear decomposition of log labor earnings. These restrictions permit estimation of the unobservable ability and productivity differences between workers and their employers as well as the way workers sort into jobs on the basis of these unobservable factors. The estimation is performed on matched employer-employee data from the LEHD program of the U.S. Census Bureau. The estimated correlation between worker and firm effects from the earnings decomposition is close to zero, a finding that is often interpreted as evidence that there is no sorting by comparative advantage in the labor market. Our estimates suggest that this finding actually results from a lack of sufficient heterogeneity in the workforce and available jobs. Workers do sort into jobs on the basis of productive differences, but the effects of sorting are not visible because of the composition of workers and employers.
    JEL: E24 J21 J31
    Date: 2009–11
  33. By: Caselli, Francesco; Michaels, Guy
    Abstract: We use variation in oil output among Brazilian municipalities to investigate the effects of resource windfalls. We find muted effects of oil through market channels: offshore oil has no effect on municipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDP composition. However, oil abundance causes municipal revenues and reported spending on a range of budgetary items to increase, mainly as a result of royalties paid by Petrobras. Nevertheless, survey-based measures of social transfers, public good provision, infrastructure, and household income increase less (if at all) than one might expect given the increase in reported spending. To explain why oil windfalls contribute little to local living standards, we use data from the Brazilian media and federal police to document that very large oil output increases alleged instances of illegal activities associated with mayors.
    Keywords: Brazil; corruption; Dutch disease; fiscal windfalls; natural resources; oil
    JEL: E62 H11 H40 H71 H72 H75 H76 O11 O13 O32 O33
    Date: 2009–11

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