nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒12‒11
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Fiscal Stabilisation through Government Spending By Fabian Eser
  2. Evaluating Monetary Policy By Svensson, Lars E.O.
  3. The role of real and nominal variables in defining business cycles: dynamic properties of a hybrid model - an alternative view By Chirwa, Themba G.
  4. Labor Supply Heterogeneity and Macroeconomic Co-movement By Stefano Eusepi; Bruce Preston
  5. Investment Shocks and Business Cycles By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  6. Do Central Bank Independence Reforms Matter for Inflation Performance? By Landström, Mats
  7. Monetary policy, inflation expectations and the price puzzle By Castelnuovo, Efrem; Surico, Paolo
  8. Quantitative Easing: A Rationale and Some Evidence from Japan By Volker Wieland
  9. A Banking Explanation of the US Velocity of Money: 1919-2004 By Szilard Benk; Max Gillman; Michal Kejak
  10. Monetary Policy in a Currency Union with Heterogeneous Limited Asset Markets Participation By Fabian Eser
  11. "The Euro and Its Guardian of Stability--The Fiction and Reality of the 10th Anniversary Blast" By Joerg Bibow
  12. Two Essays on Central Bank Independence Reforms By Landström, Mats
  13. Business cycles and remittances: can the Beveridge-Nelson decomposition provide new evidence? By Roberto Coronado
  14. Fiscal Policy in the European Monetary Union By Betty C. Daniel; Christos Shiamptanis
  15. The quality of monetary policy and inflation performance: globalization and its aftermath By Bohl , Martin T; Mayes , David G; Siklos, Pierre L
  16. GDP nowcasting with ragged-edge data : A semi-parametric modelling By Laurent Ferrara; Dominique Guegan; Patrick Rakotomarolahy
  17. Export pricing and the cross-country correlation of stock prices By Tervala, Juha
  18. ‘History of the Official Currency and the Central Bank of Cyprus’ Preliminary Conclusions for the Period 1960-2007 By Sophocles Michaelides
  19. From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons By Miguel Almunia; Agustín S. Bénétrix; Barry Eichengreen; Kevin H. O'Rourke; Gisela Rua
  20. The role of income in money demand during hyper-inflation: the case of Yugoslavia By Zorica Mladenovic; Bent Nielsen
  21. Reforming the Fed: what would real change look like? By Belongia, Michael
  22. DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion By James R. Rhodes
  23. Does inflation targeting really matter? Another look at the OECD economies By Brito, Ricardo D.
  24. The evolving role and definition of the federal funds rate in the conduct of U.S. monetary policy By Belongia, Michael; Hinich, Melvin
  25. What Drives Personal Consumption? The Role of Housing and Financial Wealth. By Jiri Slacalek
  26. Why the Publication of Socially Harmful Information May Be Socially Desirable By Volker Hahn
  27. What Causes Business Cycles? Analysis of the Japanese Industrial Production Data By Hiroshi Iyetomi; Yasuhiro Nakayama; Hiroshi Yoshikawa; Hideaki Aoyama; Yoshi Fujiwara; Yuichi Ikeda; Wataru Souma
  28. How Deep is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances By Jean-Paul Fitoussi; Francesco Saraceno
  29. Coping With Uncertainty: Historical and Real-Time Estimates Of The Natural Unemployment Rate and The Uk Monetary Policy By George Chouliarakis
  30. A New Keynesian analysis of industrial employment fluctuations. By Miguel Casares
  31. Changes in International Business Cycle Affiliations By Erdenebat Bataa; Denise R. Osborn; Marianne Sensier; Dick van Dijk
  32. Leveraged financing, over investment, and boom-bust cycles By Patrick-Antoine Pintus; Yi Weng
  33. Using Inflation to Erode the U.S. Public Debt By Joshua Aizenman; Nancy Marion
  34. Nonlinearities in the Real Exchange Rate and Monetary Policy: Interest Rate Rules Reconsidered By Konstantinos D. Mavromatis
  35. Lessons from the Great American Real Estate Boom and Bust of the 1920s By Eugene N. White
  36. Employment comovements at the sectoral level over the business cycle. By Steven P. Cassou; Jesús Vázquez
  37. "Sustaining Recovery--Medium-term Prospects and Policies for the U.S. Economy" By Dimitri B. Papadimitriou; Greg Hannsgen; Gennaro Zezza
  38. Exports and Financial Shocks By Mary Amiti; David E. Weinstein
  39. Collateral constraints and the amplification-persistence trade-off By Patrick-Antoine Pintus
  40. The Difficulties of the Chinese and Indian Exchange Rate Regimes By Ila Patnaik
  41. The Balassa-Samuelson model in general equilibrium with markup variations By Romain Restout
  42. To Shape the Future: How Labor Market Entry Conditions Affect Individuals' Long-Run Wage Profiles By Brunner, Beatrice; Kuhn, Andreas
  43. The determinants of option-adjusted delta credit spreads: a comparative analysis of the United States, the United Kingdom and the euro area By Becchetti , Leonardo; Carpentieri , Andrea; Hasan, Iftekhar
  44. Financial Dependence, Formal Credit and Informal Jobs - New Evidence from Brazilian Household Data By Luis Catao; Carmen Pages; Maria Fernanda Rosales
  45. Financial Dependence, Formal Credit, and Informal Jobs: New Evidence from Brazilian Household Data By Catão, Luis A. V.; Pagés, Carmen; Rosales, Maria Fernanda
  46. Provision of Liquidity through the Primary Credit Facility during the Financial Crisis: A Structural Analysis By Erhan Artuç; Selva Demiralp
  47. Do re-election probabilities influence public investment? By Jon H. Fiva; Gisle James Natvik
  48. Global Integration of Central and Eastern European Financial Markets: The Role of Economic Sentiments By Ansgar Belke; Joscha Beckmann; Michael Kühl
  49. The Effects of Oil Price Changes on the Industry-Level Production and Prices in the U.S. and Japan. By Ichiro Fukunaga; Naohisa Hirakata; Nao Sudo
  50. Mortgage Loan Modifications: Program Incentives and Restructuring Design By Dan Magder
  51. On the Feasibility of Perpetual Growth in a Decentralized Economy Subject to Environmental Constraints By Jean-Francois FAGNART; Marc GERMAIN
  52. Financial constraints in China: firm-level evidence By Sandra PONCET; Walter STEINGRESS; Hylke VANDENBUSSCHE
  53. Do Oil Windfalls Improve Living Standards? Evidence from Brazil By Francesco Caselli; Guy Michaels
  54. That's Where the Money Was: Foreign Bias and English Investment Abroad, 1866-1907 By Chabot, Benjamin; Kurz, Christopher J.
  55. The Impact of Local Decentralization on Economic Growth: Evidence from U.S. Counties By Hammond, George W.; Tosun, Mehmet S.
  56. Die Auswirkungen der Geldmenge und des Kreditvolumens auf die Immobilienpreise: ein ARDL-Ansatz für Deutschland By Ansgar Belke

  1. By: Fabian Eser (Nuffield College, Oxford University, Oxford.)
    Abstract: This paper examines under what conditions fiscal policy in the form of government spending should contribute to macroeconomic stabilisation. To this end optimal fiscal targeting rules minimising the microfounded social loss are examined in the following settings. Firstly, for the benchmark New Keynesian model, where monetary policy is unconstrained, a neutrality result for fiscal obtains: fiscal policy should not respond to any shocks. Secondly, if monetary policy is constrained to follow a Taylor rule, a stabilisation role for fiscal policy emerges. Fiscal policy should 'lean against' inflation and be countercyclical relative to output. Crucially, the Taylor principle is shown to remain the key requirement on policy to guarantee equilibrium determinacy. Thirdly, the fiscal targeting rule obtained under a Taylor rule is shown to be optimal, too, when policy is optimal but subject to monetary frictions. Thus, there is a stabilisation role for government spending under monetary frictions, changing the role of monetary and fiscal policy fundamentally.
    Keywords: Monetary Policy, Fiscal Policy, Macroeconomic Stabilisation, Discretion, Dynamic General Equilibrium, Sticky Prices, Monetary Frictions, Equilibrium Determinacy
    JEL: E5 E6 C62
    Date: 2009–10–13
  2. By: Svensson, Lars E.O. (Executive Board)
    Abstract: Evaluating inflation-targeting monetary policy is more complicated than checking whether inflation has been on target, because inflation control is imperfect and flexible inflation targeting means that deviations from target may be deliberate in order to stabilize the real economy. A modified Taylor curve, the forecast Taylor curve, showing the tradeoff between the variability of the inflation-gap and output-gap forecasts can be used to evaluate policy ex ante, that is, taking into account the information available at the time of the policy decisions, and even evaluate policy in real time. In particular, by plotting mean squared gaps of inflation and output-gap forecasts for alternative policy rate paths, it may be examined whether policy has achieved an efficient stabilization of both inflation and the real economy and what relative weight on the stability of inflation and the real economy has effectively been applied. Ex ante evaluation may be more relevant than evaluation ex post, after the fact. Publication of the interest-rate path also allows the evaluation of its credibility and the effectiveness of the implementation of monetary policy.
    Keywords: Monetary policy evaluation; forecast Taylor curve; mean squared gaps
    JEL: E52 E58
    Date: 2009–10–01
  3. By: Chirwa, Themba G.
    Abstract: The paper provides an alternative view to the Real and New Keynesian business cycle theories. The paper focuses on the combination of both real and nominal variables in explaining the cyclical movements of business cycles. We propose using Vector Autoregressive (VAR) technique on the production function approach in order to empirically assess the relative importance of both real and nominal variables in defining the shape of a business cycle (or output gap). An economy-specific variable (inflation) is introduced in the production function and is used to control the severity, persistence and magnitude of a given real shock. The model employed is tested in four countries namely: United States of America, United Kingdom, Canada and Germany. The results show that indeed real and nominal variables play an important and major role in explaining movements in business fluctuations. The bulk of impulse responses given a real shock to the output gap may also be attributed to movements in nominal variables mainly as a result of inflationary movements. This economy specific parameter conveys the same message that Ragnar Frisch hypothesized in 1933 based on his ‘rocking-horse theory’. The paper thus provides policy makers to identify key choice variables to use when reducing the impact of shocks in a given economy within a specified period of time.
    Keywords: Business cycle; Vector autoregression; Impulse and propagation mechanisms; Hodrick-Prescott filter; Production function approach.
    JEL: E32 E31 E52
    Date: 2009–10
  4. By: Stefano Eusepi; Bruce Preston
    Abstract: Standard real-business-cycle models must rely on total factor productivity (TFP) shocks to explain the observed co-movement between consumption, investment and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption, can generate co-movement in absence of TFP shocks. Intertemporal substitution of goods and leisure induces co-movement over the business cycle through heterogeneity in consumption behavior of employed and unemployed workers. The result is due to two model features that are introduced to capture important characteristics of US labor market data. First, individual consumption is affected by the number of hours worked with employed consuming more on average than unemployed. Second, changes in the employment rate, a central explanator of total hours variation, then affects aggregate consumption. Demand shocks --- such as shifts in the marginal efficiency of investment, government spending shocks and news shocks --- are shown to generate economic fluctuations consistent with observed business cycles.
    JEL: E13 E24 E32
    Date: 2009–12
  5. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: We study the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. In this model, shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and, to a lesser extent, technological frictions are the key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies, but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing.
    JEL: C11 E3 E32
    Date: 2009–12
  6. By: Landström, Mats (Department of Economics, Umeå University)
    Abstract: A difference-in-difference approach was used to investigate whether Central Bank Indepencence (CBI) reforms matter for inflation, based on a novel data set including the possible occurence of such reforms in 132 countries during the period 1980-2003. CBI-reforms are found to have contributed to bringing down high inflation rates where those existed, but they seem unrelated to performance in low-inflation countries.
    Keywords: Monetary policy; institutional reforms; central banking; price stability; political economy; delegation
    JEL: E52 E58
    Date: 2009–11–27
  7. By: Castelnuovo, Efrem (University of Padua); Surico, Paolo (London Business School)
    Abstract: This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.
    Keywords: SVARs; price puzzle; sticky price model; Taylor principle; passive policy
    JEL: E30 E52
    Date: 2009–11–08
  8. By: Volker Wieland
    Abstract: This paper reviews the rationale for quantitative easing when central bank policy rates reach near zero levels in light of recent announcements regarding direct asset purchases by the Bank of England, the Bank of Japan, the U.S. Federal Reserve and the European Central Bank. Empirical evidence from the previous period of quantitative easing in Japan between 2001 and 2006 is presented. During this earlier period the Bank of Japan was able to expand the monetary base very quickly and significantly. Quantitative easing translated into a greater and more lasting expansion of M1 relative to nominal GDP. Deflation subsided by 2005. As soon as inflation appeared to stabilize near a rate of zero, the Bank of Japan rapidly reduced the monetary base as a share of nominal income as it had announced in 2001. The Bank was able to exit from extensive quantitative easing within less than a year. Some implications for the current situation in Europe and the United States are discussed.
    JEL: E31 E52 E58 E61
    Date: 2009–12
  9. By: Szilard Benk (Hungarian Central Bank); Max Gillman (Institute of Economics - Hungarian Academy of Sciences); Michal Kejak (The Center for Economic Research and Graduate Education of Charles University (CERGE EI))
    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: business cycle, credit shocks, velocity and volatility
    JEL: E13 E32 E44
    Date: 2009–11
  10. By: Fabian Eser (Nuffield College, Oxford University, Oxford.)
    Abstract: This paper examines monetary policy in a currency union whose member countries exhibit heterogeneous rates of limited asset markets participation (LAMP). As a result risk sharing among member countries is imperfect and the monetary transmission mechanism can differ across countries. In the limit the elasticity of output to the union-wide nominal interest rate can be of opposite sign in different countries. I develop a tractable model in which the dispersion of asset markets participation (AMP) becomes a key parameter. While monetary policy can guarantee determinacy by following an active or passive rule depending on the sign of the interest-elasticity of output, ignoring dispersion can lead to incorrect computation of the sign and the size of the latter. Taking the heterogeneity into account is thus central for sound policy Furthermore, due to the failure of risk sharing, determinacy for union-aggregates does not guarantee determinacy in every member country. However, the more open a country is in trade terms, the greater the rate of LAMP for which the country still displays equilibrium determinacy. For complete openness, determinacy is guaranteed. This underlines the importance of risk sharing and trade integration for the functioning of a currency union. Considering the optimal union-wide targeting rule, a higher mean and dispersion of LAMP increase the desired inflation volatility and decrease the desired output volatility. The implied optimal Taylor rule shows that subject to the Taylor principle, the higher are mean and dispersion of LAMP, the softer should be the response of the nominal interest rate to expected inflation.
    Keywords: Monetary Union, Limited Asset Markets Participation, Heterogeneity, (Optimal) Monetary Policy, Real (In)determinacy, Sticky Prices
    JEL: E52 F41 E44
    Date: 2009–11–19
  11. By: Joerg Bibow
    Abstract: This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated "stability oriented" policy wisdom inherited from Germany's mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.
    Keywords: Economic and Monetary Union; Euro; European Central Bank; Global Imbalances; Global Crisis; Intra-area Imbalances; Competitiveness Positions; Policy Coordination; Tax-push Inflation; Financial Supervision; Mercantilism
    JEL: E30 E42 E52 E58 E61 E63 E65 F36
    Date: 2009–12
  12. By: Landström, Mats (Department of Economics, Umeå University)
    Abstract: This thesis consists of two empirically oriented papers on Central Bank Independence (CBI) Reforms. Paper [1] is an investigation of why politicians around the world have chosen to give up power to independent central banks, thereby reducing their ability to control the economy. A new data-set covering 132 countries, of which 89 had implemented CBI reforms during 1980-2005, was collected. Politicians in non-OECD countries were more likely to delegate power to independent central banks if their country had been characterized by high variability in inflation and if they faced a high probability of being replaced. No such effects were found for OECD countries. Paper [2], using a difference-in-difference approach, studies whether CBI reform matters for inflation performance. The analysis is based on a dataset including the possible occurence of CBI reforms in 132 countries during the period 1980-2005. CBI reform is found to have contributed to bringing down inflation in high-inflation countries, but it seems unrelated to inflation performance in low-inflation countries.
    Keywords: Monetary policy; institutional reform; central banking; price stability; political economy; delegation; institutional economics; inflation; time-inconsistency; accountability
    JEL: E52 E58 P48
    Date: 2009–11–27
  13. By: Roberto Coronado
    Abstract: In this paper, I analyze the business cycle properties of remittances and output series for three pairs of countries: United States-Mexico, United States-El Salvador, and Germany-Turkey. Using an unobserved components state-space model (via the Beveridge-Nelson decomposition), I decompose the remittances and output series into stochastic permanent and cyclical components. I then use the resulting stationary cyclical components to estimate co-movements between remittances and output series. Empirical results indicate that remittances are countercyclical with all the home countries: Mexico, El Salvador, and Turkey. With respect to source countries, remittances to Mexico are countercyclical with the United States business cycle, while remittances from the United States to El Salvador and remittances from Germany to Turkey are strongly procyclical with output fluctuations in the source country. The contribution of this paper to the literature is twofold: (1) I use high-frequency data (quarterly) for a relatively long period of time; and (2) I employ more recent and sophisticated econometric techniques in the decomposition of the series into stochastic permanent and cyclical components. The existing literature lacks both of these important aspects of my analysis. I show that once both of these factors are incorporated into the analysis, empirical results are more aligned to those predicted by economic theory.
    Keywords: Business cycles ; Emigrant remittances ; Time-series analysis ; Econometric models ; Stochastic analysis
    Date: 2009
  14. By: Betty C. Daniel (University at Albany); Christos Shiamptanis (Central Bank of Cyprus)
    Abstract: An EMU country that adheres to the Maastricht and the Stability and Growth Pact limits is implicitly promising not to allow its fiscal stance to deteriorate to a position in which it places pressure on the European Central Bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority’s freedom to determine the price level. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Panel estimates are consistent with monetary control of the price level.
    Keywords: European Monetary Union, monetary policy, fiscal policy, Fiscal Theory of the Price Level, panel cointegration, error correction
    JEL: C32 C33 E42 E62 F33
    Date: 2009–07
  15. By: Bohl , Martin T (Westfälische-Wilhelms Universität); Mayes , David G (University of Auckland); Siklos, Pierre L (Wilfrid Laurier University, Viessmann European Research Centre, Waterloo, ON, Canada. Freie Universität, Berlin, Germany. Centre for International Governance Innovation (CIGI))
    Abstract: With a few unfortunate exceptions the last three decades have seen reductions in inflation around the world to the point that many would argue that further improvements in price stability would offer only limited welfare gains. This experience is the result of many factors, some of which are country-specific. In this paper we seek to isolate one of the factors, namely, the improvement in the quality of monetary policy. There are two novel aspects to the study. Firstly, we essentially estimate a gravity-like model. Secondly, we propose generally a more exhaustive analysis of the potential role of a large number of institutional factors than has been done before. Briefly, we find that institutional factors play a role in explaining inflation relative to the US experience, which is used as the benchmark. Nevertheless, any reduction in inflation stemming from greater central bank autonomy is a feature of the 1980s and early 1990s. Thereafter, central banks in the OECD look very much alike.
    Keywords: globalization; inflation differentials; monetary policy strategy; institutional change
    JEL: C33 E42 E58
    Date: 2009–11–09
  16. By: Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Banque de France - Business Conditions and Macroeconomic Forecasting Directorate); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Patrick Rakotomarolahy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This papier formalizes the process of forecasting unbalanced monthly data sets in order to obtain robust nowcasts and forecasts of quarterly GDP growth rate through a semi-parametric modelling. This innovative approach lies on the use on non-parametric methods, based on nearest neighbors and on radial basis function approaches, ti forecast the monthly variables involved in the parametric modelling of GDP using bridge equations. A real-time experience is carried out on Euro area vintage data in order to anticipate, with an advance ranging from six to one months, the GDP flash estimate for the whole zone.
    Keywords: Euro area GDP, real-time nowcasting, forecasting, non-parametric models.
    Date: 2009–11
  17. By: Tervala, Juha (University of Turku)
    Abstract: This study analyses cross-country correlations of stock prices (values of firms) using the basic New Open Economy Macroeconomics model. We show that cross-country correlations of stock prices greatly depend on the currency of export pricing in the case of monetary shocks but not notably for temporary technology shocks. In the case of a money supply shock, the producer (local) currency pricing version of the model generates a negative (positive) cross-country correlation of stock prices.
    Keywords: stock prices; international business cycles; open economy
    JEL: E32 F30 F41 G10
    Date: 2009–11–02
  18. By: Sophocles Michaelides (Central Bank of Cyprus)
    Abstract: The period 1960 to 2007 – when the Cyprus pound was legal tender – is examined with a view to relating the major turning points of exchange, fiscal and monetary policies to their likely causes and consequences. Assumptions are made and conclusions are drawn regarding: the four periods of exchange rate policy (1960-1972, 1972-1992, 1992-1999, 1999-2007); the three phases of bank claims on the government sector (1960-1966, 1966-1975, 1975-2007); the five swings of bank credit to the private sector (1960-1965, 1965-1975, 1975-1984, 1984-2007); the five oscillations of the banking system’s foreign assets (1960-1971, 1971-1980, 1980-1989, 1989-1998, 1998-2007); the parallel tracks of GDP, CPI and the average annual salary during the 47 years under review. The above methodology is applied to the analysis and synthesis of the monetary and credit history of Cyprus between 1878 and 2007.
    Keywords: Economic history, business cycle, exchange rate, fiscal policy, private credit, price index, wage adjustment
    JEL: E3 E4 E5 N1
    Date: 2009–09
  19. By: Miguel Almunia (Department of Economics, University of California, Berkeley); Agustín S. Bénétrix (Institute for International Integration Studies, Trinity College Dublin); Barry Eichengreen (Department of Economics, University of California, Berkeley); Kevin H. O'Rourke (Institute for International Integration Studies, Trinity College Dublin; Department of Economics, Trinity College Dublin); Gisela Rua (Institute for International Integration Studies, Trinity College Dublin)
    Abstract: The Great Depression of the Thirties and the Great Credit Crisis of the "Noughties 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.
    JEL: E63 F16 N10 N27
    Date: 2009–11
  20. By: Zorica Mladenovic (Faculty of Economics, University of Belgrade); Bent Nielsen (Department of Economics, University of Oxford)
    Abstract: During extreme hyper-inflations productivity tends to fall dramatically. Yet, in models of money demand in hyper-inflation variables such as real income has been given a somewhat passive role, either assuming it exogenous or to have a negligible role. In this paper we use an empirical methodology based on cointegrated vector autoregressions to analyse data from the extreme Yugoslavian episode to investigate the role of income. The analysis suggests that even in extreme hyper-inflation the monetary variables and real income are simultaneously determined. The methodology enables a description of the short term adjustment of the variables considered.
    Keywords: Cointegration, hyper-inflation, income, money-demand
    Date: 2009–03–27
  21. By: Belongia, Michael
    Abstract: The Federal Reserve has responsibilities in three functional areas: Bank supervision and regulation, monetary policy, and services to the payments system. Although much has changed in each of these areas since the Fed was founded nearly one hundred years ago, the Federal Reserve System has changed relatively little. This paper reviews the Fed's operations and structure and suggests reforms that are coherent with its mission and the current state of the financial system.
    Keywords: Federal Reserve; monetary policy;
    JEL: E58 E50
    Date: 2009–11
  22. By: James R. Rhodes (National Graduate Institute for Policy Studies)
    Abstract: In Appreciation and Interest Irving Fisher (1896) derived an equation connecting interest rates in any two standards of value. The original Fisher equation (OFE) was expressed in terms of the expected appreciation of money [percent change in E(1/P)] whereas the ubiquitous conventional Fisher equation (CFE) uses expected goods inflation [percent change in E(P)]. Since Jensen?s inequality implies the non-equivalence of the two equations, the OFE is not subject to standard criticisms of non-rationality leveled against the CFE. The puzzling substitution of inflation for expected money appreciation in Fisher (1930) is resolved by taking into account Fisher's theory of “money illusion.”
    Keywords: Fisher equation, Fisher hypothesis, Fisher effect, money illusion, nominal interest rate, purchasing power of money, value of money.
    JEL: E40 B00 B31
    Date: 2006–06
  23. By: Brito, Ricardo D.
    Date: 2009–10
  24. By: Belongia, Michael; Hinich, Melvin
    Abstract: Over the past twenty years, the federal funds rate has evolved from being an intermediate target or indicator variable in discussions of monetary policy to the Federal Reserve’s (exogenous) policy instrument. How the funds rate is characterized has important implications for modeling, particularly in settings such as the popular Taylor Rule. Crucially, however, little investigation has been done to examine whether the funds rate meets the conditions one would require for an instrument of policy. This paper offers empirical evidence on the relationships among the federal funds rate, variables that might influence its behavior and variables of interest to monetary policy.
    Keywords: federal funds rate; monetary policy; causality tests; reserves
    JEL: E43 E58 E52
    Date: 2009–04
  25. By: Jiri Slacalek (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: I investigate the effect of wealth on consumption in a new dataset with financial and housing wealth from 16 countries. The baseline estimation method based on the sluggishness of consumption growth implies that the eventual (long-run) marginal propensity to consume out of total wealth is 5 cents (averaged across countries). While the wealth effects are quite strong—between 4 and 6 cents—in countries with more developed mortgage markets and in market-based, Anglo-Saxon and non euro area economies, consumption only barely reacts to wealth elsewhere. The effect of housing wealth is somewhat smaller than that of financial wealth for most countries, but not for the US and the UK. The housing wealth effect has risen substantially after 1988 as it has become easier to borrow against housing wealth. JEL Classification: E21, E32, C22.
    Keywords: housing prices, wealth effect, consumption dynamics, portfolio choice.
    Date: 2009–11
  26. By: Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We propose a signaling model in which the central bank and firms receive information on cost-push shocks independently from each other. If the firms’ signals are rather unlikely to be informative, central banks should remain silent about their own private signals. If, however, firms are sufficiently likely to be informed, it is socially desirable for the central bank to reveal its private information. By doing so, the central bank eliminates the distortions stemming from the signaling incentives under opacity. Our model may also explain the recent trend towards more transparency in monetary policy.
    Keywords: signaling games, transparency, monetary policy, central banks, communication
    JEL: D82 D83 E58
    Date: 2009–11
  27. By: Hiroshi Iyetomi; Yasuhiro Nakayama; Hiroshi Yoshikawa; Hideaki Aoyama; Yoshi Fujiwara; Yuichi Ikeda; Wataru Souma
    Abstract: We explore what causes business cycles by analyzing the Japanese industrial production data. The methods are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant, and identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model stands the 2008-09 recession. Because a fall of output during 2008-09 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks.
    Date: 2009–12
  28. By: Jean-Paul Fitoussi (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: The effects of the current crisis on the level of output, and consequently on unemployment and poverty, are likely to be deep and long lasting; they should not be underestimated, especially now that some timid signs of recovery are appearing. The crisis was triggered by the US financial sector, but its roots are real, and can be traced to the deepening income inequality of the last three decades, which led to a chronic deficiency of aggregate demand. In the Unites States, the center of the crisis, the policy reaction has been bold, and as a consequence the effects of the crisis are less striking than in the eurozone, where only France has a comparable performance. The policy inertia of the eurozone countries, in fact, is more structural, and is related to the institutions for the economic governance of Europe. The statute of the ECB and the SGP reflect the doctrine opposed to discretionary macroeconomic policies, constrain eurozone governments and its monetary policy. The relatively better performance of France can in fact be explained with these lenses(?) as on one side it has a well developed system of automatic stabilizers, and on the other it suffered less than other OECD countries the deepening of income inequality. Developing countries, suffering from a crisis that certainly they did not originate, should be given the means to carry on policies to contrast the crisis, thus avoiding pauperization and the long term negative effects of the adverse shock they experienced.
    Keywords: Economic Crisis, Fiscal Policy, Monetary Policy, Income Distribution, Policy Coordination, European Governance
    JEL: E24 E50 E61 F01
    Date: 2009–11
  29. By: George Chouliarakis
    Abstract: The paper derives and compares historical and real-time estimates of the UK natural unemployment rate and shows that real-time estimates are fraught with noise and should be treated with scepticism. A counterfactual exercise shows that, for most of the 1990s, the Bank of England tracked changes in the natural rate relatively successfully, albeit with some recognition lag which, at times, might have led to excessively cautious policy. A careful scrutiny of the minutes of the monetary policy committee meetings reveals that such ‘cautiousness’ should be taken as evidence of awareness of the real-time informational limitations that monetary policy is facing.
    Date: 2009
  30. By: Miguel Casares (Departamento de Economía-UPNA)
    Abstract: This paper describes a model with sticky prices, search frictions and hours-clearing wages that provides firm differentiation across several dimensions: price, output, wage, employment and hours per worker. The connection between pricing and hiring decisions results in firm-level employment fluctuations that depend upon sticky prices, search costs, demand elasticity and labor supply elasticity. The calibrated model is able to match average US industrial employment volatility when assuming a small industrial size, providing one possible answer to Shimer (2005a)´s puzzle.
    Keywords: search frictions, sticky prices, industrial employment
    JEL: E3 J2 J3 J4
    Date: 2009
  31. By: Erdenebat Bataa; Denise R. Osborn; Marianne Sensier; Dick van Dijk
    Abstract: We investigate changes in international business cycle affiliations using an iterative procedure for detecting system-wide structural breaks. We analyze GDP growth rates in two systems, one with the US, Euro-area, UK and Canada and the other for the Euro-area countries of France, Germany and Italy. We discover that international dynamic interactions change in both the mid-1980s and early 1990s, with such changes being particularly important for studying influences on the aggregate Euro-area. However, contemporaneous (conditional) correlations between these Euro-area countries increase in 1984 and 1998, with a large increase in correlations also evident across the international system during the 1990s.
    Date: 2009
  32. By: Patrick-Antoine Pintus (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); Yi Weng (Federal Reserve Bank of St. Louis - Federal Reserve Bank of St. Louis, Tsinghua University - Tsinghua University)
    Abstract: It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble).
    Keywords: Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply
    Date: 2009
  33. By: Joshua Aizenman; Nancy Marion
    Abstract: As a share of GDP, the U.S. Federal debt held by the public exceeds 50 percent in FY2009, the highest debt ratio since 1955. Projections indicate the debt ratio may be in the 70-100 percent range within ten years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade. Yet there are some important differences –shorter debt maturities today reduce the temptation to inflate, while the larger share held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the U.S. debt overhang may trigger an increase in inflation of about 5 percent for several years. This additional inflation would significantly reduce the debt ratio, even with some shortening of debt maturities.
    JEL: E6 F4 H6
    Date: 2009–12
  34. By: Konstantinos D. Mavromatis (University of Warwick)
    Abstract: Empirical research during the last ten years has found significant evidence in favour of a nonlinear-threshold type behaviour of the real exchange rate. Interest rate rules which include the exchange rate appear to have either an insignificant effect on or generate small coefficients for the real exchange rate. However, the empirical studies do not take into account the nonlinear behaviour of the exchange rate. The inclusion of nonlinearities in the real exchange rate could imply nonlinear behaviour in the interest rate rule, whenever the exchange rate is included. We use a two-country sticky price model to show that nonlinear Taylor-type rules where the exchange rate is included lead to lower variation in output and inflation.
    Keywords: Taylor rules, real exchange rate, nonlinearities
    JEL: E52 F41 F42
    Date: 2009–10
  35. By: Eugene N. White
    Abstract: Although long obscured by the Great Depression, the nationwide “bubble” that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates and a “Greenspan put,” helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail” doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.
    JEL: E5 G18 G21 N12 N22
    Date: 2009–12
  36. By: Steven P. Cassou (Kansas State University); Jesús Vázquez (Universidad del País Vasco)
    Abstract: This paper extends the technique suggested by den Haan (2000) to investigate contemporaneous as well as lead and lag correlations among economic data for a range of forecast horizons. The technique provides a richer picture of the economic dynamics generating the data and allows one to investigate which variables lead or lag others and whether the lead or lag pattern is short term or long term in nature. The technique is applied to monthly sectoral level employment data for the U.S. and shows that among the ten industrial sectors followed by the U.S. Bureau of Labor Statistics, six tend to lead the other four. These six have high correlations indicating that the structural shocks generating the data movements are mostly in common. Among the four lagging industries, some lag by longer intervals than others and some have low correlations with the leading industries indicating that these industries are partially influenced by structural shocks beyond those generating the six leading industries.
    Keywords: Business cycle, sectoral employment comovement, leading and lagging
    JEL: E32 E37
    Date: 2009–12–03
  37. By: Dimitri B. Papadimitriou; Greg Hannsgen; Gennaro Zezza
    Abstract: Though recent market activity and housing reports give some warrant for optimism, United States economic growth was only 2.8 percent in the third quarter, and the unemployment rate is still very high. In their new Strategic Analysis, the Levy Institute's Macro-Modeling Team project that high unemployment will continue to be a problem if fiscal stimulus policies expire and deficit reduction efforts become the policy focus. The authors--President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza--argue that continued fiscal stimulus is necessary to reduce unemployment. The resulting federal deficits would be sustainable, they say, as long as they were accompanied by a coordinated and gradual devaluation of the dollar, especially against undervalued Asian currencies--a step necessary to prevent an increase in the current account deficit and ward off the risk of a currency crash.
    Date: 2009–12
  38. By: Mary Amiti; David E. Weinstein
    Abstract: A striking feature of many financial crises is the collapse of exports relative to output. In the 2008 financial crisis, real world exports plunged 17 percent while GDP fell 5 percent. This paper examines whether the drying up of trade finance can help explain the large drops in exports relative to output. This paper is the first to establish a causal link between the health of banks providing trade finance and growth in a firm’s exports relative to its domestic sales. We overcome measurement and endogeneity issues by using a unique data set, covering the Japanese financial crises of the 1990s, which enables us to match exporters with the main bank that provides them with trade finance. Our point estimates are economically and statistically significant, suggesting that trade finance accounts for about one-third of the decline in Japanese exports in the financial crises of the 1990s.
    JEL: E32 E44 F40 G21
    Date: 2009–12
  39. By: Patrick-Antoine Pintus (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: Kiyotaki and Moore (1997) have stressed that an amplification-persistence trade-off arises when collateral constraints on borrowing interact with lumpy investment. In this paper, I confirm by way of example that collateral constraints are not by themselves responsible for such a deceptive trade-off. More precisely, I show in a standard general-equilibrium two-agent model that the amplification and persistence of the impact of temporary shocks go hand in hand. Unlike Kiyotaki-Moore's, the economy features concave utility and production functions, an endogenous interest rate and neo-classical input accumulation
    Keywords: collateral constraints; amplification and persistence of aggregate shocks
    Date: 2009
  40. By: Ila Patnaik
    Abstract: China and India have both attempted distorting the exchange rate in order to foster exports-led growth. This is described as the Bretton Woods II framework, where developing countries buy bonds in the US and keep undervalued exchange rates, in order to foster export-led growth. The costs and benefits of this approach need to factor in the extent to which monetary policy is distorted by the pursuit of exchange rate policy. In this paper, dates of structural change are identified, and the characteristics of the de facto exchange rate regime, for both countries are examined. These results utilise recent developments in the econometrics of structural change. Business cycle conditions and the short-term rate (expressed in real terms) in both India and China are also examined. [NIPFP WP No 2009-62].
    Keywords: GDP, RBI, indian, exports, china, India, exchange rte, bretton woods, US, monetary policy, developing countries, de facto, business cycle,
    Date: 2009
  41. By: Romain Restout
    Abstract: This contribution embeds the Balassa-Samuelson hypothesis in a general equilibrium model that combines monopolistic competition and markup variations to examine the determinants of relative prices of nontradables. The model emphasizes the role of markup variations as an important aspect driving relative price movements. Variations in the markup makes fiscal policy non-neutral and provides a strong magnification mechanism for shocks to productivity. The empirical evidence of these predictions are examined by using a panel cointegration framework. On the whole, the econometric findings support theoretical implications, suggesting that our model is more closely in line with data relative to the supply-side Balassa-Samuelson framework that abstracts from variations in the degree of competition.
    Keywords: Balassa-Samuelson effect, Monopolistic competition, Fiscal policy.
    JEL: E20 E62 F31 F41
    Date: 2009
  42. By: Brunner, Beatrice (University of Zurich); Kuhn, Andreas (University of Zurich)
    Abstract: We study the long-run effects of initial labor market conditions on wages for a large sample of male individuals entering the Austrian labor market between 1978 and 2000. We find a robust negative effect of unfavorable entry conditions on starting wages. This initial effect turns out to be quite persistent and even though wages do catch up later on, large effects on lifetime earnings result. We also show that initial labor market conditions have smaller and less persistent effects for blue-collar workers than for white-collar workers. We further show that some of the long-run adjustment takes place through changes in job-mobility and employment patterns as well as in job tenure. Finally, we find that adjustments at the aggregate level are key to explain wages' adjustment process in the longer run.
    Keywords: labor market cohorts, initial labor market conditions, long-run wage profiles, persistence of labor market shocks, unemployment, business cycle
    JEL: E3 J2 J3 J6 M5
    Date: 2009–11
  43. By: Becchetti , Leonardo (Università Tor Vergata); Carpentieri , Andrea (Nextra Investment Management and Università Tor Vergata); Hasan, Iftekhar (Rensselaer Polytechnic Institute, USA and Bank of Finland)
    Abstract: We analyse the determinants of the variation of option-adjusted credit spreads (OASs) on a unique database that enlarges the traditional scope of analysis to more disaggregated indexes (combining industry, grade and maturity levels), new variables (volumes of sales and purchases of institutional investors) and a complete set of markets (besides the United States, the United Kingdom and the euro area). With our extended set of regressors we explain almost half of the variability of OASs and find evidence of a significant impact of institutional investors’ purchases and sales on corporate bond risk. We also find that US business cycle indicators significantly affect the variability of OASs in the United Kingdom and the euro area.
    Keywords: option-adjusted credit spreads; delta; corporate bond risk; institutional investors; business cycle indicators
    JEL: E44 G12 G32
    Date: 2009–11–23
  44. By: Luis Catao; Carmen Pages; Maria Fernanda Rosales
    Abstract: This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost. The relevance of this credit channel is gauged using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil. It is found that formalization rates increase with financial deepening, especially in sectors where firms are typically more dependent on external finance. Also found is that, decomposing shifts in formalization rates into those within each firm size category and those between firm sizes, financial deepening significantly explains the former but not so much the latter. Some key policy implications are derived.
    Keywords: Credit Markets, Financial Dependence, Informality, Brazil
    JEL: E26 G21 O4 O16
    Date: 2009–12
  45. By: Catão, Luis A. V. (Inter-American Development Bank); Pagés, Carmen (Inter-American Development Bank); Rosales, Maria Fernanda (University of Chicago)
    Abstract: This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost; if so, well-functioning credit markets help foster formal employment at the expense of informal jobs. We gauge the relevance of this credit channel using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil – a large emerging market where substantial changes in banking system depth and formalization ratios have taken place and for which consistent data exists. Our results show that formalization rates increase with financial deepening and the more so in sectors where firms are typically more dependent on external finance. We also decompose shifts in aggregate formalization into those within each firm size category and those associated with changes in firm size, and find that financial deepening significantly explains the former but not so much the latter.
    Keywords: credit markets, financial dependence, informality, Brazil
    JEL: E26 G21 O4 O16
    Date: 2009–12
  46. By: Erhan Artuç (Koc University); Selva Demiralp
    Abstract: Over the course of the recent liquidity crisis, the Federal Reserve made several changes to its primary credit lending facility such as narrowing the spread between the primary credit rate and the target funds rate and increasing the term of the borrowing. In this paper, we use the model developed by Artuç and Demiralp (2008) to provide a structural assessment of the effectiveness of these changes. Our results suggest that these changes were effective in stabilizing the federal funds market.
    Keywords: Discount Window, Primary Credit, Federal Funds Market
    JEL: E40 E58
    Date: 2009–12
  47. By: Jon H. Fiva (University of Oslo); Gisle James Natvik (Norges Bank)
    Abstract: We identify exogenous variation in incumbent policymakers’ re-election probabilities and explore empirically how this variation affects their investments in physical capital. Our results indicate that a higher re-election probability leads to higher investments, particularly in the purposes preferred more strongly by the incumbents. This aligns with a theoretical framework where political parties disagree about which public goods to produce using labor and predetermined public capital.
    Keywords: Political economics, strategic capital accumulation, identifying popularity shocks.
    JEL: E62 H40 H72
    Date: 2009
  48. By: Ansgar Belke; Joscha Beckmann; Michael Kühl
    Abstract: This paper examines the importance of different economic sentiments, e.g. consumer moods, for the Central and Eastern European countries (CEECs) during the transition process. We first analyze the importance of economic confidence with respect to the CEEC's financial markets. Since the integration of formerly strongly regulated markets into global markets can also lead to an increase of the dependence of the CEECs' domestic market performance from global sentiments, we also investigate the relationship between global economic sentiments and domestic income and share prices. Finally, we test whether the impact of global sentiments and stock prices on domestic variables increases proportionally with the degree of integration. For these purposes, we apply a structural cointegrating VAR (CVAR) framework based upon a restricted autoregressive model which allows us to distinguish between the long-run and the short-run dynamics. For the long run we find evidence supporting relationships between sentiments, income and share prices in case of the Czech Republic. Our results for the short run suggest that economic sentiments in general are strongly influenced by share prices and income but also offer some predictive power with respect to the latter. What is more, global sentiments play an important role in particular for the CEECs' share prices and income. The significance of this link increases with economic integration.
    Keywords: Cointegration, European integration, financial markets, restricted autoregressive model, sentiments
    JEL: E44 G15 P2
    Date: 2009
  49. By: Ichiro Fukunaga (Director, Research and Statistics Department, Bank of Japan.); Naohisa Hirakata (Deputy Director, Research and Statistics Department, Bank of Japan.); Nao Sudo (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan.)
    Abstract: In this paper, we decompose oil price changes into their component parts following Kilian (2009) and estimate the dynamic effects of each component on industry-level production and prices in the U.S. and Japan using identified VAR models. The way oil price changes affect each industry depends on what kind of underlying shock drives oil price changes as well as on industry characteristics. Unexpected disruptions of oil supply act mainly as negative supply shocks for oil- intensive industries and act mainly as negative demand shocks for less oil- intensive industries. For most industries in the U.S., shocks to the global demand for all industrial commodities act mainly as positive demand shocks, and demand shocks that are specific to the global oil market act mainly as negative supply shocks. In Japan, the oil-specific demand shocks as well as the global demand shocks act mainly as positive demand shocks for many industries.
    Keywords: Oil price, Identified VAR, Industry-level data, Japan
    JEL: E30
    Date: 2009–10
  50. By: Dan Magder (Lone Star Funds)
    Abstract: Mortgage defaults and home foreclosures remain a growing problem that undermines the nascent US economic recovery. Delinquencies continue to skyrocket, up 300 percent since the beginning of the crisis, and the contagion has spread to prime loans where delinquencies have risen to over 11 percent of outstanding loans. The resulting foreclosures have broad consequences: Individuals lose their homes, banks take losses on the loans, neighbors suffer as area prices go down, and localities lose on property taxes. The economics of modifying loans to avoid defaults appear strong: Lenders lose an average of $145,000 during a foreclosure compared with less than $24,000 on a modified loan. Yet the track record of modification programs has been surprisingly poor. Potential lawsuits over modifying loans in securitization trusts may be a less important obstacle than many claim. More significant are misaligned incentives that put mortgage servicers in opposition to both investors and borrowers, conflicts between investors holding different tranches of mortgage-backed securities (MBS), operational impediments, and problems in loan modification design that contribute to redefaults. Policymakers should improve reporting metrics to highlight servicers’ conflicts of interest, shift the emphasis of loan modifications from short-term fixes to making the new loans more sustainable, and use government resources to drive operational/capacity improvements in the industry.
    Keywords: Mortgage Loan Modifications, Restructuring, Credit Crisis, HAMP
    JEL: E60 G18 G21
    Date: 2009–11
  51. By: Jean-Francois FAGNART (CEREC, Facultes universitaires Saint-Louis, Brussels and Department of Economics, Universite catholique de Louvain, Louvain- la-Neuve.); Marc GERMAIN (EQUIPPE, Universite de Lille 3 and Department of Economics, Universite catholique de Louvain, Louvain-la-Neuve)
    Abstract: We propose an endogenous growth model of a decentralized economy subject to environmental constraints. In a basic version, we consider an economy where final production requires some material input and where research activities allow simultaneously productive firms to reduce the dependency of their production process on this input and to improve the quality of their output. We adopt a material balance approach and, in spite of the optimistic assumption that the material input is perfectly recyclable (and thus never exhausted), we show that material output growth is always a transitory phenomenon. When it exists, a balanced growth path is necessarily characterized by constant values of the material variables, long term economic growth taking exclusively the form of perpetual improvements in the quality of consumption goods. The material esource constraint is not solely a long term issue since it is also shown to affect the whole transitory dynamics of the (material) growth process. Renewable energy is introduced in an extension of our basic model. This extension does not affect qualitatively the features of a feasible balanced growth path but make its conditions of existence more restrictive.
    Keywords: material balance, endogenous growth, recycling
    JEL: E1 Q0 Q56
    Date: 2009–10–30
  52. By: Sandra PONCET (Centre dÕEconomie de la Sorbonne, Universite Paris 1 and CEPII,); Walter STEINGRESS (Boston College); Hylke VANDENBUSSCHE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper uses a unique micro-level data-set on Chinese firms to test for the existence of a "political-pecking order" in the allocation of credit. Our findings are threefold. Firstly, private Chinese firms are credit constrained while State-owned firms and foreign-owned firms in China are not; Secondly, the geographical and sectoral presence of foreign capital alleviates credit constraints faced by private Chinese firms. Thirdly, geographical and sectoral presence of state firms aggravates financial constraints for private Chinese firms (Òcrowding outÓ). Therefore it seems that ongoing restructuring of the state-owned sector and further liberalization of foreign capital inflows in China can help to circumvent financial constraints and can boost the investment of private firms.
    Keywords: Investment-cashflow sensitivity, China, firm level data, foreign direct investment
    JEL: E22 G32
    Date: 2009–09–14
  53. By: Francesco Caselli; Guy Michaels
    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.
    JEL: E62 H11 H40 H71 H72 H75 H76 O11 O13 Q32 Q33
    Date: 2009–12
  54. By: Chabot, Benjamin (Yale University); Kurz, Christopher J. (Federal Reserve Board)
    Abstract: Why did Victorian Britain invest so much capital abroad? We collected over 500,000 monthly returns of British and foreign securities trading in London and the United States between 1866 and 1907. These heretofore-unknown data allow us to better quantify the historical benefits of international diversification and revisit the question of whether British Victorian investor bias starved new domestic industries of capital. We find no evidence of bias. A British investor who increased his investment in new British industry at the expense of foreign diversification would have been worse off. The addition of foreign assets significantly expanded the mean-variance frontier and resulted in utility gains equivalent to a meaningful increase in lifetime consumption.
    JEL: E44 F22 G11 G15 N21 N23 O16
    Date: 2009–06
  55. By: Hammond, George W. (West Virginia University); Tosun, Mehmet S. (University of Nevada, Reno)
    Abstract: We analyze the impact of fiscal decentralization on U.S. county population, employment, and real income growth. Our findings suggest that government organization matters for local economic growth, but that the impacts vary by government unit and by economic indicator. We find that single-purpose governments per square mile have a positive impact on metropolitan population and employment growth, but no significant impact on nonmetropolitan counties. In contrast, the fragmentation of general-purpose governments per capita has a negative impact on employment and population growth in nonmetropolitan counties. Our results suggest that local government decentralization matters differently for metropolitan and nonmetropolitan counties.
    Keywords: fiscal decentralization, metropolitan, nonmetropolitan, population, employment, income, spatial econometrics
    JEL: E62 H7 R11
    Date: 2009–11
  56. By: Ansgar Belke
    Abstract: Die aktuellen Finanzmarktturbulenzen wurden durch Entwicklungen im Immobiliensektor ausgelöst. Vor diesem Hintergrund analysiert dieser Beitrag den Zusammenhang zwischen den Immobilienpreisen und der Geldmengen- und Kreditvolumensentwicklung für den Zeitraum 1992 -2006 (westdeutsche Preisdaten) bzw. 1997 bis 2006 (ostdeutsche Preisdaten). Die Untersuchung konzentriert sich erstmals auf die Bundesrepublik Deutschland, deren Immobilienmarkt von einer moderaten Preisentwicklung gekennzeichnet ist und im Vergleich zu den meisten europäischen Ländern damit eine Sonderstellung einnimmt. Auf der Grundlage eines Autoregressiven Distributed Lag (ARDL)-Ansatzes werden Tests auf Kointegration der genannten Variablen durchgeführt. Nach Schätzungen der Langfristparameter werden die zugehörigen Fehlerkorrekturmodell-Regressionen für Immobilienpreise in unterschiedlicher Abgrenzung geschätzt. Die Ergebnisse liefern Evidenz für eine Mitverantwortung der Geld- und Kreditpolitik für die Immobilienpreisentwicklung gerade in Westdeutschland. Es folgen einige Robustheitstests. Zuvor unberücksichtigte Variable der Steuerpolitik wie Sonderabschreibungen in den Neuen Bundesländern üben demnach auf die Immobilienpreise ebenfalls einen wichtigen Einfluss aus, ohne jedoch den Einfluss der Liquidität zu dominieren. Andere Förderprogramme wie beispielsweise vergünstigte Kredite für klimapolitische Maßnahmen (CO2-Gebäudesanierung) erwiesen sich als nicht signifikant. Schließlich verändert auch die Anwendung eines alternativen Kointegrationstestverfahrens die Ergebnisse nicht.
    Keywords: Finanzkrise, Geldmenge, Immobilienpreise, Liquidität, Kreditvolumen, Kointegration.
    JEL: E44 E52 R21 R31
    Date: 2009

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