nep-mac New Economics Papers
on Macroeconomics
Issue of 2009‒12‒19
57 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Estimating the Evolution of Money's Role in the U.S. Monetary Business Cycle By Efrem Castelnuovo
  2. Why inflation targeting central banks seem to follow a standard Taylor rule By Kühn Stefan; Muysken Joan
  3. Does the Fed Respond to Oil Price Shocks? By Kilian, Lutz; Lewis, Logan
  4. Trends and Cycles : an Historical Review of the Euro Area. By Barthélemy, J.; Marx, M.; Poissonnier, A.
  5. Distortionary tax instruments and implementable monetary policy By L. Marattin; M. Marzo; P. Zagaglia
  6. Fiscal Adjustment and Macroeconomic Re-balancing in Ireland By Colm McCarthy
  7. The Conduct of Monetary Policy in Turkey in the Pre- and Post-crisis Period of 2001 in Comparative Perspective: a Case for Central Bank Independence By Alper, Emre; Hatipoglu, Ozan
  8. US Fiscal Indicators, Inflation and Output By Yunus Aksoy; Giovanni Melina
  9. Central bank independence: The case of Croatia By Tomislav Ćorić; Dajana Cvrlje
  10. Monetary Policy Rules in Central and Eastern European Countries: Does the Exchange Rate Matter? By M. FRÖMMEL; G. GARABEDIAN; F. SCHOBERT
  11. Investment Shocks and the Relative Price of Investment By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  12. Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach. By Luca Agnello; Jacopo Cimadomo
  13. Real Interest Rates, Bubbles and Monetary Policy in the GCC countries By Razzak, Weshah; Bentour, E M
  14. Interest Rate Dynamics and Monetary Policy Implementation in Switzerland By Puriya Abbassi; Dieter Nautz; Christian J. Offermanns
  15. Macroeconomic News, Announcements, and Stock Market Jump Intensity Dynamics By José Gonzalo Rangel
  16. Japan's Lost Decade: Does Money have a Role? By Canova, Fabio; Menz, Tobias
  17. Monetary Policy in a Currency Union with Heterogeneous Limited Asset Markets Participation By Fabian Eser
  18. Inflation and investment in monetary growth models By Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
  19. Reversing unconventional monetary policy: technical and political considerations By Buiter, Willem H.
  20. New time series evidence for the causality relationship between inflation and inflation uncertainty in the Turkish economy By Korap, Levent; Saatçioğlu, Cem
  21. Stabilizing an unstable economy: on the choice of proper policy measures By Asada, Toichiro; Chiarella, Carl; Flaschel, Peter; Mouakil, Tarik; Proaño, Christian R.
  22. Monetary effects on nominal oil prices By Max Gillman; Anton Nakov
  23. "Non-Traditional Monetary Polices: G7 Central Banks during 2007-2009 and the Bank of Japan during 1998-2006" By Kazuo Ueda
  24. Understanding Central Bank Loss Functions: Implied and Delegated Targets By Huiping Yuan; Stephen M. Miller
  25. Unemployment insurance and the business cycle: prolong benefit entitlements in bad times? By Moyen, Stéphane; Stähler, Nikolai
  26. An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play By Gonzalez-Astudillo, Manuel
  27. On the usefulness of government spending in the EU area By Salotti, Simone; Marattin, Luigi
  28. The paradox of monetary profits: an obstacle to understanding financial and economic Crisis? By Bruun , Charlotte; Heyn-Johnsen, Carsten
  29. Ambulance Economics: The Pros and Cons of Fiscal Stimuli By W. Max Corden
  30. The Limits to Fiscal Stimulus By Buiter, Willem H.
  31. On the usefulness of government spending in the EU area By L. Marattin; S. Salotti
  32. Global Imbalances and the Financial Crisis: Products of Common Causes By Obstfeld, Maurice; Rogoff, Kenneth
  33. Medium-term business cycles in developing countries By Comin, Diego; Loayza, Norman; Pasha, Farooq; Serven, Luis
  34. Changes in the Fiscal Stance and the Composition of Public Spending By Juraj Stancik; Timo Valila
  35. The origins of a paper money economy - the case of Norway By Lars Fredrik Øksendal
  36. Exports and Financial Shocks By Amiti, Mary; Weinstein, David E.
  37. A unified framework for understanding and comparing dynamic wage and price-setting models. By Dixon, H. D.
  38. The Impact of Plant-Level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth By Amil Petrin; T. Kirk White; Jerome P. Reiter
  39. The Great Depression Analogy By Michael D. Bordo; Harold James
  40. To Shape the Future: How Labor Market Entry Conditions Affect Individuals’s Long-Run Wage Profiles By Beartice Brunner; Andreas Kuhn
  41. From Wage Rigidities to Labour Market Rigidities: A Turning-Point in Explaining Equilibrium Unemployment? By Marco Guerrazzi; Nicola Meccheri
  42. To shape the future: How labor market entry conditions affect individuals' long-run wage profiles By Beatrice Brunner; Andreas Kuhn
  43. The performance of the Italian housing market and its effects on the financial system By Fabio Panetta; Michele Leonardo Bianchi; Marcello Bofondi; Fabrizio Borselli; Guido Bulligan; Alessandro Buoncompagni; Mari Cappabianca; Luisa Carpinelli; Agostino Chiabrera; Francesco Columba; Guido de Blasio; Alessio d’Ignazio; Cristina Fabrizi; Carlo Gola; Roberto Sabbatini; Federico Maria Signoretti; Francesco Zollino
  44. The Diminishing Influences of Agricultural Output Changes on General Price Changes in China By Xian Xin; Xiuqing Wang; Xiaoyun Liu; Xuefeng Mao
  45. Dynamic macroeconomic effects of public capital: evidence from regional Italian data By Valter Di Giacinto; Giacinto Micucci; Pasqualino Montanaro
  46. Real Convergence, Capital Flows, and Competitiveness in Central and Eastern Europe By Ansgar Belke; Gunther Schnabl; Holger Zemanek
  47. Structural Macro-Econometric Modelling in a Policy Environment By Martin Fukac; Adrian Pagan
  48. Krīzes un 2009. gada nodokļu politikas izmaiņu ietekme uz Latvijas ekonomiku By Skribans, Valerijs
  49. Produce or Speculate? Asset Bubbles, Occupational Choice and Efficiency By Cahuc, Pierre; Challe, Edouard
  50. Productivity Growth and Levels in France, Japan, the United Kingdom and the United States in the Twentieth Century By Gilbert Cette; Yusuf Kocoglu; Jacques Mairesse
  51. Real Wage Chronology By Amy Peng; Louis N. Christofides
  52. Prudential Regulation and Competition in Financial Markets By Rudiger Ahrend; Jens Arnold; Fabrice Murtin
  53. Droughts, Floods and Financial Distress in the United States By John Landon-Lane; Hugh Rockoff; Richard H. Steckel
  54. Government Spending Composition in a Simple Model of Schumpeterian Growth By Simon Wiederhold
  55. Unfunded pensions and endogenous labor supply By Torben M. Andersen; Joydeep Bhattacharya
  56. Fiscal policy and economic growth: empirical evidence from EU countries By Benos, Nikos
  57. An Equilibrium Theory of Learning, Search and Wages By Francisco M. Gonzalez; Shouyong Shi

  1. By: Efrem Castelnuovo (University of Padua)
    Abstract: We assess the time-varying money's role in the post-WWII U.S. business cycle by estimating a new-Keynesian framework featuring nonseparability in real balances and consumption, portfolio adjustment costs, and a systematic reaction of policymakers to money growth. Rolling-window Bayesian estimations a la Canova (2009) are contrasted to a full sample fixed-coefficient investigation. Our results suggest that the assumption of stable parameters is unwarranted. The omission of money may induce biased assessments on the impact of structural shocks to the U.S. macroeconomic aggregates, especially during the great inflation period.
    JEL: E31 E51 E52
    Date: 2009–11
  2. By: Kühn Stefan; Muysken Joan (METEOR)
    Abstract: Studies on central bank reaction functions find that central banks only caring about inflation stability, like the ECB, seem to follow a standard Taylor rule in the sense that the interest rate reacts significantly to variations in the output gap. We explain this result by claiming that the alleged reaction to the output gap could in fact be a reaction of the nominal interest rate to variations in the natural real rate of interest, which monetary policy should take into account. This provides a rationale for central banks to observe the output gap in the conduct of purely inflation targeting monetary policy.
    Keywords: monetary economics ;
    Date: 2009
  3. By: Kilian, Lutz; Lewis, Logan
    Abstract: Since Bernanke, Gertler and Watson (1997), a common view in the literature has been that systematic monetary policy responses to the inflation triggered by oil price shocks are an important source of aggregate fluctuations in the U.S. economy. We show that there is no evidence of systematic monetary policy responses to oil price shocks after 1987 and that this lack of a policy response is unlikely to be explained by reduced real wage rigidities. Prior to 1987, according to standard VAR models, the Federal Reserve was not responding to the inflation triggered by oil price shocks, as commonly presumed, but rather to the oil price shocks directly, consistent with a preemptive move by the Federal Reserve to counteract potential inflationary pressures. There are indications that this response is poorly identified, however, and there is no evidence that this policy response in the pre-1987 period caused substantial fluctuations in the Federal Funds rate or in real output. Our analysis suggests that the traditional monetary policy reaction framework explored by BGW and incorporated in subsequent DSGE models should be replaced by DSGE models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.
    Keywords: Counterfactual; Oil; Recessions; Systematic Monetary Policy; Temporal Instability
    JEL: E31 E32 E52 Q43
    Date: 2009–12
  4. By: Barthélemy, J.; Marx, M.; Poissonnier, A.
    Abstract: We analyze the euro area business cycle in a medium scale DSGE model where we assume two stochastic trends: one on total factor productivity and one on the inflation target of the central bank. To justify our choice of integrated trends, we test alternative specifications for both of them. We do so, estimating trends together with the model's structural parameters, to prevent estimation biases. In our estimates, business cycle fluctuations are dominated by investment specific shocks and preference shocks of households. Our results cast doubts on the view that cost push shocks dominate economic fluctuations in DSGE models and show that productivity shocks drive fluctuations on a longer term. As a conclusion, we present our estimation's historical reading of the business cycle in the euro area. This estimation gives credible explanations of major economic events since 1985.
    Keywords: New Keynesian model, Business Cycle, Bayesian estimation.
    JEL: E32
    Date: 2009
  5. By: L. Marattin; M. Marzo; P. Zagaglia
    Abstract: We introduce distortionary taxes on consumption, labor and capital income into a New Keynesian model with Calvo pricing and nominal bonds. We study the relation between tax instruments and optimal monetary policy by computing simple rules for monetary and fiscal policy when one tax instrument at a time varies, while the other two are fixed at their steady-state level. The optimal rules maximize the second-order approximation to intertemporal utility. Three results emerge: (a) when prices are sticky, perfect inflation stabilization is optimal independently from the tax instrument adopted; (b) the optimal degree of responsiveness of monetary policy to output varies depending on which tax instrument induces fluctuations in the average tax rate; (c) when prices are flexible, fiscal rules that prescribe unexpected variations in the price level to support debt changes are always welfare-maximizing.
    JEL: E52 E61 E63
    Date: 2009–11
  6. By: Colm McCarthy (University College Dublin)
    Keywords: Fiscal policy, Ireland, Macroeconomic policy
    Date: 2009–12–01
  7. By: Alper, Emre; Hatipoglu, Ozan
    Abstract: We document the role of independence for Central Bank of Republic of Turkey (CBRT) as it matters to successful implementation of monetary policy. We compare the implementation of monetary policy pre- and post-crisis periods within an empirical framework which allows us to measure the role of independence quantitatively. We estimate a Taylor rule with time varying coefficients by employing a dual extended Kalman filter. We find that the coefficient of inflation gap has increased substantially since CBRT gained de-juro independence.
    Keywords: Taylor Rule; Kalman Filter; Monetary Policy
    JEL: E58 E52 E00 C11
    Date: 2009–01
  8. By: Yunus Aksoy; Giovanni Melina (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: In this paper we explore the information content of a large set of fiscal indicators for US real output growth and inflation. We provide evidence that fluctuations in certain fiscal variables contain valuable information to predict fluctuations in output and prices. The distinction between federal and state-local fiscal indicators yields useful insights and helps define a new set of stylized facts for US macroeconomic conditions. First, we find that variations in state-local indirect taxes as well as state government surplus or deficit help predict output growth. Next, the federal counterparts of these indicators contain valuable information for inflation. Finally, state-local expenditures help predict US inflation. A set of formal and informal stability tests confirm that these relationships are stable. The fiscal indicators in questions are also among the ones that yield the best in-sample and out-of-sample performances.
    Date: 2009–12
  9. By: Tomislav Ćorić (Department of Economics, School of Business Administration, Fort Lewis College); Dajana Cvrlje (Faculty of Economics and Business, University of Zagreb)
    Abstract: A trend of increasing role of central bank's independence took place in the most of modern economies. The central bank independence (CBI) is seen as a way of bringing economy to a higher level. It is argued that an independent central bank is more credible and moreover, that the higher degree of central bank independence facilitates central bank to identify signals of financial problems and alert financial markets. Furthermore, an independent central bank is less likely to be exposed to the inflationary bias, inherent in monetary policy, and is more aware of the inflation costs of expansionary monetary policy. This is in line with Friedman’s theoretical concept that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the central bank. In order to achieve the main goal; price stability, it is essential for a central bank to be connected to government as little as possible. However, governments generally have a certain influence over central banks, even in the case of banks who claim to be independent. The first part of the paper offers theoretical background for the central bank independence (CBI concept). The empirical evidence on the relationship between central bank independence and economic variables suggests negative relationship between central bank independence and inflation. The strong evidence of central bank independence influence on other macroeconomic variables so far has not been found. The analysis of the independence of Croatian national bank was made using 3 different methods; 1) central bank governor turnover rate (TOR), 2) Petursson G. Thorarinn criterion and 3) Cukierman, Webb and Neyapti (CWN) questionnaire. The obtained results affirm high level of central bank independence in Croatia.
    Keywords: monetary policy, central bank independence
    JEL: E58
    Date: 2009–11–12
    Abstract: We estimate monetary policy rules for six central and eastern European countries (CEEC) during the period, when they prepared for membership to the EU and monetary union. By taking changes in the policy settings explicitly into account and by introducing several new methodological features we significantly improve estimation results for monetary policy rules in CEEC. We find that in the Czech Republic, Hungary and Poland the focus of the interest rate setting behaviour switched from defending the peg to targeting inflation. For Slovakia, however, there still seemed to be on ongoing focus on the exchange rate. For Slovenia and only after a policy switch for Romania we find a solid relation with inflation as well.
    Keywords: monetary policy, Taylor rules, transition economies, CEEC, inflation targeting
    JEL: E52 E58 P20
    Date: 2009–08
  11. By: Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
    Abstract: We estimate a New-Neoclassical Synthesis business cycle model with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into the future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the post-war period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that it correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.
    Keywords: Business cycles; DSGE model; financial factors; investment-specific technology
    JEL: C11 E22 E30
    Date: 2009–12
  12. By: Luca Agnello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jacopo Cimadomo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores how discretionary fiscal policies on the revenue side of the government budget have reacted to economic fluctuations in European Union countries. For this purpose, it uses data on legislated revenue changes and structural indicators provided twice per year by National Central Banks of European Union countries in the ESCB framework for analysing fiscal policy. The analysis is based on the estimation of fiscal policy rules linking these measures of legislated fiscal policy changes to the output gap and other control variables. Then, baseline results are compared with regression estimates where variations of cyclically-adjusted indicators are used as proxy for discretionary fiscal policies, as conventionally proposed in the empirical literature on fiscal policy. Results suggest that, overall, legislated changes in taxes and social security contributions have responded in a strongly pro-cyclical way to the business cycle, while commonly-used cyclical-adjustment methods point to a-cyclicality. JEL Classification: E62, E65, H20.
    Keywords: Discretionary fiscal policies, government revenues, cyclical sensitivity, legislation changes, narrative approach, ESCB disaggregated framework.
    Date: 2009–11
  13. By: Razzak, Weshah; Bentour, E M
    Abstract: The Gulf Cooperation Council countries (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Their monetary policy objective is to stabilize the foreign price, i.e., exchange rate instead of the domestic price level, where the nominal interest rate is equalized with the US federal fund rate, but the inflation rates are independent. High oil prices and the depreciating US dollar caused inflation to rise and real interest rates to be persistently negative in the UAE and Qatar. Asset prices bubbles formed then burst creating large loses. They could have moderated the effect of, or avoided, the bubble had they floated the currency and stabilized domestic prices.
    Keywords: inflation; real interest rate; bubbles
    JEL: E31 E58 E37
    Date: 2009–12–01
  14. By: Puriya Abbassi; Dieter Nautz; Christian J. Offermanns
    Abstract: The maturity of the operational target of monetary policy is a distinguishing feature of the SNB's operational framework of monetary policy. While most central banks use targets for the overnight rate to signal the policy-intended interest rate level, the SNB announces a target range for the three-month Libor. This paper investigates the working and the consequences of the SNB's unique operational framework for the behavior of Swiss money market rates before and during the financial crisis.
    Keywords: Implementation of Monetary Policy, Operational Targets of Monetary Policy, Three-Month Rate Targeting, Financial Crisis
    JEL: E52 E58
    Date: 2009–12
  15. By: José Gonzalo Rangel
    Abstract: This paper examines the effect of macroeconomic releases on stock market volatility through a Poisson-Gaussian-GARCH process with time varying jump intensity, which is allowed to respond to such information. It is found that the day of the announcement, per se, has little impact on jump intensities. Employment releases are an exception. However, when macroeconomic surprises are considered, inflation shocks show persistent effects while monetary policy and employment shocks show only short-lived effects. Also, the jump intensity responds asymmetrically to macroeconomic shocks. Evidence that macroeconomic variables are relevant to explain jump dynamics and improve volatility forecasts on event days is provided.
    Keywords: Conditional jump intensity, conditional volatility, macroeconomic announcements.
    JEL: C22 G14
    Date: 2009–12
  16. By: Canova, Fabio; Menz, Tobias
    Abstract: We study the contribution of the stock of money to the macroeconomic outcomes of the 1990s in Japan using a small scale structural model. Likelihood-based estimates of the parameters are provided and time stabilities of the structural relationships analyzed. Real balances are statistically important for output and inflation fluctuations and their role has changed over time. Models which give money no role give a distorted representation of the sources of cyclical fluctuations. The severe stagnation and the long deflation are driven by different causes.
    Keywords: deflation; Japan's Lost decade; money; structural model
    JEL: E31 E32 E52
    Date: 2009–12
  17. By: Fabian Eser
    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 gaurantee 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. 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
  18. By: Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
    Abstract: The article contains a review of monetary growth models. We analyze the ways in which money is introduced into these models and the models’ conclusions about the impact of inflation on investment. We find that the models differ widely with respect to the ways in which they account for money and its functions in the economy as well as with respect to the “technical” assumptions, about e.g. the form of the utility function or the production function. Despite these differences most models fail to adequately capture money’s role and are highly sensitive to changes in the assumptions. Moreover, the models differ in their predictions about inflation’s impact on capital accumulation, with some models offering conclusions that are not only counterintuitive but also inconsistent with empirical evidence.
    Keywords: investment, inflation, monetary models of growth, monetary search theoretic models
    JEL: O42 E31 E22 E52
    Date: 2009–11
  19. By: Buiter, Willem H.
    Abstract: There are few if any technical problems involved in reversing the unconventional monetary policies - quantitative easing, credit easing and enhanced credit support - implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound. The two main obstacles to an early and easy exit from unconventional monetary policies are political. The first is a potential conflict between the central bank and the fiscal authority about the role of monetary financing in the fiscal-financial-monetary programme of the state. If there is a conflict about the role of seigniorage in closing the government’s solvency gap, the likely outcome is a win for the fiscal authority, except in the case of the ECB. The second political impediment to a prompt and painless exit from unconventional monetary policy is that scaling down the size of the central bank’s balance sheet and the scale and scope of its other interventions in financial markets and institutions is likely to reveal the true extent of the central bank’s quasi-fiscal activities during the crisis and its aftermath. The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm. Delay in the dropping of the veil is therefore likely.
    Keywords: Credit easing; Enhanced credit support; Quantitative easing; quasi-fiscal policy; regulatory capture
    JEL: E4 E5 E6 G1 H6
    Date: 2009–12
  20. By: Korap, Levent; Saatçioğlu, Cem
    Abstract: This paper aims to investigate the relationship between inflation and inflation uncertainty in the Turkish economy by using contemporaneous Exponential GARCH (EGARCH) estimation methodology. Our findings indicate that inflation leads to inflation uncertainty, and dealing with the information content of this relationship, the conditional variance of inflation reacts more to past positive shocks than to negative innovations of equal size. Causality analysis between inflation and inflation uncertainty reveals that inflation Granger- causes, or in other words, precedes inflation uncertainty, but no clear-cut and significant evidence in the opposite direction can be obtained. Furthermore, generalized impulse response analysis estimated in a vector autoregressive framework yields supportive results to these findings.
    Keywords: Inflation ; Inflation uncertainty; Granger causality analysis ; EGARCH modelling ; Impulse response analysis ;
    JEL: C51 C32 E31
    Date: 2009–07
  21. By: Asada, Toichiro; Chiarella, Carl; Flaschel, Peter; Mouakil, Tarik; Proaño, Christian R.
    Abstract: Currently, many monetary and fiscal policy measures are aimed at preventing the financial market meltdown that started in the US subprime sector and has spread worldwide as a great recession. Although some slow recovery appears to be on the horizon, it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of Keynesian macro models. Fragilities and destabilizing feedback mechanisms are known to be potential features of all markets—the product markets, the labor market, and the financial markets. In this paper we in particular focus on the financial market. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study the potential that labor market, fiscal and monetary policies have to stabilize unstable macroeconomies. Besides other stabilizing policies we in particular propose a countercyclical monetary policy that sells assets in the boom and purchases assets in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of those suggested policies. --
    Keywords: Monetary Business Cycles,Portfolio Choice,(In-)Stability,Stabilizing Policy Measures
    JEL: E12 E24 E31 E52
    Date: 2009
  22. By: Max Gillman (Cardiff University Business School); Anton Nakov (Banco de España)
    Abstract: The paper presents a theory of nominal asset prices for competitively owned oil. Focusing on monetary effects, with flexible oil prices the US dollar oil price should follow the aggregate US price level. But with rigid nominal oil prices, the nominal oil price jumps proportionally to nominal interest rate increases. We find evidence for structural breaks in the nominal oil price that are used to illustrate the theory of oil price jumps. The evidence also indicates strong Granger causality of the oil price by US inflation as is consistent with the theory.
    Keywords: oil prices, infl ation, cash-in-advance, multiple structural breaks, Granger causality
    JEL: E31 E4
    Date: 2009–12
  23. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper offers a brief summary of non-traditional monetary policy measures currently adopted by G7 central banks and their provisional evaluation in the light of the Bank of Japan (BOJ)'s experience during the period of 1998-2006. The paper points out that although unprecedented measures seem to have been adopted by major central banks since 2007, many of them have been tried in one way or another in earlier episodes of financial crises, especially by the BOJ during 1998-2006 and are in this sense not new. We summarize the BOJ's and G7 central banks' policies based on a typology of policies that can be used even when interest rates are very low. Non-traditional policy measures can be classified into managing interest rate expectations, targeted asset purchases and quantitative easing, all of which were used by the BOJ. The so-called credit easing can be considered to be a part of targeted asset purchases. In the current episode, targeted asset purchases or credit easing has been employed by most central banks, while expectations management and (strong forms of) quantitative easing have not been widely used. We explore reasons for such a choice of policy strategy in the current period. In addition, some important lessons can be learned about the effectiveness of non-traditional policies from what the BOJ and the Japanese government did and did not do during the early to mid 1990s and its ultimate failure to avoid deflation.
    Date: 2009–11
  24. By: Huiping Yuan (Xiamen University); Stephen M. Miller (University of Connecticut)
    Abstract: The paper studies the dynamic nature of optimal solutions under commitment in Barro-Gordon and new-Keynesian models and, finds two interesting parameters -- the implied targets and the persistence parameter that governs the adjustment toward the implied targets. The implied targets generally differ from the social ones, but exhibit a trade-off between targets and equal the long-run equilibrium values of target variables. The implied targets prove consistent with the models and the social targets do not. Moreover, the implied targets emerge in the long run according to the persistence parameter. As such, the government delegates to the central bank short-term, state-contingent targets, which guide discretionary policy to evolve along optimal paths as these targets converge to their long-run implied targets. For the Barro-Gordon model with output persistence, the correct delegated targets eliminate the constant average and state-contingent inflation biases, and a weight-liberal central bank removes the stabilization bias. For the new-Keynesian models, delegated targets, combined with the appropriate weight-liberal or -conservative central bank, can eliminate all three biases. The delegated targets may reflect backward- or forward-looking behavior, depending on the model.
    Keywords: Optimal Policy, Central Bank Loss Functions, Policy Rules
    JEL: E42 E52 E58
    Date: 2009–10
  25. By: Moyen, Stéphane; Stähler, Nikolai
    Abstract: The aim of this paper is to study the optimal duration of unemployment benefit entitlement duration across the business cycle. We wonder if the entitlement duration should be prolonged in bad and shortened in good times. Because of consumption smoothing, such a countercyclical policy can be welfare-enhancing as long as it does not affect labor market adjustment too severely or even helps to reduce inefficiencies there. If, however, the labor market is quite inflexible already, procyclical behavior may be preferable. In a calibrated dynamic business cycle framework, we find that countercyclical benefit entitlement duration may be preferable in the US but not in Europe. --
    Keywords: Unemployment insurance,entitlement duration,business cycle
    JEL: E32 E62
    Date: 2009
  26. By: Gonzalez-Astudillo, Manuel
    Abstract: In this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution.
    Keywords: Yield curve; Recursive preferences; Logistic stochastic volatility; Nonlinear Kalman filter; Quadrature-based methods.
    JEL: E43 C32 G12
    Date: 2009–12–10
  27. By: Salotti, Simone; Marattin, Luigi
    Abstract: We investigate the effects of fiscal policy on private consumption and investment in the European Union. A certain consensus has aroused that fiscal impulses have expansionary Keynesian effects on the economic activity. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area, by using annual data and a panel vector auto-regression approach (PVAR). Our results show that increases in public spending lead to positive and significant effects on private consumption and private investment. According to our baseline estimate, a 1% increase in public spending produces a 0.36% on impact rise in private consumption, and a 0.79% impact rise in private investment. The effects are substantial, and die out slowly (faster in the case of private consumption). A further disaggregation between wage and non-wage components reveals different effects. As for the impact on private consumption, our results show that public salaries have a relatively stronger stimulating role, a result which is probably due to the importance of the public sector especially in continental Europe. On the other hand, the positive impact on private investment is mainly due to the non-wage component of government consumption.
    Keywords: Fiscal policy; private consumption; panel vector autoregression.
    JEL: E62 C33
    Date: 2009–12
  28. By: Bruun , Charlotte; Heyn-Johnsen, Carsten
    Abstract: The paradox of monetary profits has been a recurrent theme in macroeconomics since the problem was first formulated by Marx. Capitalists as a whole can at most get from workers, what they already paid out in wages. Marx did not solve this problem, and neither did Keynes, who had to face the problem in “The General Theory”. A consequential logical conclusion to Keynes’ treatment of the problem, leaves his concept of aggregate income indeterminate—based on imaginary magnitudes. Both Marx and Keynes tried to solve the problem by addressing current transaction flows, which is also the approach taken by more recent contributors. Another solution to the problem is to regard monetary profits as a flow arising from changes in stock magnitudes—more specifically the monetary valuation of real capital performed at financial markets. Besides solving the paradox of monetary profits, this solution also provides us with a very strong connection between the real and the financial spheres. The monetary profit inducing capitalist production, emanates from the sphere of finance. In a world of fundamental uncertainty this gives us an explanation of, not only what may drive financial booms and busts, but also how these movements on financial markets are related to the real sphere of production. --
    Keywords: Monetary production theory,stock-flow consistency,finance,national income accounting
    JEL: E44 E01 E11 E12 E25
    Date: 2009
  29. By: W. Max Corden
    Abstract: This lecture deals not with the causes of the world financial crisis nor how to forecast or avoid one in the future, nor how to revive the financial sector, but rather with the crucial emergency "ambulance" policy of fiscal stimulus. What are the main effects of stimuli policies, and, in particular, the post-crisis effects? What are the main decisions to make and practical problems involved? What difference does a preexisting public debt problem make? Seven arguments against fiscal stimuli will be examined. Finally, fundamental ideological issues, namely government failure versus market failure, and fear of inflation versus fear of depression, will be noted.
    Keywords: financial crisis, depression, fiscal policy, Keynes
    JEL: E12 E62 H62
    Date: 2009
  30. By: Buiter, Willem H.
    Abstract: The paper considers the case for an internationally coordinated further fiscal stimulus during the second half of 2009. Although this makes some of the analysis period-specific, most of the issues and principles considered are timeless. For a fiscal stimulus to be both effective there must be idle resources due to a failure of effective demand. For it to be desirable, there must be no alternative policy instruments (including monetary policy) for boosting demand. There must be no complete financial crowding out and no complete direct crowding out, through Ricardian equivalence/debt neutrality, through Minsky equivalence or through a high degree of substitutability between private and public exhaustive expenditure in private preferences or production possibilities. Finally, for international coordination to be desirable, there must be cross-border externalities from national fiscal stimuli. The paper considers each of these conditions in turn.
    Keywords: Crowding out; Debt sustainability; Fiscal Policy; Minsky neutrality; Ricardian equivalence
    JEL: E4 E5 E6 F3 H3 H5 H6
    Date: 2009–12
  31. By: L. Marattin; S. Salotti
    Abstract: We investigate the effects of fiscal policy on private consumption and investment in the European Union. A certain consensus has aroused that fiscal impulses have expansionary Keynesian effects on the economic activity. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area, by using annual data and a panel vector auto-regression approach (PVAR). Our results show that increases in public spending lead to positive and significant effects on private consumption and private investment. According to our baseline estimate, a 1% increase in public spending produces a 0.36% on impact rise in private consumption, and a 0.79% impact rise in private investment. The effects are substantial, and die out slowly (faster in the case of private consumption). A further disaggregation between wage and non-wage components reveals different effects. As for the impact on private consumption, our results show that public salaries have a relatively stronger stimulating role, a result which is probably due to the importance of the public sector especially in continental Europe. On the other hand, the positive impact on private investment is mainly due to the non-wage component of government consumption.
    JEL: E62 C33
    Date: 2009–12
  32. By: Obstfeld, Maurice; Rogoff, Kenneth
    Abstract: This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed’s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States’ ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble.
    Keywords: current account deficit; financial crisis; financial reform; global imbalances; housing bubble
    JEL: E44 E58 F32 F33 F42 G15
    Date: 2009–12
  33. By: Comin, Diego; Loayza, Norman; Pasha, Farooq; Serven, Luis
    Abstract: Empirical evidence - including the current global crisis - suggests that shocks from advanced countries often have a disproportionate effect on developing economies. Can this account for the fact that aggregate fluctuations are larger and more persistent in the latter than in the former economies? And what are the mechanisms at play? This paper addresses these questions using a model of an industrial and a developing economy trading goods and assets, with (i) a product cycle shaping the range of intermediate goods used to produce new capital in each country, and (ii) investment adjustment costs in the developing economy. Innovation by the advanced economy results in new intermediate goods, at first produced at home, and eventually transferred to the developing economy through direct investment. The pace of innovation and technology transfer is driven by profitability. This process of technology diffusion creates a medium-term connection between both economies, over and above the short-term link through trade. Calibration of the model to match Mexico-United States trade and foreign direct investment flows shows that this mechanism can explain why shocks to the United States economy have a larger effect on Mexico than on the United States itself, and hence why Mexico shows higher volatility than the United States; why business cycles in the United States lead to medium-term fluctuations in Mexico; and why consumption is not less volatile than output in Mexico.
    Keywords: Economic Theory&Research,Political Economy,Emerging Markets,Debt Markets,Markets and Market Access
    Date: 2009–12–01
  34. By: Juraj Stancik; Timo Valila
    Abstract: The share of public investment relative to consumption expenditure has declined in past decades. Earlier literature has attributed this stylised fact variably to the relative political ease of cutting investment; different cyclical patterns of public investment and consumption; or to EMU’s fiscal rules. We consider the impact of both cyclical and structural changes in the fiscal stance on public spending composition for a panel of EU countries, including individual components of public investment. We find that both cyclically-induced and structural changes in the fiscal stance affect the composition of public spending, with fiscal tightening of both types increasing, not decreasing, the relative share of investment and loosening favouring consumption expenditure. There is, however, some asymmetry in that the gain in investment following a tightening tends to be smaller than the gain in consumption expenditure following a loosening. Of the components of public investment, infrastructure and redistribution respond to cyclical changes in the fiscal stance, while investment in hospitals and schools responds most clearly to structural changes.
    Keywords: Fiscal policy, public expenditure, fiscal stance.
    JEL: E62 H50 H62 C33
    Date: 2009–11
  35. By: Lars Fredrik Øksendal (Norwegian School of Economics and Business Administration (NHH))
    Abstract: This article sketches the origins of paper money in Norway back to the last half of the 18th century and asks why there was no circulation of full-bodied coins even after notes had become convertible into silver at par in 1842. The argument put forward is that the choice of fiat paper money reflected the relative economic backwardness of the country. Although Gresham’s law also applied for Norway, the most important reason paper money caught on and maintained that position as the most important part of the money stock was the chronic shortage of means of payment. In such a situation, bad money was not that bad after all. Moreover, times of war and political havoc besides, paper money managed to stay fairly stable and fulfil an essential function as a store of wealth. With time, paper money became institutionalised in the Norwegian economy, overwhelmingly dominating the domestic circulation and functioning as the key monetary reference (unit of account). Thus, convertibility in 1842 linked the domestic currency with international money at fixed rates, but had hardly any bearing on the domestic function of money.
    Keywords: Banknotes, bullion standard, convertibility, Gresham’s law, paper money
    JEL: E42 E58 N23
    Date: 2009–12–04
  36. By: Amiti, Mary; Weinstein, David E.
    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.
    Keywords: exports; financial crisis; financial shocks; Japan; trade finance
    JEL: E32 E44 F40 G21
    Date: 2009–12
  37. By: Dixon, H. D.
    Abstract: This paper argues that the cross-sectional approach to durations is essential to understand nominal rigidity because this captures the fact that price-spells are generated by firms' price-setting behavior. Since the distribution of durations is dominated by a proliferation of short contracts, the cross-sectional measure corrects for this by length-biased sampling. Modelling the price-spell durations in this way enables us to see how Taylor, Calvo and their generalizations relate to each other, and enable us to compare price-setting behavior for a given distribution of durations. We also show how the micro-data can be directly related to the macroeconomic pricing models in this setting.
    Keywords: Price-spell, steady state, hazard rate, Calvo, Taylor.
    JEL: E50
    Date: 2009
  38. By: Amil Petrin; T. Kirk White; Jerome P. Reiter
    Abstract: We build up from the plant level an "aggregate(d) Solow residual" by estimating every U.S. manufacturing plant's contribution to the change in aggregate final demand between 1976 and 1996. We decompose these contributions into plant-level resource reallocations and plant-level technical efficiency changes. We allow for 459 different production technologies, one for each 4- digit SIC code. Our framework uses the Petrin and Levinsohn (2008) definition of aggregate productivity growth, which aggregates plant-level changes to changes in aggregate final demand in the presence of imperfect competition and other distortions and frictions. On average, we find that aggregate reallocation made a larger contribution than aggregate technical efficiency growth. Our estimates of the contribution of reallocation range from 1:7% to2:1% per year, while our estimates of the average contribution of aggregate technical efficiency growth range from 0:2% to 0:6% per year. In terms of cyclicality, the aggregate technical efficiency component has a standard deviation that is roughly 50% to 100% larger than that of aggregate total reallocation, pointing to an important role for technical efficiency in macroeconomic fluctuations. Aggregate reallocation is negative in only 3 of the 20 years of our sample, suggesting that the movement of inputs to more highly valued activities on average plays a stabilizing role in manufacturing growth.
    Keywords: Macroeconomic Fluctuations; Aggregate Productivity Growth; Reallocation; Technical Efficiency
    JEL: E32 L6 O47
    Date: 2009–12
  39. By: Michael D. Bordo; Harold James
    Abstract: This paper examines three areas in which analogies have been made between the interwar depression and the financial crisis of 2007 which reached a dramatic climax in September 2008 with the collapse of Lehman Brothers and the rescue of AIG: they can be labeled macro-economic, micro-economic, and geo-political. First, the paper considers the story of monetary policy failures; second, there follows an examination of the micro-economic issues concerned with bank regulation and the reorganization of banking following the failure of one or more major financial institutions and the threat of systemic collapse; third, the paper turns to the issue of global imbalances and asks whether there are parallels that might be found in this domain too between the 1930s and the events of today.
    JEL: E58 N0 N12
    Date: 2009–12
  40. By: Beartice Brunner (Institute for Empirical Research in Economics, University of Zurich, Switzerland); Andreas Kuhn (Institute for Empirical Research in Economics, University of Zurich, Switzerland)
    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
  41. By: Marco Guerrazzi; Nicola Meccheri
    Abstract: This paper offers a critical discussion of the concept of labour market rigidity relevant to explaining unemployment. Starting from Keynes’s own view, we discuss how the concept of labour market flexibility has changed over time, involving nominal or real wage flexibility, contract flexibility or labour market institution flexibility. We also provide a critical assessment of the factors that lead the search framework highlighting labour market rigidities (frictions) to challenge the more widespread explanation of equilibrium unemployment grounded on wage rigidity.
    Keywords: Labour Market Rigidities, Nominal and Real Wages, Unemployment, Search Theory.
    JEL: E12 E24
    Date: 2009–11–26
  42. By: Beatrice Brunner; Andreas Kuhn
    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: Fabio Panetta (Banca d'Italia); Michele Leonardo Bianchi (Banca d'Italia); Marcello Bofondi (Banca d'Italia); Fabrizio Borselli (Banca d'Italia); Guido Bulligan (Banca d'Italia); Alessandro Buoncompagni (Banca d'Italia); Mari Cappabianca (Banca d'Italia); Luisa Carpinelli (Banca d'Italia); Agostino Chiabrera (Banca d'Italia); Francesco Columba (Banca d'Italia); Guido de Blasio (Banca d'Italia); Alessio d’Ignazio (Banca d'Italia); Cristina Fabrizi (Banca d'Italia); Carlo Gola (Banca d'Italia); Roberto Sabbatini (Banca d'Italia); Federico Maria Signoretti (Banca d'Italia); Francesco Zollino (Banca d'Italia)
    Abstract: Developments in the real-estate sector are of crucial importance for the business cycle and financial stability. This study analyses developments in the Italian housing market on the basis of both real and financial variables. Following the sharp contraction of the market during the financial crisis and the more general fall in economic activity, a few signals suggests that the recession in the housing market is easing somewhat. However, the degree of uncertainty remains considerable. In recent months the ratio between the flow of bad debts to total outstanding loans to households and construction firms has reached the highest levels since the beginning of the decade. The paper also investigates three issues of a more structural nature. First, it examines the performance and the regulatory framework of real-estate investment funds in Italy. Second, it analyses the main characteristics of the taxation of residential housing, with reference to ownership, rentals and transactions. Finally, the paper estimates the impact on residential house prices of the growing demand for housing services by immigrants.
    Keywords: housing market cycle, transactions, rentals, residential house prices, mortgages, real-estate investment funds, taxation of residential housing
    JEL: E0 G21 H2 L85 R2 R31
    Date: 2009–12
  44. By: Xian Xin; Xiuqing Wang (China Agricultural University); Xiaoyun Liu (China Agricultural University); Xuefeng Mao
    Abstract: It has been argued that the influences of agriculture on the macro economy will be weakening along with economic development. We in this paper assess the impact of agricultural output changes on the general price level over time with China as an example. Our results suggest that China witnessed a declining influence of agricultural output changes on general price changes. The contribution of given agricultural output change on the general price change in 2005 was merely less than 60% of that in 1987, which in turn implies that macro policies targeting to curb general inflation via boosting agricultural output will be less effective as those of twenty years ago. We generate these results with the general equilibrium model calibrated to aggregated China¡¯s input-output tables of 1987, 1997, and 2005.
    Keywords: Inflation; General Equilibrium Model
    JEL: E31 Q10
    Date: 2009–05
  45. By: Valter Di Giacinto (Bank of Italy); Giacinto Micucci (Bank of Italy); Pasqualino Montanaro (Bank of Italy JEL classification: C32, H54, R53)
    Abstract: This paper assesses the effects of public capital in Italy on the main macroeconomic aggregates: GDP, private capital and labour. A cointegrated vector autoregressive (VAR) model, in line with recent advancements in the field, allows us to take into account the complex nexus of direct and indirect links between the variables. We find a persistent increase in GDP in response to a positive shock to public capital; this result is mainly attributable to a strong stimulus exerted by public infrastructures on private capital (crowding in). The positive effects of public capital are quite pervasive across Italy, albeit to differing extents. In particular, a higher elasticity of GDP to public capital is estimated for the South, whereas marginal productivity turns out to be higher in the Centre-North. This suggests that public capital has a lower economic return in the South, bearing out the existence of a potential conflict between equity and efficiency goals. Finally, we indirectly document the existence of positive spillover effects at the regional level, allowing individual regions to benefit from the endowment of public capital in the rest of the country.
    Keywords: public capital, crowding in effects, Italian regional divides, VAR models
    Date: 2009–11
  46. By: Ansgar Belke; Gunther Schnabl; Holger Zemanek
    Abstract: The paper scrutinizes the role of wages and capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa-Samuelson model by international capital markets. The augmented Balassa-Samuelson model is linked to the monetary overinvestment theories of Wicksell and Hayek in order to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1993 to 2008 reveal mixed evidence for the role of capital markets for both the economic catch-up process and international competitiveness of the Central and Eastern European countries.
    Keywords: Exchange rate regime, wages, Central and Eastern Europe, EMU accession, panel model
    JEL: E24 F16 F31 F32
    Date: 2009–10
  47. By: Martin Fukac (Reserve Bank of NA); Adrian Pagan (QUT)
    Abstract: The paper looks at the development of macroeconometric models over the past sixty years. In particular those that have been used for analysing policy options. We argue that there have been four generations of these. Each generation has evolved new features that have been partly drawn from the developing academic literature and partly from the perceived weaknesses in the previous generation. Overall the evolution has been governed by a desire to answer a set of basic questions and sometimes by what can be achieved using new computational methods. Our account of each generation considers their design, the way in which parameters were quantiÂ…ed and how they were evaluated.
    Keywords: DSGE models;Phillips Curve;Macroeconometric Models;Bayesian Estimation
    JEL: E12 E13 C51 C52
    Date: 2009–11–17
  48. By: Skribans, Valerijs
    Abstract: The paper discusses the influence of the global economic crisis on the Latvian economy. Using the system dynamics approach and models produced beforehand, various development scenarios of tax policy, householder crediting, and the job market are analyzed. Produced models allow to obtain effective change data in line with new development tendencies to check various hypotheses. Model results show that an increase of the rate of the value added tax (VAT) will cause not only the increase of VAT volume but also, by way of feedback, a decline in consumption. The VAT and excise tax volumes planned in the beginning will diminish in case of declining consumption. The VAT rate increase will allow for a short-time increase in income from taxes, but it will not have a protracted effect. A similar situation is with the excise tax. The reduction of the income tax rate diminishes the volume of income tax and, simultaneously, fosters consumption, which in turn causes VAT, excise and income taxes to increase again. 30% cuts of salaries will impede householders to pay their credits and the interest rates without reducing their other expenditures. Nevertheless, such a large salary cut is unreal. Migration of labour force will introduce the average salary slightly below that of the salary minimum in the more developed European states into the Latvian labour market.
    Keywords: nodokļu politika; kredītslodze; darba alga; darbaspēka migrācija; sistēmdinamika
    JEL: E22 E21 A10 C53 E27 E24 C40 E00 E20 C01
    Date: 2009
  49. By: Cahuc, Pierre; Challe, Edouard
    Abstract: We study the macroeconomic effects of rational asset bubbles in an overlapping-generations economy where asset trading requires specialized intermediaries and where agents freely choose between working in the production or in the financial sector. Frictions in the market for deposits create rents in the financial sector that affect workers' choice of occupation. When rents are large, the private gains associated with trading asset bubbles may lead too many workers to become speculators, thereby causing rational bubbles to lose their efficiency properties. Moreover, if speculation can be carried out by skilled labor only, then asset bubbles displace skilled workers away from the productive sector and raise income and consumption inequalities.
    Keywords: dynamic efficiency; occupational choice; Rational bubbles
    JEL: E22 E44 G21
    Date: 2009–12
  50. By: Gilbert Cette; Yusuf Kocoglu; Jacques Mairesse
    Abstract: This study compares labor and total factor productivity (TFP) in France, Japan, the United Kingdom and the United States in the very long (since 1890) and medium (since 1980) runs. During the past century, the United States has overtaken the United Kingdom and become the leading world economy. During the past 25 years, the four countries have also experienced contrasting advances in productivity, in particular as a result of unequal investment in information and communication technology (ICT). The past 120 years have been characterized by: (i) rapid economic growth and large productivity gains in all four countries; (ii) a long decline of productivity in the United Kingdom relative to the United States, and to a lesser extent also to France and Japan, a relative decline that was interrupted by the second world war (WW2); (iii) the remarkable catching-up to the United States by France and Japan after WW2, that stopped in the case of Japan during the 1990s. Capital deepening (at least to the extent this can be measured) accounts for a large share of the variations in performance; increasingly during the past 25 years, this has meant ICT capital deepening. However, the capital contribution to growth varies considerably over time and across the four countries, and it is always less important, except in Japan, than the contribution of the various other factors underlying TFP growth, such as, among others, labor skills, technical and organizational changes and knowledge spillovers. Most recently (in 2006), before the current financial world crisis, hourly labor productivity levels were slightly higher in France than in the United States, and noticeably lower in the United Kingdom (by roughly 10%) and even lower in Japan (30%), while TFP levels are very close in France, the United Kingdom and the United States, but much lower (40%) in Japan.
    JEL: E22 J24 N10 O47 O57
    Date: 2009–12
  51. By: Amy Peng (Department of Economics, Ryerson University, Toronto, Canada); Louis N. Christofides (Department of Economics, University of Cyprus, Nicosia, Cyprus)
    Abstract: We process information in a large number of Canadian wage contracts, signed over a period of several decades, to generate the long-run history of the real wage for each bargaining pair. We term these hitherto unexamined histories ‘chronologies’. We are able to generate 1574 continuous real wage chronologies and we examine the evolution of the real wage in each case. We explore the influence of productivity growth, the labour relations record of the pair, the influence of industry and region as well as the initial wage on the growth of the real wage rate over the decades in the sample. We also consider the relation between the mean and variance of the real wage contained in these chronologies.
    Keywords: Wages, productivity, labour relations, compensating differentials,convergence.
    JEL: E31 J41 J50
    Date: 2009–11
  52. By: Rudiger Ahrend; Jens Arnold; Fabrice Murtin
    Abstract: This paper examines how a range of stability-oriented regulatory policies for banking and insurance are related to selected stability and competition outcomes in these sectors. Based on survey information on financial market regulation, policy indicators for eight areas of prudential banking regulation are constructed, in addition to indicators for the insurance sector. Despite incomplete information on some areas that turned out to be important in the context of the recent financial crisis, the indicators correlate well with different measures of financial stability, both during the recent crisis and beyond. Furthermore, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking and insurance.<P>Régulation prudentielle et concurrence sur les marchés financiers<BR>Cette étude examine le lien entre les politiques de régulation prudentielle des industries de la banque et de l’assurance et les résultats observés dans ces secteurs en termes de stabilité et de concurrence. Sur la base d’enquêtes portant sur la régulation des marchés financiers, des indicateurs sont construits pour évaluer les politiques touchant à huit segments différents de la régulation bancaire prudentielle, ainsi qu‘au secteur de l’assurance. En dépit de lacunes dans le renseignement de certains segments de la régulation, lacunes préjudiciables dans le contexte récent de crise financière, ces indicateurs présentent une corrélation satisfaisante avec diverses mesures de stabilité financière, à la fois dans ce contexte de crise et au-delà. En outre, les résultats ne confirment pas l’hypothèse qu’il y aurait en général un arbitrage entre la régulation prudentielle et la concurrence dans les secteurs de la banque et de l’assurance.
    Keywords: banking, competition, insurance, prudential regulation, stability, assurance, banque, concurrence, régulation prudentielle, stabilité
    JEL: E44 G14 G21 G22 G28 L11
    Date: 2009–12–01
  53. By: John Landon-Lane; Hugh Rockoff; Richard H. Steckel
    Abstract: The relationships among the weather, agricultural markets, and financial markets have long been of interest to economic historians, but relatively little empirical work has been done. We push this literature forward by using modern drought indexes, which are available in detail over a wide area and for long periods of time to perform a battery of tests on the relationship between these indexes and sensitive indicators of financial stress. The drought indexes were devised by climate historians from instrument records and tree rings, and because they are unfamiliar to most economic historians and economists, we briefly describe the methodology. The financial literature in the area can be traced to William Stanley Jevons, who connected his sun spot theory to rainfall patterns. The Dust bowl of the 1930s brought the climate-finance link to the attention of the general public. Here we assemble new evidence to test various hypotheses involving the impact of extreme swings in moisture on financial stress.
    JEL: E3 N0 N11 N12
    Date: 2009–12
  54. By: Simon Wiederhold (Friedrich Schiller University Jena, GK-EIC "The Economics of Innovative Change")
    Abstract: This paper investigates the relevance of government purchasing behavior for innovation-based economic growth. We construct a parsimonious Schumpeterian growth model in which demand from the public sphere can effectively alter the economy's rate of technological change. We incorporate results of various empirical studies arguing that public sector demand acts as incentive for private innovation activities. In contrast to the standard Schumpeterian growth framework, we account for industry heterogeneity in terms of innovation potential. This extension allows to bring government demand policy within the realm of the growth policy debate. By varying the composition of its purchases, the government can induce a reallocation of private resources to stimulate the rate of technological change. This comes along with temporarily faster economic growth. Moreover, our welfare analysis implies that it is always worth implementing a policy in which industries benefit from public purchases subject to their specific innovation size.
    Keywords: public demand, endogenous technological change, Schumpeterian growth
    JEL: E62 H54 H57 O31 O32 O41
    Date: 2009–12–09
  55. By: Torben M. Andersen (School of Economics and Management, University of Aarhus, Denmark); Joydeep Bhattacharya (Iowa State University, USA)
    Abstract: Abstract. A classic result in dynamic public economics, dating back to Aaron (1966) and Samuelson (1975), states that there is no welfare rationale for PAYG pensions in a dynamically-efficient neoclassical economy with exogenous labor supply. This paper argues that this result, under the fairly-mild restriction that the old be no less risk-averse than the young, extends to a neoclassical economy with endogenous labor supply.
    Keywords: pay-as-you-go, social security, endogenous labor supply, dynamic efficiency
    JEL: E6 H3
    Date: 2009–12–08
  56. By: Benos, Nikos
    Abstract: This paper studies whether a reallocation of the components of public spending and revenues can enhance economic growth using data on 14 EU countries during 1990-2006. The results provide support for endogenous growth models. Specifically, the findings are: a) public expenditures on infrastructure (economic affairs, general public services) and property rights protection (defense, public order-safety) exert a positive impact on growth; b) distortionary taxation depresses growth; c) government expenditures on human capital enhancing activities (education, health, housing-community amenities, environment protection, recreation-culture-religion) and social protection do not have a significant growth effect. However, when coefficient heterogeneity across countries along with non-linearities are taken into account and public expenditures are further disaggregated, we have in addition that government outlays on education, defense and social protection are growth-enhancing. These findings are robust to changes in specification and estimation methodology.
    Keywords: Panel Data; Fiscal Policy; Taxation; Government Expenditures.
    JEL: E62 C23
    Date: 2009–09
  57. By: Francisco M. Gonzalez; Shouyong Shi
    Abstract: We examine the labor market effects of incomplete information about the workers' own job-finding process. Search outcomes convey valuable information, and learning from search generates endogenous heterogeneity in workers' beliefs about their job-finding probability. We characterize this process and analyze its interactions with job creation and wage determination. Our theory sheds new light on how unemployment can affect workers' labor market outcomes and wage determination, providing a rational explanation for discouragement as the consequence of negative search outcomes. In particular, longer unemployment durations are likely to be followed by lower re-employment wages because a worker's beliefs about his job-finding process deteriorate with unemployment duration. Moreover, our analysis provides a set of useful results on dynamic programming with optimal learning.
    Keywords: Learning; Wages; Unemployment; Directed search; Monotone comparative statics
    JEL: E24 D83 J64
    Date: 2009–12–08

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