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on Macroeconomics |
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Issue of 2010‒01‒10
47 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pedro Teles (Universidade Católica Portuguesa, alma de Cima, CP-1649-023 Lisboa, Portugal.); Oeste Tristani (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | How should monetary policy respond to changes in financial conditions? In this paper we consider a simple model where firms are subject to idiosyncratic shocks which may force them to default on their debt. Firms’assets and liabilities are denominated in nominal terms and predetermined when shocks occur. Monetary policy can therefore affect the real value of funds used to finance production. Furthermore, policy affects the loan and deposit rates. We find that allowing for short-term inflation volatility in response to exogenous shocks can be optimal; that the optimal response to adverse financial shocks is to lower interest rates, if not at the zero bound, and to engineer a short period of inflation; that the Taylor rule may implement allocations that have opposite cyclical properties to the optimal ones. JEL Classification: E20, E44, E52. |
| Keywords: | Financial stability, debt deflation, bankruptcy costs, price level volatility, optimal monetary policy, stabilization policy. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091123&r=mac |
| By: | Marco Buchmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper addresses the estimation of Phillips curve equations for the euro area while employing less stringent assumptions on the functional correspondence between price inflation, inflation expectations and marginal costs. Expectations are not assumed to be an unbiased predictor of actual inflation and instead derived from the European Commission’s Consumer Survey data. The results suggest that expectations drive inflation with a lag of about 6 months, which casts further doubt on the validity of the New Keynesian Phillips curve. Moreover, the trade off between inflation and real economic activity is not vertical in the short run. Non- and Semiparametric estimates reveal an important nonlinearity in the sense that demand pressure on price inflation is not invariant to the state of the economy as it increases considerably at times of high economic activity. Conventional linear Phillips curves cannot capture this empirical regularity. Some implications for monetary policy are discussed. JEL Classification: C14, E31, E32. |
| Keywords: | Inflation, Phillips Curve, Survey Expectations, Non- and Semiparametric Econometrics, Monetary Policy. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091119&r=mac |
| By: | Stefan Niemann; Paul Pichler; Gerhard Sorger |
| Abstract: | We examine the dynamic properties of inflation in a model of optimal discretionary fiscal and monetary policies. The lack of commitment and the presence of nominally risk-free debt provide the government with an incentive to implement policies which induce positive and persistent inflation rates. We show that this property obtains already in an environment with flexible prices and perfectly competitive product markets. Introducing nominal rigidities and imperfect competition has no qualitative but important quantitative implications. In particular, with a modest degree of price stickiness our model generates inflation dynamics very similar to those experienced in the U.S. since the Volcker disinflation of the early 1980s. |
| Date: | 2009–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:681&r=mac |
| By: | Martha R. López; Juan David Prada |
| Abstract: | The unfolding of the 2007 world financial and economic crisis has highlighted the vulnerability of real economic activity to strong fluctuations in asset prices. Which is the optimal monetary policy in an economy like the Colombian that is exposed to swings in asset prices? What is the implication in terms of Central Bank losses when it follows a standard simple rule instead of the optimal monetary policy? To answer these questions we use a Dynamic Stochastic General Equilibrium (DSGE) model with physical capital and sticky wages for the Colombian economy and derive the optimal monetary policy. Then, we explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic under the optimal policy rule and alternative specifications of simple rules and definitions of output gap. |
| Date: | 2009–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:006299&r=mac |
| By: | Shin-ichi Fukuda (Faculty of Economics, University of Tokyo) |
| Abstract: | Under the financial turbulence, the Bank of Japan (BOJ) had launched a series of unprecedented monetary policies in the late 1990s and the early 2000s. The conventional monetary policies were not effective under liquidity trap. However, some unconventional monetary policies, including zero interest rate, quantitative easing, and credit easing, had important roles in stabilizing the economy. The first is to stabilize long-run expectations through the BOJ's commitment that the policy will continue until deflationary concerns disappear. The second is to maintain the proper functioning of the market so as to avoid disturbance in the short-term money market. The latter part of this paper shows that the second element was successful in stabilizing the short-term money market in Japan in the early 2000s. The credit easing policy was more powerful tool in providing ample liquidity under the Japanese Financial Crisis. However, the unconventional monetary policies caused a variety of moral hazards in the markets. We show that the extreme monetary policy was useful in improving macroeconomic performance with some nonnegligible costs. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:tky:jseres:2009cj215&r=mac |
| By: | Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci |
| Abstract: | We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to Italy’s entry in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next, we estimate alternative Phillips equations and investigate whether nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off, relying partly on sub-sample estimates and partly on time-varying parameters estimated via the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:0908&r=mac |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0910&r=mac |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Policy counterfactuals based on estimated structural VARs routinely suggest that bringing Alan Greenspan back in the 1970s’ United States would not have prevented the Great Inflation. We show that a standard policy counterfactual suggests that the Bundesbank–which is near-universally credited for sparing West Germany the Great Inflation–would also not have been able to prevent the Great Inflation in the United States. The sheer implausibility of this result sounds a cautionary note on taking the outcome of SVAR-based policy counterfactuals at face value, and raises questions on the very reliability of such exercises. JEL Classification: E32, E47, E52, E58. |
| Keywords: | Bayesian VARs; time-varying parameters; stochastic volatility; identified VARs; Great Inflation; policy counterfactuals. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091134&r=mac |
| By: | Pablo Burriel (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Francisco de Castro (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Daniel Garrote (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Esther Gordo (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Joan Paredes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.) |
| Abstract: | We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly available quarterly dataset of fiscal variables for the period 1981-2007. To allow for comparability with previous results on euro area countries and the US, we use a standard structural VAR framework, and study the impact of aggregated and disaggregated government spending and net taxes shocks. In addition, to frame euro area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the provided results to the inclusion of variables aiming at measuring “financial stress” (increases in risk) and “fiscal stress” (sustainability concerns). Analysing US and euro area data with a common methodology provides some interesting insights on the interpretation of fiscal policy shocks. JEL Classification: E62, H30. |
| Keywords: | Euro area, SVAR, Fiscal Shocks, Fiscal multipliers. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091133&r=mac |
| By: | Ronny Mazzocchi; Roberto Tamborini; Hans-Michael Trautwein |
| Abstract: | The current consensus in macroeconomics, as represented by the New Neoclassical Synthesis, is to work within frameworks that combine intertemporal optimization, imperfect competition and sticky prices. We contrast this “NNS triangle” with a model in the spirit of Wicksell and Keynes that sets the focus on interest-rate misalignments as problems of intertemporal coordination of consumption and production plans in imperfect capital markets. We show that, with minimal deviations from the standard perfect competition model, a model structure can be derived that looks similar to the NNS triangle, but yields substantially different conclusions with regard to the dynamics of inflation and output gaps and to the design of the appropriate rule for monetary policy. |
| JEL: | E20 E31 E32 E52 D84 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0906&r=mac |
| By: | Joan Paredes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego J. Pedregal (Uuniversidad. Castilla-La Mancha, Real Casa de la Misericordia C/ Altagracia 50, 13071 Ciudad Real, España.); Javier J. Pérez (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.) |
| Abstract: | The analysis of the macroeconomic impact of fiscal policies in the euro area has been traditionally limited by the absence of quarterly fiscal data. To overcome this problem, we provide two new databases in this paper. Firstly, we construct a quarterly database of euro area fiscal variables for the period 1980-2008 for a quite disaggregated set of fiscal variables; secondly, we present a real-time fiscal database for a subset of fiscal variables, composed of biannual vintages of data for the euro area period (2000-2009). All models are multivariate, state space mixed-frequencies models estimated with available national accounts fiscal data (mostly annual) and, more importantly, monthly and quarterly information taken from the cash accounts of the governments. We provide not seasonally- and seasonally-adjusted data. Focusing solely on intra-annual fiscal information for interpolation purposes allows us to capture genuine intra-annual "fiscal" dynamics in the data. Thus, we provide fiscal data that avoid some problems likely to appear in studies using fiscal time series interpolated on the basis of general macroeconomic indicators, namely the well-known decoupling of tax collection from the evolution of standard macroeconomic tax bases (revenue windfalls/shortfalls). JEL Classification: C53, E6, H6. |
| Keywords: | Euro area, Fiscal policies, Interpolation, Unobserved Components models, Mixed frequencies. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091132&r=mac |
| By: | Martin, Christopher; Milas, C |
| Abstract: | We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis. |
| Keywords: | financial crisis; liquidity; monetary policy; global imbalances |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:18/09&r=mac |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christian Saborowski (University of Warwick, Coventry CV4 7AL, United Kingdom.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper shows that monetary policy shocks exert a substantial effect on the size and composition of capital flows and the trade balance for the United States, with a 100 basis point easing raising net capital inflows and lowering the trade balance by 1% of GDP, and explaining about 20-25% of their time variation. Monetary policy easing causes positive returns to both equities and bonds. Yet such a monetary policy easing shock also induces a shift in portfolio composition out of equities and into bonds, implying a negative conditional correlation between flows in equities and bonds. Moreover, such shocks induce a negative conditional correlation between equity flows and equity returns, but a positive conditional correlation between bond flows and bond returns. The findings thus provide evidence for the presence of a portfolio rebalancing motive behind investment decisions in equities, but the dominance of what is akin to a return chasing motive for bonds, conditional on monetary policy shocks. The results also shed light on the puzzle of the strongly time-varying equity-bond return correlations found in the literature. JEL Classification: F4, E52, G1, F32. |
| Keywords: | monetary policy, trade balance, capital flows, portfolio choice, asset prices, United States, vector auto regressions, sign restrictions. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091122&r=mac |
| By: | G.C. Lim; R. Dixon; S. Tsiaplias |
| Abstract: | A time-varying Phillips curve was estimated as a means to examine the changing nature of the relationship between wage inflation and the unemployment rate in Australia. The implied time-varying equilibrium unemployment rate was generated and the analysis showed the important role played by variations in the slope of the Phillips curve in changing the equilibrium unemployment rate. The deviations of actual unemployment rates from the estimated equilibrium unemployment rates also performed remarkedly well as measures of inflationary pressure. |
| Keywords: | Phillips curve; equilibrium unemployment rate; inflation |
| JEL: | E24 E31 E32 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1070&r=mac |
| By: | Shigeru Fujita; Makoto Nakajima |
| Abstract: | Worker flows and job flows behave differently over the business cycle. The authors investigate the sources of the differences by studying quantitative properties of a multiple-worker version of the search/matching model that features endogenous job separation and intra-firm wage bargaining. Their calibration incorporates micro- and macro-level evidence on worker and job flows. The authors show that the dynamic stochastic equilibrium of the model replicates important cyclical features of worker flows and job flow simultaneously. In particular, the model correctly predicts that hires from unemployment move countercyclically while the job creation rate moves procyclically. The key to this result is to allow for a large hiring flow that does not go through unemployment but is part of job creation, for which procyclicality of the job finding rate dominates its cyclicality. The authors also show that the model generates large volatilities of unemployment and vacancies when a worker's outside option is at 83 percent of aggregate labor productivity. |
| Keywords: | Employment ; Business cycles |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-33&r=mac |
| By: | Paul Soderlind |
| Abstract: | An affine yield curve model is estimated on daily Swiss data 2002--2009. The market price of risk is modelled in terms of proxies for uncertainty, which are estimated from interest rate options. The estimated model generates innovations in the 3-month rate that are similar to external evidence of monetary policy surprises - as well as term premia that are consistent with survey data. The results indicate that a surprise increase in the policy rate gives a reasonably sized decrease (-0.25%) in term premia for longer maturities. |
| Keywords: | affine price of risk, interest rate caps, survey data |
| JEL: | E27 E47 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-33&r=mac |
| By: | Terrence Kairiza (National Graduate Institute for Policy Studies) |
| Abstract: | The first impetus to Zimbabwe’s drive to hyperinflation and official dollarization predates the disruption in production caused by the fast-track land reform programme. The initial push came from the departure from relatively disciplined fiscal policies to a string of measures aimed at pacifying restive groups threatening political power through the transfer of economic and financial resources to those groups to the detriment of the fiscus. This stance caused investors to run away from the Zimbabwean currency thus causing currency depreciation hence inducing cost-push inflation which was worsened by the decline in production that accompanied the land reform programme and the associated disturbances to production in all sectors of the economy. The liquidity expansion by the central bank to prop the ruling party embodied in the quasi-fiscal activities veiled as expansionary Keynesian economics played a major role in firmly setting the stage for hyperinflation in the latter stages of the saga. In the backdrop of hyperinflation, the institution of official dollarization was merely de jure recognition of the unofficial dollarization that had set in. On the basis of Zimbabwe’s idiosyncrasies, the article contends that any attempt to dedollarize should be an endogenous outcome of a policy of macroeconomic stabilization. |
| Keywords: | Africa, Zimbabwe, Hyperinflation, Currency problems |
| JEL: | E31 E42 E58 E61 O55 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:09-12&r=mac |
| By: | Matteo Iacoviello; Marina Pavan |
| Abstract: | This paper describes an equilibrium life-cycle model of housing where nonconvex adjustment costs lead households to adjust their housing choice infrequently and by large amounts when they do so. In the cross-sectional dimension, the model matches the wealth distribution; the age profiles of consumption, homeownership, and mortgage debt; and data on the frequency of housing adjustment. In the time-series dimension, the model accounts for the procyclicality and volatility of housing investment, and for the procyclical behavior of household debt. |
| Keywords: | Housing ; Mortgage loans |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:09-12&r=mac |
| By: | Helena Marques (Universitat de les Illes Balears); Gabriel Pino (Universidad de Concepción, Chile); J.D.Tena (Universidad di Sassari, Italia y Universidad Carlos III, Spain) |
| Abstract: | This paper provides empirical evidence of the role of spatial factors on the determination of inflation dynamics for a representative set of tradable commodities in Chile. We present a simple model that explains inflation divergence across regions in a monetary union with similar preferences as a consequence of the geographical allocation of producers in the different regions. Our results indicate that spatial allocation together with transport costs are important determinants of regional inflation while macroeconomic common factors do not play an important role in this process. Existing literature had obtained the opposite result for Europe and the reasons for that difference warrant further investigation. Moreover, we find that geographical distance seems to be a more appropriate measure of neighbourhood than the adjacency of regions. |
| Keywords: | regional inflation dynamics, space-time models, Chile |
| JEL: | E31 E52 E58 R11 C23 C21 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ubi:deawps:40&r=mac |
| By: | Jørn Inge Halvorsen (Norges Bank and Norwegian School of Management (BI)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway)) |
| Abstract: | We analyze the importance of bank lending shocks on real activity in Norway and the UK, using structural VARs and based on quarterly data for the past 21 years. The VARs are identified using a combination of sign and short-term zero restrictions, allowing for simultaneous interaction between various variables. We find that a negative bank lending shock causes output to contract. The significance of bank lending shocks seems evident as they explain a substantial share of output gap variability. This suggests that the banking sector is an important source of shocks. The empirical analysis comprises the Norwegian banking crisis (1988-1993) and the recent period of banking failures and recession in the UK. The results are clearly non-negligible also when omitting periods of systemic banking distress from the sample. |
| Keywords: | Identification, VAR, Monetary Policy, Bank lending. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_27&r=mac |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper explores optimal policy design in an estimated model of three small open economies: Australia, Canada and New Zealand. Within a class of generalized Taylor rules, we show that to stabilize a weighted objective of output, consumer price inflation and nominal interest variation optimal policy does not respond to the nominal exchange. This is despite the presence of local currency pricing and due, in large part, to observed exchange rate disconnect in these economies. Optimal policies that account for the uncertainty of model estimates, as captured by the parameters' posterior distrbution, similarly exhibit a lack of exchange rate response. In contrast to Brainard (1967), the presence of parameter uncertainty can lead to more or less aggressive policy responses, depending on the model at hand. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-09-21&r=mac |
| By: | Erdenebat Bataa; Denise R. Osborn; Marianne Sensier; Dick van Dijk |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0924&r=mac |
| By: | Robert S. Pindyck |
| Abstract: | What is the likelihood that the U.S. will experience a devastating catastrophic event over the next few decades – something that would substantially reduce the capital stock, GDP and wealth? What does the possibility of such an event imply for the behavior of economic variables such as investment, interest rates, and equity prices? And how much should society be willing to pay to reduce the probability or likely impact of such an event? We address these questions using a general equilibrium model that describes production, capital accumulation, and household preferences, and includes as an integral part the possible arrival of catastrophic shocks. Calibrating the model to average values of economic and financial variables yields estimates of the implied expected mean arrival rate and impact distribution of catastrophic shocks. We also use the model to calculate the tax on consumption society would accept to reduce the probability or impact of a shock. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:mee:wpaper:0912&r=mac |
| By: | Michelle L. Barnes; Zvi Bodie; Robert K. Triest; J. Christina Wang |
| Abstract: | In September 1997, the U.S. Treasury developed the TIPS market in order to achieve three important policy objectives: (1) to provide consumers with a class of assets that allows for hedging against real interest rate risk, (2) to provide holders of nominal contracts a means of hedging against inflation risk, and (3) to provide everyone with a reliable indicator of the term structure of expected inflation. This paper evaluates progress toward the achievement of these objectives and analyzes prospective ways to better meet these objectives in the future, by, for example, extending the maturity of TIPS and/or the use of inflation indexes suited to particular geographic regions or demographics. We conclude by arguing that while it is tempting to consider completing markets by introducing more TIPS-like securities indexed to inflation rates more tailored to particular demographics, our analysis suggests that TIPS indexed to CPI do, in fact, facilitate good synthetic hedges against unexpected changes in inflation for many different investors, since the various inflation measures are very highly correlated. We do, however, argue for extending the maturity of TIPS. |
| Keywords: | Treasury bonds ; Treasury notes ; Inflation-indexed bonds |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:09-8&r=mac |
| By: | Martin, Christopher; Milas, C. |
| Abstract: | The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis |
| Keywords: | optimal monetary policy; sub-prime crisis |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:1/09&r=mac |
| By: | Ferdinand Fichtner (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rasmus Rüffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Bernd Schnatz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Using OECD composite leading indicators (CLI), we assess empirically whether the ability of the country-specific CLIs to predict economic activity has diminished in recent years, e.g. due to rapid advances in globalisation. Overall, we find evidence that the CLI encompasses useful information for forecasting industrial production, particularly over horizons of four to eight months ahead. The evidence is particularly strong when taking cointegration relationships into account. At the same time, we find indications that the forecast accuracy has declined over time for several countries. Augmenting the country-specific CLI with a leading indicator of the external environment and employing forecast combination techniques improves the forecast performance for several economies. Over time, the increasing importance of international dependencies is documented by relative performance gains of the extended model for selected countries. JEL Classification: C53, E32, E37, F47. |
| Keywords: | Leading Indicator, Business Cycle, Forecast Comparison, Globalisation, Structural Change. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091125&r=mac |
| By: | Julio Davila (Centre d'Economie de la Sorbonne - Paris School of Economics and CORE) |
| Abstract: | This paper establishes, in the context of the Diamond (1965) overlapping generations economy with production, that the risk that savings in unbacked assets (like fiat money or public debt) become worthless implies that, not only the first-best steady state, but even the best steady state attainable with those saving instruments fails to be a competitive equilibrium outcome under laissez-faire. It is nonetheless shown as well that this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. Interestingly enough, this policy requires non redistribution of income among agents, unlike the implementation of the first-best steady state. The policy is balanced every period at the steady state and, since no public spending exists in the model, it serves the only purpose of implementing a steady state that provides all agents with a higher utility than the laissez-faire competitive equilibrium steady state. The results thus provide a rationale for an active fiscal policy that has nothing to do with redistributive goals or the need to fund any kind of public sending. |
| Keywords: | Taxation of savings, overlapping generations, asset bubble. |
| JEL: | E62 E21 E22 H21 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09079&r=mac |
| By: | Dennis P. Lockhart |
| Abstract: | Remarks at the Rotary Club of Nashville, Nashville, Tennessee, July 20, 2009 |
| Keywords: | Inflation (Finance) ; Economic development ; Prices ; Economic stabilization |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:4:x:1&r=mac |
| By: | Alexander Kriwoluzky; Christian A. Stoltenbergz |
| Abstract: | Uncertainty about the appropriate choice among nested models is a central concern for optimal policy when policy prescriptions from those models differ. The standard procedure is to specify a prior over the parameter space ignoring the special status of some sub-models, e.g. those resulting from zero restrictions. This is especially problematic if a model's generalization could be either true progress or the latest fad found to fit the data. We propose a procedure that ensures that the specified set of sub-models is not discarded too easily and thus receives no weight in determining optimal policy. We find that optimal policy based on our procedure leads to substantial welfare gains compared to the standard practice. |
| Keywords: | Optimal monetary policy, model uncertainty, Bayesian model estimation |
| JEL: | E32 C51 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/37&r=mac |
| By: | Thorsten Lehnert (Luxembourg School of Finance, University of Luxembourg); Aleksandar Andonov (Limburg Institute of Financial Economics, Maastricht University); Florian Bardong (Fixed Income Research, Barclays Global Investors, London) |
| Abstract: | Previous research indicates that the US market for inflation-linked bonds is not efficient and that market inefficiencies can be exploited by informed traders who include survey estimations or inflation model forecasts in trades on break-even inflation. Results from this extended research over a time-period in which the TIPS market matured and increased in depth, while the volatility of real yields and inflation increased, confirm that TIPS market inefficiency was not temporary but persisted over the entire time period between 1997 and 2009. Using estimations generated by the Survey of Professional Forecasters or forecasts based on the Kothari and Shanken (2004) inflation model to construct a break-even trading strategy leads to excess returns over a static buy-and-hold strategy. These excess returns remain substantial even after accounting for trading costs. Furthermore, TIPS returns still include a substantial liquidity premium, which increased during the financial crisis. |
| Keywords: | TIPS, market, inflation expectations, survey of Professional Forecasters, financial crisis |
| JEL: | E31 E43 E44 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:09-09&r=mac |
| By: | Cecilia Garcia-Penalosa; Stephen Turnovsky |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2006-27-p&r=mac |
| By: | Kiyotaka Sato (Faculty of Economics, Yokohama National University); Zhaoyong Zhang (School of Accounting, Finance and Economics, Edith Cowan University); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute) |
| Abstract: | In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf694&r=mac |
| By: | Dennis P. Lockhart |
| Abstract: | Remarks at the Chattanooga Area Chamber of Commerce, Chattanooga, Tennessee, August 26, 2009 |
| Keywords: | Economic development ; Unemployment ; Employment ; Economic stabilization |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:5:x:1&r=mac |
| By: | Cahuc, Pierre (Ecole Polytechnique, Paris); Challe, Edouard (Ecole Polytechnique, Paris) |
| 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: | rational bubbles, occupational choice, dynamic efficiency |
| JEL: | E22 E44 G21 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4630&r=mac |
| By: | Benedetto Molinari (Department of Economics, Universidad Pablo de Olavide); Francesco Turino (Universitat d'Alacant and Università di Bologna) |
| Abstract: | This paper studies the influence of persuasive advertising in a neoclassical growth model with monopolistically competitive firms. Our findings show that advertising can significantly affect the stationary equilibrium of a model economy in which the labor supply is endogenous. In this case, for empirically plausible calibrations, we find that the equilibrium level of hours worked, GDP, and consumption increase with the amount of resources invested in advertising. These findings are consistent with a new stylized fact provided in this paper: over the past decade, per-capita advertising expenditures have been positively correlated with per-capita output, consumption and hours worked across OECD countries. Because of the connection between advertising and labor supply, we show that our model improves on its neoclassical counterpart in explaining both within-country and cross-country variability of hours worked per capita. |
| Keywords: | Advertising, Labor Wedge, Labor supply, Economic Growth, Hours Worked. |
| JEL: | E20 E32 J22 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:09.16&r=mac |
| By: | Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ilja Kristian Kavonius (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The financial crisis has highlighted the need for models that can identify counterparty risk exposures and shock transmission processes at the systemic level. We use the euro area financial accounts (flow of funds) data to construct a sector-level network of bilateral balance sheet exposures and show how local shocks can propagate throughout the network and affect the balance sheets in other, even seemingly remote, parts of the financial system. We then use the contingent claims approach to extend this accounting-based network of interlinked exposures to risk-based balance sheets which are sensitive to changes in leverage and asset volatility. We conclude that the bilateral cross-sector exposures in the euro area financial system constitute important channels through which local risk exposures and balance sheet dislocations can be transmitted, with the financial intermediaries playing a key role in the processes. High financial leverage and high asset volatility are found to increase a sector’s vulnerability to shocks and contagion. JEL Classification: C22, E01, E21, E44, F36, G01, G12, G14. |
| Keywords: | Balance sheet contagion, financial accounts, network models, contingent claims analysis, systemic risk, macro-prudential analysis. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091124&r=mac |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper demonstrates that an estimated, structural, small open-economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-09-19&r=mac |
| By: | Ganugi, P; Grossi, L; Ianulardo, Giancarlo |
| Abstract: | This paper investigates the demand for money by firms and the existence of economies of scales in order to evaluate the efficiency in the cash management of the Italian manufacturing industry. We estimate a money demand for cash elaborated by Fujiki and Mulligan (1996). Estimates differ from the previous literature firstly, because we use a choice dynamic model to overcome endogeneity problems in cash holdings; secondly, because we use an iterative procedure based on backward exclusion of firms from model estimation with which we point out the high heterogeneity of Italian companies in money demand. Our estimates show that the Italian Manufacturing industry, considered as whole, does not enjoy scale economies in money demand. Our iterative procedure points out that the cause of this result is to be ascribed to small firms which are characterized by thin cash money holdings and a consequently very modest opportunity cost. Once small size firms are removed from our data set our estimates reveal that money demand of medium and large size firms is different for high scale economies. This result, together with the fact that small firms’ cash balances are thin, implies the efficiency of Italian manufacturing industry. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:17/09&r=mac |
| By: | Anastasia Litina (Department of Economics, University of Macedonia); Theodore Palivos (Department of Economics, University of Macedonia) |
| Abstract: | This paper characterizes analytically the saving rate in the Ramsey-Cass-Koopmans model with a general production function when there exists both exogenous and endoge- nous growth. It points out conditions involving the share of capital and the elasticities of factor and intertemporal substitution under which the saving rate path to its steady-state value exhibits overshooting, undershooting, or is monotonic. Simulations illustrate these interesting dynamics. The paper also identi?es the general class of production functions that render the saving rate constant along the entire transition path and hence make the Ramsey-Cass-Koopmans model isomorphic to that of Solow-Swan. |
| Keywords: | Ramsey-Cass-Koopmans Model, Saving Rate, Elasticities of Substitution. |
| JEL: | E20 O41 O10 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2009_17&r=mac |
| By: | Thomas Scheiber (Oesterreichische Nationalbank, Foreign Research Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna); Helmut Stix (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna) |
| Abstract: | We present new evidence on de facto euroization in eleven Central, Eastern and Southeastern European countries. Estimates of the extent of foreign currency cash holdings are derived from survey data. Furthermore, we define overall euroization indices, relating both assets and cash holdings. Results confirm that some countries are heavily euroized and that euro cash holdings constitute a sizeable share of local currency in circulation. Euroization levels in other –mainly Central European– countries are low and economically insignificant. Evidently, high euroization bears various significant consequences for economic policies. Therefore, we inquire on the determinants of euroization. We find that euroization is highly correlated with the quality of past economic governance, reflecting past periods of instabilities. In contrast, the more recent –pre-financial crisis– course of economic history had only limited impact. Thus, our results are in line with the view that policy makers in highly euroized countries are severely constrained by past events and that euroization levels might be difficult to revert through stable macroeconomic policies. |
| Keywords: | Dollarization, Euroization, Currency Substitution, Survey Data, Central,Eastern, Southeastern, Europe, CEE, SEE |
| JEL: | E41 E50 D14 |
| Date: | 2009–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:159&r=mac |
| By: | Tobias Wuergler |
| Abstract: | This paper studies the effect of financial booms and extreme asset valuations on the relative demand for skills and the wage structure. The substantial rise in wage inequality in the U.S. since the late 1970s has been accompanied by a major expansion of financial services, a series of asset bubbles, and rising relative wages and relative education in the financial industry. I motivate and develop a theoretical framework where financial institutions benefit from financial booms and asset bubbles. Yet the complexity and novelty of financial products and fundamentals surrounding bubbles favor the supremacy of skilled individuals in exploiting these opportunities. Hence financial booms increase opportunities for skilled labor, contributing to the rise in overall wage inequality in the economy. Simple extensions of the basic framework allow us to study the implications of financial regulation and globalization of financial services, as well as further topics. Finally, the paper documents and compares relative wage and employment patterns in the U.S., U.K., Germany, and France, providing suggestive evidence for the theoretical framework. |
| Keywords: | Skill demand, inequality, asset bubbles, financial institutions, financial regulation |
| JEL: | E24 E44 G20 G28 J24 J31 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:460&r=mac |
| By: | Luigi Bonatti; Andrea Fracasso |
| Abstract: | This work presents a two-country two-stage growth model capturing the special relationship that has emerged in recent years between the US and China (the so-called BWII regime described by Dooley et al., 2003). The Chinese authorities maintain a competitive (i.e., undervalued) exchange rate in order to sustain the high-productive exporting sectors, foster growth and absorb the large amount of rural workers into the industrial sector. Thus, China runs current account surpluses against the US and accumulates US assets in the form of foreign reserves. The US policy-makers are supposedly more concerned with keeping high the consumption possibilities of the population and exploit the Chinese willingness to finance the US external deficits. We consider three scenarios for the future state of the Sino-American co-dependency. All the scenarios share phase 1, resembling what has actually occurred in recent years, but differ in accordance with what fiscal policy the Chinese authorities adopt, and whether and when China fully liberalizes its capital account and floats the currency (thus starting phase 2). Scenario A is quite optimistic because the Chinese fiscal policy is effective in partially substituting the mercantilist policy undertaken in phase 1 as a fundamental source of demand for tradables and as an engine of growth. Scenario B emphasizes the risks for China of abandoning too early the peg of the exchange rate. Finally, Scenario C shows that a Chinese continuation of the current export-led growth strategy can be economically feasible and lead to the mobilization of the Chinese manpower into the advanced sectors of the economy. |
| Keywords: | Bretton Woods II, growth, global imbalances, regime switch |
| JEL: | E42 F33 F41 F43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0905&r=mac |
| By: | Christian Wolff (Luxembourg School of Finance, University of Luxembourg); Ron Jongen (Erasmus School of Economics, Erasmus University Rotterdam); Willem F.C. Verschoor |
| Abstract: | Using a large, previously unexplored international dataset of market expectations that covers a broad range of deposits, this paper presents a wealth of empirical evidence on the behavior of the term structure of interest rates in an international perspective. We find that our survey forecasts are of quite good quality, outperforming a relevant naive benchmark in most cases. We also find considerable international evidence in favor of rejecting the ‘pure’ version of the expectations hypothesis. We also find some evidence that the behavior of market participants, when making predictions about the future level of interest rates, is not entirely in line with rational behavior. There is strong evidence of time-variation in term premia. Furthermore, while this variation in term premia can be captured adequately by low-order members of the ARMA class models, there is clear evidence that conditional heteroskedasticity in the movement of term premia plays an important role in explaining the time-variation for a number of countries. |
| Keywords: | Interest rate expectations, expectations hypothesis, rationality, survey data, term structure, time-varying term premia. |
| JEL: | E43 G15 E42 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:09-02&r=mac |
| By: | Chollete, Loran (University of Stavanger); Jaffee, Dwight (University of California, Berkeley) |
| Abstract: | . |
| Keywords: | Endogenous Probabilities; Extreme Events; Financial Environment; Informational Costs; Regime Shifts |
| JEL: | E44 G11 G32 |
| Date: | 2009–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2009_032&r=mac |
| By: | Næs, Randi (Ministry of Trade and Industry); Skjeltorp, Johannes (Norges Bank); Ødegaard, Bernt Arne (University of Stavanger) |
| Abstract: | This paper analyzes return patterns and determinants at the Oslo Stock Exchange (OSE) in the period 1980--2006. We find that a three-factor model containing the market, a size factor and a liquidity factor provides a reasonable fit for the cross-section of Norwegian stock returns. As expected, oil prices significantly affect cash flows of most industry sectors at the OSE. Oil is, however, not a priced risk factor in the Norwegian stock market. As the case in many other countries, we find that macroeconomic variables affect stock prices, but since we find only weak evidence of these variables being priced in the market, the most reasonable channel for these effects is through company cash flows. |
| Keywords: | Stock Market Valuation; Asset Pricing; Factor Models; Generalized Method of Moments |
| JEL: | E44 G12 |
| Date: | 2009–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2009_033&r=mac |
| By: | Michel Beine; Elisabetta Lodigiani; Robert Vermeulen (CREA, University of Luxembourg) |
| Abstract: | Remittances have greatly increased during recent years, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels. One way of doing so is to increase their financial openness, but this is not without costs. More specifically for developing countries, governments need to weight the positive effects of remittances with the additional risks in terms of macroeconomic volatility associated to financial openness. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We account for the persistence of financial openness, initial conditions, trade openness, institutional quality and domestic financial development. In addition, we apply a two-step method akin to two stage least squares to deal with the potential endogeneity of remittances. We find a strong positive effect of remittances on financial openness, i.e. the more remittances a country receives, the more likely it will be financially open. This positive effect is both statistically significant and economically large. |
| JEL: | E60 F24 F41 O10 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:09-09&r=mac |
| By: | John Freebairn |
| Abstract: | Arguments for, and then the form and level of, compensation of households and businesses for the additional costs of an emissions trading scheme to lower greenhouse gas (GHG) emissions are evaluated. With most of the costs passed forward to households as higher consumer prices, a sequential set of direct income transfers to all households is proposed to meet equity and macroeconomic stability objectives. In the event that Australia proceeds with a scheme before some of the other global polluters, to avoid carbon leakage and unnecessary industrial restructuring a consumption base system of taxing the GHG component of imports and compensating the GHG component of exports is proposed. |
| Keywords: | Macroeconomics: Consumption; Saving; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance |
| JEL: | E21 G34 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1071&r=mac |