nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒01‒16
67 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Camp View of Inflation Forecasts By Felix Geiger; Oliver Sauter; Kai D. Schmid
  2. Macroeconomic Implications for Hong Kong SAR of Accommodative U.S. Monetary Policy By Papa M'B. P. N'Diaye
  3. Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy By Papa M'B. P. N'Diaye
  4. Monetary policy and potential output uncertainty: a quantitative assessment. By Simona Delle Chiaie
  5. Macroeconomic Dynamics in Macedonia and Slovakia: Structural Estimation and Comparison By Melecky, Martin
  6. The new macroeconometric model of the Polish economy By Katarzyna Budnik; Michal Greszta; Michal Hulej; Marcin Kolasa; Karol Murawski; Michal Rot; Bartosz Rybaczyk; Magdalena Tarnicka
  7. Inflation dynamics and the New Keynesian Phillips curve in EU-4 By Borek Vasicek
  8. Quasi-Fiscal Policies of Independent Central Banks and Inflation By Seok Gil Park
  9. U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices? By John, Tatom
  10. Anchors Away: How Fiscal Policy Can Undermine “Good” Monetary Policy By Eric M. Leeper
  11. Real time underlying inflation gauges for monetary policymakers By Marlene Amstad; Simon Potter
  12. Inflation Targeting Twenty Years on: Where, When, Why, With what Effects, What lies ahead? By Klaus Schmidt-Hebbel.
  13. The implications of inflation in an estimated new-Keynesian model By Pablo A. Guerron-Quintana
  14. Do credit constraints amplify macroeconomic fluctuations? By Zheng Liu; Pengfei Wang; Tao Zha
  15. Real and Nominal Frictions within the Firm: How Lumpy Investment Matters for Price Adjustment By Michael K. Johnston
  16. Investment shocks and the relative price of investment By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  17. Optimal Structure of Monetary Policy Committees By Keiichi Morimoto
  18. The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank By Gebhard Kirchgässner; Jürgen Wolters
  19. Closed-form estimates of the New Keynesian Phillips Curve with time-varying trend inflation By Michelle L. Barnes; Fabià Gumbau-Brisa; Denny Lie; Giovanni P. Olivei
  20. Inflation Targeting Pillars: Transparency and Accountability By Charles Freedman; Douglas Laxton
  21. Macro-finance models of interest rates and the economy By Glenn D. Rudebusch
  22. Improving Surveillance Across the CEMAC Region By Misa Takebe; Robert C. York; Noriaki Kinoshita; Plamen Iossifov; Zaijin Zhan
  23. fiscal policy shocks in the euro area and the us: an empirical assessment By Pablo Burriel; francisco de castro; daniel garrote; esther gordo; joan paredes; javier j. pérez
  24. The Nature of Aggregate Demand and Supply Shocks in ASEAN Countries By Bashar, Omar H M N
  25. The search for co-integration between money, prices and income: low frequency evidence from the Turkish economy By Levent, Korap
  26. Inflation Volatility: An Asian Perspective By Rizvi, Syed Kumail Abbas; Naqvi, Bushra
  27. Monetary policy and the housing bubble By Jane Dokko; Brian Doyle; Michael T. Kiley; Jinill Kim; Shane Sherlund; Jae Sim; Skander Van den Heuvel
  28. Inflation persistence By Jeffrey C. Fuhrer
  29. On the usefulness of government spending in the EU area By Salotti, Simone; Marattin, Luigi
  30. Measuring consumer uncertainty about future inflation By Wandi Bruine de Bruin; Charles F. Manski; Giorgio Topa; Wilbert van der Klaauw
  31. Effects of Fiscal Policy Shocks in the European Transition Economies By Mirdala, Rajmund
  32. Estimating the cross-sectional distribution of price stickiness from aggregate data By Carlos Carvalho; Niels Arne Dam
  33. What explains the surge in euro area sovereign spreads during the financial crisis of 2007-09? By Maria-Grazia Attinasi; Cristina Checherita; Christiane Nickel
  34. Asymmetric Response to Monetary Policy Surprises at the Long-End of the Yield Curve By Selva Demiralp; Kamil Yilmaz
  35. Estimating DSGE-Model-Consistent Trends for Use in Forecasting By Jean-Philippe Cayen; Marc-André Gosselin; Sharon Kozicki
  36. The taxation of savings in overlapping generations economies with unbacked risky assets By Julio Davila
  37. Inflation Targeting Framework: Is the story different for Asian Economies? By Naqvi, Bushra; Rizvi, Syed Kumail Abbas
  38. External Shocks and the Indian Economy: Analyzing through a Small, Structural Quarterly Macroeconometric Model By NR, Bhanumurthy; Kumawat, Lokendra
  39. Regional and Sectoral Effects of a Common Monetary Policy: Evidence from Euro Referenda in Denmark and Sweden By Gabriel Ahlfeldt; Wolfgang Maennig; Tobias Osterheider
  40. Rates of Return and Alternative Measures of Capital Input: 14 Countries and 10 Branches, 1971-2005 By Nicholas Oulton; Ana Rincon-Aznar
  41. An Alternate Approach to Theory of Taxation and Sources of Public Finance in an Interest Free Economy By Shaikh, Salman
  42. Testing Fiscal Sustainability By Takao Fujii
  43. On the social cost of transparency in monetary economies By David Andolfatto
  44. Leverage Causes Fat Tails and Clustered Volatility By Stefan Thurner; J. Doyne Farmer; John Geanakoplos
  45. Housing wealth isn't wealth By Buiter, Willem H.
  46. Impactos Macroeconômicos dos Gastos Públicos na América Latina By Alexandre Manuel Angelo da Silva; José Oswaldo Cândido Júnior
  47. Forecast disagreement among FOMC members By Chanont Banternghansa; Michael W. McCracken
  48. Excess Comovements between the Euro/US dollar and British pound/US dollar exchange rates By Michael Kühl
  49. Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone By Przystupa, Jan
  50. Getting Talk Back on Target: The Exchange Rate and the Inflation Rate By David Laidler
  51. The Global Crisis and Medium Term Growth Prospects for Developing Countries: the case of Vietnam By Anh Ngoc Nguyen; Nhat Duc Nguyen; Chuc Dinh Nguyen; Nguyen Thang
  52. Do Oil Windfalls Improve Living Standards? Evidence from Brazil By Francesco Caselli; Guy Michaels
  53. The Puzzle of the Replacement Ratio in the Context of Renewal Theory By Bitros, George
  54. Too Many Cooks? The German Joint Diagnosis and Its Production By Ulrich Fritsche; Ullrich Heilemann
  55. A General Equilibrium Analysis of Parental Leave Policies By Andres Erosa; Luisa Fuster; Diego Restuccia
  56. The Impact of Government Spending on the Duration and the Intensity of Economic Crises: Latin America 1900-2000 By Rodrigo Cerda.
  57. Quantifying the Distortionary Fiscal Cost of ‘The Bailout’ By Francisco Gomes; Alexander Michaelides; Valery Polkovnichenko
  58. Sectoral Structural Change in a Knowledge Economy By Che, Natasha Xingyuan
  59. Direct tests of the expectations theory of the term structure: Survey expectations, the term premium and coefficient biases By Smant, David / D.J.C.
  60. Sectoral Structural Change in a Knowledge Economy By Che, Natasha Xingyuan
  61. Search Frictions and Asset Price Volatility By B. Ravikumar; Enchuan Shao
  62. Corporate finance in an interest free economy: An alternate approach to practiced Islamic Corporate Finance By Shaikh, Salman
  63. How Deep is the Annuity Market Participation Puzzle? By Joachim Inkmann; Paula Lopes; Alexander Michaelides
  64. Forecasting New Zealand's economic growth using yield curve information By Leo Krippner; Leif Anders Thorsrud
  65. An P-VAR analysis of the dynamics of UK insurance underwriting regimes By Mamatzakis, E; Milidonis, A; Christodoulakis, G
  66. Social Ingredients and Conditional Convergence in the Study of Sectoral Growth By Jacques Kibambe; Renee van Eyden; charlotte du Toit
  67. Zur Entwicklung der Sparquoten der privaten Haushalte: Eine Auswertung von Haushaltsdaten des SOEP By Ulrike Stein

  1. By: Felix Geiger; Oliver Sauter; Kai D. Schmid
    Abstract: Analyzing sample moments of survey forecasts, we derive disagreement and un- certainty measures for the short- and medium term inflation outlook. The latter provide insights into the development of inflation forecast uncertainty in the context of a changing macroeconomic environment since the beginning of 2008. Motivated by the debate on the role of monetary aggregates and cyclical variables describing a Phillips-curve logic, we develop a macroeconomic indicator spread which is assumed to drive forecasters’ judgments. Empirical evidence suggests procyclical dynamics between disagreement among forecasters, individual forecast uncertainty and the macro-spread. We call this approach the camp view of inflation forecasts and show that camps form up whenever the spread widens.
    Keywords: monetary policy, survey forecasts, inflation uncertainty, heterogenous beliefs and expectations, monetary aggregates
    JEL: E47 E51 E52 E58 E66
    Date: 2009–12
  2. By: Papa M'B. P. N'Diaye
    Abstract: This paper discusses the potential macroeconomic implications for Hong Kong SAR of accommodative monetary policy in the United States. It shows, through model simulations, that a resumption of the credit channel in Hong Kong SAR has the potential to create inflation in both goods and asset markets. Expansionary financial conditions will likely have a greater impact in fueling asset price inflation, manifested in the model through a strong increase in equity prices. Higher asset prices could, in turn, through a financial accelerator mechanism, lead to further credit expansion and an upward cycle of asset prices and credit. This cycle, if unchecked, can potentially feed into volatility in consumption, output and employment and complicate macroeconomic management. The simulation results suggest there is a role for countercyclical prudential regulations to mitigate the amplitude of the cycle and lessen the financial and macroeconomic volatility associated with an unwinding of the credit-asset price cycle.
    Keywords: Asset prices , Business cycles , Credit expansion , Economic models , Exchange systems , Fiscal policy , Hong Kong Special Administrative Region of China , Monetary policy , Monetary transmission mechanism , United States ,
    Date: 2009–11–19
  3. By: Papa M'B. P. N'Diaye
    Abstract: This paper explores how prudential regulations can support monetary policy in reducing output fluctuations while maintaining financial stability. It uses a new framework that blends a standard model for monetary policy analysis with a contingent claims model of financial sector vulnerabilities. The results suggest that binding countercyclical prudential regulations can help reduce output fluctuations and lessen the risk of financial instability. More specifically, countercyclical rules such as countercyclical capital adequacy rules, can allow monetary authorities to achieve the same output and inflation objectives but with smaller adjustments in interest rates. The countercyclical rules can help stem swings in asset prices, lean against a financial accelerator process, and thereby help to lower risks of macroeconomic and financial instability. In economies with fixed exchange rates, where countercyclical monetary policy is not possible, prudential regulations can provide a useful mechanism for mitigating a run-up in asset prices and for promoting output stability.
    Keywords: Asset prices , Capital , Economic models , Financial stability , Inflation , Market interest rates , Monetary policy ,
    Date: 2009–11–19
  4. By: Simona Delle Chiaie (Oesterreichische National Bank, Economic Studies Division, Otto-Wagner Platz 3, 1090 Wien, Austria.)
    Abstract: I estimate a dynamic stochastic general equilibrium model where the policymaker and the private sector have imperfect knowledge about potential output. The estimation of the structural parameters and of the monetary authorities’objectives is key to assess the quantitative relevance of the imperfect information problem and to evaluate the robustness of previous exercises based on calibration. The estimated model also allows me to revisit the Orphanides (2001, 2003) findings that the central bank can make large and persistent mistakes to estimate potential output in response to productivity and cost shocks. I find that when real unit labor cost is used as a monetary policy indicator, the potential output uncertainty has quantitatively negligible consequences on policy behaviour and inflation dynamics. JEL Classification: E4, E5.
    Keywords: Monetary policy, potential output uncertainty, indicator variables, real unit labor cost.
    Date: 2009–12
  5. By: Melecky, Martin
    Abstract: This paper estimates the structural model of Linde et al. (2008) using data for Macedonia and Slovakia. A comparison of the estimated model parameters suggest that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions present Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia’s macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia’s variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets.
    Keywords: Structural Open-Economy Model; Bayesian Estimation; Eastern European Transition Economies.
    JEL: E32 E50 F41
    Date: 2010–01
  6. By: Katarzyna Budnik (National Bank of Poland, Economic Institute); Michal Greszta (National Bank of Poland, Economic Institute; University of Warsaw, Faculty of Economics); Michal Hulej (National Bank of Poland, Economic Institute); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Karol Murawski (National Bank of Poland, Economic Institute); Michal Rot (National Bank of Poland, Economic Institute); Bartosz Rybaczyk (National Bank of Poland, Economic Institute); Magdalena Tarnicka (National Bank of Poland, Economic Institute)
    Abstract: This paper presents the structural macroeconometric model of the Polish economy, NECMOD, which was developed foremost to facilitate implementation of the monetary policy in Poland through a regular delivery of inflation and GDP projections. The model encompasses all major channels of the monetary policy transmission mechanism and is able to deliver a comprehensive account of factors underlying the main economic developments. With its complex labour market structure, explicit incorporation of inflation expectations, distortionary fiscal policy and heterogeneity of the capital stock, NECMOD is able to describe propagation of a range of macroeconomic shocks. As a forecasting and simulation tool, the model is specifically designed to reflect the dynamic nature of a converging economy.
    Date: 2009
  7. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: The paper seeks to shed light on inflation dynamics of four new EU member states: the Czech Republic, Hungary, Poland and Slovakia. To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds a forward- looking component, the backward-looking component is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.
    Keywords: Inflation dynamics, New Keynesian Phillips curve, CEEC, GMM estimation
    JEL: C32 E31
    Date: 2009–12
  8. By: Seok Gil Park (Indiana University)
    Abstract: Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-?scal operations are signi?cant in size and assumed to be crucial for the economy?s recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The main contribution of this paper is to show that quasi-?scal shocks may a¤ect in?ation in plausible cases by utilizing a simple DSGE model that embraces the budgetary inde- pendence of the central banks. In the active quasi-?scal policy regime, the shocks in the central bank?s earnings alter the private agent?s portfolio between consumption and the nominal money balance, thus a¤ecting in?ation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, this paper shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-?scal shocks may produce undesirable e¤ects, such as in?ation following de?ationary mone- tary policy during the implementation of exit strategy.
    Date: 2009–10
  9. By: John, Tatom
    Abstract: This article rejects the linkages in proposals that the Federal Reserve Bank (Fed) target equity prices. The real federal funds rate (RFF) and stock prices (SP) are uncorrelated; causality tests show a positive effect of SP on RFF and a negative effect of SP on RFF. These results occur as part of the dynamics of a negative cointegrated relationship between SP and RFF. A theoretically expected inverse relation between SP and inflation accounts for the results. The negative effect of SP on FF is also confirmed in a Taylor Rule estimate. Higher stock prices anticipate lower, not higher, inflation.
    Keywords: Monetary Policy; Bubbles; Asset Prices; Inflation.
    JEL: E32 G12 E58 E52
    Date: 2009–12–01
  10. By: Eric M. Leeper (Indiana University)
    Abstract: Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care ex- penditures. If economic agents place sufficient probability on the economy hitting its “fiscal limit” at some point in the future—after which further tax revenues are not forthcoming—it may no longer be possible for “good” monetary policy behavior to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems con- frontingmonetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored.
    Date: 2009–11
  11. By: Marlene Amstad; Simon Potter
    Abstract: Central banks analyze a wide range of data to obtain better measures of underlying inflationary pressures. Factor models have widely been used to formalize this procedure. Using a dynamic factor model this paper develops a measure of underlying inflation (UIG) at time horizons of relevance for monetary policymakers for both CPI and PCE. The UIG uses a broad data set allowing for high-frequency updates on underlying inflation. The paper complements the existing literature on U.S. "core" measures by illustrating how UIG is used and interpreted in real time since late 2005.
    Keywords: Inflation (Finance) ; Economic indicators ; Economic forecasting ; Monetary policy ; Banks and banking, Central
    Date: 2009
  12. By: Klaus Schmidt-Hebbel. (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: This paper looks back at 20 years of inflation targeting (IT) in the world, reviewing previous findings and reporting new cross-country and panel-data evidence on the determinants or IT regime choice and the results of IT adoption. After describing the where and when of IT adoption, the paper assesses the determinants of why countries choose this monetary regime against alternative candidates. Which have been the main results under IT? Next the paper focuses on several dimensions of monetary policy performance under IT. One is target achievement; beyond measuring cross-country differences in target deviations, the paper assesses empirically what lies behind those deviations. Two, it reviews monetary policy efficiency more broadly, comparing output and inflation volatility under IT to volatility observed in non-IT experiences. Three, it surveys descriptive evidence on monetary policy transparency attained under IT in comparison to other monetary regimes. A discussion of the very important challenges posed by the recent boom-and-bust cycle to IT close the paper.
    Keywords: Inflation targeting, inflation, monetary regimes
    JEL: E31 E52 C53
    Date: 2009
  13. By: Pablo A. Guerron-Quintana
    Abstract: This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.
    Keywords: Inflation (Finance) ; Econometric models ; Keynesian economics
    Date: 2010
  14. 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.
    Keywords: Credit ; Macroeconomics - Econometric models
    Date: 2009
  15. By: Michael K. Johnston
    Abstract: Real rigidities are an important feature of modern sticky price models and are policyrelevant because of their welfare consequences, but cannot be structurally identified from time series. I evaluate the plausibility of capital specificity as a source of real rigidities using a two-dimensional generalized (s,S) model calibrated to micro evidence. Capital lumpiness reduces price stickiness as endogenous fluctuations in the marginal cost of output increase willingness to pay menu costs (an extensive effect), but increases price stickiness through complementarities (an intensive effect). The extensive effect warrants higher menu costs to match evidence on price changes, and the effects of complementarities prevail.
    Keywords: Transmission of monetary policy
    JEL: E12 E22 E31
    Date: 2009
  16. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: We estimate a New-Neoclassical Synthesis model of the business cycle 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 future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the postwar 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 the shock correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.
    Keywords: Business cycles ; Saving and investment ; Recessions
    Date: 2009
  17. By: Keiichi Morimoto (Graduate School of Economics, Osaka University)
    Abstract: This paper explores an optimal personnel organization problem of monetary policy committees. First, I construct an analytically tractable model for monetary policy analysis which starts from decision-making in the monetary policy committee. Using the model, I investigate the relationship between preference heterogeneity among the committee members and the optimal structure of the monetary policy committee. The result shows that it is optimal in general cases to appoint not only inflation-minded (hawkish) persons but also output-minded (dovish) persons. This is a theoretical justification for the fact that the actual monetary policy committees (e.g., MPC of Bank of England and FOMC) usually consist of both type members as the empirical researches suggest. It also explains why the committees have replaced the single policy makers in the actual central banks.
    Keywords: monetary policy, committee, delegation, imperfect information, higher order expectations
    JEL: D71 D84 E58
    Date: 2009–10
  18. By: Gebhard Kirchgässner; Jürgen Wolters
    Abstract: Using Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011.
    Keywords: Stability of Money Demand; Monetary Aggregates and Inflation
    JEL: E41 E52
    Date: 2009–12
  19. By: Michelle L. Barnes; Fabià Gumbau-Brisa; Denny Lie; Giovanni P. Olivei
    Abstract: We compare estimates of the New Keynesian Phillips Curve (NKPC) when the curve is specified in two different ways. In the standard difference equation (DE) form, current inflation is a function of past inflation, expected future inflation, and real marginal costs. The alternative closed form (CF) specification explicitly solves the DE form to express inflation as a function of past inflation and a present-discounted value of current and expected future marginal costs. The CF specification places model-consistent constraints on expected future inflation that are not imposed in the DE form. In a Monte Carlo exercise, we show that estimating the CF version of the NKPC gives estimates that are much more efficient than the estimates obtained from the DE specification. We then compare DE and CF estimates of the NKPC with time-varying trend inflation on actual data. The data and estimation methodology are the same as in Cogley and Sbordone (2008). We show that DE and CF estimates differ substantially and have very different implications for inflation dynamics. As in Cogley and Sbordone, it is possible to estimate DE specifications of the NKPC where lagged inflation plays no role once trend inflation is taken into account. The CF estimates of the NKPC, however, typically imply as large a role for lagged inflation as for expected future inflation. These estimates thus suggest that trend inflation is not in itself sufficient to explain the persistent dynamics of inflation.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2009
  20. By: Charles Freedman; Douglas Laxton
    Abstract: This is the fourth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation- Targeting Regimes: Saying What You Do and Doing What You Say." It examines a number of issues related to transparency and accountability in an inflation-targeting regime. It first looks at the factors behind the move to increased transparency in recent years and the important role of a communications strategy in transparency. It then turns to the role of the forecast in communications, how risks surrounding the forecast are communicated, and whether there should be limits on what is made public. It concludes with a short discussion of accountability.
    Keywords: Central bank policy , Central banks , Inflation , Inflation targeting , Monetary policy , Transparency ,
    Date: 2009–12–02
  21. By: Glenn D. Rudebusch
    Abstract: During the past decade, much new research has combined elements of finance, monetary economics, and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I describe three different strands of such interdisciplinary macro-finance term structure research. The first adds macroeconomic variables and structure to a canonical arbitrage-free finance representation of the yield curve. The second examines bond pricing and bond risk premiums in a canonical macroeconomic dynamic stochastic general equilibrium model. The third developsa new class of arbitrage-free term structure models that are empirically tractable and well suited to macro-finance investigations.
    Keywords: Interest rates ; Macroeconomics - Econometric models
    Date: 2010
  22. By: Misa Takebe; Robert C. York; Noriaki Kinoshita; Plamen Iossifov; Zaijin Zhan
    Abstract: In this paper, we consider the design of the surveillance, and, in particular, the fiscal criteria in the Central African Economic and Monetary Community (CEMAC) with the view to ensuring they are consistent with internal and external sustainability. This consistency is important within a monetary union because fiscal policy is the primary instrument through which national governments can influence macroeconomic performance. We comment on how surveillance might be improved by broadening the region's current criteria through alternative fiscal indicators, some focus on the scope and nature of external shocks, and attention to the consistency of policies in assuring the viability of the union and its fixed exchange rate regime.
    Keywords: Budget deficits , Business cycles , Central African Economic and Monetary Community , External shocks , Fiscal policy , Monetary policy , Monetary unions , Multilateral surveillance , Nonoil sector ,
    Date: 2009–11–25
  23. By: Pablo Burriel (Banco de España); francisco de castro (Banco de España); daniel garrote (Banco de España); esther gordo (Banco de España); joan paredes (european central bank); javier j. pérez (Banco de España)
    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.
    Keywords: euro area, svar, fiscal shocks, fiscal multipliers.
    JEL: E62 H30
    Date: 2009–12
  24. By: Bashar, Omar H M N
    Abstract: This paper revisits the issue of identification of macroeconomic shocks in ASEAN countries using an alternative identification scheme where the aggregate demand and supply shocks are allowed to be correlated. Applying the technique of Cover et al (2006) within a bivariate Structural VAR model, this paper showed that aggregate demand and supply shocks are interrelated (positively) in ASEAN countries. Unlike previous studies, it is found that changes in the output level are mainly driven by aggregate demand shocks, whereas supply shocks are playing the dominant role in affecting inflation in ASEAN countries. The correlations of the shocks across the countries are found to be quite small, suggesting that ASEAN is still not ready to form a common currency union like Europe.
    Keywords: ASEAN; Aggregate Demand and Supply; Structural VAR; Blanchard-Quah Decomposition
    JEL: C32 E32 E31
    Date: 2009–12–22
  25. By: Levent, Korap
    Abstract: In this paper, we aim to test the empirical validity of the QTM relationship for the Turkish economy. Using some contemporaneous time series estimation techniques, our estimation results reveal that stationarity characteristics of the velocities of currency in circulation and the broad money aggregate in the economy cannot be rejected through a quantity theoretical co-integrating long-term variable space. We find that there exists an about one-to-one proportionality between money and prices and money and real income, and that the exogeneity of money cannot be rejected for the currency in circulation in the economy. But, the exception here comes from the broad monetary aggregate used in the QTM equation such that money seems to be endogenous as for the long-term variable space.
    Keywords: Money ; Prices ; Income ; Quantity Theory of Money ; Co-integration ; Long-span Data ; Turkish Data ;
    JEL: C32 E51 E52 E61
    Date: 2009
  26. By: Rizvi, Syed Kumail Abbas; Naqvi, Bushra
    Abstract: The primary purpose of this study is to model and analyze inflation volatility in ten selected Asian economies. We used quarterly data of inflation from 1987Q1 to 2008Q4 to model inflation volatility as time varying process through different symmetric and asymmetric GARCH specifications. We also proposed to model inflation volatility on the basis of cyclic component of inflation obtained from HP filter, instead of actual inflation when the latter does not fulfill the criterion of stationarity. Through news impact curves we tried to highlight the behavior of inflation volatility in response to lagged inflation shocks, under different GARCH specifications for selected economies. Bivariate granger causality test is also applied to analyze the direction of causality between inflation and different volatility estimates. We get few important results. At first, leverage parameter shows expected sign and is significant for almost all countries suggesting strong asymmetry in inflation volatility. The hyperbolic sign integral shape of news impact curves based on GJR-GARCH is not only consistent with the results of our previous study based on Pakistani data (Rizvi and Naqvi, 2008) but also highlight the importance of inflation stabilization programs particularly because of the subsequent evidences obtained in favor of bidirectional causality running between inflation and inflation volatility. We also found that cyclic component of inflation could be a suitable proxy of inflation for volatility estimation.
    Keywords: Inflation Volatility, Uncertainty, GJR-GARCH, EGARCH, Asymmetry, Asia, Asian
    JEL: E31 C22 E37
    Date: 2009–08–01
  27. By: Jane Dokko; Brian Doyle; Michael T. Kiley; Jinill Kim; Shane Sherlund; Jae Sim; Skander Van den Heuvel
    Abstract: We examine the role of monetary policy in the housing bubble. Our review examines the setting of monetary policy in the middle of this decade, the impetus from monetary policy to the housing market, and other factors that may have contributed to the run-up, and subsequent collapse, in house prices.
    Date: 2009
  28. By: Jeffrey C. Fuhrer
    Abstract: This paper examines the concept of inflation persistence in macroeconomic theory. It begins with a definition of persistence, emphasizing the difference between reduced-form and structural persistence. It then examines a number of empirical measures of reduced-form persistence, considering the possibility that persistence may have changed over time. The paper then examines the theoretical sources of persistence, distinguishing “intrinsic” from “inherited” persistence, and deriving a number of analytical results on persistence. It summarizes the implications for persistence from the literatures on “sticky-information” models, learning models, and so-called “trend inflation models,” providing some new results throughout.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2009
  29. 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 0.26% on impact rise in private consumption, and a 0.43% impact rise in private investment. The effects are substantial, and die out slowly in the case of private consumption (0.63% cumulative impact after 3 years), but much faster in the case of private investment. A further disaggregation between wage and non-wage components reveals 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. Note that this is not due to the different weight on GDP of the two components, which have comparable values in our sample.
    Keywords: Fiscal policy, private consumption, panel vector autoregression.
    JEL: E62 C33
    Date: 2009–12
  30. By: Wandi Bruine de Bruin; Charles F. Manski; Giorgio Topa; Wilbert van der Klaauw
    Abstract: Survey measures of consumer inflation expectations have an important shortcoming in that, while providing useful summary measures of the distribution of point forecasts across individuals, they contain no direct information about an individual's uncertainty about future inflation. The latter is important not only for forecasting inflation and other macroeconomic outcomes, but also for assessing a central bank's credibility and effectiveness of communication. This paper explores the feasibility of eliciting individual consumers' subjective probability distributions of future inflation outcomes. ; In November 2007, we began administering web-based surveys to participants in RAND's American Life Panel. In addition to their point predictions, respondents were asked for their subjective assessments of the percentage chance that inflation will fall in each of several predetermined intervals. We find that our measures of individual forecast densities and uncertainty are internally consistent and reliable. Those who are more uncertain about year-ahead price inflation are also generally more uncertain about longer term price inflation and future wage changes. We find also that participants expressing higher uncertainty in their density forecasts make larger revisions to their point forecasts over time. Measures of central tendency derived from individual density forecasts are highly correlated with point forecasts, but they usually differ, often substantially, at the individual level. ; Finally, we relate our direct measure of aggregate consumer uncertainty to a more conventional approach that uses disagreement among individual forecasters, as seen in the dispersion of their point forecasts, as a proxy for forecast uncertainty. Although the two measures are positively correlated, our results suggest that disagreement and uncertainty are distinct concepts, both relevant to the analysis of inflation expectations.
    Keywords: Consumer surveys ; Inflation (Finance) ; Economic forecasting
    Date: 2009
  31. By: Mirdala, Rajmund
    Abstract: EU member countries are currently exposed to negative implications of the economic and financial crisis. In connection with this problem arises the question of an anti-cyclic role of an economic policy or more precisely the (regulatory) role of the government in the economy that seems to be the centre of discussions in the academic as well as economic policy sphere. The problem of a permanent deficiency of the general government budget stresses many “old” as well as “new” EU member countries. It significantly reduces an expansionary potential of the national fiscal policies. Because the economic crisis seems to be a very difficult problem due to its specific and complex features, it is necessary for the EU member countries to coordinate the process of the national stimulatory actions approving that would help the countries to avoid an undesired reallocation of resources outside the EU single market as well as the negative common competitive effects. In the paper we analyze the effects of fiscal policy shocks in the Czech republic, Hungary, Poland, the Slovak republic, Bulgaria and Romania in the period 2000-2008. Our objective is to estimate the effects of discretionary changes in fiscal policy (associated with an increase in government expenditures) as well as the role of automatic stabilizers (associated with an increase in tax revenues). To meet the objective we estimate vector autoregression (VAR) model. To check the robustness of the results we implement an identification scheme based on two approaches. The first, recursive approach, is based on the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. The second approach, structural VAR approach, is based on applying long-run restrictions to the reduced-form VAR model. From both identified true models we compute impulse-response functions to estimate the responses of real output, inflation and short term interest rates to the government expenditure and tax revenue shocks.
    Keywords: fiscal policy; government expenditure; tax revenue; unrestricted VAR; Cholesky decomposition; SVAR; structural shocks; impulse-response function
    JEL: C32 E62
    Date: 2009–10
  32. By: Carlos Carvalho; Niels Arne Dam
    Abstract: We estimate a multisector sticky-price model for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. For this purpose, we use a specification that allows us to extract information about the underlying cross-sectional distribution from aggregate data. Identification is possible because sectors play different roles in determining the response of aggregate variables to shocks at different frequencies: Sectors where prices are stickier are relatively more important in determining the low-frequency response. Estimating the model using only aggregate data on nominal and real output, we find that the inferred distribution of price stickiness is strikingly similar to the empirical distribution constructed from the recent microeconomic evidence on price setting in the U.S. economy. We also provide macro-based estimates of the underlying distribution for ten other countries. Finally, we explore our Bayesian approach to combine the aggregate time-series data with the microeconomic information on the distribution of price rigidity. Our results show that allowing for this type of heterogeneity is critically important to understanding the joint dynamics of output and prices, and it constitutes a step toward reconciling the extent of nominal price rigidity implied by aggregate data with the evidence from microeconomic data on price stickiness.
    Keywords: Prices ; Bayesian statistical decision theory ; Time-series analysis
    Date: 2009
  33. By: Maria-Grazia Attinasi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cristina Checherita (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christiane Nickel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper uses a dynamic panel approach to explain the determinants of widening sovereign bond yield spreads vis-à-vis Germany in selected euro area countries during the period end-July 2007 to end-March 2009, when the financial turmoil developed into a full-blown financial and economic crisis. Emphasis is given to the role of fiscal fundamentals and government announcements of substantial bank rescue packages. The paper finds that higher expected budget deficits and/or higher government debt ratios relative to Germany contributed to higher government bond yield spreads in the euro area during the analysed period. More importantly, the announcements of bank rescue packages have led to a re-assessment, from the part of investors, of sovereign credit risk, first and foremost through a transfer of risk from the private financial sector to the government. JEL Classification: E62, E43, G12.
    Keywords: Fiscal Policy, Sovereign Spreads, Fiscal Announcements.
    Date: 2009–12
  34. By: Selva Demiralp (Koc University); Kamil Yilmaz (Koc University)
    Abstract: This paper provides a dynamic analysis of the responsiveness of asset markets to monetary policy path revisions. In an era of increased transparency and gradualism in policy making, one might expect an increased response to path revisions in asset markets as the policy actions become more predictable over longer horizons. Using federal funds futures contracts to extract near-term path revisions, we find that the responsiveness of Treasury securities to path revisions is significantly asymmetric, increasing during cycles of tightenings and declining during easings. This is consistent with the earlier literature that documents asymmetric effects of monetary policy on output.Length: 34 pages
    Keywords: Asymmetric monetary policy; yield curve; federal funds futures
    JEL: E44 E52
    Date: 2009–12
  35. By: Jean-Philippe Cayen; Marc-André Gosselin; Sharon Kozicki
    Abstract: The workhorse DSGE model used for monetary policy evaluation is designed to capture business cycle fluctuations in an optimization-based format. It is commonplace to loglinearize models and express them with variables in deviation-from-steady-state format. Structural parameters are either calibrated, or estimated using data pre-filtered to extract trends. Such procedures treat past and future trends as fully known by all economic agents or, at least, as independent of cyclical behaviour. With such a setup, in a forecasting environment it seems natural to add forecasts from DSGE models to trend forecasts. While this may be an intuitive starting point, efficiency can be improved in multiple dimensions. Ideally, behaviour of trends and cycles should be jointly modeled. However, for computational reasons it may not be feasible to do so, particularly with medium- or large-scale models. Nevertheless, marginal improvements on the standard framework can still be made. First, pre-filtering of data can be amended to incorporate structural links between the various trends that are implied by the economic theory on which the model is based, improving the efficiency of trend estimates. Second, forecast efficiency can be improved by building a forecast model for model-consistent trends. Third, decomposition of shocks into permanent and transitory components can be endogenized to also be model-consistent. This paper proposes a unified framework for introducing these improvements. Application of the methodology validates the existence of considerable deviations between trends used for detrending data prior to structural parameter estimation and model-consistent estimates of trends, implying the potential for efficiency gains in forecasting. Such deviations also provide information on aspects of the model that are least coherent with the data, possibly indicating model misspecification. Additionally, the framework provides a structure for examining cyclical responses to trend shocks, among other extensions.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: E3 D52 C32
    Date: 2009
  36. By: Julio Davila (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CORE - Université Catholique de Louvain)
    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.
    Date: 2009–12
  37. By: Naqvi, Bushra; Rizvi, Syed Kumail Abbas
    Abstract: This paper aims to measure and compare the economic performance of four Asian economies who adopted Inflation Targeting (Indonesia, Philippines, South Korea and Thailand) against their six neighboring Asian non-targeting economies (China, Hong Kong, India, Malaysia, Singapore and Pakistan). Using the methodology of Ball and Sheridan, firstly, behavior of inflation, output growth and short term interest rate has been measured for both groups (Targeters vs. Non-Targeters) in pre and post IT adoption period in order to see whether performance has improved in targeting countries after the adoption of IT. Secondly, we try to find out whether Inflation Targeting has played any significant role in the changed behavior of these variables. Thirdly, we measure the effect of output gap and supply shock on inflation and see whether economic structure of these countries has changed between pre and post targeting period; and then we measure the role of IT in the structural change of these economies if there is any. The results force us to believe that economic performance has improved in all Asian economies in post targeting period. However, IT does not seem to play any significant role in this improvement of targeting countries. In addition to this, we find strong evidence that all variables showed strong reversion to mean suggesting that improved performance of variables today is in fact the outcome of poor economic performance in the past.
    Keywords: Inflation Targeting; Asian countries; Output gap; Targeters vs Non Targeters; Economic Performance
    JEL: E30 E31 E58 E52
    Date: 2009–06–01
  38. By: NR, Bhanumurthy; Kumawat, Lokendra
    Abstract: Though a large number of structural macroeconometric models have been estimated for India, the fact that all these are based on annual data limit their usefulness for short-term policy analysis, particularly in volatile periods of the type seen during last few quarters. Therefore the present paper builds up a short-term macroeconometric model for India using quarterly data. The model has reasonably good in-sample performance. One important feature of the model is use of quadratic relation between government expenditure and credit to private sector, which shows presence of both crowding in and crowding out effects, the latter dominating the former when expenditure is high enough. Some simulations are also carried out to analyse the impact of recent external shocks such as rise in global food and fuel prices and the global financial meltdown, on the Indian economy. The results show that the current slowdown in India’s growth predates the global price shock and the global financial crisis, and is more of a regular cyclical downturn. The global developments only further deepen the slowdown and prolong the recovery.
    Keywords: Structural model; External Shocks; India
    JEL: C51 C53 C52 E19
    Date: 2009–11
  39. By: Gabriel Ahlfeldt (Chair for Economic Policy, University of Hamburg); Wolfgang Maennig (Chair for Economic Policy, University of Hamburg); Tobias Osterheider
    Abstract: This article provides empirical evidence for the (anticipated) net costs and benefits of a common monetary policy that varies across regions depending on the industry mix. The paper is the first to approach the issue of the regional and sectoral effects of a common monetary policy by using empirical spatial models to analyze referenda. Here, the referenda examined are the 2000 and 2003 referenda held in Denmark and Sweden regarding participation in the EMU. We find that voters in regions with a high proportion of interest-sensitive sectors and low international integration tend to oppose participation in a currency union. The opposite is true for non-interest-sensitive sectors with relatively high integration. These findings are in line with the hypothesis of rational voters maximizing utility. Furthermore, perceived net costs are found to increase with distance from the European core and with the age of voters, indicating that a national currency represents an experience good. These results are robust to spatial dependencies and are not driven by broader forms of Euro-skepticism.
    Keywords: EMU, Euro, Regional & Sectoral Effects of Monetary Policy, Public Referenda, Denmark, Sweden
    JEL: E52 P16 R12
    Date: 2009
  40. By: Nicholas Oulton; Ana Rincon-Aznar
    Abstract: We employ the EU KLEMS database to estimate the real rate of return to capital in 14 countries (11in the EU, three outside the EU) in 10 branches of the market economy plus the market economy as awhole. Our measure of capital is an aggregate over seven types of asset: three ICT assets (computers,communications equipment, and software) and four non-ICT assets (machinery and equipment, nonresidentialstructures, transport equipment, and other). The real rate of return in the market economydoes not vary very much across countries, with the exception of Spain where it is exceptionally highand in Italy where it is exceptionally low. The real rate appears to be trendless in most countries.Within each country however, the rate varies widely across the 10 branches, often being implausiblyhigh or low. We also estimate the growth of capital services by two different methods: ex-post and exante,and the contribution of capital to output growth by three methods: ex-post, ex-ante and hybrid.Our implementation of the ex-ante method uses an estimate of the required rate of return for eachcountry instead of the actual, average rate of return to calculate user costs and also employs theexpected growth of asset prices rather than the actual growth. These estimates are derived fromexactly the same data as for the ex-post method, ie without any extraneous data being employed. Forestimating the contribution of capital to output growth, the ex-ante method uses ex-ante profit as theweight, while both the ex-post and the hybrid method use ex-post profit. We find that the threemethods produce very similar results at the market economy level. But differences are much larger atthe branch level, particularly between the ex-post and ex-ante methods.
    Keywords: Capital, rate of return, ex post, ex ante
    JEL: E22 E23 D
    Date: 2009–11
  41. By: Shaikh, Salman
    Abstract: This unique study discusses the theory of taxation in Islam and the role of Zakat in an Islamic economy. Zakat is a compulsory payment i.e. a tax in this sense paid to the government on one’s income and wealth. The Zakat rates are studied for their viability and effectiveness to fulfill fiscal needs of the government. Based on the evidence from many countries, it is argued that Zakat rates are substantial enough to generate the needed public finance given the large tax base and free the government from using seignorage and deficit financing. Its compulsory nature both as per law of the land and as per religion would ensure minimum tax evasion and its progressive and direct nature would effectively redistribute income. The effect of Zakat on the overall macroeconomy, the financial system, monetary system, property market, stock market, inflation, foreign debt, balance of payments, FDI and the on the development oriented variables like inequality and poverty are also discussed to give a holistic view of the effects of the proposed system.
    Keywords: Interest free economy; Public finance; Taxation; Inequality; Income redistribution; Islamic Economic System; fiscal policy; deficit financing.
    JEL: E62 H2 H3
    Date: 2009–12
  42. By: Takao Fujii (Graduate School of Economics, Kobe University)
    JEL: E62 H60
    Date: 2009–12
  43. By: David Andolfatto
    Abstract: I study a class of models commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to exogenous news events, but whose expected long-run return is independent of this information. I show that there are circumstances in which the nondisclosure of news by an asset manager is welfare-improving. When nondisclosure is infeasible, the framework admits a role for government debt. The theory is used to interpret the nondisclosure practices of reputable financial agencies and suggests caveats for legislation designed to promote financial market transparency.
    Keywords: Transparency ; Monetary policy
    Date: 2010
  44. By: Stefan Thurner (Dept. of Mathematics, University of Vienna); J. Doyne Farmer (Sante Fe Institute); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called "value investing," i.e. systematically attempting to buy underpriced assets. When funds do not borrow, the price fluctuations of the asset are normally distributed and uncorrelated across time. All this changes when the funds are allowed to leverage, i.e. borrow from a bank, to purchase more assets than their wealth would otherwise permit. During good times competition drives investors to funds that use more leverage, because they have higher profits. As leverage increases price fluctuations become heavy tailed and display clustered volatility, similar to what is observed in real markets. Previous explanations of fat tails and clustered volatility depended on "irrational behavior," such as trend fol­lowing. Here instead this comes from the fact that leverage limits cause funds to sell into a falling market: A prudent bank makes itself locally safer by putting a limit to leverage, so when a fund exceeds its leverage limit, it must partially repay its loan by selling the asset. Unfortunately this sometimes happens to all the funds simultaneously when the price is already falling. The resulting nonlinear feedback amplifies large downward price movements. At the extreme this causes crashes, but the effect is seen at every time scale, producing a power law of price disturbances. A standard (supposedly more sophisticated) risk control policy in which individual banks base leverage limits on volatility causes leverage to rise during periods of low volatility, and to contract more quickly when volatility gets high, making these extreme fluctuations even worse.
    Keywords: Systemic risk, Clustered volatility, Fat tails, Crash, Margin calls, Leverage
    JEL: E32 E37 G12 G14
    Date: 2010–01
  45. By: Buiter, Willem H.
    Abstract: A fall in house prices due to a change in its fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run. --
    Keywords: Wealth effect,house prices,speculative bubbles
    JEL: E2 E3 E5 E6 G1
    Date: 2009
  46. By: Alexandre Manuel Angelo da Silva; José Oswaldo Cândido Júnior
    Abstract: Este artigo mensura os impactos macroeconômicos dos gastos públicos (consumo e investimento as administrações públicas) nas principais economias da América Latina por meio do modelo cointegrado dos vetores autorregressivos. No longo prazo, de maneira geral, os investimentos públicos tendem a afetar positivamente o produto e o consumo das famílias, embora tenha apresentado uma relação de substitutibilidade com o investimento privado. No curto prazo, na maioria dos casos, os multiplicadores do consumo do governo com relação ao produto, consumo e investimento privados são positivos e significativos, embora de pequena magnitude. Já os multiplicadores do investimento público para a maioria dos países são estatisticamente não significativos. This paper measures the public expenditure macroeconomic impacts (public consumption and public investment) in the more important Latin American economies by cointegrated autoregressive vectors. In the long run, public investments affect positively output and private consumption, although it has showed a substitution relationship with private investments. In the short run, government consumption multipliers used to be positive and statistically significant, although it has showed low impact. However, government investment multipliers used not to be statistically significant
    Date: 2009–11
  47. By: Chanont Banternghansa; Michael W. McCracken
    Abstract: This paper presents empirical evidence on the disagreement among Federal Open Market Committee (FOMC) forecasts. In contrast to earlier studies that analyze the range of FOMC forecasts available in the Monetary Policy Report to the Congress, we analyze the forecasts made by each individual member of the FOMC from 1992 to 1998. This newly available dataset, while rich in detail, is short in duration. Even so, we are able to identify a handful of patterns in the forecasts related to i) forecast horizon; ii) whether the individual is a Federal Reserve Bank president, governor, and/or Vice Chairman; and iii) whether individual is a voting member of the FOMC. Additional comparisons are made between forecasts made by the FOMC and the Survey of Professional Forecasters.
    Keywords: Federal Open Market Committee ; Monetary policy ; Economic forecasting
    Date: 2009
  48. By: Michael Kühl
    Abstract: The aim of this paper is to discuss excess comovements for the Euro/US dollar and British pound/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by fundamentals. The results of the empirical analysis give evidence that excess comovements indeed exist. A long-run analysis on correlations can verify that the correlations dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply are linked. We found that money supply and prices play major roles. From the investigation of our exchange rate pair it becomes obvious that non-fundamental factors in exchange rates have an important meaning for modelling foreign exchange rates.
    Keywords: Foreign Exchange Market, DCC-GARCH, Excess Comovements
    JEL: E44 F31 G15
    Date: 2009–11–18
  49. By: Przystupa, Jan
    Abstract: Taking into account a large number of types of nominal and real exchange rates, while estimating the real equilibrium exchange rate, one should always remember that there is no a single, universal equilibrium exchange rate. A point value or a path of that exchange rate depends on the adopted definitions and assumptions as well as on the method and purpose of the analysis. However, a value added of each estimation of the equilibrium exchange rate is an answer, whether the economic policy causes upset or stabilisation of the economy. Moreover, in the period of discussion on the exchange rate of accession to ERM-2, showing an interval of the exchange rate where all values of the exchange rate ensure at least suboptimal behaviour of the economy may help to make a decision on the date of accession to ERM-2 that will minimise costs of retention of the exchange rate within a definite currency band. For Poland, estimated by the NATREX method the long-run real equilibrium exchange rate ensures the internal equilibrium with annual growth rates of GDP amounting to 4.1%, comprised of growth of consumption by 4% p.a., investment by 8.7%, volume of exports by 8.5% and volume of imports by 8.1% p.a. Estimating on the ground of real exchange rates an approximate value of nominal exchange rates, one can state that the long-term equilibrium in the economy is ensured with the exchange rate of 3.80-3.90 zlotys for 1 euro. The current exchange rate will probably approach the equilibrium exchange rate at the turn of 2010 and 2011, and it will remain near that level over 5-6 quarters. This means that in that period cost of retention of the PLN exchange rate within a narrow band of fluctuations is relatively the least. The next period where the current exchange rate should approach the optimal exchange rate is 2014. Then, also in the medium term, the exchange rate of zloty should be comprised within the interval of 3.80-3.90 (assuming the stable exchange rate of USD/EUR=1.40)
    Keywords: equilibrium exchange rate; NATREX
    JEL: E52 F31
    Date: 2009–10–04
  50. By: David Laidler (C.D. Howe Institute)
    Abstract: Recent efforts by the Bank of Canada to “talk down” the dollar in its public statements have led to public perceptions that the Bank is considering action to weaken it.In permitting this response to gather momentum, the Bank has stepped onto a slippery slope, because if talk seems to be failing, people might reasonably expect direct intervention in the exchange market to follow.
    Keywords: Bank of Canada, inflation rate, exchange rate
    JEL: E58 E31 F31 E4
    Date: 2009–12
  51. By: Anh Ngoc Nguyen (Development and Policies Research Center (DEPOCEN), Vietnam); Nhat Duc Nguyen (Development and Policies Research Center (DEPOCEN), Vietnam); Chuc Dinh Nguyen (Aston University, UK); Nguyen Thang (Center for Analysis and Forecasting, Vietnam)
    Abstract: Thanks to the high economic growth rate during the last 20 years, Vietnam is expected to join the middle-income country group by around 2010. The global financial crisis has severely impacted many countries, including Vietnam. The crisis together with the recent turbulence of macroeconomic development in the last two years has opened up several weakness of the economy, and begged the question whether Vietnam can continue her present course of economic development in the face of a changing world? This paper is an initial attempt to answer this question by (i) reviewing the economic development of Vietnam during the last 20 years, (ii) analyzing the impacts of the crisis on Vietnam and the policy responses by the government; and (iii) suggests some medium-term prospects and policy implications for the country.
    Keywords: Global crisis, Vietnam, growth, GDP decomposition
    JEL: E21 E22 E32 E60
    Date: 2010
  52. By: Francesco Caselli; Guy Michaels
    Abstract: We use variation in oil output among Brazilian municipalities to investigate the effects of resourcewindfalls. We find muted effects of oil through market channels: offshore oil has no effect onmunicipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDPcomposition. However, oil abundance causes municipal revenues and reported spending on a range ofbudgetary items to increase, mainly as a result of royalties paid by Petrobras. Nevertheless, surveybasedmeasures of social transfers, public good provision, infrastructure, and household incomeincrease less (if at all) than one might expect given the increase in reported spending. To explain whyoil windfalls contribute little to local living standards, we use data from the Brazilian media andfederal police to document that very large oil output increases alleged instances of illegal activitiesassociated with mayors.
    Keywords: Brazil, corruption, Dutch disease, fiscal windfalls, natural resources and oil
    JEL: E62 H11 H40 H71 H72 H75 H76 O11 O13 O32 O33
    Date: 2009–12
  53. By: Bitros, George
    Abstract: The models Feldstein and Rothschild (1974) and Jorgenson (1974) adopted to highlight the nature of the replacement ratio were identical. Yet, even though the theorems they derived from them were complementary and reinforced each other, the authors reached diametrically opposite conclusions. Digging deeper into the controversy that erupted, it emerges that the staying power of the theorem, according to which replacement is a constant propor-tion of the outstanding capital stock, may be attributed to the following reasons. The discernible shift from realism to instrumentalism in the methodology of economics; Its operational advantages; The data that accumulated, thus facilitating research without having to compute capital stock series from scratch; The inertia of the status quo, which is sustained by the absence of a process to decide when a theorem is in conflict with experience and should be set aside, and lastly the lack of a model leading to a more useful theorem than the one un-der consideration. In this light it is concluded that the time has come for research efforts to be directed towards constructing and testing models in which the useful life of capital is deter-mined endogenously in the presence of embodied technological change.
    Keywords: Proportional replacement hypothesis; renewal theory; durability; aggregation
    JEL: E22
    Date: 2010–01–07
  54. By: Ulrich Fritsche (Department for Socioeconomics, University of Hamburg); Ullrich Heilemann (Faculty of Economics, University of Leipzig)
    Abstract: The “Gemeinschaftsdiagnose” [Joint Diagnosis (JD)] is the most influential semi-annual mac-roeconomic forecast in Germany. Jointly produced by up to six institutes, its accuracy as well as the large number of involved participants is often criticised. This study examines the JD’s growth and inflation forecasts from 1970 to 2007, including most of the contributions of the forecasts submitted by the five institutes at the start of the JD. Four questions are addressed: (i) Are these forecasts unbiased and efficient? (ii) How do results change if we presume an asymmetric loss function? (iii) Are any of the institutes more accurate than the JD? Are five/six institutes necessary and at what cost? (iv) Do the institutes make strategic forecasts to influence the JD forecast? Results show that there is no strong evidence of bias or inefficiency of the institutes’ forecasts and no evidence of asymmetric loss functions. Five institutes are not necessary, but it is very hard to predict the redundant institutes; however, the loss of accu-racy by employing only two is small.
    Keywords: Forecast accuracy, joint forecasts, strategic forecast behaviour
    JEL: E37 C53 D72
    Date: 2010–01
  55. By: Andres Erosa; Luisa Fuster; Diego Restuccia
    Abstract: Despite mandatory parental leave policies being a prevalent feature of labor markets in developed countries, their aggregate effects in the economy are not well understood. To assess their quantitative impact, we develop a general equilibrium model of fertility and labor market decisions that builds on the labor matching framework of Mortensen and Pissarides (1994). We find that females gain substantially with generous policies but this benefit occurs at the expense of a reduction in the welfare of males. Leave policies have important effects on fertility, leave taking decisions, and employment. These effects are mainly driven by how the policy affects bargaining -- young females anticipate future states with higher threat points induced by the policy. Because the realization of these states depend on the decisions of females to give birth and take a leave, leave policies effectively subsidize fertility and leave taking. We also find that generous paid parental leaves can be an effective tool to encourage mothers to spend time with their children after giving birth.
    Keywords: human capital; labor market equilibrium; parental leave policies; fertility; temporary separations
    JEL: E24 E60 J2 J3
    Date: 2009–12–30
  56. By: Rodrigo Cerda. (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: We study the role of fiscal expenditure during episodes of economic crises using one century data from 20 Latin American countries. We use output drops as way of indicating the irruption of economic crises and we are able to document episodes of large output drops and large duration of economic crises, which are characteristics that vary considerably among countries. We study the duration of crises by means of count data and hazard models while we study the intensity of the crisis by means of growth regressions. Our main findings suggest that fiscal expenditure has low power to shorten economic crises but it might act as an effective instrument to smooth output-drops during crises.
    Keywords: Economic Crisis, Fiscal Expenditure, Latin America.
    JEL: E62 H50 N16
    Date: 2009
  57. By: Francisco Gomes (London Business School and CEPR); Alexander Michaelides (London School of Economics, Central Bank of Cyprus, CEPR and FMG); Valery Polkovnichenko (University of Texas at Dallas)
    Abstract: We utilize an overlapping generations model with endogenous production and incomplete markets to quantify the distortionary costs associated with financing the increase in government expenditures directed to investments in the private sector in 2008 and 2009 (also known as ‘the bailout’), and its differential impact on different groups of the population (in the USA). In our baseline calibration, this distortion corresponds to a loss of approximately $300 billion dollars in total household consumption. For plausible alternative assumptions regarding both the expected and actual duration of this increase in expenditures, or the willingness of foreign institutions and/or investors in absorbing additional government debt, this number can increase to $800 billion. We find that the cost falls more dramatically on those households which are either older and/or wealthier. Retirees face approximately 50% of the cost, as younger agents still expect to be alive when the economy has returned to its steady-state. Across wealth groups, the top 25% of the wealth distribution bears almost two thirds of the cost.
    Keywords: Fiscal Policy, tax distortions, bailout, incomplete markets
    JEL: E21 E62 G12
    Date: 2009–12
  58. By: Che, Natasha Xingyuan
    Abstract: The sectoral composition of US economy has shifted dramatically in the recent decades. At the same time, knowledge and information capital has become increasingly important in modern production process. This paper argues that a ready explanation for the recent sectoral structural change lies in the difference of intangible capital accumulation across sectors. In the two-sector model of the paper, as the importance of intangible capital increases, labor is shifted from direct goods production to creating sector-specific intangible capital. In the process, the real output and employment shares of the high-intangible sector increase. The model generates sectoral composition change and labor productivity trend that reasonably match the data. It also shows that conventional labor productivity calculation understates the "true" productivity in sectoral goods production. The underestimation is greater for the growing sector. The empirical regressions of the paper indicate a positive and significant association between intangible capital investment intensity and firms' future output and employment growth. The correlation is higher for firms in the growing sector. At the industry level, controlling for industry human capital intensity, physical capital intensity and IT investment level, intangible capital intensity is positively correlated with future industry real output and employment share growth. These findings are consistent with the implications of the model. The paper also presents evidence suggesting that most growing service industries are intangible capital intensive. Thus the theory developed here can also help to reconcile the expansion of the service sector and the seemingly low productivity of the sector.
    Keywords: Intangible Capital; Structural Change; Knowledge Economy; Firm Investment;
    JEL: E22 E17 E23
    Date: 2009–12–29
  59. By: Smant, David / D.J.C.
    Abstract: Many studies have reported on various empirical tests of the expectations theory of the term structure of interest rates (ET). Although a common perception seems to be that the ET is rejected by the empirical tests, the overall evidence is actually mixed between frequent support and occasional rejection of the ET and requires careful interpretation. The discussion and empirical results presented in this paper show that after taking into account the weaknesses of the perfect-foresight-with-error expectations hypothesis and taking into account the coefficient bias caused by term premium and forecast errors, the expectations theory fits the term structure data very well.
    Keywords: Expectations theory; term structure of interest rates; survey expectations; term premium
    JEL: E43 G10
    Date: 2010–01–06
  60. By: Che, Natasha Xingyuan
    Abstract: The sectoral composition of the US economy has shifted dramatically in the recent decades. At the same time, knowledge and information capital has become increasingly important in modern production processes. This paper argues that a ready explanation for the recent sectoral structural change lies in the difference of intangible capital accumulation across sectors. In the two-sector model of the paper, as the importance of intangible capital increases, labor is shifted from direct goods production to creating sector-specific intangible capital. In the process, the real output and employment shares of the high-intangible sector increase. The model generates sectoral composition change and labor productivity trend that reasonably match the data. It also shows that conventional labor productivity calculation understates the "true" productivity in sectoral goods production. The underestimation is greater for the growing sector. The empirical regressions of the paper indicate a positive and significant association between intangible capital investment intensity and firms' future output and employment growth. The correlation is higher for firms in the growing sector. At the industry level, controlling for industry human capital intensity, physical capital intensity and IT investment level, intangible capital intensity is positively correlated with future industry real output and employment share growth. These findings are consistent with the implications of the model. The paper also presents evidence suggesting that most growing service industries are intangible capital intensive. Thus the theory developed here can also help to reconcile the expansion of the service sector and the seemingly low productivity of the sector.
    Keywords: Intangible Capital; Structural Change; Knowledge Economy; Firm Investment;
    JEL: E22 E17 E23
    Date: 2009–12–29
  61. By: B. Ravikumar; Enchuan Shao
    Abstract: We examine the quantitative effect of search frictions in product markets on asset price volatility. We combine several features from Shi (1997) and Lagos and Wright (2002) in a model without money. Households prefer special goods and general goods. Special goods can be obtained only via a search in decentralized markets. General goods can be obtained via trade in centralized competitive markets and via ownership of an asset. There is only one asset in our model that yields general goods. The asset is also used as a medium of exchange in the decentralized market to obtain the special goods. The value of the asset in facilitating transactions in the decentralized market is determined endogenously. This transaction role makes the asset pricing implications of our model different from those in the standard asset pricing model. Our model not only delivers the observed average rate of return on equity and the volatility of the equity price, but also accounts for most of the spectral characteristics of the equity price.
    Keywords: Financial markets; Market structure and pricing
    JEL: E44 G12
    Date: 2010
  62. By: Shaikh, Salman
    Abstract: This paper suggests an alternate approach to corporate finance in an interest free economy by looking beyond practiced Islamic finance and suggesting alternatives for corporate finance in sourcing funds i.e. i) Ijara with embedded options, ii) limited liability partnership, iii) equity modes like Musharakah and Mudarabah iv) income bonds and v) convertible income bonds. It also suggests alternatives for corporate finance in using funds i.e. i) Islamic income funds, ii) Islamic REITs, iii) Treasury Bonds, iv) income bonds v) convertible income bonds, vi) foreign currency reserves, vii) making strategic expansion, and viii) equity investments in other companies. It also suggests methods of valuation by suggesting an alternate means of pricing capital in interest free economy and use of appropriate discount rate i.e. Nominal GDP growth rate in public finance and corporate finance in CAPM, dividend discount model, project valuation, calculating NPV, valuing income bonds and stocks. It also discusses how the problems of scarcity of capital will be solved and alternatives for insurance in an interest free economy.
    Keywords: Islamic corporate finance; pricing of capital; Islamic public finance; scarcity of capital; Interest free economy; Interest free finance; Zakat; Usury; Time value of money; CAPM; Project evaluation; NPV; FCF
    JEL: E44 G00 G30
    Date: 2009–12
  63. By: Joachim Inkmann (The University of Melbourne and Netspar); Paula Lopes (London School of Economics, FMG and Netspar); Alexander Michaelides (Central Bank of Cyprus, London School of Economics, CEPR, FMG, and Netspar)
    Abstract: Using UK microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, effects in a life-cycle model of annuity and life insurance demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data. For stockholders, a relatively strong bequest motive is sufficient to simultaneously generate balanced portfolios and low annuity demand.
    Keywords: Annuities, portfolio choice, life insurance, bequest motive
    JEL: E21 H00
    Date: 2009–10
  64. By: Leo Krippner; Leif Anders Thorsrud (Reserve Bank of New Zealand)
    Abstract: We forecast economic growth in New Zealand using yield curve data within simple statistical models; i.e. typical OLS relationships that have been well-established for other countries, and related VAR specifcations. We find that the yield curve data has significant forecasting power in absolute terms and performs well relative to various benchmarks. Specifications including measures of the yield curve slope produce the best forecasts overall. Our results also highlight the benefits of fully exploiting the timeliness of yield curve information (i.e it is always available and up to date).
    JEL: E43 E44 E47
    Date: 2009–12
  65. By: Mamatzakis, E; Milidonis, A; Christodoulakis, G
    Abstract: Using a unique dataset for the five major UK insurance industries, we adopt a novel approach in the insurance literature and model the evolution of their underwriting returns as Regime Switching processes, which outperforms standard approaches. This produces estimates of time-varying conditional regime probabilities and captures the non-normality present in the data, thus allowing the study of joint dynamics of industry regime probabilities using Dynamic Panel and Panel Vector Auto-Regressions and their attribution to economic factors. Our evidence uncovers high/low volatility regime switching for all industries, where their joint evolution is mainly attributed to industry specific factors. Impulse response functions and variance decompositions from a panel VAR identify a plethora of causal links among our variables and their underlying persistence of interaction, showing that shocks from changes in claims assert a positive impact on the probability of high volatility regime.
    Keywords: Insurance; Reinsurance; Business Cycles; Regime Switching; Panel VAR
    JEL: E30 G30 C1
    Date: 2009–12
  66. By: Jacques Kibambe (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria); charlotte du Toit (Department of Economics, University of Pretoria)
    Abstract: In this research article, we investigate the improved modelling ability and the outstanding policy advocacy of infusing health and education in sectoral growth equations of the South African economy. Our findings not only include improved and dependable modelling results but also provide distinct estimates of the returns on investment in health and education per sector using Iterative Seemingly Unrelated Regressions techniques. Additionally, this paper provides a theoretical description of the productivity effects of HIV/AIDS using sectoral equations. Also, this research investigates the diffusion process in the technological progress at the South African sectoral level and its impact on the study of social ingredients. Using a fixed effects model, some features of the diffusion process are explained.
    Keywords: Coefficient of effectiveness, Diffusion process, Fixed effects model, Seemingly Unrelated Regressions
    JEL: E23 I39
    Date: 2009–10
  67. By: Ulrike Stein
    Abstract: According to the National Accounts the German savings rate has increased continuously since 2001 after it fell continuously from 1991. This increase was rather unexpected and hence it is interesting to analyse whether the savings rate of the total population has increased or whether the increase in the aggregated savings rate has been due to the fact that the savings behaviour of certain socio-economic groups developed differently during the last decade. For this project data from the German Socio-Economic Panel (SOEP) is used for the years 1995 to 2007. The analysis of household’s savings rates differentiated according to socio-economic characteristics shows, that the savings rates develop differently depending on the respective householder’s labour market status. The examination of savings rates of different age groups does not provide conclusive results. Finally, the increase in the aggregate savings rate is attributed alone to the changed savings behaviour of the households in the top quartile of the income distribution whereas the savings rates of the other quartiles tend to have declined.
    Keywords: Sparquoten, Haushalte, Sozioökonomische Gruppen, SOEP
    JEL: E21 H31
    Date: 2009

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