nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒01‒30
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Lending Relationships and Monetary Policy By Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy,
  2. Commentary on Policy at the Zero Lower Bound By Christopher A. Sims
  3. Jointly Optimal Monetary and Fiscal Policy Rules under Borrowing Constraints By Michael Kumhof; Huixin Bi
  4. An SVAR Analysis of Monetary Policy Dynamics and Housing Market Responses in Australia By IKM Mokhtarul Wadud; Omar HMN Bashar; Huson Joher Ali Ahmed
  5. On the Sources of Oil Price Fluctuations By Deren Unalmis; Ibrahim Unalmis; D. Filiz Unsal
  6. Monetary cycles, financial cycles, and the business cycle By Tobias Adrian; Arturo Estrella; Hyun Song Shin
  7. Assessing McCallum and Taylor rules in a cross-section of emerging market economies By Mehrotra, Aaron; Sánchez-Fung, José R.
  8. The reception of public signals in financial markets – what if central bank communication becomes stale? By Michael Ehrmann
  9. Determinants of inflation and price level differentials across the euro area countries. By Malin Andersson; Klaus Masuch; Marc Schiffbauer
  10. “Lost Decade†in Translation:What Japan’s Crisis could Portend about Recovery from the Great Recession By Murtaza H. Syed; Kiichi Tokuoka; Kenneth Kang
  11. Financial intermediation, asset prices, and macroeconomic dynamics By Tobias Adrian; Emanuel Moench; Hyun Song Shin
  12. Measures of Inflation in India: Issues and Perspectives By Deepak Mohanty
  13. The Demand for Money in Cote d’Ivoire: Evidence from the Cointegration Test. By Drama, Bedi Guy Herve; Yao , Shen
  14. Inflation in Tajikistan:Dynamic and Forecasting Analysis and Monetary Policy Challenges By Fahad Alturki; Svetlana Vtyurina
  15. The relationship between output growth and inflation: Evidence from Turkey By Omay, Tolga; Aluftekin, Nilay; Karadagli, Ece C.
  16. The Leverage Cycle By John Geanakoplos
  17. Non-uniform staggered prices and output persistence By Söderberg, Johan
  18. The Impact Of The Global Crisis on Canada: What Do Macro-Financial Linkages Tell Us? By Natalia Barrera; Rupa Duttagupta
  19. Stochastic Dynamics and Matching in the Old Keynesian Economics: A Rationale for the Shimer's Puzzle By Marco Guerrazzi
  20. How Central Should the Central Bank Be? By Alan S. Blinder
  21. Common factors in small open economies: inference and consequences By Pablo A. Guerron-Quintana
  22. The Housing Cycle in Emerging Middle Eastern Economies and its Macroeconomic Policy Implications By Samya Beidas-Strom; Weicheng Lian; Ashwaq Maseeh
  23. The measurement of rent inflation By Jonathan McCarthy; Richard W. Peach
  24. Central Bank Independence and Budget Deficits in Developing Countries: New Evidence from Panel Data Analysis By Yannick Lucotte
  25. Composition Bias and Italian Wage Rigidities over the Business Cycle By Isabella David
  26. Dollarization as a Signaling Device By Krzysztof Makarski
  27. Solving the Present Crisis and Managing the Leverage Cycle By John Geanakoplos
  28. Money and finance: the heterodox views of R. Clower, A. Leijonhufvud and H. Minsky By Elisabetta De Antoni
  29. United Kingdom Eurozone Entry Scenarios Evaluated By John Ryan
  30. Monetary Regimes in Post-Communist Countries. Some Long-Term Reflections By Nikolay Nenovsky
  31. D and Z in ROPE – Will the Real Keynes Please Stand Up? By Jochen Hartwig
  32. The 2008 Financial Crisis and Taxation Policy By Thomas Hemmelgarn; Gaëtan Nicodème
  33. Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations By Guido Menzio; Shouyong Shi
  34. Canada's Potential Growth: Another Victim of the Crisis? By Marcello M. Estevão; Evridiki Tsounta
  35. The Evolution of Education: A Macroeconomic Analysis By Diego Restuccia; Guillaume Vandenbroucke
  36. Skilled and Unskilled Wages in a Globalizing World, 1968-1998 By Davin Chor
  37. Cognitive Issues in Policy Making By Akira IIDA
  38. SINGAPORE'S BEVERIDGE CURVE- A Comparative Study of the Unemployment and Vacancy Relationship for Selected East Asian Countries By Edward Teo; Shandre M. Thangavelu; Elizabeth Quah
  39. Promarket reforms and allocation of capital in India By Desai, Sameeksha; Eklund, Johan; Högberg, Andreas
  40. Have Lifecycle Consumption and Income Patterns in the Philippines Changed between 1994 and 2002? By Rachel H. Racelis; J.M. Ian Salas
  41. Consumption, Income, and Intergenerational Reallocation of Resources- Application of NTA in the Philippines, 1999 By J.M Ian S. Salas; Rachel H. Racelis
  42. The Measurement and Trends of Unemployment in Indonesia- The Issue of Discouraged Workers By Daniel Suryadarma; Asep Suryahadi; Sudarno Sumarto
  43. A Shred of Credible Evidence on the Long Run Elasticity of Labor Supply By Orley Ashenfelter; Kirk B. Doran; Bruce Schaller
  44. A Note on Defining the Dependent Population Based on Age By Rachel H. Racelis; J.M. Ian S. Salas

  1. By: Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy, (,
    Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.
    Keywords: Endogenous Banking Spread; Credit Markets; Cost Chanell of Monetary Transmission; Firm-bank Relationships
    JEL: E44 E52 G21
    Date: 2010–01–21
  2. By: Christopher A. Sims (Princeton University)
    Abstract: Several aspects of the difficulties of policy at the zero lower bound are discussed: The difficulty of credible commitment to higher future inflation, as most New Keynesian models imply is necessary; the need for fiscal and monetary policy coordination; the pitfalls in the taking of quasi-fiscal actions by the central bank.
    Keywords: central banks, monetary policy, keynesian economics, inflation
    JEL: E42 E50 E60 G21
    Date: 2010–01
  3. By: Michael Kumhof; Huixin Bi
    Abstract: We study the welfare properties of an economy where both monetary and fiscal policy follow simple rules, and where a subset of agents is borrowing constrained. The optimized fiscal rule is far more aggressive than automatic stabilizers, and stabilizes the income of borrowingconstrained agents, rather than output. The optimized monetary rule features super-inertia and a very low coefficient on inflation, which minimizes real wage volatility. The welfare gains of optimizing the fiscal rule are far larger than the welfare gains of optimizing the monetary rule. The preferred fiscal instruments are government spending and transfers targeted to borrowing-constrained agents.
    Keywords: Borrowing , Economic models , External shocks , Fiscal policy , Monetary policy , Welfare ,
    Date: 2009–12–28
  4. By: IKM Mokhtarul Wadud; Omar HMN Bashar; Huson Joher Ali Ahmed
    Abstract: This paper examines the impact of monetary policy and a range of sector-specific and macroeconomic shocks on the Australian housing market using quarterly data for a period of 1974-2008. The paper develops a structural vector autoregressive (SVAR) model based on contemporaneous restrictions to analyse the dynamics of these shocks. The results indicate that supply of new houses in Australia rises with higher real house prices; and that house prices rise and fall with higher inflation rate and interest rate, respectively. Dynamics of the impulse responses reveal significant effect of monetary policy on new house constructions, real house prices, material costs and inflation. Results also suggest that housing output, real house prices and interest rates respond significantly to shocks to housing supply, housing demand and to a number of other variables. These results are expected to shed some lights on the current policy environment pertaining to the Australian housing sector.
    Keywords: Monetary transmission, Housing market, Structural VAR
    JEL: R31 E52 E62 C51
    Date: 2009–12–22
  5. By: Deren Unalmis; Ibrahim Unalmis; D. Filiz Unsal
    Abstract: Analyzing macroeconomic impacts of oil price changes requires first to investigate different sources of these changes and their distinct effects. Kilian (2009) analyzes the effects of an oil supply shock, an aggregate demand shock, and a precautionary oil demand shock. The paper's aim is to model macroeconomic consequences of these shocks within a new Keynesian DSGE framework. It models a small open economy and the rest of the world together to discover both accompanying effects of oil price changes and their international transmission mechanisms. Our results indicate that different sources of oil price fluctuations bring remarkably diverse outcomes for both economies.
    Keywords: Demand , Economic models , External shocks , Fiscal policy , Inflation targeting , Monetary policy , Oil prices , Oil production , Price increases , Productivity , Supply ,
    Date: 2009–12–28
  6. By: Tobias Adrian; Arturo Estrella; Hyun Song Shin
    Abstract: One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle.
    Keywords: Monetary policy ; Intermediation (Finance) ; Interest rates ; Forecasting ; Business cycles
    Date: 2010
  7. By: Mehrotra, Aaron (BOFIT); Sánchez-Fung, José R. (BOFIT)
    Abstract: The paper estimates McCallum and Taylor monetary policy reaction functions, and hybrids mixing instruments and targets from the two frameworks, for 20 emerging market economies. McCallum-Taylor specifications with an interest rate instrument and a nominal income gap target perform better than benchmark Taylor rules in describing monetary policy in inflation targeting economies. Estimating reaction functions for economies operating monetary and exchange rate targeting regimes produces mixed results, often revealing a lean with the wind behaviour. Instrument smoothing is a feature in the monetary base and in the interest rate reaction functions, but the exchange rate is not consistently significant. The results from the econometric analysis are robust to using alternative estimators.
    Keywords: McCallum and Taylor rules; nominal feedback rule; monetary policy; inflation targeting; emerging markets
    JEL: E52 E58 F41
    Date: 2010–01–21
  8. By: Michael Ehrmann (European Central Bank)
    Abstract: How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to acroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses.
    Keywords: public signals, inflation reports, monetary policy, interest rates, announcement effects, co-ordination of beliefs, Bank of England
    JEL: E58 E43 G12 G14
    Date: 2009
  9. By: Malin Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Klaus Masuch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marc Schiffbauer (University of Bonn, Regina-Pacis-Weg 3, D-53113 Bonn, Germany.)
    Abstract: This paper analyses the determinants of inflation differentials and price levels across the euro area countries. Dynamic panel estimations for the period 1999-2006 show that inflation differentials are primarily determined by cyclical positions and inflation persistence. The persistence in inflation differentials appears to be partly explained by administered prices and to some extent by product market regulations. In a cointegrating framework we find that the price level of each euro area country is governed by the levels of GDP per capita. JEL Classification: E32, E52, E43, F2.
    Keywords: inflation differentials, inflation persistence, price level, convergence.
    Date: 2009–12
  10. By: Murtaza H. Syed; Kiichi Tokuoka; Kenneth Kang
    Abstract: Is the recovery from the global financial crisis now secured? A strikingly similar crisis that stalled Japan's growth miracle two decades ago could provide some clues. This paper explores the parallels and draws potential implications for the current global outlook and policies. Japan's experiences suggest four broad lessons. First, green shoots do not guarantee a recovery, implying a need to be cautious about the outlook. Second, financial fragilities can leave an economy vulnerable to adverse shocks and should be resolved for a durable recovery. Third, well-calibrated macroeconomic stimulus can facilitate this adjustment, but carries increasing costs. And fourth, while judging the best time to exit from policy support is difficult, clear medium-term plans may help.
    Keywords: Banking crisis , Banking sector , Central bank policy , Demand , Economic recovery , Financial crisis , Fiscal policy , Global Financial Crisis 2008-2009 , International financial system , Japan , Liquidity management , Monetary policy , Private sector , Public investment ,
    Date: 2009–12–22
  11. By: Tobias Adrian; Emanuel Moench; Hyun Song Shin
    Abstract: Fluctuations in the aggregate balance sheets of financial intermediaries provide a window on the joint determination of asset prices and macroeconomic aggregates. We document that financial intermediary balance sheets contain strong predictive power for future excess returns on a broad set of equity, corporate, and Treasury bond portfolios. We also show that the same intermediary variables that predict excess returns forecast real economic activity and various measures of inflation. Our findings point to the importance of financing frictions in macroeconomic dynamics and provide quantitative guidance for preemptive macroprudential and monetary policies.
    Keywords: Macroeconomics ; Intermediation (Finance) ; Assets (Accounting) ; Forecasting
    Date: 2010
  12. By: Deepak Mohanty
    Abstract: A review of the various primary measures of inflation with a particular reference to the divergence between WPI and CPI. Focus is also given on different secondary (derived) measures of inflation, particularly core inflation, and end the discussion with some thoughts on the way forward. [Speech at the Conference of Indian Association for Research in National Income and Wealth (IARNIW)].
    Keywords: national income, wealth, whole sale price index, consumption, expenditure, data, income, prices, crude prices, consumer prices indices, inflation, WPI, CPI, Indian, central banks, monetary policy, prices, primary measures, Keynes,
    Date: 2010
  13. By: Drama, Bedi Guy Herve; Yao , Shen
    Abstract: This paper demonstrates that there is a long run equilibrium relationship between money supply 〖(M〗_1) and its main determinants, real income (GDP) and interest rate in Cote d’Ivoire. In order to investigate long-term relationship among these variables, we use Juselius and Johansen cointegration test with time series data covering the period of 1980-2007. The results show that there is long-term relationship among these variables as well as the linkage between them. Base from this result we found that only real money balances 〖(M〗_1) has significant long -run economic impact of variations in monetary policy in Cote d’Ivoire. However, the study also revealed that the effect of aggregate 〖(M〗_2) is not so stable linking with it determinants.
    Keywords: Cointegration test; Money demand
    JEL: E52
    Date: 2010–01–19
  14. By: Fahad Alturki; Svetlana Vtyurina
    Abstract: This paper attempts to explain short- and long-term dynamics of-and forecast-inflation in Tajikistan using the Vector Error Correction Model (VECM) and Autoregressive Moving Average Model (ARMA). By analyzing different transmission channels through the VECM, we were able to evaluate their relative dominance, magnitude, and speed of transition to the equilibrium price level, with the view of identifying those policy tools that will enhance the effectiveness of monetary policy. We found that excess supply of broad money is inflationary in both the short and long term. The dynamic analysis also demonstrates that the exchange rate and international inflation have a strong impact on local prices. Available monetary instruments, such as the refinancing rate, have proven to be ineffective. Therefore, the Tajik monetary authority could greatly benefit from enhancing its monetary instruments toolkit, including by developing the interest rate channel, to improve its monetary policy execution and to achieve stable inflationary conditions.
    Date: 2010–01–19
  15. By: Omay, Tolga; Aluftekin, Nilay; Karadagli, Ece C.
    Abstract: In this study, a bi-variate Generalized Autoregressive Conditional Heteroscedasticty model is used in order to investigate the Granger causality relationships between output growth, inflation rate and their uncertainties. Our test results show that the existence of Granger-causality is observed from nominal uncertainty to inflation, from nominal uncertainty to real uncertainty, from output growth to real uncertainty, from output growth to nominal uncertainty and from inflation to nominal uncertainty. These findings prove that theoretical predictions of Cuikerman and Meltzer (1986), Okun (1971) and Friedman (1977) are valid for the period 1986:6-2007:1 for Turkey. On the other hand, ‘Short-run Phillips Curve’ and ‘Taylor Effect’ have proven empirically to be invalid for Turkey for this sample period. Moreover, we deduce that Turkish inflation is affected by the output growth through the nominal uncertainty channel.
    Keywords: Inflation; output growth; uncertainty; Granger-Causality; bi-variate GARCH.
    JEL: C32 E31 E00
    Date: 2009–09–10
  16. By: John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: Equilibrium determines leverage, not just interest rates. Variations in leverage cause fluctuations in asset prices. This leverage cycle can be damaging to the economy, and should be regulated.
    Keywords: Leverage, Collateral, Cycle, Crisis, Regulation
    JEL: E3 E32 G12
    Date: 2009–07
  17. By: Söderberg, Johan (Department of Economics)
    Abstract: Staggered prices are a fundamental building block of New Keynesian dynamic stochastic general equilibrium models. In the standard model, prices are uniformly staggered but recent empirical evidence suggest that deviations from uniform staggering are common, This paper analyzes how synchronization of price changes affects the response to monetary policy shocks. I find that even large deviations from uniform staggering have small effects on the response in output. Aggregate dynamics in a model of uniform staggering may serve well as an approximation to a more complicated model with some degree of synchronization in price setting.
    Keywords: Price setting; Staggering; Synchronization; Persistence
    JEL: E31 E32
    Date: 2010–01–21
  18. By: Natalia Barrera; Rupa Duttagupta
    Abstract: This paper builds a Bayesian VAR estimation model of growth for Canada, by focusing specifically on the role of external and domestic financial indicators, including credit conditions. A variance decomposition shows that financial conditions explain one-third of the total variability in Canada's real GDP growth, although changes in U.S. real GDP growth still account for a larger share of volatility in Canadian growth. A macro-financial conditions index built from the VAR's impulse responses shows that U.S. real GDP growth and lending standards will increasingly bear on Canada's growth, implying that a normalization of the U.S. economic and financial conditions is key for a sustained recovery in Canada.
    Keywords: Bank credit , Canada , Credit controls , Economic forecasting , Economic growth , Economic models , External sector , Financial crisis , Global Financial Crisis 2008-2009 , Gross domestic product , Monetary policy , Spillovers ,
    Date: 2010–01–11
  19. By: Marco Guerrazzi
    Abstract: Following the Farmer’s (2008a-b, 2010) micro-foundation of the General Theory, I build a competitive search model in which output and employment are demand-driven, prices are flexible, the nominal wage is used as numeraire and agents are divided in two categories: wage and profit earners. Within this framework, I show that the model economy has a continuum of demand constrained equilibria that might be consistent with a certain degree of endogenous real wage stickiness. Moreover, calibrating and simulating the model economy in order to fit the US first-moments data, I show that this setting can provide a rationale for the Shimer’s (2005) puzzle, i.e., the relative stability of real wages in spite of the large volatility of labor market tightness.
    Keywords: Stochastic Dynamics, Competitive Search, Old Keynesian Economics, Demand Constrained Equilibrium, Numerical Simulations.
    JEL: E12 E24 J63 J64
    Date: 2010–01–18
  20. By: Alan S. Blinder (Princeton University)
    Abstract: About six years ago, I published a small book entitled The Quiet Revolution (Blinder 2004). Though its subtitle was Central Banking Goes Modern, I never imagined the half of it. Since March 2008, the Federal Reserve has gone post-modern with a bewildering variety of unprecedented actions that have either changed the nature and scope of the central bank’s role or stretched it beyond the breaking point, depending on your point of view. And that leads straight to the central question of this essay: What should--and shouldn’t--the Federal Reserve do?
    Keywords: Federal reserve bank, monetary policy, central bank
    JEL: E42 E50 E60 G21
    Date: 2010–01
  21. By: Pablo A. Guerron-Quintana
    Abstract: Inference about common international stochastic trends and interest rates is gained using a small open economy model, data from seven developed countries, and Bayesian methods. Shocks to these common factors explain up to 17 percent of the variability of output in several economies. Country-specific preference and premium disturbances account for the bulk of the volatility observed in the data. There is substantial heterogeneity in the estimated structural parameters as well as stochastic processes for the countries in the sample. This diversity translates into a rich array of impulse responses across countries. According to the model, the recent low international interest rates might have initially deepened the decline of GDP in several developed economies.
    Keywords: Econometric models ; Recessions ; Business cycles ; International economic relations
    Date: 2010
  22. By: Samya Beidas-Strom; Weicheng Lian; Ashwaq Maseeh
    Abstract: This paper examines housing finance and housing price dynamics in selected emerging Middle Eastern economies over the past two decades. It finds that (i) mortgage markets have experienced rapid development, which has led to lower private per capita consumer spending volatility this decade; (ii) a downward price correction occurred in the housing market after 2007, which appears to have bottomed out; (iii) the rental market appears to be largely determined by region-specific economic fundamentals-a youthful working-age population and wealth variables; and (iv) a segregation between self-owned house and rental price dynamics exists in this region, rendering the former more sensitive to the business cycle.
    Keywords: Business cycles , Consumption , Cross country analysis , Economic models , Emerging markets , Household credit , Housing , Housing prices , Middle East and Central Asia , North Africa , Price increases , Real estate prices ,
    Date: 2009–12–30
  23. By: Jonathan McCarthy; Richard W. Peach
    Abstract: Providing for shelter represents a large portion of the typical household budget. Accordingly, rent, paid either to a landlord or to oneself as an owner-occupant, has a large weight in the CPI and in the personal consumption expenditures deflator, resulting in substantial scrutiny of how tenant rent and owners' equivalent rent are measured in these price indexes. In this paper, we describe how the Bureau of Labor Statistics (BLS) estimates tenant rent and owners' equivalent rent. We then estimate alternative inflation rates for tenant rent and owners' equivalent rent based on American Housing Survey data, following BLS methodology as closely as possible. Our alternative tenant rent inflation series is generally consistent with the corresponding BLS series. However, our alternative owners' equivalent rent inflation series is consistently lower than the corresponding BLS series by an amount large enough to have a significant effect on the overall inflation rate. This result is driven by the inverse relationship between rent inflation and the level of monthly housing cost evident in the American Housing Survey data.
    Keywords: Rent ; Consumer price indexes ; Consumption (Economics) ; Economic indicators ; Economic surveys ; Inflation (Finance)
    Date: 2010
  24. By: Yannick Lucotte (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)
    Abstract: Over the past two decades, many countries have passed legislation giving more independence to their central banks. This institutional evolution has concerned several developed countries but also developing countries and, is consistent with the Barro and Gordon's theory of time-inconsistent monetary policy, which emphasizes the importance of independence in terms of acquiring anti-inflationary credibility. But, central bank independence (CBI) could also affect the design of fiscal policy. Indeed, theoretical literature shows that a greater degree of independence influences government to fiscal discipline; conversely, a weak degree of independence may influence the government to pursue lax fiscal policy. However, the few empirical studies that attempted to assess the relation between CBI and budget deficits principally focused on industrial countries and provided disappointing econometric results. This paper seeks to address this gap in the literature by providing empirical analysis of the influence of CBI on budget deficits in a large set of developing countries over the 1995-2004 period. Using a panel data analysis and two indicators of CBI, the results show a negative relationship between CBI and budget deficits.
    Keywords: Central bank independence; Budget balances; Developing countries; Panel data analysis
    Date: 2009
  25. By: Isabella David
    Abstract: I estimate the cyclicality of Italian real wages over the period 1985-2003 controlling for the so-called "composition bias". Aggregate real wage statistics, commonly used to measure real wage elasticity, are affected by the bias arising from the cyclical change in the skill-composition of the labor force. An analysis on WHIP longitudinal data shows that the degree of Italian real wage procyclicality significantly increases after controlling for composition bias: this result is robust to several checks and it is consistent with Solon, Barsky and Parker's 1994 seminal paper on the US. Finally, I discuss the effects of the the 90's labor market's reforms on Italian real wage cyclicality.
    Date: 2009
  26. By: Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: The objective of this paper is to point out that dollarization, apart from being a commitment device, may also be used as a signaling device if there is uncertainty about the government’s intentions. To this end, we modify the standard approach to modeling monetary policy by introducing two types of government: good and bad. It is assumed that the good government conducts optimal policy while the bad government prefers to finance higher (than optimal) government expenditure by printing money. People do not observe the type of government, however they know the probability distribution over the two government types. Due to this uncertainty, the good government cannot achieve the first best even if it conducts optimal monetary policy. Hence, the good government has an incentive to dollarize, while the bad governments avoids this step. As a result, we obtain a separating equilibrium where dollarization is a perfect signal of the government type.
    Keywords: dollarization, monetary policy
    JEL: E42 F40
    Date: 2009
  27. By: John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: The present crisis is the bottom of a recurring problem that I call the leverage cycle, in which leverage gradually rises too high then suddenly falls much too low. The government must manage the leverage cycle in normal times by monitoring and regulating leverage to keep it from getting too high. In the crisis stage the government must stem the scary bad news that brought on the crisis, which often will entail coordinated write downs of principal; it must restore sane leverage by going around the banks and lending at lower collateral rates (not lower interest rates), and when necessary it must inject optimistic capital into firms and markets than cannot be allowed to fail. Economists and the Fed have for too long focused on interest rates and ignored collateral.
    Keywords: Leverage, Collateral, Margins, Leverage cycle, Externality, Principal
    JEL: E3 E32 G12
    Date: 2010–01
  28. By: Elisabetta De Antoni
    Abstract: The heterodoxy of Robert Clower, Axel Leijonhufvud and Hyman Minsky consisted in dispensing with the dominant assumption according to which the system spontaneously tends to a situation of full coordination. In analysing the effective disequilibrium behaviour of the system, all three came to the conclusion that monetary and financial forces have a crucial importance for coordination and that their role can be highly destabilising. Contrary to the dominant theory, all three offer useful insights to understand what is happening today.
    Date: 2009
  29. By: John Ryan (University of Venice)
    Abstract: After 10 years of abstinence from the European Monetary Union, should the UK be seriously thinking about joining the Eurozone? Especially in view of the European Central Bank's improved reputation as a crisis manager in the wake of the financial crisis, could EMU represent a safe haven for the UK economy? Would it be wise for Britain to attach itself to the reserve currency Euro to avoid the perils of drifting alone on a storm-tossed open sea? These are big questions. They have been debated in the UK for a generation and have become relevant again during the current financial and economic crises. I will in this short paper assess three scenarios regarding the UK and the Euro - UK entry, EMU collapses before a UK entry, No UK entry and I will discuss the Eurozone view on potential UK membership.
    Keywords: UK Economy, Eurozone, Euro, Sterling, European Central Bank
    JEL: E12 E41 E52 E60 F02
    Date: 2009
  30. By: Nikolay Nenovsky
    Abstract: This article offers an attempt at typologisation of the evolution of monetary regimes in post-communist countries (1990-2008), which is exceptionally varied by character. Two large groups have emerged: type 1 – countries, which started their reforms with a regime of fixed exchange rate and dominating external sources of money supply, and type 2 – countries starting their reforms with a floating exchange rate and predominating internal sources of money supply. The first type is much more successful and appropriate for managing the problems of transition. Some other elements of typologisation have also been suggested based on specific definitions of monetary system and monetary regime. The article also presents various approaches, which can explain the evolution of monetary regimes observed in the former socialist countries.
    Keywords: monetary regimes; post-communist countries; comparative economics
    JEL: E5 P2
    Date: 2009
  31. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The Review of Political Economy (ROPE) welcomed the year 2009 with an issue in which the first two articles use an interesting yet not very popular modeling framework, namely the aggregate demand/aggregate supply (D/Z) model from Chapter 3 of Keynes’s General Theory. Unfortunately, as I intend to show in this paper, the interpretations of Keynes’s D/Zmodel proposed by these two articles contradict each other. To resolve this unsatisfactory state of affairs, I will offer an evaluation of which of the two interpretations is more in line with Keynes’s own suggestions.
    Keywords: Keynes’s D/Z model, effective demand, Post Keynesianism
    JEL: E12
    Date: 2009–11
  32. By: Thomas Hemmelgarn (European Commission.); Gaëtan Nicodème (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, ECARES, Université Libre de Bruxelles, Brussels, European Commission, CEPR and CESifo.)
    Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, leading to deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
    Keywords: financial crisis, tax policy, taxation, fiscal stimulus, financial transaction tax, property tax.
    JEL: E62 F21 F30 G10 H20 H30 H50 H60
    Date: 2010–01
  33. By: Guido Menzio; Shouyong Shi
    Abstract: We study a labor market where workers search for jobs both on the job and off the job. In the model, there are aggregate productivity shocks and match-specific shocks. We outline the proof of existence of an equilibrium which we call a block recursive equilibrium (BRE), in which individuals' decisions and market tightness are independent of the distribution of workers over wages or contracts. A critical assumption that is responsible for a BRE to exist is that search is directed by firms' posting of contracts. We explain why a BRE does exist under the assumption of directed search and why it does not under the assumption of random search. Finally, we generalize the proof of existence of a BRE to allow workers to be ex-ante heterogeneous with respect to some observable characteristics such as education and skill.
    Keywords: Directed Search; On the Job Search; Heterogeneity; Aggregate Fluctuations
    JEL: E24 E32 J64
    Date: 2010–01–21
  34. By: Marcello M. Estevão; Evridiki Tsounta
    Abstract: This study investigates the impact of the current financial crisis on Canada's potential GDP growth. Using a simple accounting framework to decompose trend GDP growth into changes in capital, labor services and total factor productivity, we find a sizeable drop in Canadian potential growth in the short term. The estimated decline of about 1 percentage point originates from a sharply decelerating capital stock accumulation (as investment has dropped steeply) and a rising long-term unemployment rate (which would raise equilibrium unemployment rates). However, over the medium term, we expect Canada's potential GDP growth to gradually rise to around 2 percent, below the pre-crisis growth rate, mostly reflecting the effects of population aging and a secular decline in average working hours.
    Date: 2010–01–13
  35. By: Diego Restuccia; Guillaume Vandenbroucke
    Abstract: Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? Using a simple model of schooling decisions, we assess the quantitative contribution of changes in the return to schooling in explaining the evolution of education. We restrict changes in the returns to schooling to match data on earnings across educational groups and growth in aggregate labor productivity. These restrictions imply modest increases in returns that nevertheless generate a substantial increase in educational attainment: average years of schooling increase by 37 percent in the model compared to 23 percent in the data. This strong quantitative effect is robust to relevant variations of the model including allowing for changes in the relative cost of acquiring education. We also find that the substantial increase in life expectancy observed during the period contributed to only 7 percent of the change in educational attainment in the model.
    Keywords: educational attainment, schooling, skill-biased technical progress, human capital
    JEL: E1 O3 O4
    Date: 2010–01–19
  36. By: Davin Chor (Singapore Management University)
    Abstract: This paper constructs a data set on purchasing-power-parity (PPP) adjusted skilled and unskilled wages in 139 countries for the period 1968-1998, based on the International Labor Organization's (ILO) annual October Inquiry and the Freeman and Oostendorp (2000) Occupational Wages Around the World (OWW) le. It nds strong evidence for the existence of well-integrated markets for skilled and unskilled labor, justifying the approach of constructing a skilled wage series and an unskilled wage series. Several signicant results emerged from an analysis of a representative subset of 67 countries which provided unbroken coverage for 1970-1994- (i) there is striking evidence of unconditional convergence in the skilled-unskilled wage ratio worldwide; (ii) this relative wage convergence was especially strong within a "club" of open economies, suggesting that Heckscher-Ohlin-Sameulson mechanisms might be at work; and (iii) there is a relatively weak pattern of convergence in unskilled real wages, implying that the claim of "Divergence, Big Time" (Pritchett 1997) has to be qualied when factor markets are studied instead of aggregate incomes.
    Keywords: Wages, purchasing-power-parity
    JEL: E24 J31
    Date: 2010–01
  37. By: Akira IIDA (Policy Research Institute)
    Abstract: In any policy making exercise, whether it is about matters of economic, social or political problems, both domestic and international, such as diplomatic relations or national defense, there are various cognitive issues that affect the design and implementation of the policy. Without correct cognition of the actuality and history regarding the problems in question, or without correct cognition of the problems that might arise in the process of the policy implementation, the policy making exercise is bound to fail. Yet, in the history of economics, sociology or the study of the diplomacy or of national defense, philosophical inquiry about “cognitive issues in policy making� has been very poor. More specifically, on one hand, epistemologists have hesitated to go into this kind of inquiry, since policy making always embraces questions of values or other subjective judgments, and hence, objectivity is not assured. On the other hand, the attention of the economist, sociologist, or analysts on diplomacy and national defense has focused on the analysis of relationships among the economic, social, diplomatic or defense factors, while neglecting the cognitive issues in policy making itself. Policy makers should have far better knowledge in this area, but they have paid scarce attention to it, despite their policy failures, caused by their failures to recognize the factors that really mattered in the case in question
    Keywords: policy making, cognitive issues, epistemology theory, paradigm theory
    JEL: E61 E66 E60
    Date: 2010–01
  38. By: Edward Teo; Shandre M. Thangavelu; Elizabeth Quah (Singapore Centre for Applied and Policy Economics)
    Abstract: This paper explores the relationship between unemployment (U) and job vacancies (V) in the Singapore labour market. Empirical analysis using the framework of the UV Curve (also known as the Beveridge Curve) indicates that Singapore’s labour market appears to have improved in its matching efficiency as compared to other East-Asian countries. However, detailed study of Beveridge Curve for the Singapore economy reveals that it has become more inelastic since the Asian crisis, thereby suggesting that the labour market is less responsive in recent years. This might suggest the possibility that employers are now more cautious and selective in their employment decisions.
    Keywords: unemployment, job vacancies, labour, Beveridge Curve, East-Asian, Singapore
    JEL: E24 J61 J64
    Date: 2010–01
  39. By: Desai, Sameeksha (University of Missouri); Eklund, Johan (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Högberg, Andreas (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The government of India initiated pro-market reforms in the 1990s, after almost five decades of socialist planning. These and subsequent policy reforms are credited as the drivers of India’s radical economic transformation. Prior to reforms, private investment was strictly regulated and restricted to limited sectors. There have since been numerous changes in sectors important for investment, such as the bank sector, which affects outcomes of firm-level strategic decision making and investment behavior. By most estimates, India’s economy will continue to grow rapidly. The purpose of this paper is to investigate changes in investment behavior from the introduction of reforms to current conditions. Reforms changed several institutional frameworks for firm operations, allowing firms to pursue more competitive strategies. Given the importance of ownership in determining firm efficiency and access to capital, we examine the effect of ownership type, and also control for industry differences in capital allocation. We compute a measure of investment efficiency derived from the accelerator principle: Elasticity of capital with respect to output.We find that the allocation of capital has been slow to respond to reforms, indicating similar pace of firm responses. The findings suggest that firms face significant costs in adjusting their capital stock, which inturn leads to inefficient capital allocation. Surprisingly, we find no significant improvement over the 1991-2006 time period.
    Keywords: market reforms; allocatio of capital; india
    JEL: E22 E23 E44 G10 G18 L50
    Date: 2009–12–18
  40. By: Rachel H. Racelis; J.M. Ian Salas (Philippine Institute for Development Studies)
    Abstract: Have age profiles of consumption and labor income in the Philippines changed from 1994 to 2002? What are the implications of the changes observed in the lifecycle patterns? The National Transfer Accounts (NTA) methodologies are applied to estimate the per capita age profiles of current consumption and labor income for the Philippines for the years 1994, 1999 and 2002. Age profiles estimated include those for public and private consumption for three broad types, i.e. education, health and other, and two types of labor income, i.e. earnings from paid employment and self employment income. Some of the main findings include- (1) Consumption pattern by age- The age profile for mean per capita current consumption is strongly influenced by the profile of private other consumption being the single largest item of consumption. The pronounced sharp rise in per capita mean consumption observed up to age 18 and the subsequent decline is due to the age pattern of public and private education spending. And the gradual increase in per capita consumption after age 45 may be attributed to the increasing per capita public and private spending for health care as age increases. (2) Consumption age profile over time- The age profiles for current consumption have generally remained unchanged from 1994 to 2002, with mean age of consumption staying at about 27 years. (3) Labor income pattern by age- The age profile of labor income have the expected inverted-U shape, peaking at around age 40 (4) Labor income age profile over time- The overall shape of the age income profiles have generally remained the same, but a gradual shift of the position of the profiles towards the right was observed from 1994 to 2002. The mean age of labor income was 35 in 1994, 38 in 1999 and 39 in 2002. The implications of the consumption and labor income lifecycle patterns and changes observed over time for the Philippines include the following- increase in the deficit age cut-off at older ages; increase in the span of productive or surplus ages; and increase in the lifecycle surplus to deficit ratio.
    Keywords: National Transfer Accounts, economic lifecycle, income age profile, consumption age profile, lifecycle deficit
    JEL: E21 O15 D91
    Date: 2010–01
  41. By: J.M Ian S. Salas; Rachel H. Racelis (Philippine Institute for Development Studies)
    Abstract: A country’s population consists of persons at different ages and stages of their economic lifecycle. Those in the population that are incurring lifecycle deficits would not be able to sufficiently support themselves, while those generating surpluses would have more than they require. Resources then have to be reallocated or transferred from the surplus age groups (working ages) to the deficit age groups (children and elderly) and there are various ways to achieve these across age transfers or intergenerational reallocations. Lifecycle consumption and income patterns, and the systems for age reallocations in the Philippines, are examined in this paper using the 1999 NTA Flow Accounts estimates. This paper finds that- (1) Filipinos incur lifecycle deficits and do not become self-sufficient until after age 25, lifecycle surpluses are generated for the next 35 years, and at age 61 consumption starts to exceed labor earnings and lifecycle deficits are once again incurred; (2) In 1999 the estimated aggregate lifecycle deficits amounted to about PhP 1,061 billion in current prices (with the young and elderly accounting for 93 percent and 7 percent, respectively) while surpluses generated by the working age group amounted to PhP 461 billion, or an excess of PhP600 billion of deficits over surplus; (3) The mix of systems that support the consumption of Filipinos in the deficit ages differ between the young and the elderly groups, with the mix also changing with age for the elderly deficit group; (4) The financing of consumption of children up to age 14 is primarily by public and private transfers, while for the age group 15-25 about half of consumption is already paid for by own wages but a significant part continues to be supported by private transfers; and (5) Consumption of the elderly is financed by own earnings, asset reallocation, private transfers (starting age 73) and to a very small extent by public transfers (starting age 80).
    Keywords: National Transfer Accounts, economic lifecycle, intergenerational transfer, income age profile, consumption age profile, lifecycle deficit
    JEL: E24 E20 E21
    Date: 2010–01
  42. By: Daniel Suryadarma; Asep Suryahadi; Sudarno Sumarto (SMERU Research Institute)
    Abstract: This study provides an overview of the concepts used to measure unemployment in Indonesia and their consequences for the measured unemployment trends. One finding shows that BPS’s decision in 2001 to relax the definition of labor force by including discouraged workers has resulted in an artificially high open unemployment rate and disguises the actual decline in traditionally-measured open unemployment rates post-crisis. Another finding indicates that discouraged workers in Indonesia are not confined only to the poor and those who are denied access to the proper job market. We recommend that, if Indonesia still wants to utilize a broader definition of the labor force, the measurement of open unemployment should adhere to the ILO’s recommendation of only including those discouraged workers who are still willing to work. The discouraged workers who are unwilling to work should be left in the “out of labor force� category.
    Keywords: discouraged workers, open unemployment, measurement, Indonesia
    JEL: E24 J64 J60
    Date: 2010–01
  43. By: Orley Ashenfelter (Princeton University); Kirk B. Doran (University of Notre Dame); Bruce Schaller (New York City Department of Transportation)
    Abstract: The available estimates of the wage elasticity of male labor supply in the literature have varied between -0.2 and 0.2, implying that permanent wage increases have relatively small, poorly determined effects on labor supplied. The variation in existing estimates calls for a simple, natural experiment in which men can change their hours of work, and in which wages have been exogenously and permanently changed. We introduce a panel data set of taxi drivers who choose their own hours, and who experienced two exogenous permanent fare increases instituted by the New York City Taxi and Limousine Commission. Our preferred estimate suggests that their elasticity of labor supply is about -0.2.
    Keywords: male labor supply, effect of wage rates, long run labor supply, public policies, taxation, social safety nets, and redistribution of income, New York City Taxi and Limousine Commission
    JEL: E27 E24 F16 J21 J40
    Date: 2010–01
  44. By: Rachel H. Racelis; J.M. Ian S. Salas (Philippine Institute for Development Studies)
    Abstract: Dependent population is defined as that part of the population that does not work and relies on others for the goods and services they consume. In practice, specific population age groups have in their entirety been categorized as dependent population, even while the definition may not necessarily apply to every individual in the population with the indicated ages. In general those categorized as dependents include the children and the elderly. The rest of the population constitutes the working age population. The delineation of any boundary for children and for working ages varies across countries and studies, has tended to be discretionary, and thus appears arbitrary. In the Philippines the delineation is based on the legal definition for working ages set at 15 to 64 years (with provision for early retirement at age 60 years.). The implied dependent ages in the Philippines are then 0-14 years and 60 or 65 years and older. The dependent ages used in the OECD definition for dependency ratio are under 20 and over 64. In other studies, children include those in the population up to age 18 or 20 and those in the working ages limited to 59 years or younger. This paper shows that the dependent population(s) defined based on a given set of age cut-offs are generally heterogeneous in terms of personal attributes, particularly in terms of indicators of dependency or non-dependency. Thus, the population defined by any given age boundaries may satisfy some indicators of dependency but not others. That is, the age boundary delineated using one dependency indicator, as reference, could be found unsatisfactory when assessed based on a different indicator. Those considering the use of any defined set of age boundaries to identify the dependent populations, whether for research or for the implementation of support programs, should first assess the appropriateness of the boundaries for the intended use. Identifying the dependency indicators relevant to the intended use would facilitate the assessment.
    Keywords: population dependency, labor force participation, household headship, National Transfer Accounts, lifecycle deficit, financing consumption
    JEL: E21 O15 E22
    Date: 2010–01

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