nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒02‒13
twenty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. An Overhaul of Fed Doctrine: Nominal Income and the Great Moderation By Hendrickson, Joshua
  2. Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S. By Efrem Castelnuovo; Luciano Greco; Davide Raggi
  3. Cyclicality of Fiscal Policy over the Business Cycle: an Empirical Study on Developed and Developing Countries By Bogdan Bogdanov
  4. Fiscal Consolidation II : lessons from the last time. By McCarthy, Colm
  5. Fiscal adjustment and re-balancing the Irish economy. By McCarthy, Colm
  6. Inflation and unemployment in Japan: from 1980 to 2050 By Ivan O. Kitov
  7. Business cycles and the scale of economic shock By Coccia Mario
  8. US Rates and Emerging Markets Spreads By Eduardo Levy-Yeyati; Tomás Williams
  9. Zur Vertrauensökonomik: Der Interbankenmarkt in der Krise von 2007-2009 By De La Motte, Laura; Czernomoriez, Janna; Clemens, Marius
  10. Coordination Behavior and Optimal Committee Size By Keiichi Morimoto
  11. Regional Inflation Persistence: Evidence from Italy By Guido Ascari; Andrea Vaona
  12. Money and Sustainability By Othman, Jamal
  13. Exchange Market Pressure and Monetary Policy By Sayera Younus
  14. Forecast horizon of 5th – 6th – 7th long wave and short-period of contraction in economic cycles By Coccia Mario
  15. Bayesian Estimation of Stochastic-Transition Markov-Switching Models for Business Cycle Analysis By Monica Billio; Roberto Casarin
  16. Is Economic Volatility Detrimental to Global Sustainability? By Yongfu Huang
  17. Liberalization and Regulation of Capital Flows- Lessons for Emerging Market Economies By Rakesh Mohan; Muneesh Kapur
  18. Profit Sharing, Wage Formation and Flexible Outsourcing under Labor Market Imperfection By Koskela, Erkki; König, Jan
  19. Public Capital, Public Pension, and Growth By Noritaka Maebayashi
  20. A New Auction for Substitutes: Central-Bank Liquidity Auctions, “Toxic Asset†Auctions, and Variable Product-Mix Auctions.. By Klemperer, Paul
  21. Latvia’s Recession: The Cost of Adjustment With An “Internal Devaluation” By Mark Weisbrot; Rebecca Ray

  1. By: Hendrickson, Joshua
    Abstract: The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy. Specifically, early evidence suggested that the increased stability has been associated with monetary policy that responded much more strongly to rising inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve's response to movements in nominal income rather than inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in which policy adjusts to forecasts of nominal GDP for the pre- and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.
    Keywords: monetary policy rules; real-time data; Greenbook forecasts; nominal income target; Great Moderation
    JEL: E51 E30 E58
    Date: 2010–01–31
  2. By: Efrem Castelnuovo (University of Padua); Luciano Greco (University of Padua); Davide Raggi (University of Bologna)
    Abstract: This paper estimates Taylor rules featuring instabilities in policy parameters, switches in policy shocks' volatility, and time-varying trend inflation using post-WWII U.S. data. The model embedding the stochastic target performs better in terms of data-fit and identification of the changes in the FOMC's chairmanships. Policy breaks are found not to be synchronized with variations in policy shocks' volatilities. Finally, we detect a negative correlation between systematic monetary policy aggressiveness and inflation gap persistence.
    JEL: E52 E61 E62
    Date: 2010–01
  3. By: Bogdan Bogdanov (American University in Bulgaria)
    Abstract: This paper presents strong empirical evidence that automatic stabilizers and countercyclical fiscal policy decrease output volatility. The conducted empirical analysis proves the economic intuition that the automatic fiscal stance is countercyclical, regardless of the size and the prosperity of the economy. Connecting our empirical results to the Endogenous Growth Theory, we develop the idea that countercyclical fiscal policy boosts long-term economic growth. We conduct the study on two samples of countries – developed and developing. We recognize the fiscal policy pattern of the developed nations to be countercyclical, whereas the one of the developing countries to be acyclical. The derived results support our hypothesis that countercyclical fiscal policy reduces output volatility as the volatility of per capita output of the developed nations appear significantly less than the one of the developing countries. We identify possible determinants of fiscal policy in good and bad times. We empirically recognize that openness to trade, terms of trade, level of corruption and financial development affect fiscal policy in both samples of countries.
    Keywords: fiscal policy; automatic stabilizers; discretionary policy; output volatility; determinants
    JEL: C23 E32 E62
    Date: 2010
  4. By: McCarthy, Colm
    Keywords: Financial crises--Ireland; Fiscal policy--Ireland;
    Date: 2009–10–18
  5. By: McCarthy, Colm
    Keywords: Fiscal policy--Ireland; Ireland--Economic policy; Ireland--Economic conditions--21st century; Banks and banking--Ireland;
    Date: 2009–11–26
  6. By: Ivan O. Kitov
    Abstract: The evolution of inflation, p(t), and unemployment, UE(t), in Japan has been modeled. Both variables were represented as linear functions of the change rate of labor force, dLF/LF. These models provide an accurate description of disinflation in the 1990s and a deflationary period in the 2000s. In Japan, there exists a statistically reliable (R2=0.68) Phillips curve, which is characterized by a negative relation between inflation and unemployment and their synchronous evolution: UE(t) = -0.94p(t) + 0.045. Effectively, growing unemployment has resulted in decreasing inflation since 1982. A linear and lagged generalized relationship between inflation, unemployment and labor force has been also obtained for Japan: p(t) = 2.8*dLF(t)/LF(t) + 0.9*UE(t) - 0.0392. Labor force projections allow a prediction of inflation and unemployment in Japan: CPI inflation will be negative (between -0.5% and -1% per year) during the next 40 years. Unemployment will increase from ~4.0% in 2010 to 5.3% in 2050.
    Date: 2010–02
  7. By: Coccia Mario (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (Turin), Italy)
    Abstract: The purpose of this paper is to determine the scale of economic shocks (SES), considering a new indicator based on the duration (in months) of contractions and expansions within Business Cycles and their amplitude, measured by GDP percent change based on chained 2000 dollars. Data of US Business cycles are used. The result is that the SES shows the real economic impact of contractions and expansions over time and serves as a warning signal that the economic system is entering into a turbulent state in the short-run.
    Keywords: Business Cycles, Economic shock, Contractions, Expansions
    JEL: E30 E32 E37
    Date: 2009–12
  8. By: Eduardo Levy-Yeyati; Tomás Williams
    Abstract: While many studies document the influence of global liquidity and risk aversion on emerging markets spreads, less is known about their link with the US yield curve –a point that becomes more relevant at today´s historically low US rates. In this note, we examine the channels through which emerging markets spreads could be affected by changes in the US Treasury curve, and their economic importance in light of realistic scenarios, accounting for the differential response from investment and non investment grade economies, and during periods of financial distress. We find that a UST curve steepening (e.g., due to an oversupply of Treasuries) represents a more important risk factor for emerging market spreads than a monetary policy tightening.
    Date: 2010
  9. By: De La Motte, Laura; Czernomoriez, Janna; Clemens, Marius
    Abstract: “Vertrauen ist der Anfang von allem” (“trust is the beginning of everything”)- A large bank seemed to be aware of the importance of trust within financial markets when it started the marketing campaign in 1995. Almost fifteen years later banks all over the world trust nearly nobody and were not trusted by anybody. In this paper the origins, functions and aftermath of trust/distrust in financial economics are investigated by firstly analyzing trust in economic relationships in a general theoretical matter. Secondly, we provide some indicators for measuring institutional and interbank specific trust. Thirdly, we evaluate policy measures conducted by central banks due to recover the trust relationships at European interbank market. The paper is separated into two parts and seven chapters including introduction and conclusion. The first part explains a more generic approach to introduce trust and distrust into economic decisions. Thus, chapter 2 begins with some definitions about trust and an explanation about its relevance and functions in contract theory. Chapter 3 analyzes the formation of trust and distrust in the microeconomic environment based upon principal-agent theory. While trust and distrust vary in the date of origin they are both rational decision based and thus influenced by expectations, information and experience. Furthermore, the concept of social capital is introduced as a theory to explain trust and distrust in a macroeconomic framework which is more relevant to explain trust crises. The theoretical aspects are empirically applied by analyzing the net trust in macroeconomic institutions as government, central bank and money. A trust crisis - defined as sudden shift from positive to negative net trust - between EU citizen and national/transnational institutions in 2008/2009 can only be verified in case of the European Central Bank. But in contrast to theoretical requirements the net distrust occurs only for a short period. The next chapter (4) applies the economic theory of trust to the specific situation on interbank market transactions. Therefore, it investigates the role of trust in interbank relationships and the problem that occurs if this relationship is damaged. Finally, four indicators were derived to identify the want on confidence in bank-to-bank transactions: (a) the difference between EURIBOR and EUREPO rates (b) the credit volume of unsecured liabilities (c) the level of capacity for permanent facilities (d) vertical equalization of liquidity between central and commercial banks. The results of chapters 2-4 provide the theoretical framework for analyzing the specific situation at the European interbank market crisis in the second part of the paper. Chapter 5 starts with a general survey about the chronology and causes of the financial crises 2007-2009. The next chapter (6) reappraises the previously derived indicators of interbank confidence in pre-, within-, and after-crisis periods. It can be shown that the distrust situation between banks slew down since 2009, similarly to the results of institutional trust for the whole economy. The chapter closes with an interpretation of the results and some theoretical explanations. Within the last chapter (7) the reaction (interest rate reduction, restructuring of the tender system) of monetary authority to the financial distress is explained and evaluated in terms of restoring the interbank market.
    Keywords: trust; interbank market; financial crisis;
    JEL: A13
    Date: 2010–01–07
  10. By: Keiichi Morimoto (Graduate School of Economics, Osaka University)
    Abstract: How many members should committees consist of? This paper addresses this question in view of imperfect information and coordination behavior among the members, which is a new approach alternative to introducing information acquisition cost. First, using a simple model, I show that the existence of the coordination motive dismisses Condorcetfs (1785) suggestion and the finite optimal size of the committee is determined. Second, I provide an application of the mechanism to monetary policy committees in a basic New Keynesian model. This example will inspire other applications to policy issues in the dynamic stochastic general equilibrium framework.
    Keywords: committee, Condorcet jury theorem, coordination, higher order beliefs monetary policy
    JEL: D71 D84 E58
    Date: 2010–01
  11. By: Guido Ascari (Università di Pavia); Andrea Vaona (Department of Economics (University of Verona))
    Abstract: Regional patterns of inflation persistence have received attention only at a very coarse level of territorial disaggregation, that of EMU member states. However economic disparities within EMU member states are an equally important policy issue. This paper considers a country with a large regional divide, i.e., Italy, at a fine level of territorial disaggregation (NUTS3). Our results show that economically backward regions display greater inflation persistence. Moreover, we show that higher persistence is linked to a lower degree of competitiveness in the retail sector. Finally, the inflation persistence at the national level does not present any geographical aggregation bias, because it equals the mean of inflation persistence of provincial data.
    Keywords: inflation persistence, retail sector, regions
    JEL: E0 E30 R0 R10
    Date: 2010–02
  12. By: Othman, Jamal
    Abstract: This paper overviews the political-economics of FIAT and asset-based money. The paper further highlights the presumably syariah standpoint of the impartiality character of money as the fundamental factor that differentiates money from her conventional counterpart. The paper argues that while it is ideal for asset-based money to make a comeback in the interest of holistic wellbeing (maslahah) of humankind, it necessarily be complemented by an appropriate financial and regulatory system to safeguard its impartiality, i.e., viz, non-tradable, non-interest bearing, and non-debt financing to avoid the recurring pitfalls which are immanent in conventional financial system. It is hoped this rather concise paper will offer a thought provoking discourse on how syariah principles may present the world a useful ideological construct for a new monetary and financial architecture in light of the global financial crises.
    Keywords: Financial crises; Neutrality of money; FIAT money; Asset based money; Islamic perspectives of money; Financial regulatory system; Money and sustainability
    JEL: E42 Q56 E4
    Date: 2009–08–27
  13. By: Sayera Younus
    Abstract: The objective of this study is to examine empirically the impact of monetary policy on exchange market pressure (EMP) in Bangladesh. [Bangladesh Bank WP NO. 0603].
    Keywords: pressure, bangladesh, bank, monetary policy, exchange, foreign exchange, currency, market pressure, empirically, Variance, Domestic Credit Growth,
    Date: 2010
  14. By: Coccia Mario (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (Turin), Italy)
    Abstract: The purpose of this essay is to determine the forecast horizon of the fifth, sixth and seventh long wave. As the period of each long wave can change according to the data, it has been used a deterministic approach, based on historical chronologies of USA and UK economies worked out by several scholars, to determine average timing, period and forecast error of future long waves. In addition, the analysis shows that long waves have average upwave period longer than average downwave one. This result is also confirmed by US Business Cycles that have average contractions shorter than expansions phase over time.
    Keywords: Forecast Horizon, Long Waves, Kondratieff Waves, Business Cycles, Asymmetric Path
    JEL: E30 E37
    Date: 2009–12
  15. By: Monica Billio; Roberto Casarin
    Abstract: We propose a new class of Markov-switching (MS) models for business cycle analysis. As usually done in the literature, we assume that the MS latent factor is driving the dynamics of the business cycle but the transition probabilities can vary randomly over time. Transition probabilities are generated by random processes which may account for the stochastic duration of the regimes and for possible stochastic relations between the MS probabilities and some explanatory variables, such as autoregressive components and exogenous variables. The presence of latent factors and nonlinearities calls for the use of simulation-based inference methods. We propose a full Bayesian inference approach which can be naturally combined with Monte Carlo methods. We discuss the choice of the priors and a Markov-chain Monte Carlo (MCMC) algorithm for estimating the parameters and the latent variables. We provide an application of the model and of the MCMC procedure to data of Euro area. We also carry out a real-time comparison between different models by employing sequential Monte Carlo methods and some concordance statistics, which are widely used in business cycle analysis.
    Date: 2010
  16. By: Yongfu Huang
    Abstract: This paper examines the effects of economic volatility on global sustainability in a dynamic panel data model allowing for error cross section dependence. It finds that output volatility and financial market volatility exert strong negative impacts on sustainable development, with the impacts exacerbated in some subsamples such as higher energy intensity countries and lower trade share countries. The paper also identifies a financial development channel through which output volatility impedes global sustainability, highlighting the interaction between global financial markets and the wider economy as a key factor influencing the low carbon development path. The finding is significant for the conduct of macroeconomic and environmental policies in an integrated global green economy.
    Keywords: Output Volatility; Financial Market Volatility; Global Sustainability; Genuine Savings; Cross Section Dependence
    JEL: E32 O11 O16
    Date: 2010
  17. By: Rakesh Mohan; Muneesh Kapur (Asian Development Bank Institute)
    Abstract: Capital flows to emerging market economies (EMEs) have been characterized by high volatility since the 1980s. In recent years (especially since 2003), although gross as well as net capital flows to the EMEs have increased, they could not be absorbed domestically. Overall, savings have flowed uphill from EMEs to advanced economies, challenging the conventional view that capital flows to EMEs are always beneficial through augmentation of their resources leading to greater investment. Full capital account liberalization can impart avoidable volatility and have an adverse impact on growth prospects of EMEs. Available evidence is strongly in favor of a calibrated and well-sequenced approach to opening up the capital account and its active management, along with complementary reforms in other sectors. Greater caution is needed in the liberalization of debt flows. Despite much advice to the contrary, most EMEs manage their capital accounts actively to cushion their economies from undue volatility, including interventions in the foreign exchange markets accompanied by sterilization. Sound macroeconomic and financial policies―accompanied by prudent capital account management, greater exchange rate flexibility, purposive use of prudential regulation, and continued financial market development practiced by most Asian EMEs over the past decade―have cushioned their economies from the current global financial crisis that started in 2007. They have successfully achieved a virtuous circle of continuing growth, low and stable inflation, and financial stability. How these elements can be best combined will depend on the country and on the period: There is no “one size fits all.†Such a discretionary approach does put a great premium on the skill of policymakers and can run the risk of markets perceiving central bank actions becoming uncomfortably unpredictable. Such risk is mitigated by a record of successful management.
    Keywords: Emerging Market Economies, Liberalization, Regulation, Capital Flows
    JEL: E42 E44 E52 E58 F3 F4 G15
    Date: 2010
  18. By: Koskela, Erkki (University of Helsinki); König, Jan (Free University of Berlin)
    Abstract: We combine profit sharing and outsourcing, if the wage for worker is decided by a labor union to analyze how does the implementation of profit sharing affect individual effort and the bargained wage and thus outsourcing? We find that profit sharing and the wage level have an individual effort-augmenting effect and therefore increase productivity. We also find that the wage effect of profit sharing is ambiguous. There is a wage decreasing substitution effect, but on the other hand, there is a wage increasing effect via labor demand elasticity so that outsourcing and employment effects are also ambiguous.
    Keywords: employee effort, profit sharing, flexible outsourcing, labor market imperfection
    JEL: E23 E24 J23 J33 J82
    Date: 2010–01
  19. By: Noritaka Maebayashi (Graduate School of Economics, Osaka University)
    Abstract: This paper constructs an endogenous growth model with overlapping generations, whose engine of economic growth is productive public capital. The government faces a trade-off in public policy between public investment and social security provision because of its budget constraint. Larger public investment accelerates economic growth. On the other hand, larger public investment reduces the social security provision. This may reduce the consumption stream of agents. We first show that when the government aims at growth maximization, it chooses no social security provision. However, we also show that the growth-maximizing policy does not maximize welfare levels of each generation on the balanced growth path. Early generations may demand social security provision because the benefits from economic growth caused by an acceleration of public investment are relatively small. In contrast, future generations may require no social security provision but a large amount of public capital. Additionally, by setting the tax rate below the level that maximizes the growth rate, the government can make the welfare levels of all generations from the initial state on the balanced growth path better off. Moreover, in an economy facing an aging population, an increase in the social security provision to the old rather than an increase in public investment can be preferable from the viewpoint of social welfare.
    Keywords: public capital, social security, overlapping generations
    JEL: E62 H54 H55
    Date: 2010–01
  20. By: Klemperer, Paul
    Abstract: I describe a new static (sealed-bid) auction for differentiated goods—the “Product-Mix Auctionâ€. Bidders bid on multiple assets simultaneously, and bidtakers choose supply functions across assets. The auction yields greater efficiency, revenue, information, and trade than running multiple separate auctions. It is also often simpler to use and understand, and less vulnerable to collusion, than a simultaneous multiple round auction. I designed it after the 2007 Northern Rock bank-run to help the Bank of England fight the credit crunch; in 2008 the U.S. Treasury planned using a related design to buy “toxic assetsâ€; it may be used to purchase electricity.
    JEL: E58 D44
    Date: 2010
  21. By: Mark Weisbrot; Rebecca Ray
    Abstract: The Latvian recession, which is now more than two years old, has seen a world-historical drop in GDP of more than 25 percent. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. This would make Latvia’s loss more than that of the U.S. Great Depression downturn of 1929-1933. This paper argues that the depth of the recession and the difficulty of recovery are attributable in large part to the decision to maintain the country’s overvalued fixed exchange rate, because it prevents the government from pursuing the policies necessary to restore economic growth.
    Keywords: IMF, Latvia, EU, exchange rates, peg
    JEL: E E4 E42 E5 E52 E58 O O5 O52
    Date: 2010–02

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