nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒03‒28
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Credit Channel and Monetary Transmission in Brazil and Chile: A Structured VAR Approach By Luis Catão; Adrian Pagan
  2. A Model for Full-Fledged Inflation Targeting and Application to Ghana By Jihad Dagher; Ondra Kamenik; Ali Alichi; Kevin Clinton; Marshall Mills; Douglas Laxton
  3. Alternative Optimized Monetary Policy Rules in Multi-Sector Small Open Economies: The Role of Real Rigidities By Carlos de Resende; Ali Dib; Maral Kichian
  4. Taking Monetary Aggregates Seriously By Pierre Siklos
  5. Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages By Petrella, Ivan; Santoro, Emiliano
  6. Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S. By E. Castelnuovo; L. Greco; D. Raggi
  7. Monetary Policy Transmission in Mauritius Using a VAR Analysis By Charalambos G. Tsangarides
  8. Bank Credit during the 2008 Financial Crisis: A Cross-Country Comparison By Ari Aisen; Michael Franken
  9. New Keynesian Dynamics in a Low Interest Rate Environment By R. Anton Braun; Lena Mareen Korber
  10. Fiscal Policy in Oil Producing Countries During the Recent Oil Price Cycle By Pablo Lopez Murphy; Mauricio Villafuerte
  11. The effect of asset price volatility on fiscal policy outcomes By Athanasios Tagkalakis
  12. Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward? By Hans Genberg
  13. Simulating Inflation Forecasting in Real-Time: How Useful Is a Simple Phillips Curve in Germany, the UK, and the US? By Jens R. Clausen; Bianca Clausen
  14. Optimal Monetary Policy with Overlapping Generations of Policymakers By Maral Shamloo
  15. Macroeconomic Volatility and Economic Freedom: A Cross-Country Analysis By John W. Dawson
  16. Inflation Targeting and the Crisis: An Empirical Assessment By Irineu E. Carvalho Filho
  17. The taxation of savings in overlapping generations economies with unbacked risky assets By DAVILA, Julio
  18. Determinacy and sunspots in a nonlinear monetary model By Alessandra Cornaro; Anna Agliari
  19. Business Cycles around the Globe: A Regime Switching Approach By Sumru Altug; Melike Bildirici
  20. The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure By Michael Kumhof; Dirk Muir; Susanna Mursula; Douglas Laxton
  21. Fiscal Calculus in a New Keynesian Model with Matching Frictions By Alessia Campolmi; Ester Faia; Roland Winkler
  22. The Euro After Its First Decade: Weathering the Financial Storm and Enlarging the Euro Area By Regling, Klaus; Deroose, Servaas; Felke, Reinhard; Kutos, Paul
  23. Natural Gas Export Revenue, Fiscal Balance and Inflation in Myanmar By Kubo, Koji
  24. Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East By Staehr, Karsten
  25. Systemic Risks and the Macroeconomy By Gianni De Nicoló; Marcella Lucchetta
  26. Price Level Targeting: What Is the Right Price? By Malik Shukayev; Alexander Ueberfeldt
  27. The Ugly and the Bad: Banking and Housing Crises Strangle Output Permanently, Ordinary Recessions Do Not By Jens Hogrefe; Nils Jannsen; Carsten-Patrick Meier
  28. Spillovers to Central America in Light of the Crisis: What a Difference a Year Makes By Andrew Swiston
  29. Econometric Models of Forecasting Money Supply in India By Das, Rituparna
  30. The Short-Run Macroeconomics of Aid Inflows: Understanding the Interaction of Fiscal and Reserve Policy By Tokhir Mirzoev; Rafael Portillo; Luis-Felipe Zanna; Andrew Berg
  31. Asymmetric standing facilities: an unexploited monetary policy tool By Gabriel Perez-Quiros; Hugo Rodríguez Mendizábal
  32. Asset Booms and Structural Fiscal Positions: The Case of Ireland By Daniel Kanda
  33. The Fiscal Multiplier and Spillover in a Global Liquidity Trap By Ippei Fujiwara; Kozo Ueda
  34. Financial Distress in Chinese Industry: Microeconomic, Macroeconomic and Institutional Influences By Arnab Bhattacharjee; Jie Hany
  35. Potential output and the output gap in Estonia - a macro model based evalutaion By Rasmus Kattai
  36. Policy Measures to Alleviate Foreign Currency Liquidity Shortages under Aggregate Risk with Moral Hazard By Hiroshi Fujiki
  37. Financial Crisis, Trade Finance, and SMEs: Case of Central Asia By Gloria O. Pasadilla
  38. Interrelations between consumption and wealth in Poland By Magdalena Zach³od-Jelec
  39. How powerful is demography ? The Serendipity Theorem revisited By DE LA CROIX, David; PESTIEAU, Pierre; PONTHIERE, Gregory
  40. Credit risk model for the Estonian banking sector By Rasmus Kattai
  41. What is an oil shock? Panel data evidence By Dong Heon Kim
  42. Properties of Foreign Exchange Risk Premia By Sarno, Lucio; Schneider, Paul; Wagner, Christian
  43. Production, Hidden Action, and the Payment System By Chao Gu; Joseph H. Haslag; Mark Guzman
  44. The Role of State Intervention in the Financial Sector: Crisis Prevention, Containment, and Resolution By Yoon Je Cho

  1. By: Luis Catão (IDB, IMF); Adrian Pagan (UNSW, QUT)
    Abstract: We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key structural features of Emerging Market economies, notably the role of a bank-credit channel. We find that interest rate changes have swifter effects on output and inflation in both countries compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission, as currency movements are highly responsive to changes in in policy-controlled interest rates. We also find the typical size of credit shocks to have large effects on output and inflation in the two economies, being stronger in Chile where bank penetration is higher.
    Keywords: Monetary Policy, Bank Credit, VAR, Brazil, Chile
    JEL: C51 E31 E52
    Date: 2010–03–10
  2. By: Jihad Dagher; Ondra Kamenik; Ali Alichi; Kevin Clinton; Marshall Mills; Douglas Laxton
    Abstract: A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.
    Keywords: Central banks , Disinflation , Economic models , External shocks , Ghana , Inflation rates , Inflation targeting , Low-income developing countries , Monetary policy , Public information , Transparency ,
    Date: 2010–01–29
  3. By: Carlos de Resende; Ali Dib; Maral Kichian
    Abstract: Inflation-targeting central banks around the world often state their inflation objectives with regard to the consumer price index (CPI). Yet the literature on optimal monetary policy based on models with nominal rigidities and more than one sector suggests that CPI inflation is not always the best choice from a social welfare perspective. We revisit this issue in the context of an estimated multi-sector New-Keynesian small open economy model where sectors are heterogeneous along multiple dimensions. With key parameters of the model estimated using data from an inflation targeting economy, namely Canada, we particularly focus on (i) the role of sector-specific real rigidities, specially in the form of factor mobility costs, and (ii) welfare implications of targeting alternative price indices. Our estimations reveal considerable heterogeneity across sectors, and in several dimensions. Moreover, in contrast to existing studies, our welfare analysis comparing simple optimized policy rules based on alternative sectoral inflation rates provides support for CPI-based targeting policies by central banks. Capital mobility costs matter importantly in this regard.
    Keywords: Inflation: costs and benefits; Inflation and prices; Inflation targets; Monetary policy framework; Monetary policy implementation
    JEL: E4 E52 F3 F4
    Date: 2010
  4. By: Pierre Siklos (Wilfrid Laurier University)
    Abstract: In response to the recent financial crisis, central banks around the world, including the Bank of Canada, have provided markets with extraordinary levels of liquidity. As the economic recovery takes hold, the question arises of what the increased liquidity, through higher money growth, portends for the near future. The supply of and demand for money carries information on the outlook for inflation and economic growth. Current evidence suggests a rebound in economic growth and inflationary pressure unless the Bank begins to rein in money growth. The Bank of Canada should provide some guidance on its thinking on the behaviour of monetary and credit aggregates and what it entails for inflation and economic growth.
    Keywords: Monitary Policy, Bank of Canada, monetary aggregates, money gap estimate, central bank policy
    JEL: E58 E52 E51
    Date: 2010–03
  5. By: Petrella, Ivan; Santoro, Emiliano
    Abstract: This paper deals with the implications of factor demand linkages for monetary policy design. We consider a dynamic general equilibrium model with two sectors that produce durable and non-durable goods, respectively. Part of the output of each sector serves as a production input in both sectors, in accordance with a realistic input-output structure. Strategic complementarities induced by factor demand linkages significantly alter the transmission of exogenous shocks and amplify the loss of social welfare under optimal monetary policy, compared to what is observed in standard two-sector models. The distinction between value added and gross output that naturally arises in this context is of key importance to explore the welfare properties of the model economy. A flexible inflation targeting regime is close to optimal only if the central bank balances inflation and value added variability. Otherwise, targeting gross output variability entails a substantial increase in the loss of welfare.
    Keywords: Input-Output Interactions; Durable Goods; Optimal Monetary Policy
    JEL: E32 E23 E52
    Date: 2010–03–11
  6. By: E. Castelnuovo; L. Greco; D. Raggi
    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: 2010–02
  7. By: Charalambos G. Tsangarides
    Abstract: Applying commonly used vector autoregression (VAR) techniques, this paper investigates the transmission mechanism of monetary policy on output and prices for Mauritius, using data for 1999-2009. The results show that (i) an unexpected monetary policy tightening-an increase in the Bank of Mauritius policy interest rate-leads to a decline in prices and output but the effect on output is weaker; (ii) an unexpected decrease in the money supply or an unexpected increase in the nominal effective exchange rate result in a decrease in prices; and (iii) variations of the policy variables account for small a percentage of the fluctuations in output and prices. Taken together, these results suggest a rather weak monetary policy transmission mechanism. Finally, we find some differences in the transmission mechanism depending on whether core or headline consumer price index is used in the estimations.
    Keywords: Central bank policy , Consumer price indexes , Economic models , Interest rate increases , Mauritius , Monetary policy , Monetary policy instruments , Monetary transmission mechanism , Price adjustments ,
    Date: 2010–02–17
  8. By: Ari Aisen; Michael Franken
    Abstract: This paper empirically estimates the main determinants of bank credit growth during the 2008 financial crisis. Using a sample covering over 80 countries, this paper finds that larger bank credit booms prior to the crisis and lower GDP growth of trading partners are among the most important determinants of the post-crisis bank credit slowdown. Structural variables such as financial depth and integration were also relevant. Finally, countercyclical monetary policy and liquidity played a critical role in alleviating bank credit contraction after the 2008 financial crisis, suggesting that countries should pursue appropriate institutional and macroeconomic frameworks conducive to countercyclical monetary policies.
    Keywords: Bank credit , Banking systems , Business cycles , Credit expansion , Cross country analysis , Economic growth , Economic integration , Economic models , Financial crisis , Global Financial Crisis 2008-2009 , Liquidity , Monetary policy ,
    Date: 2010–02–25
  9. By: R. Anton Braun (University of Tokyo (E-mail:; Lena Mareen Korber (German Institute for Economic Research (E-mail:
    Abstract: Recent research has found that the dynamics of the New Keynesian model are very different when the nominal interest rate is zero. Improvements in technology shocks and reductions in the labor tax rate lower economic activity and the size of the government purchase multiplier can be as large as four. We consider the empirical relevance of these dynamics using Japanese data. Japan is interesting because it experienced a protracted period of zero nominal interest rates. A prototypical New Keynesian model calibrated to Japan and solved using nonlinear methods exhibits orthodox dynamics with a government purchase multiplier that is less than one.
    Keywords: Government purchases, zero nominal interest rates, monetary policy
    JEL: E3 E5 E6
    Date: 2010–03
  10. By: Pablo Lopez Murphy; Mauricio Villafuerte
    Abstract: This paper presents a detailed analysis of the average fiscal policy responses of oil producing countries (OPCs) to the recent oil price cycle. We find that OPCs worsened their non-oil primary balances substantially during 2003-2008 driven by an increase in primary spending. However, this trend was partially reversed when oil prices went down in 2009. We also find evidence that fiscal policy has been procyclical and has hence exacerbated the fluctuations in economic activity. In addition, we estimate that a small reduction in oil prices could lead to very large financing needs in the near future. Finally, we show that long-term fiscal sustainability positions in OPCs have worsened.
    Keywords: Business cycles , Commodity price fluctuations , Cross country analysis , Fiscal policy , Fiscal sustainability , Nonoil sector , Oil prices , Oil producing countries , Oil production , Oil revenues ,
    Date: 2010–02–02
  11. By: Athanasios Tagkalakis (Bank of Greece)
    Abstract: This paper examines the effect of asset price volatility on fiscal policy stance. We find that asset price volatility affects the volatility of discretionary fiscal policy in a positive and significant manner, which according to Fatas and Mihov (2003) has negative repercussions on output volatility and economic growth. Higher residential property price volatility amplifies both the volatility of government spending and the volatility of the discretionary fiscal policy stance. Equity price volatility increases the volatility of the fiscal policy stance, primarily via the government revenue channel.
    Keywords: Asset prices, fiscal policy, volatility
    JEL: E61 E62 H61 H62 E32
    Date: 2009–11
  12. By: Hans Genberg (Asian Development Bank Institute)
    Abstract: Monetary policy frameworks in the Asia and Pacific region have performed well in the past decade as judged by inflation outcomes. We argue that this is due to three principal factors: (i) central banks have focused on price stability as the primary objective of monetary policy, (ii) institutional setups have been put in place that are supportive of the central banks’ abilities to carry out their objectives, and (iii) economic policies in general have been supportive of the pursuit of price stability, in particular the adoption of prudent fiscal policies that have reduced concerns of fiscal dominance. The financial systems in the region have also held up well in the face of the current crisis, notwithstanding more adverse liquidity conditions in several markets and pressures on certain exchange rates that spilled over from the West. It may nevertheless be useful to ask whether changes in monetary policy frameworks should be contemplated. This paper concludes that: (i) for economies with well developed financial markets, there may be little value in using unconventional monetary policies in the absence of financial crises, because in normal times such policies are not likely to be effective and may further reduce the efficiency of the financial market; (ii) a good case can be made for elevating the role of the misalignment of asset prices (including exchange rates) and financial imbalances in the conduct of monetary policy; and (iii) financial stability should take on greater importance as an objective for public policy. Whether and how much of the financial stability objective should be assigned to the central bank is still an open question.
    Keywords: monetary policy, price stability, financial institutions, fiscal policy, financial crisis
    JEL: E52 E58
    Date: 2010
  13. By: Jens R. Clausen; Bianca Clausen
    Abstract: This paper simulates out-of-sample inflation forecasting for Germany, the UK, and the US. In contrast to other studies, we use output gaps estimated with unrevised real-time GDP data. This exercise assumes an information set similar to that available to a policymaker at a given point in time since GDP data is subject to sometimes substantial revisions. In addition to using real-time datasets for the UK and the US, we employ a dataset for real-time German GDP data not used before. We find that Phillips curves based on ex post output gaps generally improve the accuracy of inflation forecasts compared to an AR(1) forecast but that real-time output gaps often do not help forecasting inflation. This raises the question how operationally useful certain output gap estimates are for forecasting inflation.
    Keywords: Cross country analysis , Economic forecasting , Economic growth , Germany , Gross domestic product , Inflation , United Kingdom , United States ,
    Date: 2010–02–26
  14. By: Maral Shamloo
    Abstract: In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms. Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority's commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.
    Keywords: Economic models , Governance , Monetary authorities , Monetary policy , Russian Federation ,
    Date: 2010–02–16
  15. By: John W. Dawson
    Abstract: This paper examines the empirical relationship between business cycle volatility and economic freedom across countries. In a diverse sample of 85 countries, the results suggest a significantly negative relationship between volatility and a broad measure of freedom—even after controlling for other determinants of cross-country volatility and using an instrumental variables procedure to account for the likely endogeneity of economic freedom. Among the underlying areas of the freedom index, all but the size of government component also have a significantly negative relationship with volatility. Size of government is found to have a significantly positive relationship with volatility. Measures of changes in freedom and the volatility of freedom are found to be statistically insignificant, suggesting that freedom is not among the shocks that cause business cycles. Rather, freedom appears to allow economies to better adjust to those shocks that drive business cycles. Key Words: business cycles, volatility, institutions, economic freedom
    JEL: E32 H11
    Date: 2010
  16. By: Irineu E. Carvalho Filho
    Abstract: This paper appraises how countries with inflation targeting fared during the current crisis, with the goal of establishing the stylized facts that will guide and motivate future research. We find that since August 2008, IT countries lowered nominal policy rates by more and this loosening translated into an even larger differential in real interest rates relative to other countries; were less likely to face deflation scares; and saw sharp real depreciations not associated with a greater perception of risk by markets. We also find some weak evidence that IT countries did better on unemployment rates and advanced IT countries have had relatively stronger industrial production performance. Finally, we find that advanced IT countries had higher GDP growth rates than their non-IT peers, but find no such difference for emerging countries or the full sample.
    Keywords: Central banks , Cross country analysis , Deflation , Economic growth , Emerging markets , Financial crisis , Flexible exchange rates , Global Financial Crisis 2008-2009 , Industrial production , Inflation targeting , Monetary policy , Real effective exchange rates , Unemployment ,
    Date: 2010–02–23
  17. By: DAVILA, Julio (UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    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 no redistribution of income among agents, unlike the implementation of the first-best steady state. The policy is balanced every period at the steady state and, since no public spending exists in the model, it serves the only purpose of implementing a steady state that provides all agents with a higher utility than the laissez-faire competitive equilibrium steady state. The results thus provide a rationale for an active fiscal policy that has nothing to do with redistributive goals or the need to fund any kind of public sending
    Keywords: taxation of savings, overlapping generations, asset bubble
    JEL: E62 E21 E22 H21
    Date: 2009–12–01
  18. By: Alessandra Cornaro (DISCE, Università Cattolica); Anna Agliari (DISCE, Università Cattolica)
    Abstract: In this paper we analyze a basic sticky price model with monopolistic competition and price stickiness à la Calvo. Starting by the relations describing a general economic equilibrium model (see Woodford in Interest and Prices, Foundations of a Theory of Monetary Policy, The MIT Press, 2003), as it results from the optimizing behavior of the private agents, we provide a nonlinear model for the monetary policy analysis. This kind of model is a candidate for the existence of multiple equilibria, with a dependence of exogenous sunspots. We explore the stability of such a model combined with interest rate rules in order to investigate the determinacy of the model and we find, for some policy and elasticity parameters, the conditions under which it is possible.
    Keywords: Monetary policy; Nonlinear models; Determinacy; Sunspots
    JEL: E52 C62
    Date: 2010–02
  19. By: Sumru Altug (Koc University); Melike Bildirici
    Abstract: This paper characterizes business cycle phenomena in a sample of 22 developed and developing economies using a univariate Markov regime switching approach. It examines the efficacy of this approach for detecting business cycle turning points and for identifying distinct economic regimes for each country in question. The paper also provides a comparison of the business cycle turning points implied by this study and those derived in other studies and by other methods. Our findings document the importance of heterogeneity of individual countries’ experiences. We also argue that consideration of a large and diverse group of countries provides an alternative perspective on the co-movement of aggregate economic activity worldwide.
    Keywords: Markov switching approach, business cycles, turning point analysis, nonparametric modelling
    JEL: E32 E37 C32
    Date: 2010–03
  20. By: Michael Kumhof; Dirk Muir; Susanna Mursula; Douglas Laxton
    Abstract: This working paper presents a comprehensive overview of the theoretical structure of the Global Integrated Monetary and Fiscal Model (GIMF), a multi-region dynamic general equilibrium model that is used by the IMF for a variety of tasks including policy analysis, risk analysis, and surveillance.
    Keywords: Banking sector , Central banks , Corporate sector , Cross country analysis , Economic integration , Economic models , Fiscal policy , Monetary policy , Private consumption , Private investment , Private savings , Private sector ,
    Date: 2010–02–17
  21. By: Alessia Campolmi; Ester Faia; Roland Winkler
    Abstract: The endorsement of expansionary fiscal packages has often been based on the idea that large multipliers can contrast rising unemployment. Is that really the case? We explore those issues in a New Keynesian model in which unemployment arises because of matching frictions. We compare fiscal packages with different targets (pure demand stimuli versus subsidy to cost of hiring) and of government funding (lump sum taxation versus distortionary taxation). We find that in presence of demand stimuli fiscal multipliers are zero and even turn negative when financed with distortionary taxation. On the other side, in a model with a non-Walrasian labor market, policies aimed at reducing labor wedges, such as cost of hiring, are particularly effective in boosting employment and output
    Keywords: fiscal calculus, taxation, matching frictions
    JEL: E62 E63 E24
    Date: 2010–03
  22. By: Regling, Klaus (Asian Development Bank Institute); Deroose, Servaas (Asian Development Bank Institute); Felke, Reinhard (Asian Development Bank Institute); Kutos, Paul (Asian Development Bank Institute)
    Abstract: The first decade of economic and monetary union in Europe (EMU) has been a huge success. EMU has significantly benefited its member countries and accelerated the European integration process. Imbalances within EMU-differences in growth, inflation, competitiveness, current account and budget balances-have, however, increased in the last 10 years and, with their economic implications, have become more evident in the global economic crisis. The euro has served as a shield during the crisis, and arguments that the crisis would lead to a breakup of the monetary union are neither new nor convincing. But there are lessons to be learned. Policies should be better coordinated among EMU members and structural reforms accelerated, the framework for the supervision of financial markets strengthened, and external representation streamlined. The crisis has also made the euro more attractive, and most EU countries that are not yet members of EMU are expected to join during the next decade.
    Keywords: european monetary union; first decade; enlarging euro area; financial storm
    JEL: E60 F15 F30 F42
    Date: 2010–03–15
  23. By: Kubo, Koji
    Keywords: Myanmar, Disinflation, Natural Resource Exports, Dual Exchange Rates, Natural Gas, Exports, Inflation
    JEL: E31 F31 O53 Q33
    Date: 2010–03
  24. By: Staehr, Karsten
    Abstract: This paper investigates the process of price convergence in the 10 new EU countries from Central and Eastern Europe. The analyses are based on panel data from 1995 to 2008 of the common currency price relative to the EU15 average. The lagged income level exhibit little explanatory power towards relative inflation, while the lagged price level has some explanatory power. In the long term the relative income and price levels are closely correlated implying concurrent nominal and real convergence. Deviations from the long-term relation between price and income levels are gradually closed by changes in relative inflation and GDP growth, but the process of convergence appears to be rather slow. In the short term the capital inflows associated with current account deficits put substantial upward pressure on the relative price inflation, while the Balassa-Samuelson effect appears to be subdued
    Keywords: real convergence, nominal convergence, real exchange rate, inflation, transition economies
    JEL: E31 O57 P24
    Date: 2010–03–22
  25. By: Gianni De Nicoló; Marcella Lucchetta
    Abstract: This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4- 2009Q1.
    Keywords: Banking sector , Capital markets , Economic forecasting , Economic indicators , Economic models , External shocks , Financial risk , Group of seven , International financial system , Time series ,
    Date: 2010–02–04
  26. By: Malik Shukayev; Alexander Ueberfeldt
    Abstract: Various papers have suggested that Price-Level targeting is a welfare improving policy relative to Inflation targeting. From a practical standpoint, this raises an important yet unanswered question: What is the optimal price index to target? This paper derives the optimal price level targeting index defined over the eight main components of the Consumer Price Index. It finds that such an index places a heavier weight, relative to the expenditure weight, on sectors with slow price adjustments. However, using the expenditure weights instead of the optimal ones results in very small welfare cost.
    Keywords: Monetary policy framework
    JEL: E32 E52
    Date: 2010
  27. By: Jens Hogrefe; Nils Jannsen; Carsten-Patrick Meier
    Abstract: This paper provides statistical evidence suggesting that in industrial countries, recessions that are associated with either banking crises or housing crises dampen output far more than ordinary recessions. Using a parametric panel framework that allows for a bounceback of the level of output in the course of the cyclical recovery, we find that ordinary recessions are followed by strong recoveries that make up for almost all the preceding shortfall in output. This bounceback tends to be significantly smaller following recessions associated with banking crises or housing crises. Our paper corroborates the practice of focusing exclusively on severe crises used in an emerging macroeconomic literature and integrates it with the earlier literature on recessions and recoveries
    Keywords: business cycle, banking crisis, housing crisis, panel data, asymmetry, persistence
    JEL: E32 C33
    Date: 2010–01
  28. By: Andrew Swiston
    Abstract: This paper investigates Central America's external linkages over the last fifteen years of increased integration in light of the 2008-09 global recession. Using structural VAR models, it is found that a one percent shock to U.S. growth shifts economic activity in Central America by 0.7 to 1 percent, on average. Spillovers from global shocks and the rest of the region also affect activity in some countries. Spillovers are mostly transmitted through advanced country financial conditions and fluctuations in external demand for Central American exports. Shocks to advanced economies associated with the 2008-09 financial crisis lowered economic activity in the region by 4 to 5 percent, on average, accounting for a majority of the observed slowdown. The impact was almost twice as large as elasticities estimated on pre-crisis data would have predicted. These results underscore the importance of operating credible policy frameworks that enable a countercyclical policy response to external shocks.
    Keywords: Business cycles , Capital flows , Central America , Cross country analysis , Economic growth , Economic integration , Economic models , External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Spillovers , Trade integration , United States , Workers remittances ,
    Date: 2010–02–17
  29. By: Das, Rituparna
    Abstract: Monetary policy is a very important factor influencing the working of the financial sector of the economy. Forecasting money supply is a part and parcel of designing monetary policy. This paper reviews the econometric models of forecasting money supply in India for the entire post independence period, points out their gaps and tries to fill these gaps. Following are the findings of the paper: (a) Money stock appears as an important determining factor of the economic variables like exchange rate and export volume, which in turn determine the external balance. (b) RBI’s operations in the foreign exchange market affect the exchange rate not immediately, but at 12 months lag. (c) The exchange rate movement may affect the RBI decision to interfere in the foreign exchange market in the immediate short run, but not in the long run. (d) In short run export performance may in some cases give incentives to banks to offer loans, but not in long run. Exercising of discretionary power by bank managers in matter of extending credit facilities is a short-term and not much frequent phenomenon. (e) In absence of bank credit to commercial sector export would be negative or there will be net import.
    Keywords: interest rate; forecasting; money supply; bank credit
    JEL: E51
    Date: 2010–03–10
  30. By: Tokhir Mirzoev; Rafael Portillo; Luis-Felipe Zanna; Andrew Berg
    Abstract: We develop a tractable open-economy new-Keynesian model with two sectors to analyze the short-term effects of aid-financed fiscal expansions. We distinguish between spending the aid, which is under the control of the fiscal authorities, and absorbing the aid-using the aid to finance a higher current account deficit-which is influenced by the central bank's reserves policy when access to international capital markets is limited. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, in contrast, a policy mix that results in spending but not absorbing the aid generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation if demand pressures are strong enough to threaten external balance. Certain features of low income countries, such as limited participation in domestic financial markets, make a real depreciation more likely by amplifying demand pressures when aid is spent but not absorbed. The results from our model can help understand the recent experience of Uganda, which saw an increase in government spending following a surge in aid yet experienced a real depreciation and an increase in real interest rates.
    Date: 2010–03–17
  31. By: Gabriel Perez-Quiros (Banco de España); Hugo Rodríguez Mendizábal (Instituto de Análisis Económico (CSIC))
    Abstract: This paper analyzes the role of standing facilities in the determination of the demand for reserves in the overnight money market. In particular, we study how the asymmetric nature of the deposit and lending facilities could be used as a powerful policy tool for the simultaneous control of prices and quantities in the market for daily funds.
    Keywords: Monetary policy implementation, standing facilities, overnight interest rates, fine tuning operations
    JEL: E52 E58 E43
    Date: 2010–03
  32. By: Daniel Kanda
    Abstract: Asset booms and sectoral changes can distort traditional estimates of structural fiscal revenue, and could lead to serious fiscal policy errors. This paper extends the estimation of structural revenues to take account of asset prices and sectoral changes, and applies this to the case of Ireland, where a property bust has revealed a large hole in the public finances. It is shown that excluding these factors led to a substantial bias in the estimation of structural revenues, and the structural balance prior to the crisis was much larger than earlier estimated.
    Keywords: Asset prices , Business cycles , Economic growth , Economic models , Fiscal analysis , Fiscal policy , Government expenditures , Housing prices , Ireland , National income , Revenues , Taxes ,
    Date: 2010–03–09
  33. By: Ippei Fujiwara (Director, Financial Markets Department, Bank of Japan (E-mail: ippei.fujiwara; Kozo Ueda (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda
    Abstract: We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.
    Keywords: Zero lower bound, two-country model, fiscal policy, beggar-thy-neighbor
    JEL: E52 E62 E63 F41
    Date: 2010–03
  34. By: Arnab Bhattacharjee; Jie Hany
    Abstract: TWe study the impact of both microeconomic factors and the macroeconomy on the financial distress of Chinese listed companies over a period of massive economic transition, 1995 to 2006. Based on an economic model of financial distress under the institutional setting of state protection against exit, and using our own firm-level measure of distress, we find important impacts of firm characteristics, macroeconomic instability and institutional factors on the hazard rate of financial distress. The results are robust to unobserved heterogeneity at the firm level, as well as those shared by firms in similar macroeconomic founding conditions. Comparison with related studies for other economies highlights important policy implications.
    Keywords: Financial Distress, Macroeconomic Instability, Cox Proportional Hazards Model, Unobserved Heterogeneity, Emerging Economies.
    JEL: E32 D21 C41 L16
    Date: 2010–03
  35. By: Rasmus Kattai
    Abstract: There have been several data revisions to the output statistics in Estonia during the past six years as methodologies have been harmonised. These changes are significant enough to require corrections to the earlier understanding of Estonia\'s potential economic growth rate. In this paper the latest data vintage from 2009 is used to estimate Estonia\'s potential output growth and output gap. The production function approach that has been used shows that the gap varies quite extensively, ranging from -8% in 1999 to +8% in 2007, while the average potential growth rate in 1997-2009 was around 6%. The macro model simulations expect the potential growth rate to fall in the future. The fall in the marginal productivity of production inputs makes growth slow to about 4-5% in the next five years, if there are no additional shocks to the economy
    Keywords: potential output, potential growth, output gap
    JEL: E32 F43
    Date: 2010–02–11
  36. By: Hiroshi Fujiki (Associate Director-General and Senior Monetary Affairs Department, Bank of Japan (E-mail: hiroshi.fujiki
    Abstract: During the recent global financial crisis, some central banks introduced two innovative cross-border operations to deal with the problems of foreign currency liquidity shortages: domestic liquidity operations using cross-border collaterals and operations for supplying foreign currency based on standing swap lines among central banks. We show theoretically that central banks improve the efficiency of equilibrium under foreign currency liquidity shortages by those two innovative temporary policy measures.
    Keywords: Standing swap lines, Operations supplying US dollar funds outside the US, Cross-border collateral arrangements
    JEL: E58 F31 F33
    Date: 2010–03
  37. By: Gloria O. Pasadilla (Asian Development Bank Institute)
    Abstract: This paper surveys studies of the importance of Central Asian small- and medium-sized enterprises (SME) in the economy and their experience during the Russian financial crisis. It also uses survey data from the European Bank for Reconstruction and Development’s Business Environment and Enterprise Performance Surveys to infer noteworthy characteristics, features, and dependencies on financing of Central Asian SMEs and, consequently, derive the potential impact of the crisis on the sector. The paper also assesses government support for SMEs and the necessary market reforms that will give a boost to the sector’s development in the region.
    Keywords: SME, market reforms, central Asia, government policy, global financial crisis
    JEL: E44 G18 G28 G38
    Date: 2010
  38. By: Magdalena Zach³od-Jelec (Ministry of Finance, Poland)
    Abstract: This paper studies the long-run relationship between consumption, labour income and asset wealth in Poland. Within cointegrated VAR model dynamic responses of the variables in the system to shocks are studied. In addition series are decomposed into permanent and transitory components. Main conclusion of this paper is that deviations of the three variables from their estimated long-run relationship are better explained with fluctuations of labour income than assets. The paper offers a tentative explanation of this finding. Additionally, the magnitude of the asset wealth effect in Poland is calculated and compared with other studies for European countries and for the U.S.
    Keywords: wealth, cointegration, Beveridge-Nelson decomposition, impulse responses
    JEL: E21 C32
    Date: 2010–01–07
  39. By: DE LA CROIX, David (UniversitŽ catholique de Louvain, CORE and IRES, B-1348 Louvain-la-Neuve, Belgium); PESTIEAU, Pierre (UniversitŽ catholique de Louvain, CORE and IRES, B-1348 Louvain-la-Neuve, Belgium); PONTHIERE, Gregory (Paris School of Economics and Ecole Normale SupŽrieure, Paris, France)
    Abstract: Introduced by Samuelson (1975), the Serendipity Theorem states that the competitive economy will converge towards the optimum steady-state provided the optimum population growth rate is imposed. This paper aims at exploring whether the Serendipity Theorem still holds in an economy with risky lifetime. We show that, under general conditions, including a perfect annuity market with actuarially fair return, imposing the optimum fertility rate and the optimum survival rate leads the competitive economy to the optimum steady-state. That Extended Serendipity Theorem is also shown to hold in economies where old adults work some fraction of the old-age, whatever the retirement age is fixed or chosen by the agents
    Keywords: Serendipity Theorem, fertility, mortality, overlapping generations, retirement
    JEL: E13 E21 I18 J10
    Date: 2009–12–01
  40. By: Rasmus Kattai
    Abstract: This paper gives an overview of the credit risk model that has been developed for the Estonian banking system. The non-performing loans and loan loss provisions of the four largest banks and the rest of the banking sector have been modelled conditional on the underlying economic conditions: economic growth, unemployment, interest rates, in- flation, indebtedness and credit growth. The model highlights the importance of economic growth as the most influential factor behind the soundness of the banking sector in the latest downturn. The expected fall in output volatility will probably decrease the relative importance of output growth and increase the role of interest rates in the future.
    Keywords: credit risk, stress testing, financial soundness indicators, Estonian banking sector
    JEL: E32 E37 G21
    Date: 2010–02–04
  41. By: Dong Heon Kim (Department of Economics, Korea University)
    Abstract: This paper characterizes the nonlinear relation between oil price change and GDP growth, focusing on the panel data of various industrialized countries. Toward this end, the paper extends a flexible nonlinear inference to the panel data analysis where the random error components are incorporated into the flexible approach. The paper reports clear evidence of nonlinearity in the panel and confirms earlier claims in the literature - oil price increases are much more important than decreases and previous upheaval in oil prices causes the marginal effect of any given oil price change to be reduced. Our result suggests that the nonlinear oil-macroeconomy relation is generally observable over different industrialized countries and it is desirable for one to use the nonlinear function of oil price change for GDP forecast.
    Keywords: Oil shock; Nonlinear flexible inference; Panel data; Error components model, Economic fluctuation
    JEL: E32 C33
    Date: 2010
  42. By: Sarno, Lucio; Schneider, Paul; Wagner, Christian
    Abstract: We study the properties of foreign exchange risk premia that can explain the forward bias puzzle - the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premia arise endogenously from imposing the no-arbitrage condition on the relation between the term structure of interest rates and exchange rates, and they compensate for both currency risk and interest rate risk. In our empirical analysis, we estimate risk premia using an affine multi-currency term structure model and find that model-implied risk premia yield unbiased predictions for exchange rate excess returns. While interest rate risk affects the level of risk premia, the time-variation in excess returns is almost entirely driven by currency risk. Furthermore, risk premia are (i) closely related to global risk aversion, (ii) countercyclical to the state of the economy, and (iii) tightly linked to traditional exchange rate fundamentals.
    Keywords: term structure; exchange rates; forward bias; predictability
    JEL: E43 F31 G10
    Date: 2010–01
  43. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Mark Guzman
    Abstract: In this paper, we study a model economy that can account for the distribution of payments within a day. In our model, debtors choose when to arrive at the settlement location. Concomitant with choosing their arrival, debtors are making a production decision. We assume there is a cost to arriving early; that is, late-arrival is associated with a technology that dominates early arrival/production. Second, we treat the debtor's choice as hidden from creditors. We derive conditions under which the planner allocates production to each type of agents. In the decentralized setting, there is a nonarbitrage condition that is consistent with a positive intraday rate. The central bank may be able to implement the planner's allocation with a proper intraday interest rate. In some cases, the optimal intraday rate is positive.
    Keywords: Friedman rule; discount window policy; payment system, intraday rate, settlement risk .
    JEL: E31 E51 E58
    Date: 2010–03–15
  44. By: Yoon Je Cho (Asian Development Bank Institute)
    Abstract: This paper discusses the role of state intervention for prevention, containment, and resolution of financial crises based mainly on the Korean experience during the 1997 Asian financial crisis. Crises in emerging market and developing economies tend to be more complicated than those faced by advanced economies because they are twin crises: financial and currency crises. Such crises require the development of a comprehensive strategy covering the stabilization of the domestic financial market and the foreign exchange market, closely coordinated responses by different government bodies, an extraordinary effort for financial restructuring, and the introduction of a new regulatory framework. This effort should be based on an effective crisis management team of experts given a clear mandate with well defined power; strong political support; effective communication with the market players, both domestic and foreign; and sufficient mobilization of public funds. In this regard, this paper emphasizes the importance of building a reliable information base, prompt actions, orchestrating political consensus, and a balanced approach to restructuring and regulation among different types of financial institutions. The paper also highlights the need for a new international financial architecture matching the rapid integration into the global market of the financial markets of emerging and developing economies while their currency remains non-convertible.
    Keywords: financial crisis, Korea, state intervention, crisis management, financial regulation
    JEL: E58 G18 G21 G28 F34 F36 N20 O16
    Date: 2010

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