nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒04‒17
85 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Macroeconomic Shocks and the Business Cycle: Evidence from a Structural Factor Model By Mario Forni; Luca Gambetti
  2. Modeling Monetary Policy By Reynard, Samuel; Schabert, Andreas
  3. Expectations and economic fluctuations: an analysis using survey data By Sylvain Leduc; Keith Sill
  4. How Has the Monetary Transmission Mechanism Evolved Over Time? By Jean Boivin; Michael T. Kiley; Frederic S. Mishkin
  5. Macroeconomic dynamics and inflation regimes in the U.S. Results from threshold vector autoregressions By Mandler, Martin
  6. Macroeconomic dynamics and inflation regimes in the U.S. Results from threshold vector autoregressions By Martin Mandler
  7. Monetary Policy, the Housing Market, and the 2008 Recession: A Structural Factor Analysis By Matteo Luciani
  8. Inflation Targeting and Inflation Uncertainty By Bedri Kamil Onur Tas
  9. The Macroeconomic Consequences of EMU : International Evidence from a DSGE Model By Jürgen Jerger; Oke Röhe
  10. Implementation of Monetary Policy in India By Deepak Mohanty
  11. Zone targeting monetary policy preferences and financial market conditions: a flexible nonlinear policy reaction function of the SARB monetary policy By Ruthira Naraidoo; Leroi Raputsoane
  12. Time Varying Inflation Targets, Inflation Expectations and Credibility By Bedri Kamil Onur Tas
  13. Degree of Openness and Inflation Targeting Policy: Model of a Small Open Economy By Bousrih Jihene; Bousrih Jihene
  14. Bank-Lending Standards, the Cost Channel and Inflation Dynamics By Sylvia Kaufmann; Johann Scharler
  15. Liquidity demand and welfare in a heterogeneous-agent economy By Yi Wen
  16. Conundrum or Complication: A Study of Yield Curve Dynamics under Unusual Economic Conditions and Monetary Policies. By Peter Cripwell; David Edelman
  17. Beyond DSGE: A macrodynamic model with intertemporal coordination failure By Ronny Mazzocchi
  18. Macroeconomic Implications of Near Rational Behavior: an Application to the Italian Phillips Curve By Novella Maugeri
  19. News Shocks and the Slope of the Term Structure of Interest Rates By André Kurmann; Christopher Otrok
  20. Measuring the Natural Output Gap using Actual and Expected Output Data By Kevin Lee
  21. The macroeconomics of fiscal consolidations in a monetary union: the case of Italy By Lorenzo Forni; Andrea Gerali; Massimiliano Pisani
  22. Monetary Transmission Right from the Start: The (Dis)Connection Between the Money Market and the ECB’s Main Refinancing Rates By Puriya Abbassi; Dieter Nautz
  23. Housing Cycles In The Major Euro Area Countries By Luis J. Álvarez; Guido Bulligan; Alberto Cabrero; Laurent Ferrara; Harald Stahl
  24. Simple and robust rules for monetary policy By John B. Taylor; John C. Williams
  25. Optimal versus realized policy rules in a regime-switching framework By Sophie Pardo; Nicolas Rautureau; Thomas Vallée
  26. Financial market disturbances as sources of business cycle fluctuations in Finland By Freystätter, Hanna
  27. Money and the Welfare Cost of Inflation in an R&D-Growth Model By Angus C. Chu; Ching-Chong Lai
  28. Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness By Adam Cagliarini; Tim Robinson; Allen Tran
  29. The Power of Many: Assessing the Economic Impact of the Global Fiscal Stimulus By Carlos de Resende; René Lalonde; Stephen Snudden
  30. Search in Macroeconomic Models of the Labor Market By Richard Rogerson; Robert Shimer
  31. Inventories, inflation dynamics, and the New Keynesian Phillips Curve By Thomas A. Lubik; Wing Leong Teo
  32. Democracy, Populism and Hyperinflation(s): Some Evidence from Latin America By Manoel Bittencourt
  33. Risk Shocks and Housing Markets By Dorofeenko, Victor; Lee, Gabriel S.; Salyer, Kevin D.
  34. Global Relative Price Shocks: The Role of Macroeconomic Policies By Adam Cagliarini; Warwick McKibbin
  35. Memory of recessions. By Rod Cross; Hugh McNamara; Alexei Pokrovskii
  36. Stabilising the Indian business cycle. By Shah, Ajay; Patnaik, Ila
  37. New Monetarist Economics: models By Stephen D. Williamson; Randall Wright
  38. Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model By De Graeve, Ferre; Dossche, Maarten; Emiris, Marina; Sneessens, Henri; Wouters, Raf
  39. AIECE General Report, Report submitted at the general meeting of 5-6 November 2009 By Wim Suyker; Jos Ebregt; Douwe Kingma; Gerard van Welzenis
  40. New Monetarist Economics: methods By Stephen D. Williamson; Randall Wright
  41. Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach By Ippei Fujiwara; Yasuo Hirose; Mototsugu Shintani
  42. Interest Rate Co-movements, Global Factors and the Long End of the Term Spread By Joseph P. Byrne; Giorgio Fazio; Norbert Fiess
  43. News-Driven International Business Cycles: Effects of the US News Shock on the Canadian Economy By Michiru Sakane
  44. Evaluating Macroeconomic Forecast: A Review of Some Recent Developments By Franses, Ph.H.B.F.; McAleer, M.J.; Legerstee, R.
  45. The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences By Jules van Binsbergen; Jesús Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-Ramírez
  46. The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences By Jules H. van Binsbergen; Jesús Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-Ramírez
  47. On the Non-Causal Link between Volatility and Growth By Olaf Posch; Klaus Wälde
  48. Fiscal Adjustment and the Costs of Public Debt Service: Evidence from OECD Countries By Christoph A. Schaltegger; Martin Weder
  49. Labor Market Search, Housing Prices and Borrowing Constraints. By Javier Andrés Domingo; José Emilio Boscá; Javier Ferri
  50. Building countercyclical fiscal policies in Latin America : the international experience By Gutierrez, Mario; Revilla, Julio E.
  51. GMM and OLS Estimation and Inference for New Keynesian Phillips Curve By Hrishikesh D. Vinod
  52. Fiscal policy, employment by age, and growth in OECD economies By F. HEYLEN; R. VAN DE KERCKHOVE;
  53. Composite Leading Indicator for the Austrian Economy. Methodology and "Real-time" Performance By Jürgen Bierbaumer-Polly
  54. Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness By Zemanek, Holger; Belke, Ansgar; Schnabl, Gunther
  55. A Sticky-Dispersed Information Phillips Curve: A model with partial and delayed information By Marta Areosa; Waldyr Areosa; Vinicius Carrasco
  56. Perspectives on Evaluating Macroeconomic Forecasts By Herman Stekler
  57. Household Leverage and the Recession of 2007 to 2009 By Atif R. Mian; Amir Sufi
  58. the Reliability of Real Time Estimates of the EURO Area Output Gap By Massimiliano Marcellino; Alberto Musso
  59. Quantifying the Impact of Financial Development on Economic Development By Jeremy Greenwood; Juan M. Sanchez; Cheng Wang
  60. Identification of macroeconomic factors in large panels By Lasse BORK; Hans DEWACHTER; Romain HOUSSA
  61. Hysteresis in the fundamentals of macroeconomics. By Rod Cross; Hugh McNamara; Leonid Kalachev; Alexei Pokrovskii
  62. The consumption-wealth ratio and asset returns: The Euro Area, the UK and the US By Ricardo M. Sousa
  63. The Relationship between Exchange Rates and Interest Rate Differentials: a Wavelet Approach By Hacker, Scott; Kim, Hyunjoo; Månsson, Kristofer
  64. The Marginal Products of Residential and Non-Residential Capital Through 2009 By Casey B. Mulligan; Luke Threinen
  65. Is low inflation really causing the decline in exchange rate pass-through? By Miguel A. León-Ledesma; Reginaldo P. Nogueira Júnior
  66. Soft budget constraints in a dynamic general equilibrium model By Enrique Guilles
  67. Cross-Country Differences in the Effects of Oil Shocks By G. PEERSMAN; I. VAN ROBAYS;
  68. Does Export Pricing Explain ‘Fear of Floating’ in Small Open Emerging Market Economies? By M Farid;
  69. Asia Confronts the Impossible Trinity By Patnaik, Ila; Shah, Ajay
  70. Fiscal Expectations on the Stability and Growth Pact: Evidence from Survey Data By Marcos Poplawski-Ribeiro; Jan-Christoph Rülke
  71. Sources of the Volatility Puzzle in the Crude Oil Market By C. BAUMEISTER; G. PEERSMAN;
  72. Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position By Matthew Bell; Gary Blick; Oscar Parkyn; Paul Rodway; Polly Vowles
  73. Time-Varying Expected Returns: Evidence from the U.S. and the U.K By Ricardo M. Sousa
  74. Deep Financial Integration and Volatility By Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych
  75. The Global Financial Crisis:How Similar? How Different? How Costly? By Stijn Claessens; M. Ayhan Kose; Marco E. Terrones
  76. Role of Governance in Explaining Domestic Investment in Nigeria By Olusegun Ayodele Akanbi
  77. O problema do crescente endividamento de Portugal à luz da New Macroeconomics By Pedro Cosme da Costa Vieira
  78. The 2008 Financial Crisis and Taxation Policy By Thomas Hemmelgarn; Gaetan Nicodeme
  80. Tapping the Supercomputer Under Your Desk: Solving Dynamic Equilibrium Models with Graphics Processors By Eric M. Aldrich; Jesús Fernández-Villaverde; Ronald Gallant; Juan F. Rubio-Ramírez
  81. Saving, Investment, and Current Account Surplus in Developing Asia By Park, Donghyun; Shin, Kwanho
  82. Islamic Finance:Structure-objective mismatch and its consequences By Hasan, Zubair
  83. Decision Making in hard Times: What is a Recession, Why Do We Care and How Do We Know When We Are in One? By Kevin Lee
  84. A Macroprudential Framework for the Early Detection of Banking Problems in Emerging Economies By Loser, Claudio M.; Kiguel, Miguel A.; Mermelstein, David
  85. The Optimal Depletion of Exhaustible Resources : A Complete Characterization By BENCHEKROUN, Hassan; WITHAGEN, Cees

  1. By: Mario Forni; Luca Gambetti
    Abstract: We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian "cleansing" view of recessions.
    Keywords: structural factor model; sign restrictions; monetary policy; fiscal policy; demand; supply
    JEL: C32 E32 E52 F31
    Date: 2010–02
  2. By: Reynard, Samuel (Swiss National Bank); Schabert, Andreas (University of Dortmund)
    Abstract: We develop a macroeconomic framework where money is supplied against only few eligible securities in open market operations. The relationship between the policy rate, expected inflation and consumption growth is affected by money market conditions, i.e. the varying liquidity value of eligible assets and the associated risk. This induces a liquidity premium, which explains the observed systematic wedge between the policy rate and consumption Euler interest rate that standard models equate. It further implies a dampened response of consumption to policy rate shocks that is humpshaped when we account for realistic central bank transfers and the dynamics of bond holdings.
    Keywords: Monetary Policy; Open market operations; Liquidity premium; Money market rate; Consumption Euler rate; Monetary policy transmission
    JEL: E32 E43 E52 E58
    Date: 2009–11–09
  3. By: Sylvain Leduc; Keith Sill
    Abstract: Using survey-based measures of future U.S. economic activity from the Livingston Survey and the Survey of Professional Forecasters, we study how changes in expectations, and their interaction with monetary policy, contribute to fluctuations in macroeconomic aggregates. We find that changes in expected future economic activity are a quantitatively important driver of economic fluctuations: a perception that good times are ahead typically leads to a significant rise in current measures of economic activity and inflation. We also find that the short-term interest rate rises in response to expectations of good times as monetary policy tightens. Our results provide quantitative evidence on the importance of expectations-driven business cycles and on the role that monetary policy plays in shaping them.
    Keywords: Economic forecasting ; Monetary policy ; Business cycles
    Date: 2010
  4. By: Jean Boivin; Michael T. Kiley; Frederic S. Mishkin
    Abstract: We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission – the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand – have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes).
    JEL: E2 E3 E4 E5
    Date: 2010–04
  5. By: Mandler, Martin
    Abstract: This paper studies regime dependence in macroeconomic dynamics in the U.S. using a threshold vector autoregressive model in which endogenous regime switches are triggered by the inflation rate. The model separates a high from a low inflation regime with both regimes being strongly persistent. Generalized impulse response functions highlight important across-regime differences in the responses of the economy to monetary policy and inflation shocks. Simulating both regimes with individual structural equations interchanged shows a change in inflation dynamics to be the most important source of the transition of the U.S. economy from the high into the low inflation state while the change in the monetary policy reaction functions has only very little effect. Our results indicate that favorable changes in the economic structure and less frequent and smaller shocks are important explanations for the observed decline in U.S. macroeconomic volatility since the mid 1980s.
    Keywords: threshold vector autoregression; Great Moderation
    JEL: C32 E32 E58
    Date: 2010–03
  6. By: Martin Mandler (University of Giessen, Department of Economics and Business, Licher Straße 66, D-35394 Gießen)
    Abstract: This paper studies regime dependence in macroeconomic dynamics in the U.S. using a threshold vector autoregressive model in which endogenous regime switches are triggered by the inflation rate. The model separates a high from a low inflation regime with both regimes being strongly persistent. Generalized impulse response functions highlight important across-regime differences in the responses of the economy to monetary policy and inflation shocks. Simulating both regimes with individual structural equations interchanged shows a change in inflation dynamics to be the most important source of the transition of the U.S. economy from the high into the low inflation state while the change in the monetary policy reaction functions has only very little effect. Our results indicate that favorable changes in the economic structure and less frequent and smaller shocks are important explanations for the observed decline in U.S. macroeconomic volatility since the mid 1980s.
    Keywords: threshold vector autoregression, Great Moderation
    JEL: E32 E58 C32
    Date: 2010
  7. By: Matteo Luciani (Dipartimento di Economia, Sapienza University of Rome Italy)
    Abstract: DThis paper estimates a Structural Dynamic Factor Model on a panel of 102 US quarterly series. We model economic comovements by means of 5 underlying structural shocks (oil price, productivity, aggregate demand, monetary policy, and housing demand). The results of the benchmark model (impulse responses and variance decompositions) are in line with those predicted by economic theory and usually estimated by the empirical literature. We show that while over the whole sample the contribution of the housing demand shock is negligible, after the early eighties' liberalizations in housing finance, the housing demand shock has become a substantial source of business cycle fluctuations. The model is then used to analyze the causes of the 2008 recession: results indicate that we cannot exclude that monetary policy played a non negligible role in leading the way for the downturn in residential investment and the ensuing recession.\\ JEL Classification: C32, E32, E52, R2
    Keywords: Structural Factor Model, Business Cycle, Monetary Policy, Housing.; Structural Factor Model, Business Cycle, Monetary Policy, Housing
    JEL: C32 E32 E52 R2
    Date: 2010
  8. By: Bedri Kamil Onur Tas
    Date: 2009–12
  9. By: Jürgen Jerger (Osteuropa-Institut, Regensburg (Institut for East European Studies)); Oke Röhe (University of Regensburg)
    Abstract: In this paper, we estimate a New Keynesian DSGE model developed by Ireland (2003) on French, German and Spanish data with the aim to explore the macroeconomic consequences of EMU. In order to validate the results from the DSGE model, we amend this analysis by stability tests of monetary policy reaction functions for these countries. We find that (a) the DSGE structure is well suited for the characterization of key macroeconomic features of the three economies; (b) significant effciency gains were realized in terms of lower adjustment cost of prices and the capital stock; (c) the behavior of monetary policy did not change in Germany, unlike in France and Spain. Specifically, the impact of inflation on interest rates increased considerably in the two latter countries.
    Keywords: DSGE, monetary policy, EMU
    JEL: E31 E32 E52
    Date: 2009–10
  10. By: Deepak Mohanty
    Abstract: How does the Reserve Bank of India implement monetary policy? The objectives and framework of monetary policy, as they have evolved, the operational aspects of monetary policy have been discussed. The processes of monetary policy formulation and communication have also been depicted. [Speech delivered at the Bankers Club, Bhubaneswar].
    Keywords: financial, GDP growth, reserve bank, India, monetary policy, communication, formulation, stability, economy, India, inflation rate, exchange, demand function,
    Date: 2010
  11. By: Ruthira Naraidoo (Department of Economics, University of Pretoria); Leroi Raputsoane (Department of Economics, University of Pretoria)
    Abstract: Based on a representation of policymaker’s preferences that capture inflation zone targeting behaviors, we estimate a flexible model of the monetary policy reaction function of the South African Reserve Bank (SARB). To address the current debate on the importance of financial asset prices in monetary policy decision making, we augment the analysis to allow for responses to financial market conditions over and above prices and output stabilisation. The main findings are that the monetary authorities’ response towards inflation is zone symmetric. Secondly, the monetary authorities’ response towards output is asymmetric with increased reaction during business cycle downturns versus upturns. Thirdly, the monetary authorities’ pay close attention to financial conditions index. They place the same weight on financial market booms and recessions so that their response is symmetric.
    Keywords: Zones, asymmetries, financial conditions index
    JEL: C51 E12 E58
    Date: 2010–03
  12. By: Bedri Kamil Onur Tas
    Date: 2009–12
  13. By: Bousrih Jihene (UNIVERSITY OF RENNES 1); Bousrih Jihene
    Abstract: In this paper, we present the dynamics of a Neo-Keynesian model applied to a small open economy in order to study the impact of openness on the choice of the appropriate inflation targeting policy. In the event of exogenous shocks, we can use either a CPI inflation targeting policy or a domestic inflation targeting policy. We conclude that there is a relation between the degree of openness of the economy and the type of infation targeting policy. By considering a domestic shock, when the economy is more open towards outside, we may find that the adoption of CPI inflation targeting is benefical. Whereas in the event of foreign shock, the optimal rule would be the domestic inflation targeting. By considering the criteria of social welfare, we find that for an important degree of openness, the policy of CPI inflation targeting remains the optimal monetary rule.
    Keywords: Monetary policy, Domestic Inflation, CPI Inflation, Pass-Through, Degree of Openness
    JEL: E31 E37 E52 F41
    Date: 2010
  14. By: Sylvia Kaufmann; Johann Scharler
    Abstract: If firms borrow working capital to finance production, then nominal interest rates have a direct influence on inflation dynamics, which appears to be the case empirically. However, interest rates may only partly mirror the cost of working capital. In this paper we explore the role of bank lending standards as a potential additional cost source and evaluate their empirical importance in explaining inflation dynamics in the US and in the euro area.
    Keywords: New Keynesian Phillips Curve, Cost Channel, Bank Lending Standards, Bayesian Analysis
    JEL: E40 E50
    Date: 2009–10
  15. By: Yi Wen
    Abstract: This paper provides an analytically tractable general-equilibrium model of money demand with micro-foundations. The model is based on the incomplete-market model of Bewley (1980) where money serves as a store of value and provides liquidity to smooth consumption. The model is applied to study the effects of monetary policies. It is shown that heterogeneous liquidity demand can lead to sluggish movements in aggregate prices and positive responses from aggregate output to transitory money injections. However, permanent money growth can be extremely costly: With log utility function and an endogenously determined distribution of money balances that matches the household data, agents are willing to reduce consumption by 8% (or more) to avoid 10% annual inflation. The large welfare cost of inflation arises because inflation destroys the liquidity value and the buffer-stock function of money, thus raising the volatility of consumption for low-income households. The astonishingly large welfare cost of moderate inflation provides a justification for adopting a low inflation target by central banks and offers an explanation for the empirical relationship between inflation and social unrest in developing countries.
    Keywords: Liquidity (Economics)
    Date: 2010
  16. By: Peter Cripwell (School of Business, University College Dublin); David Edelman (School of Business, University College Dublin)
    Abstract: The definition of the decline of long term yields in the light of increasing short term yields as a conundrum by Chairman Greenspan in February 2005 has generated a significant amount of research. This paper presents a study of yield curve dynamics over this period using economic surprise data as the diagnostic tool. Results are presented for both US and Japanese data which indicate a non-linear response of the yield curve to economic data and monetary policy over the period in question. Further, a limited model is presented that is consistent with the observations. This can lead to an explanation of the conundrum in terms of a non-linear yield response to expected long term inflation and a variable expected long term real rate.
    Keywords: federal reserve, term structure of interest rates, inflation
    JEL: E43 E44 E52 E58
    Date: 2010–04–12
  17. By: Ronny Mazzocchi
    Abstract: The current consensus in macroeconomics, or New Neoclassical Synthesis (NNS), is based on dynamically stochastic general equilibrium (DSGE) modelling with a RBC core to which nominal rigidities are added by way of imperfect competition. The strategy is to minimize the frictions that are required to reproduce Keynesian results (in terms of persistent real effects of monetary policy) and Wicksellian results (in terms of interaction of interest and prices) in a rigorous framework with intertemporal optimization of consumption, forward-looking behavior and continously clearing markets. In reality the main contention of Keynes and Wicksell was saving-investment imbalances (i.e. capital market failures and intertemporal disequilibrium in modern parlance) that are notably absent from the NNS. The paper presents a dynamic model with endogenous capital stock whereby it is possible to assess, and hopefully clarify, some basic issues concerning the macroeconomics of saving-investment imbalances and to explore the dynamic properties of the system under different monetary policy rules.
    Keywords: macroeconomics, monetary policy, New Neoclassical Synthesis, saving-investment imbalances, intertemporal coordination failure.
    JEL: E21 E22 E31 E32 E52
    Date: 2010–01
  18. By: Novella Maugeri
    Abstract: New-Keynesian macroeconomic models typically conclude that longrun unemployment gravitates around the NAIRU, regardless of the nominal inflation rate. Contrastingly, the model of Akerlof, Dickens and Perry (2000) (ADP) predicts that excessively low inflation may result in a situation where unemployment is high relative to the social optimum. This paper investigates whether ADP-type short- and long-run Phillips Curves may suit the Italian economy. Firstly we estimated a short-run non accelerationist Phillips curve (i.e. where the expected inflation coefficient depends on inflation and it is generally less than unit) on Italian post-war data. Based on these results, we then simulated the long-run Phillips Curve and ran robustness checks by using a rival cointegration approach. We have two main results. First, the Italian short-run Phillips curve is actually non-accelerationist. Second, our estimates indicate that in Italy a long-run trade-o¤ between inflation and unemployment cannot be ruled out at low and moderate inflation rates.
    Keywords: Near-rationality; Non-accelerationist Phillips Curve; Natural rate of unemployment
    JEL: E24 E31 J41
    Date: 2010–03
  19. By: André Kurmann; Christopher Otrok
    Abstract: We provide a new structural interpretation of the relationship between the slope of the term structure of interest rates and macroeconomic fundamentals. We first adopt an agnostic identification approach that allows us to identify the shocks that explain most of the movements in the slope. We find that two shocks are sufficient to explain virtually all movements in the slope. Impulse response functions for the first shock, which explains the majority of the movements in the slope, lead us to interpret this main shock as a news shock about future productivity. We confirm this interpretation by formally identifying such a news shock as in Barsky and Sims (2009) and Sims (2009). We then assess to what extent a New Keynesian DSGE model is capable of generating the observed slope responses to a news shock. We find that augmenting DSGE models with a term structure provides valuable information to discipline the description of monetary policy and the model’s response to news shocks in general.
    Keywords: Term structure of interest rates, news, productivity shocks, business cycles, monetary policy
    JEL: E30 E43 E52
    Date: 2010
  20. By: Kevin Lee
    Abstract: An output gap measure is suggested based on the Beveridge-Nelson decomposition of output using a vector-autoregressive model that includes data on actual output and on expected output obtained from surveys. The paper explains the advantages of using survey data in business cycle analysis and the gap is provided economic meaning by relating it to the natural level of output defined in Dynamic Stochastic General Equilibrium models. The measure is applied to quarterly US data over the period 1970q1-2007q4 and the resultant gap estimates are shown to have sensible statistical properties and perform well in explaining inflation in estimates of New Keynesian Phillips curves.
    Keywords: Trend Output; Natural Output Level; Output Gap; Beveridge-Nelson Decomposition; Survey-based Expectations; New Keynesian Phillips Curve
    JEL: C32 D84 E32
    Date: 2009–10
  21. By: Lorenzo Forni (Bank of Italy); Andrea Gerali (Bank of Italy); Massimiliano Pisani (Bank of Italy JEL classification: E62, H63)
    Abstract: We simulate the macroeconomic and welfare implications of different fiscal consolidation scenarios in Italy using a medium scale two-areas dynamic general equilibrium currency-union model. Differently from similar models, ours is rich in the terms of fiscal features. We assume distortionary taxes (on labor income, capital income and consumption) and welfare-enhancing public expenditure. We distinguish between public spending on final goods and services, public employment and transfers to households. The scenarios that we consider envisage a decreases in the public debt to GDP ratio of 10 percentage points in 5 years. Based on our simulations we find that: first, fiscal distortions are quantitatively significant; second, a consolidation strategy that reduces expenditure and simultaneously lowers tax rates has a positive effect on long-run GDP of 5% to 7% and on welfare of 4% to 7% of the initial levels, depending on the composition of the adjustment; third, consumption and investment are stable or grow on impact and along the path to the new steady state; finally, spillovers to the rest of the Euro area are expansionary and sizeable both in the long run and along the transition.
    Keywords: fiscal consolidation, monetary union, distortionary taxation, general equilibrium models
    Date: 2010–03
  22. By: Puriya Abbassi; Dieter Nautz
    Abstract: The relation between the ECB’s main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks’ refinancing conditions.
    Keywords: Financial Crisis, Monetary transmission process, Central bank auctions, European Central Bank, Money markets
    JEL: E43 E52 E58 D44
    Date: 2010–03
  23. By: Luis J. Álvarez (Banco de España); Guido Bulligan (Banca d’Italia); Alberto Cabrero (Banco de España); Laurent Ferrara (Banque de France); Harald Stahl (Deutsche Bundesbank)
    Abstract: The recent burst of the house price bubble in the United States and its spillover effects on real economies worldwide has rekindled the interest in the role of housing in the business cycle. In this paper, we investigate the relationships between housing cycles among the four major euro area countries (Germany, France, Italy and Spain) over the sample 1980Q1-2008Q4. Our main findings are that GDP cycles show a high degree of comovement across these four countries, reflecting trade linkages, but much weaker ones for housing market cycles, where idiosyncratic factors play a major role. House prices are even less related than quantities across countries. We also find much stronger relationships in the common monetary policy period.
    Keywords: Housing cycles, synchronisation measures, euro area countries
    JEL: E32 R21 R32
    Date: 2010–03
  24. By: John B. Taylor; John C. Williams
    Abstract: This paper focuses on simple normative rules for monetary policy which central banks can use to guide their interest rate decisions. Such rules were first derived from research on empirical monetary models with rational expectations and sticky prices built in the 1970s and 1980s. During the past two decades substantial progress has been made in establishing that such rules are robust. They perform well with a variety of newer and more rigorous models and policy evaluation methods. Simple rules are also frequently more robust than fully optimal rules. Important progress has also been made in understanding how to adjust simple rules to deal with measurement error and expectations. Moreover, historical experience has shown that simple rules can work well in the real world in that macroeconomic performance has been better when central bank decisions were described by such rules. The recent financial crisis has not changed these conclusions, but it has stimulated important research on how policy rules should deal with asset bubbles and the zero bound on interest rates. Going forward the crisis has drawn attention to the importance of research on international monetary issues and on the implications of discretionary deviations from policy rules.
    Keywords: Monetary policy
    Date: 2010
  25. By: Sophie Pardo (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Nicolas Rautureau (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Thomas Vallée (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: In this paper we compare a deterministic model and a Markov switching model to analyze the behavior of the US economy and the Federal Reserve. We examine both optimal and empirical monetary policies for the US Federal Reserve between 1960 and 2008. We compare the optimal monetary policy to the actual interest rates and to the empirical reaction function. We also evaluate the sensitivity of the results to the preferences assigned to each objective. We find that there is no unique optimal solution that fits the Federal Reserve behavior over the entire period. The best fit to the actual interest rates is obtained by an optimal policy with preference switches following the rule: a high-volatility regime coincides with a priority on inflation alone while in a low-volatility regime there is equal policy priority on output stabilization and inflation.
    Date: 2010
  26. By: Freystätter, Hanna (Bank of Finland Research)
    Abstract: This paper studies financial market disturbances as sources of investment fluctuations in Finland during 1995–2008. We construct a DSGE model of the Finnish economy that incorporates two domestic financial market shocks and financial frictions in the form of a BGG financial accelerator. We investigate empirically the importance of financial market frictions and disturbances by estimating the model using a Bayesian Maximum Likelihood approach. The empirical evidence points to an operative financial accelerator mechanism in Finland. Our key result is that disturbances originating in the financial sector have played a significant role in the historical variation of investment activities in Finland. Even allowing for several shocks stemming from both domestic sources and the international economy, domestic financial market shocks emerge as key drivers of recent business cycle fluctuations in Finland.
    Keywords: financial market disturbances; DSGE models; Bayesian estimation
    JEL: E32 E44 F41
    Date: 2010–02–21
  27. By: Angus C. Chu (Institute of Economics, Academia Sinica, Taipei, Taiwan); Ching-Chong Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This study analyzes the effects of inflation on R&D and innovation-driven growth. In the theoretical section, we incorporate money demand into a quality-ladder model with elastic labor supply and derive the following results. If the elasticity of substitution between consumption and the real money balance is less (greater) than unity, then R&D and output growth are decreasing (increasing) in inflation. If either labor supply is inelastic or the elasticity of substitution between consumption and the real money balance is unity, then social welfare monotonically increases as the nominal interest rate approaches zero (i.e. the Friedman rule). Quantitatively, decreasing inflation in the US to achieve price stability improves welfare (equivalent to a permanent increase in consumption of at least 0.5%). In the empirical section, we use cross-country data to establish a negative and statistically significant relationship between inflation and R&D.
    Keywords: economic growth, inflation, money, R&D; economic growth, inflation, money, R&D
    JEL: E41 O41
    Date: 2010–03
  28. By: Adam Cagliarini (Reserve Bank of Australia); Tim Robinson (Reserve Bank of Australia); Allen Tran (Reserve Bank of Australia)
    Abstract: This paper attempts to reconcile the high estimates of price stickiness from macroeconomic estimates of a New-Keynesian Phillips Curve (NKPC) with the lower values obtained from surveys of firms’ pricing behaviour. This microeconomic evidence also suggests that the frequency with which firms adjust their prices varies across sectors. The paper shows that in the presence of this heterogeneity, estimates of aggregate price stickiness from microeconomic and macroeconomic data should differ. Heterogeneity in firms’ pricing decisions, as well as a more realistic production structure, is introduced into an otherwise standard New-Keynesian model. Using a model calibrated with microeconomic pricing survey data for Australia, the paper shows that estimates of the NKPC considerably overstate the true degree of price stickiness and may falsely suggest that some prices are indexed to past inflation. These problems arise because of a type of misspecification and a lack of suitable instruments.
    Keywords: separate by New-Keynesian Phillips Curve; inflation
    JEL: E31 E32
    Date: 2010–03
  29. By: Carlos de Resende; René Lalonde; Stephen Snudden
    Abstract: The Bank of Canada Global Economy Model (BoC-GEM) is used to examine the effect of various types of discretionary fiscal policies on different regions of the globe. The BoC-GEM is a microfounded dynamic stochastic general-equilibrium global model with six regions, multiple sectors, and international linkages. The authors use the model to assess four main fiscal policy concerns: (i) how the effect of an isolated local fiscal stimulus differs from one jointly implemented in all regions; (ii) which regions are most likely to gain from joint fiscal stimuli, and why; (iii) how the impact of fiscal stimulus can differ conditional on how it is implemented, its timing and duration, and its magnitude relative to that of other regions; and (iv) how the impact of fiscal policy is affected by the inability of monetary policy to push nominal interest rates below zero. The authors use their results to gauge the potential effect of fiscal policy initiatives of the G-20 countries in 2009 and 2010.
    Keywords: Business fluctuations and cycles; Fiscal policy; International topics; Recent economic and financial developments
    JEL: E52 E58 E61 E63 F42
    Date: 2010
  30. By: Richard Rogerson; Robert Shimer
    Abstract: This chapter assesses how models with search frictions have shaped our understanding of aggregate labor market outcomes in two contexts: business cycle fluctuations and long-run (trend) changes. We first consolidate data on aggregate labor market outcomes for a large set of OECD countries. We then ask how models with search improve our understanding of these data. Our results are mixed. Search models are useful for interpreting the behavior of some additional data series, but search frictions per se do not seem to improve our understanding of movements in total hours at either business cycle frequencies or in the long-run. Still, models with search seem promising as a framework for understanding how different wage setting processes affect aggregate labor market outcomes.
    JEL: E24 E32 J21 J64
    Date: 2010–04
  31. By: Thomas A. Lubik; Wing Leong Teo
    Abstract: We introduce inventories into an otherwise standard New Keynesian model and study the implications for inflation dynamics. Inventory holdings are motivated as a means to generate sales for demand-constrained firms. We derive various representations of the New Keynesian Phillips curve with inventories and show that one of these specifications is observationally equivalent to the standard model with respect to the behavior of inflation when the model's cross-equation restrictions are imposed. However, the driving variable in the New Keynesian Phillips curve - real marginal cost - is unobservable and has to be proxied by, for instance, unit labor costs. An alternative approach is to impute marginal cost by using the model's optimality conditions. We show that the stock-sales ratio is linked to marginal cost. We also estimate these various specifications of the New Keynesian Phillips curve using GMM. We find that predictive power of the inventory-specification at best approaches that of the standard model, but does not improve upon it. We conclude that inventories do not play a role in explaining inflation dynamics within our New Keynesian Phillips curve framework.
    Keywords: Inflation (Finance)
    Date: 2010
  32. By: Manoel Bittencourt
    Abstract: We test for the populist view of inflation in Latin America between 1970 and 2007. The empirical results - based on the relatively novel panel time-series data and analysis - confirm the theoretical prediction that recently elected governments coming into power after periods of political dictatorship, and which are faced with high economic inequality, end up generating high inflation and macroeconomic instability. All in all, we suggest that the implementation of democracy as such requires not only the right political context' - or an appropriately constrained executive - to work well, but it also must come with certain economic institutions (e.g. central bank independence and a credible and responsible fiscal authority), institutions which would raise the costs of pursuing populist policies in the first place.
    Keywords: Democracy, populism, hyperination, Latin America
    JEL: E31 E65 N16 O23 O54
    Date: 2010
  33. By: Dorofeenko, Victor (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Lee, Gabriel S. (IREBS, University of Regensburg, Regensburg, Germany, and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Salyer, Kevin D. (Department of Economics, University of California, Davis, USA)
    Abstract: This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.
    Keywords: Agency costs, credit channel, time-varying uncertainty, residential investment, housing production, calibration
    JEL: E4 E5 E2 R2 R3
    Date: 2010–02
  34. By: Adam Cagliarini (Reserve Bank of Australia); Warwick McKibbin (Centre for Applied Macroeconomic Analysis, Australian National University)
    Abstract: We use the multi-sector and multi-country G-Cubed model to explore the potential role of three major shocks – to productivity, risk premia and US monetary policy – to explain the large movements in relative prices between 2002 and 2008. We find that productivity shocks were major drivers of relative price movements, while shocks to risk premia and US monetary policy contributed temporarily to some of the relative price dispersions we observe in the data. The effect of US monetary policy shocks on relative prices was most pronounced in countries that fix their currency to the US dollar. Those countries that float were largely shielded from these effects. We conclude that the shocks we consider cannot fully capture the magnitude of the relative price movements over this period, suggesting that other driving forces could also be responsible, including those outside of the model.
    Keywords: productivity; relative prices; G-Cubed; risk premia; economic policy
    JEL: E37 E52 E65
    Date: 2009–12
  35. By: Rod Cross (Department of Economics, University of Strathclyde); Hugh McNamara (Department of applied mathematics, University cork College, Ireland); Alexei Pokrovskii (Department of applied mathematics, University cork College, Ireland)
    Abstract: This paper reviews the evidence on the effects of recessions on potential output. In contrast to the assumption in mainstream macroeconomic models that economic fluctuations do not change potential output paths, the evidence is that they do in the case of recessions. A model is proposed to explain this phenomenon, based on an analogy with water flows inporous media. Because of the discrete adjustments made by heterogeneous economic agents in such a world, potential output displays hysteresis with regard to aggregate demand shocks, and thus retains a memory of the shocks associated with recessions.
    Keywords: Recessions, Permanent Effects, Hydraulic Keynesianism, Porous Media, Hysteresis.
    JEL: E12 E32 A12
    Date: 2010–03
  36. By: Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Date: 2010–02
  37. By: Stephen D. Williamson; Randall Wright
    Abstract: The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.
    Date: 2010
  38. By: De Graeve, Ferre (Research Department, Central Bank of Sweden); Dossche, Maarten (National Bank of Belgium); Emiris, Marina (Bank of Canada); Sneessens, Henri (University of Luxembourg); Wouters, Raf (National Bank of Belgium)
    Abstract: We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in attitude towards risk and intertemporal substitution. Aggregate productivity and distribution risks are transferred across these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. Based on the empirical estimates for the two sources of real macroeconomicrisk, the model generates significant and plausible time variation in both bond and equity risk premiums. Interestingly, the single largest jump in both the risk premium and the price of risk is observed during the current recession.
    Keywords: Macro-Finance; Heterogeneous agent; Limited participation; Equity premium; Bond premium
    JEL: E32 E44 G12
    Date: 2010–01–01
  39. By: Wim Suyker; Jos Ebregt; Douwe Kingma; Gerard van Welzenis
    Abstract: The worst of the financial crisis is behind us. Nevertheless, the fall in global output in 2009 will be the largest of the post-war period. As a result, unemployment and government deficits are rising steeply this year, while inflation will be very low. Financial market support measures and expansionary macroeconomic policy have brought the steep output drop to an end and are leading to a tentative recovery of world output and world trade from the third quarter onwards. This upswing will continue next year, provided that the gradual return to normalcy now taking place in financial markets holds. The uncertainty that surrounds future international developments remains high.
    Keywords: economic outlook; Europe
    JEL: E66 F01
    Date: 2009–12
  40. By: Stephen D. Williamson; Randall Wright
    Abstract: This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. We describe the principles of these schools and contrast them with our approach. To show how it works, in practice, we build a benchmark New Monetarist model, and use it to study several issues, including the cost of inflation, liquidity and asset trading. We also develop a new model of banking.
    Date: 2010
  41. By: Ippei Fujiwara (Financial Markets Department, Bank of Japan); Yasuo Hirose (Monetary Affairs Department, Bank of Japan); Mototsugu Shintani (Department of Economics, Vanderbilt University)
    Abstract: We examine whether the news shocks, as explored in Beaudry and Portier(2004), can be a major source of aggregate fluctuations. For this purpose, we extend a standard dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005), and Smets and Wouters (2003, 2007) by allowing news shocks on the total factor productivity, and estimate the model using Bayesian methods. Estimation results on the U.S. and Japanese economies suggest that (1) news shocks play a relatively more important role in the U.S. than in Japan; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks.
    Keywords: Bayesian estimation, business cycles, news
    JEL: E30 E40 E50
    Date: 2009–12
  42. By: Joseph P. Byrne; Giorgio Fazio; Norbert Fiess
    Abstract: The disconnect between rising short and low long interest rates has been a distinctive feature of the 2000s. Both research and policy circles have argued that international forces, such as global monetary policy (e.g. Rogoff, 2006); international business cycles (e.g. Borio and Filardo, 2007); or a global savings glut (e.g Bernanke, 2005) may be responsible. In this paper, we employ recent advances in panel data econometrics to document the disconnect and link it explicitly to the existence of a global latent factor that dominates the long end of the term spread for the recent period; the saving glut story emerges as the most likely contender for the global factor.
    Keywords: Short and Long Interest Rates, Financial Globalization, Panel Data, Factor Models
    JEL: E43 F01 F36 G15 C33
    Date: 2010–03
  43. By: Michiru Sakane
    Abstract: This paper studies the international transmission effects of the news about the Total Factor Productivity (TFP) of the US to the Canadian economy. First, using the Vector Error Correction Model (VECM), the impulse responses of Canadian macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country RBC model with the preference introduced by Jaimovich and Rebelo (2008) and investment adjustment cost to generate booms in Canadian variables in response to news about future US TFP. I find that international macroeconomic comovements between the US and Canada can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian TFP to the US news shock is important in order to generate the boom observed in empirical analysis. Estimated value of the preference parameter indicates that getting rid of the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explaining the domestic boom created by the news shock, which highlights the importance of analyzing an open economy.
    Date: 2010–03
  44. By: Franses, Ph.H.B.F.; McAleer, M.J.; Legerstee, R. (Erasmus Econometric Institute)
    Abstract: Macroeconomic forecasts are frequently produced, published, discussed and used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are based on econometric model forecasts as well as on human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model, the other forecast, and intuition; and (iii) the two forecasts are generated from two distinct combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth
    Keywords: macroeconomic forecasts;econometric models;human intuition;biased forecasts;forecast performance;forecast evaluation;forecast comparison
    Date: 2010–03–30
  45. By: Jules van Binsbergen; Jesús Fernández-Villaverde; Ralph S.J. Koijen; Juan F. Rubio-Ramírez
    Abstract: We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model's fit.
    JEL: E2 E3 G12
    Date: 2010–04
  46. By: Jules H. van Binsbergen (Graduate School of Business, Stanford University); Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Ralph S.J. Koijen (Booth School of Business, University of Chicago); Juan F. Rubio-Ramírez (Department of Economics, Duke University)
    Abstract: We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model’s fit.
    Keywords: DSGE models, Epstein-Zin preferences, likelihood estimation, yield curve
    JEL: E30 G12
    Date: 2010–03–01
  47. By: Olaf Posch (School of Economics amd Management, Ahrhus University, Denmark); Klaus Wälde (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany)
    Abstract: A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the eects through which economies with dierent tax levels dier both in their volatility and growth. Using a continuous-time dynamic stochastic general equilibrium (DSGE) model with plausible parametric restrictions, we obtain closed-form measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.
    Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models
    JEL: E32 E62 H3 C65
    Date: 2010–03–08
  48. By: Christoph A. Schaltegger; Martin Weder
    Abstract: We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates – a key fiscal indicator reflecting the costs of government debt service. A government confronted with high deficits and rising debt will sooner or later need to enact fiscal adjustments in order to avoid solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. Control-ling for various economic, fiscal and political factors, we find that the size and the composi-tion of a fiscal adjustment significantly affect interest rates as well as yield spreads. Adjust-ments that are relatively large and those that primarily depend on expenditure cuts lead to substantially lower long-term interest rates. However, periods of fiscal adjustments do not generally have an influence on interest rates, even if they were successful and led to lower deficits and debt levels. Instead, financial markets only seem to value strict and decisive measures – a clear sign that the government’s pledge to cut the deficit is credible.
    Keywords: Fiscal Adjustment; Consolidation Policy; government deficit; long-term interest rates
    JEL: E61 E63 H61
    Date: 2010–04
  49. By: Javier Andrés Domingo (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain)
    Abstract: Mortgage market deregulation in the early 1980s coincided in time with a sharp break in the cyclical behavior of many variables related to housing and to the labor market. This paper analyses the joint dynamics of labor market variables, output and housing prices in a search model with efficient bargaining and financial frictions. In a setting of household heterogeneity, only mortgaged-backed loans are available for impatient households, whose borrowing cannot exceed a proportion of the expected value of their real estate holdings. This feature of the credit market, together with search and matching frictions in the labor market, establish a strong link between credit constraints and consumption that significantly affects labor market outcomes: hours, wages and vacancies. The model is also able to explain the comovements of housing prices with output, productive investment and consumption. Our analysis confirms that the response of labor market variables to technology shocks has been substantially affected by the changes in the nature and tightness of imperfections in credit markets that occurred in the early 1980s. Allowing for a housing price shock, in addition to the technology shock, the model is also able to explain the observed reduction in the correlation of housing prices with both output and private investment.
    Keywords: general equilibrium, borrowing constraints, search frictions, housing prices
    JEL: E24 E32 E44
    Date: 2010–03
  50. By: Gutierrez, Mario; Revilla, Julio E.
    Abstract: This paper reviews the international experience of developed and underdeveloped economies in reducing the pro-cyclicality and deficit bias of fiscal policies and promoting the adoption of effective countercyclical fiscal policy actions. The paper draws lessons and best international practices for building fiscal policy frameworks and adopting feasible countercyclical fiscal policies in Latin America. The authors review the main arguments regarding the proper role and limitations of countercyclical fiscal policies, and offer an evaluation of the international evidence demonstrating the typical pro-cyclicality and deficit bias of fiscal policy. The paper analyzes the international experience with fiscal frameworks, budgetary rules, and other mechanisms for implementing countercyclical fiscal policies, and describes the necessary preconditions for building a stable and effective countercyclical fiscal policy framework in Latin America. The authors review the international best practices for establishing a reliable and effective countercyclical fiscal policy in the region.
    Keywords: Economic Stabilization,Debt Markets,Public Sector Expenditure Policy,Fiscal Adjustment,Subnational Economic Development
    Date: 2010–02–01
  51. By: Hrishikesh D. Vinod (Fordham University, Department of Economics)
    Abstract: This paper considers estimation situations where identification, endogeneity and non-spherical regression error problems are present. Instead of always using GMM despite weak instruments to solve the endogeneity, it is possible to first check whether endogeneity is serious enough to cause inconsistency in the particular problem at hand. We show how to use Maximum Entropy bootstrap (meboot) for nonstationary time series data and check `convergence in probability’ and `almost sure convergence’ by evaluating the proportion of sample paths straying outside error bounds as the sample size increases. The new Keynesian Phillips curve (NKPC) ordinary least squares (OLS) estimation for US data finds little endogeneity-induced inconsistency and that GMM seems to worsen it. The potential `lack of identification’ problem is solved by replacing the traditional pivot which divides an estimate by its standard error by the Godambe pivot, as explained in Vinod (2008) and Vinod (2010), leading to superior confidence intervals for deep parameters of the NKPC model.
    Keywords: Bootstrap, simulation, convergence, inflation inertia, sticky prices
    Date: 2010
    Abstract: We build and parameterize a general equilibrium OLG model for an open economy to study hours of work in three age groups, education of the young, and aggregate per capita growth. The composition of fiscal policy plays a crucial role. The government sets tax rates on labor, capital and consumption. It allocates its revenue to productive expenditures (mainly for education), consumption and ‘non‐employment’ benefits. Labor taxes and benefits may differ across age groups. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks on employment by age and growth, as well as on welfare of current and future generations. We identify ‘non‐employment’ benefits and labor taxes as the main policy variables affecting employment. Productive government expenditures are the most effective with respect to long‐run output and growth. Long‐run output and growth may benefit also from labor tax cuts targeted at older workers. Considering welfare effects, however, these policy measures may not be the ones preferred most by current generations.
    Keywords: employment by age, endogenous growth, fiscal policy, overlapping generations
    JEL: E62 J22 O41
    Date: 2009–12
  53. By: Jürgen Bierbaumer-Polly
    Abstract: This paper describes the methodologies used for constructing a composite leading indicator for the Austrian economy (CLI-AT). First, a selection of those monthly indicators which overall fare best in showing a "steady" leading behaviour with respect to the Austrian business cycle was performed. The analysis was carried out by means of statistical methods out of the timeseries domain as well as from the frequency domain. Thirteen series have been finally classified as leading indicators. Among them, business and consumer survey data form the most prevalent group. Second, I construct the CLI-AT based on the de-trended, normalised and weighted leading series. For the de-trending procedure I use the HP filter and the weights have been obtained by means of principal components analysis. Further, idiosyncratic elements in the CLI-AT have been removed along with checking the endpoint-bias due to the HP filter smoothing procedure. I find that the "real-time" smoothed CLI-AT does not exhibit severe phase-shifts compared to a full-sample estimate. Next, I show that the CLI-AT provides a useful instrument for assessing the current and likely future direction in the Austrian business cycle. Over the period 1988-2008, the CLI-AT indicates cyclical turns with a "steady" lead in the majority of cases. Finally, in using an out-of-sample forecasting exercise it is shown that the CLI-AT carries important business cycle information and that its inclusion in a forecasting model can increase the projection quality of the underlying reference series.
    Keywords: Business cycles, turning points, cyclical analysis, leading indicators, composite indicators, HP filter, principal components, out-of-sample forecasting
    Date: 2010–04–06
  54. By: Zemanek, Holger (University of Leipzig); Belke, Ansgar (University of Duisburg-Essen); Schnabl, Gunther (University of Leipzig)
    Abstract: Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe.
    Keywords: structural reforms, competitiveness, current account imbalances, euro area, European Monetary Union, dynamic panel estimation, interaction term
    JEL: E24 F15 F16 F32 F33
    Date: 2009–04
  55. By: Marta Areosa (Banco Central do Brasi); Waldyr Areosa (Banco Central do Brasil); Vinicius Carrasco (Department of Economics PUC-Rio)
    Abstract: We study the interaction between dispersed and sticky information by assuming that firms receive private noisy signals about the state in an otherwise standard model of price setting with sticky-information. We show that there exists a unique equilibrium of the incomplete information game induced by the firms’ pricing decisions, and derive the resulting Sticky-Dispersed Information (SDI) Phillips curve. The (equilibrium) aggregate price level and the inflation rates we derive depend on all values they have taken in the past. We perform several numerical simulations to evaluate how the Sticky-Dispersed Phillips curve we derive respond to changes in the main parameters of the model.
    Keywords: Sticky information, dispersed information, Phillips curve JEL Codes: D82, D83, E31
    Date: 2010–03
  56. By: Herman Stekler (Department of Economics The George Washington University)
    Abstract: Over the past 50 or so years, I have been concerned with the quality of economic forecasts and have written both about the procedures for evaluating these predictions and the results that were obtained from these evaluations. In this paper I provide some perspectives on the issues involved in judging the quality of these forecasts. These include the reasons for evaluating forecasts, the questions that have been asked in these evaluations, the statistical tools that have been used, and the generally accepted results. (I do also present some new material that has not yet been published.) I do this in two parts: first focusing on short-run GDP and inflation predictions and then turning to labor market forecasts.
    Date: 2010–03
  57. By: Atif R. Mian; Amir Sufi
    Abstract: We show that household leverage as of 2006 is a powerful statistical predictor of the severity of the 2007 to 2009 recession across U.S. counties. Counties in the U.S. that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006 – a full year before the official beginning of the recession in the fourth quarter of 2007. Similarly, counties with the highest reliance on credit card borrowing reduced durable consumption by significantly more following the financial crisis of the fall of 2008. Overall, our statistical model shows that household leverage growth and dependence on credit card borrowing as of 2006 explain a large fraction of the overall consumer default, house price, unemployment, residential investment, and durable consumption patterns during the recession. Our findings suggest that a focus on household finance may help elucidate the sources macroeconomic fluctuations.
    JEL: E2 E3 R2
    Date: 2010–04
  58. By: Massimiliano Marcellino; Alberto Musso
    Abstract: This paper provides evidence on the reliability of euro area real-time output gap estimates, including those provided by the IMF, OECD and EC and a set of model based measures. A genuine real-time data set is used, including vintages of several sets of euro area output gap estimates available from 1999 to 2006. It turns out that real-time estimates of the output gap are characterised by a high degree of uncertainty, much higher than that resulting from model and estimation uncertainty only. In particular, the evidence indicates that both the magnitude and the sign of the real-time estimates of the euro area output gap are very uncertain. The uncertainty is mostly due to parameter instability, while data revisions seem to play a minor role. To benchmark our results, we repeat the analysis for the US over the same sample. It turns out that US real time estimates are much more correlated with final estimates than for the euro area, data revisions play a larger role, but overall the unreliability in real time of the US output gap measures detected in earlier studies is confirmed in the more recent period.
    Keywords: Output gap, real-time data, euro area, data revisions
    JEL: E31 E37 E52 E58
    Date: 2010
  59. By: Jeremy Greenwood; Juan M. Sanchez; Cheng Wang
    Abstract: How important is financial development for economic development? A costly state verification model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as intermediation spreads and the firm-size distribution for the years 1974 and 2004. It is then used to study the international data, using cross-country interest-rate spreads and per-capita GDP. The analysis suggests a country like Uganda could increase its output by 140 to 180% if it could adopt the world's best practice in the financial sector. Still, this amounts to only 34 to 40% of the gap between Uganda's potential and actual output.
    JEL: E13 O11 O16 O4
    Date: 2010–04
  60. By: Lasse BORK; Hans DEWACHTER; Romain HOUSSA
    Abstract: This paper presents a dynamic factor model in which the extracted factors and shocks are given a clear economic interpretation. The economic interpretation of the factors is obtained by means of a set of over-identifying loading restrictions, while the structural shocks are estimated following standard practices in the SVAR literature. Estimators based on the EM algorithm are developped. We apply this framework to a large panel of US monthly macroeconomic series. In particular, we identify nine macroeconomic factors and discuss the economic impact of monetary policy stocks. The results are theoretically plausible and in line with other findings in the literature. The first part of this paper uses quantitative methods to assess the success of party affiliation, personal interests and the economic profile of the constituencies in predicting voting behavior. Thanks to the detailed censuses of 1846 on agriculture, industry and population, it is possible to typify the economic make-up of the electoral districts in much more detail than in the British case. However, the analysis of roll-call voting proves that party affiliation and personal and constituency economic interests are insufficient to explain the shift towards free trade. The second part of the paper then discusses the role played by political strategy and ideas in the liberalization of corn tariffs, using a qualitative analysis of the debates on tariff policy. The large number of votes over a forty year period allows us to document the relationship between ideas and interests in a new way.
    Keywords: Monetary policy, Business Cycles, Factor Models, EM Algorithm.
    JEL: E3 E43 C51 E52 C33
    Date: 2009–09
  61. By: Rod Cross (Department of Economics, University of Strathclyde); Hugh McNamara (Department of applied mathematics, University college Cork, Cork, Ireland.); Leonid Kalachev (Department of Mathematical Sciences, University of Montana, Missoula, MT.); Alexei Pokrovskii (Department of applied mathematics, University college Cork, Cork, Ireland.)
    Abstract: Two fundamental problems in economic analysis concern the determination of aggregate output, and the determination of market prices and quantities. The way economic adjustments are made at the micro level suggests that the history of shocks to the economic environment matters. This paper presents tractable approach for introducing hysteresis into models of how aggregate output and market prices and quantities are determined.
    Keywords: Hysteresis, Aggregate Output, Market Supply and Demand
    JEL: C60 C65 E10
    Date: 2010–03
  62. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: In this paper, I assess the forecasting power of the residuals of the trend relationship among consumption, aggregate wealth, and labour income for stock returns and government bond yields in the euro area, the UK and the US . I find that when stock returns are expected to be higher in the future, forward-looking investors will temporarily allow consumption to rise. As for bond returns, when government bonds are seen as a component of asset wealth, then investors react in the same manner. If, however, investors perceive the increase in bond returns as signalling a future rise in taxes or a deterioration of public finances, then they will let consumption fall temporarily below its equilibrium level.
    Keywords: consumption, wealth, stock returns, bond returns.
    JEL: E21 E44 D12
    Date: 2010
  63. By: Hacker, Scott (Jonkoping International Business School); Kim, Hyunjoo (Jonkoping International Business School); Månsson, Kristofer (Jonkoping International Business School)
    Abstract: This paper uses wavelet analysis to investigate the relationship between the spot exchange rate and the interest rate differential for seven pairs of countries, with a small country, Sweden, included in each of the cases. The key empirical results show that there tends to be a negative relationship between the spot exchange rate (domestic-currency price of foreign currency) and the nominal interest rate differential (approximately the domestic interest rate minus the foreign interest rate) at the shortest time scales, while a positive relationship is shown at the longest time scales. This indicates that among models of exchange rate determination using the asset approach, the sticky-price models are supported in the short-run while in the long-run the flexible-price models appear to better explain the sign of the relationship.
    Keywords: exchange rates; interest rate differential; uncovered interest parity; monetary approach; small-economy; wavelet analysis
    JEL: E44 F31 F42
    Date: 2010–02–11
  64. By: Casey B. Mulligan; Luke Threinen
    Abstract: Estimates of the marginal product of capital can help forecast economic growth, test competing business cycle theories, and perform cost-benefit analysis. This paper presents annual and quarterly estimates of the marginal product of capital in the U.S. separately for the residential and non-residential sectors. The two sectors had positively correlated marginal products until the 2000s, when the residential marginal product fell during the housing boom, and rose during the housing bust. By the end of 2009, the residential MPK was back to the level of the 1990s. Although off its lows, the non-residential MPK is still below its historical average.
    JEL: E22 O47
    Date: 2010–04
  65. By: Miguel A. León-Ledesma; Reginaldo P. Nogueira Júnior
    Abstract: Recent literature has argued that exchange rate pass-through (ERPT) into domestic inflation has been declining in many countries following a dramatic change in inflation environment during the 1990s. Available empirical results face two central challenges: (i) the evidence on declining ERPT is mostlybased on sample-splitting approaches and hence subject to a degree of arbitrariness; and (ii) the link between a lower ERPT and inflation environment is usually based on simple correlation analysis and hence silent about temporal causality. We address these issues by making use of a state-space model that allows ERPT to be time-varying and dependent on the inflation environment. We estimate the model for 12 developed and emerging economies and test whether inflation contains significant information about the future evolution of the ERPT. The results reinforce the view of a smooth decline in the impact of exchange rates on domestic inflation, but do not support the hypothesis that lower inflation precedes this declining ERPT.
    Keywords: Exchange Rate Pass-Through, Inflation, State-space Models, Causality Tests.
    JEL: E42 E52 E58 F31 F41
    Date: 2010–04
  66. By: Enrique Guilles
    Abstract: This paper considers an overlapping generations model in which capital investment is financed in a credit market with adverse selection. Lenders’ inability to commit ex-ante not to bailout ex-post, together with a wealthy position of entrepreneurs gives rise to the soft budget constraint syndrome, i.e. the absence of liquidation of poor performing firms on a regular basis. This problem arises endogenously as a result of the interaction between the economic behavior of agents, without relying on political economy ex- planations. We found the problem more binding along the business cycle, providing an explanation to creditors leniency during booms in some Latin- American countries in the late seventies and early nineties.
    Date: 2010–02–28
    Abstract: We compare the economic consequences of several types of oil shocks across a set of industrialized countries that are structurally very diverse with respect to the role of oil and other forms of energy in their economy. We find considerably different effects across countries, which crucially depend on the underlying source of the oil price shift. For oil demand shocks driven by global economic activity and oil-specific demand shocks, all countries experience respectively a temporary increase and transitory decline of real GDP following the oil price increase. The role of oil and other forms of energy seems not to matter to explain cross-country differences for the consequences of both shocks. This role, however, is very important to explain asymmetries in the effects of exogenous oil supply shocks. Whereas net oil and energy-importing countries all face a permanent fall in economic activity, the impact is insignificant or even positive in net energy-exporting countries. In addition, countries that improved their net energy-position the most over time, became less vulnerable to oil supply and oil-specific demand shocks, relative to other countries.
    Keywords: Oil prices, vector autoregressions, cross-country differences
    JEL: E31 E32 Q43
    Date: 2009–12
  68. By: M Farid;
    Abstract: Trade data on East Asian EMEs shows the predominant use of Dollar Currency Pricing (DCP). Using a DSGE model with six-stage vertical production chain, staggered prices, and cross-border trade in intermediate inputs, we aim to provide an alternative explanation for ‘fear of floating’ by EMEs. We examine interactions between firms’ pricing rules and the transmission of external shocks under different exchange rate regimes. We find that weak input substitution and DCP of exports eliminate expenditure-switching and the allocative role of exchange rate adjustment, resulting in ‘exchange rate disconnect’, and hence ‘fear of floating’ by EMEs.
    Keywords: Vertical production chain; Staggered price contracts; Input Substitution; External Currency Pricing; Monetary Policy
    JEL: E31 E52 F41
    Date: 2010–03
  69. By: Patnaik, Ila (Asian Development Bank Institute); Shah, Ajay (Asian Development Bank Institute)
    Abstract: In this paper, we examine capital account openness and exchange rate flexibility in 11 Asian economies. Asia has made slow progress in de jure capital account openness, but has made much more progress in de facto capital account openness. While there has been a gradual increase in exchange rate flexibility, most Asian economies continue to have largely inflexible exchange rates. This combination of advancing de facto capital account integration without greater exchange rate flexibility has led to procyclical monetary policy, when capital flows are procyclical. This paper emphasises the need for a consistent monetary policy framework.
    Keywords: capital account openness; exchange rate flexibility; asian economies
    JEL: E40 E60 F41
    Date: 2010–03–12
  70. By: Marcos Poplawski-Ribeiro; Jan-Christoph Rülke
    Abstract: The paper uses survey data to analyze whether the Stability and Growth Pact (SGP) has changed financial market’s expectations on government budget deficits in France, Germany, Italy, and the UK. Our findings indicate that accuracy of financial experts’ deficit forecasts has increased in France during the SGP. The Pact seems to have also promoted a gain in credibility of European Commission’s deficit forecasts in France, Italy, and in the UK, particularly after its reform in 2005 and up to December 2007. Nevertheless, the National Fiscal Authorities’ forecasts of France, Germany, and Italy seem to have not been credible among market experts during the SGP. These results suggest that additional measures could be taken in order to make the fiscal rules of the Pact more credible among market specialists.
    Keywords: Expectations; credibility; stability and growth pact; survey data
    JEL: E62 H11 H30 H50
    Date: 2010–03
    Abstract: A remarkable but unnoticed feature of the crude oil market is that the dramatic rise in oil price volatility over time has been accompanied by a substantial fall in oil production volatility. We investigate the reasons for this opposite evolution of both oil market variables. Our main finding is that the observed volatility puzzle can be rationalized by the fact that the price elasticities of both oil supply and oil demand have decreased considerably over time. This implies that small disturbances on either side of the oil market currently generate large price reactions but only modest quantity adjustments. We further document that the variance of innovations which shift oil demand and supply has even become smaller in the more recent past thereby mitigating oil price fluctuations.
    Keywords: Oil prices, volatility, time variation, price elasticities
    JEL: E31 E32 Q43
    Date: 2010–01
  72. By: Matthew Bell; Gary Blick; Oscar Parkyn; Paul Rodway; Polly Vowles (The Treasury)
    Abstract: This working paper provides further detail on the modelling behind Challenges and Choices – New Zealand’s Long-Term Fiscal Statement, published on 29 October 2009. Building on the first Statement of 2006, we construct two main fiscal scenarios over a 40- year horizon. The historic trends scenario allows historic and current spending and revenue settings to interact with changing demography. The sustainable debt scenario applies a fiscal constraint on non-benefit spending so that Crown net debt follows the Government’s medium-term fiscal targets. The modelling innovations introduced this time do not alter the basic structure and principles of the Long-term Fiscal Model, but instead provide insights into government spending: public sector productivity growth and the growth of the basket of services each person receives. These innovations enable us to illustrate the effects of tradeoffs between broad spending categories in a constrained fiscal environment. In the 2009 Statement, these policy changes are combined into three possible scenarios for obtaining a sustainable fiscal position. The paper also illustrates the sensitivity of the fiscal position to small changes in the demographic, macroeconomic and fiscal modelling assumptions.
    Keywords: Population, projections, social expenditure, fiscal costs, New Zealand
    JEL: E62 H50 H68 J11
    Date: 2010–01
  73. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: I assess the relative performance of several empirical proxies developed in the literature of asset pricing to capture time-variation in expected future returns using data for the U.S. and the U.K.. I show that the wealth composition risk by Sousa (2010) exhibits strong forecasting power.
    Keywords: asset pricing, wealth, empirical proxies, expected returns.
    JEL: E21 E44 D12
    Date: 2010
  74. By: Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych
    Abstract: We investigate the relationship between financial integration and output volatility at micro and macro levels. Using a very large firm-level dataset from EU countries over time, we construct a measure of "deep" financial integration at the regional level based on foreign ownership at the firm level. We find a positive effect of foreign ownership on volatility of firms' outcomes. This effect survives aggregation and carries over to regional output. Exploiting variation in the transposition dates of EU-wide legislation, we find that high trust regions in countries who harmonized capital markets sooner have higher levels of financial integration and volatility.
    JEL: E32 F15 F36 O16
    Date: 2010–04
  75. By: Stijn Claessens; M. Ayhan Kose (IMF); Marco E. Terrones
    Abstract: This paper provides a brief analysis of three major questions raised in the context of the recent global financial crisis. First, how similar is the crisis to previous episodes? We argue that the crisis featured some close similarities to earlier ones, including the presence of credit and asset price booms fueled by rapid debt accumulation. Second, how different is it from earlier episodes? We show that, as much as it displayed some similarities with previous cases, it also featured some significant differences, such as the explosion of opaque and complex financial instruments in a context of highly integrated global financial markets. Third, how costly are recessions that followed these types of crises? Although the latest episode took a very heavy toll on the real economy, we argue that this was not a surprising outcome. In particular, historical comparisons indicate that recessions associated with periods of deep financial disruptions result in much larger declines in real economic activity. We discuss the implications of these findings for economic and financial sector policies and future research.
    Keywords: Global financial crisis; Similarities; Differences; Cost; Recessions.
    JEL: E32 E44 E51 F42
    Date: 2010–03
  76. By: Olusegun Ayodele Akanbi
    Abstract: This study empirically examines the pattern of domestic investment that is consistent with a neoclassical supply-side model of the Nigerian economy. The estimations are carried out with time-series data from 1970 to 2006 using the Johansen estimation techniques. The results conform to the findings of existing literature that real output, user cost of capital, and the level of financial development are significant determinants of domestic investment in Nigeria. The distinctive feature of the study is the significant role played by governance in explaining the long-term pattern of domestic investment in Nigeria. The results from the long-run estimation and the impulse responses revealed that a well-structured and stable socio-economic environment will boost domestic investment over the long run. Therefore, in modelling domestic investment for Nigeria, it is imperative to incorporate the significant role played by governance.
    Keywords: Investment; Governance; Nigeria
    JEL: E22 E21 G39
    Date: 2010
  77. By: Pedro Cosme da Costa Vieira (Faculdade de Economia da Universidade do Porto)
    Abstract: Neste texto apresento o modelo base da abordagem teórica denominada por New Macroeconomics aplicando-o à tendência secular, aos ciclos económicos e ao crescente endividamento de Portugal. É demonstrado que i) o endividamento crescente prejudica as exportações e favorece as importações e que, ii) não podendo o aumentar para sempre, a correcção do endividamento será feita pela subida da taxa de juro real e descida do salário nominal. A tentativa (sindical e governamental) de evitar a queda dos salários nominais terá como efeito um aumento ainda maior da taxa de juro real e uma taxa de desemprego muito elevada que levará à deslocação da mão-de-obra para o exterior (emigração). As conclusões do modelo parecem estar de acordo com a evidência empírica.
    Keywords: Novos Clássicos, Nova Macroeconomia, Endividamento Público
    JEL: E2 E13 D91
    Date: 2010–02
  78. By: Thomas Hemmelgarn (European Commission); Gaetan Nicodeme (European Commission)
    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, ending into 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: Taxation, financial crisis, banking crisis, fiscal incentives
    JEL: E62 F21 F30 G10 H20 H30 H50 H60
    Date: 2010–01
  79. By: Kitov, Ivan; Kitov, Oleg
    Abstract: In April 2009, we introduced a model representing the evolution of motor fuel price (a subcategory of the consumer price index of transportation) relative to the overall CPI as a linear function of time. Under our framework, all price deviations from the linear trend are transient and the price must promptly return to the trend. Specifically, the model predicted that “the price for motor fuel in the US will also grow by 50% by the end of 2009. Oil price is expected to rise by ~50% as well, from its current value of ~$50 per barrel.” The behavior of actual price has shown that this prediction is accurate in both amplitude and trajectory shape. Hence, one can conclude that the concept of price decomposition into a short-term (oscillating) and long-term (linear trend) components is valid. According to the model, the price of motor fuel and crude oil will be falling to the level of $30 per barrel during the next 5 to 8 years.
    Keywords: CPI; PPI; crude oil; motor fuel; price; prediction; USA
    JEL: E3
    Date: 2010–04–06
  80. By: Eric M. Aldrich (Department of Economics, Duke University); Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Ronald Gallant (Fuqua School of Business, Duke University); Juan F. Rubio-Ramírez (Department of Economics, Duke University)
    Abstract: This paper shows how to build algorithms that use graphics processing units (GPUs) installed in most modern computers to solve dynamic equilibrium models in economics. In particular, we rely on the compute uni.ed device architecture (CUDA) of NVIDIA GPUs. We illustrate the power of the approach by solving a simple real business cycle model with value function iteration. We document improvements in speed of around 200 times and suggest that even further gains are likely.
    Keywords: GPU computing, Dynamic Equilibrium models
    JEL: E0 C87
    Date: 2010–04–10
  81. By: Park, Donghyun (Asian Development Bank); Shin, Kwanho (Asian Development Bank)
    Abstract: An integral part of global current account imbalances is the large and persistent current account surplus developing Asia has run since the 1997–1998 Asian crisis. A country’s current account surplus is, by definition, equal to its net saving. The central objective of this paper is to investigate the extent to which the saving and investment rate of Asian countries can be explained by the underlying fundamental determinants of saving and investment such as gross domestic product growth and demographic factors. Our empirical analysis yields two key findings. First, we find stronger evidence of oversaving than underinvestment in the region. Second, we find stronger evidence of overinvestment prior to the Asian crisis than underinvestment after the Asian crisis. This suggests that the key to rebalancing Asian growth toward domestic sources lies in promoting consumption rather than investment.
    Keywords: Saving; investment; current account balance; global imbalance; Asia
    JEL: E21 E22 F32
    Date: 2009–04
  82. By: Hasan, Zubair
    Abstract: This paper raises the issue of an initial structure-objective mismatch in the launching of Islamic finance. The abolition of interest and promotion of growth with equity were goals of the conceived system. These goals expressed a long run vision to improve the condition of the Muslim communities across the world. However, the organizational form adopted for Islamic finance was of the existing commercial banks which provided essentially short-term loans on interest to trade industry and commerce. The choice thus involved an intrinsic mismatch between the structure and objectives of Islamic finance. The mismatch did carry some advantages, but on a more important side it exposed Islamic finance to commitments and influences which could not mostly align well with the goals the pioneers had in mind. Note that in focus here is not the reversal of the mismatch but its consequences that have forced the nascent Islamic system to convergence and competition with the mature conventional finance the West dominates. It is not the ground realities that are being adapted to Shari’ah norms; it is the norms that are being stretched to limit for meeting the demands of the conventional system. Ordinary Muslims who hoped to benefit from Islamic financing remain unattended. Thus, what Islamic finance can or cannot change will depend on where its ongoing integration with the conventional system leads it to. Currently, most merits claimed for the Islamic system defy evidence. The basic reforms financial systems require in the face of current crisis are the control of credit, leverage lure, and speculation. Islamic finance is in principle better equipped to achieve these ends.
    Keywords: Keywords: Islamic finance; convergence; Shari’ah compliance; credit creation; leverage; derivatives; financial crisis
    JEL: E51 E42 E50 E44
    Date: 2010–01
  83. By: Kevin Lee
    Abstract: Defining a recessionary event as one which impacts adversely on individuals’ economic well-being, the paper argues that recession is a multi-faceted phenomenon whose meaning differs from person to person as it impacts on their decision-making in real time. It argues that recession is best represented through the calculation of the nowcast of recession event probabilities. A variety of such probabilities are produced using a real-time data set for the US for the period, focusing on the likelihood of various recessionary events through 1986q1-2008q4 and on prospects beyond the end of the sample.
    Keywords: Recession; Probability Forecasts; Real Time
    JEL: E52 E58
    Date: 2009–10
  84. By: Loser, Claudio M. (Centennial Group); Kiguel, Miguel A. (Centennial Group); Mermelstein, David (Centennial Group)
    Abstract: This paper develops an analytical framework that can be used to anticipate problems in the banking system and enable supervisors to take mitigating actions at an early stage. <p> This paper has two components. First, it develops an early warning indicator that is intended to capture a number of the systemic risks that can affect the banking system as a whole. Second, it develops a methodology to detect problems at the individual bank level in an effort to identify those firms with financial vulnerabilities. <p> For the systemic component of our methodology, the final output is a banking system vulnerability index to facilitate bank monitoring tasks, as well as some disaggregated subcomponents that are intended to display the relative importance of the different risks (e.g., liquidity, currency, and interest rate risks). Regarding the assessment of the soundness of individual institutions, the paper uses a methodology based on cluster analysis that incorporates the results of the previous framework. <p> There is an empirical application of the systemic component that is based on the 2001 Argentine banking crisis. It shows that the proposed vulnerability indicator started to increase steadily beginning in 1999, following 2 years in which it had remained flat, and it finally peaked in mid-2001, which was just before the onset of the crisis.
    Keywords: Banks; stress testing; banking crises; banking regulation; banking supervision; early warning systems
    JEL: E44 E58 E65 G21 G28
    Date: 2010–03–01
  85. By: BENCHEKROUN, Hassan; WITHAGEN, Cees
    Abstract: We provide the closed form solution to the Dasgupta-Heal-Solow-Stiglitz (DHSS) model. The DHSS model is based on the seminal articles Dasgupta and Heal (Rev. Econ. Stud.,1974), Solow (Rev. Econ. Stud.,1974) and Stiglitz (Rev. Econ. Stud.,1974) and describes an economy with two assets, man-made capital and a nonrenewable resource stock. We explicitly characterize, for such an economy, the dynamics along the optimal trajectory of all the variables in the model and from all possible initial values of the stocks. We use the analytical solution to prove several properties of the optimal consumption path. In particular, we show that the initial consumption under a utilitarian criterion starts below the maximin rate of consumption if and only the resource is abundant enough and that under a utilitarian criterion, it is not necessarily the present generation that benefits most from a windfall of resources.
    Keywords: Exhaustible resources, Dasgupta-Heal-Solow-Stiglitz economy, exponential integral
    JEL: E20 Q30 C65
    Date: 2010

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