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on Macroeconomics |
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Issue of 2010‒04‒24
twenty-two papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Zeno Enders |
| Abstract: | This paper examines the implications of segmented assets markets for the real and nominal effects of monetary policy. I develop a model, in which varieties of consumption bundles are purchased sequentially. Newly injected money thus disseminates slowly through the economy via second-round effects and induces a non-degenerate, long-lasting heterogeneity in wealth. As a result, the effective elasticity of substitution differs across households, affecting optimal markups chosen by producers. In line with empirical evidence, the model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical profits and wages after monetary shocks. |
| Keywords: | Segmented Asset Markets, Monetary Policy, CountercyclicalMarkups Liquidity Effect, Limited Participation |
| JEL: | E31 E32 E51 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse08_2010&r=mac |
| By: | Dieter Nautz; Ulrike Rondorf |
| Abstract: | The instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specific monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries. |
| Keywords: | Money demand, cross-country analysis, panel error correction model, euro area |
| JEL: | E41 E51 E52 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-023&r=mac |
| By: | Steven P. Cassou (Kansas State University); Jesús Vázquez (Universidad del País Vasco) |
| Abstract: | This paper uses a new method for describing dynamic comovement and persistence in economic time series which builds on the contemporaneous forecast error method developed in den Haan (2000). This data description method is then used to address issues in New Keynesian model performance in two ways. First, well known data patterns, such as output and inflation leads and lags and inflation persistence, are decomposed into forecast horizon components to give a more complete description of the data patterns. These results show that the well known lead and lag patterns between output and inflation arise mostly in the medium term forecasts horizons. Second, the data summary method is used to investigate a rich New Keynesian model with many modeling features to see which of these features can reproduce lead, lag and persistence patterns seen in the data. Many studies have suggested that a backward looking component in the Phillips curve is needed to match the data, but our simulations show this is not necessary. We show that a simple general equilibrium model with persistent IS curve shocks and persistent supply shocks can reproduce the lead, lag and persistence patterns seen in the data. |
| Keywords: | New Keynesian, output and inflation comovement, inflation persistence, forecast error |
| JEL: | E31 E32 E37 |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:201005&r=mac |
| By: | Stefan Niemann; Paul Pichler; Gerhard Sorger |
| Abstract: | We study the monetary instrument problem in a model of optimal discretionary fiscal and monetary policy. The policy problem is cast as a dynamic game between the central bank, the fiscal authority, and the private sector. We show that, as long as there is a conflict of interest between the two policy-makers, the central bank's monetary instrument choice critically affects the Markov-perfect Nash equilibrium of this game. Focussing on a scenario where the fiscal authority is impatient relative to the monetary authority, we show that the equilibrium allocation is typically characterized by a public spending bias if the central bank uses the nominal money supply as its instrument. If it uses instead the nominal interest rate, the central bank can prevent distortions due to fiscal impatience and implement the same equilibrium allocation that would obtain under cooperation of two benevolent policy authorities. Despite this property, the welfare-maximizing choice of instrument depends on the economic environment under consideration. In particular, the money growth instrument is to be preferred whenever fiscal impatience has positive welfare effects, which is easily possible under lack of commitment. |
| Date: | 2010–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:687&r=mac |
| By: | Olivier Coibion (Department of Economics, College of William and Mary) |
| Abstract: | This paper studies the estimated effects of monetary policy shocks from standard VAR’s, which are small, and those from the approach of Romer and Romer (2004), which are large. The differences appear to be driven by three factors: a) the contractionary impetus associated with each shock, b) the period of non-borrowed reserves targeting and c) lag length selection. Accounting for these factors, the real effects of monetary policy shocks are consistent across approaches and are most likely medium: a one-hundred basis point innovation to the Federal Funds Rate lowers production by 2-3% and raises the unemployment rate by approximately 0.50% points. In addition, alternative measures of monetary policy shocks from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been nontrivial, particularly during the 1970s. |
| Keywords: | Monetary Policy, Shocks, Taylor rule |
| JEL: | E3 E5 |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:90&r=mac |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | With an estimated New Keynesian model, this paper compares the "great recession" of 2007-09 to its two immediate predecessors in 1990-91 and 2001. The model attributes all three downturns to a similar mix of aggregate demand and supply disturbances. The most recent series of adverse shocks lasted longer and became more severe, however, prolonging and deepening the great recession. In addition, the zero lower bound on the nominal interest rate prevented monetary policy from stabilizing the US economy as it had previously; counterfactual simulations suggest that without this constraint, output would have recovered sooner and more quickly in 2009. |
| Keywords: | recession, New Keynesian, zero lower bound |
| JEL: | E32 E52 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:735&r=mac |
| By: | Kelly, Logan; Barnett, William A.; Keating, John |
| Abstract: | Historically, attempts to solve the liquidity puzzle have focused on narrowly defined monetary aggregates, such as non-borrowed reserves, the monetary base, or M1. Many of these efforts have failed to find a short-term negative correlation between interest rates and monetary policy innovations. More recent research uses sophisticated macroeconomic and econometric modeling. However, little research has investigated the role measurement error plays in the liquidity puzzle, since in nearly every case, work investigating the liquidity puzzle has used one of the official monetary aggregates, which have been shown to exhibit significant measurement error. This paper examines the role that measurement error plays in the liquidity puzzle by (i) providing a theoretical framework explaining how the official simple-sum methodology can lead to a liquidity puzzle, and (ii) testing for the liquidity effect by estimating an unrestricted VAR. |
| Keywords: | Liquidity Puzzle; Monetary Policy; Monetary Aggregation; Money Stock; Divisia Index Numbers |
| JEL: | E43 E50 |
| Date: | 2010–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22087&r=mac |
| By: | Kelly, Logan; Barnett, William A.; Keating, John W. |
| Abstract: | Historically, attempts to solve the liquidity puzzle have focused on narrowly defined monetary aggregates, such as non-borrowed reserves, the monetary base, or M1. Many of these efforts have failed to find a short-term negative correlation between interest rates and monetary policy innovations. More recent research uses sophisticated macroeconomic and econometric modeling. However, little research has investigated the role measurement error plays in the liquidity puzzle, since in nearly every case, work investigating the liquidity puzzle has used one of the official monetary aggregates, which have been shown to exhibit significant measurement error. This paper examines the role that measurement error plays in the liquidity puzzle by (i) providing a theoretical framework explaining how the official simple-sum methodology can lead to a liquidity puzzle, and (ii) testing for the liquidity effect by estimating an unrestricted VAR. |
| Keywords: | Liquidity Puzzle; Monetary Policy; Monetary Aggregation; Money Stock; Divisia Index Numbers |
| JEL: | E43 E50 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22085&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas); Logan Kelly (Department of Economics, Bryant University); John Keating (Department of Economics, The University of Kansas) |
| Abstract: | Historically, attempts to solve the liquidity puzzle have focused on narrowly defined monetary aggregates, such as non-borrowed reserves, the monetary base, or M1. Many of these efforts have failed to find a short-term negative correlation between interest rates and monetary policy innovations. More recent research uses sophisticated macroeconomic and econometric modeling. However, little research has investigated the role measurement error plays in the liquidity puzzle, since in nearly every case, work investigating the liquidity puzzle has used one of the official monetary aggregates, which have been shown to exhibit significant measurement error. This paper examines the role that measurement error plays in the liquidity puzzle by (i) providing a theoretical framework explaining how the official simple-sum methodology can lead to a liquidity puzzle, and (ii) testing for the liquidity effect by estimating an unrestricted VAR. |
| Keywords: | Liquidity Puzzle, Monetary Policy, Monetary Aggregation, Money Stock, Divisia Index Numbers |
| JEL: | E43 E50 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201002&r=mac |
| By: | John B. Taylor; John C. Williams |
| Abstract: | This paper focuses on simple rules for monetary policy which central banks have used in various ways to guide their interest rate decisions. Such rules, which can be evaluated using simulation and optimization techniques, 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. |
| JEL: | E5 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15908&r=mac |
| By: | Paula Hernandez-Verme (Department of Economics and Finance, Universidad de Guanajuato) |
| Abstract: | This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations. |
| Keywords: | Currency Board, Endogenously Arising Volatility, Fixed exchange rates, Floating exchange rates, Growth, Indeterminacy, Inflation, Multiple Reserve Requirements, Private Information, Stabilization |
| JEL: | E31 E32 E42 E44 F31 F33 G14 G18 O16 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:gua:wpaper:ec200906&r=mac |
| By: | Robert A. Ritz |
| Abstract: | This paper presents a simple model of risk-averse banks that face uncertainty over funding conditions in the money market. It shows when increased funding uncertainty causes interest rates on loans and deposits to rise, while bank lending and bank profitability fall. It also finds that funding uncertainty typically dampens the rate of pass-through from changes in the central bank’s policy rate to market interest rates. These results help explain observed bank behaviour and reduced effectiveness of monetary policy in the 2007/9 financial crisis. Funding uncertainty also has strong implications for consumer welfare, and can turn deposits into a “loss leader” for banks. |
| Keywords: | Bank lending, Interbank market, Interest rate pass-through, Loan-to-deposite ratio, Loan-deposit synergies, Loss leader, Monetary policy |
| JEL: | E43 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:481&r=mac |
| By: | Ben Zipperer (University of Massachusetts Amherst); Peter Skott (University of Massachusetts Amherst) |
| Abstract: | The interaction between income distribution, accumulation, employment and the utilization of capital is central to macroeconomic models in the `heterodox' tradition. This paper examines the stylized pattern of these variables using US data for the period after 1948. We look at the trends and cycles in individual time series and examine the bivariate cycical patterns among the variables. JEL Categories: E12, E32, O41 |
| Keywords: | growth, business cycles, aggregate demand, instability, income distribution, utilization rate, investment function, pricing. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2010-02&r=mac |
| By: | Furceri, Davide; Karras, Georgios |
| Abstract: | This paper investigates the cyclical properties of the average effective tax rate in 26 OECD countries over 1965-2003 in order to test the validity of three theories of fiscal policy: (i) the standard Keynesian theory which recommends that tax policy should be counter-cyclical, (ii) the Tax Smoothing hypothesis, which implies that changes in GDP should be uncorrelated with tax rates, and (iii) the positive theory of Battaglini and Coate (2008) which predicts that the average tax rate should be negatively correlated with GDP. Our main finding is that the correlations of tax rates with cyclical GDP are generally quite small and statistically indistinguishable from zero. This finding is quite robust and is more consistent with the implications of the Tax Smoothing hypothesis than either the recommendations of the standard Keynesian model or the predictions of Battaglini and Coate’s theory. |
| Keywords: | Fiscal Policy; Tax Rates; Business Cycle |
| JEL: | E62 E32 |
| Date: | 2010–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22208&r=mac |
| By: | Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna) |
| Abstract: | In this paper I study the relation between real wage rigidity (RWR) and nominal price and wage rigidity. I show that in a standard DSGE model RWR is mainly affected by the interaction of the two nominal rigidities and not by other structural parameters. The degree of RWR is, however, considerably influenced by the modelling assumption about the structure of wage contracts (Calvo vs. Taylor) and about other institutional characteristics of wage-setting (clustering of contracts,heterogeneous contract length, indexation). I use survey evidence on price- and wage-setting for 15 European countries to calculate the degrees of RWR implied by the theoretical model. The average levels of RWR are broadly in line with empirical estimates based on macroeconomic data. In order to be able to also match the observed cross-country variation in RWR it is, however, essential to move beyond the country-specific durations of price and wages and to take more institutional details into account. |
| Keywords: | Inflation Persistence, Real Wage Rigidity, Nominal Wage Rigidity, DSGE models, Staggered Contracts, |
| JEL: | E31 E32 E24 J51 |
| Date: | 2010–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:161&r=mac |
| By: | Estrada, Fernando |
| Abstract: | Overall, this paper presents a white swan that seems to confirm the hypothesis of Alesina / Tabellini / Campante (2008). Fiscal policy in many developing countries is procyclical. Specifically, the former may explain monetary policy failures associated with problems of political agency. And in this case, the trend of the cycles is caused by voters who seek to devour the Leviathan by reducing their incomes. In these cases, voters observe the conditions of the economy, but not willing to cover the costs of corrupt governments. When they observe a boom, voters optimally demand more public goods or lower taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: Procyclicality of fiscal policy is more pronounced in more corrupt democracies. |
| Keywords: | Colombia; procyclical economy; tax power; redistributive justice; state controls |
| JEL: | E62 A1 H5 B22 E6 H2 H71 H23 A10 E60 H70 H7 E65 N46 |
| Date: | 2010–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21981&r=mac |
| By: | Gogas, Periklis; Pragkidis, Ioannis |
| Abstract: | Several studies have established the predictive power of the yield curve, i.e.: the difference between long and short term bond rates, in terms of real economic activity, for the U.S. and various European countries. In this paper we use monthly data of the industrial production index of the Greek economy ranging from January 2000 to December 2008 and we calculate the year-to-year percentage change, while the European Central Bank’s euro area government benchmark bonds of various maturities are employed for the calculation of the yield spreads. We also augment the models tested with non monetary policy variables: the Greek unemployment rate and the FTSE-100 stock index returns. The methodology employed in the effort to forecast negative year-to-year changes in the industrial production index is a probit model of the inverse cumulative distribution function of the standard distribution, using several formal forecasting and goodness of fit evaluation tests. The results show that the yield curve augmented with the composite stock index has significant forecasting power in terms of the industrial production in Greece. |
| Keywords: | yield spreads; industrial production; forecast; probit; greece |
| JEL: | E43 C53 E52 E44 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22148&r=mac |
| By: | Kimberly Beaton; Carlos de Resende; René Lalonde; Stephen Snudden |
| Abstract: | The authors use the Bank of Canada's version of the Global Economy Model, a multi-country, multi-sector dynamic stochastic general-equilibrium model with an active banking system (the BoC-GEM-FIN), to study the evolution of global current account balances following the recent global financial crisis. More specifically, they use several shocks from the model to generate a simulated baseline scenario that mimics: (i) the initial, pre-crisis state of disequilibrium in global current account balances, and (ii) the effects of the crisis, including those of the policy responses undertaken worldwide. The authors find that a sufficient set of conditions and policies for a sustainable resolution of the global current account imbalances relies on three key elements: (i) a continuous upward adjustment of U.S. private savings, (ii) fiscal consolidation in advanced countries, and (iii) an orderly adjustment of exchange rates. These three criteria facilitate a gradual decline in the U.S. current account deficit going forward. A fourth key element, the implementation of policies aimed at stimulating domestic demand in emerging Asia, is needed to ensure that the counterpart of the decrease in the U.S. current account deficit is mainly a reduction in the surpluses of emerging Asia. Sensitivity analysis based on deviations from these conditions illustrates the factors behind the main results and the costs associated with the alternative scenarios considered. |
| Keywords: | Balance of payments and components; Business fluctuations and cycles; International topics; Recent economic and financial developments |
| JEL: | E21 F01 F32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:10-4&r=mac |
| By: | Davide, Furceri; Aleksandra, Zdzienicka |
| Abstract: | The aim of this work is to assess the short and medium term impact of banking crises on developing economies. Using an unbalanced panel of 159 countries from 1970 to 2006, the paper shows that banking crises produce significant output losses, both in the short and in the medium term. The effect depends on structural and policy variables. Output losses are larger for relatively more wealthy economies, characterized by a higher level of financial deepening and larger current account imbalances. Flexible exchange rates, fiscal and monetary policy have been found to be efficient tools to attenuate the effect of the crises. Among banking intervention policies, liquidity support resulted to be the one associated with lower output losses. |
| Keywords: | Output Growth; Financial Crisis. |
| JEL: | E60 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22078&r=mac |
| By: | Nguyen Ngoc Anh (Development and Policies Research Center, Vietnam); Nguyen Duc Nhat (Development and Policies Research Center, Vietnam); Nguyen Thang (Center for Analysis and Forecasting, Vietnam) |
| Abstract: | In the year 2008 and the first half of 2009, the world witnessed the unfolding and heavy repercussions of the global financial crisis. Being a small open, FDI-reliant and export-dependant economy, Vietnam has not been spared from this external shock. The global crisis has led to the reduction of investments inflow, lower global commodity prices and trade. The government of Vietnam has acted quickly, easing both monetary and fiscal policies. It seems that the expansionary policy has worked in preventing the economy from falling further. Pursuing such an expansionary policy puts extra-ordinary pressure on the economy. Given the fragility of the situation, a premature withdrawal of stimulus could cause recovery to halt; at the same time, the continuation of expansionary macroeconomic policies could also raise inflationary and debt sustainability concerns. This paper intends to examine the impact of this global financial crisis on Vietnam economy and discuss the policy responses and their implications on the fiscal sustainability of the government. |
| Keywords: | Global financial crisis, fiscal stimulus, Vietnam |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1010&r=mac |
| By: | Dennis Wesselbaum |
| Abstract: | We build a RBC endogenous separation matching model and introduce efficiency wages along the lines of Akerlof (1982). While the standard endogenous separation matching model reveals shortcomings in explaining correlations and volatilities jointly, this approach performs reasonably well along both dimensions. The proper introduction of real rigidities can consistently enhance the performance of the (endogenous separation) matching model |
| Keywords: | Efficiency Wages, Endogenous Separations, Search and Matching |
| JEL: | E32 J41 J64 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1616&r=mac |
| By: | Don Bredin (University College Dublin); John Elder (North Dakota State University); Stilianos Fountas (University of Macedonia) |
| Abstract: | The failure of decreases in oil prices to produce expansions that mirror the contractions associated with higher oil prices has been a topic of considerable interest. We investigate for the G-7 one explanation for this feature - the role of uncertainty about oil prices. In particular, we examine the link between oil price uncertainty and industrial production utilizing a very general and °exible empirical methodology that is based on a structural VAR modi¯ed to accommodate multivariate GARCH in mean. Our primary result is that oil price uncertainty has had a negative and signi¯cant e®ect on industrial production in four of the G-7 countries - Canada, France, UK and US. Impulse-response analysis suggests that, in the short-run, both positive and negative oil shocks may be contractionary. Our result helps explain why the sudden collapse in oil prices in the mid-1980's failed to produce rapid expansion in the G-7, and why the steady increases in oil prices from 2003-2007 did not induce recessions. |
| Keywords: | Oil, Volatility, Vector autoregression, Multivariate GARCH-in-Mean VAR. |
| JEL: | E32 C32 |
| Date: | 2010–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:200840&r=mac |