nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒05‒08
24 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Money and Risk Aversion in a DSGE Framework: A Bayesian Application to the Euro Zone By Benchimol, Jonathan; Fourçans, André
  2. Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data By Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  3. The Barnett Critique After Three Decades: A New Keynesian Analysis By Michael T. Belongia; Peter N. Ireland
  4. Inflation, price dispersion and market integration through the lens of a monetary search model By Becker, Sascha; Nautz, Dieter
  5. Room for Manoeuvre – Monetary Policy Over the Next Eighteen Months, and the Allure of Price-Level Targeting By Philippe Bergevin; David Laidler
  6. Wage Bargaining and the Phillips Curve in Italy By Alessandra Del Boca; Michele Fratianni; Franco Spinelli; Carmine Trecroci
  7. News versus sunspot shocks in a New Keynesian model By Karnizova, Lilia
  8. Heterogeneity in money holdings across euro area countries: the role of housing By Ralph Setzer; Paul van den Noord; Guntram B. Wolff
  9. Unexpected changes in tax revenues and the stabilisation function of fiscal policy. Evidence for EU By Salvador Barrios; Pietro Rizza
  10. Central bank liquidity and market liquidity: the role of collateral provision on the French government debt securities market. By Avouyi-Dovi, S.; Julien, I.
  11. In?ation and Economic Growth in Latin America: Some Panel Time-Series Evidence By Manoel Bittencourt
  12. Fiscal policy under imperfect competition: A survey By Costa, Luís F.; Dixon, Huw David
  13. The Synchronization of GDP Growth in the G7 during U.S. Recessions. Is this Time Different? By Nikolaos Antonakakis; Johann Scharler
  14. The Financial Instability Hypothesis:a Stochastic Microfoundation Framework By Carl Chiarella; Corrado Di Guilmi
  15. Role of Governance in Explaining Domestic Investment in Nigeria By Olusegun A. Akanbi
  16. EU labour market behaviour during the Great Recession By Arpaia, Alfonso; Curci, Nicola
  17. An Autopsy of the U.S. Financial System By Ross Levine
  18. EU labour market behaviour during the Great Recession By Alfonso Arpaia; Nicola Curci
  19. Lessons for China from financial liberalization in Scandinavia By Hongyi Chen; Lars Jonung; Olaf Unteroberdoerster
  20. A comparison of structural reform scenarios across the EU member states - Simulation-based analysis using the QUEST model with endogenous growth By Francesca D'Auria; Andrea Pagano; Marco Ratto; Janos Varga
  21. An indicator-based assessment framework to identify country-specific challenges towards greener grow By Joan Canton; Ariane Labat; Anton Roodhuijzen
  22. Pension entitlements of French and american households: a first comparison. By Durant, D.; Frey, L.
  23. credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman By Ugo Albertazzi; Domenico J. Marchetti
  24. Firm Heterogeneity, Credit Constraints, and Endogenous Growth By Jürgen Antony; Torben Klarl; Alfred Maussner

  1. By: Benchimol, Jonathan (CES, University Paris 1 Panthéon-Sorbonne and Department of Economics, ESSEC Business School); Fourçans, André (ESSEC Business School, Department of Economics)
    Abstract: In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents’ risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor.
    Keywords: Bayesian Estimation; DSGE Model; Euro Area; Money
    JEL: E31 E51 E58
    Date: 2010–04
  2. By: Jesús Fernández-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerrón-Quintana (Federal Reserve Bank of Philadelphia); Juan F. Rubio-Ramírez (Department of Economics, Duke University)
    Abstract: This paper compares the role of stochastic volatility versus changes in monetary policy rules in accounting for the time-varying volatility of U.S. aggregate data. Of special interest to us is understanding the sources of the great moderation of business cycle fluctuations that the U.S. economy experienced between 1984 and 2007. To explore this issue, we build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and we estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, we show how to confront such a rich model with the data by exploiting the structure of the high-order approximation to the decision rules that characterize the equilibrium of the economy. Our main empirical findings are: 1) even after controlling for stochastic volatility (and there is a fair amount of it), there is overwhelming evidence of changes in monetary policy during the analyzed period; 2) however, these changes in monetary policy mattered little for the great moderation; 3) most of the great performance of the U.S. economy during the 1990s was a result of good shocks; and 4) the response of monetary policy to inflation under Burns, Miller, and Greenspan was similar, while it was much higher under Volcker.
    Keywords: DSGE models, Stochastic volatility, Parameter drifting, Bayesian methods
    JEL: E10 E30 C11
    Date: 2010–04–15
  3. By: Michael T. Belongia (University of Mississipp); Peter N. Ireland (Boston College)
    Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of real and nominal shocks. Finally, the analysis characterizes the optimal monetary policy response to shocks that originate in an explicitly-modeled financial sector.
    Keywords: Barnet critique, Divisia, liquidity, aggregation
    JEL: C43 E32 E41 E52
    Date: 2010–05–01
  4. By: Becker, Sascha; Nautz, Dieter
    Abstract: Recent monetary search models emphasize that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which implies an optimal inflation rate above zero. For highly integrated markets, however, theory suggests that the impact of inflation on price dispersion disappears. Employing price data of the European Union member states, this paper is the first that empirically tests these implications of monetary search theory. --
    Keywords: Inflation,Relative price variability,Monetary search models,European market integration
    JEL: E31 C23
    Date: 2010
  5. By: Philippe Bergevin (C.D. Howe Institute); David Laidler (C.D. Howe Institute)
    Abstract: Moving to price-level targeting from inflation-rate targeting could be a sound option for the Bank of Canada after 2011, when its current agreement with the Minister of Finance is up for renewal. However, the authors say the viability of that option rests on whether the Bank can maintain its credibility in monetary policy over the coming months, as it seeks a balance between providing support to the still fragile economic recovery and avoiding a resurgence of inflation above its 2 percent inflation target.
    Keywords: Monetary Policy, Bank of Canada, price-level targeting, inflation-rate targeting, exchange rate
    JEL: E58 E52 E31 E42
    Date: 2010–04
  6. By: Alessandra Del Boca (University of Brescia); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR); Franco Spinelli (University of Brescia); Carmine Trecroci (University of Brescia)
    Abstract: The theme of this paper is whether there was a textbook-like Phillips Curve in post-WWII Italy. We estimate a standard model of the relationship between inflation and the level of real economic activity over the 1949-1998 period and find no evidence of a significant and positive feedback from output to prices. We also estimate similar models for the UK and the US and compare them with the Italian experience. Italy stands out as sharply different from the two Anglo-Saxon countries. We attribute this difference, among other factors, to the role of wage coordination and indexation mechanisms. In particular, the scala mobile, the rigid indexation mechanism aimed at protecting wages from inflation contributed to the persistent inflation bias that Italy experienced almost until its entry into the EMU.
    Keywords: Italy, Phillips Curve, inflation, ndexation, wage bargaining
    JEL: E31 E32 J50 N10
    Date: 2010–04
  7. By: Karnizova, Lilia
    Abstract: Separately, news and sunspot shocks have been shown empirically to be determinants of changes in expectations. This paper considers both of them together in a simple New Keynesian monetary business cycle model. A full set of rational expectations solutions is derived analytically. The analytical characterization allows an explicit comparison of news about future monetary policy and sunspots. The key distinction between the shocks lies in their relation to the realized policy shock. If monetary policy is 'passive', both types of shocks affect model dynamics through forecast errors. The effect of the news on forecast errors is not unique, and the dynamics induced by news and sunspot shocks can be observationally equivalent. If monetary policy is 'active', the sunspots are irrelevant, and the model responses to the news shocks are unique. In both cases, news shocks strengthen the endogenous propagation of the model, since anticipation of future changes prolongs agents' reaction. --
    Keywords: News shocks,sunspots,expectations,monetary policy,indeterminacy
    JEL: E32 E47 E52
    Date: 2010
  8. By: Ralph Setzer; Paul van den Noord; Guntram B. Wolff
    Abstract: In this paper we examine why monetary aggregates of euro area Member States have developed differently since the inception of the euro. We derive a money demand equation that incorporates housing wealth and collateral as well as substitution effects on real money holdings. Empirically, we show that cross-country differences in real balances are determined not only by income differences, a standard determinant of money demand, but also by house price developments.Higher house prices and higher user costs of housing are both associated with larger money holdings. Country-specific money holdings are also connected with structural features of the housing market.
    Keywords: european union eu setzer wolff van den Noord euro area money heterogeneity money holdings
    JEL: E41 E51 E52
    Date: 2010–02
  9. By: Salvador Barrios; Pietro Rizza
    Abstract: This paper analyzes the size and the determinants of unexpected changes in EU countries' tax revenues and their impact on the ability of EU governments to use fiscal policy as a macroeconomic stabilisation device. We make use of information taken from the Stability and Convergence Programmes (SCP) setting countries' medium-term fiscal plans and focus on the period preceding the 2008/2009 global financial crisis. Tax revenue surprises are found to have fluctuated widely, alternating periods of sizeable windfalls and periods of substantial shortfalls.When analysing this, we find that GDP growth surprises and, in some cases (i.e. Ireland, Spain the UK and Finland) asset prices fluctuations have exerted the most significant influence. In the sequel we provide evidence on the incidence of these unexpected changes in governments' tax revenues on the ability of governments to conduct counter-cyclical fiscal policies, which are desirable from a macroeconomic perspective.We find that countries that have experienced the largest tax revenue windfalls in the run-up to the 2008/2009 crisis have also tended to run more pro-cyclical fiscal policies although these results vary depending on the use of ex-post vs. real-time data and on the method used to calculate the cyclical position of the economy. Put differently, these results tend to indicate that while tax revenue windfalls may be good for the public purse during favourable times they may also (paradoxically) dwindle the ability of the countries concerned to run counter-cyclical fiscal policies when cyclical conditions revert.
    Keywords: european union eu tax revenues windfalls shortfalls business cycles fiscal policy stabilisation barrios rizza
    JEL: E62 E63 E65 E32 H2 H6
    Date: 2010–02
  10. By: Avouyi-Dovi, S.; Julien, I.
    Abstract: We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.
    Keywords: Monetary policy, collateral, liquidity, volatility, French bond market.
    JEL: G10 C22 C53
    Date: 2010
  11. By: Manoel Bittencourt (Department of Economics, University of Pretoria)
    Abstract: In this paper we investigate the role of poor macroeconomic per- formance, in terms of high rates of inflation, in determining economic growth in four Latin American countries between 1970 and 2007. The empirical results, based on the relatively novel panel time-series analy- sis, confirm the anecdotal evidence which suggests that inflation has had a detrimental effect to growth in the region. All in all, we high- light the costs that in?ation has had on economic activity, and also the importance of particular economic institutions which were imple- mented in the 1990s - central-bank independence and fiscal responsi- bilities laws- in actually keeping inflation under control in the region, as a first step in the direction of sustained growth and prosperity.
    Keywords: Inflation, Growth, Latin America
    JEL: E31 O11 O42 O54
    Date: 2010–04
  12. By: Costa, Luís F.; Dixon, Huw David
    Abstract: This paper surveys the link between imperfect competition and the effects of fiscal policy on output, employment and welfare. We examine static and dynamic models, with and without entry under a variety of assumptions using a common analytical framework. We find that in general there is a robust relationship between the fiscal multiplier and welfare, the tantalizing possibility of Pareto improving fiscal policy is much more elusive. In general, the mechanisms are supply side, and so welfare improving policy, whilst possible, is not a general result. --
    Keywords: Fiscal policy,imperfect competition
    JEL: E62
    Date: 2010
  13. By: Nikolaos Antonakakis; Johann Scharler
    Abstract: Using the dynamic conditional correlation (DCC) model due to Engle (2002), we estimate time varying correlations of quarterly real GDP growth among the G7 countries. In general, we find that rathe heterogeneous patterns of international synchronization exist during U.S. recessions. During the 2007 - 2009 recession, however, international co-movement increased substantially.
    Keywords: Dynamic conditional correlation, Business cycle synchronization, Recession
    JEL: E3 E32 F4 F41
    Date: 2010–04
  14. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Corrado Di Guilmi (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper examines the dynamics of ï¬nancial distress and in particular th emechanism of transmission of shocks from the ï¬nancial sector to the real economy. The analysis is performed by representing the linkages between microeconomic ï¬nancial variables and the aggregate performance of the economy by means of a microfounded model with ï¬rms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a ï¬nancially fragile system.
    Keywords: financial fragility; complex dynamics; stochastic aggregation
    JEL: E12 E22 E44
    Date: 2010–03–01
  15. By: Olusegun A. Akanbi (Department of Economics, University of Pretoria)
    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 longterm 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: 2010–03
  16. By: Arpaia, Alfonso; Curci, Nicola
    Abstract: This paper provides an analysis of the labour market adjustment to the 2008-2009 recession in terms of employment, unemployment, hours worked and wages. It highlights differences in the response of employment and unemployment across countries and different socioeconomic groups. For all EU Member States, it provides evidence of the developments during the crisis of the monthly job finding and separation rates. This helps to assess whether the increase in unemployment is due to an increase of job separation or to a decline in the job finding rate. The paper discusses the risks of jobless growth and compares the dynamics of unemployment and employment across different periods. It provides evidence of an asymmetric response over the cycle, with recessions being characterised by more job destruction than by job creation in the following recoveries. The analysis of the wage dynamics during the recession suggests that there has been an adjustment in the compensation per employee led by the variable component; yet, this has not been sufficient to avoid the increase in the nominal unit labour costs due to labour hoarding.
    Keywords: Unemployment; Workers' flows; job separation; job finding rate; Okun's law;
    JEL: E32 J60 E24
    Date: 2010–02
  17. By: Ross Levine
    Abstract: In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products. Rather, the evidence indicates that regulatory agencies were aware of the growing fragility of the financial system associated with their policies during the decade before the crisis and yet chose not to modify those policies.
    JEL: E60 G20 G28 H1
    Date: 2010–04
  18. By: Alfonso Arpaia; Nicola Curci
    Abstract: This paper provides an analysis of the labour market adjustment to the 2008-2009 recession. It highlights differences in the response of employment and unemployment across countries and different socioeconomic groups. For all EU Member States, it provides evidence of the developments during the crisis of the monthly job finding and separation rates. This helps to assess whether the increase in unemployment is due to an increase of job separation or to a decline in the job finding rate. The paper discusses the risks of jobless growth and compares the dynamics of unemployment and employment across different periods. It provides evidence of an asymmetric response over the cycle, with recessions being characterised by more job destruction than by job creation in the following recoveries. The analysis of the wage dynamics suggests that there has been an adjustment in the compensation per employee led by the variable component; yet, this has not been sufficient to avoid the increase in the nominal unit labour costs due to labour hoarding.
    Keywords: european union eu recession labour markets unemeployment Workers' flows job separation job finding rate Okun's law arpaia curci
    JEL: E24 E32 J6
    Date: 2010–03
  19. By: Hongyi Chen; Lars Jonung; Olaf Unteroberdoerster
    Abstract: This study brings out policy lessons for China today, a financially repressed country, from the financial liberalization process in Denmakr, Finland, Norway and Sweden in the 1980s and early 1990s. This report identifies a set of policy lessons for China today from the experience of financial deregulation, financial crisis and recovery in Scandinavia during the period 1985-2000. Although there are considerable differences between the huge Chinese economy and the small Nordic countries, there are enough similarities to make lesson-drawing a worthwhile exercise. Based on the Scandinavian experience and the added complexity of China’s status as a transition economy, financial reforms should strike a proper balance between being gradual (to avoid costly mistakes) and substantive (to secure efficiency gains in the longer term) with due consideration being given to initial conditions concerning regulation, taxes and exchange rate arrangements. A well managed process of financial deregulation requires that policy-makers and market participants fully understand the interlinkages between financial reforms and the rest of the economy. In addition, the supervisory and management systems in the financial sector should move in step with the liberalization process.
    Keywords: Financial liberalization,financial crisis,transition,financial regulation,banking,boom-bust,China,Scandinavia,the Nordics
    JEL: E52 E58 F31 F32 G21 G28 G32 P52
    Date: 2009–08
  20. By: Francesca D'Auria; Andrea Pagano; Marco Ratto; Janos Varga
    Abstract: This paper calibrates the Roeger-Varga-Veld (2008) micro-founded DSGE model with endogenous growth for all EU member states using country specific structural characteristics and employs the individual country models to analyse the macroeconomic impact of various structural reforms. We analyse the costs and benefits of reforms in terms of fiscal policy instruments such as taxes, benefits, subsidies and administrative costs faced by firms. We find that less R&D intensive countries would benefit the most from R&D promoting and skill-upgrading policies. We also find that shifting from labour to consumption taxes, reducing the benefit replacement rate and relieving administrative entry barriers are the most effective measures in those countries which have high labour taxes and entry barriers.
    Keywords: Structural reforms, endogenous growth, DSGE modelling, EU member states, tax credits, tax shifts, entry barriers, human capital, D'Auria, Pagano, Ratto, Varga
    JEL: E32 E62 O30 O41
    Date: 2009–12
  21. By: Joan Canton; Ariane Labat; Anton Roodhuijzen
    Abstract: The paper sets the basis for an indicator-based analytical framework to assess Member States' policies to promote "green growth".An illustrative application of this new analytical framework reveals that it can be used to provide a nuanced economic assessment of Member States' environmental performance. This framework can serve to highlight country-specific strengths in addressing environmental challenges in a way that best fosters growth and jobs. To prepare for future economic policy monitoring at the EU level, a test was also run to analyse performance in various dimensions of environmental policy in combination with information about macroeconomic performance.Overall, this framework can contribute to identify country-specific challenges to create new sources of green growth; it may therefore serve to encourage relevant structural reforms bringing about a competitive greener economy.
    Keywords: europa european commission institutions news calendar organisation commissioners president recruitment contact services european union eu
    JEL: E66 Q52 Q58
    Date: 2010–02
  22. By: Durant, D.; Frey, L.
    Abstract: The aim of this paper is to build and estimate a macroeconomic model of credit risk for the French manufacturing sector. This model is based on Wilson's CreditPortfolioView model (1997a, 1997b); it enables us to simulate loss distributions for a credit portfolio for several macroeconomic scenarios. We implement two simulation procedures based on two assumptions relative to probabilities of default (PDs): in the first procedure, firms are assumed to have identical default probabilities; in the second, individual risk is taken into account. The empirical results indicate that these simulation procedures lead to quite different loss distributions. For instance, a negative one standard deviation shock on output leads to a maximum loss of 3.07% of the financial debt of the French manufacturing sector, with a probability of 99%, under the identical default probability hypothesis versus 2.61% with individual default probabilities.
    Keywords: Consumption and savings, pension funds, social security and public pensions, portfolio choices and investment decisions.
    JEL: E21 G11 G23 H55
    Date: 2010
  23. By: Ugo Albertazzi (Bank of Italy); Domenico J. Marchetti (Bank of Italy)
    Abstract: This paper analyzes the effects of the financial crisis on credit supply by using highly detailed data on bank-firm relationships in Italy after Lehman’s collapse. We control for firms’ unobservable characteristics, such as credit demand and borrowers’ risk, by exploiting multiple lending. We find evidence of a contraction of credit supply, associated to low bank capitalization and scarce liquidity. The ability of borrowers to compensate through substitution across banks appears to have been limited. We also document that larger less-capitalized banks reallocated loans away from riskier firms, contributing to credit pro-cyclicality. Such ‘flight to quality’ has not occurred for smaller less-capitalized banks. We argue that this may have reflected, among other things, evergreening practices. We provide corroborating evidence based on data on borrowers' productivity and interest rates at bank-firm level.
    Keywords: credit supply, bank capital, flight to quality, evergreening
    JEL: E44 E51 G21 G34 L16
    Date: 2010–04
  24. By: Jürgen Antony (CPB Netherlands Bureau for Economic Policy Analysis, The Hague, The Netherlands); Torben Klarl (University of Augsburg, Department of Economics); Alfred Maussner (University of Augsburg, Department of Economics)
    Abstract: This paper is concerned with the role of firm heterogeneity under credit constraints for economic growth. We focus on firm size, innovativeness and credit constraints in a semi-endogenous growth model reflecting recent empirical findings on firm heterogeneity. It allows for an explicit solution for transitional growth and balanced growth path productivity as well as the growth maximizing firm heterogeneity. This enables us to draw inference about the impact of key policy parameters of the model on these quantities and to draw conclusions about firm and capital market related policies.
    Keywords: firm heterogeneity, credit constraints, firm size, SME, economic growth
    JEL: E5 O31
    Date: 2010–04

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