nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒05‒15
forty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Modeling Monetary Policy By Samuel Reynard; Andreas Schabert
  2. Monetary policy through the “credit-cost channel”. Italy and Germany pre and post-EMU By Giuliana Passamani; Roberto Tamborini
  3. Trading off monetary and financial stability: a balance of risk framework By Jan Willem van den End
  4. Reading the recent monetary history of the U.S., 1959-2007 By Jesus Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez.
  5. Should Central Banks of Small Open Economies Respond to Exchange Rate Fluctuations? The Case of South Africa By Sami Alpanda; Kevin Kotze; Geoffrey Woglom
  6. Fortune or virtue: time-variant volatilities versus parameter drifting By Jesus Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  7. Endogenous Money or Sticky Wages: A Bayesian Approach By Guangling 'Dave' Liu
  8. How has the monetary transmission mechanism evolved over time? By Jean Boivin; Michael T. Kiley; Frederic S. Mishkin
  9. Investigating the Zero Lower Bound on the Nominal Interest Rate under Financial Instability By Carrillo Julio A.; Poilly Céline
  10. Structural shocks and the comovements between output and interest rates By Elmar Mertens
  11. How Well Does Sticky Information Explain Inflation and Output Inertia? By Carrillo Julio A.
  12. Involuntary Unemployment and the Business Cycle By Christiano, Lawrence J.; Trabrandt, Mathias; Walentin, Karl
  13. Stock market conditions and monetary policy in an DSGE model for the US By Castelnuovo , Efrem; Nisticò, Salvatore
  14. Business Cycle Synchronization in Europe: Evidence from the Scandinavian Currency Union By U. Michael Bergman; Lars Jonung
  15. Output gaps By Michael T. Kiley
  16. Modelling anti-inflationary monetary targeting: with an application to Romania By Marcelo Sánchez
  17. Are policy counterfactuals based on structural VARs reliable? By Luca Benati
  18. Housing collateral and the monetary transmission mechanism By Walentin, Karl; Sellin, Peter
  19. Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter? By Michał Brzoza-Brzezina; Tomasz Chmielewski; Joanna Niedźwiedzińska
  20. Costly Information, Planning Complementarity and the New Keynesian Phillips Curve By Acharya, Sushant
  21. Relationship Finance, Market Finance and Endogenous Business Cycles By L.Deidda; B.Fattouh
  22. Default Risk Premia on Government Bonds in a Quantitative Macroeconomic Model By Falko Juessen; Ludger Linnemann; Andreas Schabert
  23. Towards a Program for Financial Stability. By Robert E. Krainer
  24. Cointegration and Asymmetric Adjustment between Output and Unemployment: an Application to the U.S. Economy By Elisabeth T. Pereira; J. P. Cerdeira Bento; Ricardo Fernando Silva
  25. A Comparison of Inflation Expectations and Inflation Credibility in South Africa: Results from Survey Data By Jannie Rossouw; Vishnu Padayachee; Adél Bosch
  26. The Fisher BCPI: The Bank of Canada’s New Commodity Price Index By Ilan Kolet; Ryan Mcdonald
  27. Fiscal stimulus in a model with endogenous firm entry By Totzek, Alexander; Winkler, Roland
  28. Pricing to Market in Business Cycle Models By Drozd, Lukasz A.; Nosal, Jaromir B.
  29. The historical relationship between inflation and political rebellion, and what it might teach us about neoliberalism By Cohen, Joseph N; Linton, April
  30. Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues By Dong He; Robert N. McCauley
  31. On the Role of a Stock Market in the Bank Loan Market: a Study of France, Germany,and the Euro Area (1). By Robert E. Krainer
  32. The discursive dilemma in monetary policy By Carl Andreas Claussen; Øistein Røisland
  33. Collateralizable Wealth, Asset Returns, and Systemic Risk: International Evidence By Ricardo M. Sousa
  34. Gauging by numbers: A first attempt to measure the quality of public finances in the EU By Salvador Barrios; Andrea Schaechter
  35. Housing loan rate margins in Finland By Putkuri, Hanna
  36. The China-US co-dependency and the elusive costs of growth rebalancing By Luigi Bonatti; Andrea Fracasso
  37. Fiscal Federalism and Long-Run Macroeconomic Performance By Lars P. Feld; Jan Schnellenbach
  38. Budgetpolitik im Zeitalter verminderter Erwartungen By Markus Marterbauer
  39. Growth and economic crises in Turkey: leaving behind a turbulent past? By Mihai Macovei
  40. Crises and the Collapse of World Trade: the Shift to Lower Quality By Antoine Berthou; Charlotte Emlinger
  41. On the Extent of Economic Integration: A Comparison of EU Countries and US States By Harry P. Bowen; Haris Munandar; Jean-Marie Viaene
  42. Determinants of intra-euro area government bond spreads during the financial crisis By Salvador Barrios; Per Iversen; Magdalena Lewandowska; Ralph Setzer
  43. Caracterización del ciclo económico en Andalucía 1980 - 2008 By Anelí Bongers; José L. Torres; Jesús Rodríguez
  44. Measuring Persistence of U.S. City Prices: New Evidence from Robust Tests By Basher, Syed Abul; Carrion-i-Silvestre, Josep Lluis
  45. Characterizing economic trends by Bayesian stochastic model specification search By Grassi, Stefano; Proietti, Tommaso
  46. Inferential Expectations and the Missing Middle of Price Changes By Timo Henckel; Gordon Menzies; Daniel Zizzo
  47. Relative Price Movements and Labour Productivity in Canada: A VAR Analysis By Michael Dolega; David Dupuis; Lise Pichette
  48. World Equity Premium based Risk Aversion Estimates By L.C.G. Pozzi; C.G. de Vries; J. Zenhorst
  49. New evidence on implicit contracts from linked employer-employee data By Kilponen, Juha; Santavirta, Torsten

  1. By: Samuel Reynard (Swiss National Bank); Andreas Schabert (University of Amsterdam)
    Abstract: We develop a macroeconomic framework where money is
    Keywords: Monetary policy; Open market operations; Liquidity
    JEL: E52 E58 E43 E32
    Date: 2009–11–10
  2. By: Giuliana Passamani; Roberto Tamborini
    Abstract: In this paper we present an empirical analysis of the "credit-cost channel" (CCC) of monetary policy transmission. This model combines bank credit supply, as a means whereby monetary policy affects economic activity ("credit channel"), and interest rates on loans as a cost to firms ("cost channel"). The thrust of the model is that the CCC makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence a) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, b) the real effects of monetary policy are larger and persistent. We have applied the Johansen-Juselius CVAR methodology to Italy and Germany in the "hard" EMS period and in the EMU period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. We have also replicated the Johansen-Juselius technique for the simulation of rule-based stabilization policy for both Italy and Germany in the EMU period. As a result, we have found confirmation that inflationtargeting by way of inter-bank rate control, grafted onto the estimated CCC model, would stabilize inflation through structural shifts of the stochastic equilibrium paths of both inflation and output.
    Keywords: Macroeconomics and monetary economics, Monetary transmission mechanisms, Structural cointegration models, Italian economy, German economy
    JEL: E51 C32
    Date: 2010
  3. By: Jan Willem van den End
    Abstract: This paper presents a framework that quantifies the trade-offs for a central bank that includes financial stability in its strategy and uses macroprudential instruments next to the interest rate. It is an innovative application of the Kaminsky and Reinhart early warning method, by assuming that the central bank takes into account financial variables as signals of inflation risks. The empirical application shows that trading off monetary and macroprudential policy reduces the overall costs related to inflation and financial instability. This can be achieved by changing the preferences of the central bank, lengthening the monetary policy horizon and by a more flexible inflation target. Estimation results of a probit model indicate that the monetary stance in the US and the Euro area has not adequately traded off price stability against financial stability.
    Keywords: financial stability; macroprudential policy; monetary policy; policy co-ordination; inflation
    JEL: E31 E52 E61 G28
    Date: 2010–05
  4. By: Jesus Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez.
    Abstract: The authors report the results of the estimation of a rich dynamic stochastic general equilibrium model of the U.S. economy with both stochastic volatility and parameter drifting in the Taylor rule. They use the results of this estimation to examine the recent monetary history of the U.S. and to interpret, through this lens, the sources of the rise and fall of the great American inflation from the late 1960s to the early 1980s and of the great moderation of business cycle fluctuations between 1984 and 2007.
    Keywords: Economic conditions - United States ; Business cycles - Econometric models ; Econometric models ; Monetary policy - United States
    Date: 2010
  5. By: Sami Alpanda; Kevin Kotze; Geoffrey Woglom
    Abstract: We estimate a New Keynesian small open economy DSGE model for South Africa, using Bayesian techniques. The model features imperfect competition, incomplete asset markets, partial exchange rate pass-through, and other commonly used nominal and real rigidities, such as sticky prices, price indexation and habit formation. We study the effects of various shocks on macroeconomic variables, and calculate the optimal Taylor rule coefficients using a loss function for the central bank. We find that the optimal Taylor rule places a heavier weight on inflation and output than the estimated Taylor rule, but almost no weight on the depreciation of currency.
    Keywords: optimal monetary policy, small open economy, Bayesian estimation
    JEL: F41 E52
    Date: 2010
  6. By: Jesus Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
    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 the authors 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, the authors build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and they estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, the authors 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. Their 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: Monetary policy ; Business cycles ; Board of Governors of the Federal Reserve System (U.S.) ; Econometric models
    Date: 2010
  7. By: Guangling 'Dave' Liu
    Abstract: This paper attempts to answer question similar to that asked by Ireland (2003): What explains the correlations between nominal and real variables in postwar US data? More precisely, this paper aims to investigate whether endogenous money, sticky wages, or some combination of the two, are necessary features in a dynamic New Keynesian model in explaining the correlations between nominal and real variables in postwar US data. To do so, we estimate a medium-scale dynamic stochastic general equilibrium model of endogenous money. The model is estimated using Bayesian maximum likelihood and compared with a restricted version of the structural model, in which wages are flexible. We conclude that both endogenous money and sticky wages are necessary features in a dynamic New Keynesian model in explaining the variation in key macroeconomic variables, both nominal and real.
    Keywords: Endogenous money, Sticky wages, New Keynesian model, Bayesian analysis
    JEL: E31 E32 E52
    Date: 2010
  8. 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).
    Date: 2010
  9. By: Carrillo Julio A.; Poilly Céline (METEOR)
    Abstract: This paper introduces a zero lower bound constraint on the nominal interest rate in a financial accelerator model with nominal and real rigidities. We .rst analyze the implicationsfor aggregate dynamics of binding the zero lower bound for shocks that depress the nominalinterest rate. We include a sudden decrease in the value of the business sector net worth and an increase in its returns volatility, as two financial shocks that originate in the endogenous credit market of the model. We then explore the effects of the central bank management of expectations and a fiscal stimulus in a deep recession scenario, where the interest rate initially binds its zero bound. We find that a commitment by the central bank to keep the interest rate low for more time than prescribed by a typical interest rate rule may indeed reduce the volatility of output and inflation. For government purchases, we find a fiscal multiplier greater than one for at least 5 quarters. This is due to the presence of the zero lower bound and the Fisher (1933)’s debt-deflation channel, which implies that government spending may reduce the business sector risk premium and thus the cost of investment.
    Keywords: monetary economics ;
    Date: 2010
  10. By: Elmar Mertens
    Abstract: Stylized facts on U.S. output and interest rates have so far proved hard to match with DSGE models. But model predictions hinge on the joint specification of economic structure and a set of driving processes. In a model, different shocks often induce different comovements, such that the overall pattern depends as much on the specified transmission mechanisms from shocks to outcomes, as well as on the composition of these driving processes. I estimate covariances between output, nominal and real interest rate conditional on several shocks, since such evidence has largely been lacking in previous discussions of the output-interest rate puzzle. ; Conditional on shocks to neutral technology and monetary policy, the results square with simple models, like the standard RBC model or a textbook version of the New Keynesian model. In addition, news about future productivity help to explain the overall counter-cyclical behavior of the real rate. ; A sub-sample analysis documents also interesting changes in these pattern. During the Great Inflation (1959-1979), permanent shocks to inflation accounted for the counter-cyclical behavior of the real rate and its inverted leading indicator property. Over the Great Moderation (1982-2006), neutral technology shocks were more dominant in explaining comovements between output and interest rates, and the real rate has been pro-cyclical.
    Date: 2010
  11. By: Carrillo Julio A. (METEOR)
    Abstract: This paper compares two approaches that aim to explain the lagged and persistent behaviorof inflation and output after a variation in the interest rate. Two variants that produce inertiaare added to a baseline DSGE model of sticky prices: 1) a lagged inflation indexation rulealong with habit formation; and 2) sticky information applied to firms, workers, and households. The rival models are then confronted to a monetary SVAR using U.S. data in order to estimate the rates of inflation indexation, habit formation, price rigidities, information stickiness, and the monetary policy rule parameters. It is shown that the sticky information model has a modest advantage at fitting inflation than the lagged inflation index. model with habits. For output, the opposite is true. These differences are consistent throughout the robustness analysis, but they are not big enough to imply a significant statistical difference in terms of the goodness of fit of each model. In addition, the results suggest that sticky information may replace entirely sticky prices as a explanation of price setting behavior, but the latter might not apply to wages. Finally, the analysis find that information stickiness should be pervasive (i.e., applied to households, firms, and workers) in order to replicate the responses of aggregate variables to a shock in monetary policy.
    Keywords: monetary economics ;
    Date: 2010
  12. By: Christiano, Lawrence J. (Northwestern University); Trabrandt, Mathias (European Central Bank); Walentin, Karl (Research Department, Central Bank of Sweden)
    Abstract: We propose a monetary model in which the unemployed satisfy the official US definition of unemployment: they are people without jobs who are (i) currently making concrete efforts to find work and (ii) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (i.e., unemployment is ‘involuntary’). We integrate our model of invol- untary unemployment into the simple New Keynesian framework with no capital and use the resulting model to discuss the concept of the ‘non-accelerating inflation rate of unemployment’. We then integrate the model into a medium sized DSGE model with capital and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to the three shocks.
    Keywords: DSGE; unemployment; business cycles; monetary policy; Bayesian estima- tion.
    JEL: E20 E30 E50 J20 J60
    Date: 2010–04–01
  13. By: Castelnuovo , Efrem (Università di Padova and Bank of Finland Research); Nisticò, Salvatore (Università di Roma ‘Tor Vergata’ and LUISS ‘Guido Carli’)
    Abstract: This paper investigates the relationship between stock market fluctuations and monetary policy in a DSGE model for the US economy. We initially adopt a framework in which fluctuations in households’ financial wealth are allowed – but not required – to influence current consumption. This is due to interaction in the financial markets between long-time traders holding wealth accumulated over time and zero-wealth newcomers. Importantly, we introduce nominal wage stickiness to induce pro-cyclicality in real dividends. Additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables used to estimate our model. We fit our model to US post-WWII data and report three main results. First, the data strongly support a significant impact of stock prices on real activity and business cycles. Second, our estimates also identify a significant and counteractive Fed response to stock-price fluctuations. Third, we derive from our model a microfounded measure of financial slack – the stock-price gap – which we then compare with alternative measures, currently used in empirical studies, to assess the properties of the latter for capturing the dynamic and cyclical implications of our DSGE model. The behavior of our stock-price gap is consistent with the episodes of stock-market booms and busts in the post-WWII period, as reported by independent analyses, and closely correlates with the current financial meltdown. Typically, the proxies used for financial slack, such as detrended log-indexes or growth rates, show limited capabilities of capturing the implications of our model-consistent index of financial stress. Cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed.
    Keywords: stock prices; monetary policy; Bayesian estimation; wealth effects
    JEL: E12 E44 E52
    Date: 2010–04–28
  14. By: U. Michael Bergman; Lars Jonung
    Abstract: This paper studies business cycle synchronization in the three Scandinavian countries Denmark, Norway and Sweden prior to, during and after the Scandinavian Currency Union 1873-1913. We find that the degree of synchronization tended to increase during the currency union, thus supporting earlier empirical evidence. Estimates of factor models suggest that common Scandinavian shocks are important for these three countries. At the same time we find evidence suggesting that the importance of these shocks does not depend on the monetary regime.
    Keywords: european union eu denmark sweden norway jonung bergman scandinavian currency union synchronisation of cycles co-movement of cycles monetary unions symnetry symmetry european business cycles
    JEL: E32 F41
    Date: 2010–02
  15. By: Michael T. Kiley
    Abstract: What is the output gap? There are many definitions in the economics literature, all of which have a long history. I discuss three alternatives: the deviation of output from its long-run stochastic trend (i.e., the "Beveridge-Nelson cycle"); the deviation of output from the level consistent with current technologies and normal utilization of capital and labor input (i.e., the "production-function approach"); and the deviation of output from "flexible-price" output (i.e., its "natural rate"). Estimates of each concept are presented from a dynamic-stochastic-general-equilibrium (DSGE) model of the U.S. economy used at the Federal Reserve Board. Four points are emphasized: The DSGE model's estimate of the Beveridge-Nelson gap is very similar to gaps from policy institutions, but the DSGE model's estimate of potential growth has a higher variance and substantially different covariance with GDP growth; the natural rate concept depends strongly on model assumptions and is not designed to guide nominal interest rate movements in "Taylor" rules in the same way as the other measures; the natural rate and production function trends converge to the Beveridge-Nelson trend; and the DSGE model's estimate of the Beveridge-Nelson gap is as closely related to unemployment fluctuations as those from policy institutions and has more predictive ability for inflation.
    Date: 2010
  16. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper attempts to characterise an anti-inflationary monetary targeting (MT) regime. In order to derive a formal representation of this regime, we formulate the central bank’s optimisation problem under the assumption that it is possible for the monetary targeted variable to have an impact on inflation. We apply a rather general framework to the Romanian experience with MT in the period 1999-2005. We find that during this period Romania's MT regime can be characterised by a concern for price stability and an additional role for smoothing of the central bank's instrument (base money growth). Our results suggest that exchange rate variability and output gap stability appear not to have entered the objective function significantly. JEL Classification: E52, E58, C32, C61.
    Keywords: monetary targeting, optimal monetary policy, Romania.
    Date: 2010–05
  17. By: Luca Benati (European Central Bank, Monetary Policy Strategy Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Based on standard New Keynesian models I show that policy counterfactuals based on the theoretical structural VAR representations of the models fail to reliably capture the impact of changes in the parameters of the Taylor rule on the (reduced-form) properties of the economy. Based on estimated models for the Great Inflation and the most recent period, I show that, as a practical matter, the problem appears to be non-negligible. These results imply that the outcomes of SVAR-based policy counterfactuals should be regarded with caution, as their informativeness for the specific issue at hand–e.g., understanding the role played by monetary policy in exacerbating the Great Depression, causing the Great Inflation, or fostering the Great Moderation–is, in principle, open to question. Finally, I argue that SVAR-based policy counterfactuals suffer from a cruciallogical shortcoming: given that their reliability crucially depends on unknown structural characteristics of the underlying data generation process, such reliability cannot simply be assumed, and can instead only be ascertained with a reasonable degree of confidence by estimating structural (DSGE) models. JEL Classification: E30, E32.
    Keywords: Lucas critique, structural VARs, policy counterfactuals, DSGE models, Taylor rules, monetary policy, Great Depression, Great Inflation, Great Moderation.
    Date: 2010–05
  18. By: Walentin, Karl (Research Department, Central Bank of Sweden); Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper our main aim is to quantify the role that housing collateral plays for the monetary transmission mechanism. Furthermore, we want to explore the implications of the increase in household indebtedness, and specifically the loan-to-value ratio, in the last two decades. We set up a two sector DSGE model with production of goods and housing. Households can only borrow by using their houses as collateral. The structure of the model closely follows Iacoviello and Neri (2010). To be able to do quantitatively relevant exercises we estimate the model using Bayesian methods on Swedish data for 1986q1-2008q3. We quantify the reinforcement of the monetary transmission mechanism that housing used as collateral implies in the presence of nominal loan contracts. This mechanism functions through the effects of the interest rate on house prices as well as on inflation and thereby the real value of nominal debt. This component of the monetary transmission mechanism becomes stronger the higher the loan-to-value ratio is. A change in the maximum loan-to-value ratio from 85% to 95%, all else being equal, implies that the effect of a monetary policy shock is increased by 4% for inflation, 8% for GDP and 24% for consumption. We conclude that to properly understand the monetary transmission mechanism and its changing nature over time, we need to take into account the effects of housing related collateral constraints.
    Keywords: House prices; residential investment; monetary policy; monetary transmis- sion mechanism; collateral constraints; Bayesian estimation
    JEL: E21 E32 E44 E52 R21 R31
    Date: 2010–04–01
  19. By: Michał Brzoza-Brzezina (National Bank of Poland, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland.); Tomasz Chmielewski (Warsaw School of Economics, al. Niepodległości 162, 02-554 Warszawa, Poland.); Joanna Niedźwiedzińska (National Bank of Poland, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland.)
    Abstract: In this paper we analyse the impact of monetary policy on total bank lending in the presence of a developed market for foreign currency denominated loans and potential substitutability between domestic and foreign currency loans. Our results, based on a panel of four biggest Central European countries (the Czech Republic, Hungary, Poland and Slovakia) confirm significant and probably strong substitution between these loans. Restrictive monetary policy leads to a decrease in domestic currency lending but simultaneously accelerates foreign currency denominated loans. This makes the central bank’s job harder. JEL Classification: E44, E52, E58.
    Keywords: Domestic and foreign currency loans, substitution, monetary policy, Central Europe.
    Date: 2010–05
  20. By: Acharya, Sushant
    Abstract: I show that in a setting with costly information processing, strategic complementarity in pricing, by generating planning complementatrities, results in the aggregate price responding slowly to nominal shocks even though individual firm prices change by large amounts in response to idiosyncratic shocks. Klenow and Kryvtsov (2008) conclude that none of the commonly used pricing models is capable of matching all the facts from micro data and at the same time generate a large and persistent response to monetary policy. Unlike the standard state dependent pricing models which rely on physical costs of changing prices to generate unresponsiveness of prices, I instead focus on costs of planning and processing information, a channel which researchers have found empirically more important than physical costs of changing prices in determining pricing decisions of firms. The model is able to match all the features of micro pricing data and at the same time generates a sluggish response of aggregate price to monetary policy, thus predicting a short run Phillips curve. Also, the model generates firms behavior in which they set price plans rather than prices and also shows that firms may choose to index prices to long run inflation optimally as is often assumed in New-Keynesian models. The paper highlights the fact that to explain non-neutrality in the short run, prices need not be sticky, it is just that they do not contain all the information in the short run but become informationally efficient in the long run resulting in a long run neutrality result.
    Keywords: Planning Complementarity; Price Rigidity; Costly Information Acquisition; Real effects of Nominal Shocks; Forecasting; Strategic Complementarity
    JEL: E5 D8 E3
    Date: 2010–04–14
  21. By: L.Deidda; B.Fattouh
    Abstract: This paper develops an overlapping generation model with asymmetric information in the credit market such that the interplay between relationship finance supplied by investors who monitor investment decisions ex-ante and market finance supplied by investors who relay on public information can be the source of endogenous business fluctuations. Monitoring helps reducing the inefficiency caused by moral hazard. However, the incentives of entrepreneurs to demand relationship finance to induce monitoring –which is also non-contractible – are weaker the lower is the return to investment. If the return to investment is low enough, entrepreneurs demand too little relationship finance. This leads to an inefficiently low level of monitoring and of entrepreneurial effort. Under decreasing marginal returns to capital, the model generates a reversion mechanism that can induce macroeconomic instability. The economy can experience endogenous business cycles characterized by a pro-cyclical behavior of the relative importance of relationship finance. This is consistent with the pro-cyclical behavior of the indicator of relative importance of relationship finance, which we construct based on quarterly and annual data from the US Flow of Funds Accounts for the non-financial corporate business sector.
    Keywords: Moral hazard; Endogenous business cycles; relationship finance; market finance; Monitoring
    JEL: D82 E32 E44
    Date: 2010
  22. By: Falko Juessen (TU Dortmund University); Ludger Linnemann (TU Dortmund University); Andreas Schabert (TU Dortmund University)
    Abstract: This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large.
    Keywords: Sovereign default; asset pricing; fiscal policy; government debt
    JEL: E62 G12 H6 E32
    Date: 2009–11–17
  23. By: Robert E. Krainer (University of Wisconsin Madison)
    Abstract: Fifty years ago Milton Friedman published a book entitled A Program for Monetary Stability. In it he outlined a number of suggestions for the conduct of monetary and fiscal policies that he thought would contribute to monetary stability and pari passu to price stability and a greater degree of output/employment stability. In this paper I review some of his policy prescriptions in light of the financial and economic crisis of 2007-2009.From the perspective of financial development the world today is much different from the world that Friedman knew in the late 1950’s. In what way would his policy recommendations have to be modified to account for these changes in financial development? To stabilize the banking system we argue that his proposal for 100 percent reserves or narrow banking merits serious consideration in current policy discussions. To stabilize asset markets we propose two policies that Friedman would not likely endorse. The first is to reinstate selective credit controls in the areas of the securities markets and the real estate market. The second policy designed to dampen excessive variability in the stock market is for the Central Bank to carry out some open market operations in an index fund of equities.
    Keywords: Financial Stability, Narrow Banking, Open Market Operations in Equities, Selective Credit Controls.
    JEL: E32 E44 E52 G18 G21
    Date: 2010
  24. By: Elisabeth T. Pereira (GOVCOPP, Departamento de Economia e Gestão Industrial, Universidade de Aveiro); J. P. Cerdeira Bento (GOVCOPP, Departamento de Economia e Gestão Industrial, Universidade de Aveiro); Ricardo Fernando Silva (Departamento de Economia e Gestão Industrial, Universidade de Aveiro)
    Abstract: This paper focuses on the properties of the adjustment between the real output and the unemployment rate for the U.S. economy in the period from 1975 to 2006. It starts by checking the order of integration of the two series and then tests for the presence of asymmetry in the Okun’s law relationship through a cyclical equation, a first differences equation and an ADL(p,q). Using the threshold cointegration approach this study also accounts for the possible existence of a long-run equilibrium relationship and it is ability to test for the asymmetric adjustment hypothesis. It is found that Okun’s coefficient ranges between -0.41 and -0.59, being the latter estimated by the cointegrating equation. Furthermore, the unemployment rate behaves differently along the business cycle and increases faster in recessions than it recovers in expansions. A long-run equilibrium relationship is established where adjustment is made asymmetrically. Positive deviations away from equilibrium are corrected slightly faster than negative ones. Our explanation concerns the higher speed of flows within the labor market during a recession than during an expansion which may also be related to the existence of nominal rigidities in the US economy that causes imperfectly flexible prices.
    Keywords: Okun’s Law, Threshold Cointegration, Asymmetric Adjustment, Monte Carlo Simulations, U.S. Economy
    JEL: E30 E32 C22
    Date: 2009–12
  25. By: Jannie Rossouw; Vishnu Padayachee; Adél Bosch
    Abstract: This paper reports a comparison of South African household inflation expectations and inflation credibility surveys undertaken in 2006 and 2008. The objective is to test for possible feed-through between inflating credibility and inflation expectations. It supplements similar earlier research that focused only on the 2006 survey results. The single most important difference between the survey results of 2006 and 2008 is that female and male respondents reported inflation expectations at the same level in 2006, while female respondents expected higher inflation than male respondents in the 2008 inflation expectations survey. More periodic survey data will be required for developing final conclusions on the possibility of feed-through effects. A very large percentage of respondents in the inflation credibility surveys indicate that they 'don't know' whether the historic rate of inflation is an accurate indication of price increases. It will be necessary to reconsider the structure of credibility surveys to increase the number of respondents providing views on the accuracy of historic inflation data.
    Keywords: Inflation; inflation credibility; inflation expecttaions; inflation surveys; multinomial analysis
    JEL: E31 E52 E58
    Date: 2010
  26. By: Ilan Kolet; Ryan Mcdonald
    Abstract: The prices of commodities produced in Canada have important implications for the performance of the Canadian economy and the conduct of monetary policy. The authors explain an important change to the methodology used to construct the Bank of Canada commodity price index (BCPI). Since its inception, the BCPI has been a fixed-weight index of commodity prices, with weights that were updated roughly once a decade. Such indexes are subject to bias, because output shares change over time. In this paper, the authors use the chain Fisher index method to update the production weights on an annual basis, and expand the BCPI to include a broader set of commodities. They find that the new index, called the Fisher BCPI, is more comprehensive, flexible, and accurate than the fixed-weight index.
    Keywords: Inflation and prices; Econometric and statistical methods
    JEL: E3 C1
    Date: 2010
  27. By: Totzek, Alexander; Winkler, Roland
    Abstract: This paper explores different fiscal stimuli within a business cycle model with an endogenous number of firms. We demonstrate that a changing number of firms is a crucial dimension for evaluating fiscal policy since it accelerates the impacts of fiscal policy. In the presence of demand stimuli fiscal multipliers are small and the number of firms may decline, in particular under distortionary tax financing. Policies that disburden private agents from income taxes, on the other hand, are effective in boosting economic activity and new firm creation. --
    Keywords: Fiscal Multipliers,Firm Entry,Product Variety
    JEL: E62 E32 E22
    Date: 2010
  28. By: Drozd, Lukasz A.; Nosal, Jaromir B.
    Abstract: This paper evaluates the performance of leading micro-founded pricing-to-market frictions vis-a-vis a set of robust stylized facts about international prices. In order to make that evaluation meaningful, we embed each friction into a unified IRBC framework and parameterize the models in a uniform way. Our goal is to evaluate the broad-based applicability of these frictions for policy-oriented DSGE modeling by documenting their strengths and weaknesses. We make three points: (i) the mechanisms generating pricing to market are not always neutral to business cycle dynamics of quantities, (ii) some mechanisms require producer markups at least 50% to account for the full range of estimates of the empirical exchange rate pass-through to export prices of 35%-50%, (iii) some frictions crucially depend on a particular driver of uncertainty in the underlying model.
    Keywords: pricing to market; law of one price; incomplete pass-through; international correlations; international business cycle; sticky prices; pass-through coefficient
    JEL: E32 F41 F31
    Date: 2010–03–17
  29. By: Cohen, Joseph N; Linton, April
    Abstract: Chronic inflation is argued to be politically destabilizing. We examine data on inflation and political instability that goes as far back as 500 years. Although the behavior of both prices and political rebellion have changed over these five centuries, and enduring relationship between price and political destabilization appears in our analyses. This relationship may provide insight into the context from which neoliberalism emerged, potential reasons for its failure, and some of the key dilemmas upon which the post-2008 global economic order may hinge
    Keywords: inflation; political instability; long-run history;
    JEL: E31 N2 N4
    Date: 2010–02
  30. By: Dong He (Research Department, Hong Kong Monetary Authority); Robert N. McCauley (Bank for International Settlements)
    Abstract: We show in this paper that offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. We argue that, for emerging market economies that are interested to see some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency, while still allowing the authorities to retain a measure of control on the pace of capital account liberalisation. The development of offshore markets could pose risks to monetary and financial stability in the home economy, which need to be prudently managed. Experience in dealing with the Euromarkets by the Federal Reserve and other authorities of the major reserve currency economies show that policy options are available for managing such risks.
    Keywords: offshore markets; currency internationalisation; monetary stability; financial stability
    JEL: E51 E58 F33
    Date: 2010–03
  31. By: Robert E. Krainer (University of Wisconsin Madison)
    Abstract: In this paper we compare a traditional demand oriented model to a non-traditional capital budgeting model of bank lending based on movements in the equity cost of capital for France, Germany, and the Euro area. Using non-nested hypothesis tests and omitted variables tests, we find that we reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions in France and the Euro area. For Germany the results are inconclusive. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions of banks.
    Keywords: Bank Loans, Stock Market, Non-nested Hypothesis Tests.
    JEL: E3 E5 G2
    Date: 2010
  32. By: Carl Andreas Claussen (Sveriges Riksbank); Øistein Røisland (Norges Bank (Central Bank of Norway))
    Abstract: The discursive dilemma implies that the policy decision of a board of policymakers depends on whether the board reaches the decision by voting directly on policy (conclusion-based procedure), or by voting on the premises for the decision (premise-based procedure). We derive results showing when the discursive dilemma may occur, both in a general model and in a standard monetary policy model. When the board aggregates by majority voting, a discursive dilemma can occur if either (i) the relationship between the premise and the decision is non-monotonic, or (ii) if the board members have different judgments on at least two of the premises. Normatively, a premise-based procedure tends to give better decisions when there is disagreement on parameters of the model.
    Date: 2010–04–20
  33. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner; (ii) if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia. Finally, I show that the occurrence of crises episodes (in particular, systemic crises) amplifies the transmission of housing market shocks to financial markets and the banking sector.
    Keywords: stock returns; government bond yields; systemic crises.
    JEL: E21 E44 D12
    Date: 2010
  34. By: Salvador Barrios; Andrea Schaechter
    Abstract: Ensuring high quality of public finances (QPF) with a view to supporting long-term economic growth has gained new urgency as the room for fiscal manoeuvre has shrunk in light of the current crisis. To more systematically analyse QPF and compare developments across countries and over time, a greater focus on identifying and developing comparable QPF indicators is needed. This paper provides a first attempt in this respect. Based on the view that QPF is a multi-dimensional concept, it creates composite indicators for twelve areas of public finances that are linked to long-term economic growth. While the proposed alternative calculation methods yield relatively robust results and findings are in line with conventional wisdom, due to data problems the composite indicators should only be seen as a useful starting point for identifying a country's main strengths and weaknesses in QPF. This would need to be complemented by qualitative analysis that also accounts for country and other specificities. JEL classification: E62, H11, H50, H52, H60
    Keywords: Quality of public finances, public finances, fiscal policy, long-term economic growth, public expenditure, public revenue, fiscal governance, Barrios, Schaechter
    JEL: E62 H11 H50 H52 H60
    Date: 2009–08
  35. By: Putkuri, Hanna (Bank of Finland Research)
    Abstract: This paper examines how housing loan rates are determined, using data on new housing loans in Finland. Finland is an example of a bank-based euro area country where the majority of loans are granted at variable rates. The paper extends the earlier interest rate pass-through literature by taking explicitly into account the changing of lending rate margins. A standard lending rate pass-through model, empirically specified as an error-correction model, is extended with variables predicted by a theoretical bank interest rate setting model. The results show that, since the mid-1990s, short-run movements in housing loan rates can be largely explained by changes in money market rates, and that long-run developments have also been affected by less volatile cost and credit risk factors. The roles of loan competition and capital regulation are also considered, but these effects are more difficult to identify empirically.
    Keywords: housing loan; lending rate; lending rate margin; error-correction model
    JEL: E43 G21
    Date: 2010–04–28
  36. By: Luigi Bonatti; Andrea Fracasso
    Abstract: The global crisis burst in 2007 has revived the growth-rebalancing debate and backed the position of those advocating a fast reduction of the global imbalances centered on the symbiotic US-China relationship. In this work, we develop a two-country two-stage growth model reproducing the main features of the Sino-American co-dependency and we analyze alternative (medium- and long-term) scenarios for its evolution. We show that altering the Chinese exchange rate policy and down-sizing the US external deficits with a view to moving the production of tradables toward the US may imply some relevant costs. If exchange rate and fiscal policies are not properly tuned in both countries, the rebalancing process may lead to the emergence of structural unemployment in the US (due to the greater labor intensity of growth recorded in the nontradable sector than in the tradable sector) and to a slow-down in the process whereby the Chinese labor force is gradually absorbed in the modern sectors of the economy
    Keywords: Growth-rebalancing, global imbalances, structural unemployment
    JEL: E42 F33 F41 F43 O41
    Date: 2010
  37. By: Lars P. Feld (Ruprecht-Karls-Universitat Heidelberg, Alfred Weber Institute for Economics); Jan Schnellenbach (Ruprecht-Karls-Universitat Heidelberg, Alfred Weber Institute for Economics)
    Abstract: In this paper, we offer both a broad survey of the literature on fiscal federalism and long-run economic performance, and a detailed report of some of our own recent studies in this field. We look at the difference between study types (cross-country versus single-country studies), and at the relevance of the broader institutional framework into which fiscal decentralization is embedded. We also look into structural change and intergovernmental transfers as a detailed mechanism through which federalism may have an impact on aggregate economic performance.It turns out that fiscal decentralization has no robust effect on growth, but the evidence hints at a positive effect on overall productivity, conditional on the broader institutional framework.
    Keywords: fiscal federalism; scal decentralization; growth; economic performances
    Date: 2010–02–01
  38. By: Markus Marterbauer (Austrian Institute of Economic Research)
    Abstract: The concept of financial balances implies that the general government balance can be improved only if the enterprise sector and the foreign sector simultaneously increase their financial deficits and the household sector cuts its surplus. This paper explores how these adjustments can be influenced by economic policy during “a period of diminished expectations” (a period of weak GDP growth which is expected to persist for the coming years). Credit financed growth of private investment is unlikely to accelerate as capacity utilization rates are low. Increased spending by the foreign sector, which allows an export oriented growth strategy, could be dampened by simultaneous budget consolidation efforts of all European countries. Savings rates of private households have increased during the crisis. In order to reduce them various alternatives are discussed. Firstly, a credit financed housing bubble This has been practiced by some economies in recent years, but proved to be not sustainable. Secondly, a decline of unemployment rates and consequently of precautionary saving: During periods of low growth of GDP and employment, improvements in the employment elasticity of growth enhancing policy measures and reductions of working time could be effective in this respect. Thirdly, incentives for upper income households to expand investment expenditures and cut back their savings. Fourthly, a redistribution of wealth and income: This strategy leads to a decrease of average savings rates and an increase of consumption rates of private households.
    Keywords: Budget consolidation, fiscal balances, savings rates of private households
    JEL: E21 E62 H30 H62
    Date: 2010
  39. By: Mihai Macovei
    Abstract: Turkey's performance in the current crisis shows that it has managed to weather the global stormy conditions relatively well and avoid collapsing into a full-fledged currency and financial crisis. On the face of it, one could conclude economic reforms introduced since 2001 have paid off and today's performance marks a clean break with the past. But there are also indications that the Turkish economy still retains some of its old vulnerabilities. By determining how resilient Turkey's economy has become to domestic and international economic volatility, one can better assess the sustainability of the accelerated economic convergence process on which Turkey embarked after the 2001 crisis.
    Keywords: Economic crisis, external vulnerabilities, growth, economic convergence, fiscal consolidation, structural reforms, enlargement, boom-bust growth pattern, Macovei
    JEL: E32 E63 F33 P17
    Date: 2009–10
  40. By: Antoine Berthou; Charlotte Emlinger
    Abstract: One of the most striking features of the crisis that started during the fall of 2008 has been the sharp decrease in the world volume of trade in goods. The collapse of trade values has been even larger, leading to a decrease of import price indices. We argue that the decrease of import price indices can be explained by a decrease of the demand addressed to the most expansive varieties. Descriptive statistics for the EU15 confirm that the decrease in the import price index is mainly due to a loss in market shares by high price varieties. The estimation of import demand equations confirm that higher price varieties report a larger elasticity with respect to GDP variations, as compared to low price varieties. Countries specialized over high quality varieties are expected to lose more trade in periods of global turmoil, and experience a faster recovery.
    Keywords: Global crisis; income elasticity; quality ladders
    JEL: E31 F14 F41
    Date: 2010–03
  41. By: Harry P. Bowen (Queens University of Charlotte); Haris Munandar (Bank Indonesia); Jean-Marie Viaene (Erasmus University Rotterdam, and CESifo)
    Abstract: European economic integration is commonly believed to be incomplete, and that further reforms are needed. In this context, the union of U.S. states is considered the benchmark of complete economic integration and is often the basis for comparison regarding the extent of E.U economic integration. Yet, with low trade barriers and with productive factors at least notionally mobile across E.U. countries, is the belief that U.S. states are more integrated than E.U. member states correct? To address this question, this paper first develops three theoretical predictions about the distribution of output and factors that would arise among members of a fully integrated economic area in which goods, capital and labor are freely mobile and policies are harmonized. These theoretical predictions are then empirically tested using data on the output and factor stocks of 14 E.U. member states and the 51 U.S. states (includes District of Columbia) for the period 1965 to 2000. The empirical results convincingly support each theoretical prediction. Hence, contrary to popular belief, the extent of E.U. economic integration is not statistically different from that among U.S. states.
    Keywords: Economic integration; capital mobility; factor price equalization; Brownian motion; Zipf’s law
    JEL: E13 F15 F21 F22 F4 O57
    Date: 2010–01–07
  42. By: Salvador Barrios; Per Iversen; Magdalena Lewandowska; Ralph Setzer
    Abstract: This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period.
    Keywords: sovereign bond, intra-euro area government bond spreads, spread determinants, financial crisis Barrios, Iversen, Lewandowska, Setzer
    JEL: E44 F36 G12 G15
    Date: 2009–11
  43. By: Anelí Bongers (Universidad de Málaga); José L. Torres (Universidad de Málaga); Jesús Rodríguez (Universidad Pablo de Olavide)
    Abstract: En este trabajo se realiza una caracterización del ciclo económico de Andalucía, utilizando diferentes métodos de descomposición ciclo-tendencia para un conjunto de agregados macroeconómicos. Los datos usados tienen una frecuencia trimestral para el periodo 1980-2008, y contienen los principales agregados macroeconómicos de la economía andaluza. Los resultados obtenidos son los siguientes.
    Keywords: Fluctuaciones cíclicas, tendencia, componente cíclico, filtros de descomposición.
    JEL: E32
    Date: 2010
  44. By: Basher, Syed Abul; Carrion-i-Silvestre, Josep Lluis
    Abstract: This paper revisits the empirical analysis in Cecchetti, Mark and Sonora (2002) involving long-span U.S. city prices, who estimated the persistence of U.S. price differentials to be around nine years. After controlling for the structural breaks in the data, we find that U.S. city price level differentials are I(0) stationary processes with the median half-life of convergence ranged between 1.5 and 2.6 years, estimates that are in accordance with what should be expected from a highly integrated economy as the United States. Our results are also robust to a pairwise tests of price level convergence.
    Keywords: Purchasing power parity; Price level convergence; Half-life; Multiple structural breaks; Pairwise convergence.
    JEL: E31 C23 F41 C33
    Date: 2010–05–04
  45. By: Grassi, Stefano; Proietti, Tommaso
    Abstract: We apply a recently proposed Bayesian model selection technique, known as stochastic model specification search, for characterising the nature of the trend in macroeconomic time series. We illustrate that the methodology can be quite successfully applied to discriminate between stochastic and deterministic trends. In particular, we formulate autoregressive models with stochastic trends components and decide on whether a specific feature of the series, i.e. the underlying level and/or the rate of drift, are fixed or evolutive.
    Keywords: Bayesian model selection; stationarity; unit roots; stochastic trends; variable selection.
    JEL: E32 C52 C22
    Date: 2010–05–07
  46. By: Timo Henckel (Australian National University); Gordon Menzies (University of Technology, Sydney); Daniel Zizzo (School of Economics, University of East Anglia)
    Abstract: Microeconomic evidence suggests price changes are either very small, or large. The theory of inferential expectations predicts this phenomena if agents use a low test size, reflecting a reluctance to change their minds on the basis of evidence.
    Keywords: inferential Expectations, prices, near-rationality
    JEL: E31 D84
    Date: 2010–05–03
  47. By: Michael Dolega; David Dupuis; Lise Pichette
    Abstract: In recent years, the Canadian economy has been affected by strong movements in relative prices brought about by the surging costs of energy and non-energy commodities, with significant implications for the terms of trade, the exchange rate, and the allocation of resources across Canadian sectors and regions. While the energy and mining industries have benefited from these movements, the pressure on the manufacturing sector has intensified, since many firms in this sector were already dealing with growing competition from low-cost economies such as China. The adjustments undertaken within the Canadian economy are readily noticeable through investment decisions, as well as through production and employment reallocation. Using vector autoregressive techniques, the authors examine how an appreciation in commodity prices and the subsequent reallocation of resources across sectors will affect hours worked and output growth and, ultimately, aggregate and sectoral labour productivity growth in Canada. Results suggest that the impact of a positive relative price shock will – in the adjustment process – lower productivity growth in the primary and the non-tradable sectors, and increase it somewhat in the manufacturing sector. The overall impact appears to be slightly negative on aggregate labour productivity growth, but this effect is only temporary.
    Keywords: Recent economic and financial developments; Productivity; Labour markets
    JEL: E23 E24 O47
    Date: 2010
  48. By: L.C.G. Pozzi (Erasmus University Rotterdam); C.G. de Vries (Erasmus University Rotterdam); J. Zenhorst (Erasmus University Rotterdam)
    Abstract: The equity premium puzzle holds that the coefficient of relative risk aversion estimated from the consumption based CAPM under power utility is excessively high. Moreover, estimates in the literature vary considerably across countries. We gauge the uncertainty pertaining to the country risk aversion estimates by means of jackknife resampling and pooling. The confidence band for the world risk aversion estimate from the pooled country data is much tighter and the pooled point estimate presents less of a puzzle than the individual country estimates.
    Keywords: Equity premium puzzle; Jackknife; Pooling
    JEL: E21 G12
    Date: 2010–01–05
  49. By: Kilponen, Juha (Bank of Finland Research and European Central Bank); Santavirta, Torsten (Aalto University School of Economics)
    Abstract: We improve the precision of the test of the implicit contract model that Beaudry and DiNardo proposed twenty years ago. Our data set allows us to define the precise industry and plant of a particular employment relationship, link local labour market characteristics and company characteristics to the individual level of wages, and control for composition effects. We find evidence in favour of the spot market model of wage setting in the whole sample, but there is significant variation across industries and educational levels. In particular, the spot market matters most for low-skill workers, while the implicit contract model with one-sided limited commitment applies better to high-skill workers.
    Keywords: wage cyclicality; limited commitment; match-specific fixed effects
    JEL: E32 J41 J64
    Date: 2010–04–28

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