nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒05‒22
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Inflation Target Shocks and Monetary Policy Inertia in the Euro Area By Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
  2. Inflation, Oil Price Volatility and Monetary Policy By Castillo, Paul; Montoro, Carlos; Tuesta, Vicente.
  3. Trend inflation, endogenous mark-ups and the non-vertical Phillips curve By Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola
  4. Monetary Policy and Heterogeneous Expectations By William A. Branch; George W. Evans
  5. The Euro-dividend: public debt and interest rates in the Monetary Union By Simone Salotti; Luigi Marattin
  6. Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment By Merkl, Christian; Schmitz, Tom
  7. Rethinking multipliers in a globalized world By Nallari, Raj; Mba, Leopold Engozogo
  8. Will China Have Serious Inflation? By Gregory C. Chow
  9. The Central Bank Balance Sheet as an Instrument of Monetary Policy By Vasco Curdia; Michael Woodford
  10. Heterogeneity in money holdings across euro area countries: The role of housing By Setzer, Ralph; Noord, Paul van den; Wolff, Guntram
  11. Fluctuation Dynamics in US Interest Rates and the Role of Monetary Policy By Daniel Oliveira Cajueiro; Benjamin M. Tabak
  12. Modeling News-Driven International Business Cycles By Beaudry, Paul; Dupaigne, Martial; Portier, Franck
  13. Fiscal Policy in the Crisis: Impact, Sustainability, and Long-Term Implications By Padoan, Pier Carlo
  14. Conventional and Unconventional Monetary Policy By Vasco Curdia; Michael Woodford
  15. The Role and Effectiveness of Unconventional Monetary Policy By Morgan, Peter
  16. Quantitative Easing: Entrance and Exit Strategies By Alan S. Blinder
  17. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts By Farhi, Emmanuel; Tirole, Jean
  18. The Global Economic Crisis: Impact on India and Policy Responses By Kumar, Rajiv; Vashisht, Pankaj
  19. America's Financial Crisis: The End of an Era By Bosworth, Barry; Flaaen, Aaron
  20. The Republic of Korea's Economy in the Swirl of Global Crisis By Cho, Dong Chul
  21. The Great Recession of 2008-2009: Causes, Consequences and Policy Responses By Verick, Sher; Islam, Iyanatul
  22. Recessions and Recoveries in Asia: What Can the Past Teach Us about the Present Recession? By Gupta, Souvik; Miniane, Jacques
  23. Optimal Monetary Stabilization Policy By Michael Woodford
  24. GDP Trend Deviations and the Yield Spread: the Case of Five E.U. Countries By Periklis Gogas; Ioannis Pragidis
  25. The unemployment volatility puzzle: the role of the underground economy By Lisi, Gaetano
  26. Bubbly Liquidity By Farhi, Emmanuel; Tirole, Jean
  27. Thailand's Growth Rebalancing By Jitsuchon, Somchai; Sussangkarn, Chalongphob
  28. The size of informal economy in Pakistan By Arby, Muhammad Farooq; Malik, Muhammad Jahanzeb; Hanif, Muhammad Nadim
  29. Corporate Tax Stimulus and Investment in Colombia By Arturo Galindo; Marcela Melendez
  30. Illiquidity and All Its Friends By Tirole, Jean
  31. Does Cointegration Matter? An Analysis in a RBC Perspective By Bisio Laura; Faccini Andrea
  32. Financial Crisis and Crisis Management in Sweden. Lessons for Today By Jonung, Lars
  33. Payment System in Indonesia: Recent Developments and Policy Issues By Titiheruw, Ira S.; Atje, Raymond
  34. Malaysia and the Global Crisis: Impact, Response, Rebalancing Strategies By Nambiar, Shankaran

  1. By: Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
    Date: 2009–07
  2. By: Castillo, Paul (Banco Central de Reserva del Perú); Montoro, Carlos (Banco Central de Reserva del Perú; CENTRUM-Catolica); Tuesta, Vicente. (CENTRUM-Catolica)
    Abstract: In a fully micro-founded New Keynesian framework, we characterize analytically the relation between average inflation and oil price volatility by solving the rational expectations equilibrium of the model up to second order of accuracy. Higher oil price volatility induces higher levels of average inflation. We also show that when oil has low substitutability and the central bank responds to output fluctuations, oil price volatility matters for the level of average inflation. The model shows that when oil price volatility increases, average inflation increases whereas average output falls: this implies a trade-off also between average inflation and that of output. The analytical solution further indicates that for a given level of oil price volatility, average inflation is higher when marginal costs are convex in oil prices, the Phillips Curve is convex, and the degree of relative price dispersion is also higher. We perform a numerical exercise showing that the model with a empirically plausible Taylor rule can replicate the level of average inflation observed in the U.S. in 2000s.
    Keywords: Oil price volatility, monetary policy, perturbation method, second order solution.
    JEL: E52 E42 E12 C63
    Date: 2010–01
  3. By: Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola
    Abstract: Recent developments in macroeconomics resurrect the view that welfare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, we find a disciplining effect of a positive inflation target on the wage markup and identify a long-term trade-off between inflation and output.
    Keywords: trend inflation, long-run Phillips curve, inflation targeting, real money balances
    JEL: E52 E58 E24
    Date: 2010–04
  4. By: William A. Branch; George W. Evans
    Abstract: This paper studies the implications for monetary policy of heterogeneous expectations in a New Keynesian model. The assumption of rational expec?tations is replaced with parsimonious forecasting models where agents select between predictors that are underparameterized. In a Misspecification Equilib?rium agents only select the best-performing statistical models. We demonstrate that, even when monetary policy rules satisfy the Taylor principle by adjusting nominal interest rates more than one for one with inflation, there may exist equilibria with Intrinsic Heterogeneity. Under certain conditions, there may exist multiple misspecification equilibria. We show that these findings have im?portant implications for business cycle dynamics and for the design of monetary policy.
    Keywords: Heterogeneous expectations, monetary policy, multiple equilib?ria, adaptive learning.
    JEL: G12 G14 D82 D83
    Date: 2010–04
  5. By: Simone Salotti (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Luigi Marattin (Dipartimento di Scienze Economiche, Universita` degli Studi di Bologna)
    Abstract: The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates. Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond.
    Keywords: Panel VAR, Fiscal policy, government bond’s yields
    JEL: E62 G12
    Date: 2010–02
  6. By: Merkl, Christian (Kiel Institute for the World Economy); Schmitz, Tom (HEC Paris)
    Abstract: This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.
    Keywords: labor market institutions, output and inflation volatility, labor turnover costs, unemployment benefits, unemployment, eurozone
    JEL: E24 E32 J20
    Date: 2010–05
  7. By: Nallari, Raj; Mba, Leopold Engozogo
    Abstract: This paper uses the central tool of an investment-savings and monetary-policy model with an augmented Philips curve and presents a few extensions of that model to analyze the multiplier effects of macroeconomic policies in the United States. In doing so, the authors incorporate realistic assumptions in the model related to the recent financial characteristics of the global economy. The monetary policy reaction function embeds a new augmented Taylor-rule incorporating housing and stock prices and the credit lending rate. And the household consumption and firm investment decisions incorporate housing and stock assets and the credit market frictions. The equilibrium income is derived and compared with the actual nominal gross domestic product of the United States for the period 1990 to 2009. More importantly, fiscal and trade multipliers are derived and discussed. The main finding is that government spending, tax cut, and trade multipliers are relatively smaller in size when more realistic features are incorporated in the model. The model simulation shows that the model can track actual gross domestic product reasonably well. The model should be further improved before it could be used for policy exercises.
    Keywords: Economic Theory&Research,Debt Markets,Emerging Markets,Economic Stabilization,Access to Finance
    Date: 2010–04–01
  8. By: Gregory C. Chow
    Abstract: There has been much concern about inflation in China recently. The People’s Bank in the last few months has raised the reserve requirement several times to control the money supply to slow down inflation. In 1985 when I was organizing a summer workshop on macroeconomics in cooperation with the Ministry of Education, Premier Zhao Ziyang asked me to forecast inflation in 1985-1986 because in 1984 the supply of money in the form of currency in circulation increased by 50 percent. I estimated an equation using data from 1952 to 1984 to explain inflation and used the equation to project forward to forecast an inflation rate for 1985 of no more than 9 percent which turned out to be correct. This equation was published in Chow (1987, equation 18) and updated using data up to 2004 in Chow (2007, pp. 34-5).
    Keywords: inflation, china, Peoples Bank, money supply
    JEL: E30 E31 E42 E58 N15
    Date: 2010–04
  9. By: Vasco Curdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: While many analyses of monetary policy consider only the adjustment of a central bank's target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves beyond those required to achieve an interest-rate target, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank's balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between "quantitative easing" in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves, and argue that the interest rate on reserves should be kept near the central bank's target for the policy rate at all times.
    Date: 2010
  10. By: Setzer, Ralph; Noord, Paul van den; Wolff, Guntram
    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: Money,housing,national contribution,euro area
    JEL: E41 E51 E52
    Date: 2010
  11. By: Daniel Oliveira Cajueiro; Benjamin M. Tabak
    Abstract: This paper presents empirical evidence suggesting that the degree of long-range dependence in interest rates depends on the conduct of monetary policy. We study the term structure of interest rates for the US and find evidence that global Hurst exponents change dramatically according to Chairman Tenure in the Federal Reserve Board and also with changes in the conduct of monetary policy. In the period from 1960's until the monetarist experiment in the beginning of the 1980's interest rates had a significant long-range dependence behavior. However, in the recent period, in the second part of the Volcker tenure and in the Greenspan tenure, interest rates do not present long-range dependence behavior. These empirical findings cast some light on the origins of long-range dependence behavior in financial assets.
    Date: 2010–04
  12. By: Beaudry, Paul; Dupaigne, Martial; Portier, Franck
    Abstract: This paper reexamines the question of how to explain business cycle co-movements within and between countries. First, we present two simple theoretically flexible price models to illustrate how and why news shocks can generate robust positive co-movements in economic activity across countries. We also discuss under what conditions the multi-sector version of the model generates appropriate business cycle patterns within countries. Second, we develop a quantitative two-country multi-sector model that is capable of replicating many international business cycle facts. The model is a two-country extension of the closed economy model of Beaudry and Portier [2004], in which there are limited possibilities to reallocate factors between investment and consumption good sectors.
    Keywords: business cycles, expectations, international fluctuations
    JEL: E32 F41
    Date: 2009–11
  13. By: Padoan, Pier Carlo (Asian Development Bank Institute)
    Abstract: The global economic and financial crisis has sparked an unprecedentedly large, generalized fiscal policy response in practically all major industrial and emerging economies, which will change the fiscal and macroeconomic landscapes for some time to come. This paper offers an overview of the new fiscal landscape looking at the following aspects: the size and composition of the fiscal stimulus packages of the major economies, the likely impact of such packages on aggregate demand and growth, the sustainability of countries' fiscal positions, and the international implications of the new fiscal landscape. It then considers under which conditions a virtuous scenario could develop that combines strong and balanced growth with fiscal sustainability. Finally, it offers some conclusions and lessons that can be shared by European and non-European economies.
    Keywords: overview fiscal stimulus packages; stimulus impacts on demand
    JEL: E62 F41 F42
    Date: 2009–12–14
  14. By: Vasco Curdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads, and to allow a role for the central bank's balance sheet in equilibrium determination. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central-bank policy | variations in the size and composition of the central bank's balance sheet, and payment of interest on reserves, alongside the traditional question of the proper choice of an operating target for an overnight policy rate. We also give particular attention to the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions, within a single unified framework, and to provide policy prescriptions that apply equally when financial markets work efficiently and when they are subject to substantial disruptions, and equally when the zero bound is reached and when it is not a concern.
    Date: 2010
  15. By: Morgan, Peter (Asian Development Bank Institute)
    Abstract: This paper reviews the effectiveness of unconventional monetary policies and their relevance for emerging markets. Such policies may be useful either when interbank rates fall to zero, or when a credit crunch or rise in risk premium impairs the normal transmission mechanism of monetary policy. Unconventional monetary policy measures encompass three broad categories: (i) commitment effect, i.e., verbal commitments to maintain very low interest rates for a certain period, either conditionally or unconditionally; (ii) quantitative easing, i.e., targeting the level of current account balances of the central bank; and (iii) qualitative or credit easing, which involves purchases of targeted assets to lower rates and/or increase liquidity in the target market. It also examines issues related to the exit strategy from unconventional policy, and assesses the applicability of unconventional policies for Asian economies other than Japan. <p>Most studies of the commitment effect (or duration effect) suggest that statements by a central bank regarding the duration of a policy of very low or zero interest rates also affect market expectations of interest rates, but the impact is mainly limited to shorter-term rates. The literature on the effects of quantitative easing monetary policy is less conclusive, especially when one accounts for other announcements by the central bank. Regarding qualitative easing (credit easing) policy, the effect of expanding outright purchases of government bonds on bond yields looks limited. However, other kinds of asset purchase interventions do seem to have been more successful in relieving market stresses. <p>For Asian countries aside from Japan, unconventional policies look most attractive as a way to relieve funding blockages in specific markets rather than to stimulate overall growth. Only India; Republic of Korea; Singapore; and Taipei,China adopted unconventional measures, and those of the middle two were chiefly related to their use of the Fed's swap line for United States dollars to ease dollar shortages in the region. However, if growth of United States consumption slows structurally, this may force Asian economies to rely more on unconventional monetary policy measures during future downturns.
    Keywords: unconventional monetary policy; monetary policy emerging markets
    JEL: E50 E52 E58 F41 F42
    Date: 2009–11–11
  16. By: Alan S. Blinder (Princeton University)
    Abstract: Apparently, it can happen here. On December 16, 2008, the Federal Open Market Committee (FOMC), in an effort to fight what was shaping up to be the worst recession since 1937, reduced the federal funds rate to nearly zero.1 From then on, with all of its conventional ammunition spent, the Federal Reserve was squarely in the brave new world of quantitative easing. Chairman Ben Bernanke tried to call the Fed’s new policies credit easing, probably to differentiate them from what the Bank of Japan had done earlier in the decade, but the label did not stick.
    Keywords: Recession, Federal Reserve, open market committee, banking policy, deflation, monetary policy
    JEL: E31 E58 G21
    Date: 2010–03
  17. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts.
    JEL: E44 E52 G28
    Date: 2009–06
  18. By: Kumar, Rajiv (Asian Development Bank Institute); Vashisht, Pankaj (Asian Development Bank Institute)
    Abstract: India's financial sector is not deeply integrated with the global financial system, which spared it the first round adverse effects of the global financial crisis and left Indian banks mostly unaffected. However, as the financial crisis morphed in to a full-blown global economic downturn, India could not escape the second round effects. The global crisis has affected India through three distinct channels: financial markets, trade flows, and exchange rates. The reversal in capital inflows, which created a credit crunch in domestic markets along with a severe deterioration in export demand, contributed to the decline of gross domestic product by more than 2 percentage points in the fiscal year 2008–2009. In line with efforts taken by governments and central banks all over the world, the Government and the Reserve Bank of India took aggressive countercyclical measures, sharply relaxing monetary policy and introducing a fiscal stimulus to boost domestic demand. However, this paper argues that with very limited fiscal maneuverability and the limited traction of monetary policy, policy measures to restore the Indian gross domestic product growth back to its potential rate of 8–9% must focus on addressing the structural constraints that are holding down private investment demand.
    Keywords: india global financial crisis; gdp growth
    JEL: E66
    Date: 2009–11–12
  19. By: Bosworth, Barry (Asian Development Bank Institute); Flaaen, Aaron (Asian Development Bank Institute)
    Abstract: This paper reviews research on the origins of the financial crisis of 2008–2009, highlights the key events that triggered a financial panic in September 2008, and summarizes the extraordinary policy actions the United States (US) has taken to ameliorate the crisis. We discuss the proximate causes of the crisis, including the characteristics and growth of the subprime mortgage market, and the distorted incentives and flawed regulatory structure surrounding the secondary market for mortgage-backed securities. We also assess the role of more fundamental macroeconomic determinants of the bubble in US asset prices, most notably low global interest rates attributed to either loose monetary policy or excess global saving. We find that while low global interest rates may have contributed to the boom in housing markets and speculative excesses, the poorly understood innovations and microeconomic distortions of the financial system played a more fundamental role. Finally, the otherwise extraordinary policy response of the US government has been limited by the lack of an effective restructuring of the financial system, and a recovery marked by higher private saving, weak domestic investment, and a large public deficit appears to be unsustainable. Ultimately, the US economy will need to shift about 3% of GDP from domestic consumption to the export sector. This will pose some serious challenges to countries that have come to rely on exports to the US market.
    Keywords: global financial crisis; financial panic; american policy actions
    JEL: E65 E66 E69 F40
    Date: 2009–07–21
  20. By: Cho, Dong Chul (Asian Development Bank Institute)
    Abstract: This paper argues that the Republic of Korea (hereafter Korea) is not immune to global crises, but that a more than proportional response of gross domestic product to global crises does not seem to be the general case either. Along this line of reasoning, Korea's extreme response to current crisis in the fourth quarter of 2008 was attributed not only to the crisis in the United States, but also to additional idiosyncratic components, such as the extraordinary collapse of the People's Republic of China's (PRC) imports and the drastic capital outflow from Korea. <p>The paper also emphasizes the differences between the current recession and the currency crisis period. The currency crisis was mainly attributed to the internal fragility of Korea's financial market, but the current recession was caused mostly by external shocks. This difference was clearly reflected in the different responses of private consumption and exports, and hence employment. In the dimension of macroeconomic policy reactions, monetary policy was far more flexible this time than during the currency crisis period. <p>From this analysis, two implications are drawn. First, as far as the economic response of the fourth quarter of 2008 being more extreme than necessary to rebalance the macroeconomic fundamentals in Korea, it is expected that those economic losses can be recovered relatively soon. Yet, for a more visible recovery of the Korean economy, the recovery of the PRC's domestic demand seems necessary, and a full-blown recovery will be in line with the global recovery. A second implication is that structural aspects are critical for maintaining economic stability as well as employing flexible macroeconomic policies. While the Korean economy plunged into a historic crisis in 1997—triggered by the relatively small external shock of the Thai baht crisis—the economy is expected to remain relatively robust this time, even in the midst of the most serious global crisis since the Great Depression.
    Keywords: korea global crisis recovery; korea economy response crisis; korea financial market recovery
    JEL: E32 E44 F41
    Date: 2009–08–19
  21. By: Verick, Sher (ILO International Labour Organization); Islam, Iyanatul (Griffith University)
    Abstract: Starting in mid-2007, the global financial crisis quickly metamorphosed from the bursting of the housing bubble in the US to the worst recession the world has witnessed for over six decades. Through an in-depth review of the crisis in terms of the causes, consequences and policy responses, this paper identifies four key messages. Firstly, contrary to widely-held perceptions during the boom years before the crisis, the paper underscores that the global economy was by no means as stable as suggested, while at the same time the majority of the world’s poor had benefited insufficiently from stronger economic growth. Secondly, there were complex and interlinked factors behind the emergence of the crisis in 2007, namely loose monetary policy, global imbalances, misperception of risk and lax financial regulation. Thirdly, beyond the aggregate picture of economic collapse and rising unemployment, this paper stresses that the impact of the crisis is rather diverse, reflecting differences in initial conditions, transmission channels and vulnerabilities of economies, along with the role of government policy in mitigating the downturn. Fourthly, while the recovery phase has commenced, a number of risks remain that could derail improvements in economies and hinder efforts to ensure that the recovery is accompanied by job creation. These risks pertain in particular to the challenges of dealing with public debt and continuing global imbalances.
    Keywords: global financial crisis, unemployment, macroeconomic policy, labour market policy
    JEL: E24 E60 J08 J60
    Date: 2010–05
  22. By: Gupta, Souvik (Asian Development Bank Institute); Miniane, Jacques (Asian Development Bank Institute)
    Abstract: With the global economy still in recession, two important questions arise for Asia: how soon will the recession end, and how vigorous will the region's recovery be? The purpose of this paper is to look at past recessions and recoveries in Asia in order to shed light on these issues. Several important stylized facts emerge from this study: (i) recessions accompanied by financial stress—notably, stress in domestic banking sectors—have been substantially longer and deeper than the norm, suggesting that the current recession could have been even costlier and more drawn out had Asia's banks not entered the downturn in such strong shape; (ii) recoveries in Asia have been weak because they were typically driven by a single engine: exports. In contrast, other emerging economies have tended to experience more vigorous recoveries because of a stronger contribution from domestic demand, notably investment; (iii) in Asia, deep recessions have resulted in substantial declines in potential output growth, meaning that their effects are not just cyclical but permanent. A clear lesson emerges from past experience: given the expected weak recovery in the eurozone and the United States, Asia should not count on exports to rebound strongly as it did in previous upturns. Rather, a fundamental rebalancing towards domestic demand is needed if Asia wants to preserve the high growth rates that have characterized its recent past. Finally, it remains to be seen whether potential output will fully recover from pre-crisis levels in the countries most affected by the crisis.
    Keywords: asian economic recession recovery; past recessions future recovery
    JEL: E32 E65
    Date: 2009–09–02
  23. By: Michael Woodford (Columbia University - Department of Economics)
    Abstract: This chapter reviews the theory of optimal monetary stabilization policy in New Keynesian models, with particular emphasis on developments since the treatment of this topic in Woodford (2003). The primary emphasis of the chapter is on methods of analysis that are useful in this area, rather than on final conclusions about the ideal conduct of policy (that are obviously model-dependent, and hence dependent on the stand that one might take on many issues that remain controversial), and on general themes that have been found to be important under a range of possible model specifications. With regard to methodology, some of the central themes of this review will be the application of the method of Ramsey policy analysis to the problem of the optimal conduct of monetary policy, and the connection that can be established between utility maximization and linear-quadratic policy problems of the sort often considered in the central banking literature. With regard to the structure of a desirable decision framework for monetary policy deliberations, some of the central themes will be the importance of commitment for a superior stabilization outcome, and more generally, the importance of advance signals about the future conduct of policy; the advantages of history-dependent policies over purely forward-looking approaches; and the usefulness of a target criterion as a way of characterizing a central bank's policy commitment.
    Date: 2010
  24. By: Periklis Gogas; Ioannis Pragidis
    Abstract: Several studies have established the predictive power of the yield curve in terms of real economic activity. In this paper we use data for a variety of E.U. countries: both EMU (Germany, France, Italy) and non-EMU members (Sweden and the U.K.). The data used range from 1991:Q1 to 2009:Q1. For each country, we extract the long run trend and the cyclical component of real economic activity, while the corresponding interbank interest rates of long and short term maturities are used for the calculation of the country specific yield spreads. We also augment the models tested with non monetary policy variables: the countries' unemployment rates and stock indices. The methodology employed in the effort to forecast real output, is a probit model of the inverse cumulative distribution function of the standard distribution, using several formal forecasting and goodness of fit evaluation tests. The results show that the yield curve augmented with the non-monetary variables has significant forecasting power in terms of real economic activity but the results differ qualitatively between the individual economies examined raising non-trivial policy implications.
    Date: 2010–05
  25. By: Lisi, Gaetano
    Abstract: Relying on the non-negligible role played by the underground economy in the labour market fluctuations, this paper extends the standard matching model à la Mortensen-Pissarides by introducing an underground sector along with an endogenous sector choice for both entrepreneurs and workers. These modifications improve the quantitative properties of the standard matching model, thus providing a possible explanation for the unemployment volatility puzzle.
    Keywords: unemployment and vacancies volatility; productivity and job destruction shocks; underground economy; shadow economy; hidden economy; matching models.
    JEL: E32 J63 J64 J24 E26 L26 J23
    Date: 2010–05–13
  26. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: This paper analyzes the possibility and the consequences of asset price overvaluation in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze the economic implications of firm heterogeneity, endogenous corporate governance, and stochastic bubbles. Finally we draw some implications for the way public policy could react to bubbles.
    JEL: E2 E44
    Date: 2009–10
  27. By: Jitsuchon, Somchai (Asian Development Bank Institute); Sussangkarn, Chalongphob (Asian Development Bank Institute)
    Abstract: This paper reviews Thailand's structural changes, the 1997 crisis experience, and recovery and lessons from the crisis. The paper then discusses the impacts of the subprime crisis on the Thai economy and the policy responses to date. The paper ends by discussing strategies to rebalance growth by reducing the dependence on exports as the main growth engine. <p>The recovery from the 1997 crisis left Thailand more dependent than ever on exports as the main engine of growth, with the ratio of exports to gross domestic product (GDP) increasing from a precrisis level of about 38% to about 65% recently. The lessons learned from the 1997 crisis led to a more risk-averse financial system, and this helped Thailand avoid the direct impacts of the subprime crisis. However, being highly dependent on exports, Thailand, along with other export oriented East Asian economies, is now heavily affected by the indirect impacts of the subprime crisis, especially in the export industries. Exports and GDP have dropped sharply over the past two quarters. <p>The government has been using fiscal stimulus and monetary easing measures to try to improve the economy. These measures are mostly short-term in nature, and if the subprime crisis is protracted, then the sustainability of the fiscal stimulus will be called into question. In the medium- to long-term, Thailand needs to move to a more balanced growth path, depending less on exports (although exports will still be important) and more on other, domestic sources of growth. The paper concludes by discussing a number of policy strategies that will contribute to a more balanced growth path.
    Keywords: thailand growth rebalancing; exports; trade statistics; financial crises
    JEL: E65 F14 F30 F40 O11
    Date: 2009–10–06
  28. By: Arby, Muhammad Farooq; Malik, Muhammad Jahanzeb; Hanif, Muhammad Nadim
    Abstract: This paper estimates the size of informal economy in Pakistan by using monetary approach with some modifications, electricity consumption approach and MIMIC model. Under monetary approach, we take care of the issue of the stationarity of variables and use autoregressive distributed lag (ARDL) model instead of simple OLS and add education as an additional factor affecting the size of informal economy along with some other technical improvements in the standard monetary models. The electricity consumption approach and MIMIC models are used for the first time in case of Pakistan. The results show that the informal economy in Pakistan has been about 30 percent of the total economy which declined considerably in 2000s. Currently, about 20 percent of the economic transactions are taking place in the informal sector.
    Keywords: Informal Economy; ARDL; MIMIC
    JEL: E26
    Date: 2010–05–07
  29. By: Arturo Galindo; Marcela Melendez
    Abstract: This paper uses a yearly dataset of plant-level investment in Colombian firms during the period 1997 to 2007 to assess the impact of a tax incentive for firms that invest in fixed assets implemented in 2004. A positive and statistically significant correlation is found between the boom observed in investment and the adoption of the tax policy. However, the correlation vanishes when year-specific effects are controlled for. This result is robust to changes in the empirical specification, changes in estimation techniques, the inclusion of additional controls, and changes in the data set, among other tests. Overall, it is concluded that the tax stimulus analyzed was ineffective in promoting investment in Colombia.
    Keywords: Taxes, Investment, Colombia
    JEL: E22 H2 O54
    Date: 2010–04
  30. By: Tirole, Jean (University of Toulouse Capitole)
    Abstract: The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macroprudential policies.
    JEL: E44 E52 G28
    Date: 2009–09–12
  31. By: Bisio Laura; Faccini Andrea
    Abstract: The aim of this paper is to verify if a proper SVEC representation of a standard Real Business Cycle model exists even when the capital stock series is omitted. The argument is relevant as the common unavailability of su¢ ciently long medium-frequency capital series prevent researchers from including capital in the widespread structural VAR (SVAR) representations of DSGE models - which is supposed to be the cause of the SVAR biased estimates. Indeed, a large debate about the truncation and small sample bias a¤ecting the SVAR performance in approximating DSGE models has been recently rising. In our view, it might be the case of a smaller degree of estimates distorsions when the RBC dynamics is approximated through a SVEC model as the information provided by the cointegrating relations among some variables might compensate the exclusion of the capital stock series from the empirical representation of the model.
    Keywords: RBC, SVAR, SVEC model, cointegration
    JEL: E27 E32 C32 C52
    Date: 2010–05
  32. By: Jonung, Lars (Asian Development Bank Institute)
    Abstract: This paper gives an account of the Swedish financial crisis covering the period 1985–2000, dealing with financial deregulation and the boom in the late 1980s, the bust and the financial crisis in the early 1990s, the recovery from the crisis and the bank resolution policy adopted during the crisis. The paper focuses on three issues: the causes and consequences of the financial crisis, the policy response concerning bank resolution, and the applicability of the Swedish model of bank crisis management for countries currently facing financial problems.
    Keywords: financial crisis; crisis management; bank resolution; solvency crisis; banking crisis
    JEL: E32 E44 E63 F32 F34 G21 G32 G33
    Date: 2009–11–20
  33. By: Titiheruw, Ira S. (Asian Development Bank Institute); Atje, Raymond (Asian Development Bank Institute)
    Abstract: This paper describes the existing payment system in Indonesia, which is comprised of cash and non-cash payment systems. The non-cash payment system has evolved swiftly due to improvements in information technology and the resulting transition from a paper-based to a card-based system. With the development of e-money, it is already moving toward a paperless payment system. As the monetary authority in Indonesia, Bank Indonesia is responsible for regulating and safeguarding the smooth and efficient operation of the national payment system. In 2004, the bank revised the blueprint of the system, which was originally introduced in 1995 in anticipation of efficiency-related challenges and legal implications arising from economic and technological development. Although Bank Indonesia expects to be able to provide equitable access and offer consumer protection, potential benefits arising from technological advances to the payment system, such as access in remote areas, remains an issue for small- and medium-sized enterprises. This paper examines this issue closely, with an eye to making the payment system more inclusive. It also examines the impact of the recent global financial crisis on Indonesia's payment system. The authors found that the system has remained safe, secure, and reliable despite some minor liquidity problems experienced by small banks in the last quarter of 2008 as the effects of the global crisis began to penetrate the country's financial sector.
    Keywords: payment system indonesia; bank indonesia payment system; indonesia financial crisis
    JEL: E42
    Date: 2009–08–31
  34. By: Nambiar, Shankaran (Asian Development Bank Institute)
    Abstract: The economic crisis that began in the United States had an effect on the developed world, including the European Union, Japan, and Singapore. The downturn of the economy in the United States, coupled with developments in the European Union, Japan, and Singapore, has affected the Malaysian economy. This paper argues that Malaysia, being a small open economy with a strong export-dependent manufacturing sector, was particularly vulnerable to the global crisis. The very countries that generate the demand for Malaysian exports have been struck by the crisis, leading to declines in output in Malaysia. These declines have resulted in labor market shocks which have led to retrenchments. The severity of the crisis and its prolonged duration requires an approach that is not unduly dependent on export-led growth. This paper will suggest that Malaysia adopt a rebalancing strategy in response to the current crisis.
    Keywords: malaysia financial crisis; export and labor markets; rebalancing strategy
    JEL: E21 E60 F10 F40
    Date: 2009–08–26

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