nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒06‒04
thirty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Central bank’s macroeconomic projections and learning By Giuseppe Ferrero; Alessandro Secchi
  2. Endogenous Monetary Policy Regimes and the Great Moderation By Ana Beatriz Galvao; Massimiliano Marcellino
  3. A Macro-Finance Approach to Exchange Rate Determination By Yu-chin Chen; Kwok Ping Tsang
  4. Central banking and monetary management in islamic financial environment By Hanif, M. Nadim; Sheikh, Salman
  5. A note on expectational stability under non-zero trend inflation By Kobayashi, Teruyoshi; Muto, Ichiro
  6. Loud and clear? Can we hear when the SARB speaks? By Monique Reid; Stan du Plessis
  7. Insulation Impossible: Fiscal Spillovers in a Monetary Union By Russell Cooper; Hubert Kempf; Dan Peled
  8. The Aggregate Demand, Aggregate Supply, and Endogenous Growth: A Synthetic neo-Kaleckian Model By Thomas I. Palley
  9. Liquidity Shocks and the Business Cycle By Bigio, Saki
  10. Credit, Housing Collateral and Consumption: Evidence from the UK, Japan and the US By Janine Aron; John V. Duca; John Muellbauer; Keido Murata; Anthony Murphy
  11. Industry evidence on the effects of government spending By Christopher J. Nekarda; Valerie A. Ramey
  12. Inflation in the New EU Countries from Central and Eastern Europe : Theories and panel data estimations By Karsten Staehr
  13. The Superiority of Greenbook Forecasts and the Role of Recessions By Kishor N. Kundan
  14. Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentina’s Experience By Bernardo Maggi; Eleonora Cavallaro; Marcella Mulino
  15. Financial Shocks, Financial Frictions and Financial Intermediaries in DSGE Models: Comments on the Recent Literature By Arend, Mario
  16. The Simple Macroeconomics of Fiscal Austerity, Public Sector Debt and Deflation By Thomas I. Palley
  17. Determination of Money Supply in India: The Great Debate By Das, Rituparna
  18. The functioning of the European interbank market during the 2007-08 financial crisis By Silvia Gabrieli
  19. Capital Based Macroeconomic model and 100 percent reserve system, free banking system and BFH system: A Comparism among Latvia, Lithuania, Kazakhstan, and Kyrgyzstan. By Baafi Antwi, Joseph
  20. Documentation of the Estimated, Dynamic, Optimization-based (EDO) model of the U.S. economy: 2010 version By Hess T. Chung; Michael T. Kiley; Jean-Philippe Laforte
  21. Managerial Pay (Cadrisme) and the Post Keynesian Growth Model By Thomas I. Palley
  22. The disappointment of expectations and the theory of fluctuations By Meacci, Ferdinando
  23. The Future of the Sino-American Co-Dependency By Luigi Bonatti; Andrea Fracasso
  24. Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004. By Olga Gorbachev; Keshav Dogra
  25. Predictions of short-term rates and the expectations hypothesis By Massimo Guidolin; Daniel L. Thornton
  26. Adaptive Interest Rate Modelling By Mengmeng Guo; Wolfgang Karl Härdle
  27. Econometric Models of Relationship among Money, Output and Prices By Das, Rituparna
  28. Technological Transitions and Educational Policies By Mario Amendola; Francesco Vona
  29. Estimating Incentive and Welfare Effects of Non-Stationary Unemployment Benefits By Andrey Launov; Klaus Wälde
  30. Dynamic Provisioning: Some Lessons from Existing Experiences By de Lis, Santiago Fernández; Herrero, Alicia Garcia
  31. On the measurement of technological progress across countries By Jakub Growiec

  1. By: Giuseppe Ferrero (Banca d'Italia); Alessandro Secchi (Banca d'Italia)
    Abstract: We study the impact of the publication of central bank’s macroeconomic projections on the dynamic properties of an economy where: (i) private agents have incomplete information and form their expectations using recursive learning algorithms, (ii) the short-term nominal interest rate is set as a linear function of the deviations of inflation and real output from their target level and (iii) the central bank, ignoring the exact mechanism used by private agents to form expectations, assumes that it can be reasonably approximated by perfect rationality and releases macroeconomic projections consistent with this assumption. Results in terms of stability of the equilibrium and speed of convergence of the learning process crucially depend on the set of macroeconomic projections released by the central bank. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria under learning and helps agents to learn faster, the announcement of the interest rate path exerts the opposite effect. In the latter case, in order to stabilize expectations and to speed up the learning process the response of the policy instrument to inflation should be stronger than under no announcement.
    Keywords: Monetary policy, Communication, Interest rates, Learning, Speed of Convergence
    JEL: E58 E52 E43 D83
    Date: 2010
  2. By: Ana Beatriz Galvao; Massimiliano Marcellino
    Abstract: This paper contributes to the literature on the changing transmission mechanism of monetary policy by introducing a model whose parameter evolution explicitly depends on the conduct of monetary policy. We find that the model fits the data well, in particular when complemented with an estimated break around 1985 that could be associated with the re-gained credibility of the central bank. The responses of output and inflation to policy shocks change not only because of the break in 1985 but also according to the monetary policy stance: policy shocks have stronger negative e¤ects when policy is tight. There is also evidence in favour of large changes in the volatility of the output equation, but not of inflation. A set of counterfactual experiments indicate that good policy and good luck contributed to the great moderation, but neither of them can fully explain it. A more general variation in the model dynamics underlying the shock transmission mechanism is required.
    Date: 2010
  3. By: Yu-chin Chen (University of Washington); Kwok Ping Tsang (Virginia Tech)
    Abstract: The nominal exchange rate is both a macroeconomic variable equilibrating international markets and a financial asset that embodies expectations and prices risks associated with cross border currency holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we employ a state-space system to model the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a vector autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound rates relative to the dollar. Moreover, by decomposing the yield curves into expected future yields and bond market term premiums, we show that both expectations about future macroeconomic conditions and perceived risks are priced into the currencies. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic as well as financial forces.
    Date: 2009–12
  4. By: Hanif, M. Nadim; Sheikh, Salman
    Abstract: Continuous growth in Islamic finance calls for studying the framework in which the monetary policy maker (i.e., central bank) performs its functions. Central banks in Muslim countries are using various instruments for monetary policy purpose including interest rate. As a result, Islamic financial institutions (IFIs) are facing issues in benchmarking the price of financial instruments. Acceptable solution to benchmarking lies in the presence of a real economic activity in the base of any proposal and its feasibility for business performance when put against conventional banking. This paper presents empirical evidence of statistical equivalence of nominal GDP growth rate and official interest rate for ‘advanced,’ ‘all,’ and some Muslim countries. We propose nominal GDP growth rate as benchmark for pricing domestic financial transactions of IFIs as well as for pricing external bilateral/ multilateral loans. The paper also suggests nominal income targeting as monetary policy regime.
    Keywords: Islamic Finance; Central Bank; Interest Rate; Nominal Income Targeting
    JEL: G12 E58
    Date: 2009–11
  5. By: Kobayashi, Teruyoshi; Muto, Ichiro
    Abstract: This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.
    Keywords: adaptive learning, E-stability, Taylor rule, trend inflation
    JEL: D84 E31 E52
    Date: 2010–05–28
  6. By: Monique Reid (Department of Economics, University of Stellenbosch); Stan du Plessis (Department of Economics, University of Stellenbosch)
    Abstract: Inflation targeting is a forward-looking framework for monetary policy that has brought unprecedented transparency to the process of monetary policy. This paper aims to assess the degree to which the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has, since the introduction of inflation targeting, successfully communicated to the public its policy analysis, and, in particular, the expected future policy changes. This paper follows international literature (Rosa and Verga (2007), Ehrmann and Fratszcher (2005)) in constructing a numerical index that is used to reflect the information content of the SARB’s communications, specifically the monetary policy statements that accompanied each of the MPC meetings since 2000. Relating this index to subsequent policy decisions reveals the informativeness of the index and, by implication, the informativeness of the underlying monetary policy statements. This method allows us to judge, systematically, the degree to which the MPC has communicated successfully, and the evolution of that success over the past nine years. We find evidence that the MPC has succeeded in signalling their likely future policy decision with consistency over this period.
    Keywords: South Africa, Inflation targeting, Central bank communication, Effective monetary policy, forward-looking policy framework
    JEL: E42 E52 E58
    Date: 2010
  7. By: Russell Cooper; Hubert Kempf; Dan Peled
    Abstract: This paper studies fiscal spillovers in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will inuence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be inuenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.
    Date: 2010
  8. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper develops a neo-Kaleckian endogenous growth model that incorporates aggregate supply - demand balance and balance between labor force and employment growth. The paper explicitly models income distribution which is a critical channel whereby unemployment affects investment and growth. The model generates a growth unemployment rate trade-off. A reduced propensity to save raises growth but it also raises the unemployment rate because of induced technological progress. This resonates with Alvin Hansen's hypothesis. The paper contains several theoretical innovations including a new mechanism whereby unemployment affects income distribution; introduction of a Phillips curve and inflation effects; and introduction of demand growth expectation effects.
    Keywords: aggregate demand, supply, unemployment, neo-Kaleckian endogenous growth theory
    JEL: E12 O41 O33
    Date: 2010
  9. By: Bigio, Saki (Department of Economics, New York University)
    Abstract: This paper studies the properties of an economy subject to random liquidity shocks. As in Kiyotaki and Moore [2008], liquidity shocks affect the ease with which equity can be used as to finance the down-payment for new investment projects. We obtain a liquidity frontier which separates the state-space into two regions (liquidity constrained and unconstrained). In the unconstrained region, the economy behaves according to the dynamics of the standard real business cycle model. Below the frontier, liquidity shocks have the effects of investment shocks. In this region, investment is under-efficient and there is a wedge between the price of equity and the real cost of capital. As with investment shocks, we argue that liquidity shocks are not an important source of business cycle fluctuations in absence of other frictions affecting the labor market.
    Keywords: Business Cycle, Asset Pricing, Liquidity
    JEL: E32 E44 D82
    Date: 2010–05
  10. By: Janine Aron; John V. Duca; John Muellbauer; Keido Murata; Anthony Murphy
    Abstract: The consumption behaviour of UK, US and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for UK and US but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the UK and US as mortgage down-payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the US and UK, while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the UK and US and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the US, UK and other credit-liberalized economies.
    Keywords: Consumption, Credit conditions, Housing collateral and housing wealth
    JEL: E21 E32 E44 E51
    Date: 2010
  11. By: Christopher J. Nekarda; Valerie A. Ramey
    Abstract: This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but lower real product wages and productivity. Markups do not change as a result of government demand increases. The results are consistent with the neoclassical model of government spending, but they are not consistent with the New Keynesian model of the effects of government spending.
    Date: 2010
  12. By: Karsten Staehr
    Abstract: This paper seeks to identify factors driving consumer price inflation in the new EU member countries from Central and Eastern Europe. Different theories are discussed, including some of particular importance to economies experiencing high economic growth and rapid structural change. The explanatory power of the theories is tested using panel data estimations based on annual data from 1997 to 2007. Convergence- related factors, including the Balassa-Samuelson and the Bhagwati capital-deepening effects, are important drivers of inflation. Import inflation and, by implication, exchange rate developments have an important impact, while the exchange rate regime is unimportant. Higher government debt and larger revenues are associated with higher inflation. The cyclical position as measured by unemployment, employment changes or the current account balance is found to affect inflation. Food price shocks have large but short-lived effects, while energy price shocks have longer-lasting effects on the inflation rate. Multicollinearity across the explanatory variables makes it difficult to identify the effect of each individual factor
    Keywords: inflation, inflation theories, real and nominal convergence, inflation determinants
    JEL: E31 E42 E63 P24
    Date: 2010–05–26
  13. By: Kishor N. Kundan (University of Wisconsin-Milwaukee)
    Abstract: In this paper, we investigate the role of recessions on the relative forecasting performance of the Fed and the private sector. Romer and Romer (2000) showed that the Fed's forecasts of inflation and output were superior to that of the private sector in the pre-1991 period. D'Agostino and Whelan (2008) found that the information superiority of the Fed deteriorated after 1991. Our results show that the information superiority of the Fed in forecasting real activity did arise from its forecasting dominance during recessions. If recessions are excluded from the pre-1992 period, the informational advantage of the Fed disappears, and in some cases, private sector forecasts perform better. We do not find any systematic effect of recessions on inflation forecasts.
    Keywords: Greenbook Forecasts, Recessions, Business Cycle Turning Points
    JEL: E31 E32 E37
    Date: 2010
  14. By: Bernardo Maggi; Eleonora Cavallaro; Marcella Mulino (Univ. of Rome “La Sapienza”)
    Abstract: The paper presents an open-economy macrodynamical growth model with the aim of giving an endogenous characterisation to the process that leads a small country with a currency-board arrangement to accumulate dangerously high levels of external debt and become vulnerable to macroeconomic instability. The macrodynamics of the model results from the combination of the commitment to maintain the peg - that makes liquidity closely dependent on the dynamics of foreign reserves – and the non-linear real and financial interactions that drives the pro-cyclical behaviour of the economy. Within this context, the external finance ease during an economic upswing leads to debt-supported growth and financial fragility; the consequent deterioration of profitability expectations brings about a capital reversal that, in the absence of monetary stabilization tools, makes the currency arrangement unsustainable. A financial crisis may thus turn into a currency crisis. We run a continuous-time estimation of a non-linear differential equations system for Argentina during the years of the currency-board arrangement. We find that two steady-state solutions exist. The local stability and sensitivity analysis show that both equilibria are unstable and that the qualitative nature of the equilibria depends in particular on lenders’ responsiveness to the degree of leverage. On the contrary, when considering a different currency arrangement with an autonomous monetary policy, the system becomes stable.
    Keywords: Currency Board, Financial Crisis, Monetary policy, Continuous Time Econometrics, Stability, Sensitivity
    JEL: C51 C62 F34 E52
    Date: 2010
  15. By: Arend, Mario
    Abstract: The aim of this work is to compare and contrast different ways of modeling financial shocks and financial intermediaries in the Dynamic Stochastic General Equilibrium models (DSGE models) and to discuss the empirical evidence on the importance of modeling financial sector and financial shocks in the economy. The analysis is based on four papers on the matter Jerman and Quiadrini (2009),Christiano, Motto and Rostagno (2006), Goodfriend and McCallum (2007), and Gertler and Kiyotaki (2009)
    Keywords: Financial frictions; Financial Intermediaries; Financial shocks; DSGE models.
    JEL: E5 E44 E4 E3
    Date: 2010–05–27
  16. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper explores the macroeconomics of fiscal austerity and deflation in an economy with public debt. A binding budget deficit cap destabilizes the economy by turning the government budget into an automatic destabilizer. Public debt helps maintain AD in the presence of deflation because deflation increases the real value of public interest payments. That makes public debt significantly different from private debt. If the economy is subject to a binding deficit cap, deflation no longer stabilizes output. This is because increased real interest payments must be matched by spending cuts, giving rise to a negative balanced budget multiplier.
    Keywords: fiscal austerity, budget deficit cap, public debt, deflation growth theory
    JEL: E12 E60 E62 H62
    Date: 2010
  17. By: Das, Rituparna
    Abstract: Researchers reported that - there were two approaches to money supply determination in India: balance sheet or structural approach and money multiplier approach; the former focused on individual items in the balance sheet of the consolidated monetary sector in order to explain changes in money supply and the latter focused on the relationship between money stock and reserve money; the money multiplier approach emerged strongly as a critic to the balance sheet approach; between January 1976 and January 1978 there was a hot and rich debate between two groups of researchers, one group led by Gupta who believed in the money multiplier theory, the other group of RBI economists, who were not accepting this theory; the debate gave rise to a number of research papers where mostly regression techniques were used to estimate and forecast money supply function; Bhattacharya (1972), Gupta (1972) and Marwah (1972) used regression techniques to estimate money multiplier in India four years before the debate took place. The above debate is narrated below in an analytical style.
    Keywords: money supply; high powered money; reserve money; RBI; Working Group; multiplier; balance sheet; forecast; currency
    JEL: E0 E4
    Date: 2010
  18. By: Silvia Gabrieli (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper analyses the functioning of the overnight unsecured euro money market during the ongoing crisis in terms of i) operational efficiency of monetary policy implementation, ii) efficient reallocation of banking system’s reserves, iii) developments in the pricing of interbank loans. The results suggest that monetary policy implementation has been hampered by the crisis, particularly after the end of September 2008. A heightened awareness of counterparty credit risk seems to be one key factor behind the downward pressure on unsecured rates, as well as behind the notable increase in their cross-section dispersion. Starting from September 2008, and even more in October 2008, banks perceived as relatively “riskier” pre-turmoil paid significantly higher interest rates to borrow overnight funds. In November, a non-uniform softening of the strains occurred: only the most active (roughly the largest) borrowers experienced a notable price improvement. This is possibly a reflection of the bailouts of “too-big-to-fail” institutions. Heterogeneous developments in banks’ funding costs also suggest a move against the integration of the euro interbank market.
    Keywords: Interbank market; Financial crisis; Monetary policy operational efficiency; Moral hazard; European financial integration
    JEL: E58 G21
    Date: 2010–05–28
  19. By: Baafi Antwi, Joseph
    Abstract: This essay extends the capital based macroeconomic theory to include international capital flow thus extending it to an open economy and analyze it in the context of the BFH system, Free banking system and 100 percent reserve ration. In all these, it was noticed that interest rate will barely change even though the possibility of interest rate changes was not ruled out completely. A test of these systems was conducted on Latvia, Lithuanian, Kazakhstan and Kyrgyzstan and was successful. However, it must be noted that these are just prepositions as these system are not in place at the moment. In furtherance to this, past and present monetary system used by the countries exhibited similarities to these systems, even though difference could largely be seen.
    Keywords: International Capital Flows: Interest rate: 100 percent reserve system: free banking system: BFH system
    JEL: F0 F41
    Date: 2010–02–17
  20. By: Hess T. Chung; Michael T. Kiley; Jean-Philippe Laforte
    Abstract: This paper provides documentation for a large-scale estimated DSGE model of the U.S. economy--the Federal Reserve Board's Estimated, Dynamic, Optimization-based (FRB/EDO) model project. The model can be used to address a wide range of practical policy questions on a routine basis. The paper discusses the model's specification, estimated parameters, and key properties.
    Date: 2010
  21. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper examines the effects of managerial pay on the Post Keynesian model of growth and distribution. Introducing managerial pay explains why economies may exhibit both wage- and profit-led characteristics in response to changed income distribution. Second, managerial pay undoes Pasinetti's (1961/2) theorem regarding the irrelevance of worker saving behavior for long run growth outcomes. Third, managerial pay links neo-classical Marxist theory with Post Keynesian growth theory. Neo-classical Marxists focus on why firms may choose inefficient production techniques. Similar logic carries over to Post Keynesian growth theory and firms may choose techniques that lower growth because they increase profits.
    Keywords: Post Keynesian growth theory, managerial pay, neo-classical Marxism
    JEL: E12 E25
    Date: 2010
  22. By: Meacci, Ferdinando
    Abstract: The role of “errors in time” (Fanno, 1933) or “disappointment of expectations” (Hicks, 1933) was a major object of analysis in the years of high theory when it contributed to the replacement of the paradigm of General Equilibrium Theory by the new paradigm of the Economics of Uncertainty and Expectations that took place in those years. The scope of this paper is to re-evaluate this object of analysis in the light of the evolution of the theory of fluctuations to which it belongs. The paper is thus divided in two Parts. Part I provides a unified account of how the leading authors of those years (Keynes, Hayek, Hicks) dealt with expectations and their disappointment in their theory of fluctuations. Part II provides instead a brief account of the major constructions worked out by some leading authors of what is here called the “years of rational expectations”. The paper shows how the focus on errors in time has been replaced in the latter period by a set of assumptions and arguments which either neglect the impact of the disappointment of expectations on macroeconomic disequilibrium or even exclude the very possibility of this disappointment. The paper concludes by highlighting the decreasing scope and relevance of the theory of fluctuations as one moves from the years of high theory to the more recent years of rational expectations.
    Keywords: Expectations; Disappointment; Errors; Fluctuations
    JEL: E32 E2 E1
    Date: 2009–12
  23. By: Luigi Bonatti; Andrea Fracasso
    Abstract: The crisis of 2008 has shown the unsustainability of the global imbalances centered on the USChina symbiotic relationship that characterized the previous decade. This has revived the so-called growth-rebalancing debate. In particular, the new emerging consensus calls for a re-orientation of the US economy away from consumption and toward exports, and for policy shifts that can help China to reduce its dependence on external demand and inefficiently high rates of capital accumulation. In this essay, we discuss the economic and political feasibility of the proposed patterns of re-adjustment by focusing on the short- and long-term trade-offs faced by the policymakers. We argue that the rebalancing will be gradual and partial because of the costs associated with a radical shift in the growth strategies of both countries. We also believe that this scenario will be consistent with a world economy expanding at lower rates than in the past decade.
    Keywords: Growth strategies; Global imbalances; Sino-American co-dependency; Growth Rebalancing
    JEL: E42 F33 F41 F43 O41
    Date: 2010
  24. By: Olga Gorbachev; Keshav Dogra
    Abstract: We study whether the increased income uncertainty in the US over the last quarter-century had a negative impact on household welfare by looking at variability of household consumption growth. We are particularly interested in understanding the effect of greater uncertainty on the liquidity constrained households. We study the evolution of liquidity constraints in the US in the Panel Study of Income Dynamics, extending Jappelli et al. [1998] methodology using information from the Survey of Consumer Finances. We find that although household indebtedness increased substantially, reflecting greater availability of credit, there was no decline in the proportion of liquidity constrained households between 1983 and 2007. Applying methodology developed in Gorbachev [2009], we find that the evolution of consumption volatility for the liquidity constrained households increased by economically and statistically more than for the unconstrained households. This increase was lower than that of family income volatility for these groups. Nevertheless, the welfare cost to society is substantial: we estimate that an average household would be willing to sacrifice 4.7 percent of nondurable consumption per year to lower consumption risk to its 1984 levels.
    Date: 2009–11
  25. By: Massimo Guidolin; Daniel L. Thornton
    Abstract: Despite its role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support. The empirical failure of the EH was attributed to a variety of econometric biases associated with the single-equation models most often used to test it, although no bias seems to account for the extent and magnitude of the failure. This paper analyzes the EH by focusing on the predictability of the short-term rate. This is done by comparing h-month ahead forecasts for the 1- and 3-month Treasury bill yields implied by the EH with the forecasts from random-walk, Diebold and Li’s (2006), and Duffee’s (2002) models. The evidence suggests that the failure of the EH is likely a consequence of market participants’ inability to adequately predict the short-term rate, in that none of these models out-performs a simple random walk model in recursive, real time experiments. Using standard methods that take into account the additional uncertainty caused by the need to estimate model parameters, the null hypothesis of equal predictive accuracy of each models relative to the random walk alternative is never rejected
    Keywords: Rational expectations (Economic theory) ; Interest rates
    Date: 2010
  26. By: Mengmeng Guo; Wolfgang Karl Härdle
    Abstract: A good description of the dynamics of interest rates is crucial to price derivatives and to hedge corresponding risk. Interest rate modelling in an unstable macroeconomic context motivates one factor models with time varying parameters. In this paper, the local parameter approach is introduced to adaptively estimate interest rate models. This method can be generally used in time varying coefficient parametric models. It is used not only to detect the jumps and structural breaks, but also to choose the largest time homogeneous interval for each time point, such that in this interval, the coeffcients are statistically constant. We use this adaptive approach and apply it in simulations and real data. Using the three month treasure bill rate as a proxy of the short rate, we nd that our method can detect both structural changes and stable intervals for homogeneous modelling of the interest rate process. In more unstable macroeconomy periods, the time homogeneous interval can not last long. Furthermore, our approach performs well in long horizon forecasting.
    Keywords: CIR model, Interest rate, Local parametric approach, Time homogeneous interval, Adaptive statistical techniques
    JEL: E44 G12 G32 N22
    Date: 2010–05
  27. By: Das, Rituparna
    Abstract: This paper discusses the econometric models and tools like Granger causality and VAR discussed in ascertaining the relationship between money, output and prices. It found that Jha et al (2002) and Ahmed (2003) employed a VAR model accompanied by ECM and Johansen-Juselius procedure; others like Rangarajan et al (1990) employed simulation models containing regressions equations of variety of forms simple linear function and double logarithmic function, and also autoregressive equations of first order (AR1) and only Ray et al (1988) employed filters for prewhitening purpose i.e. making a nonstationary series stationary. The filter technique did not seem to be popular. Even Jha et al (2002) employed ADF test in order to detect the level of integration of the series and accordingly took measures to ensure stationarity.
    Keywords: Granger; causality; Sims; vector autoregression; multiplier
    JEL: E0 B23
    Date: 2010
  28. By: Mario Amendola; Francesco Vona (Sapienza University of Rome)
    Abstract: This paper presents an out-of-equilibrium model to explain cross-country dierences in the capacity to absorb new skill-biased technologies. The usual mainstream viewpoint stressing the role of labour markets will be re-examined in a context characterized by a sequential structure of both the process of production and the skill formation, whose interaction brings about coordination failures harming the viabiity of the innovation process. In this light, educational policies play a crucial role in restoring the required coordination. The robust results of the simulations show that educational policies appear to be important both in rigid and in exible systems. In the former case, educational policies nanced by taxation allow the system to escape a low productivity nal equilibrium. In the latter, they contrast the nancial constraint associated to a large decrease in the unskilled wage. Altogether, a moderate degree of rigidity seems the most appropriate institutional environment to reach the targets of viability and of a full exploitation of the technological potential.
    Keywords: Skill-Biased Technical Change, Labour Markets, Educational Policies, Out-of-Equilibrium Models
    JEL: E22 E24 O3
    Date: 2010
  29. By: Andrey Launov (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany); Klaus Wälde (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany)
    Abstract: The distribution of unemployment duration in our equilibrium matching model with spell-dependent unemployment bene?ts displays a time-varying exit rate. Building on Semi-Markov processes, we translate these exit rates into an expres- sion for the aggregate unemployment rate. Structural estimation using a German micro-data set (SOEP) allows us to discuss the effects of a recent unemployment bene?t reform (Hartz IV). The reform reduced unemployment by only 0.3%. Contrary to general beliefs, we ?nd that both employed and unemployed workers gain (the latter from an intertemporal perspective). The reason is the rise in the net wage caused by more vacancies per unemployed worker.
    Keywords: Non-stationary unemployment bene?ts, endogenous effort, matching model, structural estimation, Semi-Markov process
    JEL: E24 J64 J68 C13
    Date: 2010–05–21
  30. By: de Lis, Santiago Fernández (Asian Development Bank Institute); Herrero, Alicia Garcia (Asian Development Bank Institute)
    Abstract: After analyzing the different reasons why the financial system and also the regulatory framework induced procyclicality, this paper reviews the experiences of three countries which have introduced dynamic provisioning as a regulatory tool to limit procyclicality. The case of Spain—the country with the longest experience—is reviewed, as well as those of Colombia and Peru—countries that have recently adopted dynamic provisioning. A number of policy lessons are drawn from that comparison.
    Keywords: dynamic provisioning; colombia; peru; spain; bank regulation; procyclical
    JEL: E32 G21 G28 G32
    Date: 2010–05–26
  31. By: Jakub Growiec (National Bank of Poland, Economic Institute)
    Abstract: We construct 14 alternative measures of technological progress for 19 OECD countries over the period 1970–2000, distinguishing between measures of productivity gains actually obtained in a given country (TFP growth, Malmquist index) and technological progress at the world technology frontier (potential TFP growth, the “frontier shift” index). We then compare these measures according to a range of characteristics, shedding light on some of their relative weaknesses and strengths. We find that these characteristics are sensitive to the precision of estimates of the world technology frontier, and then we demonstrate that this precision can be increased substantially by allowing for imperfect substitutability between unskilled and skilled labor and using US state-level data apart from cross-country data for estimating the world technology frontier. Because none of the 14 measures dominates all others on all dimensions, we conclude that the choice of appropriate measurement method should be suited to the question addressed in each particular study.
    Keywords: technological progress, world technology frontier, countrylevel data, US state-level data, production function, DEA
    JEL: E23 O11 O14 O33 O47
    Date: 2010

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