nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒06‒11
35 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Microfoundations of Inflation Persistence in the New Keynesian Phillips Curve By Marcelle, Chauvet; Insu, Kim
  2. Time-varying inflation expectations and economic fluctuations in the United Kingdom: a structural VAR analysis By Barnett, Alina; Groen, Jan J J; Mumtaz, Haroon
  3. Can the New Keynesian Phillips Curve Explain Inflation Gap Persistence? By Fang Yao
  4. Monetary Policy Lessons from the Crisis By Athanasios Orphanides
  5. Involuntary unemployment and the business cycle By Lawrence J. Christiano; Mathias Trabandt; Karl Walentin
  6. Monetary Policy Mistakes and the Evolution of Inflation Expectations By Athanasios Orphanides; John C. Williams
  7. Optimal Monetary Policy When Agents Are Learning By Krisztina Molnár; Sergio Santoro
  8. Monetary policy mistakes and the evolution of inflation expectations By Athanasios Orphanides; John C. Williams
  9. The Taylor Principle in a medium-scale macroeconomic model By Tommy Sveen; Lutz Weinke
  10. The Forecasting Performance of Real Time Estimates of the EURO Area Output Gap By Massimiliano Marcellino; Alberto Musso
  11. What Determine China’s Inflation? By Hua Xiuping
  12. Currency substitution in the economies of Central Asia: How much does it cost? By ISAKOVA, Asel
  13. A 2-Equation Model of the North Atlantic Economies, a Dynamic Panel Study By David Kiefer
  14. Regime-Shifts & Post-Float Inflation Dynamics In Australia By Neil Dias Karunaratne; Ramprasad Bhar
  15. Macrofoundations for A (Near) 2% Inflation Target By Faugere, Christophe
  16. The Intranational Business Cycle in Japan By Michael Artis; Toshihiro Okubo
  17. Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies By di Pace, Federico; Faccini, Renato
  18. The Extreme Risk Problem and Monetary Policies of the Euro-Candidates By Hubert Gabrisch; L. Orlowski
  19. Sunspots and Credit Frictions By Sharon G. Harrison; Mark Weder
  20. Deep Habits, Nominal Rigidities and the Response of Consumption to Fiscal Expansions By P. JACOB;
  21. Exchange Rate Regimes and Macroeconomic Performance in South Asia By Ashima Goyal
  22. Government deficit sustainability, and monetary versus fiscal dominance: The case of Spain, 1850-2000 By Oscar Bajo-Rubio; Carmen Díaz-Roldán; Vicente Esteve
  23. Sovereign Default Risk in a Monetary Union By Betty C. Daniel; Christos Shiamptanis
  24. Technology shocks, employment and labour market frictions By Mandelman, Federico S; Zanetti, Francesco
  25. Clusters and Loops of the German Phillips Curve By Quaas, Georg; Klein, Mathias
  26. Are Inflation Forecasts from Major Swedish Forecasters Biased? By Lundholm, Michael
  27. Proposal for a New Economic Framework Based On Islamic Principles By Shaikh, Salman Ahmed
  28. Forecasting Money Supply in India: Remaining Policy Issues By Das, Rituparna
  29. Foreign Banks and Credit Volatility: The Case of Latin American Countries By Haouat, Meriem; Moccero, Diego Nicolas; Sosa Navarro , Ramiro
  30. Government deficits: Some long-term evidence for Spain, 1850-2000 By Oscar Bajo-Rubio; Carmen Díaz-Roldán; Vicente Esteve
  31. Sources of Public Finance in an Islamic Economy By Shaikh, Salman Ahmed
  32. Goodwin’s Lotka-Volterra Model in Disaggregative Form: A Note By Rodousakis, Nikolaos
  33. Labor Market Cycles and Unemployment Insurance Eligibility By Miquel Faig; Min Zhang
  34. EL MERCADO LABORAL COLOMBIANO: Tendencias de largo plazo y sugerencias de política By Hugo López Castaño
  35. Liquidity-saving mechanisms in collateral-based RTGS payment systems By Jurgilas, Marius; Martin, Antoine

  1. By: Marcelle, Chauvet; Insu, Kim
    Abstract: This paper proposes a dynamic stochastic general equilibrium model that endogenously generates inflation persistence. We assume that although firms change prices periodically, they face convex costs that preclude optimal adjustment. In essence, the model assumes that price stickiness arises from both the frequency and size of price adjustments. The model is estimated using Bayesian techniques and the results strongly support both sources of price stickiness in the U.S. data. In contrast with traditional sticky price models, the framework yields inflation inertia, delayed effect of monetary policy shocks on inflation, and the observed "reverse dynamic" correlation between inflation and economic activity.
    Keywords: In Inflation Persistence; Phillips Curve; Sticky Prices; Convex Costs
    JEL: E30 E31
    Date: 2010–05
  2. By: Barnett, Alina (Bank of England); Groen, Jan J J (Federal Reserve Bank of New York); Mumtaz, Haroon (Bank of England)
    Abstract: This paper examines how the interaction between inflation expectations and nominal and real macroeconomic variables has evolved for the United Kingdom over the post-WWII period until 2007. We model time-variation through a Markov-switching structural vector autoregressive framework with variants of the sign restriction identification scheme to back out the time-varying effect of different structural shocks. We investigate the following questions: (i) How has the impact of the mix of real and nominal shocks on the UK economy evolved over time and did this have a specific impact on UK inflation expectations? and (ii) Has there been an autonomous impact of inflation expectations on the UK economy and has it changed over time? Our results suggest that shocks to inflation expectations had important effects on actual inflation in the 1970s, but this impact had significantly declined towards the end of our sample. This seems to be mainly due to a relatively slower response of monetary policy to these shocks in the 1970s compared to later years. Similarly, oil price shocks and real demand shocks led to important changes in macroeconomic variables in the 1970s. Beyond that period and up to the end of our sample oil price shocks became less significant for the dynamics of actual inflation and output growth. However real demand shocks became a relatively more important determinant for fluctuations in those series during the 1990s and the beginning of the 2000s. The changing response of monetary policy to this type of shock appears to be crucial for this result.
    Keywords: Inflation expectations; Markov-switching structural VAR
    JEL: C10 E50
    Date: 2010–06–03
  3. By: Fang Yao
    Abstract: Whelan (2007) found that the generalized Calvo-sticky-price model fails to replicate a typical feature of the empirical reduced-form Phillips curve - the positive dependence of inflation on its own lags. In this paper, I show that it is the 4-period-Taylor-contract hazard function he chose that gives rise to this result. In contrast, an empirically-based aggregate price reset hazard function can generate simulated data that are consistent with inflation gap persistence found in US CPI data. I conclude that a non-constant price reset hazard plays a crucial role for generating realistic inflation dynamics.
    Keywords: Inflation gap persistence, Trend inflation, New Keynesian Phillips curve, Hazard function
    JEL: E12 E31
    Date: 2010–06
  4. By: Athanasios Orphanides (Central Bank of Cyprus)
    Abstract: This paper provides a policymaker's perspective on some lessons from the recent financial crisis. It focuses on questions in three areas. First, what lessons can be drawn regarding the institutional framework for monetary policy? Has the experience changed the pre-crisis consensus that monetary policy is best performed by an independent central bank focused on achieving and maintaining price stability? Second, what lessons can be drawn regarding the monetary policy strategy that should be followed by a central bank? How activist should a central bank be in dampening macroeconomic fluctuations? Should the "output gap" serve as an important policy guide? Are there lessons regarding the stability-oriented approach followed by the ECB? How activist should a central bank be in tackling perceived asset price misalignments? Does the ECB's monetary analysis pillar help incorporate the pertinent information in formulating policy? Third, is monetary policy pursuing price stability enough to ensure overall stability in the economy? Or is there room for improvement regarding how central banks can contribute to financial stability? Should the role of monetary policy be seen as completely separate from the broader istitutional environment governing financial markets and institutions in our economy? Or would greater central bank involvement in regulation and supervision pertaining to credit and finance allow better management of overall economic stability?
    Keywords: Great ¯nancial crisis, activist stabilisation policy, real-time output gap, robust simple rules, stability-oriented monetary policy, asset prices, macro-prudential supervision,financial stability, ECB.
    JEL: E50 E52 E58
    Date: 2010–05
  5. By: Lawrence J. Christiano (Northwestern University, Department of Economics, 2001 Sheridan Road, Evanston, Illinois 60208, USA.); Mathias Trabandt (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Karl Walentin (Sveriges Riksbank, Research Division, 103 37 Stockholm, 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 involuntary 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. JEL Classification: E2, E3, E5, J2, J6.
    Keywords: DSGE, unemployment, business cycles, monetary policy, Bayesian estimation.
    Date: 2010–06
  6. By: Athanasios Orphanides (Central Bank of Cyprus); John C. Williams (Federal Reserve Bank of San Francisco)
    Abstract: What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? We use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. We show that policies constructed using modern optimal control techniques aimed at stabilizing inflation, economic activity, and interest rates would have succeeded in achieving a high degree of economic stability as well as price stability only if the Federal Reserve had possessed excellent information regarding the structure of the economy or if it had acted as if it placed relatively low weight on stabilizing the real economy. Neither condition held true. We document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. We show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Finally, we show that a strategy of following a robust first-difference policy rule would have been highly successful in the presence of informational imperfections. This robust monetary policy rule yields simulated outcomes that are close to those seen during the period of the Great Moderation starting in the mid-1980s.
    Keywords: Great Inflation, rational expectations, robust control, model uncertainty, natural rate of unemployment
    JEL: E52
    Date: 2010–05
  7. By: Krisztina Molnár (Norwegian School of Economics and Business Administration, and Norges Bank (Central Bank of Norway)); Sergio Santoro (Bank of Italy)
    Abstract: We derive the optimal monetary policy in a sticky price model when private agents follow adaptive learning. We show that this slight departure from rationality has important implications for policy design. The central bank faces a new intertemporal trade-off, not present under rational expectations: it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation-output gap trade-offs. The policy recommendation is robust: the welfare loss entailed by the optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning.
    Keywords: optimal monetary policy, learning, rational expectations
    JEL: C62 D83 D84 E52
    Date: 2010–05–27
  8. By: Athanasios Orphanides; John C. Williams
    Abstract: What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? We use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. We show that policies constructed using modern optimal control techniques aimed at stabilizing inflation, economic activity, and interest rates would have succeeded in achieving a high degree of economic stability as well as price stability only if the Federal Reserve had possessed excellent information regarding the structure of the economy or if it had acted as if it placed relatively low weight on stabilizing the real economy. Neither condition held true. We document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. We show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Finally, we show that a strategy of following a robust first-difference policy rule would have been highly successful in the presence of informational imperfections. This robust monetary policy rule yields simulated outcomes that are close to those seen during the period of the Great Moderation starting in the mid-1980s.
    Keywords: Monetary policy ; Inflation (Finance)
    Date: 2010
  9. By: Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Humboldt-Universität zu Berlin)
    Abstract: The Taylor Principle is often used to explain macroeconomic stability (see, e.g., Clarida et al. 2000). The reason is that this simple principle guarantees determinacy, i.e., local uniqueness of rational expectations equilibrium, in many New Keynesian models. However, analyses of determinacy are generally conducted in the context of highly stylized models. In the present paper we use a medium-scale model which combines features that have been shown to explain fairly well postwar U.S. business cycles. Our main result demonstrates that the stability properties of forward-looking interest rate rules are very similar to the corresponding outcomes under current-looking rules. This is in stark contrast with many findings that have been obtained in the context of models whose empirical relevance is limited.
    Keywords: Nominal Rigidities, Real Rigidities, Monetary Policy
    JEL: E22 E31
    Date: 2010–05–28
  10. By: Massimiliano Marcellino; Alberto Musso
    Abstract: This paper provides real time evidence on the usefulness of the euro area output gap as a leading indicator for inflation and growth. A genuine real-time data set for the euro area is used, including vintages of several alternative gap estimates. It turns out that, despite some difference across output gap estimates and forecast horizons, the results point clearly to a lack of any usefulness of real-time output gap estimates for inflation forecasting both in the short term (one-quarter and one-year ahead) and the medium term (two-year and three-year ahead). By contrast, we find some evidence that several output gap estimates are useful to forecast real GDP growth, particularly in the short term, and some appear also useful in the medium run. A comparison with the US yields similar conclusions.
    Keywords: Output gap, real-time data, euro area, inflation forecasts, real GDP forecasts, data revisions.
    JEL: E31 E37 E52 E58
    Date: 2010
  11. By: Hua Xiuping (China Center for Economic Research)
    Abstract: We examine determinants of inflation in China. Analyses of both year‐on‐year and month‐on‐month growth data confirm excess liquidity, output gap, housing prices and stock prices positively affecting inflation. Impulse response analyses indicate that most effects occur during the initial five months and disappear after 10 months. Effects of real interest rates and exchange rates on inflation are relatively weak. Our results suggest that output gap is as important as excess liquidity in explaining inflation trajectory. The central bank should closely monitor asset prices given their spillovers to inflation. Currently liquidity measures are still central for controlling inflation, but further liberalization of interest rates and exchange rates are critical.
    Keywords: China, inflation, excess liquidity, output gap and asset prices
    JEL: E31 E58 G12 R20
    Date: 2010
  12. By: ISAKOVA, Asel (CERGE-EI, 11121 Praha 1, Czech Republic)
    Abstract: Underdeveloped financial markets and periods of high inflation have stimulated dollarization and currency substitution in the economies of Central Asia. Some authors argue that the latter can pose serious obstacles for the effective conduct of monetary policy and can affect households' welfare. This study uses a model with money-in-the-utility function to estimate the elasticity of substitution between domestic and foreign currencies in three economies of Central Asia - Kazakhstan, the Kyrgyz Republic and Tajikistan. Utility derived from holding money balances is represented by a CES function with money holdings denominated in two currencies. The residents are assumed to diversify their monetary holdings due to instability of the domestic currency. The steady state analysis reveals that though currency substitution decreases governments' seigniorage revenue, holding foreign money can be welfare generating if domestic currency depreciates vis-ˆ-vis the currencies in which households' foreign balances holdings are denominated. De-dollarization can only be achieved through further macroeconomic stabilization that will bring price and exchange rate stability. Financial sector development will also decrease currency substitution through the provision of reliable financial instruments and the gaining of public confidence.
    Keywords: currency substitution, dollarization, monetary policy, seigniorage, welfare, transition economies
    JEL: E58 P2 E41
    Date: 2010–04–01
  13. By: David Kiefer
    Abstract: Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy to replace the conventional IS-LM-AS model. One of their new equations is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. They label their replacement model the IS-PC-MR. Central banks achieve the PC-MR solution by setting interest rates along an IS curve. Observing that governments have more tools than just the interest rate, we simplify their model to 2 equations. We develop a state space econometric specification as the solution of these equations, adding a random walk model of the unobserved potential growth. Applying this method to a panel of North Atlantic countries, we find it historically consistent with a few qualifications. For one, governments are more likely to target growth rates, than output gaps. And, inflation expectations are more likely backward looking, than rational, but a two-step estimation based on a forward-looking sticky-price model dramatically improves the empirical fit. Significant interdependence can be seen in the between-country covariance of inflation and growth shocks.
    Keywords: new Keynesian, Kalman filtering, open economies
    JEL: E61 E63
    Date: 2010–06
  14. By: Neil Dias Karunaratne; Ramprasad Bhar (School of Economics, The University of Queensland)
    Abstract: Australia’s inflation rate and inflation uncertainty during the post-float era 1983Q3-2006Q4 have acted as important barometers of Australia’s macroeconomic performance. The conceptualisation and measurement of the nexus between inflation and inflation uncertainty is subject to complex dynamics. We use Markov regime switching heteroscedasticity (MRSH) model to capture long-run stochastic trend and short-run noisy components. This allows us to conclude that in post-float Australia the results deviate significantly from the mainstream Friedman paradigm on inflation and its uncertainty. We also critically review the plausibility of rival paradigm explaining this paradoxical behaviour. The regime shifts detected in the inflation dynamics appear to be linked to the macroeconomic policies pursued to achieve external and internal balance as implied by Keynesian Mundell-Fleming model.
    Date: 2010
  15. By: Faugere, Christophe
    Abstract: Economists have argued that a long-term inflation target near 2% is optimal (Summers, 1991; Fischer, 1996; Goodfriend, 2002; Coenen et al., 2003; Bernanke, 2003). However, these arguments are really about why a low positive inflation rate is ideal to avoid a deflationary trap, not explaining why the specific value of 2% (or a value near it) happens to be the optimal long-run inflation rate. In line with the transaction motive literature (Baumol, 1952 and Tobin, 1956), I postulate that new forms of money and technological progress generate cost savings in the transaction technology by comparison to barter. I derive the optimal velocity of money, which depends on real GDP/capita and the net return on depository institutions’ assets. As long as progress is on average biased towards new forms of money, the velocity of money will grow at a pace slower than long-term real GDP/capita growth; i.e. less than 2%. The empirical tests using Johansen’s (1995) VECM approach for the U.S. over the period 1959-2007 confirm that this is indeed the case. Along with a parameter representing the type of bias in the technical progress affecting transactions, the depository institutions’ overall mean leverage ratio also appears as a key parameter in the long-run equilibrium equation describing the behavior of the velocity of narrow money (M1, M1RS and M1S). I show that a ‘naïve’ Friedman k-percent monetary rule that aims at growing the money supply at the same rate as real GDP naturally leads to a rate of inflation equal to the rate of velocity growth. Hence, setting an inflation target near but below 2% makes economic sense. In spite of previously held beliefs, a money growth objective is compatible with an interest-targeting objective; i.e. a derived Taylor (1993) type rule. A Taylor rule that embeds the optimal inflation target defined here is more flexible to account for possible changes in velocity vs. a pure money growth rule.
    Keywords: Inflation target; velocity of narrow money; M1; M1RS; M1S; real GDP per capita growth; barter; financial leverage
    JEL: E40
    Date: 2010–06
  16. By: Michael Artis (Swansea University, and CEPR); Toshihiro Okubo (Research Institute for Economics and Business Administration)
    Abstract: This paper studies the intranational business cycle – that is the set of regional (prefectural) business cycles – in Japan. One reason for choosing to examine the Japanese case is that long time series of relatively detailed data are available. A Hodrick-Prescott filter is applied to identify cycles in annual data from 1955 to 1995 and bilateral cross-correlations of prefectural GDPs are calculated for all pairs of prefectures, in our results we find fairly high cross-correlations. The paper then turns to an econometric explanation of the cross-correlation coefficients in the augmented gravity model framework. Two prefectures with similar GDPs and a shorter distance between them lead to business cycle synchronization whilst those with larger regional gaps in factor endowments (capital, labor and human capital) result in more idiosyncratic business cycle.
    Keywords: Intranational business cycle, Hodrick-Prescott filter, Optimal Currency Area, Gravity Model, Heckscher-Ohlin theorem
    JEL: E32 F41 R11
    Date: 2010–06
  17. By: di Pace, Federico (Department of Economics, Mathematics and Statistics, Birkbeck, University of London); Faccini, Renato (Bank of England)
    Abstract: We extend the standard textbook search and matching model by introducing deep habits in consumption. The cyclical fluctuations of vacancies and unemployment in our model can replicate those observed in the US data, with labour market tightness being 20 times more volatile than consumption. Vacancies display a hump-shaped response to technology shocks as well as autocorrelation coefficients that are in line with the empirical evidence. Our model preserves the assumption of fully flexible wages for the new hires and the calibration is consistent with the estimated elasticity of unemployment to unemployment benefits. The numerical simulations generate an artificial Beveridge curve which is in line with the data.
    Keywords: Consumption; business cycles; labour market fluctuations; search and matching; wage bargaining
    JEL: E21 E24 E32 J41 J64
    Date: 2010–06–03
  18. By: Hubert Gabrisch; L. Orlowski
    Abstract: We argue that monetary policies in euro-candidate countries should also aim at mitigating excessive instability of the key target and instrument variables of monetary policy during turbulent market periods. Our empirical tests show a significant degree of leptokurtosis, thus prevalence of tail-risks, in the conditional volatility series of such variables in the euro-candidate countries. Their central banks will be well-advised to use both standard and unorthodox (discretionary) tools of monetary policy to mitigate such extreme risks while steering their economies out of the crisis and through the euroconvergence process. Such policies provide flexibility that is not embedded in the Taylor-type instrument rules, or in the Maastricht convergence criteria.
    Keywords: monetary policy rules, tail-risks, convergence to the euro, global financial crisis, equity market risk, interest rate risk, exchange rate risk
    JEL: E44 F31 G15 P34
    Date: 2010–05
  19. By: Sharon G. Harrison (Department of Economics, Barnard College, Columbia University); Mark Weder (School of Economics, University of Adelaide)
    Abstract: We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parametrizations than in previous, similar models without these features.
    Keywords: Business cycles, Credit markets, Collateral Constraint, Sunspots
    JEL: E32
    Date: 2010–01
  20. By: P. JACOB;
    Abstract: Many empirical studies report that .fiscal expansions have a positive effect on private consumption. This paper provides a closer examination of the .deep. habits mechanism used by Ravn, Schmitt-Grohé and Uribe (2006) to generate the positive comovement between public and private consumption. In their set-up, habit-formation at the level of individual varieties makes the demand function facing the price-setting .firm, dynamic. This makes it optimal for the .firms to lower mark-ups of prices over nominal marginal costs when they expand production in response to the .fiscal expansion, leading to an increase in the demand for labor and hence the real wage rises. The consequent intra-temporal substitution of consumption for leisure triggers the positive response of consumption. Here, we show that increasing either price or nominal wage stickiness, reduces the impact of fiscal spending shocks on the mark-up and the real wage. Hence, consumption is still crowded out as in traditional models.
    Keywords: Deep Habits, Sticky Prices, Sticky Wages, Fiscal Shocks, Crowding-out.
    JEL: E21 E31 E62
    Date: 2010–02
  21. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Stylized facts for South Asia show the dominance of supply shocks, amplified by macroeconomic policies and procyclical current accounts. Interest and exchange rate volatility rose initially on liberalization, but fell as markets deepened. A gradual middling through approach to openness and market development are helping the region absorb shocks without reducing growth. Diverse sources of demand, flexible exchange rates, robust domestic savings, and changing political preferences are contributing. Countercyclical policy more suited to structure, and removal of distortions raising costs, would allow better coordination of monetary and fiscal polices to further support the process.
    Keywords: South Asia, supply shocks, flexible exchange rates, diversity, distortions
    JEL: E3 E63 O11
    Date: 2010
  22. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia y Universidad de La Laguna)
    Abstract: In this paper, we provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, and examine the role played by monetary and fiscal dominance in order to get fiscal solvency. The longer than usual span of the data would allow us to obtain some more robust results on the fulfilling of the intertemporal budget constraint than in most of previous analyses. First, we analyze the relationship between primary surplus and debt, following the recent critique of Bohn (2007), and investigate the possibility of structural changes occurring along the period by means of the new approach of Kejriwal and Perron (2008). The analysis is complemented in two directions: (i) performing Granger-causality tests in order to distinguish properly between a fiscal dominant and a monetary dominant regime; and (ii) presenting the impulse-response functions of debt to innovations in the primary surplus, through the approach of Canzoneri, Cumby and Diba (2001).
    Keywords: Fiscal policy, Sustainability, Fiscal Theory of the Price Level, Monetary dominance, Fiscal dominance.
    JEL: E62 H62
    Date: 2010–06
  23. By: Betty C. Daniel (University at Albany); Christos Shiamptanis (Central Bank of Cyprus)
    Abstract: A country entering a monetary union gives up the right to determine its own monetary policy, thereby relinquishing monetary instruments to assure fiscal solvency. In this paper, we develop a new theoretical model to address fiscal solvency risk. We show that when debt is subject to an upper bound and policy faces stochastic shocks, a government can find itself in a position for which the expected present value of future surpluses under current policy is less than debt. Agents refuse to lend into such a position, and the sudden stop of capital flows defines a fiscal solvency crisis. We model the dynamics of a fiscal solvency crisis in a monetary union under the assumption that the fiscal authority will respond to the crisis using default to reduce the value of debt. We simulate the model to estimate fiscal solvency risk in the European Monetary Union. We find that countries adhering to the Stability and Growth Pack limits are perfectly safe, while countries like Greece and Italy, whose debt relative to GDP has strayed far above the 60 percent limit, are not.
    Keywords: European Monetary Union, sovereign default, financial crisis
    JEL: E42 E47 E62 F34
    Date: 2010–05
  24. By: Mandelman, Federico S (Federal Reserve Bank of Atlanta); Zanetti, Francesco (Bank of England)
    Abstract: Recent empirical evidence suggests that a positive technology shock leads to a decline in labour inputs. However, the standard real business model fails to account for this empirical regularity. Can the presence of labour market frictions address this problem, without otherwise altering the functioning of the model? We develop and estimate a real business cycle model using Bayesian techniques that allows, but does not require, labour market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labour market frictions are the factor responsible for the negative response of employment.
    Keywords: Technology shocks; employment; labour market frictions
    JEL: E32
    Date: 2010–06–03
  25. By: Quaas, Georg; Klein, Mathias
    Abstract: A preliminary regression analysis of different versions of the Phillips Curve on the basis of yearly data of the German economy from 1952 to 2004 leads to the conclusion that the original finding might still be of empirical relevance. A simple plot of seasonal adjusted quarterly data between the change of nominal wage rates and the unemployment rate shows a picture similar to that by which Phillips was inspired to his famous discovery: A long-term tendency of a negative, non-linear relationship coupled with minor deviations from this tendency forming sometimes so called loops. At fist sight, the Phillips Curve of Germany comprises clusters of data points and movements between these clusters. The clusters can be analysed and – together with the rest of data – dissolved into 12 (left or right turning) loops and 9 movements between these loops during the period from 1971Q1 to 2009Q4. In spite of the striking differences of these phenomena, a model with one regression equation is sufficient to explain the loops, the movements between the loops and the long-term tendency of the German Phillips Curve. This empirical finding contradicts several aspects with the ruling dogma of a Phillips Curve that broke down in the ‘70s and with the allegedly better fit of its replacements by augmented and modified Phillips Curves.
    Keywords: Wages; inflation; unemployment; Phillips curve
    JEL: E24 E13
    Date: 2010–06–05
  26. By: Lundholm, Michael (Dept. of Economics, Stockholm University)
    Abstract: Inflation forecasts made 1999-2005 by Sveriges Riksbank and Konjunkturinstitet of Swedish inflation rates 1999-2007 are tested for unbiasedness; i.e., are the mean forecast errors zero? The bias is in the order of -0.1 percentage units for horizons below one year and in the order of 0.1 and 0.6 (depending on inflation measure) above one year. Using the maximum entropy bootstrap for inference bias is significant whereas inference using HAC indicates insignificance.
    Keywords: Forecast evaluation; inflation; unbiasedness; maximum entropy bootstrap
    JEL: E37
    Date: 2010–06–03
  27. By: Shaikh, Salman Ahmed
    Abstract: This book provides a holistic socio-economic framework working in conformity with the Islamic principles. Chapter 2 builds the ground for the proposed framework by discussing the foundations of the ethical precepts of Islam. It discusses the thesis of religion, answers some of the questions in the comparative study of religion and tries to resolve few of the misconceptions about the faith of Islam. Chapter 3 outlines the economic teachings of Islam with regard to earning and spending. It discusses at length the ideals Islam set before its adherents in the ethical sphere of life. The ethical principles are discussed based on the study of relevant Quranic text and the narrations of Prophet Muhammad (PBUH). Chapter 4 studies the comparative economic systems. It analyzes Capitalism, Socialism, Mixed Economy and Islamic economic system. Chapter 5 introduces the salient features of the proposed economic framework with special focus on fiscal reforms. It discusses the potential of the institution of Zakat to meet fiscal needs of the government and to assist it in doing away with deficit financing, fiscal bleeding, crowding out private sector and reducing deadweight loss by parting the way with private sector so as to ensure market economy operating on its own as far as possible and playing an active regulatory role. Chapter 6 introduces the monetary reforms. It discusses how savings would feature despite discontinuation of interest, how inflation will be checked with central banks not having at their disposal conventional OMO, how liquidity will be managed in banking sector when a central bank wants to inject liquidity or mop up funds. How and to what extent the institution of Zakat would enable the government to meet its fiscal targets and does not crowd out private sector with public borrowing. How balance of payments and exchange rate stability can be managed in an interest free economy. If in the short term, the government or central bank needs alternative source of revenue other than Zakat, they can issue GDP linked bonds. This could replace T-bill and provide a base instrument for OMO and liquidity management in the banking and financial sector. Chapter 7 introduces the currently practiced Islamic Banking and Finance. Since Islamic economic principles have more prominently been used in banking and finance, much of the discussion centers on Islamic banking and finance in lieu of analyzing the existing practices and then in the next chapter, preferable alternatives in areas where shortcoming is observed and need for improvement is felt are suggested. Chapter 8 discusses the financial system in the proposed framework with the role of institutions and the discussion on comprehensive need fulfillment mechanisms to serve every major need of a sophisticated contemporary financial system. Some important novel changes are recommended, such as introduction of options in mortgage financing, which will allow the bank to separate the tenancy and sale contract in a distinctive way. This will still ensure that it locks the sale with the borrower or with the third party without making both contracts dependent on each other. It will benefit the bank as well as the borrower, who will have an option but not an obligation to buy the asset at maturity. The modified role of bank entering in a Mudarabah contract as a “Rabb-ul-maal” (investor) will ensure that the bank takes on operational risk. It will enable the resources to go into productive avenues rather than in financial instruments. This modification will generate employment and productive activities in the economy in a more direct manner. The division of Mudarabah corporate and Mudarabah consumer will target two very distinct markets and will result in channeling of funds from saving surplus units to saving-deficient units. Reforms in equity markets and alternatives for insurance are also suggested. Chapter 9 introduces feasibility and structure of Micro credit as an alternative for interest based micro finance. It discusses how the potential obstacles in the form of lack of trust, funding commitment, lack of collateral arrangement, lack of documentation etc would be handled.
    Keywords: Interest Free Economy; Islamic Economy; Islamic Economic System; Islamic Monetary Policy; Islamic Fiscal Policy; Interest; Zakat; Riba; Usury; Development; Redistribution; Economic Systems; Financial System; Financial Intermediation; Saving; Investment.
    JEL: E0 A1 H2 G0 B5
    Date: 2010–04–17
  28. By: Das, Rituparna
    Abstract: This article analyzes the issues, unaddressed in the contemporary econometric literature on forecasting money supply in India, with the help of the relevant studies. In doing so there is an attempt to ascertain what could be the best fit model to forecast money supply in India.
    Keywords: Interest Rate; Forecast; Money Supply; Assets; Deregulation; Market
    JEL: E47
    Date: 2010
  29. By: Haouat, Meriem; Moccero, Diego Nicolas; Sosa Navarro , Ramiro
    Abstract: Foreign bank presence has substantially increased in Latin America during the second half of the 1990s, which has prompted an intense debate on its banking and macroeconomic consequences. In this paper, we apply ARCH techniques to jointly estimate the impact of foreign bank presence on the level and volatility of real credit in a panel of eight Latin American countries, using quarterly data over the period 1995:1-2001:4. Results show that, together with financial development, foreign bank presence has contributed to reduce real credit volatility, improving the buffer shock function of the banking sector. This finding is consistent with the fact that foreign banks are typically well diversified institutions holding higher quality assets and having access to a broad set of liquidity sources. Keywords: foreign banks; credit volatility; Latin America; panel data; ARCH techniques
    Keywords: Foreign Banks; Credit Volatility; Latin America; Panel Data; ARCH techniques
    JEL: E51 C33 G21
    Date: 2010–03–15
  30. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia y Universidad de La Laguna)
    Abstract: We provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, from the estimation of a cointegration relationship between government expenditures and revenues derived from the intertemporal budget constraint. The longer than usual span of the data allows us to obtain more robust results on the fulfilment of the intertemporal budget constraint than most of the previous analyses. Two additional robustness checks are provided. First, we investigate the possibility of structural changes occurring along the period analyzed, using the new approach of Kejriwal and Perron (2008, 2010) to testing for multiple structural changes in cointegrated regression models. Second, we investigate whether the behaviour of fiscal authorities has been non-linear, by means of the procedure of Hansen and Seo (2002) based on a threshold cointegration model. Our results show that (i) the government deficit has been strongly sustainable in the long run, (ii) no evidence is found on any significant structural break throughout the whole period, and (iii) fiscal sustainability has been attained due to the non-linear behaviour of fiscal authorities, which have only acted on the budget deficit when it has exceeded around 4.5% of GDP.
    Keywords: fiscal policy, sustainability, structural change, threshold cointegration, nonlinearity
    JEL: E62 H62
    Date: 2010–06
  31. By: Shaikh, Salman Ahmed
    Abstract: Since interest is prohibited in Islam, the government in an Islamic economy cannot issue interest based T-Bills, T-Bonds and/or obtain interest based sovereign debt. Based on the literature review, it is argued that neither Prophet Muhammad (P.B.U.H) nor the pious Caliphates (rta) levied any taxes other than Zakah. Accordingly, this study explores the sources of revenue for a government in an Islamic economy. In discussing sources of tax revenue, it is maintained that Zakah is the only tax the government in an Islamic economy can levy. Nevertheless, the government can charge service/performance based fees, duties, charges etc in providing public goods. Furthermore, the profitable operations of state owned enterprises form an important part of non-tax revenues. It is also analyzed that how the non-profitable public institutions like police and courts will be funded. This study also discusses that how the government can finance its deficit keeping in view that interest is prohibited in Islam and Zakah rates are very low and Zakah base is very narrow as per common understanding. The study also gives brief insights into how much Zakah can be collected in Pakistan. Finally, it suggests that the nominal GDP growth linked rate of return can be used to benchmark domestic and external loans including those from IMF, WB and IDA etc.
    Keywords: Public Finance; Taxation; Expenditure; Fiscsl Policy; Deficit Financing; Zakat; Redistribution.
    JEL: E62 H2 H3
    Date: 2010–04–17
  32. By: Rodousakis, Nikolaos
    Abstract: This paper investigates Goodwin’s Lotka-Volterra model in disaggregative form. It is found that the dynamic behavior of the model depends on the material input coefficients matrix.
    Keywords: Goodwin’s Lotka-Volterra model; principal coordinates; disaggregated models; multiple degree of freedom system
    JEL: E32 C02
    Date: 2010–05–29
  33. By: Miquel Faig; Min Zhang
    Abstract: If entitlement to Unemployment Insurance (UI) benefits must be earned with employment, generous UI is an additional benefit to an employment relationship, so it promotes job creation. If individuals are risk neutral, UI is fairly priced, and the UI system prevents moral-hazard, the generosity of UI has no effect on unemployment. As with Ricardian Equivalence, this result should be useful to pinpoint the effects of UI to violation of its premises. In itself, the endogenous entitlement of UI benefits does not resolve if the Mortensen-Pissarides model is able to generate realistic cycles. However, it brings some insights into this debate: The widespread concern in the design of UI systems to minimize moral-hazard unemployment only makes sense if workers have sufficiently high values of leisure (80 percent of labor productivity in our baseline calculation for the United States). Also, the fact that the generosity of UI has potentially a small effect on unemployment reconciles a high response of unemployment to changes in labor productivity with a small response to changes in UI benefits.
    Keywords: Search, Matching, UI Eligibility, Business Cycles, Labor Markets
    JEL: E24 E32 J64
    Date: 2010–05–31
  34. By: Hugo López Castaño
    Abstract: Aunque, en el largo plazo, el crecimiento del empleo moderno urbano se ha desacelerado, durante esta década, al menos hasta el 2007, su desempeño fue bastante aceptable. Sin embargo, ha estado sesgado a favor del más educado y contra el menos educado, en contraste con la dotación educativa de la fuerza de trabajo. De ahí la elevadísima rotación de personal asalariado simple (su reemplazo permanente por personal calificado); de ahí el auge del empleo informal, que subió para no bajar con la crisis de finales de los ochenta y que ha aumentado más con la crisis reciente; de ahí la existencia e intensificación del ciclo de vida laboral que, con la edad, lleva a los menos educados de los empleos asalariados a los informales. La discriminación contra el trabajo poco educado -una tendencia internacional- se ha agravado por la evolución del salario mínimo, que no ayuda a los más pobres y en cambio perjudica la generación de empleo no calificado, y puede acentuarse más hacia el futuro por la forma en que se están dando los incentivos a la inversión de capital. El crecimiento económico es condición necesaria para corregir estos problemas estructurales de nuestro mercado laboral; pero como no es condición suficiente se requieren estrategias complementarias. Se sugiere -siguiendo el ejemplo Chileno- conformar una Misión, compuesta por académicos extranjeros y nacionales de todas las tendencias y que se reúna con las principales fuerzas sociales, encargada de examinar el tema y presentar recomendaciones en un plazo breve. Debería considerar una combinación de estrategias: de demanda (una política para el salario mínimo, qué hacer con los parafiscales y los estímulos tributarios a la inversión); estrategias de oferta (calificación de la fuerza laboral y acceso a la educación superior de la masa de bachilleres pobres), reformas a la seguridad social (pensiones para los informales; financiación de la salud con impactos sobre el empleo; seguro de desempleo) y programas, tipo Empleo en Acción que generen empleo moderno para los más pobres, urbanos y rurales.
    Keywords: Empleo, desempleo, Política Pública, nivel salarial, estructura de la fuerza de trabajo. Classification JEL: E24, J38, J21, J31
  35. By: Jurgilas, Marius (Bank of England); Martin, Antoine (Federal Reserve Bank of New York)
    Abstract: This paper studies banks’ incentives regarding the timing of payment submissions in a collateral-based RTGS payment system and how these incentives change with the introduction of a liquidity-saving mechanism (LSM). We show that an LSM allows banks to economise on collateral while also providing incentives to submit payments earlier. This is because in our model an LSM allows payments to be matched and offset in real time without any or very minimal funds. Under a collateral-based RTGS payment system, introduction of the LSM always improves welfare. The result contrasts with earlier work, which shows that under a fee-based RTGS system, the introduction of an LSM in some circumstances may reduce welfare.
    Keywords: liquidity-saving mechanism; intraday liquidity; payments
    JEL: E42 E58 G21
    Date: 2010–06–01

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