nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒06‒26
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Financial Stability and Monetary Policy By Christopher Martin; Costas Milas
  2. Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic By John H. Cochrane
  3. How Should Macroeconomic Policy Respond to Foreign Financial Crises? By Anthony J Makin
  4. The Effects of Discretionary Fiscal Policy on Macroeconomic Aggregates: A Reappraisal By Hebous, Shafik
  5. The Fed's TRAP: A Taylor-type Rule with Asset Prices By Drescher, Christian; Erler, Alexander; Krizanac, Damir
  6. Monetary and Fiscal Policy Interactions in a Monetary Union with Country-size Asymmetry By Celsa Machado; Ana Paula Ribeiro
  7. Government Policy in Monetary Economies By Fernando M. Martin;
  8. The Optimal Inflation Rate in New Keynesian Models By Olivier Coibion; Yuriy Gorodnichenko; Johannes F. Wieland
  9. Optimal monetary policy in open economies By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  10. The Optimal Inflation Rate in New Keynesian Models By Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland
  11. Markups and the Welfare Cost of Business Cycles : A Reappraisal By Jean-Olivier Hairault; François Langot
  12. A Floating versus Managed Exchange Rate Regime in a DSGE Model of India By Nicoletta Batini; Vasco Gabriel; Paul Levine; Joseph Pearlman
  13. Welfare implications of country size in a monetary union By Mykhaylova, Olena
  14. Optimal money demand in a heterogeneous-agent cash-in-advance economy By Yi Wen
  15. The crisis of orthodox macroeconomic policy : The case for a renewed commitment to full employment By Muhammed Muqtada
  16. Housing market dynamics and welfare By Büyükkarabacak, Berrak; Mykhaylova, Olena
  17. The Diversity of Forecasts from Macroeconomic Models of the U.S. Economy By Volker Wieland; Maik Wolters
  18. Sustainable monetary policy and inflation expectations By Roc Armenter
  19. Dating and Exploration of the Business Cycle in Iceland By Wolfgang Polasek
  20. Monetary Policy in an Uncertain World: Probability Models and the Design of Robust Monetary Rules By Paul Levine
  21. Optimal Monetary Stabilization Policy By Michael Woodford
  23. International Transmission of Business Cycles: Evidence from Dynamic Correlations By Jarko Fidrmuc; Taro Ikeda; Kentaro Iwatsubo
  24. Endogenous Persistence in an Estimated DSGE Model under Imperfect Information By Paul Levine; Joseph Pearlman; George Perendia; Bo Yang
  25. Nominal Rigidities and Retail Price Dispersion in Canada over the Twentieth Century By Ross D. Hickey; David S. Jacks
  26. "Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff" By Yeva Nersisyan; L. Randall Wray
  27. Wage-setting Behavior in France: Additional Evidence from an Ad-hoc Survey By Montornès, J. Author-Name: Sauner-Leroy, J-B.
  28. Sovereign Risk Management in Recession: The Cases of Sweden and China By Zhang, Yuewen
  29. Money and Capital as Competing Media of Exchange in a News Economy By Fernando Martin; David Andolfatto
  30. The Stock Market and the Consumer Confidence Channel in Canada By Lilia Karnizova; Hashmat Khan
  31. Financial Development and Economic Growth in Latin America: Schumpeter is Right! By Manoel Bittencourt
  32. Short-run Projections of Patterns of Job Contraction in the EU By Robert Stehrer; Terry Ward
  33. The need for government and central bank intervention in financial regulation: Free banking and the challenges of information uncertainty By Ojo, Marianne
  34. La conjoncture économique dans la région Asie-Pacifique après la crise des subprime By Lagadec, Gael; Ris, Catherine

  1. By: Christopher Martin (Department of Economics, University of Bath, UK); Costas Milas (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We argue that although UK monetary policy can be described using a Taylor rule in 1992-2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.
    Keywords: monetary policy, financial crisis
    JEL: C51 C52 E52 E58
    Date: 2010–01
  2. By: John H. Cochrane
    Abstract: I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009, to think about fiscal pressures on US inflation, and what sequence of events might surround such an inflation. I emphasize that a fiscal inflation can come well before large deficits or monetization are realized, and is likely to come with stagnation rather than a boom.
    JEL: E3 E31 E4 E5 E52 E6
    Date: 2010–06
  3. By: Anthony J Makin
    Keywords: global financial crisis, national income, exchange rate, monetary policy, fiscal stimulus
    JEL: F31 F33 F41
  4. By: Hebous, Shafik
    Abstract: Fiscal stimuli to recover? A cascade of academic and layman-articles debate the effectiveness of fiscal policy in stimulating the economy backed up by different economic models and empirical support. This essay surveys the theoretical predictions and recent empirical Vector Autoregression (VAR) evidence on the short-run effects of discretionary fiscal policy on macroeconomic aggregates.
    Keywords: Macroeconomic Policy; Fiscal Policy; Multipliers; Fiscal Stimulus; VAR
    JEL: E62 H6
    Date: 2009–07
  5. By: Drescher, Christian; Erler, Alexander; Krizanac, Damir
    Abstract: The paper examines if US monetary policy implicitly responds to asset prices. Using real-time data and a GMM framework we estimate a Taylor-type rule with an asset cycle variable, which refers to real estate prices. To analyze the Fed's responses we describe real estate price movements by means of an asset cycle dating procedure. This procedure reveals quasi real-time bull and bear markets. Our analysis yields two main findings. Firstly, the Fed does implicitly respond to real estate prices. Secondly, these responses are pro-cyclical and their intensity changes over time.
    Keywords: Fed; Monetary Policy; Taylor Rule; Asset Price Cycles; Real Estate
    JEL: E58 E52
    Date: 2010–06–14
  6. By: Celsa Machado (ISCAP - Instituto Superior de Contabilidade e Administração do Porto); Ana Paula Ribeiro (Faculdade de Economia da Universidade do Porto and CEF.UP)
    Abstract: This paper analyses optimal discretionary non-coordinated monetary and fiscal stabilization policies in a micro-founded New-Keynesian model of a two-country monetary union with country-size asymmetry, under two policy scenarios. A balanced-budget policy scenario and a policy scenario where the presence of government debt limits the macroeconomic stabilization effort and enlarges the sources of strategic policy interactions. Numerical results indicate that non-cooperation exacerbates the fiscal policy activism of a small country while moderating that of a large country. In the balanced-budget scenario, non-cooperation improves (reduces) welfare for a small (large) country while, in the high-debt scenario, it produces the opposite results. Cooperation dominates non-cooperation for the union as a whole.
    Keywords: Monetary union; optimal fiscal and monetary policies; asymmetric countries.
    JEL: E52 E61 E62 E63
    Date: 2010–06
  7. By: Fernando M. Martin (Simon Fraser University);
    Abstract: I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with trading frictions. Although intitutions/frictions are shown to have a significant structural impact in the determination of policy, the calibrated artificial economies are observationally equivalent in steady state. The policy response to aggregate shocks is qualitatively similar in the variants considered. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of money demand. The variants with no trading frictions display the best fit to U.S. post-war data.
    Keywords: government policy; lack of commitment; financial intermediation; trading frictions; micro founded models of money
    JEL: E13 E52 E62 E63
    Date: 2010–06
  8. By: Olivier Coibion; Yuriy Gorodnichenko; Johannes F. Wieland
    Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and show that steady-state inflation affects welfare through three distinct channels: steady-state effects, the magnitude of the coefficients in the utility-function approximation, and the dynamics of the model. We solve for the optimal level of inflation in the model and find that, for plausible calibrations, the optimal inflation rate is low, less than two percent, even after considering a variety of extensions, including price indexation, endogenous price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. In our models, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability.
    JEL: E3 E4 E5
    Date: 2010–06
  9. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: Research in the international dimensions of optimal monetary policy has long been inspired by a set of fascinating questions, shaping the policy debate in at least two eras of progressive cross-border integration of goods, factors, and assets markets in the years after World War I and from Bretton Woods to today. Namely, should monetary policy respond to international variables such as exchange rates, global business cycle conditions, or global imbalances beyond their in uence on the domestic output gap and inflation? Do exchange rate movements have desirable stabilization and allocative properties? Or, on the contrary, should policymakers curb exchange rate fltuations and be concerned with, and attempt to correct, currency isalignments? Are there large gains the international community could reap by strengthening cross-border monetary cooperation? ; We revisit these classical questions by building on the choice-theoretic monetary literature encompassing the research agenda of he New Keynesian models (see, e.g., Rotemberg and Woodford 1997), the New Classical Synthesis (see, e.g., Goodfriend and King 1997), and especially the New Open Economy Macroeconomics, henceforth NOEM (see, e.g., Svensson and van Wijnbergen 1989, Obstfeld and Rogo¤ 1995). In doing so, we will naturally draw on a well-established set of general principles in stabilization theory, which go beyond open-economy issues. Yet, the main goal of our analysis is to shed light on monetary policy trade-o¤s that are inherently linked to open economies which engage in cross-border trade in goods and assets.
    Keywords: Monetary policy
    Date: 2010
  10. By: Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley); Johannes Wieland (Department of Economics, niversity of California, Berkeley)
    Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and show that steady-state inflation affects welfare through three distinct channels: steady-state effects, the magnitude of the coefficients in the utility-function approximation, and the dynamics of the model. We solve for the optimal level of inflation in the model and find that, for plausible calibrations, the optimal inflation rate is low, less than two percent, even after considering a variety of extensions, including price indexation, endogenous price stickiness, capital formation, model uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability.
    Keywords: Optimal inflation, New Keynesian, zero bound, price level targeting
    JEL: E3 E4 E5
    Date: 2010–06–15
  11. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications)
    Abstract: Gali et al. (2007) have recently shown in a quantitative way that inefficient fluctuations in the allocation of resources do not generate sizable welfare costs. In this note, we show that their evaluation underestimates the welfare costs of inefficient fluctuations and propose a biased estimate of the impact of structural distortions on business cycle costs. As monopolistic suppliers, both firms and households aim at preserving their expected markups ; the interaction between aggregate fluctuations in the efficiency gap and price-setting behaviors results in making average consumption and employment lower than their counterparts in the flexible price economy. This level increases the welfare cost of business cycles. It is all the more sizable in that the degree of inefficiency is structurally high at the steady state.
    Keywords: Business cycle costs, inefficiency gap, new-Keynesian macroeconomics.
    Date: 2010–03
  12. By: Nicoletta Batini (University of Surrey and IMF); Vasco Gabriel (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University)
    Abstract: We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic in- flation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely. JEL Classification: E52, E37, E58
    Keywords: DSGE model, Indian economy, monetary interest rate rules, floating versus managed exchange rate, financial frictions.
    JEL: E52 E37 E58
    Date: 2010–04
  13. By: Mykhaylova, Olena
    Abstract: This paper calculates differences in welfare costs of nominal rigidities in large and small EMU countries. I use a two-country DSGE model characterized by optimizing agents, monopolistic wage and price setting, distortionary taxes and government debt dynamics. I find that these costs are virtually identical for all members of the EMU, and small countries are not at a disadvantage when it comes to the setting of the common monetary policy. This conclusion is primarily due to highly correlated technological processes in Europe, which cause national and Euro-wide inflations to move together. These findings are robust to the asset market structure, trade openness, and different specifications of the Taylor rule.
    Keywords: European monetary union; nominal rigidities; welfare costs
    JEL: E31 E58 E63 F33
    Date: 2009–08–31
  14. By: Yi Wen
    Abstract: Heterogeneity matters. This point is illustrated in a heterogeneous-agent, cash-in-advance economy where money serves both as a medium of exchange and as a store of value (as in Lucas, 1980). It is shown that heterogeneity can lead to dramatically different implications of monetary policies from those under the representative-agent assumption, including (i) the velocity of money is not constant but highly volatile, as in the data; (ii) lump-sum transitory money injections have expansionary effects on aggregate output despite flexible prices; and (iii) the welfare cost of anticipated inflation is potentially a couple of orders larger than the estimates of Cooley and Hansen (1989) based on a representative-agent, cash-in-advance economy.
    Keywords: Demand for money ; Monetary theory
    Date: 2010
  15. By: Muhammed Muqtada (International Labour Office, Employment Sector (retired in June 2010))
    Abstract: Critically reviews the macroeconomic experiences of the past three decades to argue the case against orthodox macroeconomics. Suggests that the prevailing orthodoxy in macroeconomics needs to give way to an alternative policy paradigm in which the Copenhagen commitment on full employment, subsequently incorporated as a Millennium Development Goal, plays a central role. The global recession of 2008-2009 reinforces the potency of this proposition.
    Keywords: employment, economic recession, economic policy, finance, international monetary system, developing countries
    Date: 2010
  16. By: Büyükkarabacak, Berrak; Mykhaylova, Olena
    Abstract: We augment a closed-economy DSGE model with collateral constraints tied to real estate values by incorporating the time-to-build phenomenon in the housing construction sector. Adding construction sector delays significantly improves business cycle properties of the model relative to the versions with no time-to-build delays or with permanently fixed housing stock. We also find that in the presence of construction lags adding housing prices to the central bank policy function increases aggregate welfare in the economy by up to 0.3 percent of consumption. This result is robust to several specifications of the Taylor rule and to changes in key parameter values.
    Keywords: Housing prices; housing construction; time-to-build; welfare.
    JEL: E32 E58 E52 E44
    Date: 2010–06–15
  17. By: Volker Wieland (Goethe University Frankfurt, Center for Financial Studies, and CEPR); Maik Wolters (Goethe University Frankfurt)
    Abstract: This paper investigates the accuracy and heterogeneity of output growth and inflation forecasts during the current and the four preceding NBER-dated U.S. recessions. We generate forecasts from six different models of the U.S. economy and compare them to professional forecasts from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters (SPF). The model parameters and model forecasts are derived from historical data vintages so as to ensure comparability to historical forecasts by professionals. The mean model forecast comes surprisingly close to the mean SPF and Greenbook forecasts in terms of accuracy even though the models only make use of a small number of data series. Model forecasts compare particularly well to professional forecasts at a horizon of three to four quarters and during recoveries. The extent of forecast heterogeneity is similar for model and professional forecasts but varies substantially over time. Thus, forecast heterogeneity constitutes a potentially important source of economic fluctuations. While the particular reasons for diversity in professional forecasts are not observable, the diversity in model forecasts can be traced to different modeling assumptions, information sets and parameter estimates.
    Keywords: Forecasting, Business Cycles, Heterogeneous Beliefs, Forecast Distribution, Model Uncertainty, Bayesian Estimation
    JEL: C53 D84 E31 E32 E37
    Date: 2010–05–20
  18. By: Roc Armenter
    Abstract: The author shows that the short-term nominal interest rate can anchor private-sector expectations into low inflation more precisely, into the best equilibrium reputation can sustain. He introduces nominal asset markets in an infinite horizon version of the Barro-Gordon model. The author then analyzes the subset of sustainable policies compatible with any given asset price system at date t = 0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate. His results suggest that policy frameworks must also be evaluated on their ability to coordinate expectations.
    Keywords: Inflation (Finance) ; Interest rates ; Asset pricing
    Date: 2010
  19. By: Wolfgang Polasek (Institute for Advanced Studies, IHS Vienna; RCEA Rimini, Italy)
    Abstract: The paper explores the quarterly sequence of business cycles in Iceland for 40 years between 1970 and 2009 using the business cycle technique of Leamer (2009). We apply first a turning point (TP) dating identification procedure based on the Hendrick- Prescott (HP) filter of the quarterly growth rates of GDP and then we use different candidates for leading indicators for turning points. We find that the Iceland economy has a rather short business cycle of about 3 years and most macroeconomic indicators are in accordance with the business cycles. Only a few indicators have a predictive potential, some variables like consumption show a one quarter lag. Furthermore, we apply the concept of abnormal contributions to growth for candidates as a leading indicator of turning points. We find that over the last decade there is some evidence that abnormal growth contributions are better indicators for troughs than for peaks.
    Keywords: Business Cycle dating, HP filtering, exploratory turning point analysis, lead and lag indicators, abnormal growth contributions, gross domestic product (GDP) growth
    JEL: E32 E60
    Date: 2010–01
  20. By: Paul Levine (University of Surrey)
    Abstract: The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporarymicro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE models estimated by Bayesian-Maximum-Likelihood methods I argue that they can be considered as probability models in the sense described by Sims (2007) and be used for risk-assessment and policy design. This is true for any one model, but with a range of models on offer it is possible also to design interest rate rules that are simple and robust across the rival models and across the distribution of parameter estimates for each of these rivals as in Levine et al. (2008). After making models better in a number of important dimensions, a possible road ahead is to consider rival models as being distinguished by the model of expectations. This would avoid becoming 'a prisoner of a single system' at least with respect to expectations formation where, as I argue, there is relatively less consensus on the appropriate modelling strategy.
    Keywords: structured uncertainty, DSGE models, robustness, Bayesian estimation, interest-rate rules
    JEL: E52 E37 E58
    Date: 2010–04
  21. By: Michael Woodford
    Abstract: This paper reviews the theory of optimal monetary stabilization policy, with an emphasis on developments since the publication of Woodford (2003). The structure of optimal policy commitments is considered, both when the objective of stabilization policy is defined by an arbitrarily specified quadratic loss function, and when the objective of policy is taken to be the maximization of expected utility. Issues treated include the time inconsistency of optimal policies and the need for commitment; the relation of optimal policy from a “timeless perspective” to the Ramsey conception of optimal policy; and the advantages of forecast targeting procedures as an approach to the implementation of optimal stabilization policy. The usefulness of characterizing optimal policy in terms of a target criterion is illustrated in a range of examples. These include models with a variety of assumptions about the nature of price and wage adjustment; models that allow for sectoral heterogeneity; cases in which policy must be conducted on the basis of imperfect information; and cases in which the zero lower bound on the policy rate constrains the conduct of policy.
    JEL: E52 E61
    Date: 2010–06
  22. By: Imed Medhioub (High Trade School, UREP Laboratory, Sfax, Tunisia)
    Abstract: Nowadays, due to the world economic regionalization, business cycle synchronization is of great importance. It is in this context that this study is defined. Indeed, following the political debates carried out especially by France in order to create a Mediterranean Union, we propose a synchronism estimation between the Tunisian, French, Italian, Spanish, Greek and Turkish industrial cycles. Several methods were used to measure the business cycles synchronization among these countries. In fact, concordance index indicates a weaker convergence between the two Mediterranean sides. Consequently, the cycles are, in general, asynchronous and the creation of a Mediterranean Union is not encouraged.
    Date: 2010–06
  23. By: Jarko Fidrmuc (Austrian Central Bank, CESifo Munich, and Comenius University Bratislava); Taro Ikeda (Graduate School of Economics, Kobe University); Kentaro Iwatsubo (Graduate School of Economics, Kobe University)
    Abstract: We exploit dynamic correlations defined in the frequency domain to estimate determinants of output comovement of OECD countries between 1990 and 2008. We show that trade intensity, degree of financial integration and specialization pattern have significantly different effects on comovements at different frequencies. This can bias the results using aggregate data or statistical filters. For example, financial integration is shown to have the highest positive effect for the business cycle frequencies, while it is insignificant for the short-term frequencies.
    Keywords: Business cycle, Transmission, Financial Integration, Dynamic Correlation
    JEL: E32 F15 F41
    Date: 2010–06
  24. By: Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); George Perendia (London Metropolitan University); Bo Yang (University of Surrey)
    Abstract: We provide a tool for estimating DSGE models by BayesianMaximum-likelihood methods under very general information assumptions. This framework is applied to a New Keynesian model where we compare the standard approach, that assumes an informational asymmetry between private agents and the econometrician, with an assumption of informational symmetry. For the former, private agents observe all state variables including shocks, whereas the econometrician uses only data for output, inflation and interest rates. For the latter both agents have the same imperfect information set and this corresponds to what we term the 'informational consistency principle'. We first assume rational expectations and then generalize the model to allow some households and firms to form expectations adaptively. We find that in terms of model posterior probabilities, impulse responses, second moments and autocorrelations, the assumption of informational symmetry by rational agents significantly improves the model fit. We also find qualified empirical support for the heterogenous expectations model. JEL Classification: C11, C52, E12, E32.
    Keywords: Imperfect Information, DSGE Model, Rational versus Adaptive Expectations, Bayesian Estimation
    JEL: E52 E37 E58
    Date: 2010–04
  25. By: Ross D. Hickey; David S. Jacks
    Abstract: We introduce a new data set on over 230,000 monthly prices for 10 goods in 50 Canadian cities over the 40 year period from 1910 to 1950. This coupled with previously published price information from the late twentieth century allows us to present one of the first comprehensive views of nominal rigidities and retail price dispersion over the past 100 years. We find that nominal rigidities have been conditioned upon prevailing rates of inflation with a greater frequency of price changes occurring in the 1920s and the 1970s. Additionally, the process of retail market integration has surprisingly followed a U-shaped trajectory, with many domestic markets being better integrated—as measured by the average dispersion of retail prices—at mid-century than in the 1990s. We also consider the linkages between nominal rigidities and price dispersion, finding results consistent with present-day data.
    JEL: E31 L11 N82
    Date: 2010–06
  26. By: Yeva Nersisyan; L. Randall Wray
    Abstract: The worst global downturn since the Great Depression has caused ballooning budget deficits in most nations, as tax revenues collapse and governments bail out financial institutions and attempt countercyclical fiscal policy. With notable exceptions, most economists accept the desirability of expansion of deficits over the short term but fear possible long-term effects. There are a number of theoretical arguments that lead to the conclusion that higher government debt ratios might depress growth. There are other arguments related to more immediate effects of debt on inflation and national solvency. Research conducted by Carmen Reinhart and Kenneth Rogoff is frequently cited to demonstrate the negative impacts of public debt on economic growth and financial stability. In this paper we critically examine their work. We distinguish between a nation that operates with its own floating exchange rate and nonconvertible (sovereign) currency, and a nation that does not. We argue that Reinhart and Rogoff’s results are not relevant to the case of the United States.
    Keywords: Government Debt; Government Deficit; Sovereign Default; Reinhart and Rogoff; Economic Growth; Inflation; Modern Money
    JEL: E60 E61 E62 E64 E69 E31 E32 O40
    Date: 2010–06
  27. By: Montornès, J. Author-Name: Sauner-Leroy, J-B.
    Abstract: We investigate the wage-setting behavior of French companies using an ad-hoc survey conducted specifically for this study. Our main results are the following. i) Wages are changed infrequently. The mean duration of wage contracts is one year. Wage changes occur at regular intervals during the year and are concentrated in January and July. ii) We find a lower degree of downward real wage rigidity and nominal wage rigidity in France compared to the European average. iii) About one third of companies have an internal policy to grant wage increases according to inflation. iv) When companies are faced with adverse shocks, only a partial response is transmitted into prices. Companies also adopt cost-cutting strategies. The wage of newly hired employees plays an important role in this adjustment.
    Keywords: Wage Rigidity, Wage-setting Behavior, Survey Data.
    JEL: E24 J3
    Date: 2010
  28. By: Zhang, Yuewen
    Abstract: Sovereign risk became a common issue after 2007 financial crisis happened. However, the crisis was only an incentive. Some high sovereign risk countries had lacked reliable sovereign risk management framework and lend overmuch debt before the crisis came. High cost of crisis and succeeding recession gave the world a critical strike. Using the cases of Sweden and China, I argue that fiscal expenditure constraints, debt control, and surplus accumulation in common time are most important measures to manage sovereign risk. A stable and efficient sovereign risk management regime framework is beneficial. A medium-term fiscal stability target should be included. Early intention, temporary stimulus policy and other budget measures could decrease cost of crisis and recession. A development domestic debt market could help relief refinancing pressure of government when some external shock happened. Perfect framework of statistics, specific accounting standard, high transparency will help the government, creditors, and investors reach some debt restructure agreement.
    Keywords: China; Sweden; risk management; Sovereign risk;
    JEL: E62 H60 G32
    Date: 2010–06–01
  29. By: Fernando Martin (Simon Fraser University); David Andolfatto (Simon Fraser University)
    Abstract: Conventional theory suggests that fiat money will have value in capitalpoor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.
    Keywords: fiat money, capital, news shocks
    JEL: E41 E42 E52
    Date: 2009–09
  30. By: Lilia Karnizova (Department of Economics, University of Ottawa, Ottawa, ON); Hashmat Khan (Department of Economics, Carleton University, Ottawa, Canada,)
    Abstract: When stock prices rise, so does aggregate consumer spending. A traditional explanation for this phenomenon is based on wealth effects. However, movements of the stock market may affect consumer spending indirectly, by influencing consumer confidence. A bullish stock market may make consumers feel more optimistic about the future of the aggregate economy, and hence increase their spending. This paper investigates the existence of the consumer confidence channel of asset price transmission in Canada. The analysis is based on the indices of consumer confidence from the Conference Board of Canada and the Toronto Stock Exchange index. The results are supportive of the consumer confidence channel at the national level. There is also evidence of asymmetric effects of stock price changes on confidence changes: declines of the stock index have larger and statistically more significant effects relative to its increases.
    Keywords: Stock market, Consumer confidence, Wealth, Asymmetry.
    JEL: E21 E44
    Date: 2010
  31. By: Manoel Bittencourt (Department of Economics, University of Pretoria)
    Abstract: In this paper we investigate the role of financial development, or more widespread access to finance, in generating economic growth in four Latin American countries between 1980 and 2007. The results, based on the relatively novel panel time-series analysis, confirm the Schumpeterian prediction which suggests that finance authorises the entrepreneur to invest in productive activities, and therefore to promote economic growth. Furthermore, given the characteristics of the sample of countries chosen, we also highlight the importance of macroeconomic stability, and all the institutional framework that it encompasses, as a necessary condition for financial development, and consequently for growth and prosperity in the region.
    Keywords: Finance, Growth, Latin America
    JEL: E31 N16 O11 O54
    Date: 2010–06
  32. By: Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Terry Ward
    Abstract: As the economic recession in the EU seems to be drawing to a close, there is inevitable interest in what the effects on employment in different sectors of activity and occupations have been, or are still likely to be once all the repercussions have materialized. Indeed, given the lags in both the collection of data and, more importantly, in the effect of a downturn in output on employment, it is likely to be only some time after the recession comes to an end and economic growth gets back close to its trend rate that the consequences for jobs will be apparent in the official statistics. Although any estimates, or predictions, of this kind are fraught with difficulty and highly uncertain, it is instructive to look back at previous episodes of economic downturn to see what can be learned from them, in particular about their differential effect on different parts of the economy and on different groups of worker. This is the concern of the present study. Specifically, the aim is to examine previous downturns in the EU economies and the different consequences they had, first, for sectors of activity because of the varying nature of the goods and services produced and, second, for the different types of job within sectors. The further aim is then to use the results of this examination as the basis for constructing projections of developments in employment over the period 2008-2010 given the present forecast of the overall change in GDP. From this, the subsequent step is to consider the implications for employment in different types of job. As part of this, the concern is also to identify the kinds of job which stand to be most affected by the current downturn and the characteristics of the people at present employed in them in different parts of the EU.
    Keywords: employment projections, crisis effects, employment structures, job quality
    JEL: E17 J23 J24 J29
    Date: 2010–02
  33. By: Ojo, Marianne
    Abstract: Through a focus on the ever increasing need to address information asymmetries, as well as reference to the uniqueness of the degree to which systemic risks are triggered in banking, this paper aims primarily to highlight reasons why government and central bank intervention are essential and required in financial regulation. The role presently assumed by regulation is not the same as it was thirty years ago. Deregulation and conglomeration have significantly altered the landscape in which regulation previously existed and to an extent, defined the role which it presently assumes. For this reason, arguments which were (and have been) directed against government, central bank intervention, as well as the role of regulation, require re-evaluation. Deposit insurance and lender of last resort arrangements serve to instil confidence in depositors hence contributing towards safeguarding system stability and preventing unnecessary runs where panics occur. Such benefits are not only considered against those arguments advanced by antagonists of deposit insurance and lender of last resort arrangements, but also against those views which do not favour government and central bank intervention. In evaluating whether free banking is equipped with as many mechanisms and safeguards required in safeguarding the stability of the financial system, the urgency for such safety net instruments, which is attributed to the peculiar and unique nature of banking, will be considered. Contrary to the argument [that “if markets are generally better at allocating resources than governments are, then the differences or distinctions which exist between “money” and the industry that provides it (the banking industry) should not serve as bases for an assumption that money and banking are exceptions to the general rule”], it has to be highlighted (for several reasons) that the banking industry could not be equated to other areas of the financial sector. One of such reasons relates to the extent to which the impact of systemic runs differ within the banking sector when compared to other areas such as the securities markets. The differences in the nature of risks which exist in banking and those which exist within the securities markets, constitutes another reason why the need for government and central bank intervention is advocated. Furthermore, even though the nature of banking risks warrants government and central bank intervention – as well as capital adequacy regulation, capital regulation should also be extended to the securities markets for many reasons – one of which is the ability to securitise assets. If there was no longer a role for regulation, then re- regulation should not have occurred in certain jurisdictions which have adopted and successfully implemented consolidated supervision.
    Keywords: asymmetric information; lender of last resort; central banks; systemic; regulation; deposit insurance; free banking
    JEL: E0 K2 E5 D8
    Date: 2010–06–15
  34. By: Lagadec, Gael; Ris, Catherine
    Abstract: This article offers elements to assess the effects of the world economic crisis in the Asia-Pacific region. The mechanisms and development of the subprime crisis are briefly recalled in order to examine how far they reach in the area. Examining the situation of the area’s economies, with a distinction between developed economies, emerging countries and developing economies highlights how the transmission of the crisis grows with the level of development. Being vulnerable due to their important dependency on revenues from outside (tourism, raw materials export, private transfers, aid…) the Pacific small developing economies have been indirectly affected by the crisis. Indeed the world economic crisis has increased the economic difficulties which the governments and populations of the Pacific already had to face when the oil and food prices rose, which seriously undermined them. Focus is laid on the three French Pacific territories. As they have hardly integrated international exchanges and rely mainly on transfers from the metropolis, their characteristics have somehow protected them from the crisis. The macroeconomic indicators of the Pacific industrialising countries are rather favourably-oriented yet the slowdown of economic growth has further weakened the most vulnerable populations.
    Keywords: Economic tendency; Subprime crisis; Asia-Pacific
    JEL: E32 O56 O53
    Date: 2010–06

This nep-mac issue is ©2010 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.