nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒07‒03
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Is Monetary Policy Effective in Developing Countries? Evidence from Ghana By Mustapha Ibn Boamah; Robert Ackrill; Juan Carlos Cuestas
  2. Financial Stability and Monetary Policy By Martin, Christopher; Milas, C
  3. Shocks and Frictions under Right-to-Manage Wage Bargaining: A Transatlantic Perspective By Agostino Consolo; Matthias S. Hertweck
  4. Optimal simple monetary policy rules and welfare in a DSGE Model for Hungary By Zoltán M. Jakab; Henrik Kucsera; Katalin Szilágyi; Balázs Világi
  5. Inflação E Globalização:Análise Dos Efeitos Globais Sobre A Dinâmica Da Inflação Brasileira By Holland, Márcio; Mori, Rogério
  6. Exchange rate regimes and macroeconomic performance in South Asia By Ashima Goyal
  7. Sectoral money demand and the great disinflation in the US By Alessandro Calza; Andrea Zaghini
  8. How Endogenous Is Money? Evidence from a New Microeconomic Estimate By David Cuberes; William R. Dougan
  9. Implementation of Monetary Policy: How Do Central Banks Set Interest Rates? By Benjamin Friedman; Kenneth Kuttner
  10. The yield curve and the prediction on the business cycle: a VAR analysis for the European Union By Cinquegrana, Giuseppe; Sarno, Domenico
  11. Inflation asymmetry, menu costs and aggregation bias – A further case for state dependent pricing By Péter Karádi; Ádám Reiff
  12. Inflation and Unemployment in Competitive Search Equilibrium By Mei Dong
  13. The last fifteen years of stagnation in Italy: A Business Cycle Accounting Perspective By R. Orsi; F. Turino
  14. The rate of interest as a macroeconomic distribution parameter: Horizontalism and Post-Keynesian models of distribution of growth By Hein, Eckhard
  15. The role of financial market structure and the trade elasticity for monetary policy in open economies By Katrin Rabitsch
  16. Politique monétaire, stabilité macroéconomique et changement structurel By Jean-Luc Gaffard
  17. Central bank co-operation and international liquidity in the financial crisis of 2008-9 By William Allen; Richhild Moessner
  18. Bank of Canada Communication, Media Coverage, and Financial Market Reactions By Bernd Hayo; Matthias Neuenkirch
  19. Perception is Always Right: The CNB’s Monetary Policy in the Media By Jiri Bohm; Petr Kral; Branislav Saxa
  20. Global Financial Crisis and Policy Responses in Southeast Asia : Towards Prudent Macroeconomic Policies By Dr. Friska Parulian
  21. The impact of changes in asset prices on real economic activity : a cointegration analysis for Germany By Andreas Nastansky; Hans Gerhard Strohe
  22. Firm-level adjustment costs and aggregate investment dynamics – Estimation on Hungarian data By Ádám Reiff
  23. Management Matters By Michelle Alexopoulos; Trevor Tombe
  24. Fiscal policy and growth: do financial crises make a difference? By António Afonso; Hans Peter Grüner; Christina Kolerus
  25. Fiscal policy and growth in Saudi Arabia By Ghazi A. Joharji; Martha A. Starr
  26. China's high saving rate: myth and reality By Guonan Ma; Wang Yi
  27. The transmission of the global financial crisis to the Italian economy. A counterfactual analysis, 2008-2010. By Michele Caivano; Lisa Rodano; Stefano Siviero
  28. The Introduction of a Private Wealth Module in CAPP_DYN: an Overview By Carlo Mazzaferro; Marcello Morciano; Elena Pisano; Simone Tedeschi
  29. Banking and sovereign risk in the euro area By Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
  30. Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-country evidence By Larch, M
  31. L'impact des chocs externes sur et dans la zone euro : un modèle VAR structurel By Jean-Baptiste Gossé; Cyriac Guillaumin
  32. Characterizing the business cycles of emerging economies By Calderon, Cesar; Fuentes, Rodrigo
  33. Public debt and Financial development: A theoretical exploration By M Ismihan; G Ozkan
  34. Should day care be subsidized? By Domeij, David; Klein, Paul
  35. Identification and Estimation of Sources of Common Fluctuations: New methodologies and applications. By [no author]
  36. Trend and cycle features in German residential investment before and after reunification By Knetsch, Thomas A.
  37. The crisis and employment in Italy By Federico Cingano; Roberto Torrini; Eliana Viviano
  38. Endogenous On-the-job Search and Frictional Wage Dispersion By Matthias S. Hertweck
  39. The Impact of Oil Prices on the Real Exchange Rate of the Dirham: a Case Study of the United Arab Emirates By Al-mulali, Usama; Che Sab, Normee
  40. Auswirkungen der Finanzkrise auf die private Altersvorsorge By Axel Börsch-Supan; Martin Gasche; Michael Ziegelmeyer
  41. The Washington Consensus: Assessing a Damaged Brand - Working Paper 213 By Nancy Birdsall
  42. What can EMU countries' sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? By Dötz, Niko; Fischer, Christoph

  1. By: Mustapha Ibn Boamah; Robert Ackrill; Juan Carlos Cuestas
    Abstract: The central bank of Ghana officially adopted an explicit inflating targeting monetary policy in May 2007 following its operational independence in March 2002. This paper explores monetary policy rules and conduct in Ghana. The paper uses time series estimations of Taylor-type reactions functions to characterise monetary policy conduct. The long-run interest rate response to inflation, output gap, and other inflation precursors from estimated reaction functions is compared with Taylor’s reference values. We conclude monetary policy was largely ineffective in controlling inflation. The paper suggests possible reasons for the non effectiveness of monetary policy and offers policy recommendations for long-term inflation control.
    Keywords: Central bank, Ghana, Inflation targeting, Monetary Policy
    JEL: E52 E58 E61
    Date: 2010–06
  2. By: Martin, Christopher; Milas, C
    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
    Date: 2010–03–31
  3. By: Agostino Consolo; Matthias S. Hertweck (University of Basel)
    Abstract: This paper introduces staggered right-to-manage wage bargaining into a New <br />Keynesian business cycle model. Our key result is that the model is able to gener- <br />ate persistent responses in output, inflation, and total labor input to both neutral <br />technology and monetary policy shocks. Furthermore, we compare the model’s dy- <br />namic behavior when calibrated to the US and to an European economy. We find <br />that the degree of price rigidity explains most of the differences in response to a <br />monetary policy shock. When the economy is hit by a neutral technology shock, <br />both price and wage rigidities turn out to be important. <br /><br />
    Keywords: Business Cycles, Labor Market Search, Wage Bargaining, Inflation
    JEL: E24 E31 E32 J64
    Date: 2010
  4. By: Zoltán M. Jakab (Office of Fiscal Council); Henrik Kucsera (Magyar Nemzeti Bank); Katalin Szilágyi (Magyar Nemzeti Bank); Balázs Világi (Magyar Nemzeti Bank)
    Abstract: We explore the properties of welfare-maximizing monetary policy in a medium-scale DSGE model for Hungary. In order to make our results operational from a policymaker’s perspective, we approximate the optimal policy rule with a set of simple rules reacting only to observable variables. Our results suggest that “science of monetary policy” that is found robust in simple models, holds in this medium-scaled setting as well. That is, the welfare-maximizing policy that aims to eliminate distortions associated with nominal rigidities can be approximated by a simple inflation targeting rule. Adding exchange rate into the feedback rule only marginally improves the stabilization properties of the policy rule. However, a rule reacting to wage inflation can be significantly welfare-improving. These results may suggest that in our medium-sized model the distortions associated with sticky wage setting have at least as important welfare implications as those related to the price stickiness in product markets.
    Keywords: monetary policy, central banking, policy design.
    JEL: E52 E58 E61
    Date: 2010
  5. By: Holland, Márcio; Mori, Rogério
    Abstract: This work discusses and tests the hypothesis that global factors changed the parameters of the domestic inflationprocess, yet, whether the output gap has lost its importance in the definition of the Phillips curve, causing it flatter. As aconsequence, it is tightly associated with the decisions of the central bank in controlling inflation with interest rules. Weshow sound estimates that the Phillips curve is really flatter in the Brazilian case, as can be seen in the reduction of thevalues of the coefficients of the output gap by 40 per cent, when the equations are controlled by foreign output gap.Empirical evidence is confirmed also by the preponderant role played by the exchange rate misalignment in theBrazilian inflation process, far than the monetary rule. It doesn’t necessarily imply that the work of the central bankers isnow less important, but they are likely facilitated by the more global integration, under conditions of internationalcushion liquidity and growth.
    Date: 2010–06–17
  6. 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: 2010–06
  7. By: Alessandro Calza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrea Zaghini (Banca d’Italia, Research Department, Via Nazionale 91, I-00184 Rome, Italy.)
    Abstract: Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and …firms. We speci…cally investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional speci…fications of money demand for US households and non-…financial …firms using flow-of-fund data covering four decades. We fi…nd that the bene…fits were signi…cant for both sectors. JEL Classification: E31, E41.
    Keywords: welfare cost of inflation, flow of funds data, demand for money.
    Date: 2010–06
  8. By: David Cuberes (Dpto. Fundamentos del Análisis Económico); William R. Dougan (Clemson University)
    Abstract: This paper uses microeconomic data on firms' money demand and investment in physical capital for the period 1983-2006 to estimate the extent to which variation in the U.S. money supply is an endogenous response to variation in firms' demand for liquidity. We estimate a simple model in which each firm's desired money balances in any period depend on that firm's current transactions, current investment, and its planned future investment, as well as aggregate variables such as interest rates and common policy forecasts. Calculations based on our estimates suggest that only a very small fraction of the variability in the aggregate stock of money represents an endogenous response to autonomous changes in firms' investment plans.
    Keywords: Money demand, money supply, endogenous money, monetary neutrality
    JEL: E41 E51
    Date: 2010–03
  9. By: Benjamin Friedman (Harvard University); Kenneth Kuttner (Williams College)
    Abstract: Central banks no longer set the short-term interest rates that they use for monetary policy purposes by manipulating the supply of banking system reserves, as in conventional economics textbooks; today this process involves little or no variation in the supply of central bank liabilities. In effect, the announcement effect has displaced the liquidity effect as the fulcrum of monetary policy implementation. The chapter begins with an exposition of the traditional view of the implementation of monetary policy, and an assessment of the relationship between the quantity of reserves, appropriately defined, and the level of short-term interest rates. Event studies show no relationship between the two for the United States, the Euro-system, or Japan. Structural estimates of banks’ reserve demand, at a frequency corresponding to the required reserve maintenance period, show no interest elasticity for the U.S. or the Euro-system (but some elasticity for Japan). The chapter next develops a model of the overnight interest rate setting process incorporating several key features of current monetary policy practice, including in particular reserve averaging procedures and a commitment, either explicit or implicit, by the central bank to lend or absorb reserves in response to differences between the policy interest rate and the corresponding target. A key implication is that if reserve demand depends on the difference between current and expected future interest rates, but not on the current level per se, then the central bank can alter the market-clearing interest rate with no change in reserve supply. This implication is borne out in structural estimates of daily reserve demand and supply in the U.S.: expected future interest rates shift banks’ reserve demand, while changes in the interest rate target are associated with no discernable change in reserve supply. The chapter concludes with a discussion of the implementation of monetary policy during the recent financial crisis, and the conditions under which the interest rate and the size of the central bank’s balance sheet could function as two independent policy instruments.
    Keywords: Reserve supply, reserve demand, liquidity effect, announcement effect
    JEL: E52 E58 E43
    Date: 2010–06
  10. By: Cinquegrana, Giuseppe; Sarno, Domenico
    Abstract: The literature on the yield curve deals with the capacity to predict the future inflation and the future real growth from the term structure of the interest rates. The aim of the paper is to verify this predictive power of the yield curve for the European Union at 16 countries in the 1995-2008 years. With this regard we propose two VAR models. The former is derived from the standard approach, the later is an extended version considering explicitly the macroeconomic effects of the risk premium. We propose the estimates of the models and their out-of-sample forecasts through both the European Union GDP (Gross Domestic Product) quarterly series and the European Union IPI (Industrial Production Index) monthly series. We show that the our extended model performs better than the standard model and that the out-of-sample forecasts of the IPI monthly series are better than ones of the GDP quarterly series. Moreover the out-of-sample exercises seems us very useful because they show the crowding out arising from Lehman Brother’s unexpected crash and the becoming next fine tuning process.
    Keywords: yield curve; monetary policy; business cycle; risk premium; real growth
    JEL: E43 E52 E44 E47
    Date: 2010–01
  11. By: Péter Karádi (Magyar Nemzeti Bank); Ádám Reiff (Magyar Nemzeti Bank)
    Abstract: Asymmetric inflation response to aggregate shocks is an identifying macro-prediction of state dependent pricing models with trend inflation (Ball and Mankiw, 1994). The paper uses the natural experiment of symmetric value-added tax (VAT) changes in Hungary with highly asymmetric inflation responses to provide further evidence for state-dependent pricing and for the Ball-Mankiw conjecture. The paper shows, furthermore, that while a standard menu cost model like that of Golosov and Lucas (2007) underestimates the observed asymmetry, a model of multi-product firms that takes sectoral heterogeneity explicitly into consideration can quantitatively account for the inflation asymmetry observed in the data. This aggregation bias of the standard model is the result of the strong interaction term between trend inflation and menu costs in determining asymmetry in the model, and the positive correlation between sectoral inflation rates and menu costs in the data. The paper implies that the real effects of negative monetary shocks can be substantial even in the standard Golosov and Lucas (2007) model if these additional factors are taken into consideration.
    Keywords: aggregation bias, inflation asymmetry, menu cost, sectoral heterogeneity, value-added tax.
    JEL: E30
    Date: 2010
  12. By: Mei Dong
    Abstract: Using a monetary search model, Rocheteau, Rupert and Wright (2007) show that the relationship between inflation and unemployment can be positive or negative depending on the primitives of the model. The key features are indivisible labor, nonseparable preferences and bargaining. Their results are derived only for a special case of the bargaining solution, take-it-or-leave-it offer by buyers. Instead of bargaining, this paper considers competitive search (price posting with directed search). I show that the results in Rocheteau, Rupert and Wright (2007) can be generalized in an environment where both buyers and sellers have nonseparable preferences. In addition, the relationship between inflation and unemployment is robust to allowing free entry by sellers, which cannot be studied in Rocheteau, Rupert and Wright (2007).
    Keywords: Inflation: costs and benefits
    JEL: E40 E52 E12 E13
    Date: 2010
  13. By: R. Orsi; F. Turino
    Abstract: In this paper, we investigate possible sources of declining economic growth performance in Italy starting around the middle of the ’90s. A long-run data analysis suggests that the poor performance of the Italian economy cannot be ascribed to an unfortunate business cycle contingency. The rest of the euro area countries have shown better performance, and the macroeconomic data show that the Italian economy has not grown as rapidly as these other European economies. We investigate the sources of economic fluctuations in Italy by applying the Business Cycle Accounting procedure introduced by Chari, Kehoe and McGrattan (2007). We analyze the relative importance of efficiency, labor, investment and government wedges for business cycles in Italy over the 1982-2008 period. We find that different wedges have played different roles during the period, but the efficiency wedge is revealed to be the main factor responsible for the stagnation phase beginning around 1995. Our findings also show that the improvement in labor market distortions that occurred in Italy during the ’90s provided an alleviating effect, preventing an even stronger slowdown in per capita output growth.
    JEL: E65 O41 O52
    Date: 2010–06
  14. By: Hein, Eckhard
    Abstract: We review the main arguments put forward against the horizontalist view of endogenous credit and money and an exogenous rate of interest under the control of monetary policies. We argue that the structuralist arguments put forward in favour of an endogenously increasing interest rate when investment and economic activity are rising, due to increasing indebtedness of the firm sector or decreasing liquidity in the commercial bank sector, raise major doubts from a macroeconomic perspective. This is shown by means of examining the effect of increasing capital accumulation on the debt-capital ratio of the firm sector in a simple Kaleckian distribution and growth model. In particular we show that rising (falling) capital accumulation may be associated with a falling (rising) debt-capital ratio for the economy as a whole and hence with the ‘paradox of debt’. Therefore, the treatment of the rate of interest as an exogenous macroeconomic distribution parameter in Post-Keynesian distribution and growth models seems to be well founded.
    Keywords: interest rate; horizontalism; distribution; debt; capital accumulation
    JEL: E43 E12 E25 E51
    Date: 2010–06
  15. By: Katrin Rabitsch (Central European University, Magyar Nemzeti Bank)
    Abstract: The degree of international risk sharing matters for how monetary policy should optimally be conducted in an open economy. This is because risk sharing affects the way in which monetary policy is affected by terms of trade considerations. In a standard two-country model with monopolistic competition and nominal rigidities I consider different assumptions on international financial markets – complete markets, financial autarky and a bond economy – and a large region for the crucial parameter of the trade elasticity. There are three main results: one, the prescription of (producer) price stability as the optimal policy is obtained only as a special case, while in general it is optimal to deviate from a strictly zero inflation rate. Two, while gains from international policy coordination are generally small, they become potentially substantial when international risk sharing is poor and wealth effects from shocks across countries are large. And, three, when international financial markets are incomplete, there are also (sometimes considerable) gains over the flexible price allocation achievable.
    Keywords: monetary policy, risk sharing, price stability, policy coordination, financial market structure, trade elasticity.
    JEL: E52 E58 F42
    Date: 2010
  16. By: Jean-Luc Gaffard (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper is dedicated at reconsidering objectives and instruments of monetary policy and also at redefining a policy mix in an economy which is systematically confronted to imbalances due to changes in technology, in the composition of demand or in the distribution of income, It is motivated by the policy failures as revealed both by the poor growth performances during the two last decades in Europe and by the difficulty of elaborating a strategy to way out from the on-going crisis. A critical assessment of DGSE models, which are the theoretical basis for the monetary policy currently carried out by central banks, is the starting point for reconsidering the nature of fluctuations and giving arguments in favour of an out-of-equilibrium approach. This approach focuses on the distortions in the structure of productive capacity induced by any structural change, and shows why and how the time inconsistency between the construction and the utilization phases of the production process has a monetary and a financial counterpart that may generate a global instability. In this perspective, instruments and objectives of monetary policy must be revised, which implies that several indicators of the performance of the economy must ne taken into account, arbitrages between conflicting objectives must be carried out, and some inertia must be privileged in reaction to current price and unemployment signals.
    Keywords: Monetary Policy, Structural Change
    JEL: E32 E52 E58 E61
    Date: 2010–05
  17. By: William Allen; Richhild Moessner
    Abstract: The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability. It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.
    Keywords: Central bank cooperation, central bank swap lines, FX swaps, international liquidity, lender of last resort
    Date: 2010–06
  18. By: Bernd Hayo (Philipps-University Marburg); Matthias Neuenkirch (Philipps-University Marburg)
    Abstract: We examine the impact of Bank of Canada communications and media reporting on them on Canadian (short- and medium-term) bond and stock market returns using a GARCH model. Communications are rather uniformly distributed over the sample period (1998–2006); however, media coverage is particularly high during phases of increased uncertainty about the future course and timing of Canadian monetary policy. Official communications exert a larger influence on the bond market, whereas media coverage is more relevant for the stock market. In general, media filtering does not play a prominent role.
    Keywords: Bank of Canada, Central Bank Communication, Financial Markets, Media Coverage, Monetary Policy
    JEL: E52 G14 G15
    Date: 2010
  19. By: Jiri Bohm; Petr Kral; Branislav Saxa
    Abstract: In this paper we analyze the favorableness and extent of the media coverage of the CNB’s monetary policy decisions in the period of 2002–2007. We identify the factors explaining the variance in these two dimensions using an extensive set of articles published in the four most relevant Czech daily broadsheets immediately after monetary policy meetings. We take account of parameters of the CNB’s actual monetary policy decisions and related communication as well as variables characterizing the general economic environment that prevailed at the times of the individual meetings. The most appealing results are that those CNB’s decisions that surprise financial markets are − if needed − not negatively perceived by the media and that the media welcomes interest rate changes. Therefore, from the media coverage point of view, there is no need for too much smoothing. Simultaneously, our analyses shed some light on how the media tends to report on (economic) events in general.
    Keywords: Communication, media, monetary policy, newspapers.
    JEL: E52 E58
    Date: 2009–12
  20. By: Dr. Friska Parulian (Associate Researcher, Economic Research Institute for ASEAN and East Asia (ERIA))
    Abstract: The global fi nancial crisis hit the Southeast Asian economies through fi nancial and real sectors by the combination of lower global demand and tighter credit demand effect. The challenge for policymakers in this region is not just to prevent the escalation of the crisis and to mitigate the downturn, but also to ensure a good starting position once the rebound sets in. Policymakers should avoid taking on an excessive level of debt or creating the conditions for an infl ationary bubble by the current reaction to the global slowdown. A prudent counter-cyclical policy is necessary, and we should not ignore the medium and long-term sustainability.
    Date: 2009–07–01
  21. By: Andreas Nastansky; Hans Gerhard Strohe
    Abstract: This paper reviews theoretical and empirical evidence of asset price movements impact on the real economic activity. A key channel is the wealth effect on consumption. Fluctuations in stock prices and housing prices influence the households wealth and could have important impacts on households consumption. In addition, stock prices may affect corporate sector investments and property prices may affect building activity. Here, the method of cointegration is used to estimate the wealth effect and the investment effect in aggregate time series for Germany after the Reunification in 1990. Moreover, we discuss the role of asset prices in the monetary policy strategy of the ECB.
    Keywords: Stock Prices, Property Prices, Consumption, Investment, Central Banking Policy
    JEL: E58 E22 E21 C32
    Date: 2010–06
  22. By: Ádám Reiff (Magyar Nemzeti Bank)
    Abstract: This paper uses Hungarian data to estimate the structural parameters of a firm-level investment model with a rich structure of adjustment costs, and analyzes whether non-convex adjustment costs have any effect on the aggregate investment dynamics. The main question addressed is whether aggregate profitability shocks (as a result of monetary policy, for example) lead to different aggregate investment dynamics under non-convex and convex adjustment costs. The main finding is that while non-convex adjustment costs make investment lumpier at the firmlevel, they lead to a more flexible adjustment pattern at the aggregate level. This is because the model is calibrated to have the same proportion of inactive (i.e. non-investing) firms under convex and non-convex adjustment costs, but the average size of new investment of active firms is higher under non-convex adjustment costs.
    Keywords: Capital adjustment costs, lumpy investment, irreversible investment, aggregation.
    JEL: E22
    Date: 2010
  23. By: Michelle Alexopoulos; Trevor Tombe
    Abstract: New indications of managerial innovations are created and then used to show that changes in organizational technologies are an important source of economic growth. Specifically, the analysis demonstrates that, first, in response to a positive managerial technology shock, output, productivity and hours significantly increase in the short run, second, these types of innovations are as important as non-managerial ones in explaining movements in these variables at business cycle frequencies, and, third, product and process innovations promote the development of new managerial techniques.
    Keywords: Business Cycles; Productivity; Management techniques; Technical Change
    JEL: E3 M1 M5 O3 O4
    Date: 2010–06–21
  24. By: António Afonso (European Central Bank, Directorate General Economics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Hans Peter Grüner (University of Mannheim, D-68131 Mannheim, Germany.); Christina Kolerus (University of Mannheim, D-68131 Mannheim, Germany.)
    Abstract: In this paper we assess to what extent in the existence of a financial crisis, government spending can contribute to mitigate economic downturns in the short run and whether such impact differs in crisis and non crisis times. We use panel analysis for a set of OECD and non-OECD countries for the period 1981-2007. The fiscal multiplier for the full sample for instrumented regular and crisis spending is about 0.6-0.8 considering the sample average government spending share of GDP of about one third. Altogether, we cannot reject the hypothesis that crisis spending and regular spending have the same impact using a variation of controls, sub-samples and specifications. JEL Classification: C23, E62, E44, F43, H50.
    Keywords: fiscal policy, financial crisis, growth, OECD, EU, panel analysis.
    Date: 2010–06
  25. By: Ghazi A. Joharji; Martha A. Starr
    Abstract: Whether government spending can boost the pace of economic growth is widely debated. In the neoclassical growth model, it is supplies of productive resources and productivity that determine growth in the long-run. In endogenous growth models, an increase in government spending may raise the steady-state rate of growth due to positive spillover effects on investment in physical and/or human capital. This paper examines the relationship between government spending and non-oil GDP in the case of Saudi Arabia. Using time-series methods and data for 1969-2005, we find that increases in government spending have a positive and significant long-run effect on the rate of growth. Estimated effects of current expenditure on growth turn out to exceed those of capital expenditure -- suggesting that government investment in infrastructure and productive capacity has been less growth-enhancing in Saudi Arabia than programs to improve administration and operation of government entities and support purchasing power. We discuss possible reasons for this finding in the Saudi case and draw some policy implications.
    Keywords: Fiscal policy, growth, Saudi Arabia JEL classification: E62, O40, O53
    Date: 2010–05
  26. By: Guonan Ma; Wang Yi
    Abstract: The saving rate of China is high from many perspectives - historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors - corporate, household and government. Moreover, adjusting for inflation alters interpretations of the time path of the propensity to save in the three sectors. Our evidence casts doubt on the proposition that distortions and subsidies account for China's rising corporate profits and high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewis-model transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.
    Keywords: corporate, household and government saving, Chinese economy
    Date: 2010–06
  27. By: Michele Caivano (Banca d'Italia); Lisa Rodano (Banca d'Italia); Stefano Siviero (Banca d'Italia)
    Abstract: The world recession triggered by the financial crisis has impacted with extraordinary violence on economic activity in Italy.What has been the contribution of the various channels through which the crisis was transmitted to the Italian economy? What have been the effects stemming from the reaction of economic policies? To address these questions, our paper makes a counterfactual analysis of the Italian economy over the period 2008-2010, exploring a set of “no-crisis†scenarios. We estimate that the events prompted by the financial turmoil subtracted 6.5 percentage points from economic activity over the period 2008-2010. Specifically, crisis factors curtailed GDP growth by about 10 percentage points, while economic policies and automatic stabilizers mitigated the impact by about 3.5 percentage points. According to our results, the effects of the crisis were mostly “imported from abroadâ€; the worsening of domestic financing conditions and of the business and household climates played lesser - though not negligible - roles.
    Keywords: global financial crisis, counterfactual simulations, business fluctuations.
    JEL: E27 E37 E65
    Date: 2010–04
  28. By: Carlo Mazzaferro; Marcello Morciano; Elena Pisano; Simone Tedeschi
    Abstract: Household saving rate in Italy declined over the last two decades.This trend still persists despite three pension reforms have been enacted since the beginning of the nineties. In this paper we search further evidence of general macroeconomic effects through the analysis of households behaviour. In the first part of the paper we use data from five surveys of the Bank of Italy Surveys of Household Income and Wealth (SHIW) to estimate the lifetime profiles of saving and wealth accumulation. Estimates show that the age profile of the propensity to save has been influenced more by cohort effects than by general trend effects; whereas the age profile of the ratios of financial assets to disposable income has been subject to relevant trend effects. In the second part of the paper we analyse the effects of pension reforms on saving behaviour of Italian Households. Firstly we use a difference-in-difference estimator in order to test whether the groups more severely hit by the reforms actually increased their saving rate relative to the other groups. Then we estimate the Social Security Net Wealth (SSWN) for each individual in the SHIW in the analysed period (1989-2000). Finally we estimate the substitution coefficient between SSWN and private wealth taking into account that the reaction of saving to a change in SSWN depends also on age of the individual. Our results show that the reduction of SSWN is unequally distributed across individuals. The cut is stronger for self employed, young workers and women. Most of the groups more severely hit by the reforms did not increase their saving rate relative to the control group: younger households, in particular, did not increase the saving rate. On the whole a reduction of one Euro in SSWN seems to induce, on the average, a compensating increase in private wealth by about fifty cents. The substitution coefficient between private and social security wealth is higher for the richest and oldest part of the sample. Finally when we split the sample observations by year we find that the more dramatised is the impact of the reform, the higher is the substitution coefficient.
    Keywords: Pension reform; household saving; social security wealth; difference-in-difference
    JEL: E21 H55
    Date: 2010–04
  29. By: Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
    Abstract: We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors and low equity ratios in the banking sector experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads. --
    Keywords: Sovereign bond markets,banking,liquidity,EMU
    JEL: E43 E44 G12
    Date: 2010
  30. By: Larch, M
    Abstract: A bias towards running deficits is an entrenched feature of fiscal policy making in most developed economies. Our paper examines whether this tendency is in any way associated with the personal distribution of income of a country. It takes inspiration from theoretical work according to which distributional conflicts may give rise to deficit spending or to delayed fiscal adjustment. Although these theories have been around for years the empirical literature on the determinants of fiscal performance has so far paid little or no attention to the possible role played by different degrees of income inequality. Our results suggest that this neglect was not justified. Using cross-country data we find evidence that a more unequal distribution of income can weigh on a country's fiscal performance. These findings can be relevant in the aftermath of the post-2007 global financial and economic crisis in particular when designing fiscal exist strategies. The success and sustainability of such strategies may inter alia depend on their distributional implications.
    Keywords: fiscal performance; income inequality; budget deficit;
    JEL: E62 D31 A23 G23 E6
    Date: 2010–05
  31. By: Jean-Baptiste Gossé (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Cyriac Guillaumin (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Ce papier étudie l'impact des principaux chocs externes qu'a connu la zone euro et ses pays membres depuis le début des années 2000 : chocs monétaire (baisse des taux d'intérêts mondiaux), financier (deux crises boursières) et réel (augmentation des prix du pétrole et accumulation de déséquilibres courants mondiaux). Pour cela, nous utilisons la méthodologie VAR structurel (SVAR) à partir de laquelle nous définissons quatre chocs structurels : externe, offre, demande et monétaire. L'estimation de modèles SVAR permet de déterminer l'impact de ces chocs sur la zone euro et sur les pays la composant. Cette étude met en évidence l'hétérogénéité des réactions dans la zone euro. Si les chocs pétrolier et monétaire ont des répercussions assez similaires sur l'ensemble des pays de la zone euro – à l'exception des Pays-Bas et du Royaume-Uni – les chocs financiers et de déséquilibres mondiaux ont des effets très différents. Les chocs externes contribuent à expliquer un cinquième de la variance du différentiel de croissance et de la balance courante et environ un tiers des fluctuations du taux de change effectif réel en Europe. L'impact du choc pétrolier est particulièrement fort mais il déprécie l'euro. Les déséquilibres mondiaux expliquent également une part importante des fluctuations du taux de change mais entraînent une appréciation de l'euro. Par ailleurs, les fonctions de réponses aux chocs financier et monétaire sont similaires à l'exception de celles de la balance courante. En effet, un choc financier semble provoquer davantage de sorties de capitaux qu'un choc monétaire. Cette étude met donc en évidence l'hétérogénéité des réactions dans la zone euro et montre que les chocs externes expliquent davantage les variations du taux de change effectif réel que celles du différentiel de croissance ou de la balance courante tout en soulignant le rôle particulièrement important des déséquilibres mondiaux dans les fluctuations du cours des devises européennes.
    Keywords: déséquilibres mondiaux, balances courantes, zone euro, modèles VAR structurels, restrictions contemporaines et de long terme, chocs externes, hypothèse d'exogénéité.
    Date: 2010–04–01
  32. By: Calderon, Cesar; Fuentes, Rodrigo
    Abstract: Using the dating algorithm by Harding and Pagan (2002) on a quarterly database for 23 emerging market economies (EMEs) and 12 developed countries over the period 1980.Q1 - 2006.Q2, the authors proceed to characterize and compare the business cycle features of these two groups. They first find that recessions are deeper and more frequent among EMEs (especially, among LAC countries) and that expansions are more sizable and longer (especially, among East Asian countries). After this characterization, this paper explores the linkages between the cost of recessions (as measured by the average annual rate of output loss in the peak-to-trough phase of the cycle) and several country-specific factors. The main findings are: (a) adverse terms of trade shocks raises the cost of recessions in countries with a more open trade regime, deeper financial markets and, surprisingly, a more diversified output structure. (b) U.S. interest rate shocks seem to have a significant impact on the cost of recessions in East Asian countries. (c) Recessions tend to be deeper if they coincide witha sudden stop, but the effect tends to be mitigated in countries with deeper domestic credit markets. (d) Countries with stronger institutions tend to have less costly recessions.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Banks&Banking Reform
    Date: 2010–06–01
  33. By: M Ismihan; G Ozkan
    Abstract: This paper proposes an analytical framework to examine the role of public debt in financial development, which remains largely unexplored in the existing literature. We find that in countries where the banking sector extends substantial credit to government, public debt is likely to harm financial development, with unfavourable implications for economic activity. As such, our results provide an alternative explanation for the ‘contractionary fiscal expansions’. We also show that the lower the financial depth, the greater the adverse effects of public borrowing on financial development and macroeconomic outcomes.
    Keywords: Financial sector; credit to government; public debt.
    JEL: E52 E63 H63
    Date: 2010–06
  34. By: Domeij, David (Dept. of Economics, Stockholm School of Economics); Klein, Paul (Institute for International Economics)
    Abstract: In an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing consumption/leisure wedges over the life cycle and across agents. A simple way to implement this is to make day care expenses tax deductible. Calibrating our model to Germany, we find that tax deductibility for day care expenses leads to an approximate doubling of labor supply for both married and single mothers with small children. The overall welfare gain from optimal reform corresponds to a 1.0 percent increase in consumption.
    Keywords: Female labor force participation; Germany; day care subsidies
    JEL: E13 J13
    Date: 2010–06–11
  35. By: [no author]
    Abstract: This thesis addresses the problem of how to identify and model sources of common fluctuations of economic variables. It is an interesting question not only for researchers but also for policy makers and other authorities. The literature presents two approaches. The first one is based on an assumption that the important structural shocks can be captured by a small set of macroeconomic variables. The most popular models used in this context are structural vector autoregression models (SVAR). The second approach follows from a belief that there exists a small number of factors that affect many economic processes. Therefore, it involves analysis of large data sets, with both time and cross- sectional dimensions large enough to describe the factor structure. We dedicate the first part of the thesis to the problem of identification and estimation of structural shocks in small SVAR models. We follow the ideas of Rigobon (2003) and Lanne and Lütkepohl (2008), which show that the statistical property of the data may provide enough information to identify the structure of the model. The papers argue that a shift in the error covariance matrix allows for the estimation of the structural parameters of interest. The literature concentrates on models in which the shift is a result of a structural brake or a mixed distribution of errors.
    Date: 2010
  36. By: Knetsch, Thomas A.
    Abstract: Real residential investment in Germany is found to be cointegrated with population, real national income per capita and real house prices. This evidence is consistent with a model where the trend in housing demand is determined by demographic factors and economic well-being to which supply adjusts so slowly that real house prices are affected persistently. Reunification seems to have induced two structural changes in the empirical housing market model. First, the speed of equilibrium adjustment via residential investment slowed down substantially and real house prices lost the capacity to contribute to the adjustment process. Second, the degree of persistence in the error correction term increased a lot. The changing features are key to explain significant differences in alternative trend-cycle decompositions of residential investment. --
    Keywords: Residential investment,vector autoregression,trend-cycle decomposition,Germany
    JEL: E22 C32
    Date: 2010
  37. By: Federico Cingano (Banca d'Italia); Roberto Torrini (Banca d'Italia); Eliana Viviano (Banca d'Italia)
    Abstract: The fall in employment and the increase in unemployment rates in Italy in 2009 were fairly modest, given the sharp drop in GDP and compared with the recession of the early 1990s. This work shows that these data should be interpreted with caution, however. Firstly, employment trends as measured by Italian labour force survey may understate the decline in total employment if, as seems plausible, a lag exists between the entry of immigrants into the country and their registration. Secondly, the rise in the unemployment rate has been curbed by extensive recourse to temporary income support schemes to reduce working hours (such as the Cassa integrazione guadagni or Wage Supplementation Fund) in the northern regions, and by the sharp drop in participation in the South (the discouragement effect). The results of the Bank of Italy’s Survey of Industrial and Service Firms conducted in September 2009 show that the largest employment cuts occurred in the firms most exposed to international markets. Based on estimated labour input elasticity and on the available GDP forecast for 2010-11, we calculate that Italian employment is likely to remain well below its pre-crisis level in the coming quarters.
    Keywords: crisis, employment,unemployment
    JEL: E24 J20 J60
    Date: 2010–06
  38. By: Matthias S. Hertweck (University of Basel)
    Abstract: This paper addresses the large degree of frictional wage dispersion in US data. The standard job matching model without on-the-job search cannot replicate this pattern. With on-the-job search, however, unemployed job searchers are more will- ing to accept low wage offers since they can continue to seek for better employment opportunities. This explains why observably identical workers may be paid very dif- ferently. Therefore, we examine the quantitative implications of on-the-job search in a stochastic job matching model. Our key result is that the inclusion of variable on-the-job search increases the degree of frictional wage dispersion by an order of a magnitude.
    Keywords: Matching, On-the-job Search, Wage Dispersion
    JEL: E24 J31 J64
    Date: 2010
  39. By: Al-mulali, Usama; Che Sab, Normee
    Abstract: This study investigated the impact of oil shocks on the real exchange rate of the United Arab Emirates (UAE) dirham. Time series data were used for the period 1977 to 2007 covering four important oil shocks. Five variables have been used in this study, with the real exchange rate of the dirham as the dependent variable and the gross domestic product per capita, oil price, trade balance, and foreign direct investment inflows as the independent variables. In this study we used the Johansen-Juselius cointegration procedure, and conducted the Granger causality tests based on the VECM. Through this research, we found that a fixed exchange rate to the U.S. dollar is not an appropriate exchange rate regime for the UAE. This is because when the price of oil increases, and with a fixed exchange rate regime, this would lead to rapid growth in GDP and liquidity in the UAE economy. This in turn causes domestic prices to increase, which results in high levels of inflation.
    Keywords: oil Prices; real exchange rate; UAE; VAR
    JEL: E30 F31 Q43
    Date: 2009–06–23
  40. By: Axel Börsch-Supan; Martin Gasche; Michael Ziegelmeyer (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: Die starken Vermögensverluste einzelner Anlageklassen in 2008 durch die Finanz- und aufkommende Wirtschaftskrise führte zu einer Diskussion über die Risiken der kapitalgedeckten Altersvorsorge. Diese Studie quantifiziert die Höhe der Vermögensverluste und Renditeeinbußen durch die Finanz- und Wirtschaftskrise bei der kapitalgedeckten Altersvorsorge. Die Datenbasis bilden die SAVE Daten 2008. Die Effekte auf die Portfolios der Haushalte werden auf Basis der Vermögensbestände Ende 2007 und der beobachteten Renditeentwicklung in 2008 über verschiedene Anlageklassen abgeschätzt. Im Vergleich zum Vermögen im Referenzszenario ohne Krise ergeben sich durchschnittliche Finanzvermögensverluste von rund 3.000 Euro oder 8,5%. Dies ist geringfügig weniger als die Verluste, die aus der Geldvermögensstatistik der Bundesbank abgeleitet werden können. Beschränkt man sich nur auf das Altersvorsorgevermögen, liegt der mittlere Verlust bei 3%. Man kann diese Vermögensverluste differenziert nach Geburtsjahrgängen über das gesamte Erwerbsleben bis zum Rentenalter fortschreiben und in einen Renditeverlust umrechnen. Dies führt für die Geburtsjahrgänge 1940 bis 1990 zu Renditeeinbußen von maximal 0,1 Prozentpunkten für das Altersvorsorgevermögen und maximal 0,2 Prozentpunkten für das Finanzvermögen. Die größten Renditeverluste haben die gerade in die Rente eingetretenen und die rentennahen Jahrgänge, weil sie zum Zeitpunkt der Krise schon viel Vermögen angesammelt haben und deshalb auch die größten Verluste erleiden. Da der Renditerückgang durch den demographischen Wandel jedoch weit größer ist als der Renditerückgang durch die Finanzkrise, genießen diese Jahrgänge immer noch eine deutlich höhere Rendite als die jüngeren Jahrgänge.
    JEL: E27 G11 J26
    Date: 2009–12–30
  41. By: Nancy Birdsall
    Abstract: In this paper we analyze the Washington Consensus, which at its original formulation reflected views not only from Washington but also from Latin America. We trace the life of the Consensus from a Latin American perspective in terms of evolving economic development paradigms. We document the extensive implementation of Consensus-style reforms in the region as well as the mismatch between reformers’ expectations and actual outcomes, in terms of growth, poverty reduction, and inequality. We then present an assessment of what went wrong with the Washington Consensus-style reform agenda, using a taxonomy of views that put the blame, alternatively, on (i) shortfalls in the implementation of reforms combined with impatience regarding their expected effects; (ii) fundamental flaws—in either the design, sequencing, or basic premises of the reform agenda; and (iii) incompleteness of the agenda that left out crucial reform needs, such as volatility, technological innovation, institutional change and inequality.
    Keywords: Stabilization, reform, financial markets, macroeconomic policy, government,history of economic thought, institutions, Latin America, Caribbean
    JEL: E63 P11 B25 N16 N26 N46
    Date: 2010–06
  42. By: Dötz, Niko; Fischer, Christoph
    Abstract: This paper presents a new approach for analysing the recent development of EMU sovereign bond spreads. Based on a GARCH-in-mean model originally used in the exchange rate target zone literature, spreads are decomposed into a risk premium, an expected loss component and a liquidity premium. Time-varying default probabilities are derived. The results suggest that the rise in sovereign spreads during the recent financial crisis mainly reflects an increased expected loss component. In addition, the rescue of Bear Stearns in March 2008 seems to mark a change in market perceptions of sovereign bond risk. The government bonds of some countries lost their former role as a safe haven. While price competitiveness always helps to explain sovereign spreads, it increasingly moved into investors' focus as financial sector soundness weakened. --
    Keywords: Sovereign bond spread,GARCH-in-mean,default probability
    JEL: E43 G15 C32 H63 F36
    Date: 2010

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