nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒07‒24
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Financial market imperfections and monetary policy strategy. By Meixing DAI
  2. Is the Phillips curve useful for monetary policy in Nigeria? By Carlos Garcia
  3. The Phillips curve and US monetary policy: what the FOMC transcripts tell us By Ellen E. Meade; Daniel L. Thornton
  4. Bayesian Estimation of a Simple Macroeconomic Model for a Small Open and Partially Dollarized Economy By Salas, Jorge
  5. Has Inflation Targeting Changed Monetary Policy Preferences? By Jerome Creel; Paul Hubert
  6. The sensitivity of long-term interest rates to economic news: comment By Michelle L. Barnes; N. Aaron Pancost
  7. Incorporation financial sector risk into monetary policy models: application to Chile By Dale F. Gray; Carlos Garcia; Leonardo Luna; Jorge Restrepo
  8. Hybrid Inflation Targeting Regimes1 By Carlos Garcia; Jorge Restrepo; Scott Roger
  9. The Macroeconomic Consequences of EMU: International Evidence from a DSGE Model By Jerger, Jürgen; Röhe, Oke
  10. Is more exchange rate intervention necessary in small open economies? The role of risk premium and commodity shocks By Carlos Garcia; Wildo Gonzalez
  11. Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation By Lucotte, Yannick
  12. Credit Traps By Efraim Benmelech; Nittai K. Bergman
  13. Economic Policy and Output Volatility in Spain, 1950-1998: Was Fiscal Policy Destabilizing? By Battilossi, Stefano; Escario, Regina; Foreman-Peck, James
  14. Más alla del manejo de la tasa de interés para enfrentar la actual crisis: el canal de crédito y las asimetrías de la política monetaria en Chile By Carlos Garcia; Virginia Simoncelli
  15. The Euro-Project at Risk By Wilhem Hankel; Andreas Hauskrecht; Bryan Stuart
  16. Some Evidence on the Importance of Sticky Wages By Barattieri, Alessandro; Basu, Susanto; Gottschalk, Peter T.
  17. The fiscal multiplier and spillover in a global liquidity trap By Ippei Fujiwara; Kozo Ueda
  18. The Design and Effects of Monetary Policy in Sub-Saharan African Countries By Mohsin S. Khan
  19. Financial globalization, financial frictions and optimal monetary policy By Ester Faia; Eleni Iliopulos
  20. Liquidity, Interbank Market, and Capital Formation By Tarishi Matsuoka
  21. Measuring business cycles by saving for a rainy day By Mario J. Crucini; Mototsugu Shintani
  22. Wage setting patterns and monetary policy: international evidence By Giovanni Olivei; Silvana Tenreyro
  23. Inequality and Macroeconomic Performance By Jean-Paul Fitoussi; Francesco Saraceno
  24. Discordant city employment cycles By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
  25. Risk and Policy Shocks on the US Term Structure By Weber, Enzo; Wolters, Jürgen
  26. Immigration, remittances and business cycles By Federico Mandelman; Andrei Zlate
  27. Nonlinearities and the Macroeconomic Effects of Oil Prices By James D. Hamilton
  28. Fiscal policy efficiency and coordination: The New Open Economy Macroeconomics Approach. By Gilbert Koenig; Irem Zeyneloglu
  29. The US Term Structure and Central Bank Policy By Weber, Enzo; Wolters, Jürgen
  30. A factor-augmented probit model for business cycle analysis By Christophe Bellégo; Laurent Ferrara
  31. Innocent frauds meet Goodhart’s Law in monetary policy By Bezemer, Dirk J; Gardiner, Geoffrey
  32. Illiquidity and all its Friends By Jean Tirole
  33. Fiscal Rules for Commodity Exporters:Prudence and Procyclicality By Carlos Garcia; Jorge Restrepo; Evan Tanner
  34. Bank Profitability during Recessions By Wilko Bolt; Leo de Haan; Marco Hoeberichts; Maarten van Oordt; Job Swank
  35. Robustness and macroeconomic policy By Gadi Barlevy
  36. Monetization and Growth in Colonial New England, 1703-1749 By Peter L. Rousseau; Caleb Stroup
  37. The Chiang Mai Initiative Multilateralization: Origin, Development and Outlook By Sussangkarn, Chalongphob
  38. Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe By Nikolov, Pavel
  39. Conservative Stress Testing: The Role of Regular Verification By Adam Gersl; Jakub Seidler
  40. Persistence in US Interest Rate Spreads and the Expectations Hypothesis By Strohsal, Till; Weber, Enzo
  41. The Fixed Wage Puzzle: Why Profit Sharing Is So Hard to Implement By Jerger , Jürgen; Michaelis, Jochen

  1. By: Meixing DAI
    Abstract: In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank using the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if the access to liquidity is subject to non-price rationing, the central bank can use a narrow monetary aggregate and the discount interest rate as independent policy instruments to reinforce the credibility of its announcements and the role of inflation target as nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman’s k-percent money growth rule, generating dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined.
    Keywords: Imperfect financial markets, non-price rationing, inflation targeting, monetary targeting, macroeconomic stability, Friedman’s k-percent rule, feedback money growth rules, two-pillar strategy.
    JEL: E44 E52 E58
    Date: 2010
  2. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: The objective of this article is to determine if the Phillips curve is a relevant tool to conduct monetary policy in African countries wishing to adopt an inflation-targeting regime. I choose Nigeria as a case of study because it is in the early stage of the implementation of this regime. I estimate a medium-sized model for monetary policy analysis. The model reflects a synthesis between the New Keynesian and the Real Business Cycle (RBC) approaches. Then I estimate the model by using Bayesian econometric technique in order to overcome the shortage of data availability. The study concludes that there is evidence that central banks can control the inflation rate through a Phillips curve, a Taylor rule that includes the exchange rate, and the sterilization of the resources from oil exports. Nevertheless, there are limits to the stabilization program. The same evidence suggests that it is important to implement a credible inflation-targeting regime to reduce inflation gradually, instead of abrupt stabilization attempts with high costs in lost output.
    Keywords: Monetary policy, Phillips curve, inflation-target regime.
    JEL: E31 E52 E58 O23
    Date: 2010–06
  3. By: Ellen E. Meade; Daniel L. Thornton
    Abstract: The Phillips curve framework, which includes the output gap and natural rate hypothesis, plays a central role in the canonical macroeconomic model used in analyses of monetary policy. It is now well understood that real-time data must be used to evaluate historical monetary policy. We believe that it is equally important that macroeconomic models used to evaluate historical monetary policy reflect the framework that policymakers used to formulate that policy. To that end, we use the Federal Open Market Committee (FOMC) transcripts to examine the role that the Phillips curve framework played in Fed policymaking from 1982 through 2003. The FOMC?s transcripts allow us to trace the evolution in policymakers? discussion of the Phillips curve framework over time. Our analysis suggests that the Phillips curve was much less central to the formulation and implementation of US monetary policy than it is in models commonly used to evaluate that policy.
    Keywords: Phillips curve ; Monetary policy ; Federal Open Market Committee
    Date: 2010
  4. By: Salas, Jorge (Central Bank of Peru)
    Abstract: I describe a simple new-keynesian macroeconomic model for a small open and partially dollarized economy, which closely resembles the Quarterly Projection Model (QPM) developed at the Central Bank of Peru (Vega et al. (2009)). Then I use Bayesian techniques and quarterly data from Peru to estimate a large group of parameters. The empirical findings provide support for some of the parameters values imposed in the original QPM. In contrast, I find that another group of coefficients – e.g., the weights on the forward-looking components in the aggregate demand and the Phillips curve equations, among several others – should be modified to be more consistent with the data. Furthermore, the results validate the operation of different channels of monetary policy transmission, such as the traditional interest rate channel and the exchange rate channel. I also find evidence that in the most recent part of the sample (2004 onwards), the expectations channel has become more prominent, as implied by the estimated values of the forward-looking parameters in the aggregate demand and the Phillips curve equations.
    Keywords: Monetary Policy; Partial Dollarization; Bayesian Estimation
    JEL: E52 E58 F41 C11
    Date: 2010–07
  5. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques)
    Abstract: The literature on inflation targeting has up to now focused on its impact on macroeconomic performance or private expectations. In contrast, this paper proposes to investigate empirically whether the institutional adoption of this framework has changed the policy preferences of the central banker. We test the hypothesis that inflation targeting has constituted a switch towards a greater focus on inflation. We use three complementary methods: a structural break analysis, time-varying parameters and Markov-Switching VAR which make possible to estimate linear or nonlinear, and forward or backward looking specifications, to account for heteroskedasticity without having to assume a date break ex ante. Our main result is that inflation targeting has not led to a stronger response to inflation. We infer that the inflation targeting paradigm should not be confounded with the inflation targeting framework.
    Keywords: Monetary Policy; Inflation Targeting; Taylor Rule; Structural Break; Time-Varying coefficients, Markov-Switching VAR
    JEL: E52 E58
    Date: 2010–07
  6. By: Michelle L. Barnes; N. Aaron Pancost
    Abstract: Refet Gürkaynak, Brian Sack, and Eric Swanson (2005) provide empirical evidence that long forward nominal rates are overly sensitive to monetary policy shocks, and that this is consistent with a model where long-term inflation expectations are not anchored because agents must infer the central bank's inflation target from noisy interest rate movements. Using the same data, methodology, and model, we show that their empirical results are neither persistent nor robust to small changes in sample period or methodology. In addition, their theoretical results rely mainly on an ad hoc law of motion for the inflation target-imperfect information about the target plays only a small role in un-anchoring expectations in their model.
    Keywords: Interest rates ; Monetary policy
    Date: 2010
  7. By: Dale F. Gray (International Monetary Fund, Washington D.C.-USA); Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Leonardo Luna (Transelec, Chile); Jorge Restrepo (Banco Central de Chile)
    Abstract: This article analyzes whether market-based financial stability indicators (FSIs) should be included in monetary policy models and, if so, how.1 Since the economy and interest rates affect financial sector credit risk, and the financial sector affects the economy, this article builds a model of financial sector vulnerability and integrates it into a macroeconomic framework, typically used for monetary policy analysis. More specifically, should the central bank explicitly include the financial stability indicator in its monetary policy (interest rate) reaction function? This is the most important question to be answered in this article. The alternative would be to react only indirectly to financial risk by reacting to inflation and gross domestic product (GDP) gaps, since they already include the effect that financial factors have on the economy.
    Keywords: financial sector risk, monetary policy models
    JEL: E32 E61 E62 E63 F41
    Date: 2009–12
  8. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Scott Roger (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on activity.
    Keywords: Inflation targeting, monetary policy, exchange rate
    JEL: E42 E52 F41
    Date: 2009–12
  9. By: Jerger, Jürgen; Röhe, Oke
    Abstract: In this paper, we estimate a New Keynesian DSGE model developed by Ireland (2003) on French, German and Spanish data with the aim to explore the macroeconomic consequences of EMU. In order to validate the results from the DSGE model, we amend this analysis by stability tests of monetary policy reaction functions for these countries. We find that (a) the DSGE structure is well suited for the characterization of key macroeconomic features of the three economies; (b) significant efficiency gains were realized in terms of lower adjustment cost of prices and the capital stock; (c) the behavior of monetary policy did not change in Germany, unlike in France and Spain. Specifically, the impact of inflation on interest rates increased considerably in the two latter countries.
    Keywords: DSGE; Monetary Policy; EMU
    JEL: E31 E32 E52
    Date: 2009–10–01
  10. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile)
    Abstract: We estimate how the monetary policy works in small open economies with inflation target. To do so, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of representative small open economies (including Australia, Chile, Colombia, Peru and New Zealand) presents strong differences due to shocks from the international financial markets (risk premium shocks, mainly) that explain mostly the variability of the real exchange rate, which has important reallocation effects in the short run. By using the allocations of the Ramsey problem as benchmark, this article shows that if the central banks in small open economies want to reduce the observed volatility of the inflation rate and the output gap, more exchange rate intervention is necessary in order to reduce the volatility produced by risk premium shocks.
    Keywords: Small open economies economy models; monetary policy rules; exchange rates; Bayesian econometrics, Risk premium shocks, Ramsey problem.
    JEL: C32 E52 F41
    Date: 2010–04
  11. By: Lucotte, Yannick
    Abstract: Inflation targeting is a monetary policy framework which was adopted by several emerging countries over the last decade. Previous empirical studies suggest that inflation targeting has significant effects on either inflation or inflation variability in emerging targeting countries. But, by reinforcing the disinflation process and so, by reducing drastically seigniorage revenue, the adoption of this monetary policy framework could also affect the design of fiscal policy. In a recent paper, Minea and Villieu (2009a) show theoretically that inflation targeting provides an incentive for governments to improve institutional quality in order to enhance tax revenue performance. In this paper, we test this theoretical prediction by investigating whether the adoption of inflation targeting affects the fiscal effort in emerging markets economies. Using propensity score matching methodology, we evaluate the “treatment effect” of inflation targeting on fiscal mobilization in thirteen emerging countries that have adopted this monetary policy framework by the end of 2004. Our results show that, on average, inflation targeting has a significant positive effect on public revenue collection.
    Keywords: Inflation targeting; Public revenue; Treatment effect; Propensity score matching; Emerging countries.
    JEL: E62 E58 H2
    Date: 2010–07–13
  12. By: Efraim Benmelech; Nittai K. Bergman
    Abstract: This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term ‘credit traps’ to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices.
    JEL: E44 E51 E58 G32 G33
    Date: 2010–07
  13. By: Battilossi, Stefano; Escario, Regina; Foreman-Peck, James (Cardiff Business School)
    Abstract: Was Spanish fiscal policy destabilizing? We estimate policy reaction functions and test the impact of fiscal shocks on growth volatility over the period 1950-1998. We find that a transition from pro-cyclical to countercyclical fiscal policy occurred in the late years of the Franco regime, contributing to the stabilization of the growth pattern. The timing of the shift, between the late 1960s and early 1970s, was not determined by a single policy change, but rather by gradual pressure from economic liberalization, the external constraint imposed by a fixed exchange rate regime and the modernization of fiscal policy instruments. The aggressiveness of fiscal shocks also decreased over time, thus contributing to the progressive stabilization of output growth. There appears to be little necessity to appeal to a 'Great Moderation' of monetary policy to understand the greater stability of the Spanish economy from the 1980s
    Keywords: fiscal reaction function; fiscal shocks; SVAR; growth volatility
    JEL: E32 E62 N14
    Date: 2010–07
  14. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Virginia Simoncelli (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: This work develops an empirical study of the credit channel in Chile. We found that the interest rate has a positive effect in the long run credit supply. Nevertheless, the disequilibrium in the short run credit supply has a significant negative effect on economic activity. This is most marked when the central bank is carried out a contractive monetary policy. Thus, all this evidence supports the fact that the central bank should implement a monetary policy beyond the control of the interest rate i.e. non conventional monetary policies to affect directly the liquidity restriction on the banking system to avoid a collapse of the economy in crisis times.
    Keywords: Credit Channel; Cointegration; Vector Error Correction Model (VECM).
    JEL: E44 E58 G21
    Date: 2009–12
  15. By: Wilhem Hankel; Andreas Hauskrecht (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Bryan Stuart
    Abstract: In contrast to Robert Mundell's Optimum Currency Area theory and his recommendation of forming a monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries - most of all Germany, but also the Netherlands and Finland - increased productivity growth while limiting nominal wage growth. However, Mediterranean countries - particularly Greece, but also Spain, Portugal, and Italy - have dramatically lost international competitiveness. Although the overall balance of payments for the Euro area at large is almost balanced, internal disequilibria are skyrocketing and default risk premiums and tensions within the Euro area are rising, thus jeopardizing the stability of the monetary union. The findings confirm that a common currency without fiscal union is inherently unstable. The international financial and economic crisis has merely triggered events which highlight this instability. The paper discusses three possible scenarios for the future of the Euro: a laissez faire approach, a bailout, and finally an exit strategy for the Mediterranean countries, or an organized exit by a group of core countries led by Germany, forming their own smaller monetary union.
    Keywords: Optimum currency areas, monetary union, risk spreads, central banking, exchange rates, fiscal policy
    JEL: E42 E63 F15 F33 F34
    Date: 2010–05
  16. By: Barattieri, Alessandro (Boston College); Basu, Susanto (Boston College); Gottschalk, Peter T. (Boston College)
    Abstract: Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population. The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.
    Keywords: wage stickiness, micro-level evidence, measurement error
    JEL: E24 E32 J30
    Date: 2010–06
  17. By: Ippei Fujiwara; Kozo Ueda
    Abstract: We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.
    Keywords: International liquidity ; Liquidity (Economics) ; Fiscal policy ; Monetary policy
    Date: 2010
  18. By: Mohsin S. Khan (Peterson Institute for International Economics)
    Abstract: Since the 1990s there have been a number of major changes in the design and conduct of monetary policy. In a globalized environment, there is less time to adjust to shocks and greater need to achieve closer convergence of economic performance among trading partners. As a result, a number of developing countries have adopted exchange rate regimes with more flexibility, and thereby greater scope for monetary policy. Notable examples include a number of sub-Saharan African countries moving from fixed exchange-rate regimes to more flexible regimes and the adoption of formal or informal inflation targeting regimes by some of these countries. These changes have triggered considerable debate on how monetary policy should be conducted and the effects it has on the real economy. Mohsin Khan discusses the conventional objectives, targets, and instruments of monetary policy, including an analysis of the monetary transmission process. This paper examines the problems of dynamic inconsistency and inflationary bias, where governments deviate from their stated or target inflation level in order to obtain short-run output gains. Most economists now agree that any rules-based regime permits a margin for discretion, and they reject the idea that rules and discretion are mutually exclusive. As policymakers in many countries throughout the world have gravitated toward an approach based more on rules than on full discretion, a key issue is choosing an appropriate policy target, or nominal anchor. Khan discusses nominal anchors and current monetary frameworks before moving on to analyze the output effects of monetary policy. He looks at the relationship between the growth of GDP and different monetary aggregates in 20 sub-Saharan African economies and finds empirical support for the hypothesis that credit growth is more closely linked than is money growth to the growth of real GDP in these countries.
    Keywords: Monetary policy, Africa
    JEL: E52 N17
    Date: 2010–07
  19. By: Ester Faia; Eleni Iliopulos
    Abstract: How should monetary policy be optimally designed in an environment with high degrees of financial globalization? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes (floating versus pegged) shows that the impossible trinity is reversed: a higher degree of financial globalization, by inducing more persistent and volatile current account deficits, calls for exchange rate stabilization. Finally, we study the design of optimal (Ramsey) monetary policy. In this environment the policy maker faces the additional goal of stabilizing exchange rate movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires deviations from price stability and calls for exchange rate stabilization.
    Keywords: Monetary policy ; Globalization ; International finance ; Foreign exchange rates ; Financial stability ; International trade
    Date: 2010
  20. By: Tarishi Matsuoka (Graduate School of Economics, Kyoto University)
    Abstract: This paper presents a monetary model that links interbank markets to capital accumulation and growth. The purpose of this paper is to study how interbank markets affect real economic activities, and to find the monetary policy implications. The model shows that, in a stationary equilibrium, the economy with interbank markets attains higher capital stock than the economy without the markets, because of precautionary money savings. In addition, I find that inflationary policy is more desirable in the economy without well-functioning interbank markets.
    Keywords: overlapping generations, random relocation, inflation, interbank markets
    JEL: E42 E51 G21
    Date: 2010–07
  21. By: Mario J. Crucini; Mototsugu Shintani
    Abstract: We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure.
    Keywords: Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior
    Date: 2010
  22. By: Giovanni Olivei; Silvana Tenreyro
    Abstract: Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto presents the best-known case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of the calendar year. In contrast, wage agreements in Germany are well spread within the year, implying a relatively uniform degree of rigidity. We exploit variation in the timing of wage setting decisions within the year in Japan, the United States, Germany, the United Kingdom, and France to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage rigidity plays a key role in the transmission of monetary policy.
    Keywords: Monetary policy ; Wages
    Date: 2010
  23. By: Jean-Paul Fitoussi (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper argues that although the crisis may have emerged in the financial sector, its roots are much deeper and lie in a structural change in income distribution that has been going on for the past three decades. The widespread increase of inequality depressed aggregate demand and prompted monetary policy to react by maintaining a low level of interest rate which itself allowed private debt to increase beyond sustainable levels. On the other hand the search for high-return investment by those who benefited from the increase in inequalities led to the emergence of bubbles. Net wealth became overvalued, and high asset prices gave the false impression that high levels of debt were sustainable. The crisis revealed itself when the bubbles exploded, and net wealth returned to normal level. We further argue that how the trend of increasing inequality interacted differently with policies and institutions, to yield radically different outcomes in the US and in the large European Union countries before the onset of the crisis.
    Keywords: Financial crisis, income inequality, US and EU comparison, household debt, aggregate demand
    JEL: E21 E44 E63 F41
    Date: 2010–07
  24. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: The national economy is often described as having a business cycle over which aggregate output enters and exits distinct expansion and recession phases. Analogously, national employment cycles in and out of its own expansion and contraction phases, which are closely related to the business cycle. This paper estimates city-level employment cycles for 58 large U.S. cities and documents the substantial cross-city variation in the timing, lengths, and frequencies of their employment contractions. It also shows how the spread of city-level contractions associated with U.S. recessions has tended to follow recession-specific geographic patterns. In addition, cities within the same state or region have tended to have similar employment cycles. There is no evidence, however, that similarities in employment cycles are related to similarities in industry mix. This suggests that the U.S. employment and business cycles has a spatial dimension that is independent of broad industry-level fluctuations.
    Keywords: Employment (Economic theory) ; Business cycles
    Date: 2010
  25. By: Weber, Enzo; Wolters, Jürgen
    Abstract: We document two stylised facts of US short- and long-term interest rate data incompatible with the pure expectations hypothesis: Relatively slow adjustment to long-run relations and low contemporaneous correlation. We construct a small structural model which features three types of randomness: While a persistent monetary policy shock implies immediate identical reactions through the term structure, both a transitory policy shock and an autocorrelated risk premium allow for the sustained decoupling observed in the data. Indeed, we find important impacts and persistence of risk premia and a decomposition of policy shocks judging a larger part as transitory the longer the investment horizon.
    Keywords: Expectations Hypothesis; Risk Premium; Policy Reaction Function; Persistence; Transitory Shocks
    JEL: E43 C32
    Date: 2010–03–16
  26. By: Federico Mandelman; Andrei Zlate
    Abstract: We use data on border enforcement and macroeconomic indicators from the U.S. and Mexico to estimate a two-country business cycle model of labor migration and remittances. The model matches the cyclical dynamics of labor migration to the U.S. and documents how remittances to Mexico serve an insurance role to smooth consumption across the border. During expansions in the destination economy, immigration increases with the expected stream of future wage gains, but it is dampened by a sunk migration cost that reflects the intensity of border enforcement. During recessions, established migrants are deterred from returning to their country of origin, which places an additional downward pressure on the wage of native unskilled workers. Thus, migration barriers reduce the ability of the stock of immigrant labor to adjust during the cycle, enhancing the volatility of unskilled wages and remittances. We quantify the welfare implications of various immigration policies for the destination economy.
    Date: 2010
  27. By: James D. Hamilton
    Abstract: This paper reviews some of the literature on the macroeconomic effects of oil price shocks with a particular focus on possible nonlinearities in the relation and recent new results obtained by Kilian and Vigfusson (2009).
    JEL: E32 Q43
    Date: 2010–07
  28. By: Gilbert Koenig; Irem Zeyneloglu
    Abstract: The paper offers a survey of recent research on fiscal policy in both deterministic and stochastic models of the New Open Economy Macroeconomics (NOEM) initiated by Obstfeld and Rogoff (1995, 2002b). The survey includes a comparison of the implications of the deterministic benchmark model to the empirical evidence obtained in recent studies. It provides a detailed discussion of the recent extensions induced by the gap between theoretical and empirical implications. These extensions revise the traditionally studied aspects of fiscal issues such as the transmission channels of fiscal policy by introducing production specialization at the international level or by diversifying the pricing decisions of firms. They also cover current economic issues such as the effect of financial globalization on fiscal policy efficiency and the implication of a reduction in public employment in order to cut taxes. After presenting the basic features of a benchmark stochastic NOEM model for fiscal policy, the paper discusses the recent developments the gains from international fiscal policy cooperation with respect to gains from fiscal stabilization.
    Keywords: New Open Economy Macroeconomics, fiscal policy, stochastic and deterministic general equilibrium models.
    JEL: E62 E63 F41 F42
    Date: 2010
  29. By: Weber, Enzo; Wolters, Jürgen
    Abstract: The expectations hypothesis of the term structure (EHT) implies cointegration between interest rates of different maturities and predicts certain values for adjustment speed. We estimate reduced-form vector error correction models of the US term structure. These are derived from a structural model combining the EHT, autocorrelated risk premia, interest rate smoothing and monetary policy feedback, which is able to capture a wide range of empirical outcomes. We explicitly test the necessary preconditions for the validity of the theoretical model. Premia persistence rises with longer-rate maturity, while the influence of the according spreads in the central bank reaction function diminishes.
    Keywords: Expectations Hypothesis; Risk Premium; Policy Reaction Function
    JEL: E43
    Date: 2009–10–01
  30. By: Christophe Bellégo; Laurent Ferrara
    Abstract: Dimension reduction of large data sets has been recently the topic of interest of many research papers dealing with macroeconomic modelling. Especially dynamic factor models have been proved to be useful for GDP nowcasting or short-term forecasting. In this paper, we put forward an innovative factor-augmented probit model in order to analyze the business cycle. Factor estimation is carried either by standard statistical methods or by allowing a richer dynamic behaviour. An application is provided on euro area data in order to point out the ability of the model to detect recessions over the period 1974-2008.
    Date: 2010
  31. By: Bezemer, Dirk J; Gardiner, Geoffrey
    Abstract: This paper discusses recent UK monetary policies as instances of Galbraith’s ‘innocent frauds’, including the idea that money is a thing rather than a relationship, the fallacy of composition that what is possible for one bank is possible for all banks, and the belief that the money supply can be controlled by reserves management. The origins of the idea of QE, and its defense when it was applied in Britain, are analysed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE ‘worked’ either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK.
    Keywords: quantitative easing; UK; innocent frauds; accounting
    JEL: E58 E52
    Date: 2010–07
  32. By: Jean Tirole (Toulouse School of Economics)
    Abstract: The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies.
    Keywords: Liquidity, Contagion, Bailouts, Regulation
    JEL: E44 E52 G28
    Date: 2010–06
  33. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile); Evan Tanner (IMF Institute, International Monetary Fund, Washington D.C.-USA)
    Abstract: This paper compares welfare levels under alternative fiscal rules for small open, commodity exporter, economies whose fiscal income varies with the world commodity price (in a dynamic, stochastic, and general equilibrium setting). Between the extremes of a procyclical balanced budget policy and an acyclical spending rule, there is a continuum of rules. Thus, the best degree of spending stabilization is found. The acylical rule benefits households that do not enjoy access to capital markets by providing a financial cushion that they themselves cannot provide, boosting their mean consumption. However, households that enjoy full access to capital markets suffer under this rule, since the government reduces their role in smoothing consumption and accumulating assets.
    Keywords: Fiscal rules, welfare, small open economy, rule-of-thumb consumers
    JEL: E32 E61 E62 E63 F41
    Date: 2009–12
  34. By: Wilko Bolt; Leo de Haan; Marco Hoeberichts; Maarten van Oordt; Job Swank
    Abstract: This paper estimates the relation between bank profitability and economic downturns using a theoretical model that takes into account the bank’s lending history as well as amortization and losses on outstanding loans. We focus on total bank profits and its components: net interest income, other income, and net provisioning plus other costs. Using both aggregate and individual bank panel datasets, our results confirm that pro-cyclicality of bank profits is stronger for deep recessions than during mild ones. Loan-losses are found to be the main driver of this nonlinearity. We find evidence that each percent contraction of real GDP during severe recessions leads to a 0.24 percent decrease in return on bank assets.
    Keywords: Bank profitability; Business cycle
    JEL: E32 G21
    Date: 2010–07
  35. By: Gadi Barlevy
    Abstract: This paper considers the design of macroeconomic policies in the face of uncertainty. In recent years, several economists have advocated that when policymakers are uncertain about the environment they face and find it difficult to assign precise probabilities to the alternative scenarios that may characterize this environment, they should design policies to be robust in the sense that they minimize the worstcase loss these policies could ever impose. I review and evaluate the objections cited by critics of this approach. I further argue that, contrary to what some have inferred, concern about worst-case scenarios does not always lead to policies that respond more aggressively to incoming news than the optimal policy would respond absent any uncertainty.
    Date: 2010
  36. By: Peter L. Rousseau; Caleb Stroup
    Abstract: We examine econometrically the real effects of paper money's introduction into colonial New England over the 1703-1749 period. Departing from earlier analyses that focus primarily on the depreciation of paper money in the region, we show that expansion of the money stock promoted growth in modern sector activity and not the other way around. We also find that bills emitted for seigniorage purposes had a positive effect on the modern sector, while bills issued through loan banks did not.
    JEL: E42 N11
    Date: 2010–07
  37. By: Sussangkarn, Chalongphob (Asian Development Bank Institute)
    Abstract: This paper discusses the Chiang Mai Initiative Multilateralization (CMIM); its origin, development and future outlook. It puts forward a number of proposals to make the liquidity support role of the CMIM more effective. It is further argued that the CMIM can bring about major changes to the policy institutional infrastructure of East Asia, particularly through the establishment of an Independent Surveillance Unit (ISU). The ISU can provide technical and secretariat support to financial cooperation processes in the region, which have thus far been driven by officials on a part-time basis. Consolidation of the main financial forums in the region is also proposed, specifically the Finance Minister Process and the Central Bank Process. Membership of these two processes should be expanded and unified, with the ISU providing technical and secretariat support. It is argued that regular policy meetings can be institutionalized and that this could enhance the role of East Asia in the global financial arena, whilst facilitating policy cooperation, with important regional and global implications.
    Keywords: asian financial cooperation; asian policy cooperation; asian institutional infrastructure
    JEL: E44 F33 F36 F42 G15
    Date: 2010–07–12
  38. By: Nikolov, Pavel
    Abstract: This paper examines the relationship between adverse shocks to the banking system and their effect on the general economy in Europe. This topic was brought to the spotlight during the 2007-2009 financial and economic crisis, when the relatively healthy, at that time, European economy was severely hit by the spread of the US sub-prime mortgage problems. This interbanking contagion may have been one of the main, if not the primary, reasons why the region entered into a recession during the period. If significant evidence can be found to support this theory, it will make the need for more regulations on the financial system and stricter capital requirements even more apparent. The research includes comprehensive literature survey on past and recent financial crises, procyclical banking practices and their impact on the economy. Then it goes on to developing a theoretical model of the transmission of negative economic shocks from the financial system to the rest of the economy. The theoretical model is empirically tested on a range of banking specific and macroeconomic variables. The results show that a loss of confidence in the financial system and banking losses are followed by a significant decrease in the new loans to non-financial companies and subsequent economic contraction. Moreover, countries with better capitalized banks experienced smaller declines during the crisis and in general Tier 1 capital is correlated positively with economic growth.
    Keywords: economic shocks; financial crisis; banking system stability; procyclical effects
    JEL: E0 E32 E5
    Date: 2010–06–11
  39. By: Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jakub Seidler (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper focuses on how to calibrate models used to stress test the most important risks in the banking system. Based on the results of a verification of the Czech National Bank’s stress testing methodology, the paper argues that stress tests should be calibrated conservatively and slightly overestimate the risks. However, to ensure that the stress test framework is conservative enough over time, a verification, i.e. comparison of the actual values of key banking sector variables – in particular the capital adequacy ratio – with predictions generated by the stress-testing models should become a standard part of the stress-testing framework.
    Keywords: stress testing; credit risk; bank capital
    JEL: E44 E47 G21
    Date: 2010–07
  40. By: Strohsal, Till; Weber, Enzo
    Abstract: The present work provides an economic explanation of a well-known (seeming) violation of the expectations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We derive from EHT that the nonstationarity stems from the holding premium, which is hence cointegrated with the spread. We model the premium as being proportional to the IGARCH variance of excess returns and further propose a cointegration test. Simulating the distribution of the test statistic we actually find cointegration relations between premia and spreads in US data. The EHT appears to perform much better than previously thought.
    Keywords: Expectations Hypothesis; Holding Premium; GARCH; Persistence; Cointegration
    JEL: E43 C32
    Date: 2010–05–31
  41. By: Jerger , Jürgen; Michaelis, Jochen
    Abstract: It is well known that profit sharing arrangements Pareto-dominate fixed wage contracts. Share agreements are (far) less than ubiquitous, however. This paper offers a solution of this â€fixed wage puzzle“ by adopting a perspective of bounded rationality. We show that share arrangements that fulfill â€plausible“ constraints are not generally acceptable to both firms and unions.
    Keywords: Profit Sharing; Share Economy; Remuneration Systems
    JEL: E24 J33
    Date: 2010–04

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