nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒08‒28
25 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Price Indices for Targeting Inflation under Incomplete Markets By Anand, Rahul; Prasad, Eswar
  2. Bank heterogeneity and monetary policy transmission By Sophocles N. Brissimis; Manthos D. Delis
  3. China’s monetary policy and the exchange rate By Mehrotra, Aaron; Sánchez-Fung, José R.
  4. Does the euro dominate Central and Eastern European money markets? By Mario Cerrato; Alexander Kadow; Ronald MacDonald
  5. The Cyclical Volatility of Labor Markets under Frictional Financial Markets By Petrosky-Nadeau, Nicolas; Wasmer, Etienne
  6. The Macroeconomic Effects of Fiscal Policy Shocks in Algeria: An Empirical Study (in Arabic) By Abderrahim Chibi; Mohamed Benbouziane; Sidi Mohamed Chekouri
  7. Russian fiscal policy during the financial crisis By Ponomarenko, Alexey A.; Vlasov, Sergey A.
  8. Does Downward Nominal Wage Rigidity Dampen Wage Increases? By Stüber, Heiko; Beissinger, Thomas
  9. Fiscal inertia, donor credibility, and the monetary management of aid surges.. By Buffie, Edward F.; O'Connell, Stephen A.; Adam, Christopher S.
  10. Does downward nominal wage rigidity dampen wage increases? By Stüber, Heiko; Beissinger, Thomas
  11. Liquidity Transformation and Bank Capital Requirements By Hajime Tomura
  12. Internationalised Production in a Small Open Economy By Aurelien Eyquen; Gunes Kamber
  13. An Assessment of the Consistency of ECB Communication using Wordscores By David-Jan Jansen; Jakob de Haan
  14. Fifty Years of Fiscal Planning and Implementation in the Netherlands By Roel Beetsma; Massimo Giuliodori; Mark Walschot; Peter Wierts
  15. The Impact of Oil Prices on the Exchange Rate and Economic Growth in Norway By Al-mulali, Usama
  16. Makroökonomische Rahmenbedingungen und die Einkommensverteilung: Welchen Einfluss hat die Finanzkrise? By Berthold, Norbert; Brunner, Alexander; Zenzen, Jupp
  17. Government spending shocks and rule-of-thumb consumers: The role of steady state inequality By Gisle James Natvik
  18. Structural Policy Challenges in Slovakia By Martin Filko; Stefan Kiss; Ludovit Odor; Matej Siskovic
  19. Assortative Mating and Female Labor Supply By Bredemeier, Christian; Juessen, Falko
  20. Laffer Strikes Again: Dynamic Scoring of Capital Taxes By Strulik, Holger; Trimborn, Timo
  21. Proliferation of risk and policy responses in the EU financial markets By Lucjan T. Orlowski
  22. Not Your Grandfather’s IMF: Global Crisis, ‘Productive Incoherence’ a nd Developmental Policy Space (significantly revised) By Ilene Grabel
  23. The Role of the State in Managing and Forestalling Systemic Financial Crises: Some Issues and Perspectives By Adams, Charles
  24. Understanding and Forecasting Aggregate and Disaggregate Price Dynamics By D'Agostino, Antonello; Bermingham, Colin
  25. "What Do Banks Do? What Should Banks Do?" By L. Randall Wray

  1. By: Anand, Rahul (International Monetary Fund); Prasad, Eswar (Cornell University)
    Abstract: In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. In this paper, we develop a two-sector two-good closed economy new Keynesian model to study the optimal choice of price index in markets with financial frictions. Financial frictions that limit credit-constrained consumers’ access to financial markets make demand insensitive to interest rate fluctuations. The demand of credit-constrained consumers is determined by their real wage, which depends on prices in the flexible price sector. Thus, prices in the flexible price sector influence aggregate demand and, for monetary policy to have its desired effect, the central bank has to stabilize price movements in the flexible price sector. Also, in the presence of financial frictions, stabilizing core inflation is no longer equivalent to stabilizing output fluctuations. Our analysis suggests that in the presence of financial frictions a welfare-maximizing central bank should adopt flexible headline inflation targeting – a target based on headline rather than core inflation, and with some weight on the output gap. We discuss why these results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit-constrained.
    Keywords: inflation targeting, monetary policy framework, core inflation, headline inflation, financial frictions, liquidity constraints
    JEL: E31 E52 E61
    Date: 2010–08
  2. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department, 21 E. Venizelos Avenue, Athens 10250, Greece.); Manthos D. Delis (University of Ioannina, Department of Economics, Ioannina 45110, Greece.)
    Abstract: Heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress. JEL Classification: E44, E52, G21, C14.
    Keywords: Monetary policy, Bank heterogeneity, Risk-taking, Bank performance.
    Date: 2010–08
  3. By: Mehrotra, Aaron (BOFIT); Sánchez-Fung, José R. (BOFIT)
    Abstract: The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success.
    Keywords: exchange rate; hybrid McCallum-Taylor monetary policy reaction function; SVAR; survey-based inflation expectations; China
    JEL: E42 E52
    Date: 2010–07–20
  4. By: Mario Cerrato; Alexander Kadow; Ronald MacDonald
    Abstract: The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this "Euro Dominance Hypothesis (EDH)" in a novel way using a global vector autoregressive (GVAR) approach that combines country-specic error correction models in a global system. We find that euro area monetary policies are transmitted into CEE interest rates which provides evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide empirical evidence regarding the eects of the recent nancial crisis on monetary integration in Europe.
    Keywords: German Dominance Hypothesis, Global VAR, Central and Eastern Europe, monetary integration, European integration.
    JEL: E58 F36 G15
    Date: 2010–06
  5. By: Petrosky-Nadeau, Nicolas (Carnegie Mellon University); Wasmer, Etienne (Sciences Po, Paris)
    Abstract: Financial frictions are known to raise the volatility of economies to shocks (e.g. Bernanke and Gertler 1989). We follow this line of research to the labor literature concerned by the volatility of labor market outcomes to productivity shocks initiated by Shimer (2005): in an economy with search on credit and labor markets, a financial multiplier raises the elasticity of labor market tightness to productivity shocks. This multiplier increases with total financial costs and is minimized under a credit market Hosios-Pissarides rule. Using a flexible calibration method based on small perturbations, we find the parameter values to match the US share of the financial sector. Those values are far away from Hosios and lead to a financial accelerator of about 3.6 (exogenous wages) to 4.5 (endogenous wages). Both match Shimer (2005)'s elasticity of labor market tightness to productivity shocks. Financial frictions are thus an alternative to the "small labor surplus" assumption in Hagedorn and Manovskii (2008): we keep the value of wages over productivity below 0.78. We conclude that financial frictions are a good candidate to solve the volatility puzzle and rejoin Pissarides (2009) in arguing that hiring costs must be partly non-proportional to congestion in the labor market, which is the case of financial costs.
    Keywords: search, financial imperfections, Shimer puzzle, macroeconomic volatility
    JEL: E44 J60
    Date: 2010–08
  6. By: Abderrahim Chibi (Abou-Bakr Belqayed University, Algeria); Mohamed Benbouziane; Sidi Mohamed Chekouri
    Abstract: This paper focuses on the macroeconomic effects of fiscal policy shocks in Algeria using a Structural Vector Autoregression (SVAR) approach. We use annual data covering 1965-2007 period, the results of the study were as follows: A positive structural shock in the government expenditure will have a positive impact on the real GDP in the short term with very small multiplier, but in the medium and long term have a negative effect on real GDP; lead to important “crowding-out” effects, by impacting negatively on private investment; and have a persistent and positive effect on the price level, consumption and the average cost of financing. A positive structural shock in public revenue would have a positive impact on the size of government spending, the same effect by this shock to real GDP with very small multiplier; have a persistent and negative effect on the price level and the average cost of financing in the medium and long term. For the response of the components of real GDP, there is a positive influence on both the consumption and private investment. These results show that the expansion fiscal policies in Algeria have non-Keynesian effects result of generate crowding-out” effects, and this specification engender the relative ability to influence economic variables as we explicated in Variance decomposition, and therefore there is relative to the effectiveness of such policies in achieving the desired economic goals.
    Date: 2010–08
  7. By: Ponomarenko, Alexey A. (BOFIT); Vlasov, Sergey A. (BOFIT)
    Abstract: This study examines the expanding role of fiscal policy at a time of financial crisis. It analyses the stimulative fiscal measures of the Russian government in 2008-2010 and compares these with simi-lar actions taken in other countries. The risks and limitations associated with the development and implementation of the measures are analyzed. The macroeconomic effects of the fiscal policy measures are estimated using a structural vector autoregressive (SVAR) model, the fiscal multip-liers are calculated, and factors influencing multiplier size are examined.
    Keywords: fiscal stimulus; fiscal sustainability; SVAR; fiscal multiplier; financial crisis; Russia
    JEL: E62 H30 H60
    Date: 2010–07–22
  8. By: Stüber, Heiko (IAB, Nürnberg); Beissinger, Thomas (University of Hohenheim)
    Abstract: Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a data set comprising more than 169 million wage changes. We find evidence for a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets.
    Keywords: downward nominal wage rigidity, wage stickiness, wage compression, unconditional quantile regression
    JEL: E24 E31 J31
    Date: 2010–08
  9. By: Buffie, Edward F.; O'Connell, Stephen A.; Adam, Christopher S.
    Abstract: Donors cannot pre-commit to support scaled-up public spending programs on a continuing basis, nor can governments credibly commit to curtail expenditure rapidly in the event that aid revenues contract. An aid boom may therefore be accompanied by a credibility problem. When this is the case, the absorb-and-spend strategy recommended by the IMF leads to capital flight, higher inflation, and large current account surpluses inclusive of aid. The right policy package combines a critical minimum degree of fiscal restraint with reverse sterilization.
    JEL: E63 E31 F41
    Date: 2010–11
  10. By: Stüber, Heiko (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Beissinger, Thomas
    Abstract: "Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a data set comprising more than 169 million wage changes. We find evidence for a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets." (author's abstract, IAB-Doku) ((en))
    JEL: E24 E31 J31
    Date: 2010–08–18
  11. By: Hajime Tomura
    Abstract: This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected.
    Keywords: Financial stability; Financial system regulation and policies
    JEL: E44 G21 D82
    Date: 2010
  12. By: Aurelien Eyquen; Gunes Kamber (Reserve Bank of New Zealand)
    Abstract: We show that internationalised production, modelled as trade in intermediate goods, brings the dynamics of a small open economy closer to that observed in the data. We build a stylized new-Keynesian small open economy model and we show that when production is internationalised, movements of international relative prices affect the economy through an additional channel, denoted as the “cost channel”. Both qualitatively and quantitatively, this channel (i) increases the share of output variance explained by foreign shocks, consistent with empirical evidence, (ii) implies that the exchange rate pass-through is closer to estimated values, and (iii) increases the international correlation of output relative to that of consumption.
    JEL: E30 F41
    Date: 2010–04
  13. By: David-Jan Jansen; Jakob de Haan
    Abstract: Wordscores uses word frequencies to extract information from texts with known policy positions. Wordscores uses this information to estimate the unknown policy positions of so - called virgin texts. We apply Wordscores to the ECB President’s introductory statements following Governing Council meetings. We code policy positions of statements from the first three years of the Economic and Monetary Union (our reference texts) using various indicators of ECB communication as well as actual rate decisions. Treating introductory statements from 2002 to July 2009 as virgin texts, Wordscores is able to present a fairly accurate picture of ECB policy decisions during that period. The results also suggest changes in ECB communications occurred: using more introductory statements as reference texts improves the match between estimated positions and actual policy. Overall, we would characterize ECB communication during the first decade of EMU as internally consistent. At the same time, communication was flexible enough to adapt to changed circumstances.
    Keywords: central bank communication; ECB; consistency; content analysis
    JEL: E52 E58
    Date: 2010–08
  14. By: Roel Beetsma; Massimo Giuliodori; Mark Walschot; Peter Wierts
    Abstract: Using real-time data from the annual budget over the period 1958-2009, we explore the planning and realization of fiscal policy in the Netherlands . Our key findings are the following. First, planned surpluses are on average unbiased, although they are overoptimistic during the first half of the sample and too pessimistic during the second half of the sample. The latter is the result of cautious real-time revenue estimates by the Dutch Ministry of Finance during this period. Second, real growth projections by the official Dutch forecasting agency are unbiased. This contrasts with the experience of the EU as a whole where biased growth projections represent an important source of fiscal slippage. Third, general economic conditions and the state of the public finances are important determinants of both fiscal plans and their implementation. Fourth, this is also the case for political and institutional factors. Expenditure overruns are partly related to political factors , whereas cautious revenue forecasts relate to the institutional setting. In particular, the most recent regime of the “trendbased budget policy” has worked well for fiscal discipline in the Netherlands
    JEL: E6 H6
    Date: 2010–08
  15. By: Al-mulali, Usama
    Abstract: This study examines the impact of oil shocks on the real exchange rate and the gross domestic product in Norway using time series data from 1975 to 2008. The vector autoregressive has been implemented using the cointegration and the Granger causality test. The results of the study show that the increase in oil price is the reason behind Norway’s GDP increase and the increase of its competitiveness to trade by its real exchange rate depreciation. So it seems that oil price in this case is a blessing due to two reasons. First Norway uses the floating exchange rate regime which is a good shock absorber, increases the freedom of the monetary authority, and makes the adjustment smoother and less expensive. The second reason is that Norway has more flexible labor markets, improvements in monetary policy and smaller share of oil in production.
    Keywords: Oil Price, Real Exchange Rate,Economic Growth,VAR
    JEL: E30 F31 Q43
    Date: 2010–08–03
  16. By: Berthold, Norbert; Brunner, Alexander; Zenzen, Jupp
    Abstract: Ziel des vorliegenden Papiers ist es, den Einfluss makroökonomischer Größen auf die Einkommensungleichheit zu untersuchen. Auf Basis des sozio-ökonomischen Panels (SOEP) analysieren wir erstmalig diesen Zusammenhang für Deutschland. Dabei ist zu beobachten, dass die makroökonomischen Größen nur einen geringen Einfluss haben und ein positiver Zeittrend dominiert. Die Schätzungen eines Fehlerkorrekturmodells ermöglichen jedoch vorsichtige Schlüsse über die Auswirkung der Finanzkrise auf die Ungleichheit. Unter der Annahme, dass sich diese als (negativer) exogener Wachstumsschock manifestiert, ist zu erwarten, dass die Finanzkrise eine dämpfende Wirkung auf die Einkommensungleichheit in Deutschland haben wird. -- In this paper we investigate the impact of macroeconomic variables on income inequality. Using data from the German socio-economic panel (SOEP) we make a we make a first attempt to measure these effects for Germany. We find only little impact of the macroeconomy on inequality. In fact, the dominating driver of inequality seems to be a time trend. Nevertheless, estimating a vector-error-correction-model allows us to gauge the effect the financial crisis has on inequality. Assuming that the crisis is best described as an exogenous growth shock we find that income inequality in Germany is very likely to be mitigated.
    Keywords: Ungleichheit,Makroökonomie,Finanzkrise,Deutschland,Inequality,Macroeconomy,Financial Crisis,Germany
    Date: 2010
  17. By: Gisle James Natvik (Norges Bank (Central Bank of Norway))
    Abstract: Galí, López-Salido, and Vallés (2007) suggest that because part of the population follow a rule-of-thumb by which they spend their entire disposable income each period, private consumption responds positively to defcitfinanced increases in government spending. Key to this result is a centralized labor market. I show that the ability to explain the positive consumption response as a consequence of rule-of-thumb behavior hinges on the arbitrary assumption that wealth is redistributed across households in steady state. Inequality leads to equilibrium indeterminacy and undermines the theoretical foundation of the centralized labor market.
    Keywords: Rule-of-thumb consumers, wealth inequality, government spending, indeterminacy
    JEL: E32 E62
    Date: 2010–08–18
  18. By: Martin Filko (Ministry of Finance of the SR, Faculty of Social and Economic Sciences, Comenius University.); Stefan Kiss (Ministry of Finance of the SR); Ludovit Odor (National Bank of Slovakia); Matej Siskovic (Ministry of Finance of the SR)
    Abstract: The paper presents possible approaches for measuring the quality of life together with their strengths and weaknesses. We identify 10 outcome indicators, which could help not only to set targets, but also as a quantitative benchmark for structural policy evaluation in Slovakia. In addition to that we present several case studies with best practices mainly from EU countries. Based on these we formulate 33 structural policy recommendations.
    Keywords: Structural Policies, Outcome Indicators, Well-being, Economic Growth
    JEL: E01 H50 O11 O43
    Date: 2010–04
  19. By: Bredemeier, Christian (University of Dortmund); Juessen, Falko (University of Dortmund)
    Abstract: This paper investigates the pattern of wives' hours disaggregated by the husband's wage decile. In the US, this pattern has changed from downward-sloping to hump-shaped. We show that this development can be explained within a standard household model of labor supply when taking into account trends in assortative mating. We develop a model in which assortative mating determines the wage ratios within individual couples and thus the efficient time allocation of spouses. The economy-wide pattern of wives’ hours by the husband's wage is downward-sloping for low degrees, hump-shaped for medium degrees, and upward-sloping for high degrees of assortative mating. A quantitative analysis of our model suggests that changes in the gender wage gap are responsible for the overall increase in hours worked by wives. By contrast, the fact that wives married to high-wage men experienced the most pronounced increase is a result of trends in assortative mating.
    Keywords: female labor supply, assortative mating, gender wage gap
    JEL: E24 J22 J16 D13
    Date: 2010–08
  20. By: Strulik, Holger; Trimborn, Timo
    Abstract: We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax.
    Keywords: corporate taxation, capital gains, tax allowances, revenue estimation, Laffer curve, dynamic scoring
    JEL: E60 H20 O40
    Date: 2010–07
  21. By: Lucjan T. Orlowski
    Abstract: Summary for non-specialistsThis study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to the crisis outbreak. The analyzed interbank lending markets exhibited more extreme volatility outbursts than the equity and foreign exchange markets. Several countercyclical monetary and macroprudential policies aimed at abating tail risks are identified and discussed. Flexible capital adequacy and contingent capital requirements for financial institutions are advocated.
    Keywords: Global financial crisis equity markets foreign exchange markets monetary policies macroprudential policies Orlowski
    JEL: E44
    Date: 2010–07
  22. By: Ilene Grabel
    Abstract: <p><i></i><span>The response by the IMF (and developing country national governments) to the current global financial crisis represents a moment of what I term “productive incoherence” that has displaced the constraining “neoliberal coherence” of the past several decades.<span>  </span>Productive incoherence refers to the proliferation of inconsistent and even contradictory strategies and statements by the IMF that to date have not congealed into any sort of new, organized regime.<span>  </span>Those who see </span>continuity at the IMF emphasize the reassertion of the IMF’s authority; the reiteration of pro-cyclical policy adjustment; and the maintenance of existing governance patterns within the institution. In contrast, evidence of discontinuity includes a world now populated by increasingly autonomous states in the South; the normalization of capital controls; and Fund conditionality programs that are inconsistent in key respects. <span> </span>In the face of this evidence, it is best to understand the current conjuncture as an “interregnum” that is pregnant with new development possibilities.</p>
    Keywords: Global financial crisis; policy space for development; International Monetary Fund; capital controls; neo-liberal policies and development
    JEL: E65 F53 O23
    Date: 2010
  23. By: Adams, Charles (Asian Development Bank Institute)
    Abstract: This paper reviews recent state interventions in financial crises and draws lessons for crisis management. A number of areas are identified where crisis management could be strengthened, including with regard to the tools and instruments used to involve the private sector in crisis resolution (with a view to reducing the recent enhanced role of official bailouts and the associated moral hazard), to allow for the orderly resolution of systemically important financial firms (to make these firms "safe to fail"), and with regard to achieving better integration with ex ante macroprudential surveillance. The paper proposes the establishment of high level systemic risk councils (SRCs) in each country with responsibility for overseeing systemic risk in both tranquil times and crisis periods and coordinating the activities of key government ministries, agencies, and the central bank.
    Keywords: global financial crisis; state intervention; macroprudential surveiilance; crisis resolution; prevention
    JEL: E01 E58
    Date: 2010–08–16
  24. By: D'Agostino, Antonello (Central Bank and Financial Services Authority of Ireland); Bermingham, Colin (Central Bank and Financial Services Authority of Ireland)
    Abstract: The issue of forecast aggregation is to determine whether it is better to forecast a series directly or instead construct forecasts of its components and then sum these component forecasts. Notwithstanding some underlying theoretical results, it is gener- ally accepted that forecast aggregation is an empirical issue. Empirical results in the literature often go unexplained. This leaves forecasters in the dark when confronted with the option of forecast aggregation. We take our empirical exercise a step further by considering the underlying issues in more detail. We analyse two price datasets, one for the United States and one for the Euro Area, which have distinctive dynamics and provide a guide to model choice. We also consider multiple levels of aggregation for each dataset. The models include an autoregressive model, a factor augmented autoregressive model, a large Bayesian VAR and a time-varying model with stochastic volatility. We find that once the appropriate model has been found, forecast aggrega- tion can significantly improve forecast performance. These results are robust to the choice of data transformation.
    Date: 2010–08
  25. By: L. Randall Wray
    Abstract: Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled "Reconstituting the United States’ Financial Structure." This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper). Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the "capital development" of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.
    Keywords: China; Hyman Minsky; Banks and Shadow Banks; Money Manager Capitalism; Finance Capital; Financial Instability Hypothesis; Global Financial Crisis; Debt Deflation Theory
    JEL: E12 E32 E58 G2 G18 G21
    Date: 2010–08

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