nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒09‒18
37 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints By Gliksberg, Baruch
  2. The Impact of Inflation Targeting: Testing the Good Luck Hypothesis By Federico Ravenna
  3. The Role of Consumption-Labor Complementarity as a Source of Macroeconomic Instability By Gliksberg, Baruch
  4. A VAR Model of Monetary Policy and Hypothetical Case of Inflation Targeting in India By Ankita Mishra; Vinod Mishra
  5. Measurement of Inflation in India: Issues and Associated Challenges for the Conduct of Monetary Policy By Nadhanael G V; Sitikantha Pattanaik
  6. Macroeconomic and interest rate volatility under alternative monetary operating procedures By Gerlach-Kristen, Petra; Rudolf, Barbara
  7. Monetary and fiscal policy interactions with central bank transparency and public investment. By Meixing Dai; Moïse Sidiropoulos
  8. Optimal monetary policy when asset markets are incomplete By Richard Anton Braun; Tomoyuki Nakajima
  9. Has inflation targeting increased predictive power of term structure about future inflation: evidence from an emerging market ? By Ege, Yazgan; Huseyin, Kaya
  10. The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective By Junko Koeda; Ryo Kato
  11. Effectiveness of the monetary policy framework in present-day India : have financial variables functioned as useful policy indicators By Inoue, Takeshi
  12. The art of central banking of the ECB and the separation principle. By Clerc, L.; Bordes, C.
  13. Business cycle convergence in EMU: A second look at the second moment By Jesús Crespo-Cuaresma; Octavio Fernández-Amador
  14. Business cycle convergence in EMU: A second look at the second moment By Crespo Cuaresma , Jesus; Fernandez Amador, Octavio
  15. Optimal Policy Restrictions on Observable Outcomes By Federico Ravenna
  16. Monetary Policy and Financial Conditions Index By Hisashi Harui; Kentaro Iwatsubo
  17. Government expenditures and unemployment: A DSGE perspective By Mayer, Eric; Moyen, Stéphane; Stähler, Nikolai
  18. The Welfare Consequences of Monetary Policy and the Role of the Labor Market: a Tax Interpretation By Federico Ravenna; Carl E. Walsh
  19. Monetary Transmission Right from the Start: The (Dis)Connection Between the Money Market and the ECB’s Main Refinancing Rates By Puriya Abbassi; Dieter Nautz
  20. Time varying fiscal policy in the U.S. By Manuel Coutinho Pereira; Artur Silva Lopes
  21. Discretionary policy in a monetary union with sovereign debt By Campbell Leith; Simon Wren-Lewis
  22. Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5? By Wai Ching Poon
  23. A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests By Wai-Ching Poon
  24. Testing Transmission Mechanisms on Economic Growth in Malaysia By Wai Ching Poon
  25. Securitization and the Balance Sheet Channel of Monetary Transmission By Uluc Aysun; Ralf Hepp
  26. The High Sensitivity of Employment to Agency Costs: The Relevance of Wage Rigidity By Atanas Hristov
  27. Fiscal Consolidation with High Growth A Policy Simulation Model for India By Sudipto Mundle; N.R. Bhanumurthy; Surajit Das
  28. Monetary Rewards, Image Concern, and Intrinsic Motivation: Evidence from Survey on Blood Donation By Lan Shi
  29. Fiscal Federalism in Crisis: Lessons for Europe from the US By Zsolt Darvas
  30. The International Wealth Channel: A Global Error-Correcting Analysis By Nils Holinski; Robert Vermeulen
  31. The Irish Banking Crisis: Regulatory and Financial Stability Policy By Honohan, Patrick; Donovan, Donal; Gorecki, Paul; Mottiar, Rafique
  32. Technology Diffusion and Postwar Growth By Diego A. Comin; Bart Hobijn
  33. The Law of Reflux By Sproul, Michael
  34. The Intensive Margin of Technology Adoption By Diego A. Comin; Marti Mestieri
  35. Staatliche Zinssubvention und Auslandsverschuldung: Eine Mittelwert-Varianz-Analyse am Beispiel Ungarn By Pfeffer, Annamaria
  36. Update on the Venezuelan Economy By Mark Weisbrot; Rebecca Ray
  37. A time series causal model By Chen, Pu

  1. By: Gliksberg, Baruch
    Abstract: In some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and off the steady state] is also stabilizing
    Keywords: Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel; Consumption-Based Channel;
    JEL: E0 E62 E61
    Date: 2010–07
  2. By: Federico Ravenna
    Abstract: Over the last twenty years the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the “luck hypothesis” we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman-filter the historical structural shocks consistent with an estimated DSGE model. The estimated shocks are used to build counterfactual histories. Ex-ante the model predicts inflation volatility to more than halve under inflation targeting. But conditional on the shocks, we show that the luck hypothesis can explain with a high probability Canada’s low inflation volatility since the early 1990s. Any inflation stabilization induced by the shift in policy is accounted for the most part by the impact on expectations. Counterfactuals built neglecting expectations would prove the inflation targeting policy irrelevant.
    Keywords: Business cycle shocks, Kalman filter, Credibility, Inflation targeting
    JEL: E42 E52 E58
    Date: 2010
  3. By: Gliksberg, Baruch
    Abstract: The equilibrium ramification of a balanced budget rule are scrutinized in a one sector growth model augmented with investment frictions and a non-separable utility function in consumption and leisure. Edgeworth-complementarity between consumption and labor is formulated so as to generate a positive co-movement of consumption, output, and hours worked, as found in the data. Calibration of the model to the U.S. economy provides evidence that a balanced budget rule with a Taylor type monetary policy induce determinate equilibria.
    Keywords: Fiscal-Monetary policy; Non-Separable Utility; Consumption-Labor Complementarity; Endogenous Labor; Stabilization; Determinacy; Investment;
    JEL: E62 C63 E52 E61 E4 C62
    Date: 2010–06
  4. By: Ankita Mishra; Vinod Mishra
    Abstract: The empirical VAR literature on identification and measurement of the impact of monetary policy shocks on the real side of the economy is fairly comprehensive for developed economies but very limited for emerging and transition economies. In this study, we propose an identification scheme, for a developing economy taking India as a case study, which is able to capture the monetary transmission mechanism without giving rise to any empirical anomalies. We use a VAR approach with recursive contemporaneous restrictions and identify monetary policy shocks by modelling the reaction function of the central bank and structure of the economy. The effect of monetary policy shocks on the exchange rate and other macroeconomic variables is consistent with the predictions of a broad set of theoretical models. This set-up is used to build a hypothetical case of inflation targeting where the monetary policy instrument is set after looking at the current values of inflation only. This is in contrast with the „multiple indicator approach‟ currently followed by Reserve Bank of India. This hypothetical scenario of inflation targeting suggests a sharper response of the interest rate (monetary policy instrument) to shocks and strengthening of the exchange rate channel in transmission of interest rate impulses. This study also provides some useful implications on the type of theoretical framework which can be used to model the evolution of monetary policy for a developing economy like India.
    Keywords: India, Inflation Targeting, Monetary policy, VAR
    JEL: E52 E58 E47
    Date: 2010–05
  5. By: Nadhanael G V; Sitikantha Pattanaik
    Abstract: In India, there is a large divergence between CPI and WPI inflation trends in the past, wide dispersion in inflation across commodity groups within WPI, and significant volatility in headline WPI inflation under the influence of supply shocks, the statistical limitations of prices data have received increasing attention in the policy debates. This paper presents the key issues in the current context, while also explaining how policy analyses relevant for the conduct of monetary policy could yield ambiguous results if inflation data used in such analyses have serious limitations. [Staff Studies].
    Keywords: supply shocks, volatality, central bank, reserve bank, RBI, statistical issues, Exchange Rate, REER, financial, economic, Inflation Measurement, Monetary policy, India, CPT, WPI, commodity, prices, data, Inflation
    Date: 2010
  6. By: Gerlach-Kristen, Petra (Bank for International Settlements); Rudolf, Barbara (Swiss National Bank)
    Abstract: During the financial crisis of 2007/08 the level and volatility of interest rate spreads increased dramatically. This paper examines how the choice of the target interest rate for monetary policy affects the volatility of inflation, the output gap and the yield curve. We consider three monetary policy operating procedures with different target interest rates: two market rates with maturities of one and three months, respectively, and an essentially riskless one-month repo rate. The implementation tool is the one-month repo rate for all three operating procedures. In a highly stylised model, we find that using a money market rate as a target rate generally yields lower variability of the macroeconomic variables. This holds under discretion as well as under commitment both in times of financial calm or turmoil. Whether the one month or three month rate procedure performs best depends on the maturity of the specific rate that enters the IS curve.
    Keywords: Optimal monetary policy rules; monetary operating procedures; yield curve
    JEL: E43 E52 E58
    Date: 2010–07–31
  7. By: Meixing Dai; Moïse Sidiropoulos
    Abstract: In this paper, we study how the interactions between central bank transparency and fiscal policy affect macroeconomic performance and volatility, in a framework where productivity-enhancing public investment could improve future growth potential. We analyze the effects of central bank’s opacity (lack of transparency) according to the marginal effect of public investment by considering the Stackelberg equilibrium where the government is the first mover and the central bank the follower. We show that the optimal choice of tax rate and public investment, when the public investment is highly productivity-enhancing, eliminates the effects of distortionary taxation and fully counterbalance both the direct and the fiscal-disciplining effects of opacity, on the level and variability of inflation and output gap. In the case where the public investment is not sufficiently productivity-enhancing, opacity could still have some disciplining effects as in the benchmark model, which ignores the effects of public investment.
    Keywords: Distortionary taxes, output distortions, productivity-enhancing public investment, central bank transparency (opacity), fiscal disciplining effect.
    JEL: E52 E58 E62 E63 H21 H30
    Date: 2010
  8. By: Richard Anton Braun (Faculty of Economics, University of Tokyo); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University)
    Abstract: This paper considers the properties of an optimal monetary policy when households are subject to countercyclical uninsured income shocks. We develop a tractable incompletemarkets model with Calvo price setting. Incomplete markets creates a new distortion and that distortion is large in the sense that the welfare cost of business cycles is large in our model. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  9. By: Ege, Yazgan; Huseyin, Kaya
    Abstract: This paper contributes to the vast literature on the predictive power of term structure about future inflation, by focusing on an emerging market case. The following important result emerged in our paper: Monetary policy change is an important determinant of the relationship between term structure and inflation to the extent that even the existence of the relationship critically depends on the nature of monetary policy regime. In our case, the change in monetary policy is associated with the beginning of the implementation of an inflation targeting (IT) regime. While, before IT regime, the information in term structure does not provide any predictive power for future inflation, this phenomenon seems to be completely reversed after IT. Since the implementation of IT, term structure of interest rates has seemed to gain considerable forecasting power for future inflation.
    Keywords: Term Structure of Interest Rate; Structural Break; Inflation; Monetary Policy; Inflation Targeting
    JEL: E43 C53 E52 G00
    Date: 2010–08
  10. By: Junko Koeda (Faculty of Economics, University of Tokyo); Ryo Kato (Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: Using a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
    Date: 2010–03
  11. By: Inoue, Takeshi
    Abstract: In April 1998, the RBI, the Indian central bank, formally announced a shift in its policy framework from monetary targeting to a multiple indicator approach, and since then, under this framework, the bank has considered a range of economic and financial variables as policy indicators for drawing policy perspectives. This paper aims to examine the effectiveness of this current policy framework in India by analyzing the causal relationships of each indicator variable on the objective variables. The results reveal that, except for bank credit, all indicator variables considered in this study have a causal relationship with at least either output or price level, suggesting that most preannounced economic and financial variables have served as useful policy indicators under the multiple indicator approach.
    Keywords: Causality, India, LA-VAR, Policy Indicator, RBI, Monetary policy, Central bank
    JEL: E52
    Date: 2010–07
  12. By: Clerc, L.; Bordes, C.
    Abstract: This paper examines the art of central banking as practised by the European Central Bank (ECB) through the prism of Goodfriend's (2009) determination of the three policies that fall within the remit of a central bank: monetary policy, which consists in varying the size of the balance sheet, credit policy, which consists in modifying the credit structure, and interest rate policy, which consists in adjusting the interest rates of the marginal lending and deposit facilities. The theoretical literature emphasises the existence of a separation principle between the first policy, which seeks to ensure monetary stability and the other two policies, which are intended to ensure financial stability through the smooth functioning of the interbank money market. This paper shows in particular that a central bank not only has the capacity but indeed must strive to separate the conduct of its monetary policy, which must seek to ensure medium and long-term price stability, from that of its credit policy, which is driven by short-term imperatives and consists in supplying the banking system with liquidity in the event of temporary money demand shocks. During the first part of the crisis, the ECB acted in accordance with the separation principle. However, it became increasingly difficult to apply as interest rates approached the zero-lower-bound. In effect, the unconventional measures adopted by the ECB created interference between its monetary policy, its credit policy and its interest rate policy.
    Keywords: Monetary Policy ; operational framework ; Eurosystem ; separation principle.
    JEL: E51 E52 E58
    Date: 2010
  13. By: Jesús Crespo-Cuaresma; Octavio Fernández-Amador
    Abstract: We analyse the dynamics of the standard deviation of demand shocks and of the demand component of GDP across countries in the European Monetary Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement in EMU and put them in contrast to the cyclical performance of the new members of the EU and other OECD countries. We use the methodology put forward in Crespo-Cuaresma and Fern\'andez-Amador (2010), which makes use of sigma-convergence methods to identify synchronization patterns in business cycles. The Eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s. The new EU members have also experienced a strong pattern of convergence from 1998 to 2005, when a strong divergence trend appears. An enlargement of the EMU to 22 members would not decrease its optimality as a currency area. There is evidence for some European idiosyncrasy as opposed to a world-wide comovement.
    Keywords: Business cycle synchronization, structural VAR, demand shocks, European Monetary Union
    JEL: E32 E63 F02
    Date: 2010–09
  14. By: Crespo Cuaresma , Jesus (Department of Economics, Vienna University of Economics and Business); Fernandez Amador, Octavio (Department of Economics, University of Innsbruck)
    Abstract: We analyse the dynamics of the standard deviation of demand shocks and of the demand component of GDP across countries in the European Monetary Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement in EMU and put them in contrast to the cyclical performance of the new members of the EU and other OECD countries. We use the methodology put forward in Crespo-Cuaresma and Fernandez-Amador (2010), which makes use of sigma-convergence methods to identify synchronization patterns in business cycles. The Eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s. The new EU members have also experienced a strong pattern of convergence from 1998 to 2005, when a strong divergence trend appears. An enlargement of the EMU to 22 members would not decrease its optimality as a currency area. There is evidence for some European idiosyncrasy as opposed to a world-wide comovement.
    Keywords: Business cycle synchronization; structural VAR; demand shocks; European Monetary Union
    JEL: E32 E63 F02
    Date: 2010–09–10
  15. By: Federico Ravenna
    Abstract: We study the restrictions implied by optimal policy DSGE models for the volatility of observable endogenous variables. Our approach uses a parametric family of singular models to discriminate which volatility sample outcomes have zero probability of being generated by an optimal policy. Thus the set of volatility outcomes generated by the model is not of measure zero even if there are no random deviations from optimal policymaking. This methodology is applied to a new Keynesian business cycle model widely used in the optimal monetary policy literature, and its implications for the assessment of US monetary policy performance over the 1984-2005 period are discussed.
    Keywords: Optimal monetary policy, business cycle, DSGE model, policy performance
    JEL: E30
    Date: 2010
  16. By: Hisashi Harui (School of Economics, Kwansei Gakuin University); Kentaro Iwatsubo (Graduate School of Economics, Kobe University)
    Keywords: Financial conditions index; interest rates; house prices; stock prices; macro-prudential policy
    JEL: E21 E31 E32 E44 E50 E58 R21 R31
    Date: 2010–09
  17. By: Mayer, Eric; Moyen, Stéphane; Stähler, Nikolai
    Abstract: In a New Keynesian DSGE model with labor market frictions and liquidityconstrained consumers aggregate unemployment is likely to increase due to a non-persistent government spending shock. Furthermore, the group of asset-holding households reacts very differently from the group of liquidityconstrained consumers implying that the unemployment rate is likely to decrease for asset-holding households, while it increases among liquidityconstrained consumers. The main driver of our results is the marginal utility of consumption which moves in opposite directions for the two types. Regarding the model's parameters, we find that the size of the fiscal (unemployment) multiplier increases with i) highly sticky prices, ii) high degrees of risk aversion, iii) low convexity in labor disutility iv) high replacement rates, and v) debt-financed expenditures. --
    Keywords: Search and matching,government spending shocks,unemployment.
    JEL: E32 J64 E62
    Date: 2010
  18. By: Federico Ravenna; Carl E. Walsh
    Abstract: We explore the distortions in business cycle models arising from inefficiencies in price setting and in the search process matching firms to unemployed workers, and the implications of these distortions for monetary policy. To this end, we characterize the tax instruments that would implement the first best equilibrium allocations and then examine the trade-offs faced by monetary policy when tax instruments are unavailable. Our findings are that the welfare cost of search inefficiency can be large, but the incentive for policy to deviate from the inefficient flexible-price allocation is in general small. Sizable welfare gains are available if the steady state of the economy is inefficient, and these gains do not depend on the existence of an inefficient dispersion of wages. Finally, the gains from deviating from price stability are larger in economies with more volatile labor flows, as in the U.S.
    Keywords: Optimal monetary policy, search inefficiency, job vacancies, unemployment
    JEL: E52 E58 J64
    Date: 2010
  19. By: Puriya Abbassi (Chair of Financial Economics, Johannes Gutenberg-Universität MAinz, Germany); Dieter Nautz (Institute for Statistics and Econometrics, Freie Universität Berlin, Germany)
    Abstract: The relation between the ECB’s main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks’ refinancing conditions.
    Keywords: Financial Crisis; Monetary transmission process; Central bank auctions; European Central Bank; Money markets
    JEL: E43 E52 E58 D44
    Date: 2010–07–15
  20. By: Manuel Coutinho Pereira (Banco de Portugal and CEMAPRE, School of Economics and Management (ISEG), Technical University of Lisbon); Artur Silva Lopes (CEMAPRE, School of Economics and Management (ISEG), Technical University of Lisbon)
    Abstract: To investigate the time heterogeneity effects of fiscal policy in the U.S., we use a non-recursive, Blanchard and Perotti-like structural VAR with time-varying parameters, estimated through Bayesian simulation over the 1965:2-2009:2 period. Our evidence suggests that fiscal policy has lost some capacity to stimulate output but that this trend is more pronounced for taxes net of transfers than for government expenditure, whose effectiveness declines only slightly. Fiscal multipliers keep conventional signs throughout. An investigation of changes in fiscal policy conduct indicates an increase in the countercyclical activism of net taxes over time, which appears to have reached a maximum during the 2008-09 recession.
    Keywords: Fiscal policy, Bayesian estimation, Structural change, Macroeconomic stabilization
    JEL: C11 E32 E62
    Date: 2010–09
  21. By: Campbell Leith; Simon Wren-Lewis
    Abstract: This paper examines the interactions between multiple national fiscal policy- makers and a single monetary policy maker in response to shocks to govern- ment debt in some or all of the countries of a monetary union. We assume that national governments respond to excess debt in an optimal manner, but that they do not have access to a commitment technology. This implies that national fiscal policy gradually reduces debt: the lack of a commitment technology pre- cludes a random walk in steady state debt, but the need to maintain national competitiveness avoids excessively rapid debt reduction. If the central bank can commit, it adjusts its policies only slightly in response to higher debt, allowing national fiscal policy to undertake most of the adjustment. However if it cannot commit, then optimal monetary policy involves using interest rates to rapidly reduce debt, with significant welfare costs. We show that in these circumstances the central bank would do better to ignore national fiscal policies in formulating its policy.
    Date: 2010–08
  22. By: Wai Ching Poon
    Abstract: This paper uses quarterly data from 1980 to 2004 for ASEAN-5 founder countries to estimate the weight of the Augmented Monetary Conditions Index (AMCI), and identifies the key transmission mechanism paths using Pesaran and Pesaran’s (1997) ARDL procedure, and Pesaran et al.’s (2001) bounds procedure. The roles of credit and asset price channels are assessed for aggregate demand conditions and in the transmission of monetary policy. Results reveal evidence of cointegration for all the ASEAN-Five founder countries. The estimate of the interest and exchange rate elasticities of aggregate demand is used to determine the weight of the exchange rate in the AMCI, and ultimately the weight is then used to construct the AMCI ratio. Exchange rate, asset price, and interest rate channels are three key transmission mechanisms in the conduct of monetary policy in Indonesia and Thailand. Meanwhile in Malaysia and Singapore, exchange rate, both the long and short term interest rate, and credit channels are three key transmission mechanisms in the conduct of monetary policy. In the Philippines, four key transmission mechanisms take place, namely the interest rate, exchange rate, credit, and asset price channels, with short rate relatively weaker than the long rate at the margin. The estimated weights of real interest rates and real exchange rate are used to estimate the AMCI ratios. The AMCI ratios range from 0.052 to 0.664 [0.052:1 for Philippines, 0.056:1 for Thailand, 0.073:1 for Indonesia, 0.109:1 for Malaysia; and 0.664 for Singapore]. Monetary conditions during the period under-study are found to be reflected in each of the central banks’ reaction to the prevailing economic situation, which implies that AMCI tracks the movements of the real GDP plausibly on the average, particularly after 1997.
    Keywords: Augmented Monetary Conditions Index; monetary policy; transmission mechanism
    JEL: E52
    Date: 2010–05
  23. By: Wai-Ching Poon
    Abstract: This paper constructs the augmented monetary conditions index (AMCI) over 1982:1-2004:4 using UECM and bounds test approach for the Philippines data. Results reveal evidence of cointegration between the real GDP and its determinants, namely short-term interest rate, exchange rate and claims on private sectors that take into account three key transmission mechanisms channels in the conduct of monetary policy, namely the interest rate, exchange rate and credit channels. While asset price channel is found to be insignificant. The monetary conditions during the study periods is reflected in the Bangko Sentral ng Pilipinas’s reaction to the prevailing economic situation, imply that the AMCI tracks the inverse movements of the real GDP growth reasonably well after 1990s. Possible light of policy implications have put forward.
    Keywords: AMCI, monetary policy, cointegration, bounds test, UECM, transmission mechanisms
    Date: 2010–05
  24. By: Wai Ching Poon
    Abstract: This paper examines various transmission mechanism channels on economic growth in Malaysia over the quarterly period 1980:1-2004:4 using bounds testing approach. The bounds test reveals evidence of cointegration between the real GDP and the real exchange rate and share prices that address the exchange rate and asset price channels as the key transmission mechanisms in the conduct of the monetary policy stance. Nevertheless, the saving interest rate and credit channels are of insignificant.
    Keywords: cointegration, transmission mechanism channels, monetary policy stance, bounds test, Malaysia
    JEL: E52
    Date: 2010–05
  25. By: Uluc Aysun (University of Connecticut, Department of Economics); Ralf Hepp (Fordham University, Department of Economics)
    Abstract: This paper shows that the balance sheet channel of monetary transmission works mainly through U.S. bank holding companies that securitize their assets. This finding is different, in spirit, from the widely-found negative relationship between financial development and the strength of the lending channel of monetary transmission. Focusing on the balance sheet channel, and using bank-level observations, we find that securitized banks are more sensitive to borrowers’ balance sheets and that monetary policy has a greater impact on this sensitivity for securitizing bank holding companies. The optimality conditions from a simple partial equilibrium framework suggest that the positive effects of securitization on policy effectiveness could be due to the high sensitivity of security prices to policy rates.
    Keywords: balance sheet channel, banks, bank holding companies, securitization.
    JEL: E44 F31 F41 O16
    Date: 2010
  26. By: Atanas Hristov
    Abstract: This paper studies the interaction of financing constraints and labor market imperfections on the labor market and economic activity. My analysis builds on the agency cost framework of Carlstrom and Fuerst [1998. Agency costs and business cycles. Economic Theory, 12(3):583-597]. The aim of this article is to show that financing constraints can substantially amplify and propagate total factor productivity shocks in cyclical labor market dynamics. I find that under the Nash bargaining solution financing constraints increase substantially the volatility of wages, and in turn, amplification for the labor variables falls short of the observed volatilities in the data. Atop of this, the comovement between output and labor share is counterfactual. However, there is substantial scope for any type of wage rigidity and financing constraints to reinforce each other, and to generate the observed volatilities in the labor market, moreover, to produce a wide range of comovements between output and labor share.
    Keywords: Credit and search frictions, Labor market, Unemployment
    JEL: E24 E32 J64 G24
    Date: 2010–09
  27. By: Sudipto Mundle; N.R. Bhanumurthy; Surajit Das
    Abstract: In this paper a fiscal consolidation program for India has been presented based on a policy simulation model that enables us to examine the macroeconomic implications of alternative fiscal strategies, given certain assumptions about other macro policy choices and relevant exogenous factors. The model is then used to estimate the outcomes resulting from a possible strategy of fiscal consolidation in the base case. The exercise shows that it is possible to have fiscal consolidation while at the same time maintaining high GDP growth of around 8% or so. The strategy is to gradually bring down the revenue deficit to zero by 2014-15, while allowing a combined fiscal deficit for centre plus states of about 6% of GDP. This provides the space for substantial government capital expenditure, which translates to a significant public investment program. This in turn leads to high overall investment directly and indirectly, via the crowding in effect on private investment, which drives the high GDP growth. The exercise has also tested the robustness of this strategy under two alternative scenarios of higher and lower advanced country growth compared to the base case. [Working Paper No. 2010-73]
    Keywords: Macroeconomic Modelling, Policy Simulation, Fiscal Policy, India
    Date: 2010
  28. By: Lan Shi
    Date: 2010–09
  29. By: Zsolt Darvas (Bruegel, Hungarian Academy of Sciences, Corvinus University of Budapest)
    Abstract: The euro area is facing crisis, while the US is not, though the overall fiscal situation and outlook is better in the euro area than in the US, and though the US faces serious state-level fiscal crises. A higher level of fiscal federalism would strengthen the euro area, but is not inevitable. Current fiscal reform proposals (strengthening of current rules, more policy coordination and an emergency financing mechanism) will if implemented result in some improvements. But implementation might be deficient or lack credibility, and could lead to disputes and carry a significant political risk. Introduction of a Eurobond covering up to 60 percent of member states’ GDP would bring about much greater levels of fiscal discipline than any other proposal, would create an attractive Eurobond market, and would deliver a strong message about the irreversible nature of European integration.
    Keywords: federalism, redistribution, stabilisation, risk-sharing, crisis, euro-area governance reform, Eurobond
    JEL: E62 H60 H77
    Date: 2010–07–12
  30. By: Nils Holinski; Robert Vermeulen (CREA, University of Luxembourg)
    Abstract: This paper analyzes the empirical link between asset prices, consumption and the trade balance using a global macroeconometric model developed by Pesaran, Schuermann, and Weiner (2004). The model is estimated for 29 countries with quarterly data over the period 1981Q1 - 2006Q4. Motivated by increasing international _nancial and real integration, and pronounced cycles in stock and housing prices, we employ generalized impulse response functions for a group of _ve of the world's most industrialized countries and show that shocks to asset prices transmit into the trade balance. We refer to this transmission channel as the international wealth channel and _nd it to be present in the US, UK and, to a lesser extent, in France, but absent in Japan and Germany. More speci_cally, when we _nd the international wealth channel at work as stock price changes are transmitted through consumption into the trade balance, whereas housing price changes are transmitted through investment into the trade balance.
    Keywords: trade balance, wealth effect, global imbalances, GVAR, international transmission
    JEL: E21 F15 F41 G15
    Date: 2010
  31. By: Honohan, Patrick; Donovan, Donal; Gorecki, Paul; Mottiar, Rafique
    Abstract: This report to the Irish Minister for Finance by the Governor of the Central Bank describes the the performance of the respective functions of the Central Bank and Financial Regulator in the period 2003-8 in order to arrive at a fuller understanding of the root causes of the systemic failures that led to the need for extraordinary support from the State to the Irish banking system.
    Keywords: Ireland banking crisis; financial crises; financial stability policy
    JEL: E58 G28
    Date: 2010–05–31
  32. By: Diego A. Comin (Harvard Business School, Business, Government and the International Economy Unit); Bart Hobijn (Federal Reserve Bank of San Francisco)
    Abstract: In the aftermath of World War II, the world's economies exhibited very different rates of economic recovery. We provide evidence that those countries that caught up the most with the U.S. in the postwar period are those that also saw an acceleration in the speed of adoption of new technologies. This acceleration is correlated with the incidence of U.S. economic aid and technical assistance in the same period. We interpret this as supportive of the interpretation that technology transfers from the U.S. to Western European countries and Japan were an important factor in driving growth in these recipient countries during the postwar decades.
    Keywords: wars, economic growth, technology adoption, cross-country studies.
    JEL: E13 O14 O33 O41
    Date: 2010–09
  33. By: Sproul, Michael
    Abstract: The law of reflux is explained using an example of backed money. In the example, government-issued money is backed by the government’s assets (mainly taxes receivable) while bank-issued money is backed by the bank’s assets. The value of both kinds of money is determined by the amount of backing held per unit of money issued. The example shows that reflux maintains money’s value, not by assuring that excessive issues of money reflux to their issuers, but by providing people with access to the assets backing their money. Conventional metallic convertibility is only one channel of many through which money can reflux to its issuer. The suspension of metallic convertibility still leaves many other open channels of reflux, but can create the illusion that money is unbacked fiat money that was somehow forced into circulation. Backed money will hold its value as long as its issuer remains solvent. One way for an issuer to stay solvent is to issue money in exchange for short-term real bills of adequate value, but as long as the bills are of adequate value, it is largely unnecessary for the bills to be real or short-term.
    Keywords: reflux real bills doctrine backing theory
    JEL: E50
    Date: 2010–08–31
  34. By: Diego A. Comin (Harvard Business School, Business, Government and the International Economy Unit); Marti Mestieri (MIT Department of Economics)
    Abstract: We present a tractable model for analyzing the relationship between economic growth and the intensive and extensive margins of technology adoption. The "extensive" margin refers to the timing of a country's adoption of a new technology; the "intensive" margin refers to how many units are adopted (for a given size economy). At the aggregate level, our model is isomorphic to a neoclassical growth model, while at the microeconomic level it features adoption of firms at the extensive and the intensive margin. Based on a data set of 15 technologies and 166 countries our estimations of the model yield four main findings: (i) there are large cross-country differences in the intensive margin of adoption; (ii) differences in the intensive margin vary substantially across technologies; (iii) the cross-country dispersion of adoption lags has declined over time while the cross-country dispersion in the intensive margin has not; (iv) the cross- country variation in the intensive margin of adoption accounts for more than 40% of the variation in income per capita.
    Keywords: Economic Growth, Technology Adoption, Cross-country studies.
    JEL: E13 O14 O33 O41
    Date: 2010–09
  35. By: Pfeffer, Annamaria
    Abstract: Dieser Artikel zeigt, dass eine Subvention der heimischen Kreditzinsen zu einem Rückgang der Auslandsverschuldung führen kann. Ausgehend von der Mittelwert-Varianz- und der Erwartungsnutzentheorie wurde ein Modell entwickelt, in dessen Rahmen der Wirtschaftsakteur sein internationales Kreditportfolio optimiert. Eine Einbeziehung der Zinsparitätenbedingung war in der Analyse jedoch nicht zielführend. In den Modellrahmen wird eine staatliche Zinssubvention eingeführt und ihre theoretische Wirkung auf die Fremdwährungsverschuldung der Haushalte untersucht. --
    Keywords: External Debt,Interest Rate Subsidies,Mean-Variance Analysis
    JEL: E62 F34 G11
    Date: 2010
  36. By: Mark Weisbrot; Rebecca Ray
    Abstract: This paper examines recent economic data, including the most recent data released the third week of August 2010, in an attempt to evaluate the Venezuelan economy's prospects in the foreseeable future. It finds that the Venezuelan economy, which went into recession in the first quarter of 2009 after six years of record economic growth, is now most likely in recovery, and that the 2009 recession has probably ended. This is based on seasonally adjusted quarterly data, which show that the Venezuelan economy grew by an estimated 5.2 percent in the second quarter of 2010, on an annualized basis. The paper then considers possibilities and arguments that the Venezuelan economy will remain mired in recession or stagnation, and/or is doomed to long term decline. It finds that although there are a number of analysts who are predicting that the Venezuelan economy is on the verge of inevitable (and long-anticipated) ruin, there is nothing in the recent data – or that of the last decade – to indicate that this is true.
    Keywords: venezuela, foreign exchange, economy,
    JEL: E E58 E6 E62 F F1 F14 O54 O E I O4 O54 E65 E61 E2
    Date: 2010–09
  37. By: Chen, Pu
    Abstract: Cause-effect relations are central in economic analysis. Uncovering empirical cause-effect relations is one of the main research activities of empirical economics. In this paper we develop a time series casual model to explore casual relations among economic time series. The time series causal model is grounded on the theory of inferred causation that is a probabilistic and graph-theoretic approach to causality featured with automated learning algorithms. Applying our model we are able to infer cause-effect relations that are implied by the observed time series data. The empirically inferred causal relations can then be used to test economic theoretical hypotheses, to provide evidence for formulation of theoretical hypotheses, and to carry out policy analysis. Time series causal models are closely related to the popular vector autoregressive (VAR) models in time series analysis. They can be viewed as restricted structural VAR models identified by the inferred causal relations.
    Keywords: Inferred Causation; Automated Learning; VAR; Granger Causality; Wage-Price Spiral
    JEL: E31 C01
    Date: 2010–09

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