nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒09‒25
thirty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Explaining Inflation Persistence by a Time-Varying Taylor Rule By Conrad, Christian; Eife, Thomas A.
  2. Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation By Olivier Coibion; Yuriy Gorodnichenko
  3. On Expectations-Driven Business Cycles in Economies with Production Externalities: A Comment By Guo, Jang-Ting; Sirbu, Anca-Ioana; Suen, Richard M. H.
  4. Supply, demand and monetary policy shocks in a multi-country New Keynesian Model By Stéphane Dées; M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
  5. Working to Improve Price Indices Development in Pakistan By Mahmood Khalid; Zahid Asghar
  6. Short-run and Long-run Effects of Banking in a New Keynesian Model By Miguel Casares; Jean-Christophe Poutineauy
  7. Correlation Structure between Inflation and Oil Futures Returns: An Equilibrium Approach By Jaime Casassus; Diego Ceballos
  8. Matching frictions, unemployment dynamics and the cost of business cycles By Jean-Olivier Hairault; François Langot; Sophie Osotimehin
  9. Democracy, Populism and Hyperinflation[s]: Some Evidence from Latin America By Bittencourt, Manoel
  10. Money, reserves, and the transmission of monetary policy: does the money multiplier exist? By Seth B. Carpenter; Selva Demiralp
  11. The impacts of economic structures on the performance of simple policy rules in a small open economy By Siok Kun, Sek
  12. Monetary policy, asset prices and consumption in China By Tuuli Koivu
  13. Leveraged borrowing and boom-bust cycles By Patrick A. Pintus; Yi Wen
  14. Real Business Cycles in The Model with Two-Person Household and Home Production By Bornukova, Kateryna
  15. On the usefulness of government spending in the EU area By Marattin, Luigi; Salotti, Simone
  16. Fiscal Policy Issues in Korea after the Current Crisis By Kiseok Hong
  17. Short and long interest rate targets By Bernardino Adão; Isabel Correia; Pedro Teles
  18. Inclusive, Balanced, Sustained Growth in the Asia-Pacific By Yongfu Cao-Wendy Dobson-Yiping Huang; Peter A. Petri-Michael Plummer; Raimundo Soto; Shinji Takagi.
  19. Strategic Interaction among Heterogeneous Price-Setters in an Estimated DSGE Model By Olivier Coibion; Yuriy Gorodnichenko
  20. Characterizing the Business Cycles of Emerging Economies By César Calderón; Rodrigo Fuentes.
  21. Household money holdings in the euro area: An explorative investigation By Franz Seitz; Julian von Landesberger
  22. Fiscal policy in the United States: automatic stabilizers, discretionary fiscal policy actions, and the economy By Glenn Follette; Byron Lutz
  23. What credit card puzzle? Precaution, variable debt limits, and what we can learn from the small debts of poor people By Scott Fulford
  24. Impacts of Current Global Economic Crisis on Asia’s Labor Market By Phu Huynh; Steven Kapsos; Kee Beom Kim; Gyorgy Sziraczki
  25. Current account determinants and external sustainability in periods of structural change By Sophocles N. Brissimis; George Hondroyiannis; Christos Papazoglou; Nicholas T. Tsaveas; Melina A. Vasardani
  26. Macroeconomic Conditions and the Structure of Securities By Erel, Isil; Julio, Brandon; Kim, Woojin; Weisbach, Michael S.
  27. Synchronization of Recessions in Major Developed and Emerging Economies By Pami Dua; Anirvan Banerji
  28. Rebalancing Growth in the Republic of Korea By Joonkyung Ha; Jong-Wha Lee; Lea Sumulong
  29. The effects of national discretions on banks By Isabel Argimón; Jenifer Ruiz
  30. Measuring Intangible Capital Investment: an Application to the "French Data" By Vincent Delbecque; Laurence Nayman
  31. Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending By Koichi Futagami; Takeo Hori; Ryoji Ohdoi
  32. Measuring the Environmental Impacts of Changing Trade Patterns on the Poor By Kaliappa Kalirajan; VenkatachalamAnbumozhi; Kanhaiya Singh
  33. Patterns of technological progress and corporate innovation By Waśniewski, Krzysztof
  34. Will Women Save More Than Men? A Theoretical Model of Savings and Marriage By Shoshana Amyra Grossbard; Alfredo Marvão Pereira
  35. Modeling Overstock By Fernandes, Rui; Gouveia, Borges; Pinho, Carlos
  36. Further evidence regarding nonlinear trend reversion of real GDP and the CPI By Shelley, Gary; Wallace, Frederick

  1. By: Conrad, Christian; Eife, Thomas A.
    Abstract: In a simple New Keynesian model, we derive a closed form solution for the inflation persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in U.S. inflation persistence during the period 1975 to 2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.
    Keywords: inflation persistence; Great Moderation; monetary policy; New Keynesian model; Taylor rule
    Date: 2010–09–16
  2. By: Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley)
    Abstract: With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed’s response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.
    Keywords: Trend inflation, Determinacy, Great Moderation, Monetary Policy.
    JEL: C22 E3 E43 E5
    Date: 2010–09–15
  3. By: Guo, Jang-Ting; Sirbu, Anca-Ioana; Suen, Richard M. H.
    Abstract: Eusepi (2009, International Journal of Economic Theory 5, pp. 9-23) analytically finds that a one-sector real business cycle model may exhibit positive co-movement between consumption and investment when the equilibrium wage-hours locus is positively-sloped and steeper than the household's labor supply curve. However, we show that this condition does not imply expectations-driven business cycles will emerge in Eusepi's model. Specifically, a positive news shock about future productivity improvement leads to an aggregate recession whereby output, employment, consumption and investment all fall in the announcement period.
    Keywords: Expectations-Driven Business Cycles; Production Externalities.
    JEL: E32 C62
    Date: 2010–09
  4. By: Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); M. Hashem Pesaran (Cambridge University, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, CB3 9DD, United Kingdom.); L. Vanessa Smith (Cambridge University, Trumpington Street, Cambridge CB2 1AG, United Kingdom.); Ron P. Smith (Birkbeck College, London, United Kingdom.)
    Abstract: This paper estimates and solves a multi-country version of the standard DSGE New Keynesian (NK) model. The country-specific models include a Phillips curve determining inflation, an IS curve determining output, a Taylor Rule determining interest rates, and a real effective exchange rate equation. The IS equation includes a real exchange rate variable and a countryspecific foreign output variable to capture direct inter-country linkages. In accord with the theory all variables are measured as deviations from their steady states, which are estimated as long-horizon forecasts from a reduced-form cointegrating global vector autoregression. The resulting rational expectations model is then estimated for 33 countries on data for 1980Q1-2006Q4, by inequality constrained IV, using lagged and contemporaneous foreign variables as instruments, subject to the restrictions implied by the NK theory. The multi-country DSGE NK model is then solved to provide estimates of identified supply, demand and monetary policy shocks. Following the literature, we assume that the within country supply, demand and monetary policy shocks are orthogonal, though shocks of the same type (e.g. supply shocks in different countries) can be correlated. We discuss estimation of impulse response functions and variance decompositions in such large systems, and present estimates allowing for both direct channels of international transmission through regression coefficients and indirect channels through error spillover effects. Bootstrapped error bands are also provided for the cross country responses of a shock to the US monetary policy. JEL Classification: C32, E17, F37, F42.
    Keywords: Global VAR (GVAR), New Keynesian DSGE models, supply shocks, demand shocks, monetary policy shocks.
    Date: 2010–09
  5. By: Mahmood Khalid; Zahid Asghar (Pakistan Institute of Development Economics)
    Abstract: Given the importance of Consumer Price Index (CPI), there has been long debate on its measurement issues. It is the best and most well-known indicator of inflation, which is further used for evaluating the monetary and fiscal policy of a country. Other uses of CPI for indexation are social security benefits, rents, contractual payments, taxation, deflating national income accounts, purchasing power parity index, inflation incidence for different income groups of population, impact of inflation on demographic composition of the population. Any measurement error in CPI may overstate or understate inflation that will have serious repercussions for monetary, fiscal and other economic policies. The report of the Boskin Commission [Boskin, et al. (1996)] has identified possible sources of bias in the CPI like substitution bias, outlet bias, quality bias, new product bias. In this paper we have tried to evaluate these biases and to start a debate on improving Consumer Price Index (CPI) construction in Pakistan. We found that there are biases of Commodity Substitution Bias, Outlet Substitution Bias, Quality Adjustment Bias, Index Calculation Bias and New Product Bias. Other limitations for the CPI index including; Issue of selecting a representative product (or good), Defining issue of average quality, Data collection, weights determination and Base year change were also found.
    Keywords: Consumer Price Index, Biases in CPI, CPI Formulae
    JEL: C43 E31 E52
    Date: 2010
  6. By: Miguel Casares (Departamento de Economía-UPNA); Jean-Christophe Poutineauy (Faculté des Sciences Economiques, Université de Rennes I, Rennes, France)
    Abstract: This paper introduces both endogenous capital accumulation and deposit-in-advance requirements in the banking model of Goodfriend and McCallum (2007). Impulse response functions from technology and monetary shocks show some attenuation effect due to the procyclical behavior of the marginal finance cost. In addition, an adverse financial shock produces sizeable realistic declines in output, inflation and interest rates. In the long-run analysis, one economy where banking intermediation requires 4% of total labor force suffers from a permanent welfare cost equivalent to 1.96% of output.
    Keywords: financial attenuator, financial shocks, welfare cost of banking.
    JEL: E32 E43 E44
    Date: 2010
  7. By: Jaime Casassus; Diego Ceballos
    Abstract: We use a general equilibrium model of a monetary economy to understand the economics behind the correlation between in nation and oil futures returns. Oil is used as both, an input to the production of capital and as a consumption good. We estimate our model using maximum likelihood with the following datasets: crude oil futures prices, nominal interest rates, in nation rates and money supply growth rates. We nd that some of the positive correlation found in empirical studies is due to the fact that oil is in the consumption basket; however, this accounts only for a minor part of it. There exist other important sources of correlation related to monetary shocks and output shocks. In particular, we nd that the correlation is extremely sensitive to the reaction of the central bank to output shocks, while the reaction to in nation changes is less signi cant. Our estimates suggest that the monetary authority overreacts to output shocks by increasing the money supply in a more than necessary amount, generating a signi cant source of positive correlation. From a practical perspective, We nd that it is a good strategy to use as a hedge, the futures whose maturity is closer to the hedging horizon. This is particularly true for short-term hedging.
    Keywords: Correlation structure, inflation, futures, hedging, oil, monetary policy
    JEL: E31 G13 Q31 E44 E52 E23 D51
    Date: 2010
  8. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications); Sophie Osotimehin (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: We investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced-form of the matching model, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidizing employment in order to dampen the impact of the job finding rate fluctuations on welfare.
    Keywords: Business cycle costs; Unemployment dynamics; Matching
    Date: 2010–10–01
  9. By: Bittencourt, Manoel
    Abstract: We test for the populist view of inflation in Latin America between 1970 and 2007. The empirical results - based on the relatively novel panel time-series data and analysis - confirm the theoretical prediction that recently elected governments coming into power after periods of political dictatorship, and which are faced with high economic inequality, end up generating high inflation and macroeconomic instability. All in all, we suggest that the implementation of democracy as such requires not only the right political context - or an appropriately constrained executive - to work well, but it also must come with certain economic institutions (e.g. central bank independence and a credible and responsible fiscal authority), institutions which would raise the costs of pursuing populist policies in the first place. --
    Keywords: Polarisation,populism,hyperinflation,Latin America.
    JEL: E31 E65 N16 O23 O54
    Date: 2010
  10. By: Seth B. Carpenter; Selva Demiralp
    Abstract: With the use of nontraditional policy tools, the level of reserve balances has risen significantly in the United States since 2007. Before the financial crisis, reserve balances were roughly $20 billion whereas the level has risen well past $1 trillion. The effect of reserve balances in simple macroeconomic models often comes through the money multiplier, affecting the money supply and the amount of bank lending in the economy. Most models currently used for macroeconomic policy analysis, however, either exclude money or model money demand as entirely endogenous, thus precluding any causal role for reserves and money. Nevertheless, some academic research and many textbooks continue to use the money multiplier concept in discussions of money. We explore the institutional structure of the transmission mechanism beginning with open market operations through to money and loans. We then undertake empirical analysis of the relationship among reserve balances, money, and bank lending. We use aggregate as well as bank-level data in a VAR framework and document that the mechanism does not work through the standard multiplier model or the bank lending channel. In particular, if the level of reserve balances is expected to have an impact on the economy, it seems unlikely that a standard multiplier story will explain the effect.
    Date: 2010
  11. By: Siok Kun, Sek
    Abstract: Applying a stochastic dynamic general equilibrium model, the performance of various simple rules is analyzed in a small open economy context. The aspects that are considered in the analysis include the degree of exchange rate pass-through, trade openness, the policy objective and the source and persistency of shocks. The main objective of this analysis is to investigate if the rule reacts to exchange rate performs better than the basic closed economy rule without exchange rate term. Comparison on the performances is also made between the consumer inflation targeting and domestic inflation targeting rules. The results show that adding the exchange rate term to the policy rule enhances improvement especially in the higher pass-through case. The superior rule is the hybrid rule that reacts to the exchange rate term. CPI inflation targeting rules outperform the domestic inflation targeting rules in term of welfare loss. However, more complicated domestic inflation targeting rules generate lower loss in term of relative loss. On the second part of this chapter, comparisons on the performances of different exchange rate regimes are made under different source and persistency of shocks. The floating (pegged) regime is favored under more prominent real (nominal) shocks. The results suggest that emerging countries that experience very large real shocks should float their exchange rate.
    Keywords: simple policy rule; exchange rate pass-through; open economy model
    JEL: E58 N15 E52 H30 N25 F41 E61
    Date: 2009–11
  12. By: Tuuli Koivu (Bank of Finland.)
    Abstract: This paper studies the wealth channel in China. Using the structural vector autoregression method, we find that a loosening of China’s monetary policy indeed leads to higher asset prices, which in turn are linked to household consumption. However, the importance of the wealth channel as a part of the monetary policy transmission mechanism in China is still limited. JEL Classification: E52, P24.
    Keywords: China, monetary policy, asset prices.
    Date: 2010–09
  13. By: Patrick A. Pintus; Yi Wen
    Abstract: Investment booms and asset "bubbles" are often the consequence of heavily leveraged borrowing and speculations of persistent growth in asset demand. We show theoretically that dynamic interactions between leveraged borrowing and persistent asset demand can generate a multiplier-accelerator mechanism that transforms a one-time technological innovation into large and long-lasting boom-bust cycles. The predictions are consistent with the basic features of investment booms and the consequent asset-market crashes led by excessive credit expansion.
    Keywords: Asset pricing ; Credit
    Date: 2010
  14. By: Bornukova, Kateryna
    Abstract: In the U.S. economy hours and productivity are negatively correlated, and volatility of hours is two times higher than volatility of productivity. In the standard one shock RBC model hours are positively correlated with productivity, and hours are two times less volatile than productivity. This paper is an attempt to replicate the co-movement of hours and productivity observed in the post-war U.S. data using one shock model. I explore the real business cycles in the model with two-person household and home production.} The model economy has a representative household of two agents. Agents allocate their time among leisure, work on the market and home production. There is a fixed cost of working on the market, and agents may choose not to work. The fluctuations in the model are driven by aggregate technology shock. I calibrate the model to U.S. data, solve and simulate it. I find that in the model hours are 2 times more volatile than productivity, and that hours and productivity are negatively correlated. The model replicates well the co-movement of hours and productivity observed in the U.S. data.
    Keywords: Computable General Equilibrium; Business Cycles; Home Production; Labor Supply
    JEL: E32 E24 J22
    Date: 2009–12–01
  15. By: Marattin, Luigi; Salotti, Simone
    Abstract: This paper investigates the effects of government spending on private consumption and investment in the European Union. A certain consensus has been reached on the expansionary Keynesian effects on the economic activity of fiscal impulses. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area, by using annual data and a panel vector auto-regression approach (PVAR), with particular attention being paid to robustness across alternative identification assumptions (based on Cholesky orderings). Our results show that shocks in public spending positively affect private consumption and investment. According to our baseline estimate, a 1% increase in public spending produces a 0.24% impact rise in private consumption, and a 0.41% impact rise in private investment. The effects are substantial, and die out slowly in the case of private consumption (the cumulative impact amounts to 0.56% after 3 years), but much faster in the case of private investment. A further disaggregation between wage and non-wage components reveals that public salaries have a relatively stronger stimulating role. Note that this is not due to the different weights on GDP of the two components, which have comparable values in our sample.
    Keywords: Fiscal policy, private consumption, panel vector autoregression.
    JEL: E62 C33
    Date: 2009–12
  16. By: Kiseok Hong (Asian Development Bank Institute)
    Abstract: This paper examines fiscal policy issues in the Republic of Korea (hereafter Korea) after the 2009 global financial crisis, including the timing of fiscal policy responses, the effectiveness of expansionary measures, and the long-term implications for government debt. In order to evaluate more accurately Korea’s fiscal response since late 2008, this paper conducts an empirical analysis using historical data from Korea and other countries and derives stylized patterns on counter-cyclicality of fiscal policy and its role in the recovery process. The analysis suggests that Korea’s fiscal stimulus in 2009, while having contributed greatly to the economy’s fast recovery, was unusually large compared with typical fiscal responses during economic downturns. This paper also investigates whether the rapid increase in Korea’s fiscal debt burden is admissible in terms of long-term sustainability. Although existing evidence suggests that Korea’s fiscal debt is still manageable, the sizeable deficit and the increasing trend in the debt to GDP ratio in recent years call for vigilance. The paper concludes with some suggestions for fiscal consolidation in Korea: a stricter practice of medium-term budget planning, expansion of automatic stabilizers and reduction of discretionary components, use of more comprehensive measures of government debt, and further reforms in the national pension system are discussed.
    Keywords: fiscal policy, Republic of Korea, global financial crisis, fiscal stimulus, fiscal consolidation
    JEL: E30 H50 H60
    Date: 2010
  17. By: Bernardino Adão; Isabel Correia; Pedro Teles
    Abstract: We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is equivalent to a peg of state-contingent interest rates. These are the rates that should be targeted in order to implement unique equilibria. At the zero bound, while it is still possible to target state-contingent interest rates, that is no longer equivalent to the target of the term structure.
    Date: 2010
  18. By: Yongfu Cao-Wendy Dobson-Yiping Huang; Peter A. Petri-Michael Plummer; Raimundo Soto; Shinji Takagi.
    Abstract: The recovery of the Asia-Pacific from the global economic crisis of 2008-09 is underway but incomplete. Despite encouraging progress, major risks remain, ranging from slow growth and persistent unemployment to reemerging global imbalances and renewed financial volatility. The policies that stopped the economic freefall—massive stimulus and financial bailout packages— were urgent, relatively easy to sell politically, and to a large extent forced by circumstances. This report argues that sustained recovery now requires tackling different problems, including international imbalances among the United States, China, and other economies. U.S. consumers are not likely to drive world demand in the medium term, and the slack will have to be taken up in part by Asian consumption and investment. The early policy responses, successful as they were in averting a larger calamity, were not designed to address longer-term issues, and some are even counterproductive from that perspective.
    Keywords: Economic crisis, macroeconomic policy, stabilization
    JEL: E63 R1
    Date: 2010
  19. By: Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley)
    Abstract: We consider a dynamic stochastic general equilibrium (DSGE) model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or fullinformation flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 80% of firms in the model. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.
    Keywords: Heterogeneity, Price-setting, DSGE
    JEL: E3 E5
    Date: 2010–09–15
  20. By: César Calderón; Rodrigo Fuentes.
    Abstract: Using the dating algorithm by Harding and Pagan (2002) on a quarterly database for 23 emerging market economies (EMEs) and 12 developed countries over the period 1980.Q1-2006.Q2, we proceed to characterize and compare the business cycle features of these two groups. We first find that recessions are deeper and more frequent among EMEs (especially, among LAC countries) and that expansions are more sizable and longer (especially, among East Asian countries). After this characterization, this paper explores the linkages between the cost of recessions (as measured by the average annual rate of output loss in the peak-to-trough phase of the cycle) and several country-specific factors. Our main findings are: (a) adverse terms of trade shocks raises the cost of recessions in countries with a more open trade regime, deeper financial markets and, surprisingly, a more diversified output structure. (b) U.S. interest rate shocks seem to have a significant impact on the cost of recessions in East Asian countries. (c) Recessions tend to be deeper if they coincide with a sudden stop, but the effect tends to be mitigated in countries with deeper domestic credit markets. (d) Countries with stronger institutions tend to have less costly recessions.
    Keywords: Business cycles, peaks and troughs, emerging markets
    JEL: E32 F41
    Date: 2010
  21. By: Franz Seitz (University of Applied Sciences Weiden, Hetzenrichter Weg 15, D-92637 Weiden, Germany.); Julian von Landesberger (European Central Bank, Directorate General Economics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we analyse household holdings of the broad monetary aggregate M3 in the euro area from 1991 until 2009. We develop four models, two in nominal, two in real terms, with satisfactory economic and statistical properties. The main determinants are a transactions variable, wealth considerations, opportunity costs and uncertainty. The models are robust to different estimation strategies, samples considered and a multitude of mis-specification tests. The exercise also provides insights that go beyond the portfolio allocation decision of households. According to our analysis, it is quite apparent that in equilibrium, households jointly determine consumption and broad money holdings both influenced by wealth as well as interest rates. JEL Classification: E41, C23, C32, D21.
    Keywords: money demand, cointegrated VARs, households.
    Date: 2010–09
  22. By: Glenn Follette; Byron Lutz
    Abstract: We examine the effects of the economy on the government budget as well as the effects of the budget on the economy. First, we provide measures of the effects of automatic stabilizers on budget outcomes at the federal and state and local levels. For the federal government, the deficit increases about 0.35 percent of GDP for each 1 percentage point deviation of actual GDP relative to potential GDP. For state and local governments, the deficit increases by about 0.1 percent of GDP. We then examine the response of the economy to the automatic stabilizers using the FRB/US model by comparing the response to aggregate demand shocks under two scenarios: with the automatic stabilizers in place and without the automatic stabilizers. Second, we provide measures of discretionary fiscal policy actions at the federal and state and local levels. We find that federal policy actions are somewhat counter-cyclical while state and local policy actions have been somewhat pro-cyclical. Finally, we evaluate the impact of the budget, from both automatic stabilizers and discretionary actions, on economic activity in 2008 and 2009.
    Date: 2010
  23. By: Scott Fulford (Boston College)
    Abstract: Many people in the United States have both a revolving credit card balance on which they pay a high rate of interest, and have liquid checking or savings accounts on which they earn little interest. Why would so many people throw so much money away? This paper shows that it may not be much of a puzzle: if credit limits may change unexpectedly, that creates a reason for people to hold on to cash or savings as consumption insurance against the times when they have a high benefit from consumption but cannot borrow. I show that this approach can explain the credit card puzzle with low probabilities of losing access to credit for a wide range of preferences. The approach in this paper offers a novel channel for how financial uncertainty can affect real decisions: if the probability of losing access to credit increases, consumers will increase saving and decrease consumption to add to their insurance, even without "real" shocks to income.
    Keywords: credit, debt, liquidity, credit card puzzle, financial uncertainty
    JEL: E21
    Date: 2010–09–01
  24. By: Phu Huynh; Steven Kapsos; Kee Beom Kim; Gyorgy Sziraczki (Asian Development Bank Institute)
    Abstract: The paper investigates the labor market and social impacts of the global financial and economic crisis in Asia and the Pacific as well as national policy responses to the crisis. It draws on recent macroeconomic, trade, production, investment, and remittances data to assess the employment and social consequences of the crisis, including falling demand for labor, rising vulnerable and informal employment, and falling incomes and their related pressures on the working poor. The paper provides some projections of the impact on unemployment, vulnerable employment, working poverty, and labor productivity in the region in 2009. It demonstrates that labor market recovery is likely to lag behind output growth, based on the experience of Asian labor markets following the 1997 Asian financial crisis. The paper underscores some policy options that are likely to have positive outcomes toward generating employment and boosting aggregate demand, improving social protection and welfare on the basis of decent work principles, and promoting a sound and sustainable economic and labor market recovery.
    Keywords: labor market, financial crisis, unemployment, working poverty, labour productivity
    JEL: E24 I30 J08 J20
    Date: 2010
  25. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department, 21 E. Venizelos Ave., Athens 10250, Greece.); George Hondroyiannis (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Christos Papazoglou (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Nicholas T. Tsaveas (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Melina A. Vasardani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The aim of this paper is to study the main macroeconomic, financial and structural factors that shaped current account developments in Greece over the period from 1960 to 2007 and discuss these developments in relation to the issue of external sustainability. Concerns over Greece’s external sustainability have emerged since 1999 when the current account deficit widened substantially and exhibited high persistence. The empirical model used, which theoretically rests on the intertemporal approach, treats the current account as the gap between domestic saving and investment. We examine the behaviour of the current account in the long run and the short run using co-integration analysis and a variety of econometric tests to account for the effect of significant structural changes in the period under review. We find that a stable equilibrium current account model can be derived if the ratio of private sector financing to GDP, as a proxy for financial liberalisation, is included in the specification. Policy options to restore the country’s external sustainability are explored based on the estimated equilibrium model. JEL Classification: F30, F32.
    Keywords: Current account model, external sustainability.
    Date: 2010–09
  26. By: Erel, Isil (Ohio State University); Julio, Brandon (London Business School); Kim, Woojin (Korea University-Business School); Weisbach, Michael S. (Ohio State University)
    Abstract: Economic theory, as well as commonly-stated views of practitioners, suggests that macroeconomic conditions can affect both the ability and manner in which firms raise external financing. Theory suggests that downturns should be associated with a shift toward less information-sensitive securities, as well as a ‘flight to quality,’ in which firms can issue high-rated securities but not low-rated ones. We evaluate these hypotheses on a large sample of publicly-traded debt issues, seasoned equity offers, and bank loans. We find that worse macroeconomic conditions lead firms to use less information-sensitive securities. In addition, poor market conditions affect the structure of securities offered, shifting them towards shorter maturities and more security. Furthermore, market conditions affect the quality of securities offered, with worsening conditions substantially lowering the number of low-rated debt issues. Overall, these findings suggest that macroeconomic conditions are important factors in firms’ capital raising decisions.
    Keywords: Market downturns; Security choice; Maturity; Security
    JEL: E00 G32
    Date: 2010–09–17
  27. By: Pami Dua; Anirvan Banerji
    Abstract: This paper examines various measures of synchronization of recessions, including clustering of the onset of recession across economies, proportion of economies in expansion and the diffusion index of international coincident indexes, and shows that the recent global recession was possibly the most concerted in the post world war period. Factors that contributed to the synchronization and severity of the recession, such as trade and financial linkages and timing of policy actions, are analysed. [Working Paper No. 182]
    Keywords: synchronization, recessions, international, global recession, policy actions,
    Date: 2010
  28. By: Joonkyung Ha; Jong-Wha Lee; Lea Sumulong (Asian Development Bank Institute)
    Abstract: The current account surplus of the Republic of Korea (henceforth Korea) increased significantly in the immediate recovery period after the 1997–1998 Asian financial crisis. Since then the surplus has gradually diminished, and from 2006 to 2008, the current account was close to being balanced. Econometric analysis reveals that the effect of exchange rate changes on Korea's trade is not robust during non-crisis periods. Exchange rates only significantly affect trade when observations during crisis periods are included. This suggests that exchange rate adjustments alone will not solve the imbalance issue. Korea's external imbalances are not only caused by external factors; they also reflect internal and policy factors such as: (i) saving-investment imbalances; (ii) export-oriented policies; and (iii) the unbalanced structure of manufacturing and services. These internal imbalances result from domestic distortions and structural imbalances arising from market inefficiencies and public policies. These must be addressed to ensure balanced and sustained economic growth.
    Keywords: current account surplus, Asian financial crisis, Korea, saving-investment imbalances, export-oriented policies
    JEL: E2 E6 F4 O1 O2
    Date: 2010
  29. By: Isabel Argimón (Banco de España); Jenifer Ruiz (European University Institute, Florence)
    Abstract: The EU's transposition of Basel II into European law has been done through the Capital Requirements Directive (CRD). Although the Directive establishes, in general, uniform rules to set capital requirements across European countries, there are some areas where the Directive allows some heterogeneity. In particular, countries are asked to choose among different possibilities when transposing the Directive, which are called national discretions (ND). The main objective of our research is to use such observed heterogeneity to gather empirical evidence on the effects on European banks of more or less stringency and more or less risk sensitivity in capital requirements. Following the approach in Barth et al. (2004, 2006, 2008) we build index numbers for groups of national discretions and applying Altunbas et al. (2007) approach, we provide evidence on their effect on banks' risk, capital, efficiency and cost. We show that more stringency and more risk sensitivity in regulation not always result in a trade off between efficiency and solvency: the impact depends on the area of national discretion on which such characteristics apply.
    Keywords: Prudential regulation, capital requirements, bank capital, risk, efficiency
    JEL: E61 G21 G28
    Date: 2010–09
  30. By: Vincent Delbecque; Laurence Nayman
    Abstract: Following Corrado, Hulten and Sichel (2005) this paper investigates French spending in intangible capital. In this work, we tackle two issues. First, working on national accounting data we sharply investigate the data sources, using detailed supply & use tables taken from the French national accounts. Second, referring to different fields in the economic literature, we deepen the analysis and the measurement methods that have been used recently in the empirical literature. We are then able to assess more accurately the items of interest. We estimate that French intangible GFCF could be valued for the whole economy between 8% and 9% of GDP in 2004 and between 6% and 7% for the business sector.
    Keywords: Intangible capital investment; national accounts; methodology; productivity; growth
    JEL: E22 B40 C82 O47
    Date: 2010–09
  31. By: Koichi Futagami; Takeo Hori; Ryoji Ohdoi (Asian Development Bank Institute)
    Abstract: In this paper, we examine the effects of introducing constraints on government borrowing using a continuous-time overlapping generations model of a small open economy. We consider government placing constraints on the amount of government bonds outstanding by establishing an upper limit, or target level, for the ratio of government bonds to gross domestic product. We first show that there exist multiple steady states in the model small open economy. One is a steady state with high growth, the other a steady state with low growth. We next examine how changes in the target level for bonds affect economic growth rates at the steady states. If the economy has a positive amount of asset holdings, we obtain the following results. When the government runs budget surpluses, an increase in the target level for government bonds reduces the growth rate of the low-growth economy, but raises the growth rate of the high-growth economy. However, when the government runs budget deficits, an increase in the target level for government bonds raises the growth rate of the low-growth economy, but reduces the growth rate of the high-growth economy. If the economy has a negative amount of asset holdings, the results are ambiguous.
    Keywords: continuous-time overlapping generations model, government bonds, steady-state model
    JEL: E00 E21 E40
    Date: 2010
  32. By: Kaliappa Kalirajan; VenkatachalamAnbumozhi; Kanhaiya Singh (Asian Development Bank Institute)
    Abstract: It is an empirical fact that it is very difficult to balance economic growth, poverty reduction, and environment protection, particularly for developing and transitional economies. While the economic environment of a country is influenced by conditions within the country, it is also influenced by external shocks such as the recent global financial crisis depending on how integrated the country is with the rest of the world. Thus, it poses a continuing challenge for policy makers in developing and transitional countries to readjust the economic environment in a way that leads to better and more effective targeting of the chronic issue of poverty reduction without causing damage to the natural environment. It is in this context that this paper attempts to measure the environmental impact of changing trade patterns on the poor. The recent financial crisis has discouraged United States (US) private consumption, which in turn has significantly reduced exports from Asia. However, Asia’s private consumption is at a very low level even when compared with the current reduced US private consumption. Therefore, it is possible for Asian countries to focus more on improving regional trade and domestic consumption to compensate for the revenue losses that resulted from the reduction in global demand. This paper argues that energy-efficient production methods and service-led growth, particularly trade in environmental goods and services, provide good opportunities for Asian countries to enjoy “inclusive growth” without damaging the natural environment.
    Keywords: poverty reduction, environmental sustainability, trade, United States, Asia
    JEL: E20 Q43 Q56
    Date: 2010
  33. By: Waśniewski, Krzysztof
    Abstract: The bulk of the global innovative effort takes place in 5 countries: USA, Japan and China as leaders, with France and United Kingdom as immediate followers, which all display, on the long run, a negative marginal value added on innovation. The present paper attempts to answer the following question: why does most of innovative activity takes place in markets apparently hostile to innovation, i.e. giving back negative marginal value added on innovation ? A model is introduced in which any market may be represented as a Selten’s extensive game, subgames of which are played as Harsanyi’s games with imperfect information, by a temporarily finite and changing set of players. The firms’ innovative activity is a Nash’s dynamic equilibrium in which innovating is rational though suboptimal, without premium on innovation being a real economic profit. The model is the theoretical framework for the study of six cases: Ford Motor, General Motors, Honda, Chevron, Akzo Nobel and IBM, which allow to conclude that firms do innovation either because they have to or because this is their comparative advantage and they can do it in an exceptionally efficient way. As economic growth is grounded in efficient business patterns and in some countries those business patterns shape themselves in the context of a strong exogenous pressure on innovation. This leads to the development of economies which, regardless its pace of economic growth and balance of payments, come to a point when marginal value added on innovation is negative. At this point, however, incentives to innovate do not disappear and firms continue to apply the same business patterns and thus do create scientific input which gives back negative marginal real output. This pattern of global technological progress seem to be quite durable, with financial markets that allow to compensate, by successful financial placements, the downturns of innovative projects.
    Keywords: innovation; technology; technological progress; corporate strategies
    JEL: E22 L71 D20 D40 L60 B52 O3 L25 D21 D81 L10 C70 L16 L21 D52 D01 D00
    Date: 2010–05
  34. By: Shoshana Amyra Grossbard (Department of Economics,San Diego State University); Alfredo Marvão Pereira (Department of Economics, The College of William and Mary)
    Abstract: This paper presents an inter-temporal model of individual behavior with uncertainty about marriage and divorce and which accommodates the possible presence of economies or diseconomies of scale from marriage. We show that a scenario of higher marriage rates and higher divorce rates will be associated with higher savings rates in the presence of economies of marriage and with lower savings rates in the presence of diseconomies of marriage. In the context of traditional gender roles, this implies higher saving rates by young men and lower saving rates by young women than in less traditional countries, the opposite being the case with saving rates of married women relative to those of married men. We establish the relevance of traditional gender roles and marital status to understanding cross-country variation in gender differentials in savings behavior.
    Keywords: savings behavior, marriage, divorce, economies of marriage, gender roles
    JEL: E21 J12
    Date: 2010–09–15
  35. By: Fernandes, Rui; Gouveia, Borges; Pinho, Carlos
    Abstract: Two main problems have been emerging in supply chain management: the increasing pressure to reduce working capital and the growing variety of products. Most of the popular indicators have been developed based on a controlled environment. A new indicator is now proposed, based on the uncertainty of the demand, the flexibility of the supply chains, the evolution of the products lifecycle and the fulfillment of a required service level. The model to support the indicator will be developed within the real options approach.
    Keywords: overstock; stock management; real options
    JEL: E22 C61
    Date: 2010–06–08
  36. By: Shelley, Gary; Wallace, Frederick
    Abstract: his paper examines whether the CPI and real GDP for the U.S. exhibit nonlinear reversion to trend as recently concluded by Beechey and Österholm [Beechey, M. and Österholm, P., 2008. Revisiting the uncertain unit root in GDP and CPI: testing for non-linear trend reversion. Economics Letters 100, 221-223]. The wild bootstrap is used to correct for non-normality and heteroscedasticity in a nonlinear unit root test. Test results are found to be sensitive to the sample period examined.
    Keywords: nonlinear unit root test; wild bootstrap; non-normality
    JEL: E32 E31 C22
    Date: 2010–01

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