nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒10‒02
forty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. A Monetary Policy Model Without Money for India By Michael Patra; Muneesh Kapur
  2. Shocks and Frictions under Right-to-Manage Wage Bargaining: A Transatlantic Perspective By Agostino Consolo
  3. Rational Expectations And Inflation Targeting -An Analysis For Ten Countries By Fromlet, Pia
  4. Regional Inflation (Price) Behaviors: Heterogeneity and Convergence By Nagayasu, Jun
  5. Macroeconomic and interest rate volatility under alternative monetary operating procedures By Petra Gerlach-Kristen; Barbara Rudolf
  6. The Effect of Monetary Policy on Credit Spreads By Tolga Cenesizoglu; Badye Essid
  7. How well do the sticky price models explain the disaggregated price responses to aggregate technology and monetary policy shocks? By Jouchi Nakajima; Nao Sudo; Takayuki Tsuruga
  8. Relative-Price Changes and Demand Factors in the Period of Quantitative Easing in Japan By Bernd Hayo; Hiroyuki Ono
  9. Still Minding the Gap - Inflation Dynamics during Episodes of Persistent Large Output Gaps By André Meier
  10. Fiscal Policy Issues for India after the Global Financial Crisis (2008-2010) By Kumar, Rajiv; Soumya, Alamuru
  11. Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study By Paul Bloxham; Christopher Kent; Michael Robson
  12. The Determinants and Stability of Real Money Demand in Vietnam, 1999-2009 By NGUYEN Huyen Diu; Wade D. Pfau
  13. Boosting confidence: is there a role for fiscal policy? By Panagiotis Konstantinou; Athanasios Tagkalakis
  14. Rethinking the Liquidity Puzzle: Application of a New Measure of the Economic Money Stock By Logan Kelly; William Barnett; John Keating
  15. Nowcasting the Global Economy By James Rossiter
  16. Austerity is Not a Solution: Why the Deficit Hawks are Wrong By Robert Pollin
  17. The Use of a Marshallian Macroeconomic Model for Policy Evaluation: Case of South Africa By Jacques Kibambe Ngoie; Arnold Zellner
  18. Future of Central Banking under Globalization: Summary of the 2010 International Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan By Shigenori Shiratsuka; Wataru Takahashi; Yuki Teranishi; Kozo Ueda
  19. Disappointment Cycles By David Dillenberger; Kareen Rozen
  20. Forecasting Monetary Policy Rules in South Africa By Ivan Paya; Ruthira Naraidoo
  21. A Keynes-Kalecki Model of Cyclical Growth with Agent-Based Features By Mark Setterfield; Andrew Budd
  22. Exchange Rate Asymmetry and Flexible Exchange Rates under Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries By Pontines, Victor; Siregar, Reza Y.
  23. Macroeconomic uncertainty and emerging market stock market volatility: The case for South Africa By Z. Chinzara
  24. A macroeconomic model for the evaluation of labor market reforms By Krebs, Tom; Scheffel, Martin
  25. The Freetown Declaration: Countercyclical Policy for Africa By John Weeks
  26. The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications By Park, Cyn-Young; Yap, Josef T.; Majuca, Ruperto P.
  27. Output and Unemployment Dynamics during the Great Recession: A Panel Unobserved Components Analysis By Francis Vitek
  28. Managing Credit Booms and Busts: A Pigouvian Taxation Approach By Olivier Jeanne; Anton Korinek
  29. Sudden Stops, Output Drops, and Credit Collapses By Jihad Dagher
  30. Offshore markets for the domestic currency: monetary and financial stability issues By Dong he; Robert McCauley
  31. Fiscal Institutions and Public Spending Volatility in Europe By Bruno Albuquerque
  32. The Cross-Country Incidence of the Global Crisis By Gian Maria Milesi-Ferretti; Philip R. Lane
  33. "Asia and the Global Crisis: Recovery Prospects and the Future" By Jesus Felipe
  34. Productivity and Fiscal Policy in Japan: Short Term Forecasts from the Standard Growth Model By Selahattin Imrohoroglu; Nao Sudo
  36. Financial Development and Economic Growth in Latin America: Is Schumpeter Right? By Manoel Bittencourt
  37. Minimum Wages and Youth Employment By Gorry, Aspen
  38. The EMU sovereign-debt crisis: Fundamentals, expectations and contagion By Arghyrou, Michael G; Kontonikas, Alexandros
  39. Fiscal Deficits, Public Debt, and Sovereign Bond Yields By Emanuele Baldacci; Manmohan S. Kumar
  40. "How to Sustain the Chinese Economic Miracle? The Risk of Unraveling the Global Rebalancing" By Jörg Bibow
  41. Experience and Worker Flows By Gorry, Aspen
  42. Towards a New Architecture for Financial Stability: Seven Principles By Luis Garicano; Rosa Lastra
  43. Basel III and responding to the recent Financial Crisis: progress made by the Basel Committee in relation to the need for increased bank capital and increased quality of loss absorbing capital By Ojo, Marianne
  44. Statistical evaluation of spatial concentration of unemployment by gender By Jaba, Elisabeta; Balan, Christiana; Roman, Mihai; Roman, Monica
  45. Labor market institutions and labor market performance: what can we learn from transition countries? By H. Lehmann; A. Muravyev
  46. A Numerical Analysis of Optimal Extraction and Trade of Oil under Climate Policy By Emanuele Massetti; Fabio Sferra

  1. By: Michael Patra; Muneesh Kapur
    Abstract: A New Keynesian model estimated for India yields valuable insights. Aggregate demand reacts to interest rate changes with a lag of at least three quarters, with inflation taking seven quarters to respond. Inflation is inertial and persistent when it sets in, irrespective of the source. Exchange rate pass-through to domestic inflation is low. Inflation turns out to be the dominant focus of monetary policy, accompanied by a strong commitment to the stabilization of output. Recent policy actions have raised the effective policy rate, but the estimated neutral policy rate suggests some further tightening to normalize the policy stance.
    Date: 2010–08–04
  2. By: Agostino Consolo (University of Basel)
    Abstract: This paper introduces staggered right-to-manage wage bargaining into a New <br />Keynesian business cycle model. Our key result is that the model is able to gener- <br />ate persistent responses in output, inflation, and total labor input to both neutral <br />technology and monetary policy shocks. Furthermore, we compare the model’s dy- <br />namic behavior when calibrated to the US and to an European economy. We find <br />that the degree of price rigidity explains most of the differences in response to a <br />monetary policy shock. When the economy is hit by a neutral technology shock, <br />both price and wage rigidities turn out to be important. <br /><br />
    Keywords: Business Cycles, Labor Market Search, Wage Bargaining, Inflation
    JEL: E24 E31 E32 J64
    Date: 2010
  3. By: Fromlet, Pia (Department of Economics)
    Abstract: In this paper I evaluate inflation targeting for ten countries. The evaluation is based on unconditional as well as conditional measures of the variance of inflation around target. With strict inflation targeting, expectations of the future deviation from target given information about the deviation from the target today should be equal to zero. Using the Consumer Price Index (CPI) when calculating the inflation rate, I find that the null hypothesis can be rejected for six of ten countries. In an extended approach I add lagged output gap as an information variable for countries where data was available. I then get the result that rational expectations and strict inflation targeting can be rejected for five countries. Out of the ten countries, the United Kingdom has conducted in‡ation targeting most in line with the theory of rational expectations and strict inflation targeting, and Poland the least.
    Keywords: Inflation targeting; rational expectations; monetary policy
    JEL: E31 E52 E58
    Date: 2010–09–17
  4. By: Nagayasu, Jun
    Abstract: It is generally thought that members in monetary union experience a similar level of inflation. This paper verifies this conventional belief. Using regional data, we present statistical evidence of heterogeneous inflation in Japan. Not only does the average inflation differ significantly across regions, but regional inflation responds differently to common economic and monetary factors. Furthermore, we show no evidence of price convergence in a group of entire regions although there is some evidence of convergence in subgroups. These results suggest that diversified regional inflation can exist within monetary union.
    Keywords: Regional inflation; monetary policy; factor models; convergence
    JEL: F3 E3
    Date: 2010–09
  5. By: Petra Gerlach-Kristen; Barbara Rudolf
    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: a one-month market rate, a three-month market rate 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
    Date: 2010–09
  6. By: Tolga Cenesizoglu; Badye Essid
    Abstract: In this paper, we analyze the effect of monetary policy on yield spreads between corporate bonds with different credit ratings over changing conditions in the economy. Using futures data on the Fed funds rate, we distinguish between expected and unexpected changes in monetary policy. We find that unexpected changes in the Fed funds rate do not have a significant effect on changes in credit spreads when we do not control for different conditions in the economy. We then distinguish between three different cycles in the economy: business, credit and monetary policy cycles. In line with predictions of imperfect capital market theories, credit spreads widen (narrow) following an unexpected monetary policy tightening (easing) during periods of poor economic and credit market conditions. Several robustness tests suggest that our results are not due to possible endogeneity problems, lack of control variables or identification methodology or different cycles.
    Keywords: Business Cycle, Moody's Bond Indices, Fed Funds Rate Futures, Monetary Policy Surprises, Credit Spreads
    JEL: E44 E52
    Date: 2010
  7. By: Jouchi Nakajima (Currently in the Personnel and Corporate Affairs Department (studying at Duke University, E-mail:; Nao Sudo (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Takayuki Tsuruga (Associate Professor, Kyoto University (Email:
    Abstract: This paper documents empirically and analyzes theoretically the responses of disaggregated prices to aggregate technology and monetary policy shocks. Based on the price data of US personal consumption expenditure, we find that disaggregated price responses have features across shocks and across sectors that are difficult to explain using standard multi-sector sticky price models. In terms of shocks, a substantial fraction of disaggregated prices initially rise in response to a contractionary monetary policy shock, while most prices fall immediately in response to an aggregate technological improvement. In terms of sectors, the disaggregated price responses are correlated weakly with the frequency of price changes. To reconcile these observations, we extend the standard model. We find that the cost channel of monetary policy and cross-sectional heterogeneity in real rigidity are possible avenues in accounting for these facts.
    Keywords: Disaggregated Prices, Technology Shocks, Monetary Policy Shocks, Sticky Price Models
    JEL: E31 F52
    Date: 2010–09
  8. By: Bernd Hayo (Philipps-University Marburg); Hiroyuki Ono (Philipps-University Marburg)
    Abstract: Concentrating on the period of quantitative easing in Japan, this paper reexamines the correlation between the asymmetry of sectoral relative-price changes and the aggregate inflation rate. This correlation is widely interpreted as evidence that short-run inflation is determined by supply-side factors; however, we study whether, in addition to the inflation rate, monetary environment and aggregate demand explain this correlation. Using producer price index data, we show, first, that the positive and significant effect of relative-price change asymmetries on inflation is not robust with respect to various indicators of asymmetry. Second, indicators of aggregate demand and monetary environment affect the measures of asymmetries, which raises doubt about whether they can be interpreted as pure supply-side indicators. Third, in addition to the indirect effect via measures of asymmetries, demand and monetary factors directly affect inflation. Thus, we reject the claim that the recent disinflation/deflation period can be understood as primarily a supply-side phenomenon.
    Keywords: Japan, supply side, inflation, deflation, price-change asymmetries, quantitative easing
    JEL: E20 E31 E52 E65 O53
    Date: 2010
  9. By: André Meier
    Abstract: This paper studies inflation dynamics during 25 historical episodes in advanced economies where output remained well below potential for an extended period. We find that such episodes generally brought about significant disinflation, underpinned by weak labor markets, slowing wage growth, and, in many cases, falling oil prices. Indeed, inflation declined by about the same fraction of the initial inflation rate across episodes. That said, disinflation has tended to taper off at very low positive inflation rates, arguably reflecting downward nominal rigidities and well-anchored inflation expectations. Temporary inflation increases during episodes were, in turn, systematically related to currency depreciation or higher oil prices. Overall, the historical patterns suggest little upside inflation risk in advanced economies facing the prospect of persistent large output gaps.
    Keywords: Production , Deflation , Disinflation , Exchange rates , Inflation rates , Labor markets , Oil prices ,
    Date: 2010–08–10
  10. By: Kumar, Rajiv (Asian Development Bank Institute); Soumya, Alamuru (Asian Development Bank Institute)
    Abstract: The need for fiscal consolidation and sustainability is one of the key macroeconomic issues confronting Indian economy. This paper attempts to understand India's current fiscal situation, its likely future development, and its impact on the economy in the context of a weak global recovery from the current crisis. The impact of the global crisis has been transmitted to the Indian economy through three distinct channels, namely: the financial sector, exports, and exchange rates. The other significant channel of impact is the slump in business and consumer confidence leading to decrease in investment and consumption demand. The Indian government, to boost the demand, has announced several stimulus packages. However, there is not much room for further fiscal policy action as the consolidated fiscal deficit of the central and state governments in 2009-2010 is already about 11% of the gross domestic product (GDP). Any further increase in the fiscal deficit to GDP ratio could invite a sharp downgrading of India's credit rating and a loss of business confidence. The paper reviews the existing theories on the relationship between fiscal deficit and growth. It also analyzes the past trends and policy measures to understand the possible implications for economic recovery and long run growth in the Indian context. It also provides a long-term forecast of the fiscal deficit and public debt burden based on the past trends. Finally, the paper suggests a set of policy measures to get the Indian economy back on the path of sustained rapid and inclusive growth.
    Keywords: indian public finance; global financial crisis; deficit forecasts; fiscal policies
    JEL: E62 H20 H60
    Date: 2010–09–17
  11. By: Paul Bloxham (Reserve Bank of Australia); Christopher Kent (Reserve Bank of Australia); Michael Robson (Reserve Bank of Australia)
    Abstract: The long-running debate about the role of monetary policy in responding to rising asset prices has received renewed attention in the wake of the global financial crisis.This paper contributes to this debate by describing the Australian experience of a cycle in house prices and credit from 2002 to 2004, and discussing the role played by various policies during this episode. In particluar, it focuses on the efforts by the Reserve Bank of Australia to draw attention to the risks associated with large, ongoing increases in housing prices and household borrowing.
    Keywords: asset prices; credit growth; lending standards; monetary policy; regulatory policy
    JEL: E58 G28
    Date: 2010–09
  12. By: NGUYEN Huyen Diu (National Graduate Institute for Policy Studies); Wade D. Pfau (National Graduate Institute for Policy Studies)
    Abstract: Understanding the money demand function is highly important for monetary policy implementation, especially in a monetary targeting framework. The paper uses cointegration analysis and a reduced-form short-run error correction model to investigate the demand for money in Vietnam between 1999 and 2009. We find evidence for a cointegrating relationship between the real money demand, income, the foreign interest rate, and the real stock price. More importantly, statistical tests show that real money demand in Vietnam is stable in this period.
    Keywords: International Diversification, Utility Maximization, EPF, Hypothetical Worker, Modern Portfolio Theory, Sri Lanka
    JEL: E41 E58 C23
    Date: 2010–09
  13. By: Panagiotis Konstantinou (University of Macedonia); Athanasios Tagkalakis (Bank of Greece)
    Abstract: This paper investigates the widely held view that expansionary fiscal policy can boost consumer and business confidence, which will stimulate private spending and sustain economic activity. We find evidence in favor of this conjecture, i.e., cuts in direct taxes generate a positive effect on consumer and business confidence, while the same applies in cases of higher non-wage government consumption. However, higher government wage bills and government investment reduce confidence, possibly because they entail a permanent increase in the size of the public sector, which would have to be financed by higher future taxes.
    Keywords: Fiscal Policy, Consumer Confidence, Business Confidence, Fiscal Stimulus of Confidence
    JEL: E62 H31 H32
    Date: 2010–04
  14. By: Logan Kelly (University of Wisconsin, Department of Economics, River Falls, WI 54022); William Barnett (University of Kansas, Department of Economics, Lawrence, KS 66045); John Keating (University of Kansas, Department of Economics, Lawrence, KS 66045)
    Abstract: Historically, attempts to solve the liquidity puzzle have focused on narrowly defined monetary aggregates, such as non-borrowed reserves, the monetary base, or M1. Many of these efforts have failed to find a short-term negative correlation between interest rates and monetary policy innovations. More recent research uses sophisticated macroeconomic and econometric modeling. However, little research has investigated the role measurement error plays in the liquidity puzzle, since in nearly every case, work investigating the liquidity puzzle has used one of the official monetary aggregates, which have been shown to exhibit significant measurement error. This paper examines the role that measurement error plays in the liquidity puzzle by (i) providing a theoretical framework explaining how the official simple-sum methodology can lead to a liquidity puzzle, and (ii) testing for the liquidity effect by estimating an unrestricted VAR.
    Keywords: North-South, growth model, innovation assimilation
    JEL: E50 E43
    Date: 2010–04
  15. By: James Rossiter
    Abstract: Forecasts of global economic activity and inflation are important inputs when conducting monetary policy in small open economies such as Canada. As part of the Bank of Canada's broad agenda to augment its short-term forecasting tools, the author constructs simple mixed-frequency forecasting equations for quarterly global output, imports, and inflation using the monthly global Purchasing Managers Index (PMI). When compared against two benchmark models, the results show that the PMIs are useful for forecasting developments in the global economy. As the forecasts are updated throughout the quarter with the monthly release of the PMI, forecasting performance generally improves. An analysis of the forecasts over the period of the Great Recession (in particular, 2008Q4 to 2009Q2) shows that, while models that include the "soft" PMI indicators did not fully capture the sharp deterioration in the global economy, they nevertheless improved the forecasts relative to the benchmark models. This finding highlights the usefulness of such indicators for short-term forecasting.
    Keywords: Economic models; International topics
    JEL: E37 F47
    Date: 2010
  16. By: Robert Pollin
    Abstract: Wall Street hyper-speculation brought the global economy to its knees in 2008-09.<span>  </span>To prevent a 1930s-level Depression at that time, economic policymakers throughout the world enacted extraordinary measures.<span>  </span>These included large-scale fiscal stimulus programs, financed by major expansions in central government fiscal deficits.<span>  </span>In the U.S., the fiscal deficit reached 9.9 percent of GDP in 2009, and is projected at 10.3 percent of GDP in 2010.<span>  </span>But roughly 18 months after these measures were introduced, a new wave of opposition to large-scale fiscal deficits has emerged.<span>   </span><p></p> This paper reviews the arguments developed by various leading deficit hawks.<span>  </span>In<span>  </span>fact, they are not advancing one main argument or even a unified set of positions, but rather four distinct claims:<span>  </span>1)<span>  </span>Large fiscal deficits will cause high interest rates, large government debts, and inflation; 2) Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence; 3) The multiplier for fiscal stimulus policies is always close to zero and has been so with the current measures; and 4) Regardless of short-term considerations, we are courting disaster in the long run with structural deficits that the recession only worsened.<span>  </span><p></p> This paper argues that none of these deficit hawk positions stand up to scrutiny.<span>  </span>I also argue that through critiquing the four deficit-hawk positions, we can also bring greater clarity toward developing a workable recovery program.<span>  </span>This will include fiscal deficits that can stabilize state and local government budgets; maintain sufficient funds for unemployment insurance; and continue support for long-term investments in traditional infrastructure and clean energy.<span>    </span>But such fiscal policies also need to combine with credit-market measures that are capable of ‘pulling on a string’—i.e. creating strong enough incentives for both lenders and borrowers to unlock credit markets.
    JEL: E60 E62 E50
    Date: 2010
  17. By: Jacques Kibambe Ngoie; Arnold Zellner
    Abstract: Using a disaggregated Marshallian Macroeconomic Model (MMM-DA), this paper investigates how the adoption of a set of 'free market reforms' may affect the economic growth rate of South Africa. Accounting for possible side effects mainly on the budget deficit, our findings suggest that the institution of the proposed policy reforms would yield a substantial growth in the aggregate annual real GDP. The resulting GDP growth rate could range from 5.3 percent to 9.8 percent depending on which variant of the reform policies is implemented.
    Keywords: Marshallian Macroeconometric Model; Disaggregation; Transfer functions.
    JEL: E27
    Date: 2010
  18. By: Shigenori Shiratsuka (Associate Director-General, Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka; Wataru Takahashi (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.takahashi; Yuki Teranishi (Deputy Director, Institute for Monetary and Economic Studies (currently, Financial Systems and Bank Examination Department), Bank of Japan (E-mail: yuuki.teranishi; Kozo Ueda (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda
    Date: 2010–09
  19. By: David Dillenberger; Kareen Rozen
    Date: 2010–09–22
  20. By: Ivan Paya; Ruthira Naraidoo
    Abstract: This paper is the .rst one to: (i) provide in-sample estimates of linear and nonlinear Taylor rules augmented with an indicator of .nancial stability for the case of South Africa, (ii) analyse the ability of linear and nonlinear monetary policy rule speci.cations as well as nonparametric and semiparametric models in forecasting the nominal interest rate setting that describes the South African Reserve Bank (SARB) policy decisions. Our results indicate, .rst, that asset prices are taken into account when setting interest rates; second, the existence of nonlinearities in the monetary policy rule; and third, forecasts constructed from combinations of all models perform particularly well and that there are gains from semiparametric models in forecasting the interest rates as the forecasting horizon lengthens.
    Keywords: Taylor rules, nonlinearity, nonparametric, semiparametric, forecasting
    Date: 2010
  21. By: Mark Setterfield (Department of Economics, Trinity College); Andrew Budd (Sloan School of Management, MIT)
    Abstract: Throughout his career, Malcolm Sawyer has both encouraged and contributed to the development of a Kaleckian alternative to conventional macroeconomic theory. In the spirit of this endeavour, we construct a Keynes-Kalecki model of cyclical growth with agent-based features. Our model is driven by heterogeneous firms who, confronting an environment of fundamental uncertainty, revise their “state of long run expectations” in response to recent events. Model simulations generate fluctuations in the rate of growth that are aperiodic and of variable amplitude. We also study the size distribution of firms resulting from our simulations, finding evidence of a power law distribution that we have no reason to anticipate from the basic structure of our model. Finally, we reflect on the potential advantages of combining aggregate structural modelling with some of the methods and practices of agent-based computational economics.
    Keywords: Kaleckian model, growth, cycles, agent-based computational economics
    JEL: E12 E32 E37 O41
    Date: 2010–09
  22. By: Pontines, Victor; Siregar, Reza Y.
    Abstract: We demonstrate that the economies of Indonesia, Korea, Philippines and Thailand, which are among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of an asymmetrical exchange rate behaviour wherein appreciation pressures are restrained more substantially than depreciation pressures. In short, these four Asian economies exemplify aversion to appreciations such that greater flexibility is allowed only one side of the market. Formal econometric tests using the smooth transition autoregressive and the Markov regime switching models confirm this hypothesis of aversion to appreciation and show that the central banks of these four economies tend to tolerate more of depreciations than of appreciations of their local currencies against the US dollar.
    Keywords: Exchange Rate Asymmetry Inflation Targeting; Fear of Floating; Fear of Appreciation; Regime Switching Models.
    JEL: E58 F41 F31
    Date: 2010–08–28
  23. By: Z. Chinzara
    Abstract: This paper analyses how systematic risk emanating from the macro-economy is transmitted into stock market volatility using augmented autoregressive GARCH (AR-GARCH) and Vector autoregression models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997-98 Asian and the 2007-2008 sub-prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility. The findings show that macroeconomic uncertainty significantly influences stock market volatility. Although volatilities in inflation, the gold price and the oil price seem to play a role, it is found that volatility in short-term interest rates and exchange rates are the most important, suggesting that South African domestic financial markets are increasingly becoming interdependent. Finally, the results show that financial crises increase volatility in stock market and in most macroeconomic variables and, by so doing, strengthen the effects of changes in macroeconomic variables on the stock market.
    Date: 2010
  24. By: Krebs, Tom; Scheffel, Martin
    Abstract: We develop a tractable macroeconomic model with employment risk and labor market search in order evaluate the effects of labor market reform on unemployment, growth, and welfare. The model has a large number of risk-averse households who can invest in risk-free physical capital and risky human capital. Unemployed households receive unemployment benefits and decide how much search effort to exert. We present a theoretical characterization result that facilitates the computation of equilibria substantially. We calibrate the model to German data and use the calibrated model economy to simulate the macroeconomic effects of the German labor market reforms of 2005 and 2006 (Hartz Reforms). We find that the 2005-reform had large employment effects: the equilibrium unemployment rate has been reduced by approximately 1.1 percentage points from 7.5 to 6.4 percent. Moreover, the drop in unemployment has led to substantial output gains. Finally, employed and short-term unemployed households experienced significant welfare gains, whereas the long-term unemployed have lost in welfare terms. The effects of the 2006-reform are qualitatively similar, but quantitatively much smaller. We also show that the social welfare maximizing replacement rate is lower than the current (post-reform) replacement rate in Germany. However, implementing the optimal unemployment benefit system generates only small welfare gains. --
    Keywords: dynamic general equilibrium,heterogenous agents,human capital,labor market search,unemployment insurance,German labor market reform
    JEL: E24 E60 J64 J65
    Date: 2010
  25. By: John Weeks
    Abstract: In August 2009 the African finance ministers issued the Freetown Declaration, in which they committed their governments to “implement fiscal stimulus measures” to counter the effects of the international financial crisis on their economies.<span>  </span>This paper analyzes the feasibility of realizing this commitment. It considers the availability of policy instruments in the sub-Saharan countries for countercyclical intervention.<span>  </span>On the basis of this, the paper proposes a fiscal stimulus tailored to the conditions and constrains of the countries of the region.<span>  </span>In a majority of the countries the fiscal expansion could be financed domestically, in other countries governments would require additional external funding, and only for a few countries would a stimulus not be appropriate.
    JEL: E3 E62 O11 O55
    Date: 2010
  26. By: Park, Cyn-Young; Yap, Josef T.; Majuca, Ruperto P.
    Abstract: Monitoring the behavior of potential output helps policymakers implement appropriate policies in response to an economic crisis. In the short-run, estimates of the output gap will guide the timing of implementation and withdrawal of stimulus measures. In the medium- to long-term, these estimates will also provide the basis for gauging productive potential and hence guide policies to support the sustainable noninflationary output growth. In this paper, the authors investigate the postcrisis behavior of potential output in emerging East Asian economies by employing the Markov-switching model to account for structural breaks. Results show that after the 1997/98 Asian financial crisis, potential output in Hong Kong, China; Korea; Singapore; and Malaysia reverts to the level consistent with the trend prior to the crisis. While there is a permanent drop in potential output in Thailand and Indonesia, growth rates returned to the precrisis trend. PRC, Taipei,China, and the Philippines are special cases. Econometric estimates of a simple growth model show that the difference among economies can be attributed to the investment-GDP ratio, macroeconomic policies, exchange rate behavior, and productivity which is proxied by the level of technological activity. These results can guide policy after the 2008 crisis.
    Keywords: Philippines, East Asia, potential output, Markov-switching model, structural break, global crisis
    Date: 2010
  27. By: Francis Vitek
    Abstract: This paper analyzes the sources of output and unemployment dynamics in the world economy during the Great Recession. This analysis is based on a panel unobserved components model of the world economy, disaggregated into its fifteen largest national economies. We find that excess supply pressure was primarily transmitted from the output market to the labor market by economy specific combinations of negative domestic or foreign output demand shocks, mitigated to varying degrees by countercyclical labor market policies or institutions.
    Date: 2010–08–04
  28. By: Olivier Jeanne (Peterson Institute for International Economics); Anton Korinek
    Abstract: We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model with reference to (1) the US small and medium-sized enterprise sector and (2) the household sector and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
    Keywords: boom-bust cycles, financial crises, systemic externalities, macroprudential regulation, precautionary savings
    JEL: E44 G38
    Date: 2010–09
  29. By: Jihad Dagher
    Abstract: This paper proposes a tractable Sudden Stop model to explain the main patterns in firm level data in a sample of Southeast Asian firms during the Asian crisis. The model, which features trend shocks and financial frictions, is able to generate the main patterns observed in the sample during and following the Asian crisis, including the ensuing credit-less recovery, which are also patterns broadly shared by most Sudden Stop episodes as documented in Calvo et al. (2006). The model also proposes a novel explanation as to why small firms experience steeper declines than their larger peers as documented in this paper. This size effect is generated under the assumption that small firms are growth firms, to which there is support in the data. Trend shocks when combined with financial frictions in this model also generate strong leverage effects in line with what is observed in the sample, and with other observations from the literature.
    Keywords: Stock prices , Southeast Asia , Borrowing , Financial crisis , External shocks , Capital flows , Credit , Current account ,
    Date: 2010–07–29
  30. By: Dong he; Robert McCauley
    Abstract: We show in this paper that offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. We argue that, for emerging market economies that are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency while still allowing the authorities to retain a measure of control over the pace of capital account liberalisation. The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euromarkets shows that policy options are available for managing such risks.
    Keywords: offshore markets; currency internationalisation; monetary stability; financial stability
    Date: 2010–09
  31. By: Bruno Albuquerque
    Abstract: This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 25 EU countries over the 1980-2007 period. The dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility, as more checks and balances make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. Our results also show that bigger countries and bigger governments have less public spending volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that high concentration of parliamentary seats in a few parties would increase public spending volatility.
    JEL: E32 E62 H30
    Date: 2010
  32. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: We examine whether the cross-country incidence and severity of the 2008-2009 global recession is systematically related to pre-crisis macroeconomic and financial factors. We find that the pre-crisis level of development, increases in the ratio of private credit to GDP, current account deficits, and openness to trade are helpful in understanding the intensity of the crisis. International risk sharing did little to shield domestic demand from the country-specific component of output declines, while those countries with large pre-crisis current account deficits saw domestic demand fall by much more than domestic output during the crisis.
    Date: 2010–07–26
  33. By: Jesus Felipe
    Abstract: The global crisis of 2007–09 affected developing Asia largely through a decline in exports to the developed countries and a slowdown in remittances. This happened very quickly, and by 2009 there were already signs of recovery (except on the employment front). This recovery was led by China’s impressive performance, aided by a large stimulus package and easy credit. But China needs to make efforts toward rebalancing its economy. Although private consumption has increased at a fast pace during the last decades, investment has done so at an even faster pace, with the consequence that the share of consumption in total output is very low. The risk is that the country may fall into an underconsumption crisis. Looking at the medium and long term, developing Asia’s future is mixed. There is one group of countries with a highly diversified export basket. These countries have an excellent opportunity to thrive if the right policies are implemented. However, there is another group of countries that relies heavily on natural resources. These countries face a serious challenge, since they must diversify.
    Keywords: Asia; China; Global Crisis; Open Forest
    JEL: E61 O11 O53 O57
    Date: 2010–09
  34. By: Selahattin Imrohoroglu (Professor, Department of Finance and Business Economics, Marshall School of Business, University of Southern California (E-mail:; Nao Sudo (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Japan is facing severe fiscal challenges. The aging of the population is projected to raise total pension and health expenditures. There is already a huge debt to output ratio which is the highest in advanced economies. In this paper we ask `if the consumption tax rate is raised to 15%, will there be a primary surplus, and what factors are important in achieving a fiscal balance?' Using the standard growth model 's simulations as `modern back-of-the-envelope' calculations, the quantitative findings indicate the critical need to contain government expenditures. Even an annual growth rate of 3% in GDP over the next 20 years may be insufficient to turn consistent primary surpluses, combined with a new consumption tax rate of 15%, unless prudent expenditure policies are implemented.
    Keywords: Primary Balance, Fiscal Policy, Productivity, Growth Theory
    JEL: E00 H20 H50
    Date: 2010–09
  35. By: Mario Garcia Molina; Alba Avila; Ibrahim Massy
    Abstract: The article searches for quantitative evidence in favor of an extended version of Goodwin´s predator-prey model of endogenous distribution-employment cycles for 16 countries. The model is extended to include several harmonics in both series. The model fits all the observations both within sample and out of sample for half of the countries, with a 10% error, and for 4 countries with a 5% error. This suggests that the model may be useful in empirical work.
    Date: 2010–09–22
  36. By: Manoel Bittencourt
    Abstract: In this paper we investigate the role of financial development, or more wide-spread access to finance, in generating economic growth in four Latin American countries between 1980 and 2007. The results, based on panel time-series data and analysis, con.rm the Schumpeterian prediction which suggests that finance authorises the entrepreneur to invest in productive activities, and therefore to promote economic growth. Furthermore, given the characteristics of the sample of countries chosen, we highlight the importance of macroeconomic stability, and all the institutional framework that it encompasses, as a necessary pre-condition for financial development, and consequently for sustained growth and prosperity in the region.
    Keywords: Finance, growth, Latin America
    JEL: E31 N16 O11 O54
    Date: 2010
  37. By: Gorry, Aspen
    Abstract: Significant employment differences between the US and Europe are concentrated among young workers. This paper constructs a labor search model that accounts for age patterns of employment. Work experience reduces the probability that workers lose their jobs. By introducing minimum wages, the model explains empirical findings on the effects of minimum wage laws. In addition, the model shows that minimum wages can account for about half of the differences in youth employment between Europe and the United States.
    Keywords: Minimum wages; youth employment; France; United States
    JEL: E24 J64
    Date: 2010–06–24
  38. By: Arghyrou, Michael G (Cardiff Business School); Kontonikas, Alexandros
    Abstract: We offer a detailed empirical investigation of the European sovereign debt crisis based on the theoretical model by Arghyrou and Tsoukalas (2010). We find evidence of a marked shift in market pricing behaviour from a 'convergence-trade' model before August 2007 to one driven by macro-fundamentals and international risk thereafter. The majority of EMU countries have experienced contagion from Greece. There is no evidence of significant speculation effects originating from CDS markets. Finally, the escalation of the Greek debt crisis since November 2009 is confirmed as the result of an unfavourable shift in country specific market expectations. Our findings highlight the necessity of structural, competitiveness-inducing reforms in periphery EMU countries and institutional reforms at the EMU level enhancing intra-EMU economic monitoring and policy co-ordination.
    Keywords: euro-area; crisis; spreads; fundamentals; expectations; contagion; speculation
    JEL: E43 E44 F30 G12
    Date: 2010–09
  39. By: Emanuele Baldacci; Manmohan S. Kumar
    Abstract: The recent sharp increase in fiscal deficits and government debt in many countries raises questions regarding their impact on long-term sovereign bond yields. While economic theory suggests that this impact is likely to be adverse, empirical results have been less clear cut, have generally ignored nonlinear effects of deficits and debt through some other key determinants of yields, and have been mostly confined to advanced economies. This paper reexamines the impact of fiscal deficits and public debt on long-term interest rates during 1980 - 2008, taking into account a wide range of country-specific factors, for a panel of 31 advanced and emerging market economies. It finds that higher deficits and public debt lead to a significant increase in long-term interest rates, with the precise magnitude dependent on initial fiscal, institutional and other structural conditions, as well as spillovers from global financial markets. Taking into account these factors suggests that large fiscal deficits and public debts are likely to put substantial upward pressures on sovereign bond yields in many advanced economies over the medium term.
    Date: 2010–08–04
  40. By: Jörg Bibow
    Abstract: This paper investigates China’s role in creating global imbalances, and the related call for a massive renminbi revaluation as a (supposed) panacea to forestall their reemergence as the world economy recovers from severe crisis. We reject the prominence widely attributed to China as a cause of global imbalances and the exclusive focus on the renminbi-dollar exchange rate as misguided. And we emphasize that China's response to the global crisis has been exemplary. Apart from acting as a growth leader in the global recovery by boosting domestic demand to offset the slump in exports, China has in the process successfully completed the first stage in rebalancing its economy, which is in stark contrast to other leading trading nations that have simply resumed previous policy patterns. The second stage in China’s rebalancing will consist of further strengthening private consumption. We argue that this will be best supported by continued reliance on renminbi stability and capital account management, so as to assure that macroeconomic policies can be framed in line with domestic development requirements.
    Keywords: Global Imbalances; Rebalancing; Renminbi Revaluation; Stimulus Package; Export-led Growth
    JEL: E63 E65 F01 F42
    Date: 2010–09
  41. By: Gorry, Aspen
    Abstract: This paper extends the literature on learning in labor markets by parameterizing the amount of learning that transfers across jobs. Previous models have assumed that learning is either job specific as in Jovanovic (1979) or perfectly transferable across jobs as in Gibbons et al. (2005). By allowing some but not all learning to be transferred, this model generates novel predictions of a decline in job finding rates with age and a decline in the variance of wages with experience that are consistent with observed worker outcomes.
    Keywords: Job finding rate; job separation rate; experience; wage volatility
    JEL: E24 J31 J64
    Date: 2010–07–07
  42. By: Luis Garicano; Rosa Lastra
    Abstract: In this paper we use insights from organizational economics and financial regulation to studythe optimal architecture of supervision. We suggest that the new architecture should revolvearound the following principles: (i) banking, securities and insurance supervision should befurther integrated; (ii) macro prudential supervisory function must be in the hands of thecentral bank; (iii) the relation between macro and micro supervisors must be articulatedthrough a management by exception system involving direct authority of the macrosupervisor over enforcement and allocation of tasks; (iv) given the difficulty of measuringoutput on supervisory tasks, the systemic risk supervisor must necessarily be moreaccountable and less independent than Central Banks are on their monetary task; (v) thesupervisory agency cannot rely on high powered incentives to motivate supervisors, and mustrely on culture instead; (vi) the supervisor must limit its reliance on self regulation; and (vii)the international system should substitute the current loose, networked structure for a morecentralized and hierarchical one.
    Keywords: Banks, international financial markets, systematic risk
    JEL: E61 G21
    Date: 2010–07
  43. By: Ojo, Marianne
    Abstract: Developments since the introduction of the 1988 Basel Capital Accord have resulted in growing realisation that new forms of risks have emerged and that previously existing and managed forms require further redress. The revised Capital Accord, Basel II, evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risks within firms. The 1988 Basel Accord was adopted as a means of achieving two primary objectives: Firstly, “…to help strengthen the soundness and stability of the international banking system – this being facilitated where international banking organisations were encouraged to supplement their capital positions; and secondly, to mitigate competitive inequalities.” As well as briefly outlining various efforts and measures which have been undertaken and adopted by several bodies in response to the recent Financial Crisis, this paper considers why efforts aimed at developing a new framework, namely, Basel III, have been undertaken and global developments which have promulgated the need for such a framework. Further, it attempts to evaluate the strengths and flaws inherent in the present and future regulatory frameworks by drawing a comparison between Basel II and the enhanced framework which will eventually be referred to as Basel III.
    Keywords: capital; cyclicality; buffers; risk; regulation; internal controls; equity; liquidity; losses; forward looking provisions; silent participations; Basel III
    JEL: E0 K2 E32 E58 E44
    Date: 2010–09–22
  44. By: Jaba, Elisabeta; Balan, Christiana; Roman, Mihai; Roman, Monica
    Abstract: This paper studies the spatial distribution of unemployment by gender, in the counties of Romania, in 2008.The Lorenz curve and Gini index are used to identify a pattern of spatial concentration of unemployment, differentiated by gender. Evaluation of gender differences in unemployment spatial concentration model shows significant differences. There is a greater spatial concentration of unemployment for female population. Based on results of grouping counties by cluster analysis applied for unemployment rate, one could explain the gender differences in spatial concentration correlated with spatial distribution of the workforce and the characteristics of territorial development of counties in Romania.
    Keywords: unemployment; spatial concentration; gender discrepancies; cluster analysis; regional development; Romania
    JEL: E24 J21 R11
    Date: 2010–01
  45. By: H. Lehmann; A. Muravyev
    Abstract: This paper studies the relationship between labor market institutions and policies and labor market performance using a new and unique dataset that covers the countries of Eastern Europe and Central Asia, which in the last two decades experienced radical economic and institutional transformations. We document a clear trend towards liberalization of labor markets, especially in the countries of the former Soviet Union, but also substantial differences across the countries studied. Our econometric analysis implies that institutions matter for labor market outcomes, and that deregulation of labor markets improves their performance. The analysis also suggests several significant interactions between different institutions, which are in line with the idea of beneficial effects of reform complementarity and broad reform packages. Finally, we show that there are important advantages of focusing on a broader set of labor market outcomes, and not only on the unemployment rate, which until now has been the main approach in the empirical literature.
    JEL: E24 J21 P20
    Date: 2010–09
  46. By: Emanuele Massetti (Fondazione Eni Enrico Mattei, Euro-Mediterranean Center for Climate Change); Fabio Sferra (Fondazione Eni Enrico Mattei)
    Abstract: We introduce endogenous investments for increasing conventional and non-conventional oil extraction capacity in the integrated assessment model WITCH. The international price of oil emerges as the Nash equilibrium of a non-cooperative game. When carbon emissions are not constrained, oil is used throughout the century, with unconventional oil taking over conventional oil from mid-century onward. When carbon emissions are constrained, oil consumption drops dramatically and the oil price is lower than in the BaU. Unconventional oil is not extracted. Regional imbalances in the distribution of stabilisation costs are magnified and the oil-exporting countries bear, on average, costs three times larger than in previous estimates.
    Keywords: Climate Policy, Integrated Assessment, Oil Production, Oil Revenues, Oil Trade
    JEL: E17 F17 Q32 Q43 Q54
    Date: 2010–09

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