nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒10‒09
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Money Demand and the Role of Monetary Indicators in Forecasting Euro Area Inflation By Christian Dreger; Jürgen Wolters
  2. An Unfinished Transition. Inflation and Macroeconomic Policies in Argentina Post-Convertibility By Daniel Heymann; Adrián Ramos
  3. Does Trade Integration Alter Monetary Policy Transmission? By Cwik, Tobias; Müller, Gernot; Wolters, Maik H
  4. Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area By Matthieu Darracq Pariès; Christoffer Kok Sørensen; Diego Rodriguez Palenzuela
  5. Optimality criteria of hybrid inflation-price level targeting By László Bokor
  6. The End of the Great Depression 1939-41: Policy Contributions and Fiscal Multipliers By Gordon, Robert J; Krenn, Robert
  7. Banks' financial conditions and the transmission of monetary policy: a FAVAR approach. By Jimborean, R.; Mésonnier, J-S.
  8. Does Money Matter? An Empirical Investigation By Farrokh Nourzad; Barry Huston; James M. McGibany
  9. Monetary policy in exceptional times By Michele Lenza; Huw Pill; Lucrezia Reichlin
  10. Forecasting and assessing Euro area house prices through the lens of key fundamentals By Anton Nakov; Carlos Thomas
  11. Um Modelo Dinâmico de Macroeconomia Aberta com Metas de Inflação, “Conflito Distributivo” e Equilíbrio na Conta Corrente By Eduardo Drumond; Gabriel Porcile
  12. Responses of the Polish economy to demand and supply shocks under alternative fiscal policy rules By Piotr Karp; Magdalena Zachłod-Jelec
  13. A Leading Index for the Indian Economy By Pami Dua; Anirvan Banerji
  14. Bank risk-taking, securitization, supervision and low interest rates: Evidence from the euro area and the U.S. lending standards By Angela Maddaloni; José-Luis Peydró
  15. Fiscal Policy in Latin America: Countercyclical and Sustainable at Last? By Christian Daude; Angel Melguizo; Alejandro Neut
  16. Predicting recessions and recoveries in real time: The euro area-wide leading indicator (ALI) By Gabe de Bondt; Elke Hahn
  17. Are Central Banks' Projections Meaningful? By Galí, Jordi
  18. Assessing the Predictive Power of Labor-Market Indicators of Inflation By Farrokh Nourzad
  19. "Innocent Frauds Meet Goodhart's Law in Monetary Policy" By Dirk Bezemer; Geoffrey Gardiner
  20. The Dynamic Voting Patterns of the Bank of England's MPC By Jan Marc Berk; Beata Bierut; Ellen Meade
  21. The macroeconomic context of the firms in Romania – benchmarks, evolutions and certain prospective evaluations By TODEROIU, Filon
  22. The Euro overnight interbank market and ECB's liquidity management policy during tranquil and turbulent times By Nuno Cassola; Michael Huetl
  23. Real Wages and the Business Cycle in Germany By Marczak, Martyna; Beissinger, Thomas
  24. Exchange Rate Determination Under Monetary Policy Rules in a Financially Underdeveloped Economy: A Simple Model and Application to Mozambique By Shakill Hassan; Félix Simione
  25. Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America By Francisco Gallego; José Tessada
  26. "The Meltdown of the Global Economy: A Keynes-Minsky Episode?" By Sunanda Sen
  27. Feel No Pain: Why a Deficit in Times of High Unemployment is Not a Burden By Dean Baker
  28. Sustainable Economic Growth for India: An Exercise in Macroeconomic Scenario Building By V. Pandit
  29. Social Protection as an Automatic Stabilizer By Dolls, Mathias; Fuest, Clemens; Peichl, Andreas
  30. China : global crisis avoided, robust economic growth sustained By Vincelette, Gallina Andronova; Manoel, Alvaro; Hansson, Ardo; Kuijs, Louis
  31. Foreign currency borrowing of households in new EU member states By Attila Csajbók; András Hudecz; Bálint Tamási
  32. Will the US Economy Recover in 2010? A Minimal Spanning Tree Study By Yiting Zhang; Gladys Hui Ting Lee; Jian Cheng Wong; Jun Liang Kok; Manamohan Prusty; Siew Ann Cheong
  33. The Consequences of Banking Crises for Public Debt By Davide Furceri; Aleksandra Zdzienicka
  34. Effect of Rainfall on Seasonals in Indian Manufacturing Production: Evidence from Sectoral Data By Kumawat, Lokendra
  35. Skill-Biased Change in Entrepreneurial Technology By Poschke, Markus
  36. Public and Private Insurance with Costly Transactions By Bertola, Giuseppe; Koeniger, Winfried
  37. The EU Stress Test and Sovereign Debt Exposures By Adrian Blundell-Wignall; Patrick Slovik
  38. Global Financial Regulatory Reforms:Implications for Developing Asia By Arner, Douglas W.; Park, Cyn-Young
  39. The Consumer Revolution: Turning Point in Human History, or Statistical Artifact? By Clark, Gregory
  41. Does Government Expenditure on Education Promote Economic Growth? An Econometric Analysis By Abhijeet, Chandra

  1. By: Christian Dreger; Jürgen Wolters
    Abstract: This paper examines the forecasting performance of a broad monetary aggregate (M3) in predicting euro area inflation. Excess liquidity is measured as the difference between the actual money stock and its fundamental value, the latter determined by a money demand function. The out-of sample forecasting performance is compared to widely used alternatives, such as the term structure of interest rates. The results indicate that the evolution of M3 is still in line with money demand even in the period of the financial and economic crisis. Monetary indicators are useful to predict inflation at the longer horizons, especially if the forecasting equations are based on measures of excess liquid-ity. Due to the stable link between money and inflation, central banks should implement exit strategies from the current policy path, as soon as the financial conditions are ex-pected to return to normality.
    Keywords: Money demand, excess liquidity, money and inflation
    JEL: C22 C52 E41
    Date: 2010
  2. By: Daniel Heymann (Departament of Economics, Universidad de San Andres & Universidad de Buenos Aires); Adrián Ramos (CEPAL & Universidad de Buenos Aires)
    Keywords: inflation, macroeconomic, policy, Argentina, convertibility
    Date: 2010–08
  3. By: Cwik, Tobias; Müller, Gernot; Wolters, Maik H
    Abstract: This paper explores the role of trade integration - or openness - for monetary policy transmission in a medium-scale new Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation: a monetary contraction which appreciates the exchange rate lowers the local currency price of imported goods; this, in turn, induces domestic producers to lower their prices too. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on time series for the US relative to the euro area. Our estimation procedure yields plausible parameter values and suggests a strong role for strategic complementarities. Counterfactual simulations show that openness alters monetary transmission significantly. While the contractionary effect of a monetary policy shock on inflation and output tends to increase in openness, we find that monetary policy's control over inflation increases, as the output decline which is necessary to bring about a given reduction of inflation is smaller in more open economies.
    Keywords: exchange rate channel; monetary policy transmission; open economy; strategic complementarity; trade integration
    JEL: E52 F41 F42
    Date: 2010–09
  4. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego Rodriguez Palenzuela (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The financial crisis clearly illuminated the potential amplifying role of financial factors on macroeconomic developments. Indeed, the heavy impairments of banks’ balance sheets brought to the fore the banking sector’s ability to provide a smooth flow of credit to the real economy. However, most existing structural macroeconomic models fail to take into account the crucial role of banks’ balance sheet adjustment in the propagation of shocks to the economy. This paper contributes to fill this gap, analyzing the role of credit market frictions in business cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially-constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the macroeconomic implications of various financial frictions on the supply and demand of credit, and in particular we assess the effects of introducing risk-sensitive and more stringent capital requirements. Finally, we explore the scope for counter-cyclical bank capital rules and the strategic complementarities between macro-prudential tools and monetary policy. JEL Classification: E4, E5, F4.
    Keywords: DSGE models, Bayesian estimation, Banking, Financial regulation.
    Date: 2010–10
  5. By: László Bokor (Budapest University of Technology and Economics)
    Abstract: This paper provides a sensitivity analysis of the relative performance of inflation targeting, price level targeting, and hybrid targeting, the combination of these two. A simple, three-period, steady state to steady state economy is presented, where monetary policy is facing various sets of forward and backward looking expectations, social preferences on inflation and output gap stabilization, and degrees of cost push shock persistence. we derive optimal policy mix under the whole spectrum of these economic conditions, reporting also the criteria of the replicability of the theoretically optimal solution. The main intention of the examination is to reveal the nature of each interrelation between economic and policy parameters. The results show that (i) the relative strength of regimes depends heavily on the preconditions, and that (ii) the relationships of parameters related to the performance are non-linear and occasionally non-monotonic as well. our model specification is somewhat restrictive, however, contrary to the related literature, the examination, even in the intermediate cases, can be conducted analytically.
    Keywords: hybrid inflation-price level targeting, hybrid new keynesian Phillips curve, cost push shock persistence
    JEL: E50 E52 E58
    Date: 2010
  6. By: Gordon, Robert J; Krenn, Robert
    Abstract: This paper is about the size of fiscal multipliers and the sources of recovery from the Great Depression. Its contributions begin with a new quarterly data set for the interwar period that allows development of a VAR model of the U. S. economy over the period 1920-41. The quarterly data facilitate an estimate of the growth rate and level of potential real GDP, and this in turn allows us to date the end of the Great Depression as the period between 1939:Q1, when the output gap was 21.9 percent, and 1941:Q4, when the output gap was -1.3 percent. By using VAR dynamic forecasting and examining the effect of innovations to each variable individually, this paper’s baseline result is that 89.1 percent of the 1939:Q1-1941:Q4 recovery can be attributed to fiscal policy innovations, 34.1 percent to monetary policy innovations and the remaining -23.2 percent to the combined effect of the basic VAR dynamic forecast and innovations in non-government components of GDP (N). The paper attributes the negative innovations of N in the second half of 1941 to capacity constraints. Traditional Keynesian multipliers assume that there are no capacity constraints to impede a fiscal-driven expansion in aggregate demand. On the contrary, we find ample evidence of capacity constraints in 1941, particularly in the second half of that year. As a result our preferred government spending multiplier (which starts in 1940:Q2 and subtracts out the forecasts of the no-shock basic VAR model) is 1.80 when the time period ends in 1941:Q2 but only 0.88 when the time period ends in supply-constrained 1941:Q4. Only the 1.80 multiplier is relevant to situations like 2009-10 when capacity constraints are absent across the economy. Two sets of new insights emerge from a review of contemporary print media. We document that the American economy went to war starting in June 1940, fully 18 months before Pearl Harbor, in contrast to the widespread assumption in the previous literature that Pearl Harbor marked the beginning of WWII for the United States. We also detail the bifurcated nature of the 1941 economy, with excess capacity in its labor market but capacity constraints in many of the key manufacturing industries. By July 1941, the American economy was in a state of perceived national emergency. We not only show in two alternative sets of quarterly data that private consumption and investment actually declined in late 1941, but we also explain why. Among these examples, shortages of steel prevented auto companies from satisfying demand, and shortages of aluminum needed for aircraft production suppressed production even of the most humble of household objects, like tea kettles and zippers.
    Keywords: , monetary policy in the Great Depression; capacity constraints; fiscal multipliers; Great Depression; interwar period; rearmament; World War II
    JEL: E2 E22 E5 E62 N12
    Date: 2010–09
  7. By: Jimborean, R.; Mésonnier, J-S.
    Abstract: We propose a novel approach to assess whether banks' financial conditions, as reflected by bank-level information, matter for the transmission of monetary policy, while reconciling the micro and macro levels of analysis. We include factors summarizing large sets of individual bank balance sheet ratios in a standard factor-augmented vector autoregression model (FAVAR) of the French economy. We first find that factors extracted from banks' liquidity and leverage ratios predict macroeconomic fluctuations. This suggests a potential scope for macroprudential policies aimed at dampening the procyclical effects of adjustments in banks' balance sheets structure. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point monitoring the information contained in bank balance sheets, above the information already contained in credit aggregates, as far as monetary policy transmission is concerned.
    Keywords: Monetary transmission; Credit channel; Factor Augmented Vector Autoregression (FAVAR).
    JEL: E44 E52 G21
    Date: 2010
  8. By: Farrokh Nourzad (Economics Department Marquette University); Barry Huston (Economics Department Marquette University); James M. McGibany (Economics Department Marquette University)
    Abstract: This paper uses a simultaneous-equations model of the new consensus macroeconomic model to examine whether the inclusion of the money stock in the aggregate demand function improves the statistical fit of the model. The results indicate that the consensus model is accurate for the U.S. in that the inclusion of money does not increase the predictive power of the model. However, the results reveal that the estimated coefficients are more robust when money is included as an instrumental variable in the simultaneous equations consensus model
    Keywords: Consensus Macro Model; Monetary Policy; Phillips Curve; Taylor Rule
    JEL: C30 C52 E32
    Date: 2010–09
  9. By: Michele Lenza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Huw Pill (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School.)
    Abstract: This paper describes the response of three central banks to the 2007-09 financial crisis: the European Central Bank, the Federal Reserve and the Bank of England. In particular, the paper discusses the design, implementation and impact of so-called "non-standard" monetary policy measures focusing on those introduced in the euro area in the aftermath of the failure of Lehman Brothers in September 2008. Having established the impact of these measures on various observable money market spreads, we propose an empirical exercise intended to quantify the macroeconomic impact of non-standard monetary policy measures insofar as it has been transmitted via these spreads. The results suggest that non-standard measures have played a quantitatively significant role in stabilising the financial sector and economy after the collapse of Lehman Bros., even if insufficient to avoid a significant fall in economic and financial activity. JEL Classification: E52, E58.
    Keywords: Non-standard monetary policy, financial crisis.
    Date: 2010–10
  10. By: Anton Nakov (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carlos Thomas (Banco de España, Alcalá, 48, 28014 Madrid, Spain.)
    Abstract: We study optimal monetary policy in a flexible state-dependent pricing framework, in which monopolistic competition and stochastic menu costs are the only distortions. We show analytically that it is optimal to commit to zero inflation in the long run. Moreover, our numerical simulations indicate that the optimal stabilization policy is "price stability". These findings represent a generalization to a state-dependent framework of the same results found for the simple Calvo model with exogenous timing of price adjustment. JEL Classification: E31.
    Keywords: optimal monetary policy, price stability, stochastic menu costs, state-dependent pricing.
    Date: 2010–10
  11. By: Eduardo Drumond (Faculty of Economics, Universidade Federal do Paraná); Gabriel Porcile (Department of Economics, Universidade Federal do Paraná)
    Abstract: The paper discusses the impacts of an inflation target regime on growth, distribution and stability in an open economy from a Post-Keynesian perspective. The model combines a conflicting claims theory of inflation, changes in the rate of capacity utilization and equilibrium in the external sector to show that in the long run monetary policy has a real impact on growth and employment – there exists a trade-off between the inflation rate and the growth rate. A monetary rule that takes into consideration equilibrium in current account is considered. It is shown that this rule can contribute to stability in the long run, to the extent that it hinders the possibility of an explosive growth in the stock of the external debt.
    Keywords: Growth. Foreign debt. Kaleckian model of open economy. Stability. Indebtedness.
    JEL: E20 E50 F41
    Date: 2010
  12. By: Piotr Karp (University of Lodz and Ministry of Finance, Financial Policy, Analysis and Statistics Department); Magdalena Zachłod-Jelec (Ministry of Finance, Financial Policy, Analysis and Statistics Department)
    Abstract: Recent experiences of many countries during the crisis restored the important dilemma that fiscal policymakers face of how to alleviate the demand contraction while ensuring sustainability of public finances in the long-term.\\ In this paper we study the consequences of the demand and supply shocks for Poland under alternative policy scenarios. Using a macroeconometric model of the Polish economy, we analyse the response of the economy to shocks under several fiscal policy rules. We try to answer the questions which fiscal rule works best in terms of public finance sustainability and business cycle fluctuations stabilization while taking into account the source of shocks to the economy.\\ We found that structural balance rule and expenditure rule act counter-cyclically in the whole simulation period, but at the same time the pace at which they stabilize public debt is quite slow.
    Keywords: fiscal rules, model simulations, demand shocks, supply shocks
    JEL: E17 E37 E62 H30 H62 H63
    Date: 2010–07–30
  13. By: Pami Dua; Anirvan Banerji
    Abstract: Over the last few decades, the Indian economy has experienced both classical business cycles and the cyclical fluctuations in its growth rate known as growth rate cycles. In the years since the liberalization of the economy began, these cycles have been driven more by endogenous factors than by exogenous shocks. From the point of view of both policy-makers and businesses, therefore, it is important to find a way to predict Indian recessions and recoveries, along with slowdowns and speedups in growth. This paper adopts a classical leading indicator approach to the problem. [Working Paper No. 90]
    Keywords: Indian economy, classical business, cyclical fluctuations, endogenous factors, policy-makers
    Date: 2010
  14. By: Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Using a unique dataset of the Euro area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards, for household and corporate loans. This softening – especially for mortgages – is amplified by securitization activity, weak supervision for bank capital and too low for too long monetary policy rates. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor-rule residuals experienced a worse economic performance afterwards. These results help shed light on the origins of the crisis and have important policy implications. JEL Classification: G01, G21, G28, E44, E5.
    Keywords: lending standards, monetary policy, securitization, bank capital, financial stability.
    Date: 2010–10
  15. By: Christian Daude; Angel Melguizo; Alejandro Neut
    Abstract: This paper analyses fiscal policy for several economies in Latin America, from the early nineties to the 2009 crisis. We present original estimates of cyclically-adjusted public revenues for Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay implementing the standardised OECD methodology and extending it to include commodity cycles, which have a direct and significant effect on the fiscal balance of several Latin American countries. Based on these estimates, we evaluate the size of automatic tax stabilisers and the cyclicality of discretionary fiscal policy. Additionally, we highlight the uncertainty stemming from the estimation of the output gap, due to large and simultaneous cyclical, temporary and permanent shocks in several Latin American economies.<BR>Cette étude analyse la politique budgétaire dans huit économies d’Amérique Latine, à partir du début des années 1990 et jusqu’à 2009. Nous étudions les estimations des composantes structurelles et cyclique des recettes publiques en l’Argentine, le Brésil, le Chili, la Colombie, le Costa Rica, le Méxique, le Pérou et l’Uruguay, en utilisant la méthodologie de l’OCDE, et en ajoutant l’effet des prix des matières premières, qui ont un impact significatif sur le solde budgétaire en Amérique Latine. A partir de ces résultats, l’étude évalue l'ampleur des stabilisateurs automatiques, et l’stabilisation de la politique budgétaire discrétionnaire. Finalement, nous soulignons l’incertitude de l’estimation de l’écart de production en raison des larges chocs cycliques, temporaires et permanents dans plusieurs économies d’Amérique Latine.
    Keywords: fiscal policy, public finances, business cycle, politique budgétaire, cycle économique, finances publiques
    JEL: E62 H30 H60
    Date: 2010–08–25
  16. By: Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Elke Hahn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study develops a new monthly euro Area-wide Leading Indicator (ALI) for the euro area business cycle. It derives the composite ALI by applying a deviation cycle methodology with a one-sided band pass filter and choosing nine leading series. Our main findings are that i) the applied monthly reference business cycle indicator (BCI) derived from industrial production excluding construction is close to identical to the real GDP cycle, ii) the ALI reliably leads the BCI by 6 months and iii) the longer leading components of the ALI are good predictors of the ALI and therefore the BCI up to almost a year ahead and satisfactory predictors by up to 2 years ahead. A real-time analysis for predicting the euro business cycle during the 2008/2009 recession and following recovery confirms these findings. JEL Classification: E32.
    Keywords: Leading indicator, Business cycle, Deviation cycle, Real-time analysis, Euro Area.
    Date: 2010–09
  17. By: Galí, Jordi
    Abstract: Central banks' projections--i.e. forecasts conditional on a given interest rate path-- are often criticized on the grounds that their underlying policy assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. Here I describe three alternative approaches to constructing projections that are not subject to the above criticism, using two different versions of New Keynesian model as reference frameworks. Most importantly, I show how the three approaches generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.
    Keywords: conditinal forecats; constant interest rate projections; inflation targeting; interest rate path; interest rate rules; multiple equilibria
    JEL: E37 E58
    Date: 2010–09
  18. By: Farrokh Nourzad (Economics Department Marquette University)
    Abstract: This paper examines two different measures of wages as predicators of prices in a vector error-correction framework using quarterly data for the U.S. for the period from 1947.Q1 through 2008.Q1. Based on cointegration and a series of exogeneity tests, it is found that: 1) there is a stable, long-run relationship between the Consumer Price Index (CPI) and the Personal Consumption Expenditure Deflator (PCED) on the one hand and unit labor costs (ULC) and average earnings per unit of output (AHE) on the other; 2) ULC is weakly exogenous for both price indices while the two price indices are weakly exogenous for AHE; 3) ULC is strongly exogenous for CPI but not for AHE; 4) ULC is super exogenous for CPI. Taken together, these findings lead to the conclusion that ULC is a reliable indicator of price inflation but productivity-adjusted hourly earnings is not. Thus monetary policymakers are justified in using information about the behavior of ULC in formulating policy actions for achieving the goal of price stability.
    Keywords: Unit Labor Cost; Cointegration; Vector Error Correction; Exogeneity
    JEL: C32 C52 E31
    Date: 2010–09
  19. By: Dirk Bezemer; Geoffrey Gardiner
    Abstract: This paper discusses recent UK monetary policies as instances of John Kenneth Galbraith's "innocent fraud," including the idea that money is a thing rather than a relationship, the fallacy of composition (i.e., that what is possible for one bank is possible for all banks), and the belief that the money supply can be controlled by reserves management. The origins of the idea of quantitative easing (QE), and its defense when it was applied in Britain, are analyzed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE "worked," either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK.
    Keywords: Quantitative Easing; UK Innocent Frauds; Accounting
    JEL: E52 E58
    Date: 2010–09
  20. By: Jan Marc Berk; Beata Bierut; Ellen Meade
    Abstract: The literature on the behavior of the Bank of England’s Monetary Policy Committee (MPC) has focused on static voting patterns. We find statistical support for a dynamic pattern using a panel reaction function to analyze MPC votes over the 1997-2008 period. We find that internal and external members do not behave differently in their first year on the MPC. In their third year of tenure, internal members prefer higher policy rates, placing a higher weight on price stability and a lower weight on the output gap than external members.
    Keywords: Central banking; Monetary policy committees; Bank of England; Voting
    JEL: D71 D72 E52 E58
    Date: 2010–09
  21. By: TODEROIU, Filon (Institute of Agricultural Economics)
    Abstract: The present paper starts from the theoretical premise according to which the business environment of firms (as macroeconomic entities) is influenced to a greater or less extent by the behaviour of certain essential macroeconomic variables of the market econmies. In this respect, our methodological approach investigates the behaviours of six macroeconomic variables (GDP, prices, inflation, exchange rate, budget and credit), in certain periods for which relevant statistical data are available.
    Keywords: macroeconomic variable; GDP; inflation; exchange rate; budget; credit;
    JEL: B41 E31 G21 H25
    Date: 2010–09
  22. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Huetl (University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, 9000 St. Gallen, Switzerland.)
    Abstract: We analyze the impact of the recent financial market crisis on the Euro Overnight Index Average (EONIA) and interbank market trading and assess the effectiveness of the ECB liquidity policy between 07/2007 - 08/2008. We extend the model of [QM06] by (i) incorporating the microstructure of the EONIA market including the ECB fine-tuning operation on the last day of the maintenance period (MP) and banks’ daily excess liquidity, (ii) giving insight into banks’ trading behavior characterized by an endogenous regime-switch and suggesting an efficient procedure to simulate the entire MP, and (iii) proposing a model for market distortion due to lending constraints which lead to a bid-ask spread for the EONIA rate. The model is calibrated by simulation fitting daily EONIA rates and aggregate liquidity measures observed between March 2004 and September 2008. Besides lending constraints we consider market segmentation and aggregate liquidity shocks as possible market distortions in the crisis period. For a calibration cross-check and for estimating the timing of the endogenous regime-switch we use panel data covering liquidity data of 82 Euro Area commercial banks for the period 03/2003 - 07/2007. With the calibrated model the ECB policy of liquidity frontloading is evaluated and compared with a reserve band system policy similar to the Bank of England’s framework. We find that liquidity frontloading is a small scale central bank intervention which is capable of stabilizing interest rates in both frictionless and distorted markets. Simulations suggest that without frontloading the EONIA would have been, on average, 23 basis points above the policy rate (target); with frontloading, the overnight rate is, on average, on target. JEL Classification: E44, E52, G21.
    Keywords: liquidity management, open market operations, simulation, microstructure.
    Date: 2010–10
  23. By: Marczak, Martyna (University of Hohenheim); Beissinger, Thomas (University of Hohenheim)
    Abstract: This paper establishes stylized facts about the cyclicality of real consumer wages and real producer wages in Germany. As detrending methods we apply the deterministic trend model, the Beveridge-Nelson decomposition, the Hodrick-Prescott filter, the Baxter-King filter and the structural time series model. The detrended data are analyzed both in the time domain and in the frequency domain. The great advantage of an analysis in the frequency domain is that it allows to assess the relative importance of particular frequencies for the behavior of real wages. In the time domain we find that both real wages display a procyclical pattern and lag behind the business cycle. In the frequency domain the consumer real wage lags behind the business cycle and shows an anticyclical behavior for shorter time periods, whereas for longer time spans a procyclical behavior can be observed. However, for the producer real wage the results in the frequency domain remain inconclusive.
    Keywords: real wages, business cycle, frequency domain, time domain, Germany, trend-cycle decomposition, structural time series model, phase angle
    JEL: E32 C22 C32 J30
    Date: 2010–09
  24. By: Shakill Hassan; Félix Simione
    Abstract: Microstructure aspects of nominal exchange rate determination are less relevant in countries with embryonic financial markets. In less-developed economies, trade in goods and services is a more significant driver of currency demand than financial market speculation or hedging; and central banks actively set monetary variables. We develop a simple variation of the standard monetary model of exchange rate determination, incorporating interest rate rules but not relying on interest rate parity; and study the effect of monetary fundamentals on the Mozambican exchange rate. We find a long-run relationship between fundamentals and exchange rates, with coefficient signs in regression equations consistent with theoretic predictions. Moreover, the monetary model outperforms a random walk in predicting metical exchange rates out-of-sample at the four-quarter horizon.
    Date: 2010
  25. By: Francisco Gallego; José Tessada
    Abstract: Sudden stops and international financial crises have been a main feature of developing countries in the last three decades. While their aggregate effects are well known, the disaggregated channels through which they work are not well explored yet. In this paper, we study the sectoral responses that take place over episodes of sudden stops. Using job flows from a sectoral panel dataset for four Latin American countries, we find that sudden stops are characterized as periods of lower job creation and increased job destruction. Moreover, these effects are heterogeneous across sectors: we find that when a sudden stop occurs, sectors with higher dependence on external financing experience lower job creation. In turn, sectors with higher liquidity needs experience significantly larger job destruction. This evidence is consistent with the idea that dependence on external financing affects mainly the creation margin and that exposure to liquidity conditions affects mainly the destruction margin. Overall, our results confirm the large labor market effects of sudden stops, and provide evidence of financial conditions being an important transmission channel of sudden stops within a country, highlighting the role of financial frictions in the restructuring process in general.
    Keywords: Sudden stops, Gross job flows, Adjustment, Financial frictions.
    JEL: E24 F3 G21 J63
    Date: 2010
  26. By: Sunanda Sen
    Abstract: The enormity and pervasiveness of the global economic crisis that began in 2008 makes it relevant to analyze the circumstances that can explain this catastrophe. This will also provide clues to the appropriate remedial measures needed to prevent future occurrences of similar developments. The paper begins with some theoretical concerns relating to factors that could trigger a similar crisis. The first of these concerns relates to the deregulated financial institutions and the growing uncertainty that can be witnessed in these liberalized financial markets. The second relates to financial engineering with innovations in these markets, simultaneously providing cushions against risks while generating flows of liquidity that remain beyond the conventional sources of bank credit. Interpreting the role of uncertainty, one can observe the connections between investment and finance, both of which are subject to changes in the state of expectations. The initial formulation can be traced back to John Maynard Keynes’s General Theory (1936), where liquidity preference is linked to asset prices and new investments. The Keynesian analysis of the impact of uncertainty related expectations was reformulated in 1986 by Hyman P. Minsky, who introduced the possibility of sourcing external finance through debt, which further adds to the impact of uncertainty. Minsky's characterization of deregulated financial markets considers the newfangled sources of nonbank credit, especially with the involvement of banks in the securities market under the universal banking model. As for the institutional arrangements that provide for profits on transactions, financial assets bought and sold in the primary market as initial public offerings of stocks are usually transacted later, in the secondary market, where these are no longer backed by physical assets. In the upswing, finance creates a myriad of financial claims and liabilities, and thus becomes increasingly remote from the real economy, while innovations to hedge and insulate assets continue to proliferate in the financial market, especially in the presence of uncertainty. The paper dwells on an account of the pattern of the financial crisis and its spread in the United States. This is appended by a stylized account of the turn of events in terms of a theoretical model that highlights the role of uncertainty in the process.
    Keywords: Uncertainty; Speculation; Hedging; Ponzi; Securitization; Financial Fragility
    JEL: E12 E41 E44 F33 F34 F41 G15 G21
    Date: 2010–09
  27. By: Dean Baker
    Abstract: With the economy suffering from near double-digit unemployment, public debate is dominated by concerns over the budget deficit and national debt. This discussion is unfortunate both because there is no reason for people to be concerned about the deficit at present, and more importantly, because it discourages action on the unemployment crisis that is devastating the country.
    Keywords: budget deficit, deficit, fiscal responsibility, unemployment unemployment, deficit spending
    JEL: E E6 E60 E61 E62 E63 E64 E65 E66 H H2 H5 H6 H60 H61 H62 H63 H68
    Date: 2010–09
  28. By: V. Pandit
    Abstract: Use of Macroeconometric models has by now assumed a measure of universality as an unavoidable aid to forecasting and policy analysis; challenges and controversies spread over more than two decades notwithstanding. While such models are typically designed and utilised for dealing with short term problems their application to issues of long term growth has been equally important, though less frequent. The present exercise is intended to examine India’s growth prospects during the first two decades of the third millennium on the basis of a comprehensive econometric model. [Working Paper No. 100]
    Keywords: Macroeconometric, models, policy analysis, long term growth,
    Date: 2010
  29. By: Dolls, Mathias (University of Cologne); Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA)
    Abstract: This paper analyzes the effectiveness of social protection systems in Europe and the US to provide (income) insurance against macro level shocks in terms of automatic stabilizers. We find that automatic stabilizers absorb 38% of a proportional income shock and 47% of an idiosyncratic unemployment shock in Europe, compared to 32% and 34% in the US. There is large heterogeneity within Europe with stabilization being much lower in Eastern and Southern than in Central and Northern Europe. Our results suggest that social transfers, in particular the rather generous systems of unemployment insurance in Europe, play a key role for the stabilization of disposable incomes and explain a large part of the difference in automatic stabilizers between Europe and the US.
    Keywords: automatic stabilization, economic crisis, taxes and benefits
    JEL: E32 E63 H2 H31
    Date: 2010–09
  30. By: Vincelette, Gallina Andronova; Manoel, Alvaro; Hansson, Ardo; Kuijs, Louis
    Abstract: This paper explores how the ongoing crisis, the policy responses to it, and the post-crisis global economy will impact China's medium-term prospects for growth, poverty reduction, and development. The paper reviews China's pre-crisis growth experience, including its relationship to global economic developments. It discusses the pace, composition, sources, and financing of growth during 1995-2007, and the impact of key external and domestic influences. The paper also analyzes the immediate impact of the global crisis on China's economic performance in 2009 and its likely impact in the short run. It then discusses the government's policy response, with a particular focus on the fiscal and monetary stimulus measures. Finally, the paper explores China's medium-term growth prospects in light of the crisis and the key policies for moving to a robust and sustainable growth path post-crisis.
    Keywords: Debt Markets,Economic Theory&Research,Emerging Markets,Currencies and Exchange Rates,Access to Finance
    Date: 2010–09–01
  31. By: Attila Csajbók (Magyar Nemzeti Bank); András Hudecz (Magyar Nemzeti Bank); Bálint Tamási (Magyar Nemzeti Bank)
    Abstract: The post-Lehman phase of the financial crisis has exposed a number of weaknesses in the banking sectors of the European Union’s New Member States (NMSs). One of these is the prevalence of lending in foreign currency. While banks themselves in these countries have not taken on sizeable currency risk directly, they passed it on to households and the corporate sector. With large depreciations taking place or looming in the region, the currency risk at households and corporates without a natural hedge is now being transformed into credit risk for the banking sector. This is creating a serious problem in maintaining financial stability and cripples monetary policy in countries where it operates primarily through the exchange rate channel. The patterns of foreign currency lending to households in NMSs vary widely both across countries and time periods. For example, FX lending to households is virtually non-existent in the Czech Republic while in some Baltic countries its share is close to 100 per cent of total household lending. The main goal of the paper is (1) to present the stylised facts of pre-crisis FX lending in NMSs systematically and (2) to try to explain these differing patterns in an econometric model. In order to do so, a panel database of household FX borrowing is compiled, covering 10 NMSs in the period 1999-2008. Our estimation results suggest that the degree of household FX borrowing depends on the interest rate differential, the institutional features of mortgage financing and the monetary regime. Household FX borrowing tends to be less prevalent if the interest rate differential is small, fixed interest rate mortgage financing is available and the monetary authority’s “fear of floating” is low.
    Keywords: foreign currency lending, new member states, credit risk, monetary policy
    JEL: E44 E50 G21
    Date: 2010
  32. By: Yiting Zhang; Gladys Hui Ting Lee; Jian Cheng Wong; Jun Liang Kok; Manamohan Prusty; Siew Ann Cheong
    Abstract: Based on the temporal distributions of clustered segments in the time series of the ten Dow Jones US (DJUS) economic sector indices, we calculated their cross correlations over the period February 2000 to August 2008, the two-year intervals 2002--2003, 2004--2005, 2008--2009, and also over 11 corresponding segments within the present financial crisis. From these cross-correlation matrices, we constructed minimal spanning trees (MSTs) of the US economy at the sector level. In all MSTs, a core-fringe structure is found, with CY, IN, and NC consistently making up the core, and BM, EN, HC, TL, UT residing predominantly on the fringe. We saw that shocks accompanying volatility movements always start at the fringe, sometimes in conjunction with anomalously high cross correlations here, and propagate inwards to the core of all MSTs of the 11 statistically-stationary corresponding segments. Most of these volatility shocks originate within the domestic fringe sectors, HC, TL, and UT, in the US economy. More importantly, we find that the MSTs can be classified into two distinct, statistically robust, topologies: (i) star-like, with IN at the center, associated with low-volatility economic growth; and (ii) chain-like, associated with high-volatility economic crisis. When we examined successive corresponding segments within the present housing bubble financial crisis, we find that each MST can be obtained from the one before it through a minimal set of primitive rearrangements, each representing a statistically significant change in the cross correlations of the sectors involved. Finally, we present statistical evidence, based on the emergence of a star-like MST in Sep 2009, and the MST staying robustly star-like throughout the Greek Debt Crisis, that the US economy is on track to a recovery.
    Date: 2010–09
  33. By: Davide Furceri; Aleksandra Zdzienicka
    Abstract: The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and long-lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. Measuring the increase in debt in this manner seems more appropriate than some of the measures used in the literature that have provided off-quoted and very large numbers for the run-up in debt. In addition, the debt ratio increased more in countries with a higher initial gross debt-to-GDP ratio and with a higher initial foreign debt-to-GDP ratio.<P>Les conséquences des crises bancaires pour la dette publique<BR>L’objectif de ce document est de déterminer l’impact des crises bancaires sur la dette publique. Les résultats obtenus utilisant un panel non-cylindré de 154 pays sur la période 1980-2006 montrent que les crises bancaires provoquent une augmentation significative et persistante de la dette publique. Cet effet dépend de la sévérité de la crise. Plus précisément, les crises dont la sévérité est comparable à la crise la plus récente en termes de pertes de PIB augmentent la dette publique brute par rapport PIB d’environ 37 points de pourcentage à moyen terme. Cette approche semble être plus appropriée par rapport à celles utilisées dans la littérature qui centrées sur la dette publique elle-même rapportent l’impact beaucoup plus important des crises bancaires. De plus, l’impact des crises bancaires croît en fonction du niveau initial de la dette public et de la dette extérieur par rapport au PIB.
    Keywords: public debt, financial crisis, banking crisis, dette publique, crise financière, crise bancaire
    JEL: E6 G1
    Date: 2010–08–25
  34. By: Kumawat, Lokendra
    Abstract: Recent research has shown that the seasonals in Indian manufacturing production are affected by rainfall. Since the effect of rainfall comes through agricultural production, this finding raises the question of whether the effect is through demand channel or supply channel. This paper attempts to provide a preliminary answer to this question by testing for this effect in the production in different sub-sectors within the manufacturing sector. We look at the three subsectors which have more than 10% weightage each in the index of manufacturing production: (i) food products, (ii) basic chemicals and chemical products (except products of petroleum and coal), and (iii) machinery and equipment (other than transport equipment). As almost all the estimated models show some type of misspecification, we also estimate models that allow for time-variation in this behaviour. We find evidence for effect of rainfall on overall dynamics of all three components studied, and also for significant time variation in this behaviour. Focusing on seasonal component, while estimations were not possible for the basic chemicals and chemical products, for the other two components we find evidence of significant effect of rainfall on seaosonality, indicating both the channels are significant.
    Keywords: Seasonality; Manufacturing Production; Smooth Transition Autoregression
    JEL: E32 C22
    Date: 2010–09
  35. By: Poschke, Markus (McGill University)
    Abstract: In contrast to the very large literature on skill-biased technical change among workers, there is hardly any work on the importance of skills for the entrepreneurs who employ those workers, and in particular on their evolution over time. This paper proposes a simple theory of skill-biased change in entrepreneurial technology that fits with cross-country, historical and micro evidence. For this, it introduces two additional features into an otherwise standard occupational choice, heterogeneous firm model à la Lucas (1978): technological change does not benefit all potential entrepreneurs equally, and there is a positive relationship between an individual's potential payoffs in working and in entrepreneurship. If some firms consistently benefit more from technological progress than others, they stay closer to the frontier, and the others fall behind. Because wages rise for all workers, low-productivity entrepreneurs will then at some point exit and become workers. As a consequence, the entrepreneurship rate falls with income per capita, average firm size and firm size dispersion increase with income per capita, and "entrepreneurship out of necessity" falls with income per capita. The paper also documents, for two of the facts for the first time, that these are exactly the relationships prevailing in cross-country data. Quantitatively, the model fits the U.S. experience well. Using the parameters from a calibration to the U.S., the model also explains cross-country patterns quite well.
    Keywords: occupational choice, entrepreneurship, firm size, firm entry, growth, skill-biased technical change
    JEL: E24 J24 L11 L26 O30
    Date: 2010–09
  36. By: Bertola, Giuseppe (University of Turin); Koeniger, Winfried (Queen Mary, University of London)
    Abstract: We characterize how public insurance schemes are constrained by hidden financial transactions. When non-exclusive private insurance entails increasing unit transaction costs, public transfers are only partly offset by hidden private transactions, and can influence consumption allocation. We show that efficient transfer schemes should take into account the impact of insurance on unobservable effort and saving choices as well as the relative cost of public and private insurance technologies. We provide suggestive evidence for the empirical relevance of these results by inspecting the cross-country relationship between available indicators of insurance transaction costs and variation in public and private insurance.
    Keywords: public transfers, private insurance, moral hazard, transaction costs
    JEL: E21 D82 H21 G22
    Date: 2010–09
  37. By: Adrian Blundell-Wignall; Patrick Slovik
    Abstract: This working paper’s quantifications show that most sovereign debt is held on the banking books of banks, whereas the EU stress test considered only their small trading book exposures. It discusses why sovereign debt held in the banking book cannot be ignored by investors and creditors, because of: (a) recovery values in the event of individual bank failures; and (b) fiscal sustainability and structural competitiveness issues which mean the market cannot give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the European Financial Stability Facility Special Purpose Vehicle (EFSF SPV) comes to an end. How the SPV could operate to shift sovereign risk from banks to the public sector is also an important part of the discussion.
    Keywords: financial stability
    JEL: E62 G21 G28
    Date: 2010–08
  38. By: Arner, Douglas W. (University of Hong Kong); Park, Cyn-Young (Asian Development Bank)
    Abstract: The objective of global regulatory reform is to build a resilient global financial system that can withstand shocks and dampen, rather than amplify, their effects on the real economy. Lessons drawn from the recent crisis have led to specific reform proposals with concrete implementation plans at the international level. Yet, these proposals have raised concerns of relevance to Asia’s developing economies and hence require further attention at the regional level. We argue that global financial reform should allow for the enormous development challenges faced by developing countries—while ensuring that domestic financial regulatory systems keep abreast of global standards. This implies global reforms should be complemented and augmented by national and regional reforms, taking into account the very different characteristics of emerging economies’ financial systems from advanced economies. Key areas of development focus should be (i) balancing regulation and innovation, (ii) establishing national and cross-border crisis management and resolution mechanisms, (iii) preparing a comprehensive framework and contingency plan for financial institution failure, including consumer protection measures such as deposit insurance, (iv) supporting growth and development with particular attention to the region’s financial needs for infrastructure and for SMEs, and (v) reforming the international and regional financial architecture.
    Keywords: financial regulatory reform; global financial architecture; G-20; Asia; national and regional reform
    JEL: E61 G28
    Date: 2010–09–01
  39. By: Clark, Gregory
    Abstract: A Farewell to Alms argued based on wages, rents and returns on capital that the English by 1800 were no wealthier than in 1400. An argument against this has been the supposed consumer revolution of 1600-1750. Since ordinary families by 1750 begin routinely consuming former luxury goods, income must have risen much faster than wages through a concomitant industrious revolution. This paper argues that the consumer and industrious revolutions of 1600-1750 are artifacts created by misinterpreting the major source on consumption in these years, probate inventories. Properly interpreted there is no conflict between wages, income and consumption in England 1600-1750.
    Keywords: Consumer Revolution Pre-Modern
    JEL: E2 N3 O4
    Date: 2010–07–04
  40. By: Salazar Soares, Vasco (Isvouga); Lima, Antonieta (Isvouga)
    Abstract: Considering the few studies about the coupled relation between oil and gold prices and the exchange market, the purpose of this article is to explore this line of investigation. So, combining different approaches on oil and gold prices, stock indexes and exchange market (among others, Dooley, Isard and Taylor (1992), Sadorsky (1999), Park and Ratti (2007), Afshar (2008), Miller and Ratti (2008), Abdelaziz, Chortareas and Cipollini (2008) studies), our model, an unrestricted VAR and a VECM model, mixed all these variables applied to the European market, in order to explain the exchange market variation, from 1999:01 to 2010:05. We innovate by considering both gold and crude prices as explaining variables, differently from the above-mentioned authors, who only consider either gold or crude prices. Our results suggested that the model explains the long-run relationship between usd/eur and the mentioned variables, being consistent with the results previously found. Differently from the authors mentioned, in our model unrestricted VAR works better than VECM, with a R2 of 45,66% faces to 34,34%.
    Keywords: Exchange rate; crude price; gold price; stock index; inflation rate
    JEL: E44 F37
    Date: 2010–09–29
  41. By: Abhijeet, Chandra
    Abstract: Education being an important component of human capital has always attracted the interests of economists, researchers and policy makers. Governments across the globe in general and in India in particular are trying to improve the human capital by pumping more investments in education. But the issue that whether improved level of education resulting from more education spending can promote economic growth is still controversial. Some economists and researchers have supported the bi-directional relation between these two variables, while it has also been suggested that it is the economic growth that stimulates governments spend more on education, not the other way. Considering this research issue, the present paper uses linear and non-linear Granger Causality methods to determine the causal relationship between education spending and economic growth in India for the period 1951-2009. The findings of this paper indicate that economic growth affects the level of government spending on education irrespective of any lag effects, but investments in education also tend to influence economic growth after some time-lag. The results are particularly useful in theoretical and empirical research by economists, regulators and policy makers.
    Keywords: Education expenditure; Economic growth; Indian economy; Granger Causality; Non-linearity.
    JEL: E62 I21 C22 H52
    Date: 2010–08

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