nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒10‒16
53 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Estimates of the Output Gap in Armenia with Applications to Monetary and Fiscal Policy By Anke Weber; Asmaa A ElGanainy
  2. Money illusion and the long-run Phillips curve in staggered wage-setting models By Andrea Vaona
  3. Optimal Price Indices for Targeting Inflation Under Incomplete Markets By Rahul Anand; Eswar Prasad
  4. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
  5. The US Business Cycle Since 1950: A Post Keynesian Explanation By John Harvey
  6. Monetary Policy and Credit Cards: Evidence from a Small-Open Economy By Hakan Yilmazkuday
  7. On the Recovery Path during a Liquidity Trap: Do Financial Frictions Matter for Fiscal Multipliers? By Julio A. CARRILLO; Celine POILLY
  8. New Perspectives on Depreciation Shocks as a Source of Business Cycle Fluctuations By Fransesco Furlanetto; Martin Seneca
  9. Is the New Keynesian Explanation of the Great Dis-Inflation Consistent with the Cross Country Data? By Matthew Doyle; Jean-Paul Lam
  10. Monetary Transmission of Global Imbalances in Asian Countries By Il Houng Lee; Woon Gyu Choi
  11. Credit Constraints, Firms' Precautionary Investment, and the Business Cycle By Ander Pérez Orive
  12. US Business Cycles from 1971-2010: A Post Keynesian Explanation By John Harvey
  13. An empirical evaluation of three post Keynesian models By Peter Skott, Ben Zipperer
  14. Does Money Matter? An Empirical Investigation By Huston, Barry; McGibany, James M; Nourzad, Farrokh
  15. Price Dynamics in China By Nathaniel John Porter
  16. Credit supply: identifying balance-sheet channels with loan applications and granted loans By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  17. China’s monetary policy and the exchange rate By Aaron Mehrotra; José R. Sánchez-Fung
  18. NAIRU estimates for Germany: New evidence on the inflation-unemployment trade-off By Kajuth, Florian
  19. New Keynesian DSGE Models and the IS-LM Paradigm By Ingrid Größl; Ulrich Fritsche
  20. Fiscal Policy Issues in Korea after the Current Crisis By Kiseok Hong
  21. Investment - Specific Technology Shocks and International Business Cycles: An Empirical Assessment By Pau Rabanal; Juan F. Rubio-Ramirez; Federico S. Mandelman; Diego Vilan
  22. The Dynamic Effects of Commodity Prices on Fiscal Performance in Latin America By Leandro Medina
  23. Central Bank Haircut Policy By James Chapman, Jonathan Chiu, and Miguel Molico
  24. MICA-BBVA: A Factor Model of Economic and Financial Indicators for Short-term GDP Forecasting By Máximo Camacho; Rafael Doménech
  25. The flaws in Keynsian borrow and spend By Musgrave, Ralph S.
  26. The Global Financial Crisis and its Impact on Emerging Market Economies in Europe and the CIS: Evidence from mid-2010 By Marek Dabrowski
  27. A Great Recession in the UK Labour Market : A Transatlantic Perspective By Smith, Jennifer; Elsby, Michael
  28. Cyclical Behavior of Inventories and Growth Projections Recent Evidence from Europe and the United States By Jens R. Clausen; Alexander W. Hoffmaister
  29. Can Global Liquidity Forecast Asset Prices? By Reginald Darius
  30. Financial Frictions and Credit Spreads By Ke Pang; Pierre L. Siklos
  31. To Starve or not to Starve the Beast? By Michael Kumhof; Daniel Leigh; Douglas Laxton
  32. The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk By Bohn, Henning
  33. Keynes’ Business Cycle: Animal Spirits and Crisis By John Harvey
  34. Self-Fulfilling Risk Panics By Philippe Bacchetta; Cédric Tille; Eric van Wincoop
  35. Optimal Fiscal Policy with Robust Control By Justin Svec
  36. "Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-founded Macroeconomics" By Masanao Aoki; Hiroshi Yoshikawa
  37. Performance of Fiscal Accounts in South Africa in a Cross-Country Setting By Burcu Aydin
  38. Public Expenditure Policy in Bolivia: Growth and Welfare By Carlos Gustavo Machicado; Paul Estrada; Ximena Flores
  39. Barro-Gordon Revisited: Reputational Equilibria with Inferential Expectations By Timo Henckel; Gordon Menzies; Nicholas Prokhovnik; Daniel Zizzo
  40. The Future for Eurozone Financial Stability Policy By Karl Whelan
  41. Why Does Bad News Increase Volatility and Decrease Leverage? By Ana Fostel; John Geanakoplos
  42. Macroeconomic volatility after trade and capital account liberalization By Pancaro, Cosimo
  43. The alleged stability of the labour share of income in macroeconomic theories of income distribution By Hagen Krämer
  44. Barro-Gordon Revisited: Reputational Equilibria with Inferential Expectations By Timo Henckel; Gordon D. Menzies; Nick Prokhovnik; Daniel J. Zizzo
  45. Forecasting Private Consumption by Consumer Surveys By Christian Dreger; Konstantin A. Kholodilin
  46. The EMU sovereign-debt crisis: Fundamentals, expectations and contagion By Michael G. Arghyrou; Alexandros Kontonikas
  47. Functions of Central Bank of Kosovo and the need for their advancement By Lluka, Valon
  48. The Effectiveness of Macroeconomic Commitment in Weak(er) Institutional Environments By Sophia Gollwitzer; Marc Quintyn
  49. Short and long run macroeconomic effects of trade policy in the presence of debt servicing By Murshed, S.M.
  50. Asia’s Contribution to Global Rebalancing By Adams, Charles; Jeong, Hoe Yun; Park, Cyn-Young
  51. Why Have Girls Gone to College? A Quantitative Examination of the Female College Enrollment Rate in the United States: 1955-1980 By Hui He
  52. Price-Level Convergence: New Evidence from U.S. Cities By M. Ege Yazgan; Hakan Yilmazkuday
  53. The Effects of Immigration on Wages: An Application of the Structural Skill-Cell Approach By Michael Gerfin; Boris Kaiser

  1. By: Anke Weber; Asmaa A ElGanainy
    Abstract: This paper employs several econometric techniques to estimate the Armenian output gap. The findings indicate that the output gap is significantly positive in 2007 and 2008 and decreased dramatically in 2009. The paper uses these results to estimate a New Keynesian Phillips curve for Armenia, suggesting a significant role of the output gap and inflation expectations in determining current inflation. Finally, the underlying fiscal stance over the period 2000-09 is assessed by estimating the cyclically-adjusted fiscal balance. Most of Armenia’s fiscal deficit is found to be structural. Fiscal policy, while providing counter-cyclical support in 2009, has been largely pro-cyclical in the past.
    Keywords: Armenia , Business cycles , Economic growth , Economic models , Fiscal policy , Inflation , Monetary policy , Production , Time series ,
    Date: 2010–08–26
  2. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We consider the effect of money illusion - defined referring to Stevens' ratio estimation function - on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if agents under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if agents over-perceive real variables, positive money superneutralities will arise.
    Keywords: Phillips curve, inflation, nominal inertia, monetary policy, dynamic general equilibrium, money illusion, Stevens' ratio estimation function
    JEL: E3 E20 E40 E50
    Date: 2010–09
  3. By: Rahul Anand; Eswar Prasad
    Abstract: In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector two-good new-Keynesian model to study the optimal choice of price index in markets with financial frictions. We find that, in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting a target for headline CPI inflation with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained.
    Keywords: Consumer price indexes , Consumption , Demand , Economic models , Emerging markets , Food production , Inflation , Inflation targeting , Monetary policy , Price elasticity , Welfare ,
    Date: 2010–09–02
  4. By: Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii)the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth; volatility; business cycle; monetary policy
    JEL: O42 E32 E52
    Date: 2010–08
  5. By: John Harvey (Department of Economics, Texas Christian University)
    Abstract: That the economy goes through periods of expansion and recession is obvious. Whether or not this represents endogenously-generated cycles or simply stochastic variation around a trend is, however, a matter of debate. Among mainstream economists, the latter is the predominant position. For Post Keynesians, however, business cycles are a manifestation of the systemic instability inherent to the capitalist system. Endogenous fluctuations in investment spending lie at the heart of the shift from expansion to recession and while various shocks and government policies can, of course, have an impact, they are unnecessary to create the patterns we see. This paper offers evidence in support of the Post Keynesian position by tracing the US business cycle since 1950. With a combination of quantitative and qualitative evidence, it is demonstrated that, from the Korean War cycle to our current financial crisis, the central factor has been the rise and fall in investment. The complete story cannot be told without reference to fiscal and monetary policy, oil shocks, strikes, and so on–but most of it can.
    Keywords: business cycle, Keynes, Post Keynesian
    JEL: E12 E13 E32
    Date: 2010–08
  6. By: Hakan Yilmazkuday (Department of Economics, Temple University)
    Abstract: This paper uses a unique monthly data set that covers overall credit card usage in a small-open economy, Turkey, to investigate a possible credit channel of monetary policy transmission through credit cards. A reduced-form vector autoregression analysis is employed where the forecast error variance decompositions are calculated for three-year windows over the period 2002-2009. It is shown that, during the recent financial crisis that has started in 2007, the monetary policy of Turkey has shifted toward focusing on output volatility and interest-rate smoothing through setting short-term interest rates, while the inflation rate has been mostly affected by exchange rate movements and inflation inertia. Credit cards usage has an increasing effect on inflation rates through time, requiring more policy emphasis on the credit channel through credit cards. When the effects of the credit view and the money view are compared, the former seems to be more effective on the real side of the economy independent of the level of inflation.
    Keywords: Credit Cards, Monetary Policy, Credit Channel, Vector Autoregression, Turkey
    JEL: E44 E50 E60 C32
    Date: 2010–09
  7. By: Julio A. CARRILLO (Ghent University); Celine POILLY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper investigates the effects of a fiscal stimulus when financial frictions and a liquidity trap are present. These two conditions make a government spending expansion and a reduction in capital income taxes more efficient in stimulating output. In contrast, a reduction in labor income taxes may aggravate the economic conditions. In addition, small implementation delays in government spending may result in big spending multipliers in the short run. All of these results rely partly on the dynamic interaction between inflation and the external finance premium. Lastly, simulations of the ARRA stimulus package predict that the output gains due to the presence of financial frictions may lie between 1.3 % and 2.5 % of GDP.
    Keywords: Zero Lower Bound, Financial Accelerator, Fiscal Policy
    JEL: E31 E44 E52 E58
    Date: 2010–09–02
  8. By: Fransesco Furlanetto; Martin Seneca
    Abstract: In this paper we study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. We show that these shocks are a potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables.
    Date: 2010–07
  9. By: Matthew Doyle (Department of Economics, University of Waterloo); Jean-Paul Lam (Department of Economics, University of Waterloo)
    Abstract: A leading explanation of long run U.S. inflation trends attributes both the fall of inflation in the 1980s and the subsequent years of low and stable inflation to well run monetary policy pinning down inflationary expectations. Most other OECD economies experienced a similar rise and fall of inflation, as well as subsequent low and stable inflation over the same period. This observation has been under-explored in the literature. In this paper we exploit the international dimension of the fall of inflation to investigate the hypothesis that good monetary policy is responsible for recent inflation outcomes. Our results suggest that this theory is not compatible with the cross country data.
    JEL: E42 E50
    Date: 2010–10
  10. By: Il Houng Lee; Woon Gyu Choi
    Abstract: The paper explores the linkages between the global and domestic monetary gaps, and estimates the effects of monetary gaps on output growth, inflation, and net saving rates using panel data for 20 Asian countries for 1980-2008. We find a significant pass-through of the global monetary gap to domestic monetary gaps, which in turn affect output growth and inflation, in individual emerging market and developing countries in Asia. Notably, we provide evidence that the global monetary condition is partly responsible for the current account surplus in Asia. We also draw implications for monetary policy coordination for global rebalancing.
    Keywords: Asia , Balance of trade , Capital flows , Economic integration , Economic models , Export competitiveness , Globalization , Inflation , Monetary policy , Production growth , Reserves , Savings ,
    Date: 2010–09–15
  11. By: Ander Pérez Orive
    Abstract: This paper studies the macroeconomic implications of firms' precautionary investment behavior in response to the anticipation of future financing constraints. Firms increase their demand for liquid and safe investments in order to alleviate future borrowing constraints and decrease the probability of having to forego future profitable investment opportunities. This results in an increase in the share of short-term projects that produces a temporary increase in output, at the expense of lower long-run investment and future output. I show in a calibrated model that this behavior is at the source of a novel and powerful channel of shock transmission of productivity shocks that produces short-run dampening and long-run propagation. Furthermore, it can account for the observed business cycle patterns of the aggregate and firm-level composition of investment.
    Keywords: Investment Choice, Financial Frictions, Business Cycles, Idiosyncratic Production Risk.
    JEL: D92 E22 E32 G32
    Date: 2010–09
  12. By: John Harvey (Department of Economics, Texas Christian University)
    Abstract: Curiously and in spite of its name, very few business cycle theories actually treat it as a cycle. Mainstream economics, for example, models all macroeconomic fluctuations as a function of exogenous forces. In their view, the economy remains at full employment indefinitely unless impacted by some external event. Post Keynesian economists disagree strongly with this characterization, arguing instead that business-cycle fluctuations are endogenously generated. The goal of this paper is to compare the explanatory power of four business cycle models–three mainstream and one Post Keynesian–for the US economy since 1971. While the test employed is a simple one, the results are very clear: no model’s performance comes even close to that of the one based on Keynes’ seventy-year old analysis.
    Keywords: business cycle, Keynes, Post Keynesian
    JEL: E12 E13 E32
    Date: 2010–07
  13. By: Peter Skott, Ben Zipperer (University of Massachusetts Amherst)
    Abstract: Structuralist and post Keynesian models differ in their assumptions about firms’ investment behavior and pricing/output decisions. This paper compares three benchmark models: Kaleckian, Robinsonian and Kaldorian. We analyze the implications of these models for the steady growth path and the cyclical properties of the economy, and evaluate the consistency of the theoretical predictions with empirical evidence for the US. Our regression results and the stylized cyclical pattern of key variables are consistent with the Kaldorian model. The Kaleckian investment function and the Robinsonian pricing behavior find no support in the data. JEL Categories: E12, E32, O41
    Keywords: growth, business cycles, aggregate demand, instability, income distribution,utilization rate, investment function, pricing.
    Date: 2010–09
  14. By: Huston, Barry (Department of Economics Marquette University); McGibany, James M (Department of Economics Marquette University); Nourzad, Farrokh (Department of Economics 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, Economics
    JEL: C30 C52 E32
    Date: 2010–09
  15. By: Nathaniel John Porter
    Abstract: Chinese inflation, particularly non-food inflation, has been surprisingly modest in recent years. We find that supply factors, including those captured through upstream foreign commodity and producer prices, have been important drivers of non-food inflation, as has foreign demand for Chinese goods. Domestic demand and monetary conditions seem less important, possibly reflecting a large domestic output gap generated by many years of high investment. Inflation varies systemically within China, with richer (and urban) provinces having lower, more stable, inflation, but this urban inflation also influence that in lower-income provinces. Higher Mainland food inflation also raises inflation in non-Mainland China.
    Date: 2010–09–29
  16. By: Gabriel Jiménez (Banco de España); Steven Ongena (Center–Tilburg University and CEPR); José-Luis Peydró (European Central Bank); Jesús Saurina (Banco de España)
    Abstract: To identify credit availability we analyze the extensive and intensive margins of lending with loan applications and all loans granted in Spain. We find that during the period analyzed both worse economic and tighter monetary conditions reduce loan granting, especially to firms or from banks with lower capital or liquidity ratios. Moreover, responding to applications for the same loan, weak banks are less likely to grant the loan. Our results suggest that firms cannot offset the resultant credit restriction by turning to other banks. Importantly the bank-lending channel is notably stronger when we account for unobserved time-varying firm heterogeneity in loan demand and quality.
    Keywords: non-financial and financial borrower balance-sheet channels, financial accelerator, firm borrowing capacity, credit supply, business cycle, monetary policy, credit channel, net worth, capital, liquidity, 2007-09 crisis
    JEL: E32 E44 E5 G21 G28
    Date: 2010–09
  17. By: Aaron Mehrotra; José R. Sánchez-Fung
    Abstract: The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success.
    Keywords: Monetary policy - China ; Foreign exchange
    Date: 2010
  18. By: Kajuth, Florian
    Abstract: The paper estimates the NAIRU from a Phillips curve relationship in the state-space framework. To identify the inflation-unemployment trade-off we account for a time-varying inflation trend to control for the part of inflation that is not affected by the cyclical component of unemployment. In addition we use shifts in the relative volatility of shocks to unemployment and inflation to address the simultaneity problem in Phillips curve estimations. Applying the method of Rigobon and Sack (2003) allows for a data driven identification of the contemporaneous coefficients on the unemployment gap in the Phillips curve and yields more precise estimates of the structural coefficients in the Phillips curve. This tightens the economic relation on the basis of which the NAIRU is derived. --
    Keywords: non-accelerating inflation rate of unemployment,state-space estimation,identification through heteroskedasticity,trend inflation
    JEL: E24 E31 E32
    Date: 2010
  19. By: Ingrid Größl (University of Hamburg); Ulrich Fritsche (University of Hamburg)
    Abstract: New Keynesian DSGE models propose a dynamic and expectational version of the old IS-LM paradigm. Acknowledging that the Taylor rule as a substitute for the LM-curve has its merits we show that standard DSGE models do not model how the central bank achieves its targets. In filling this gap we make evident that models neglecting a store-of-value function of money but still assuming a Taylor rule are inconsistent. Our major point concerns the-so called new Keynesian IS-curve. We prove that DSGE models which typically rest on the assumption of representative agents are unable to derive the IS-curve. This implies that these models lack the capability to analyse the role of savings as a a gap in aggregate demand. By assuming overlapping generations we make evident how this shortcoming can be avoided. We also show how OLG models add a richer dynamics to the standard DSGE approach.
    Date: 2010
  20. By: Kiseok Hong
    Abstract: This paper examines fiscal policy issues in the Republic of Korea (hereafter Korea) after the 2009 global financial crisis, including the timing of fiscal policy responses, the effectiveness of expansionary measures, and the long-term implications for government debt. In order to evaluate more accurately Korea’s fiscal response since late 2008, this paper conducts an empirical analysis using historical data from Korea and other countries and derives stylized patterns on counter-cyclicality of fiscal policy and its role in the recovery process. The analysis suggests that Korea’s fiscal stimulus in 2009, while having contributed greatly to the economy’s fast recovery, was unusually large compared with typical fiscal responses during economic downturns. This paper also investigates whether the rapid increase in Korea’s fiscal debt burden is admissible in terms of long-term sustainability. [ADBI Working Paper 225]
    Keywords: fiscal policy, Republic of Korea, global financial crisis, expansionary measures, economic
    Date: 2010
  21. By: Pau Rabanal; Juan F. Rubio-Ramirez; Federico S. Mandelman; Diego Vilan
    Abstract: In this paper, we first introduce investment-specific technology (IST) shocks to an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses the "quantity", "international comovement", "Backus-Smith", and "price" puzzles. Second, we use OECD data for the relative price of investment to build and estimate these IST processes across the U.S and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error correction model (VECM). Finally, we demonstrate that when we fit such estimated IST processes in the model instead of the calibrated ones, the shocks are actually not as powerful to explain any of the four montioned puzzles.
    Keywords: Business cycles , Consumption , Cross country analysis , Demand , Economic models , External shocks , International trade , Investment , Productivity , United States ,
    Date: 2010–09–09
  22. By: Leandro Medina
    Abstract: The recent boom and bust in commodity prices has raised concerns about the impact of volatile commodity prices on Latin American countries’ fiscal positions. Using a novel quarterly data set-which includes unique country-specific commodity price indices and a comprehensive measure of public expenditures-this paper analyzes the dynamic effects of commodity price fluctuations on fiscal revenues and expenditures for eight commodity-exporting Latin American countries. The results indicate that Latin American countries’ fiscal positions react strongly to shocks to commodity prices, yet there are marked differences across countries. Fiscal variables in Venezuela display the highest sensitivity to commodity price shocks, with expenditures reacting significantly more than revenues. At the other end of the spectrum, in Chile expenditure reacts very little to commodity price fluctuations, and the dynamic responses of its fiscal indicators are very similar to those seen in high-income commodity-exporting countries. This distinct behavior across countries may relate to institutional arrangements, which in some cases include the efficient application of fiscal rules amid political commitment and high standards of transparency.
    Keywords: Business cycles , Chile , Commodities , Commodity price fluctuations , Commodity prices , Cross country analysis , Exports , External shocks , Fiscal policy , Fiscal sector , Latin America , Venezuela, República Bolivariana de ,
    Date: 2010–08–19
  23. By: James Chapman, Jonathan Chiu, and Miguel Molico
    Abstract: We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.
    Keywords: Payment, clearing, and settlement systems; Central bank research; Monetary policy implementation; Financial system regulation and policies; Financial services
    JEL: E40 E50
    Date: 2010
  24. By: Máximo Camacho; Rafael Doménech
    Abstract: In this paper we extend the Stock and Watson’s (1991) single-index dynamic factor model in an econometric framework that has the advantage of combining information from real and financial indicators published at different frequencies and delays with respect to the period to which they refer. We find that the common factor reflects the behavior of the Spanish business cycle well and helps to estimate with high precision the regime-switching probabilities in line with business cycle phases. We also show that financial indicators are useful for forecasting output growth, particularly when certain financial variables lead the common factor. Finally, we provide a simulated real-time exercise and prove that the model is a very useful tool for the short-term analysis of the Spanish Economy.
    Keywords: dynamic factor model, GDP forecast, financial variables.
    JEL: E32 C22 E27
    Date: 2010–08
  25. By: Musgrave, Ralph S.
    Abstract: Borrow and spend is a policy with several weaknesses. 1, it involves government borrowing something, that is money, which government can create in limitless quantities any time. 2, the “borrow” part of borrow and spend is deflationary: the opposite of the desired effect. 3, borrow and spend may result in interest rate increases and crowding out. To get round this, governments print extra money and buy back government securities. This is a charade: governments here are engaged in “print and spend” while pretending to effect “borrow and spend”. 4, when borrowings are paid back, the initial reflationary effect is reversed, thus borrow and spend does not have a permanent effect, whereas print and spend does. 5, one of the ways that borrow and spend works is that it supplies the private sector with additional assets (bonds which pay interest). This reduces “paradox of thrift” unemployment. But the private sector actually NEEDS or WANTS these assets, thus there is no need to pay interest to induce the recipients to accept those assets. Put another way, governments should issue zero interest bonds (i.e. cash) not interest paying bonds. 6, Borrow and spend expands the national debt, some of which will be held by foreigners. Paying interest to foreigners when no interest needs to be paid makes even less sense than paying such interest to natives. For the purposes of influencing unemployment and inflation, print and spend is a superior policy to adjusting interest rates because the latter is distortionary.
    Keywords: Keynes; borrow and spend; national debt; government borrowing; print money; interest rates;
    JEL: H62 E12 H50 E51 E41
    Date: 2010–09–25
  26. By: Marek Dabrowski
    Abstract: Emerging market economies were major beneficiaries of the economic boom before 2007. More recently, they have become victims of the global financial crisis. Their future development depends, to a large extent, on global economic prospects. Today the global economy and the European economy are much more integrated and interdependent than they were ten or twenty years ago. Every country must recognize its limited economic sovereignty and must be prepared to deal with the consequences of global macroeconomic fluctuations. The statistical data for 2009 provides a mixed picture with respect to the impact of the crisis on various groups of countries and individual economies. On average, Central and Eastern Europe experienced a smaller output decline than the Euro area and the entire EU while the CIS, especially its European part, contracted more dramatically. However, there was a deep differentiation within each country group. Looking globally, richer countries, which are more open to trade and in which the banking sector plays a larger role and which rely more on external financing, suffered more than less sophisticated economies, which are less dependent on trade and credit (especially from external sources). With some exceptions, the previous good growth performance helped rather than handicapped countries in the CEE and CIS regions in the crisis year of 2009. The post-crisis recovery has been rather modest and incomplete. It remains vulnerable to new shocks (like the Greek Fiscal crisis), the danger of sovereign default and other uncertainties. Full post-crisis recovery and increasing potential growth will require far going economic and institutional reforms on both national, regional (e.g., EU) and global levels.
    Keywords: global financial crisis, emerging-market economies, European Union, Economic and Monetary Union, Central and Eastern Europe, Commonwealth of Independent States, sovereign debt crisis, global policy coordination
    JEL: E44 E63 F32 F36 F42 G15 H63
    Date: 2010–10
  27. By: Smith, Jennifer (Department of Economics, University of Warwick); Elsby, Michael (University of Michigan and NBER)
    Abstract: The increase in unemployment in the United Kingdom that accompanied the Great Recession has been conspicuous by its moderation. The rise in joblessness is dwarfed by the recent experience of the United States, by past recessionary episodes in the U.K. and by the contraction in GDP in the U.K. Increased rates of job loss have played a dominant role in shaping the rise in British unemployment. Unemployment duration has not increased to the levels seen in previous recessions, in contrast to the U.S. where duration substantially exceeds previous peaks. Looking forward, the U.K. labour market appears to have adjusted fully to the shocks that prompted the recession. Signs of reductions in match efficiency witnessed recently in the U.S. are not mirrored in the U.K. In contrast, while long-term unemployment currently remains well below historical levels, recent estimates of job finding rates suggest that it has the potential to rise much further. Thus, a timely recovery in aggregate demand will play an important role in averting persistently high unemployment in the future.
    Keywords: Labour market ; business cycle ; unemployment ; worker flows JEL Classification: E24 ; J6
    Date: 2010
  28. By: Jens R. Clausen; Alexander W. Hoffmaister
    Abstract: In the United States and a few European countries, inventory behavior is mainly the outcome of demand shocks: a standard buffer-stock model best characterizes these economies. But most European countries are described by a modified buffer-stock model where supply shocks dominate. In contrast to the United States, inventories boost growth with a one-year lag in Europe. Moreover, inventories provide limited information to improve growth forecasts particularly when a modified buffer-stock model characterizes inventory behavior.
    Keywords: Business cycles , Cross country analysis , Europe , Forecasting models , Manufacturing sector , Production growth , United States ,
    Date: 2010–09–14
  29. By: Reginald Darius
    Abstract: During the period leading up to the global financial crisis many asset classes registered rapid price increases. This coincided with a significant rise in global liquidity. This paper attempts to determine the extent to which the rise in asset prices was influenced by developments in global liquidity. We confirm that global liquidity had a significant impact on the buildup in house prices; however, the impact on equity prices was limited. In contrast to common perception, we find that the impact of global liquidity declined during the period of the Great Moderation. The paper also examines spillovers from global liquidity to domestic variables and concludes that domestic factors generally played a more significant role in house price appreciation relative to global factors. This contradicts the hypothesis of weakened potency of domestic monetary policy in the presence of increased international liquidity.
    Keywords: Asset prices , Economic growth , Forecasting models , Inflation , International liquidity , Price increases , Real estate prices , Spillovers ,
    Date: 2010–08–25
  30. By: Ke Pang; Pierre L. Siklos
    Abstract: This paper uses the credit-friction model developed by C´urdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as in times of crisis. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads unlike quantitative easing which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.
    JEL: E43 E44 E51 E58
    Date: 2010–10
  31. By: Michael Kumhof; Daniel Leigh; Douglas Laxton
    Abstract: For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.
    Keywords: Budget deficits , Cross country analysis , Economic models , Fiscal analysis , Fiscal policy , Government expenditures , Tax policy , Tax reductions , United States , Welfare ,
    Date: 2010–09–02
  32. By: Bohn, Henning
    Abstract: The rapidly growing federal government debt has become a concern for policy makers and the public. Yet the U.S. government has seemingly unbounded access to credit at low interest rates. Historically, Treasury yields have been below the growth rate of the economy. The paper examines the ramifications of debt financing at low interest rates. Given the short maturity of U.S. public debt – over $2.5 trillion maturing in 2010 – investor expectations are critical. Excessive debts justify reasonable doubts about solvency and monetary stability and thus undermine a financing strategy built on the perception that U.S. debt is safe.
    Keywords: government debt, budget deficits
    Date: 2010–04–01
  33. By: John Harvey (Department of Economics, Texas Christian University)
    Abstract: Today, we are in the midst of the worst economic crisis since the Great Depression. Recovery has not been swift, and policymakers and citizens throughout the globe have turned to economists for answers. While in the mainstream, the general opinion is that the collapse was unpredictable and caused by exogenous events (i.e., poor policy decisions), those in the Post-Keynesian school not only raised voices of concern well before the crisis struck, but they have argued consistently that the problems we face are systemic. They base this conclusion on theories developed by John Maynard Keynes. This paper attempts to determine the primary factors creating instability by building and then analyzing a system dynamics model of Keynes’ explanation of the business cycle. It shows that the financial sector is key and that while, of course, exogenous factors can play critical roles, they are unnecessary: cycles are generated endogenously.
    Keywords: Keynes, business cycle, system dynamics
    JEL: E12 E17 E32
    Date: 2010–03
  34. By: Philippe Bacchetta; Cédric Tille; Eric van Wincoop
    Abstract: Recent crises have seen very large spikes in asset price risk without dramatic shifts in fundamentals. We propose an explanation for these risk panics based on self-fulfilling shifts in risk made possible by a negative link between the current asset price and risk about the future asset price. This link implies that risk about tomorrow's asset price depends on uncertainty about risk tomorrow. This dynamic mapping of risk into itself gives rise to the possibility of multiple equilibria and self-fulfilling shifts in risk. We show that this can generate risk panics. The impact of the panic is larger when the shift from a low to a high risk equilibrium takes place in an environment of weak fundamentals. The sharp increase in risk leads to a large drop in the asset price, decreased leverage and reduced market liquidity. We show that the model can account well for the developments during the recent financial crisis.
    Keywords: financial panics and sunspot-like equilibria
    JEL: E44 G11 G12
    Date: 2010–06
  35. By: Justin Svec (Department of Economics, College of the Holy Cross)
    Abstract: This paper compares the fiscal policies implemented by two types of government when confronted by consumer uncertainty. Consumers, lacking confidence in their knowledge of the stochastic environment, endogenously tilt their subjective probability model away from an approximating probability model. The government does not face this uncertainty. Through its choice of a labor tax and the supply of one-period public debt, the government manipulates the competitive equilibrium allocation and the consumers' probability distortion. I consider two types of altruistic government. A "benevolent" government maximizes the consumers' expected utility under the approximating probability model, whereas a "political" government maximizes the consumers' expected utility under the consumers' subjective probability model. I find that, relative to a full-confidence setup, the benevolent government relies more heavily on labor taxes to finance fluctuations in spending, while the political government depends more on public debt to absorb the fiscal shock. These policies are designed to re-align the consumers' savings decisions with their full-confidence values and to reduce the fluctuations in the consumers' welfare across states, respectively.
    Keywords: Robust control, uncertainty, taxes, debt, Ramsey problem
    JEL: E61 E62 H21
    Date: 2010–10
  36. By: Masanao Aoki (Department of Economics, University of California, Los Angeles); Hiroshi Yoshikawa (Faculty of Economics, University of Tokyo)
    Abstract: When the coefficient of variation, namely the standard deviation relative to mean approaches zero as the number of economic agents becomes large, the system is called self-averaging. Otherwise, it is non-self-averaging. Most economic models take it for granted that economic system is self-averaging. However, they are based on an extremely unrealistic assumption that all the economic agents face the same probability distribution. Once this unrealistic assumption is dropped, non-self averaging naturally emerges. Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not go to zero even if the number of sectors or economic agents goes to infinity. Non-self-averaging implies that even if the number of economic agents is large, dispersion can remain significant, and, therefore, that we can not legitimately focus on the means of aggregate variables. It, in turn, means that the standard microeconomic foundations based on representative agents has little value for they are meant to provide us with accurate dynamics of the means of aggregate variables. Contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations.
    Date: 2010–09
  37. By: Burcu Aydin
    Abstract: This paper analyzes the cyclical fluctuations in South Africa in a cross-country context, and studies the impact of the output gap by controlling for export intensity, the debt burden, asset prices, and banking crises. Results show that South Africa’s revenue performance was outstanding during the mid-2000s, and the recent decline in revenue was one of the least among the emerging and advanced markets. Results on the elasticity of tax revenue show that South Africa’s elasticity is higher during business upturns, indicating good prospects for recovering the revenue lost during the global financial crisis.
    Keywords: Business cycles , Cross country analysis , Economic models , Fiscal analysis , Revenues , South Africa , Tax collection , Tax revenues ,
    Date: 2010–09–17
  38. By: Carlos Gustavo Machicado (Institute for Advanced Development Studies); Paul Estrada (Institute for Advanced Development Studies); Ximena Flores (Institute for Advanced Development Studies)
    Abstract: It has been widely documented that fiscal policy can promote economic growth, when it is based on an efficient provision of pubic capital. But little work has been done, in Bolivia, in relation to the macroeconomic and sectoral impacts of increasing public investment in infrastructure. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model for a small open economy with five sectors: Non-tradable or services, importable or manufacturing, hydrocarbons, mining and agriculture. The model is parameterized and solved for the Bolivian economy and several interesting scenarios are simulated by changing government expenditures, taxes, country risk, Total Factor Productivity, effectiveness of public capital and terms of trade. This analysis is relevant for the Bolivian economy, because the government is using fiscal policy as one of its main tool to attack poverty and aims to put public investment as the foremost instruments to promote growth and welfare.
    Keywords: Fiscal Policy, Infrastructure, Multisector Growth Model
    JEL: E62 H54 O41
    Date: 2010–05
  39. By: Timo Henckel (Australian National University); Gordon Menzies (University of Technology, Sydney); Nicholas Prokhovnik (University of Technology, Sydney); Daniel Zizzo (School of Economics, University of East Anglia)
    Abstract: We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
    Keywords: credibility; time inconsistency; reputation; inferential expectations
    JEL: E52 E61
    Date: 2010–10–04
  40. By: Karl Whelan (University College Dublin)
    Abstract: The past few months have exposed serious problems in relation to Europe’s ability to cope with financial stress. Placing the new Financial Stability funds on a permanent basis, in the form of a new European Monetary Fund will be required if Europe is to deal effectively with the serious debt problems of some Eurozone countries. However, this fund should exist to manage sovereign defaults in an orderly manner, not to prevent them altogether. Bank supervisors also need to publish regular stress tests, change their regulations on the risk weighting of sovereign debt and put new resolution procedures in place. Together, these reforms will allow Europe to deal with future sovereign debt problems without provoking a crisis.
    Date: 2010–09–30
  41. By: Ana Fostel; John Geanakoplos
    Abstract: The literature on leverage until now shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility. This paper suggests a reason why bad news is more often than not associated with higher future volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest mostly in technologies that become volatile in bad times. Together with the old literature this explains pro-cyclical leverage. The result also gives rationale to the pattern of volatility smiles observed in the stock options since 1987. Finally, the paper presents for the first time a dynamic model in which an asset is endogenously traded simultaneously at different margin requirements in equilibrium.
    Keywords: Asset prices , Business cycles , Debt , Economic models , External shocks , Financial crisis , Housing , Housing prices , Price elasticity ,
    Date: 2010–09–08
  42. By: Pancaro, Cosimo
    Abstract: What are the equilibrium effects of trade and capital liberalization on consumption smoothing? This question is addressed by studying the response to productivity shocks in a baseline two country, two goods, incomplete market model, where foreign borrowing is secured by collateral. The paper shows that international financial integration, modeled by relaxing a borrowing constraint a la Kiyotaki in the domestic country, worsens consumption smoothing; international trade integration, modeled by a reduction of non linear iceberg transportation costs, improves it. As a measure of consumption smoothing, the analysis uses the ratio between the simulated standard deviation of consumption growth and the simulated standard deviation of output growth. These results are qualitatively consistent with the empirical evidence provided by Kose, Prasad and Terrones (2003).
    Keywords: Emerging Markets,Economic Theory&Research,Free Trade,Debt Markets,Trade Policy
    Date: 2010–10–01
  43. By: Hagen Krämer (Karlsruhe University of Applied Sciences)
    Abstract: The labour share of income in national product has shown a declining trend in many advanced economies over the past 30 years. However, many economists still hold the view that the wage share remains almost constant in the long run. The notion of the relative stability of the wage share in the long run is considers to be a stylized fact or even sometimes called a “law of economics”. This paper attempts to show how the alleged stability of the labour share of income became known as one of the “great magnitudes in economics”. It also shows how this “law” made its way into the three major theories of macroeconomic income distribution, i.e. neoclassical, post-Keynesian, and Kaleckian distribution theory. Since the data show strong fluctuation of aggregate income shares over the long run, the conclusion is reached that the major macroeconomic theories of growth and distribution are built around an invalid – or at least highly questionable – assumption about the real world.
    Date: 2010
  44. By: Timo Henckel; Gordon D. Menzies; Nick Prokhovnik; Daniel J. Zizzo
    Abstract: We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
    JEL: E52 E61
    Date: 2010–10
  45. By: Christian Dreger; Konstantin A. Kholodilin
    Abstract: Survey-based indicators such as the consumer confidence are widely seen as leading indicators for economic activity, especially for the future path of private consumption. Although they receive high attention in the media, their forecasting power appears to be very limited. Therefore, this paper takes a fresh look on the survey data, which serve as a basis for the consumer confidence indicator (CCI) reported by the EU Commission for the euro area and individual member states. Different pooling methods are considered to exploit the information embedded in the consumer survey. Quantitative forecasts are based on Mixed Data Sampling (MIDAS) and bridge equations. While the CCI does not outperform an autoregressive benchmark for the majority of countries, the new indicators increase the forecasting performance. The gains over the CCI are striking for Italy and the entire euro area (20 percent). For Germany and France the gains seem to be lower, but are nevertheless substantial (10 to 15 percent). The best performing indicator should be built upon pre-selection methods, while data-driven aggregation methods should be preferred to determine the weights of the individual ingredients.
    Keywords: Consumer confidence, consumption, nowcasting, mixed frequency data
    JEL: E21 C22
    Date: 2010
  46. By: Michael G. Arghyrou; Alexandros Kontonikas
    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 countryspecific 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
  47. By: Lluka, Valon
    Abstract: Central Bank of the Republic of Kosova (CBK), was established in June 2008, and is the successor of the Authority of Banking and Payments of Kosovo and the Central Banking Authority of Kosovo. Main Functions of the Central Bank of Kosovo are: • Drafting and implementation of monetary policy, • Regulation and supervision of the banking system, • Bank of the Government, • Management of foreign exhange and gold reserves. Central Bank acts as the Banker, Fiscal Agent, and Economic Adviser to Government. Developing an efficient and safe system for domestic payments is a primary function of the CBK. Creating of Electronic System for Interbank Clearing (SEKN) in 2001, first as a system of interbank payments was a major step forward in terms of facilitating the operations of domestic payments through the banking system. SEKN remains the only system of interbank payments since then, but has been raised significantly functionally in recent years, especially in 2008, aiming at modernizing and enriching ways of conducting transactions. Specifically, in 2008, was passed in web technology platform and developed the Direct Debit scheme. Facilitating the exchange of information between lending institutions is a crucial and target commitment of the CBK in order to develop interbank infrastructure for credit market advancement and promotion of financial stability.
    Keywords: Central Bank; Functions; Banking; Kosovo
    JEL: E58 E42 E52 E5
    Date: 2010–09–30
  48. By: Sophia Gollwitzer; Marc Quintyn
    Abstract: This paper analyzes the institutional conditions affecting the establishment and effectiveness of independent central banks and of budgetary institutions. It draws on the recent theory developed by North, Wallis and Weingast on the transition from a closed and fragile state to an open economic and political environment. The paper presents a composite indicator allowing for the identification of a country’s position along this transition path. The findings suggest that (i) while the establishment of autonomous central banks seems to be relatively independent from the broader institutional framework, sound budgetary institutions tend to be established in countries with higher levels of rule of law for the elites, and (ii) while central bank independence is effective in reducing inflation irrespective of a country’s position along the transition path, budget institutions seem to be most effective as a disciplining device in weak institutional environments.
    Keywords: Budgetary policy , Central bank autonomy , Central banks , Developed countries , Governance , Low-income developing countries , Political economy ,
    Date: 2010–08–23
  49. By: Murshed, S.M.
    Abstract: The purpose of this paper is to analyze the macroeconomic effects of trade policy, when the instrument is a voluntary export restraint (VER), on both the home (imposing) country and the foreign (targeted) country. The innovation in the paper is the analysis of trade policy when debt servicing is present in the current account of the balance of payments. This captures the contemporary experience of deficit nations like the USA vis-à-vis surplus countries like China. Trade policy (VER) in the short-run affects the current account and exchange rate, leading to the accumulation of debt stocks, which have to be repaid in the long-run in the form of debt servicing flows. This leads to a major difference between the short and long-run effects of trade policy in the form of VERs, which can be expansionary and contractionary respectively for the trade policy initiating nation.
    Keywords: Macroeconomic effects of trade policy;voluntary export restraints;debt servicing
    Date: 2010–03–01
  50. By: Adams, Charles (National University of Singapore); Jeong, Hoe Yun (Asian Development Bank); Park, Cyn-Young (Asian Development Bank)
    Abstract: Developing Asia remains at the core of global payment imbalances. While the geographical concentration of current account imbalances is rather significant, with the People’s Republic of China accounting for the lion’s share of the region’s current account surplus, how Asia contributes to global rebalancing also depends critically on the NIEs and larger ASEAN economies. Given the region’s huge diversity, the necessary national macroeconomic and structural policies will vary significantly across Asia’s emerging economies. Whereas near-term rebalancing efforts will be driven primarily by macroeconomic and exchange rate policies, medium- to long-term measures will involve policies and structural reforms directed to boost domestic and regional demand as a source of economic growth. In this paper, we argue that regional rebalancing will depend critically on the adoption of deeper and more comprehensive structural reforms and further trade liberalization that promote domestic spending—thus reducing Asia’s high dependence on extra regional demand. Priority policies should include infrastructure spending, competition, trade, financial development, investment, immigration, and other social policies to reduce national savings.
    Keywords: global imbalances; Asia; rebalancing
    JEL: E61 F42 F43
    Date: 2010–09–01
  51. By: Hui He (University of Hawaii at Manoa, Department of Economics)
    Abstract: This paper documents a dramatic increase in the college enrollment rate of women from 1955 to 1980 and asks a quantitative question: to what extent can such increase be accounted for by the change in the female cohort-specific college wage premium? I develop and calibrate an overlapping generations model with discrete schooling choice. I find that changes in the life-cycle earnings differential can explain the increase in the female college enrollment rate very well. Young women's changing expectations of future earnings may also play an important role in driving their college attendance decision.
    Keywords: Female College Enrollment rate, College Wage Premium, Life-cycle
    JEL: E24 J24 J31 I21
    Date: 2010–09–17
  52. By: M. Ege Yazgan (Department of Economics, Istanbul Bilgi University); Hakan Yilmazkuday (Department of Economics, Temple University)
    Abstract: This paper tests the bilateral price-level convergence among 52 U.S. cities at the good level. We employ a new approach which is free of problems that arise when using an arbitrary benchmark, cross-section dependence, and heterogeneity. We find quite strong evidence in favor of convergence with significantly quick rates. This finding is surprising as the estimated median half lives are far below the half lives found in the corresponding studies for the U.S.
    Keywords: Convergence, Micro-Level Prices, PPP Puzzle.
    JEL: E31 F41
    Date: 2010–09
  53. By: Michael Gerfin; Boris Kaiser
    Abstract: This paper investigates how recent immigration inflows from 2002 to 2008 have affected wages in Switzerland. This period is of particular interest as it marks the time during which the bilateral agreement with the EU on the free cross-border movement of workers has been effective. Since different types of workers are likely to be unevenly affected by recent immigration inflows, we follow the "structural skill-cell approach". This paper provides two main contributions. First, we estimate empirically the elasticities of substitution between different types of workers in Switzerland. Our results suggest that natives and immigrants are imperfect substitutes. Regarding different skill levels, the estimates indicate that workers are imperfect substitutes across broad education groups and across different experience groups. Second, the estimated elasticities of substitution are used to simulate the impact on domestic wages using the actual immigration inflows from 2002 to 2008. For the long run, the simulations produce some notable distributional consequences across different types of workers: While previous immigrants incur wage losses (-1.6%), native workers are not negatively affected on average (+0.4%). In the short run, immigration has a negative macroeconomic effect on the average wage, which, however, gradually dies out in the process of capital adjustment.
    Keywords: Immigration; Wages; Labour Demand; Labour Supply; Skill Groups
    JEL: E24 F22 J61 J31
    Date: 2010–09

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