nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒10‒23
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. How Does Monetary Policy Change? Evidence on Inflation Targeting Countries By Jaromír Baxa; Roman Horváth; Bořek Vašíček
  2. US post-war monetary policy: what caused the Great Moderation? By Minford, Patrick; Ou, Zhirong
  3. Did Tax Policies mitigate US Business Cycles? By Jimborean, R.; Ferroni, F.
  4. Insulation impossible: monetary policy and regional fiscal spillovers in a federation By Cooper, R.; Kempf, H.; Peled, D.
  5. Sovereign Risk and Macroeconomic Fluctuations in an Emerging Market Economy By Markus Kirchner; Malte Rieth
  6. Modelling Italian potential output and the output gap By Antonio Bassanetti; Michele Caivano; Alberto Locarno
  7. Global policy at the zero lower bound in a large-scale DSGE model By Sandra Gomes; Pascal Jacquinot; Ricardo Mestre; João Sousa
  8. Inflation and Economic Growth in Bangladesh: 1981-2005 By Shamim Ahmed; M. Golam Mortaza
  9. Business Cycle Implications of Internal Consumption Habit for New Keynesian Models By Takashi Kano; James M. Nason
  10. Business Cycle Persistence in Developing Countries: How Successful is a DSGE Model with a Vertical Production Chain and Sticky Prices? By Rachel Male
  11. Fiscal Policy in a Tractable Liquidity-Constrained Economy By Challe, E.; Ragot, X.
  12. Inflation, Human Capital and Tobin's q By Parantap Basu; Max Gillman; Joseph Pearlman
  13. Macroeconomic Effects of China’s Fiscal Stimulus By Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
  14. Policy Games with Liquidity Constrained Consumers By Albonico, Alice
  15. The Impact of ECB and FED announcements on the Euro Interest Rates By Andrea Monticini; David Peel; Giacomo Vaciago
  16. On Some Monetarist Arithmetic By M J Manohar Rao
  17. Monetary Policy and Real Estate Prices: A Disaggregated Analysis for Switzerland By Berlemann, Michael; Freese, Julia
  18. Interbank Lending and the Demand for Central Bank Loans - a Simple Microfoundation By Markus Pasche
  19. Fixed Exchange Rate Regimes in Mediterranean Countries and the Experience of Cyprus By George Syrichas
  20. On the Granger Causality between Median Inflation and Price Dispersion By Richard Ashley
  21. Fiscal Federalism in Crisis: Lessons for Europe from the US By Zsolt Darvas
  22. Housing Investment: What Makes It so Volatile? Theory and Evidence from OECD Countries By Quoc Hung Nguyen
  23. Macroeconomic Conditions and Capital Structure: Evidence from Taiwan By Hsien-Hung Yeh; Eduardo Roca
  24. The Unending Search for a New Global Monetary and Financial Architecture By Gerardo della Paolera
  25. Monetary transmission in low income countries By Prachi Mishra; Antonio Spilimbergo; Peter Montiel
  26. Pension financing and macroeconomic equilibrium By Enrico D’Elia
  27. Modelling and Forecasting Seasonality in Indian Macroeconomic Time Series By Pami Dua; Lokendra Kumawat
  28. The Forecasting Properties of Survey-Based Wage-Growth Expectations By Jonsson, Thomas; Österholm, Pär
  29. Cyclical Persistence and the Cyclicality of R&D By Min Ouyang
  30. Winners and Losers in House Markets By Nobuhiro Kiyotaki; Alexander Michaelides; Kalin Nikolov
  31. Endogenous Credit Cycles By Chao Gu; Randall Wright
  32. Managing Credit Booms and Busts: A Pigouvian Taxation Approach By Jeanne, O. Prof.Dr.; Korinek, A.
  33. The Great Recession, 'Rainy Day' Funds, and Countercyclical Fiscal Policy in Latin America By Eduardo Fernández-Arias; Peter Montiel
  34. Long-Term Oil Price Forecasts: A New Perspective on Oil and the Macroeconomy By J. Isaac Miller; Shawn Ni
  35. Dematerialisation of consumption: a win-win strategy? By Kronenberg, Tobias
  36. Financial Linkages and Business Cycles of Japan: An Analysis Using Financial Conditions Index By Jun-ichi Shinkai; Akira Kohsaka
  37. Habits and Endogenous Investment Fluctuations By Been-Lon Chen; Yu-Shan Hsu; Kazuo Mino
  38. Financial Market Integration of South Asian Countries: Panel data Analysis By Mohsin, H; Rivers, P
  39. Virtue of Bad Times and Financial Market Frictions By Min Ouyang
  40. Structural Policy Challenges in Slovakia By Martin Filko; Stefan Kiss; Ludovit Odor; Matej Siskovic
  41. Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides: Markets with Search Frictions By Committee, Nobel Prize
  42. Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides: Markets with search costs By Committee, Nobel Prize
  43. Estimación de la estructura de tasas utilizando el modelo Dinámico Nelson Siegel: resultados para Chile y EEUU By Alfaro, Rodrigo; Becerra, Juan Sebastian; Sagner, Andres

  1. By: Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Bořek Vašíček (Universitat Autonoma de Barcelona)
    Abstract: We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom), applying a moment-based estimator in a time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually, pointing to the importance of applying a time-varying estimation framework. Second, the interest rate smoothing parameter is much lower than typically reported by previous time-invariant estimates of policy rules. External factors matter for all countries, although the importance of the exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates to inflation is particularly strong during periods when central bankers want to break a record of high inflation, such as in the UK or Australia at the beginning of the 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting, suggesting a positive anchoring effect of this regime on inflation expectations. This result is supported by our finding that inflation persistence as well as the policy neutral rate typically decreased after the adoption of inflation targeting.
    Keywords: Taylor rule, inflation targeting, monetary policy, time-varying parameter model, endogenous regressors
    JEL: E43 E52 E58
    Date: 2010–10
  2. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: Using indirect inference based on a VAR we confront US data from 1972 to 2007 with a standard New Keynesian model in which an optimal timeless policy is substituted for a Taylor rule. We find the model explains the data both for the Great Acceleration and the Great Moderation. The implication is that changing variances of shocks caused the reduction of volatility. Smaller Fed policy errors accounted for the fall in inflation volatility. Smaller supply shocks accounted for the fall in output volatility and smaller demand shocks for lower interest rate volatility. The same model with differing Taylor rules of the standard sorts cannot explain the data of either episode. But the model with timeless optimal policy could have generated data in which Taylor rule regressions could have been found, creating an illusion that monetary policy was following such rules.
    Keywords: Great Moderation; Shocks; Monetary policy; New Keynesian model; Bootstrap; VAR; Indirect inference; Wald statistic
    JEL: E32 E42 E52 E58
    Date: 2010–10
  3. By: Jimborean, R.; Ferroni, F.
    Abstract: I study whether US Tax Policies affected economic volatility during the post World War II period. I employ a Real Business Cycle model with distorting taxation on household income and tax rules, and assume that taxes respond to the cyclical conditions of the economy. I estimate the deep parameters of the model using Bayesian techniques. My findings are; (a) fiscal policies display a strong countercyclical behavior, (b) help to reduce the cyclical and raw volatility of GDP, consumption, investment when the government can issue debt, and (c) unexpected changes in tax policies do not affect the volatility of the macroeconomic variables.
    Keywords: Fiscal Policy and Business Cycles, Bayesian Methods.
    JEL: E32 E62 C11 C22
    Date: 2010
  4. By: Cooper, R.; Kempf, H.; Peled, D.
    Abstract: This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modeled here as reserve requirements. When capital markets are integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.
    Keywords: Monetary Union, Inflation tax, Seigniorage, monetary rules, public debt.
    JEL: E31 E42 E58 E62
    Date: 2010
  5. By: Markus Kirchner (University of Amsterdam); Malte Rieth (University of Dortmund)
    Abstract: This paper assesses the role of sovereign risk in explaining macroeconomic fluctuations in Turkey. We estimate two versions of a simple New Keynesian small open economy model on quarterly data for the period 1994Q3-2008Q2: A basic version and a version augmented by a default premium on government debt due to a perceived risk of sovereign debt default. Model comparisons clearly support the augmented version since it leads to stronger internal propagation and hence smaller shocks are required in order to reconcile the observed dynamics of nominal and real variables, leading to better forecasting performance. The estimated default probability is highly debt-elastic, indicating that default fears are a relevant concern. The results suggest that the augmented model may lead to a better understanding of macroeconomic fluctuations in emerging market economies that are subject to sovereign risk. In terms of policy implications, counterfactual experiments show that both more active monetary policy and stronger fiscal feedbacks from debt on taxes can lead to less volatile inflation and debt dynamics, but higher debt feedbacks on taxation additionally reduce expected default rates.
    Keywords: Sovereign default risk; Macroeconomic fluctuations; Emerging market economies; Small open economy models; Monetary and fiscal policy
    JEL: E10 E30 E63 H30
    Date: 2010–11–10
  6. By: Antonio Bassanetti (Bank of Italy); Michele Caivano (Bank of Italy); Alberto Locarno (Bank of Italy)
    Abstract: The aim of the paper is to estimate a reliable quarterly time-series of potential output for the Italian economy, exploiting four alternative approaches: a Bayesian unobserved component method, a univariate time-varying autoregressive model, a production function approach and a structural VAR. Based on a wide range of evaluation criteria, all methods generate output gaps that accurately describe the Italian business cycle over the past three decades. All output gap measures are subject to non-negligible revisions when new data become available. Nonetheless they still prove to be informative about the current cyclical phase and, unlike the evidence reported in most of the literature, helpful at predicting inflation compared with simple benchmarks. We assess also the performance of output gap estimates obtained by combining the four original indicators, using either equal weights or Bayesian averaging, showing that the resulting measures (i) are less sensitive to revisions; (ii) are at least as good as the originals at tracking business cycle fluctuations; (iii) are more accurate as inflation predictors.
    Keywords: potential output, business cycle, Phillips curve, output gap
    JEL: E37 C52
    Date: 2010–09
  7. By: Sandra Gomes (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); João Sousa (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.)
    Abstract: The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results. JEL Classification: E40, E62, E63, F42.
    Keywords: Zero Lower Bound, Fiscal Multipliers, Monetary Policy, DSGE models.
    Date: 2010–10
  8. By: Shamim Ahmed; M. Golam Mortaza
    Abstract: This paper empirically explores the present relationship between inflation and economic growth in the context of Bangladesh. Using annual data set on real GDP and CPI for the period of 1980 to 2005, an assessment of empirical evidence has been acquired through the co-integration and error correction models. Further, it explores an interesting policy issue of what is the threshold level of inflation for the economy. [BB WP no. 0604].
    Keywords: inflation, economic growth, bangladesh, GDP, CPI, intergration, correction models, inflation, economy, economic growth, Granger Causality, Structural Break, Threshold level, sustainability,
    Date: 2010
  9. By: Takashi Kano; James M. Nason
    Abstract: This paper studies the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that consumption habit often improves the ability of NKDSGE models to match output and consumption growth spectra. Nonetheless, the fit of NKDSGE models with consumption habit is susceptible to the source of the nominal rigidity, to spectra identified by permanent productivity shocks, to the frequencies used for evaluation, and to the choice of monetary policy rule. These vulnerabilities suggest that NKDSGE model specification is fragile.
    JEL: E10 E20 E32
    Date: 2010–10
  10. By: Rachel Male (Queen Mary, University of London)
    Abstract: It is well documented that business cycles of developed countries are characterised by persistent output fluctuations, and this has been the subject of much theoretical interest. However, the case for developing countries has been somewhat neglected in the literature. This paper addresses this imbalance, revealing that whilst both developed and developing countries exhibit persistent output fluctuations, there is a significant positive relationship between output persistence and level of economic development. This relationship was successfully modelled using a vertical production chain DSGE model (Huang and Liu, 2001). This model lends itself to such an analysis, as by altering the number of production stages (N) it is possible to represent economies at different levels of development. However, calibration of low input-output (γ) parameter values for the US and UK effectively inhibited the model from generating enough persistence to match that observed in these countries. Nonetheless, after abstracting from the US and UK results, there was found to be a strong significant positive relationship between the magnitude of output persistence generated by the model and economic development. A final very significant finding of this analysis is that the model overestimates output persistence in high inflation countries and underestimates output persistence in low inflation countries. This has important implications not only for this model, but also for any economist attempting to construct a business cycle model capable of replicating the observed patterns of output persistence.
    Keywords: Output persistence, Vertical production chain, Staggered price contracts, Economic development, Inflation
    JEL: E31 E32 E52
    Date: 2010–10
  11. By: Challe, E.; Ragot, X.
    Abstract: In this paper, we analyse the effects of transitory fiscal expansions when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into a tractable flexible-price, incomplete-market economy where heterogenous, infinitely-lived agents face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effects that arise following the shock. The expansionary effects of tax cuts are also discussed. Classification-JEL: E21; E62.
    Keywords: Borrowing constraints; Public Debt; Fiscal Policy Shocks.
    Date: 2010
  12. By: Parantap Basu (Durham University); Max Gillman (Institute of Economics - Hungarian Academy of Sciences, Cardiff University); Joseph Pearlman (London Metropolitan University)
    Abstract: A less well-known empirical finding for the US and UK is a pronounced low frequency negative relationship between inflation and Tobin's q; a normalized market price of capital. This stylized fact is explained within a dynamic stochastic general equilibrium model using three key features: (i) a Lucas and Prescott (1971) physical capital adjustment cost with a rising marginal cost of investment, (ii) production of human capital with endogenous growth and (iii) an inflation tax cash-in-advance economy. The baseline endogenous growth model matches the US inflation and q long term correlation, while comparable exogenous growth are unable to do this, and it outperforms the exogenous growth models in explaining business cycle volatilities of q and of stock returns.
    Keywords: Low frequency, Tobin's q; inflation tax, endogenous growth
    JEL: E31 E44 G12
    Date: 2010–09
  13. By: Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
    Abstract: This paper analyzes the macroeconomic impact of China’s 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on China’s economic activity are sizeable: absent fiscal stimulus China’s GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010, respectively. The effects are stronger under a US dollar peg because of the imported loose monetary policy stance from the United States. Higher Chinese aggregate demand stimulates higher (gross and net) imports from other regions, in particular from Japan and the rest of the world, and, only to a lesser extent, from the United States and the euro area. However, the overall GDP impact of the Chinese stimulus on the rest of the world is limited. These results warn that a fiscal policydriven increase in China’s domestic aggregate demand associated with a more flexible exchange rate regime have only a limited potential to contribute to an orderly resolution of global trade and financial imbalances.
    Keywords: Fiscal stimulus, Financial crisis
    JEL: E62 F41 F42 H30 H63
    Date: 2010–10
  14. By: Albonico, Alice
    Abstract: We investigate the optimal responses of policy authorities through a model where the fiscal and the monetary policymakers are independent and play strategically. We allow for the presence of two types of consumers: ‘Ricardians’, who trade in the assets market and ‘liquidity constrained’ consumers, who spend all their disposable labor income for consumption. We find that not only the different game structures but mainly the presence of ‘liquidity constrained’ consumers is crucial in determining the optimal responses of policies. In particular, for high enough fractions of liquidity constrained consumers the way policies react to cope with a mark-up shock change significantly and the role of fiscal policy becomes more relevant.
    Keywords: policy games; optimal monetary and fiscal policy; liquidity constrained consumers;
    JEL: E63 E61
    Date: 2010–09
  15. By: Andrea Monticini (Catholic University, Milan, Italy); David Peel; Giacomo Vaciago
    Abstract: Employing a new method of analysis suggested by Thornton (2009) we investigate the impact of news in the ECB and FED monetary policy announcements on daily changes in Euro interest rates. We document significant impacts of ECB announcements throughout the period but only until mid-2004 of FED announcements. The latter result on the news content of FED announcements is consistent with the analysis of Thornton (2009) who reports an insignificant impact of FED announcements on changes in US interest rates over a sample period that has significant overlap with the one employed in this letter.
    Keywords: monetary policy shocks, identification, wild bootstrap
    JEL: E40 E52
    Date: 2010–09
  16. By: M J Manohar Rao
    Abstract: The paper improves upon the original Sargent-Wallace (SW) version which had to resort to numerical simulations to prove this point It is also shown that incorporating the Mundeil-Tobin and Darby-Tanzi effects into the model indicates further conditions that would (in)validate the SW result
    Keywords: sargent wallace, SW, Darby-Tanzi, validate, effects, numerical, simulations, steady-state inflation, monetary accommodation, debt-financing, monetarist, arithmetic
    Date: 2010
  17. By: Berlemann, Michael (Helmut Schmidt University, Hamburg); Freese, Julia (Helmut Schmidt University, Hamburg)
    Abstract: Most empirical studies found that monetary policy has a significant effect on house prices while stock markets remain unaffected by interest rate shocks. In this paper we conduct a more detailed analysis by studying various sub-segments of the real estate market. Employing a new dataset for Switzerland we estimate vector autoregressive models and find substitution effects between house and apartment prices on the one hand and rental prices on the other. Interestingly enough, commercial property prices do not react on interest rate variations.
    Keywords: monetary policy; interest rate shocks; real estate; stock market
    JEL: E43 E52 R21
    Date: 2010–10–14
  18. By: Markus Pasche (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: The paper presents a simple model of banking behavior where portfolio, liquidity, and liability management determine simultaneously the demand and supply of borrowed reserves on the interbank market. As the central bank is one player in this market due to its refinancing policy, it is able to determine the interest rate and henceforth the residual demand for central bank loans. Comparative static analysis shows how external or monetary policy shocks affect the behavior on the interbank market, the volume as well as the structure of the bank's balance sheet. It turns out that the banking firm behavior is non-linear and partially non-monotonous, indicating that the transmission of monetary measures is more complex when endogeneous banking behavior is taken into account.
    Keywords: banking firm, balance sheet, interbank market, borrowed reserves, central banking, liquidity, transmission
    JEL: E43 E58 G21
    Date: 2010–10–11
  19. By: George Syrichas (Central Bank of Cyprus)
    Abstract: Mediterranean countries following a fixed exchange rate regime have been confronted with some challenges that test the efficacy of the regimes in place. These challenges mostly arise from the combination of inflationary pressures and the need for further capital account liberalisation amid conditions of ample liquidity in the banking system and rapid money and credit growth. In light of these developments, some of these exchange rate targeting Mediterranean countries are assessing the framework in place or even contemplating change to a more flexible arrangement, which would allow them greater freedom to pursue domestic objectives. Theoretical and empirical considerations do not point to the superiority of a particular exchange rate regime, but provide broad guidance on the factors and conditions that are predisposed to a fixed exchange rate regime and its sustainability in a liberalised environment. The case of Cyprus confirms the view that, under certain conditions, it is possible to maintain a credible fixed exchange rate regime while advancing capital account liberalisation and still achieve the primary objective of monetary policy. Adherence to a simple monetary rule, such as an exchange rate target, can confer credibility on a central bank and deliver price stability. Another important lesson drawn from the Cyprus case is that this strategy requires an independent central bank and needs to be supplemented by additional measures. Monetary aggregates, in particular credit, should be closely monitored and controlled, if necessary. The current account also warrants close monitoring, both as an indicator of inflationary pressures and as a warning signal helping to avoid unsustainable external imbalances. Finally, capital account liberalisation requires that the authorities have in advance a well-prepared and comprehensive plan, including, first and foremost, reforms in the conduct of monetary policy and banking supervision.
    Keywords: Exchange rate policy, exchange rate pegs, monetary policy, Mediterranean countries, Cyprus.
    JEL: E31 E4 E52 F31 F33
    Date: 2010–10
  20. By: Richard Ashley
    Abstract: The Granger-causal relationship between the size and dispersion of fluctuations in sub-components of the U.S. Consumer Price Index (CPI) is examined using both in-sample and post- sample tests and data from January 1968 to December 2008. Strong in-sample evidence is found for feedback between median inflation and price dispersion; the evidence for Granger-causation from median inflation to price dispersion remains strong in out-of-sample testing, but is less strong for Granger-causation in the opposite direction. The implications of these results for the variety of price-level determination models in the literature are discussed.
    Keywords: CPI, Granger, Causal Relationship, Price Dispersion, Inflation
    Date: 2010
  21. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Science, Bruegel-Brusselss)
    Abstract: The euro area is facing crisis, while the US is not, though the overall fiscal situation and outlook is better in the euro area than in the US, and though the US faces serious state-level fiscal crises. A higher level of fiscal federalism would strengthen the euro area, but is not inevitable. Current fiscal reform proposals (strengthening of current rules, more policy coordination and an emergency financing mechanism) will if implemented result in some improvements. But implementation might be deficient or lack credibility, and could lead to disputes and carry a significant political risk. Introduction of a Eurobond covering up to 60 percent of member states' GDP would bring about much greater levels of fiscal discipline than any other proposal, would create an attractive Eurobond market, and would deliver a strong message about the irreversible nature of European integration.
    Keywords: federalism; redistribution; stabilisation; risk-sharing; crisis; euro-area governance reform; Eurobond
    JEL: E62 H60 H77
    Date: 2010–09
  22. By: Quoc Hung Nguyen (Institute of Developing Economies and Hong Kong Institute for Monetary Research)
    Abstract: This paper explains how mortgage market liberalization can introduce greater volatility in the housing market. It begins by documenting two stylized facts for OECD countries that models with perfect credit markets fail to explain: (i) housing investment is about five times as volatile as output and (ii) housing investment tends to be more volatile in economies with more liberalized mortgage markets. The paper then develops a DSGE model where households face a credit constraint and housing is used as collateral. This housing collateral constraint creates a link between the housing market and borrowing capacity, a link that amplifies the response of housing demand to shocks and becomes stronger with more mortgage market liberalization. Finally, calibrated models with a housing collateral constraint explain about 90 percent of housing investment volatility in the UK economy.
    Keywords: Housing Investment, Collateral Constraint, Mortgage Markets
    JEL: E22 E32 F34 F41
    Date: 2010–09
  23. By: Hsien-Hung Yeh; Eduardo Roca
    Keywords: Capital structure, macroeconomic conditions, financial constraint, partial adjustment model
    Date: 2010
  24. By: Gerardo della Paolera (Global Development Network (GDN))
    Abstract: This paper analyzes some key features of the global monetary and financial crisis and the limitations faced by Central Banks. It also includes a brief description for the collectively previous efforts to anchor a Global Monetary and Financial regime. The main difficulties to “globalize” banking and financial reforms are illustrated in this paper. It is concluded with some open questions concerning the threats and opportunities that this crisis presents for emerging, developing and poorer countries.
    Date: 2010–10
  25. By: Prachi Mishra (International Monetary Fund); Antonio Spilimbergo (International Monetary Fund); Peter Montiel (Williams College)
    Abstract: This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.
    Keywords: monetary policy, exchange rate, interest rate, banks, credit, institutions
    Date: 2010–07
  26. By: Enrico D’Elia (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Financing pension systems necessitates that actual output is redistributed from workers and entrepreneurs actually in activity in favour of retirees. Therefore, in a closed economy, the return on accrued pension funds, to be distributed to pensioners, is ceiled by the real growth of income, unless the share of income levied on active workers increases indefinitely. Only possible revenues from past foreign investment can increase the overall resources available to pay domestic pensions. Thus, an efficient pre funded pension system inevitably stimulates large international capital movements. The paper sheds some light on an issue often overlooked in the debate on the merits and drawbacks of different systems, i.e. their possible consequences on interest and exchange rates. In order to provide an explicit solution for the dynamics of the relevant variables, the paper adopts an analytical approach more simple than the usual overlapping generation models. In particular, the paper confirms that in an aging society, with a fully indexed PAYG system, a constant contribution rate would make the public debt and related interest rates explode. On the other hand, in a pre-funded system, interest rates should be set below the national growth rates, and exchange rates must be ready to accommodate to large deficit of the balance of payment for many decades after the switch from a PAYG system, and later to large surplus.
    Keywords: Aging society, Capital movements, Monetary policy, Pensions
    JEL: E43 F21 F32 H55 J32
    Date: 2010–07
  27. By: Pami Dua; Lokendra Kumawat
    Abstract: This paper models the univariate dynamics of seasonally unadjusted quarterly macroeconomic time series for the Indian economy including industrial production, money supply (broad and narrow measures) and consumer price index. The seasonal integration-cointegration and the periodic models are employed. The ‘best’ model is selected on the basis of a battery of econometric tests including comparison of out-of sample forecast performance. [Working Paper No. 136]
    Keywords: Seasonality, Integration, Periodic Integration, Forecast Performance
    Date: 2010
  28. By: Jonsson, Thomas (National Institute of Economic Research); Österholm, Pär (National Institute of Economic Research)
    Abstract: In this paper, we evaluate survey-based wage-growth expectations in Sweden. Results show that the expectations are neither unbiased nor efficient forecasts. Evaluating out-of-sample forecasting performance, we find that the survey participants generally perform worse than a con-stant forecast based on reasonable assumptions regarding the inflation target and productivity growth. Our findings indicate that caution should be exercised when relying on these data for policymaking.
    Keywords: Survey data;
    JEL: E52 J30
    Date: 2010–09
  29. By: Min Ouyang (Department of Economics, University of California-Irvine)
    Abstract: We propose cyclical persistence as an important factor influencing the link between short-run cycles and long-run growth, through the cyclicality of R&D. A simple theory is presented, suggesting that higher persistence can drive R&D pro-cyclical by raising the cyclicality of innovation’s expected marginal return relative to that of its marginal opportunity cost. Our theory is carried to an industry panel of R&D and output. We find that cyclical persistence can account for about half of the observed variation in industry R&D’s cyclicality.
    Keywords: Business cycles; Growth; Cyclical persistence; R&D
    JEL: E32 E44 O30
    Date: 2010–08
  30. By: Nobuhiro Kiyotaki (Princeton University); Alexander Michaelides (Central Bank of Cyprus and London School of Economics); Kalin Nikolov (Bank of England and London School of Economics)
    Abstract: This paper is a quantitatively-oriented theoretical study of the interaction between housing prices, aggregate production, and household behavior over a lifetime. We develop a life-cycle model of a production economy in which land and capital are used to build residential and commercial real estates. We find that, in an economy where the share of land in the value of real estates is large, housing prices react more to an exogenous change in expected productivity or the world interest rate, causing a large redistribution between net buyers and net sellers of houses. Changing financing constraints, however, has limited effects on housing prices.
    Keywords: Real estates, land, housing prices, life cycle, collateral constraints
    JEL: E20 G10 R20 R30
    Date: 2010–07
  31. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Randall Wright
    Abstract: We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
    Keywords: sunspot credit, commitment, dynamics, cycles.
    JEL: E2
    Date: 2010–10–11
  32. By: Jeanne, O. Prof.Dr.; Korinek, A. (Tilburg University, Center for Economic Research)
    Abstract: We study a dynamic model in which the interaction between debt ac- cumulation and asset prices magni…es credit booms and busts. We find that borrowers do not internalize these feedback e¤ects and therefore suf- fer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model by reference to (i) the US small and medium-sized enterprise sector and (ii) the household sector, and …nd the optimal tax to be countercycli- cal in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
    Keywords: boom-bust cycles;…nancial crises;systemic externalities;macro-prudential regulation;precautionary savings
    JEL: E44 G38
    Date: 2010
  33. By: Eduardo Fernández-Arias (Inter-American Development Bank); Peter Montiel (Williams College)
    Abstract: This paper examines the fiscal policy options that were available to Latin American countries at the onset of the current global economic crisis. It concludes that most of the major countries in the region possessed the fiscal space (as measured by credible fiscal sustainability and debt headroom) to run prudent countercyclical fiscal deficits. For those countries, the appropriate policy response involved a constrained fiscal expansion focused on productive public spending and financed by drawing on the “rainy day” funds - in the form of large stocks of foreign exchange reserves - that they accumulated in prior years, rather than by market borrowing. It shows that the recent surge in multilateral financial activity to alleviate market illiquidity, whether intended for reserve or budget support, strengthens the case for this policy prescription : with multilateral support, the appropriate policy response is more expansionary, and its financing is less reliant on market borrowing.
    Keywords: countercyclical policy, fiscal space, international reserves, multilateral financial support
    JEL: E62 E63 F34
    Date: 2010–07
  34. By: J. Isaac Miller (Department of Economics, University of Missouri-Columbia); Shawn Ni (Department of Economics, University of Missouri-Columbia)
    Abstract: We examine how future real GDP growth relates to changes in the forecasted long-term average of discounted real oil prices and to changes in unanticipated fluctuations of real oil prices around the forecasts. Forecasts are conducted using a state-space oil market model, in which global real economic activity and real oil prices share a common stochastic trend. Changes in unanticipated fluctuations and changes in the forecasted long-term average of discounted real oil prices sum to real oil price changes. We find that these two components have distinctly different relationships with future real GDP growth. Positive and negative changes in the unanticipated fluctuations of real oil prices correlate with asymmetric responses of future real GDP growth. In comparison, changes in the forecasted long-term average are smaller in magnitude but are more influential on real GDP. Persistent upward revisions of forecasts in the 2000s had a substantial negative impact on real GDP growth, according to our estimates..
    Keywords: oil price and the macroeconomy, oil market fundamental, oil price forecasts, Kalman filter
    JEL: E31 E32 Q43
    Date: 2010–10–11
  35. By: Kronenberg, Tobias
    Abstract: A dematerialisation of the economy can provide a crucial contribution toward sustainable devel-opment. It can take place in the production sphere through technological change or in the con-sumption sphere through altered consumer behaviour. This paper focuses on the second case, a shift of expenditure from material consumption (e.g. manufactured products) to non-material consumption (e.g. services). Since all production requires material, an input-output model is used to account for indirect material use. The model features post-Keynesian macroeconomic founda-tions, which make it possible to study the effects of altered consumption patterns on total con-sumption, output, and income distribution. The empirical application for the case of Germany shows that a dematerialisation of consumption might be considered a win-win strategy from an ecological and economic viewpoint. However, its effects on the distribution of income and inter-national trade may be problematic.
    Keywords: Sustainable consumption; input-output model; social sustainability; income distribution
    JEL: E12 Q01 C67 Q43 Q57
    Date: 2010–10–01
  36. By: Jun-ichi Shinkai (Specially Appointed Researcher, Osaka School of International Public Policy (OSIPP)); Akira Kohsaka (Professor, Osaka School of International Public Policy (OSIPP))
    Abstract: This paper constructs a financial conditions index (FCI) for Japan, using vector autoregressions (VAR) and impulse responses functions, and then investigate the effect of financial shocks on business cycles of Japan. Based upon our estimation results, we found that, in addition to the trade channel, the financial linkage played a significant role in Japanese business downturn caused by the current global financial crisis, and that its effect has come mainly from fallen stock prices and exchange rate appreciation, but not from credit crunch or the financial accelerator mechanism as had been the case in the recession in the early 1990s.
    Keywords: financial conditions index (FCI), financial linkages, international business cycle transmission, vector autoregressions, global financial crisis
    JEL: E32 E44
    Date: 2010–10
  37. By: Been-Lon Chen (Institute of Economics, Academia Sinica); Yu-Shan Hsu (Department of Economics, National Chung Cheng University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper envisages whether an external habit effect can produce indeterminate equilibrium paths thereby generating endogenous investment fluctuations. In an otherwise standard optimal growth model with leisure, we find that an external habit effect can cause endogenous investment fluctuations if there is a proper habit effect together with a proper intertemporal elasticity of substitution. In a calibrated version of the model, we find that endogenous investment fluctuations are plausible when the habit effect is negative with the "catching up with the Joneses"effect.
    Keywords: catching up with the Joneses, habit, indeterminacy, one-sector growth model
    JEL: E21 E32
    Date: 2010–10
  38. By: Mohsin, H; Rivers, P
    Abstract: According to Frankel (1992) in order to find financial integration from Feldstein Horoika (FH, 1980) model, the real interest parity must hold. This paper estimates the degree of financial market integration of South Asian countries i.e. Pakistan, India, Bangladesh, Sri Lanka and Nepal with both the techniques. The study finds some degree of integration with FH model has which increased after 1990s, post liberalization period. Furthermore, Panel Unit Root techniques i.e. LLC, IPS and Hadri has been used to estimate the real interest rate differentials (RIDs) of South Asian countries are found to be stationary with USA, Canada, UK, Germany, Sweden, Netherland, Australia, Malaysia, Indonesia, South Korea, Singapore, China and Japan. The empirical evidence of integration with both the techniques in my study is unique in the literature. Even though, the RIDS technique provides strong evidence of integration, correlation between savings and investment is still significant.
    Keywords: Financial Integration; interest rate parity; savings investment correlation; South Asian economy
    JEL: E2 F36
    Date: 2010–07
  39. By: Min Ouyang (Department of Economics, University of California-Irvine)
    Abstract: Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the "virtue of bad times" theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation's marginal opportunity cost dominates that of its marginal expected return; but binding financial constraints can hinder such virtue, preventing innovation from rising during recessions. Our theory is carried to an industry panel of production and innovation. Our evidence suggests that recessions indeed have potential virtue, but such virtue is hindered by financial-market frictions.
    Keywords: Recessions; Growth; Financial-market frictions
    JEL: E32 E44 O30
    Date: 2010–08
  40. By: Martin Filko (Ministry of Finance of the SR, Faculty of Social and Economic Sciences, Comenius University.); Stefan Kiss (Ministry of Finance of the SR); Ludovit Odor (National Bank of Slovakia); Matej Siskovic (Ministry of Finance of the SR)
    Abstract: The paper presents possible approaches for measuring the quality of life together with their strengths and weaknesses. We identify 10 outcome indicators, which could help not only to set targets, but also as a quantitative benchmark for structural policy evaluation in Slovakia. In addition to that we present several case studies with best practices mainly from EU countries. Based on these we formulate 33 structural policy recommendations.
    Keywords: Structural Policies, Outcome Indicators, Well-being, Economic Growth
    JEL: E01 H50 O11 O43
    Date: 2010–04
  41. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009 compiled by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–10–11
  42. By: Committee, Nobel Prize (Nobel Prize Committee)
    Abstract: Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–10–11
  43. By: Alfaro, Rodrigo; Becerra, Juan Sebastian; Sagner, Andres
    Abstract: The model proposed by Nelson and Siegel (1987) has been used for several researcher to fit the yield curve. In this paper we propose a discrete-time version of that model by using dynamic factors, such that the model is dynamic in the sense proposed by Diebold and Li (2006). We found the exact parameters in the VAR model that generates Dynamic-Nelson-Siegel (DNS) which has a strong implication in the time-series properties of the interest rates: those should be model by an ARIMA(2,1,2). Finally we provide empirical evidence of the model for the cases of Chile and US, our finding matches previous results about the non-linear parameter of the model.
    Keywords: Nelson-Siegel; Yield Curve; ARIMA
    JEL: E43 G12 C22
    Date: 2010–06–23

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