nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒10‒30
fifty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Banks, Credit Market Frictions, and Business Cycles By Ali Dib
  2. The Effectiveness of Monetary Policy During the Recent Financial Turmoil By Puriya Abbassi; Tobias Linzert
  3. The US Business Cycle Since 1950: A Post Keynesian Explanation By John Harvey
  4. Explaining ECB and Fed interest rate correlation: Economic interdependence and optimal monetary policy By Mandler, Martin
  5. The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  6. Unconventional monetary policy and the great recession - Estimating the impact of a compression in the yield spread at the zero lower bound By Christiane Baumeister; Luca Benati
  7. Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy By Martin Mandler;
  8. Modeling Inflation After the Crisis By James H. Stock; Mark W. Watson
  9. Credit risk transfers and the macroeconomy By Ester Faia
  10. Credit Crunch in a Small Open Economy By Michał Brzoza-Brzezina; Krzysztof Makarski
  11. Tramsission de la politique monétaire: le cas des pays de la CEMAC By MEZUI-MBENG, Pamphile
  12. US Business Cycles from 1971-2010: A Post Keynesian Explanation By John Harvey
  13. Real time data, regime shifts, and a simple but effective estimated Fed policy rule, 1969-2009 By Smant, David / D.J.C.
  14. Bank Lending in Turkey: Effects of Monetary and Fiscal Policies By Deniz Igan; Burcu Aydin
  15. U.S. Monetary and Fiscal Policy in the 1930s By Price V. Fishback
  16. The IMF and Economic Recovery: Is Fund Policy Contributing to Downside Risks? By Mark Weisbrot; Juan Antonio Montecino
  17. Financial Stability and Monetary Policy - The case of Brazil By Benjamin M. Tabak; Marcela T. Laiz; Daniel O. Cajueiro
  18. Monetary Policy Matters: New Evidence Based on a New Shock Measure By Christopher W. Crowe; S. Mahdi Barakchian
  19. A New Keynesian Model with Heterogeneous Price Setting By Paul Middleditch
  20. Dancing together at arm’s length? – The interaction of central banks with governments in the G7 By Cristina Bodea; Stefan Huemer
  21. Imperfect Interbank Markets and the Lender of Last Resort By Tarishi Matsuoka
  22. Mitigating the pro-cyclicality of Basel II By Rafael Repullo; Jesús Saurina; Carlos Trucharte
  23. The labor wedge as a matching friction By Anton A. Cheremukhin; Paulina Restrepo-Echavarria
  24. A Simulation Model of Federal, Provincial and Territorial Government Accounts for the Analysis of Fiscal-Consolidation Strategies in Canada By Yvan Guillemette
  25. Keynes’ Business Cycle: Animal Spirits and Crisis By John Harvey
  26. Deep Habits, Nominal Rigidities and Interest Rate Rules By Zubairy, Sarah
  27. Growth and Distributional Effects of Inflation with Progressive Taxation By Seiya , Fujisaki; Kazuo, Mino
  28. Cyclicality of Fiscal Policy and the Shadow Economy By Deniz Cicek; Ceyhun Elgin
  29. Changes in the Second-Moment Properties of Disaggregated Capital Flows By Silvio Contessi; Pierangelo De Pace; Johanna Francis
  30. International real business cycles with endogenous markup variability By Scott Davis; Kevin X.D. Huang
  31. How Big (Small?) are Fiscal Multipliers? By Ethan Ilzetzki; Enrique G. Mendoza; Carlos A. Végh
  32. The Myth of Expansionary Fiscal Austerity By Dean Baker
  33. "Bretton Woods 2 Is Dead, Long Live Bretton Woods 3?" By Jorg Bibow
  34. Real exchange rate dynamics revisited: a case with financial market imperfections By Ippei Fujiwara; Yuki Teranishi
  35. The Euro Area Crisis Management Framework – Consequences and Institutional Follow-ups By Ansgar Belke
  36. Is there a fiscal free lunch in a liquidity trap? By Christopher J. Erceg; Jesper Linde
  37. Government Investment and Fiscal Stimulus By Eric M. Leeper; Todd B. Walker; Shu-Chun S. Yang
  38. Fiscal fragility: what the past may say about the future By Joshua Aizenman; Gurnain Kaur Pasricha
  39. Political ideology as a source of business cycles By marina, azzimonti
  40. Sustainable Public Debt, Credit Constraints, and Social Welfare By Real Arai; Takuma Kunieda
  41. A DSGE Model from the Old Keynesian Economics: An Empirical Investigation By Paolo Gelain; Marco Guerrazzi
  42. Endogenous On-the-job Search and Frictional Wage Dispersion By Matthias S. Hertweck
  43. Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs By Pengfei Wang; Yi Wen
  44. Real wages, working time, and the Great Depression By Hart, Robert A.; Roberts, J. Elizabeth
  45. Restoring Debt Sustainability After Crises: Implications for the Fiscal Mix By Carlos Mulas-Granados; Emanuele Baldacci; Sanjeev Gupta
  46. Labor Market Policy Instruments and the Role of Economic Turbulence By Philip Schuster
  47. Rationally inattentive macroeconomic wedges By Antonella Tutino
  48. Disarmed and Disadvantaged: Canada’s Workers Need More Physical Capital to Confront the Productivity Challenge By Colin Busby; William B.P. Robson
  49. MODELLING TIME AND MACROECONOMIC DYNAMICS By Anagnostopoulos, Alexis; Giannitsarou, Chryssi
  50. A quantitative approach to the effects of social policy measures. An application to Portugal, using Social Accounting Matrices By Susana Santos
  51. Equity premium predictions with adaptive macro indexes By Jennie Bai
  52. Cruise visitors’ intention to return as land tourists and recommend a visited destination. A structural equation model By JG. Brida; Manuela Pulina; E. Riaño; SZ. Aguirre

  1. By: Ali Dib
    Abstract: The author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator. He evaluates the role of the banking sector in the transmission and propagation of the real effects of aggregate shocks, and assesses the importance of financial shocks in U.S. business cycle fluctuations. The banking sector consists of two types of profitmaximizing banks that offer different banking services and transact in an interbank market. Loans are produced using interbank borrowing and bank capital subject to a regulatory capital requirement. Banks have monopoly power, set nominal deposit and prime lending rates, choose their leverage ratio and their portfolio composition, and can endogenously default on a fraction of their interbank borrowing. Because it is costly to raise capital to satisfy the regulatory capital requirement, the banking sector attenuates the real effects of financial shocks, reduces macroeconomic volatilities, and helps stabilize the economy. The model also includes two unconventional monetary policies (quantitative and qualitative easing) that reduce the negative impacts of financial crises.
    Keywords: Economic models; Business fluctuations and cycles; Credit and credit aggregates; Financial stability
    JEL: E32 E44 G1
    Date: 2010
  2. By: Puriya Abbassi; Tobias Linzert
    Abstract: The recent financial crisis has deeply affected the marginal cost of funding bank loans and thus the proper functioning of the interest rate channel. We analyze the effectiveness of monetary policy in the euro area with respect to the predictability of money market rates on the basis of monetary policy expectations, and the impact of extraordinary central bank measures on money markets. We find that market’s expectations are less relevant for money market rates up to 12 months after August 2007 compared to the pre-crisis period. At the same time, our results indicate that the ECB’s net increase in outstanding open market operations as of October 2008 accounts for at least a 100 basis point decline in Euribor rates. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.
    Keywords: Monetary transmission mechanism; Financial Crisis; Monetary policy implementation; European Central Bank; Money market
    JEL: E43 E52 E58
    Date: 2010–10
  3. 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
  4. By: Mandler, Martin
    Abstract: This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts explicitly for economic interrelationships between the two economies reproduces substantial parts of the observed patterns of interest rate correlation and represents a good approximation to the actually observed monetary policy of the ECB. It implies strong reactions to shocks to US variables, particularly to shocks to the Federal Funds Rate.
    Keywords: optimal monetary policy; monetary policy reaction function; vector autoregressions
    JEL: E58 E52 E47
    Date: 2010–10
  5. By: Sala, Luca (Department of Economics and IGIER); Söderström, Ulf (Research Department, Central Bank of Sweden); Trigari, Antonella (Department of Economics and IGIER)
    Abstract: We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and efficient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inefficient allocation of labor. (ii) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the efficiency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.
    Keywords: Business cycles; Efficiency; Labor markets; Monetary policy
    JEL: E24 E32 E52
    Date: 2010–09–01
  6. By: Christiane Baumeister (Research Department, Bank of Canada, 234 Wellington Street, Ottawa, Ontario, Canada, K1A 0G9.); Luca Benati (Monetary Policy Research Division, Banque de France, 31, Rue Croix des Petits Champs, 75049 Paris CEDEX 01, France.)
    Abstract: We explore the macroeconomic impact of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a Bayesian time-varying parameter structural VAR. We identify a ‘pure’ spread shock which, leaving the short-term rate unchanged by construction, allows us to characterise the macroeconomic impact of a compression in the yield spread induced by central banks’ asset purchases within an environment in which the short rate cannot move because it is constrained by the zero lower bound. Two main findings stand out. First, in all the countries we analyse (U.S., Euro area, Japan, and U.K.) a compression in the long-term yield spread exerts a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the FED’s and the Bank of England’s asset purchase programmes on long-term government bond yield spreads, our counterfactual simulations indicate that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression. JEL Classification: E30, E32.
    Keywords: Great Recession, structural VARs, time-varying parameters, Bayesian VARs, stochastic volatility, Monte Carlo integration, policy counterfactuals.
    Date: 2010–10
  7. By: Martin Mandler (University of Giessen);
    Abstract: This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts explicitly for economic interrelationships between the two economies reproduces substantial parts of the observed patterns of interest rate correlation and represents a good approximation to the actually observed monetary policy of the ECB. It implies strong reactions to shocks to US variables, particularly to shocks to the Federal Funds Rate.
    Keywords: optimal monetary policy, monetary policy reaction function, vector autoregressions
    JEL: E47 E52 E58
    Date: 2010
  8. By: James H. Stock; Mark W. Watson
    Abstract: In the United States, the rate of price inflation falls in recessions. Turning this observation into a useful inflation forecasting equation is difficult because of multiple sources of time variation in the inflation process, including changes in Fed policy and credibility. We propose a tightly parameterized model in which the deviation of inflation from a stochastic trend (which we interpret as long-term expected inflation) reacts stably to a new gap measure, which we call the unemployment recession gap. The short-term response of inflation to an increase in this gap is stable, but the long-term response depends on the resilience, or anchoring, of trend inflation. Dynamic simulations (given the path of unemployment) match the paths of inflation during post-1960 downturns, including the current one.
    JEL: C22 E31
    Date: 2010–10
  9. By: Ester Faia (Goethe University Frankfurt, House of Finance, office 3.47, Grueneburgplatz 1, 60323, Frankfurt am Main, Germany.)
    Abstract: The recent financial crisis has highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. JEL Classification: E3, E5, G3.
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare.
    Date: 2010–10
  10. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute; Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by approximately 1.5 percent.
    Keywords: credit crunch, monetary policy, DSGE with banking sector
    JEL: E32 E44 E52
    Date: 2010
  11. By: MEZUI-MBENG, Pamphile
    Abstract: This article analyzes the process by which the monetary policy influences economies of the six countries of the Economic and Monetary Community of Central Africa (CEMAC) during the period 1980-2008. After having identified the channels of interest rate, credit and currency, we show that the monetary policy ended in differentiated effects on the economies of the sub-region. In particular, extent of the shocks on the variables of the monetary transmission led to important differences between the countries with short and long-term.
    Keywords: monetary tranmission, VAR models, CEMAC
    JEL: E0 C51 E52 B22 E01 C01
    Date: 2010–08–27
  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: Smant, David / D.J.C.
    Abstract: Estimates of Taylor rule equations for Federal Reserve policy over periods before the Greenspan period are misleading. Until 1979 Fed policy changed the real funds rate in response to the output gap, with no response to an inflation target. During the Volcker period the policy rule kept the real funds rate at a high but constant level, with no response to the output gap. Taking into account the regime shifts, a simple but effective funds rate equation can be estimated using only inflation and output gap.
    Keywords: Taylor rule; policy regime shifts; real time data
    JEL: E43 E58
    Date: 2010–10–22
  14. By: Deniz Igan; Burcu Aydin
    Abstract: The period following the 2000-01 crisis was marked by a successful disinflation program sustained through inflation targeting and fiscal discipline in Turkey. This paper studies the impact of monetary and fiscal policies on credit growth during this period. Using quarterly bank-level data covering 2002-08, we find evidence that liquidity-constrained banks have sharper decline in lending during contractionary monetary policies and that crowding-out effect disappears more for banks with a retail-banking focus when fiscal policies are prudent.The results are statistically weak, suggesting that bank lending channel is not strong in Turkey and government finances has limited direct impact on credit.
    Date: 2010–10–18
  15. By: Price V. Fishback
    Abstract: The paper provides a survey of fiscal and monetary policies during the 1930s under the Hoover and Roosevelt Administrations and how they influenced the policies during the recent Great Recession. The discussion of the causal impacts of monetary policy focuses on papers written in the last decade and the findings of scholars using dynamic structural general equilibrium modeling. The discussion of fiscal policy shows why economists do not see the New Deal as a Keynesian stimulus, describes the significant shift toward excise taxation during the 1930s, and surveys estimates of the impact of federal spending on local economies. The paper concludes with discussion of the lessons for the present from 1930s monetary and fiscal policy.
    JEL: E5 E62 N12 N92
    Date: 2010–10
  16. By: Mark Weisbrot; Juan Antonio Montecino
    Abstract: The IMF’s most recent World Economic Outlook (WEO), published last week, projects world economic growth will slow, from 4.8 percent in 2010 to 4.2 percent next year. Throughout the report, there are numerous concerns expressed about the “fragility” of the global economic recovery. The Acting Chair of the Executive Board states that “[t]he recovery is losing momentum temporarily during the second half of 2010 and will likely remain weak in the first half of 2011, as extraordinary policy stimulus is gradually withdrawn.” In view of the report and its findings, one might expect a strong bias towards continuing fiscal stimulus in weak economies, and a bias against fiscal consolidation. However, this paper finds that the IMF continues to support pro-cyclical policies in some countries, fiscal consolidation in many others, and clearly does not support central bank financing of fiscal stimulus – even in countries such as the United States – where the threat of high inflation is very remote.
    Keywords: IMF
    JEL: E E3 E6 E32 E5 E52 F F3 F33 F34 F35 F37 O O1 O2 O3 O4 O5
    Date: 2010–10
  17. By: Benjamin M. Tabak; Marcela T. Laiz; Daniel O. Cajueiro
    Abstract: This paper investigates the effects of monetary policy over banks' loans growth and non-performing loans for the recent period in Brazil. We contribute to the literature on bank lending and risk taking channel by showing that during periods of loosening/tightening monetary policy, banks increase/decrease their loans. Moreover, our results illustrate that large, well-capitalized and liquid banks absorb better the effects of monetary policy shocks. We also find that low interest rates lead to an increase in credit risk exposure, supporting the existence of a risk-taking channel. Finally, we show that the impact of monetary policy differs across state-owned, foreign and private domestic banks. These results are important for developing and conducting monetary policy.
    Date: 2010–10
  18. By: Christopher W. Crowe; S. Mahdi Barakchian
    Abstract: Conventional VAR and non-VAR methods of identifying the effects of monetary policy shocks on the economy have found a negative output response to monetary tightening using U.S. data over the 1960s-1990s. However, we show that these methods fail to find this contractionary effect when the sample is restricted to the period since the 1980s, apparently due to changes in the policymaking environment that reduce their effectiveness. Identifying policy shocks using Fed Funds futures data, we recover the contractionary effect of monetary tightening on output and find that almost half of output variation over the period appears due to policy shocks.
    Date: 2010–10–14
  19. By: Paul Middleditch
    Abstract: The Calvo contract pricing mechanism has become the most widely accepted microfoundation to the NK Phillips curve but unfortunately predicts that all firms in the economy face the same probability of price change. To better explain the stylized fact this paper relaxes the homogeneous firm assumption in the Calvo contract, to provide a macroeconomic explanation more consistent with recently available microeconomic evidence that suggests firms face differing probabilities of price change. A simple New Keynesian dynamic stochastic general equilibrium (DSGE) model with nominal rigidities and habit in consumption for the US is estimated using Bayesian techniques and finds evidence of a flexible price sector of around 6% and a sticky price sector of between 55% and 70% depending on model specification.
    Date: 2010
  20. By: Cristina Bodea (Michigan State University); Stefan Huemer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: Central bank independence is a common feature in advanced economies. Delegation of monetary policy to an independent central bank with a clear mandate for price stability has proven to be successful in keeping a check on inflation and providing a trusted currency. However, it is also a fact that central banks in most countries have regular contacts with the government and cooperate with them on a number of issues. This paper looks into the various forms of cooperation between central banks and governments in the G7. The focus is on those central banks that exercise a monetary policy decision-making function, i.e. the ECB and the central banks of the four G7 countries outside the euro area (the US, UK, Japan and Canada). The paper first reviews the objectives of and arrangements for central bank/government cooperation in the US, UK, Japan and Canada in areas such as monetary policy and its interlink with economic policy; foreign exchange operations and foreign reserve management; international cooperation; payment systems/securities clearing and settlement systems; supervision, regulation and financial stability; banknotes and coins; collection of statistics; and the role of fiscal agent for the government. In parallel the paper looks into the objectives of and arrangements for cooperation between the ECB and relevant European counterparts, reflecting the specific European institutional environment characterised by the absence of a ‘European government’. Following a comprehensive stocktaking of practices, the paper embarks on a comparison of existing arrangements, pointing to the similarities and differences among the five surveyed central banks. The Appendix provides a more in-depth description of central bank/government cooperation per country and topic; it presents the detailed factual background on which the paper builds, serving as a reference for the reader interested in more detail. JEL Classification: E58
    Keywords: Central bank-government cooperation, central bank governance, central bank tasks, G7
    Date: 2010–10
  21. By: Tarishi Matsuoka (Graduate School of Economics, Kyoto University)
    Abstract: This paper presents a monetary model in which interbank markets bear limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.
    Keywords: Overlapping generations, money, interbank markets, limited commitment, the lender of last resort
    JEL: E42 E51 G21
    Date: 2010–10
  22. By: Rafael Repullo (CEMFI); Jesús Saurina (Banco de España); Carlos Trucharte (Banco de España)
    Abstract: Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclical effects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative procedures that have been proposed to mitigate this problem. We estimate a model of the probabilities of default (PDs) of Spanish firms during the period 1987 2008, and use the estimated PDs to compute the corresponding series of Basel II capital requirements per unit of loans. These requirements move significantly along the business cycle, ranging from 7.6% (in 2006) to 11.9% (in 1993). The comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the input of the Basel II formula by using through the cycle PDs or to smooth the output with a multiplier based on GDP growth. Our discussion concludes that the latter is better in terms of simplicity, transparency, and consistency with banks’ risk pricing and risk management systems. For the portfolio of Spanish commercial and industrial loans and a 45% loss given default (LGD), the multiplier would amount to a 6.5% surcharge for each standard deviation in GDP growth. The surcharge would be significantly higher with cyclically-varying LGDs.
    Keywords: Bank capital regulation, Basel II, Pro-cyclicality, Business cycles, Credit crunch
    JEL: E32 G28
    Date: 2010–09
  23. By: Anton A. Cheremukhin; Paulina Restrepo-Echavarria
    Abstract: The labor wedge accounts for a large fraction of business cycle fluctuations. This paper uses a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role. We find that frictions to job destruction and bargaining commonly considered in the search literature are not helpful in explaining the labor wedge. We also identify an asymmetric effect of separation, bargaining and matching frictions on unemployment, as well as a potential solution to Shimer's puzzle.
    Keywords: Business cycles - Econometric models ; Labor supply ; Unemployment ; Labor turnover
    Date: 2010
  24. By: Yvan Guillemette
    Abstract: This paper presents a simulation model of the main budget aggregates of federal, provincial and territorial governments in Canada. The general approach is to use a cyclical indicator (output gap), estimate the sensitivity of government revenue and expenditure to this cyclical indicator using historical data, and use projections of the cyclical indicator to simulate budgetary outcomes under various economic scenarios. Provincial/territorial annual output gaps are estimated going back to 1984. These are used to jointly estimate for all governments the historical sensitivities of the main revenue and expenditure categories to provincial/territorial economic cycles using Seemingly Unrelated Regressions. Projections of potential output by province and territory are then made to 2020 and a multitude of paths for the evolution of provincial/territorial output gaps are generated to 2020. These output gap paths serve as bases for simulating medium-term fiscal outcomes under a variety of possible economic scenarios, allowing the construction of probability densities for fiscal outcomes. The paper also contains an analysis of the cyclicality of Canadian governments’ fiscal policies between 1984 and 2007. Several jurisdictions are found to have had pro-cyclical fiscal policies over this period.<P>Un modèle de simulation des comptes gouvernementaux fédéraux, provinciaux et territoriaux pour l’analyse des stratégies de consolidation fiscale au Canada<BR>Ce document de travail présente un modèle de simulation des principaux agrégats budgétaires des gouvernements fédéral, provinciaux et territoriaux du Canada. L’approche générale consiste à utiliser un indicateur cyclique (écart de production), estimer la sensibilité des revenues et dépenses d’un gouvernement à cet indicateur cyclique en utilisant des données historiques, et utiliser des projections de l’indicateur cyclique pour simuler les résultats budgétaires sous différents scénarios économiques. Des écarts de production annuels sont estimés pour chaque province/territoire depuis 1984. Ceux-ci sont utilisés pour estimer conjointement pour tous les gouvernements la sensibilité historique des principaux postes de revenue et de dépense aux cycles économiques provinciaux/territoriaux en utilisant la méthode des Régressions Apparemment Non-Reliées. Des projections de la production potentielle des provinces et territoires jusqu’en 2020 sont ensuite réalisées et une multitude de trajectoires pour l’évolution des écarts de production sont générées jusqu’en 2020. Ces trajectoires servent à simuler les budgets gouvernementaux à moyen terme sous un grand nombre de conditions économiques plausibles, permettant ainsi l’obtention de densités de probabilités pour les résultats budgétaires. Le document de travail contient aussi une analyse de la cyclicalité budgétaire des différents gouvernements Canadiens entre 1984 et 2007. Plusieurs juridictions semblent avoir opéré une politique fiscale pro-cyclique durant cette période.
    Keywords: budgets, fiscal policy, Canada, simulation, deficit, debt, consolidation, model, budget, politique fiscale, Canada, simulation, déficit, dette, consolidation, modèle
    JEL: E37 E61 E62 H68
    Date: 2010–08–26
  25. 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
  26. By: Zubairy, Sarah
    Abstract: This paper explores how the introduction of deep habits in a standard new-Keynesian model affects the properties of widely used interest rate rules. In particular, an interest rate rule satisfying the Taylor principle is no longer a su±cient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly improve the regions of determinacy. However, under all the simple interest rate rules considered here with contemporaneous variables, determinacy is not guaranteed for very high degree of deep habits. The intuition behind these findings is tied to how deep habits give rise to counter-cyclical markups, a property that makes it an appealing feature in the study of demand shocks.
    Keywords: Taylor principle; interest rate rules; sticky prices; deep habits
    JEL: E31 E52
    Date: 2010–08–18
  27. By: Seiya , Fujisaki; Kazuo, Mino
    Abstract: This paper examines the growth and income distribution effects of inflation in a growing economy with heterogeneous households and progressive income taxation. Assuming that the cash-in-advance constraint applies to investment as well as to consumption spending, we show that a higher growth of monetary supply yields a negative impact on growth and an ambiguous effect on income distribution. Numerical example with plausible parameter values, however, demonstrate that those long-run effects of inflation tax are rather small. In contrast, fiscal distortion caused by progressive taxation yield significant impacts on growth and distribution
    Keywords: Inflation Tax; Progressive Income Tax; Growth; Income Distribution
    JEL: E32 O40
    Date: 2010–10–20
  28. By: Deniz Cicek; Ceyhun Elgin
    Date: 2010–09
  29. By: Silvio Contessi (Federal Reserve Bank of St. Louis, Reseach Division); Pierangelo De Pace (Pomona College, Department of Economics); Johanna Francis (Fordham University, Department of Economics)
    Abstract: Using formal statistical tests, we detect (i) significant volatility increases for various types of capital flows for a period of changes in business cycle comovement among the G7 countries, and (ii) mixed evidence of changes in covariances and correlations with a set of macroeconomic variables.
    Keywords: Capital Flows, International Business Cycles.
    JEL: E32 F21 F32 F36
    Date: 2010
  30. By: Scott Davis; Kevin X.D. Huang
    Abstract: The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model.
    Keywords: Industrial organization (Economic theory) ; Business cycles - Econometric models ; International finance ; International trade - Econometric models ; Gross domestic product
    Date: 2010
  31. By: Ethan Ilzetzki; Enrique G. Mendoza; Carlos A. Végh
    Abstract: We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.
    JEL: E2 E6 F41 H5
    Date: 2010–10
  32. By: Dean Baker
    Abstract: Recently governments, economists, and international financial institutions have been debating the merits of further fiscal stimulus to combat the Great Recession versus fiscal austerity or “adjustment” – that is, higher taxes and/or lower government spending – to combat budget deficits. Some supporters of austerity have gone as far as arguing that fiscal adjustment could restore economic growth. These analyses are being touted to oppose increased stimulus to boost the economy. This paper examines the arguments for austerity and emonstrates that current economic conditions in the United States do not support the case for fiscal adjustment.
    Keywords: budget deficit, deficit, fiscal austerity, stimulus, unemployment, deficit spending
    JEL: E E6 E60 E61 E62 E63 E64 E65 E66 H H2 H5 H6 H60 H61 H62 H63 H68
    Date: 2010–10
  33. By: Jorg Bibow
    Abstract: This paper sets out to investigate the forces and conditions that led to the emergence of global imbalances preceding the worldwide crisis of 2007–09, and both the likelihood and the potential sustainability of reemerging global imbalances as the world economy recovers from that crisis. The "Bretton Woods 2" hypothesis of sustainable global imbalances featuring a quasi-permanent U.S. current account deficit overlooked that the domestic counterpart to the United States' external deficit—soaring household indebtedness—was based not on safe debts but rather toxic ones. We critique the "global saving glut" hypothesis, and propose the "global dollar glut" hypothesis in its stead. With the U.S. private sector in retrenchment mode, the question arises whether fiscal expansion might not only succeed in filling the gap in U.S. domestic demand but also restart global arrangements along BW2 lines, albeit this time based on public debt—call it "Bretton Woods 3." This paper explores the chances of a BW3 regime, highlighting the role of "dollar leveraging" in sustaining U.S. trade deficits. Longer-term prospects for a postdollar standard are discussed in the light of John Maynard Keynes’s "bancor" plan.
    Keywords: Reserve Currency; Global Monetary Order; Global Saving Glut; Global Dollar Glut; Global Crisis
    JEL: E12 E58 E65 F33
    Date: 2010–05
  34. By: Ippei Fujiwara; Yuki Teranishi
    Abstract: In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates staggered loan contracts as a simple form of the financial market imperfections. Our model with such a financial market friction replicates persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to materialize in standard NOEM models. Remarkably, these realistic responses can materialize even with both supply and demand shocks, such as cost-push, loan rate and monetary policy shocks. This implies that the financial market developments is a key element for understanding real exchange rate dynamics.
    Keywords: Foreign exchange ; International finance ; Macroeconomics - Econometric models
    Date: 2010
  35. By: Ansgar Belke
    Abstract: The current instruments in the EU to deal with debt and liquidity crises include among others the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Both are temporary in nature (3 years). In terms of an efficient future crisis management framework one has to ask what follows after the EFSF and the EFSM expire in 3 years time. In this vein, this briefing paper addresses the question of the political and economic medium- to long-term consequences of the recent decisions. Moreover, we assess what needs to be done using this window of opportunity of the coming 3 years. Which institutions need to be formalized, into what format, in order to achieve a coherent whole structure? This briefing paper presents and evaluates alternatives as regards the on-going debate on establishing permanent instruments to support the stability of the euro. Among them are the enhancement of the effectiveness of the Stability and Growth Pact combined with the introduction of a “European semester” and a macroeconomic surveillance and crisis mechanism, fiscal limits hard-coded into each country’s legislation in the form of automatic, binding and unchangeable rules and, as the preferred solution, the European Monetary Fund.
    Keywords: EU governance; European Financial Stability Facility; European Financial Stabilisation Mechanism; European Monetary Fund; policy coordination; Stability and Growth Pact
    JEL: E61 E62 P48
    Date: 2010–09
  36. By: Christopher J. Erceg; Jesper Linde
    Abstract: This paper uses a DSGE model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. But given this "fiscal free lunch," it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.
    Date: 2010
  37. By: Eric M. Leeper; Todd B. Walker; Shu-Chun S. Yang
    Abstract: Effects of government investment are studied in an estimated neoclassical growth model. The analysis focuses on two dimensions that are critical for understanding government investment as a fiscal stimulus: implementation delays for building public capital and expected fiscal adjustments to deficit-financed spending. Implementation delays can produce small or even negative labor and output responses to increases in government investment in the short run. Anticipated fiscal adjustments matter both quantitatively and qualitatively for long-run growth effects. When public capital is insufficiently productive, distorting financing can make government investment contractionary at longer horizons.
    Date: 2010–10–14
  38. By: Joshua Aizenman; Gurnain Kaur Pasricha
    Abstract: The end of the great moderation has profound implications on the assessment of fiscal sustainability. The pertinent issue goes beyond the obvious increase in the stock of public debt/GDP induced by the global recession, to include the neglected perspective that the vulnerabilities associated with a given public debt/GDP increase with the future volatility of key economic variables. We evaluate for a given future projected public debt/GDP, the possible distribution of the fiscal burden or the flow cost of funding debt for each OECD country, assuming that this in future decades resembles that in the past four decades. Fiscal projections may be alarmist if one jumps from the priors of great moderation to the prior of permanent high future burden. Prudent adjustment for countries exposed to heightened vulnerability may entail both short term stabilization and forward looking fiscal reforms.
    JEL: E62 E66 F41
    Date: 2010–10
  39. By: marina, azzimonti
    Abstract: When the government must decide not only on broad public-policy programs but also on the provision of group-specific public goods, dynamic strategic inefficiencies arise. The struggle between opposing groups–that disagree on the composition of expenditures and compete for office–results in governments being endogenously short-sighted: systematic under-investment in infrastructure and overspending on public goods arises, as resources are more valuable when in power. This distorts allocations even under lump-sum taxation. Ideological biases create asymmetries in the group’s relative political power generating endogenous economic cycles in an otherwise deterministic environment. Volatility is non-monotonic in the size of the bias and is an additional source of inefficiency.
    Keywords: Public Investment; Commitment; Probabilistic Voting; Markov Equilibrium; Political Cycles; Time Consistency.
    JEL: E62 O23 H21 H11 H41 E61
    Date: 2010–06
  40. By: Real Arai (Institute of Economic Research, Kyoto University); Takuma Kunieda (Department of Economics and Finance, City University of Hong Kong)
    Abstract: Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.
    Keywords: Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth
    JEL: E63 O40
    Date: 2010–10
  41. By: Paolo Gelain; Marco Guerrazzi
    Abstract: In this paper we estimate a DSGE model built along the lines of the recent Farmer¡¯s micro-foundation of the General Theory. Estimating a simple demand-driven competitive-search model, we test the ability of this new theoretical proposal to match the behaviour of the US and Euro Area labour markets. We show that within a relatively simple model we are able to fairly replicate their salient features, confirming for instance the conventional wisdom according to which the US labour market is more flexible than its Euro Area counterpart. Moreover, we provide an estimation of the not-yet-measured (unobserved) Euro Area job vacancies time series.
    Keywords: Old Keynesian Economics, Competitive Search, DSGE Model, Bayesian Estimation.
    JEL: E24 E32 E52 J64
    Date: 2010–10–18
  42. By: Matthias S. Hertweck (University of Basel)
    Abstract: This paper addresses the large degree of frictional wage dispersion in US data. The standard job matching model without on-the-job search cannot replicate this pattern. With on-the-job search, however, unemployed job searchers are more will- ing to accept low wage offers since they can continue to seek for better employment opportunities. This explains why observably identical workers may be paid very dif- ferently. Therefore, we examine the quantitative implications of on-the-job search in a stochastic job matching model. Our key result is that the inclusion of variable on-the-job search increases the degree of frictional wage dispersion by an order of a magnitude.
    Keywords: Matching, On-the-job Search, Wage Dispersion
    JEL: E24 J31 J64
    Date: 2010
  43. By: Pengfei Wang; Yi Wen
    Abstract: Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin’s Q and plant-level investment. Although aggregate adjustment cost functions can be derived from microfoundations, they are subject to the Lucas critique because parameters in such functions may not be structural and policy invariant.>
    Keywords: Capital investments ; Tobin's q
    Date: 2010
  44. By: Hart, Robert A.; Roberts, J. Elizabeth
    Abstract: We have assembled two British data sets to re-examine the behaviour of real wages over the 1927-1937 cycle that contained the Great Depression. Both provide a degree of micro detail that greatly exceeds previous studies. The first consists of annual wages for 36 manufacturing industries. The second is based on blue-collar workers' company payroll data within engineering and metal working firms. It allows us to distinguish between pieceworkers and timeworkers, 14 occupations and 51 travel-to-work geographical districts. We measure the cycle using national unemployment rates as well as rates that match our industrial and district breakdowns. The roles of standard and overtime hours are found to be crucial to the behaviour of real pay during the Depression. Real weekly earnings are strongly procyclical. Real hourly earnings of pieceworkers are also significantly procyclical. Otherwise, real wage measures that do not fully reflect hours changes produce either weak procyclical or acyclical wage responses.
    Keywords: the Great Depression; timework; piecework; working time; Real wage cyc licality
    Date: 2010–09
  45. By: Carlos Mulas-Granados; Emanuele Baldacci; Sanjeev Gupta
    Abstract: This paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 - 2008 after banking crises, which led to large accumulation of public debt. It finds that successful debt reductions have relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts. These savings have been accompanied by growth-promoting measures and a supportive monetary policy stance. While these results are consistent with the existing literature, the paper finds that revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis. This reflects the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.
    Date: 2010–10–18
  46. By: Philip Schuster
    Abstract: Times of high unemployment always inspire debates on the role of labor market policy and its optimal implementation. This paper uses a dynamic model of search unemployment and bilateral wage bargaining to characterize optimal labor market policy in a possibly turbulent environment. A firing externality, generated by the existence of a partial unemployment insurance system, distorts the pre-policy equilibrium along three margins: job creation, job acceptance, and job destruction. Optimal policy is characterized by a payroll tax, a firing tax, and a hiring subsidy. Endogenous job acceptance demands that a firing tax and a hiring subsidy have to be set equal in any case and cannot be used to correct for the possible failure of the Hosios condition. In that case the optimal policy mix has to be extended by either an output or recruitment tax/subsidy. It is further shown that the derived policy mix is robust to the introduction of economic turbulence in form of state-dependent worker transitions between skill classes. This is crucial as widely discussed intergroup redistribution schemes, like in-work benefits targeted at low-skilled workers, are rendered considerably less effective in that case. Instead of redistribution from high- to low-skilled workers or from firing firms to unemployed workers, the paper identifies a scheme involving redistribution from firing to hiring firms to be optimal.
    Keywords: Search and matching, employment subsidies, economic turbulence, policy spill-over
    JEL: E24 E61 J08
    Date: 2010–10
  47. By: Antonella Tutino
    Abstract: This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model, where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that a consumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.
    Keywords: Consumption (Economics) ; Labor market ; Econometric models ; Consumer behavior
    Date: 2010
  48. By: Colin Busby (C.D. Howe Institute); William B.P. Robson (C.D. Howe Institute)
    Abstract: Canadian workers have enjoyed less robust investment in plant and equipment than their counterparts in the United States and other major developed countries over the past 15 years. And notwithstanding Canada’s relative economic resilience through the recent slump, the per-worker investment gap vis-à-vis other countries appears to have widened. The authors say if this pattern continues, Canadian businesses will continue equipping their workers less well than those in other countries, a setback in the quest for rising living standards in the coming expansion.
    Keywords: Economic Growth and Innovation, Canadian workers, business investment per worker
    JEL: E22 J24
    Date: 2010–10
  49. By: Anagnostopoulos, Alexis; Giannitsarou, Chryssi
    Abstract: In this paper, we analyze the importance of the frequency of decision making for macroeconomic dynamics. We explain how the frequency of decision making (period length) and the unit of time measurement (calibration frequency) differ and study the implications of this difference for macroeconomic modelling. We construct a generic dynamic general equilibrium model that nests a wide range of macroeconomic models and which leaves the period length as an undetermined parameter. We provide a series of examples (variations of the Cass-Koopmans and the New Keynesian models) that fit into this framework and use these to do comparative dynamics with respect to the period length. In particular, we analyze local stability and how this is affected by changes in the period length. We find that in models with endogenous capital accumulation, as the period gets longer, indeterminacy occurs less often. Moreover, as economic agents become less patient and as capital depreciates more, indeterminacy also occurs less often. We also show that, in the case of the New Keynesian model, standard continuous and discrete time versions have entirely different local stability properties due to a discontinuity at zero period length.
    Keywords: depreciation; discounting; local indeterminacy; Macroeconomic dynamics; period length
    JEL: C62 E22 O41
    Date: 2010–10
  50. By: Susana Santos
    Abstract: The impacts of policy measures on transfers between government and households will be quantified using Social Accounting Matrices (SAMs). The System of National Accounts (SNA) will be the main source used for the construction of the numerical version of these matrices, which will then form the basis for two algebraic versions. One version will consist of accounting multipliers, and structural path analysis will also be used for its decomposition. The other version will be a so-called SAM-based linear model, in which each cell will be defined with a linear equation or system of equations, whose components will be all the known and quantified transactions of the SNA, using the parameters deduced from the numerical SAM that served as the basis for this model. Macroeconomic aggregates and balances, as well as structural indicators of the distribution and use of income, will be calculated from numerical and algebraic versions of the SAM. These will make it possible to quantify and compare the effects of social policy measures and to evaluate their differences, in order to define the path for future research work on the SAM-based linear model.
    Keywords: Social Accounting Matrix; SAM-based Modelling; Macroeconomic Modelling; Policy Analysis; Structural Path Analysis.
    JEL: E61 E10 D57
    Date: 2010–10–13
  51. By: Jennie Bai
    Abstract: Fundamental economic conditions are crucial determinants of equity premia. However, commonly used predictors do not adequately capture the changing nature of economic conditions and hence have limited power in forecasting equity returns. To address the inadequacy, this paper constructs macro indexes from large data sets and adaptively chooses optimal indexes to predict stock returns. I find that adaptive macro indexes explain a substantial fraction of the short-term variation in future stock returns and have more forecasting power than both the historical average of stock returns and commonly used predictors. The forecasting power exhibits a strong cyclical pattern, implying the ability of adaptive macro indexes to capture time-varying economic conditions. This finding highlights the importance of using dynamically measured economic conditions to investigate empirical linkages between the equity premium and macroeconomic fundamentals.
    Keywords: Stocks - Rate of return ; Forecasting ; Macroeconomics ; Economic indicators
    Date: 2010
  52. By: JG. Brida; Manuela Pulina; E. Riaño; SZ. Aguirre
    Abstract: This study analyses cruise visitors’ travel experience, their intention to return to a destination as land tourists and the probability to recommend. Consumer’s satisfaction is evaluated by taking into account the economic production factors, that is human and physical capital. “Satisfaction with prices” is also included to evaluate the monetary value of the overall purchasing experience. Safety in the harbour is considered as a further attribute. The empirical data were collected via a survey of cruise ship passengers that stopped in Cartagena de Indias (Colombia) during 2009. A structural equation model (SEM) is developed. The findings reveal that satisfaction is positively affected by human and physical capital, while overall satisfaction positively influences customers’ loyalty. Loyalty is also positively influenced by prices, whereas negatively by an unsafe perception. Finally, loyalty positively effects both the probability of return as land tourists and to recommend, though with a different magnitude.
    Keywords: cruise; customer’s satisfaction; loyalty; probability of return; probability of recommend; SEM
    JEL: E43 C30 L83
    Date: 2010

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