nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒11‒20
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Forecasting Inflation (and the Business Cycle?) with Monetary Aggregates By João Valle e Azevedo; Ana Pereira
  2. Estimating Central Bank preferences in a small open economy: Sweden 1995-2009 By D'Adamo, Gaetano
  3. Reference-dependent Preferences and the Transmission of Monetary Policy By Gaffeo, E.; Petrella, I.; Pfajfar, D.; Santoro, E.
  4. Firm leverage, household leverage and the business cycle By Solomon, Bernard Daniel
  5. The effects of capital market openness on exchange rate pass-through and welfare in an inflation-targeting small open economy By Sanchita Mukherjee
  6. Bank lending channel of monetary policy: dynamic panel data evidence from Malaysia By Abdul Karim, Zulkefly; Wan Ngah, Wan Azman Saini; Abdul Karim, Bakri
  7. Fiscal consolidation with high growth: A policy simulation model for India. By Mundle, Sudipto; Bhanumurthy, N.R.; Das, Surajit
  8. Agent-based financial markets and New Keynesian macroeconomics: A synthesis By Lengnick, Matthias; Wohltmann, Hans-Werner
  9. Monetary Policy, Commodity Prices and Infl ation – Empirical Evidence from the US By Florian Verheyen
  10. Interest rate rule for the conduct of monetary policy: analysis for Egypt (1997:2007) By Rageh, Rania
  11. Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics By George J. Hall; Thomas J. Sargent
  12. Increasing Returns and Unsynchronized Wage Adjustment in Sunspot Models of the Business Cycle By Kevin X.D. Huang; Qinglai Meng
  13. "Bernanke’s Paradox: Can He Reconcile His Position on the Federal Budget with His Recent Charge to Prevent Deflation?" By Pavlina R. Tcherneva
  14. Optimal Unemployment Insurance over the Business Cycle By Camille Landais; Pascal Michaillat; Emmanuel Saez
  15. Does Inflation Targeting decrease Exchange Rate Pass-through in Emerging Countries? By Coulibaly, D.; Kempf, H.
  16. Can Turkish Recessions be Predicted? By Adrian Pagan
  17. Fiscal stimulus and exit strategies in a small euro area economy By Vanda Almeida; Gabriela Lopes de Castro; Ricardo Mourinho Félix; José Ramos Maria
  18. Essays on Empirical Macroeconomics By Mehrotra, Aaron
  19. The Euro Area Crisis Management Framework: Consequences and Institutional Follow-ups By Ansgar Belke
  20. Governments under influence: Country interactions in discretionary fiscal policy By Aurélie Cassette; Jerome Creel; Etienne Farvaque; Sonia Paty
  21. Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts By Olivier Coibion; Yuriy Gorodnichenko
  22. Is the Phillips Curve of Germany Spurious? By Quaas, Georg; Klein, Mathias
  23. Pro-cyclicality of capital regulation: is it a problem? How to fix it? By Paolo Angelini; Andrea Enria; Stefano Neri; Fabio Panetta; Mario Quagliariello
  24. Private investment behavior in India: Is there a crowding out effect? By Panda, Sitakanta; Sahu, Jagadish Prasad
  25. Entreprises adaptatives, détermination des prix et répartition du revenu dans un modèle macroéconomique multi-agents avec monnaie endogène By Pascal Seppecher
  26. Essays on financial crises in emerging markets By Komulainen, Tuomas
  27. Estimating Incentive and Welfare Effects of Non-Stationary Unemployment Benefits By Andrey Launov; Klaus Wälde
  28. Incomplete markets, liquidation risk, and the term structure of interest rates By Challe, E.; Le Grand, F.; Ragot, X.
  29. Growth, Poverty and Inequality: From Washington Consensus to Inclusive Growth By Alfredo Saad-Filho
  30. Wage formation and bargaining power during the Great Depression.. By Bårdsen, Gunnar; Doornik, Jurgen A.; Klovland, Jan Tore
  31. Analyse der Renditestrukturkurve: Zur Laufzeitenstruktur von Investitions- und Finanzierungsentscheidungen By Lenz, Rainer
  32. Optimal size of government and economic growth in EU-27 By Magazzino, Cosimo; Forte, Francesco
  33. The Price of Egalitarianism By Yongsung Chang; Sun-Bin Kim
  34. China in Africa: A Macroeconomic Perspective By Benedicte Vibe Christensen
  35. Model Nash Bargaining, Credible Bargaining and Efficiency Wages in a Matching Model for the US By James M. Malcomson; Sophocles Mavroeidis
  36. El factor multiplicador en el crecimiento del dinero. España 1874-1998 (The multiplier factor in money growth. Spain 1874-1998) By Regina Escario
  37. The historical place of the 'Friedman-Phelps' expectations critique.. By Forder, James
  38. "Financial Stability, Regulatory Buffers, and Economic Growth: Some Postrecession Regulatory Implications" By Éric Tymoigne
  39. L’information boursière comme bien public. Enjeux et perspectives de la révision de la directive européenne « Marchés d’instruments financiers ». By Hautcoeur, Pierre-Cyrille; Lagneau-Ymonet, Paul; Riva, Angelo
  40. A Defense of the Current US Tax Treatment of Employer-Provided Medical Insurance By Kevin X. D. Huang; Gregory W. Huffman
  41. Central bank communication: fragmentation as an engine for limiting the publicity degree of information By Trabelsi, Emna
  42. Sign Restrictions in Structural Vector Autoregressions: A Critical Review By Renee Fry; Adrian Pagan

  1. By: João Valle e Azevedo; Ana Pereira
    Abstract: We show how monetary aggregates can be usefully incorporated in forecasts of inflation. This requires fully disregarding the high-frequency fluctuations blurring the money/inflation relation, i.e., the projection of inflation onto monetary aggregates must be restricted to the low frequencies. Using the same tools, we show that money growth has (little) predictive power over output at business cycle frequencies.
    JEL: C51 E31 E32 E52 E58
    Date: 2010
  2. By: D'Adamo, Gaetano
    Abstract: Interest Rate rules are often estimated as simple reaction functions linking the policy interest rate to variables such as (forecasted) inflation and the output gap; however, the coefficients estimated with this approach are convolutions of structural and preference parameters. I propose an approach to estimate Central Bank preferences starting from the Central Bank's optimization problem within a small open economy. When we consider open economies in a regime of Inflation Targeting, the issue of the role of the exchange rate in the Monetary Policy rule becomes relevant. The empirical analysis is conducted on Sweden, to verify whether the recent stabilization of the Krona/Euro exchange rate was due to “Fear of Floating”; the results show that the exchange rate might not have played a role in monetary policy, suggesting that the stabilization probably occurred as a result of increased economic integration and business cycle convergence.
    Keywords: Interest Rate Rules; Inflation Targeting; Central Bank Preferences; Fear of Floating.
    JEL: C32 E58 E52
    Date: 2010–11–09
  3. By: Gaffeo, E.; Petrella, I.; Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research)
    Abstract: This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger e¤ects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically different across different cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households' utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing effects on the responses of output and inflation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-o¤ between inflation and output stabilization that naturally arises in this context. Greater elasticity of inflation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of inflation under discretion, compared to what is otherwise prescribed during contractions.
    Keywords: Reference-dependent Preferences;Asymmetry;Monetary policy.
    JEL: E32 E52 D11
    Date: 2010
  4. By: Solomon, Bernard Daniel
    Abstract: This paper develops a macroeconomic model of the interaction between consumer debt and firm debt over the business cycle. I incorporate interest rate spreads generated by firm and household loan default risk into a real business cycle model. I estimate the model on US aggregate data. This allows me to analyse the quantitative importance of possible feedback effects between the debt levels of firms and households, and the relative contributions of financial and supply shocks to economic fluctuations. While firm level credit market frictions significantly amplify the response of investment to shocks, they do not amplify output responses. In general equilibrium, higher external financing spreads for households contribute to lower external financing spreads for firms, contrary to traditional Keynesian predictions. Furthermore, total factor productivity shocks remain an important source of business cycles in my model. They are responsible for 71 - 74% of the variance of output and 56 - 69% of the variance of consumption in the model. Financial shocks are important in explaining interest rate spreads and leverage ratios, but they account for less than 11% of the fluctuations in output. My results suggest that other factors, beyond credit market frictions on their own, are necessary to justify an important role for financial shocks in aggregate output fluctuations.
    Keywords: Financial frictions; external finance premium; DSGE models; Bayesian estimation; business cycles
    JEL: E43 E32 E44 E21 C11
    Date: 2010–10–30
  5. By: Sanchita Mukherjee
    Abstract: This paper analyzes the impact of capital market openness on exchange rate pass-through and subsequently on the social loss function in an inflation-targeting small open economy under a pure commitment policy. Applying the intuition behind the macroeconomic trilemma, the author examines whether a more open capital market in an inflation-targeting country improves the credibility of the central bank and consequently reduces exchange rate pass-through. First, the effect of capital openness on exchange rate pass-through is empirically examined using a new Keynesian Phillips curve. The empirical investigation reveals that limited capital openness leads to greater pass-through from the exchange rate to domestic inflation, which raises the marginal cost of deviation from the inflation target. This subsequently worsens the inflation output-gap trade-off and increases the social loss of the inflation targeting central bank under pure commitment. However, the calibration results suggest that the inflation output-gap trade-off improves and the social loss decreases even in the presence of larger exchange rate pass-through if the capital controls are effective at insulating the exchange rate from interest rate and risk-premia shocks.
    Keywords: Monetary policy ; Inflation targeting ; Foreign exchange
    Date: 2010
  6. By: Abdul Karim, Zulkefly; Wan Ngah, Wan Azman Saini; Abdul Karim, Bakri
    Abstract: This paper aims to investigate the relevance of bank-lending channel (BLC) of monetary policy in a small-open economy, i.e. Malaysia by using disaggregated bank-level data set. A dynamic panel data method namely GMM framework proposed by Arellano and Bond (1991), Arellano and Bover (1995), and Blundell and Bond (1998) have been used in estimating the dynamic of banks’ loan supply function. The empirical evidence has stated that monetary policy shocks is significantly and negatively influenced the banks’ loan supply, and therefore has supported the existence of BLC in Malaysia. In addition, several bank-characteristics variables namely bank liquidity and bank capitalization (capital adequacy ratio) are also statistically significant in influencing the banks’ loan supply. Therefore, the implementation of monetary policy is effective in influencing economic activity via bank balance sheet position, in particular bank loans.
    Keywords: Bank-lending channel; monetary policy; dynamic panel data
    JEL: E58 E52 C33
    Date: 2010–09–10
  7. By: Mundle, Sudipto (National Institute of Public Finance and Policy); Bhanumurthy, N.R. (National Institute of Public Finance and Policy); Das, Surajit (National Institute of Public Finance and Policy)
    Abstract: In this paper a fiscal consolidation program for India has been presented based on a policy simulation model that enables us to examine the macroeconomic implications of alternative fiscal strategies, given certain assumptions about other macro policy choices and relevant exogenous factors. The model is then used to estimate the outcomes resulting from a possible strategy of fiscal consolidation in the base case. The exercise shows that it is possible to have fiscal consolidation while at the same time maintaining high GDP growth of around 8 percent or so. The strategy is to gradually bring down the revenue deficit to zero by 2014-15, while allowing a combined fiscal deficit for centre plus states of about 6 percent of GDP. This provides the space for substantial government capital expenditure, which translates to a significant public investment program. This in turn leads to high overall investment directly and indirectly, via the crowding in effect on private investment, which drives the high GDP growth. The exercise has also tested the robustness of this strategy under two alternative scenarios of higher and lower advanced country growth compared to the base case.
    Keywords: Macroeconomic modelling, Policy simulation, Fiscal policy, India
    JEL: C32 E10 E17 E60 H60
    Date: 2010–08
  8. By: Lengnick, Matthias; Wohltmann, Hans-Werner
    Abstract: We combine a simple agent-based model of financial markets with a standard New Keynesian macroeconomic model via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of stock price bubbles. Even with such a simplistic comprehensive model, we can show that the behavioral foundations of the stock market exert important influence on the macroeconomy, e.g. they change the impulse-response functions of macroeconomic variables significantly. We also analyze financial market transaction taxes as well as asset price bubble deflating monetary policy, and find that both can be used to reduce volatility and distortion of the macroeconomic aggregates. --
    Keywords: agent-based financial markets,New Keynesian macroeconomics,stock market,transaction tax,Taylor rule
    JEL: E0 E52 G12 G18
    Date: 2010
  9. By: Florian Verheyen
    Abstract: The past years were characterized by unprecedented rises in prices of commodities such as oil or wheat and inflation rates moved up above the mark of two percent per annum. This led to a revival of the debate whether commodity prices indicate future CPI inflation and if they can be used as indicator variables for central banks or not. We apply various econometric methods like Granger causality tests and SVAR models to US data. The results corroborate the notion that there was a strong link between commodity prices and CPI inflation in the 1970s and the beginning of the 1980s. For a more recent sample, the relationship has weakened, respectively diminished.
    Keywords: Monetary policy; commodity prices; infl ation; United States; SVAR
    JEL: E44 E52 E58
    Date: 2010–10
  10. By: Rageh, Rania
    Abstract: The main objective of the paper in hand is to examine the validity of using Taylor rule as a robust rule for conducting monetary policy in case of Egypt. In this context, the paper works through two main pillars. First: parts two and three; critically analyze the theoretical grounds for using an interest rate rule in conducting monetary policy. Second: part four; emphasize how the Taylor rule can be empirically estimated and evaluated. Consistently; this exercised while estimating and evaluating both simple backward and forward-looking Taylor rule for Egypt, guided by lessons from selected countries` experiences in estimating Taylor rule like U.S.A., U.K and Chile. JEL Classification Numbers: E52; E58
    Keywords: Keywords: central bank; monetary policy; Taylor rule.
    JEL: E58 E52
    Date: 2010–05–08
  11. By: George J. Hall (Department of Economics, Brandeis University); Thomas J. Sargent (Department of Economics, New York University)
    Abstract: This paper uses a sequence of government budget constraints to motivate estimates of returns on the U.S. Federal government debt. Our estimates differ conceptually and quantitatively from the interest payments reported by the U.S. government. We use our estimates to account for contributions to the evolution of the debt-GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities.
    Keywords: Holding period returns, capital gains, inflation, growth, debt- GDP ratio, government budget constraint
    Date: 2010–11
  12. By: Kevin X.D. Huang (Department of Economics, Vanderbilt University); Qinglai Meng (Department of Economics, Oregon State University, Department of Economics, Chinese University of Hong Kong)
    Abstract: A challenge facing the literature of equilibrium indeterminacy and sunspot-driven business cycle fluctuations based on increasing returns to scale in production is that the required degree of increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor. We show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to an empirically plausible level and make it invariant to the relative risk aversion in labor. As a result, indeterminacy and sunspot-driven business cycle fluctuations may emerge for empirically plausible increasing returns regardless of the value of the relative risk aversion in labor. The impulse responses of our model to demand shocks under indeterminacy are reasonable in terms of matching the business cycle, and sunspot shocks become more important due to the presence of labor market frictions.
    Keywords: Increasing returns, Unsynchronized wage adjustment, Relative wages, Relative risk aversion in labor, Indeterminacy, Sunspot
    JEL: E12 E31 E52
    Date: 2010–03
  13. By: Pavlina R. Tcherneva
    Abstract: This paper examines Federal Reserve Chairman Ben Bernanke’s recipe for deflation fighting and the specific policy actions he took in the aftermath of the 2008 financial crisis. Both in his academic and in his policy work, Bernanke has made the case that monetary policy is able to stem deflationary forces largely because of its "fiscal components," and that governments like those in the United States or Japan face no constraints in financing these fiscal components. On the other hand, he has recently expressed strong concerns about the size of the federal budget deficit, calling for its reversal in the name of financial sustainability. The paper argues that these positions are fundamentally at odds with each other, and resolves the paradox by arguing on theoretical and technical grounds that there are no fundamental differences in financing conventional government spending programs and what Bernanke considers to be the fiscal components of monetary policy.
    Keywords: Bernanke; Deflation; Monetary Policy; Crowding Out; Financial Sustainability
    JEL: E31 E42 E58 E63 E65
    Date: 2010–11
  14. By: Camille Landais; Pascal Michaillat; Emmanuel Saez
    Abstract: This paper analyzes optimal unemployment insurance over the business cycle in a search model in which unemployment stems from matching frictions (in booms) and job rationing (in recessions). Job rationing during recessions introduces two novel effects ignored in previous studies of optimal unemployment insurance. First, job-search efforts have little effect on aggregate unemployment because the number of jobs available is limited, independently of matching frictions. Second, while job-search efforts increase the individual probability of finding a job, they create a negative externality by reducing other jobseekers’ probability of finding one of the few available jobs. Both effects are captured by the positive and countercyclical wedge between micro-elasticity and macro-elasticity of unemployment with respect to net rewards from work. We derive a simple optimal unemployment insurance formula expressed in terms of those two elasticities and risk aversion. The formula coincides with the classical Baily-Chetty formula only when unemployment is low, and macro- and micro-elasticity are (almost) equal. The formula implies that the generosity of unemployment insurance should be countercyclical. We illustrate this result by simulating the optimal unemployment insurance over the business cycle in a dynamic stochastic general equilibrium model calibrated with US data.
    JEL: E24 E32 H21 H23
    Date: 2010–11
  15. By: Coulibaly, D.; Kempf, H.
    Abstract: In this paper, we empirically examine the effect of inflation targeting on the exchange rate pass-through to prices in emerging countries. We use a panel VAR that allows us to use a large dataset on twenty-seven emerging countries (fifteen inflation targeters and twelve inflation nontargeters). Our evidence suggests that inflation targeting in emerging countries contributed to a reduction in the pass-through to various price indexes (import prices, producer prices and consumer prices) from a higher level to a new level that is significantly different from zero. The variance decomposition shows that the contribution of exchange rate shocks to price fluctuations is more important in emerging targeters compared to nontargeters, and the contribution of exchange rate shocks to price fluctuations in emerging targeters declines after adopting inflation targeting.
    Keywords: Inflation Targeting, Exchange Rate Pass-Through, panel VAR.
    JEL: E31 E52 F41
    Date: 2010
  16. By: Adrian Pagan (QUT/UTS)
    Abstract: In response to the widespread criticism that macro-economists failed to predict the global recession coming from the GFC, we look at whether recessions in Turkey can be predicted. Because the growth in Turkish GDP is quite persistent one might expect this is possible. But it is the sign of GDP growth that needs to be forecast if we are to predict a recession, and this is made more difficult by the persistence in GDP growth. We build a small SVAR model of the Turkish economy that is motivated by New Keynesian models of the open economy, and find that using the variables entering it increases predictive success, although it is still the case that the predictive record is not good. Non-linear models for Turkish growth are then found to add little to predictive ability. Fundamentally, recession prediction requires one to forecast future shocks to the economy, and thus one needs some indicators of these. The paper explores a range of indicators for the Turkish economy, but none are particularly advantageous. Developing a bigger range of these indicators should be a priority for future Turkish macro-economic research.
    Keywords: Business cycles, binary models, predicting recessions
    Date: 2010–10–10
  17. By: Vanda Almeida; Gabriela Lopes de Castro; Ricardo Mourinho Félix; José Ramos Maria
    Abstract: This article is focused on fiscal stimulus and exit strategies in a small euro area economy. The analysis is based on a New-Keynesian general equilibrium model with non-Ricardian features introduced in Almeida, Castro and Félix (2010). We define a benchmark fiscal stimulus and, conditional on alternative exit strategies, clarify its macroeconomic effects. We investigate if a fiscal stimulus can be enhanced (or harmed) by particular exit strategies. The impact multipliers proved insufficient to discriminate between alternative strategies. However, since the policy impacts are not limited to the short run, there are relevant effects over the medium run that can be used to evaluate the different strategies. It will be claimed that (i) the announcement of a promptly and timely exit strategy, contemporaneous to the announcement of the fiscal stimulus, with a consolidation period that is not prolonged indefinitively, may improve the effectiveness of the stimulus and that (ii) exit strategies based on Government<br>consumption cuts tend to dominate over other alternatives, such as transfers cuts or tax rate increases.
    JEL: E62 F41 H62
    Date: 2010
  18. By: Mehrotra, Aaron (Bank of Finland Research)
    Abstract: This thesis consists of four essays in empirical macroeconomics. The first three essays examine the conduct of monetary policy during a disinflationary and deflationary era, with the policy interest rates close to or at the zero bound. The questions of interest include the potency of the interest rate channel, the stability of broad money demand, and the possibility to use the exchange rate channel in order to affect economic activity and the price level. We use time series econometrics techniques, mainly vector autoregressions, focusing on Japan. While we find that basic relationships between the variables appear unaltered by deflation, a further stimulative impact is difficult to implement once the zero bound is hit. This can be due to political reasons, as in the case of introducing a tax on currency in order to bring about negative interest rates, or because the needed stimulus is very big, as in the case of yen depreciation to increase the price level. The last essay focuses on the fiscal policy aspects of the European Union’s most recent enlargement. We examine whether the fiscal austerity required by the Maastricht criteria and the Stability and Growth Pact would be harmful for the socio-economic development of the new Member States. Introducing an indicator for socio-economic development and utilizing instrumental variables regressions, we find that fiscal retrenchment, including a lower level of public debt, would be advantageous for development. A policy implication is to maintain the Stability and Growth Pact or an equivalent intergovernmental fiscal rule to curb public spending and debt.
    Keywords: deflation; disinflation; zero lower bound; broadly defined liquidity; socio-economic development; Stability and Growth Pact; EU enlargement
    JEL: E00 E31 E60 N00
    Date: 2010–11–11
  19. 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 GrowthPact
    JEL: E61 E62 P48
    Date: 2010
  20. By: Aurélie Cassette (EQUIPPE-Universités de Lille, Faculté des sciences économiques et sociales); Jerome Creel (Observatoire Français des Conjonctures Économiques); Etienne Farvaque (EQUIPPE-Universités de Lille, Faculté des sciences économiques et sociales); Sonia Paty (CREM Université de Caen and CNRS (France) and EQUIPPE-Universités de Lille, Faculté des sciences économiques et sociales)
    Abstract: We investigate the interactions between countries of the discretionary component of national fiscal policies (i.e. the cyclically- and interest-adjusted part of fiscal policy), therefore observing and investigating the part of public spending and tax receipts on which governments keep full discretion. Our sample covers 18 OECD countries, during the 1974-2008 period. First, we build a measure of such discretionary fiscal policy, considered as the residual component of a VAR model, and compute the measure for the full sample. Drawing on this new dataset, the second step provides estimates of discretionary fiscal policy interactions between countries of the sample. Our results highlight the existence of interactions between neighboring countries' public decisions, where neighborhood is defined by economic leadership as well as geography. We also find evidence of an opportunistic behavior of OECD countries' governments for the discretionary public spending. Finally, the disciplining device of the European Union fiscal framework is shown to be ineffective.
    Keywords: Fiscal policy; discretion; interactions; VAR; spatial econometrics
    JEL: E62 H60 H87
    Date: 2010–10
  21. By: Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley)
    Abstract: We propose a new approach to test of the null of full-information rational expectations which is informative about whether rejections of the null reflect departures from rationality or full-information. This approach can also quantify the economic significance of departures from the null by mapping them into the underlying degree of information rigidity faced by economic agents. Applying this approach to both U.S. and cross-country data of professional forecasters and other economic agents yields pervasive evidence of informational rigidities that can be explained by models of imperfect information. Furthermore, the proposed approach sheds new light on the implications of policies such as inflation-targeting and those leading to the Great Moderation on expectations. Finally, we document evidence of state-dependence in the expectations formation process. implications.
    Keywords: Expectations, Information Rigidity, Survey Forecasts
    JEL: E3 E4 E5
    Date: 2010–11–08
  22. By: Quaas, Georg; Klein, Mathias
    Abstract: A simple plot of seasonal adjusted quarterly data between the change of nominal wage rates and the unemployment rate for the German economy shows a picture similar to that by which Phillips was inspired to his famous discovery, that there is a long-term tendency of a negative, non-linear relationship coupled with minor deviations from this tendency, which form so-called loops. At first sight, the Phillips Curve of Germany comprises clusters of data points and movements between these clusters. In spite of the striking differences of these phenomena, a model with one regression equation is sufficient to explain the loops, the movements between the loops and the long-term tendency of the German Phillips Curve. It might well be that the German Phillips Curve and the corresponding regressions are spurious, but an allegedly missing co-integration of wage rate changes and unemployment rate is not the argument that could be drawn on to sustain this scepticism. On the contrary, both variables are co-integrated. To get a more detailed insight into the relationship, the two variables are split into a trend and a cyclical component by the help of the HP-filter. The results of regression analyses applied to the separated components support Phillips’ hypothesis of a negative relationship between wage rate changes and the unemployment rate.
    Keywords: Wages; Unemployment; Phillips Curve
    JEL: E24 E13
    Date: 2010–11–10
  23. By: Paolo Angelini (Banca d'Italia); Andrea Enria (Banca d'Italia); Stefano Neri (Banca d'Italia); Fabio Panetta (Banca d'Italia); Mario Quagliariello (Banca d'Italia)
    Abstract: We use a macroeconomic euro area model with a bank sector to study the pro-cyclical effect of the capital regulation, focusing on the extra pro-cyclicality induced by Basel II over Basel I. Our results suggest that this incremental effect is modest. We also find that regulators could offset the extra pro-cyclicality by a countercyclical capital-requirements policy. Our results also suggest that banks may have incentives to accumulate countercyclical capital buffers, making this policy less relevant, but this finding is depends on the type of economic shock posited. We also survey different policy options for dealing with procyclicality and discuss the pros and cons of the measures available.
    Keywords: Basel accord, pro-cyclicality
    JEL: E32 E44 E58
    Date: 2010–10
  24. By: Panda, Sitakanta; Sahu, Jagadish Prasad
    Abstract: This paper attempts to explain the determinants of private investment behavior in India, especially the reaction of it to government investment in the long run in order to examine the socalled crowding out hypothesis in the developing countries in the Indian context. While modifying the Blejer & Khan (1984) neoclassical flexible accelerator model to find out   the   long   run   behavior   in   an   ARDL   bounds testing   approach   to   co­integration framework,   we find   government   spending   does   not   crowd   out   or   displace   private investment   in   India,   rather   complements   it.   Both   GDP   and   public   investment   (public spending,   though,   is   very   weakly   significant)   have   positive   impact   on   private   capital formation and interest rates are not sig nificant as a determinant of private inv estment.
    Keywords: private   investment;   crowding   out;   flexible   accelerator;   ARDL   bounds testing; India.
    JEL: E62 H54 E22 E13 E41
    Date: 2010–10
  25. By: Pascal Seppecher (CEMAFI - Centre d'Etudes en Macroéconomie et Finance Internationale - Université de Nice Sophia-Antipolis)
    Abstract: Ce papier présente un modèle macroéconomique qui associe étroitement théorie de la monnaie endogène et approche multi-agents. C'est un modèle décentralisé, peuplé d'agents multiples, hétérogènes, autonomes et concurrents qui interagissent simultanément dans les sphères réelle et monétaire. Les propriétés macroéconomiques du modèle ne sont pas postulées, ce sont des propriétés émergentes du système complexe formé par les interactions entre les agents. On dote les entreprises de capacité d'adaptation, alliant imitation et innovation, pour déterminer les prix sur le marché des biens. Par une série de simulations, on observe l'évolution des comportements des entreprises et leur impact sur la dynamique macroéconomique, en particulier sur le partage du revenu entre salaires et profits.
    Keywords: complex adaptive system, agent-based computational economics, evolutionary economics, genetic algorithms, Nelder-Mead algorithm, evolutionary strategies, pricing, mark-up, income distribution, monetary production economy, endogenous money, entrepreneur economy
    Date: 2010–07–08
  26. By: Komulainen, Tuomas (Bank of Finland Research)
    Abstract: The financial crises in emerging markets in 1997-1999 were preceded by financial liberalisation, rapid surges in capital inflows, increased levels of indebtedness, and then sudden capital outflows. The study contains four essays that extend the different generations of crisis literature and analyse the role of capital movements and borrowing in the recent crises. Essay 1 extends the first generation models of currency crises. It analyses bond financing of fiscal deficits in domestic and foreign currency, and compares the timing and magnitude of attack with the basic case where deficits are monetised. The essay finds that bond financing may not delay the crisis. But if the country’s indebtedness is low, the crisis is delayed by bond financing, especially if the borrowing is carried out with bonds denominated in foreign currency. Essay 2 extends the second generation model of currency crises by adding capital flows. If these depend negatively on crisis probability, there will be multiple equilibria. The range of country fundamentals for which self-fulfilling crises are possible is wider when capital flows are included, and thus more countries may end up in crisis. An application of the model shows that in 1996 in many emerging economies the fundamentals were inside the range of multiple equilibria and hence self-fulfilling crises were possible. Essay 3 studies financial contagion and develops a model of the international financial system. It uses a basic model of financial intermediation, but adds several local banks and an international bank. These banks are able to use outside borrowing, the amount of which is determined by the value of their collateral. The essay finds that the use of leverage by local and global banks and the fall in collateral prices comprise an important channel and reason for contagion. Essay 4 analyses the causes of financial crises in 31 emerging market countries in 1980–2001. A probit model is estimated using 23 macroeconomic and financial sector indicators. The essay finds that traditional variables (eg unemployment and inflation) and several indicators of indebtedness (eg private sector liabilities and banks' foreign liabilities) explain currency crises. When the sample was divided into pre- and post-liberalisation periods, the indicators of indebtedness became more important in predicting crisis in the postliberalisation period.
    Keywords: currency crises; banking crises; emerging markets; borrowing; collateral; contagion; liberalisation
    JEL: E50 E60 F00 N20 O10 O40
    Date: 2010–11–11
  27. By: Andrey Launov; Klaus Wälde
    Abstract: The distribution of unemployment duration in our equilibrium matching model with spell-dependent unemployment benefits displays a time-varying exit rate. Building on Semi-Markov processes, we translate these exit rates into an expression for the aggregate unemployment rate. Structural estimation using a German micro-data set (SOEP) allows us to discuss the effects of a recent unemployment benefit reform (Hartz IV). The reform reduced unemployment by only 0:3%. Contrary to general beliefs, we find that both employed and unemployed workers gain (the latter from an intertemporal perspective). The reason is the rise in the net wage caused by more vacancies per unemployed worker.
    Keywords: Non-stationary unemployment benefits, endogenous effort, matching model, structural estimation, Semi-Markov process
    JEL: E24 J64 J68 C13
    Date: 2010
  28. By: Challe, E.; Le Grand, F.; Ragot, X.
    Abstract: We analyze the term structure of real interest rates in a general equilibrium model with incomplete markets and borrowing constraints. Agents are subject to both aggregate and idiosyncratic income shocks, which latter may force them into early portfolio liquidation in a bad aggregate state. We derive a closed-form equilibrium with limited agent heterogeneity (despite market incompleteness), which allows us to produce analytical expressions for bond prices and returns at any maturity. The attractiveness of bonds as liquidity makes aggregate bond demand downward-sloping, so that greater bond supply raises both the level and the slope of the yield curve. Moreover, time-variations in liquidation risk are shown to help explain the rejection of the Expectations Hypothesis.
    Keywords: Incomplete markets; yield curve; borrowing constraints.
    JEL: E21 E43 G12
    Date: 2010
  29. By: Alfredo Saad-Filho
    Abstract: This paper reviews recent economic policy debates about the relationship between growth, poverty and inequality. These debates have tended to focus on whether market-led growth is sufficient to eliminate poverty and reduce inequality, or whether specific policies are necessary because untargeted growth may be insufficient or even perverse. The paper charts the degenerating outcomes of these debates, and the emergence of the inclusive growth (IG) paradigm within the World Bank. A critical examination of IG suggests that its weaknesses are best addressed through a more ambitious restatement of the pro-poor goals of economic policy.
    Keywords: Macroeconomic policy, pro-poor policies, inclusive growth, World Bank, Washington Consensus
    JEL: E60 E64 O23
    Date: 2010–11
  30. By: Bårdsen, Gunnar; Doornik, Jurgen A.; Klovland, Jan Tore
    Abstract: We present an econometric analysis of wage behaviour in Norway during the interwar years. The analysis is based on a panel of manufacturing industry data using GMM estimation methods. Our empirical analysis shows that wage formation in the interwar period can be understood with the help of modern bargaining theory and well-established wage equations. We estimate a long-run wage curve that has all the standard features of being homogeneous in prices, proportional to productivity, and with a negative unemployment elasticity. We also present some new Monte Carlo evidence on the properties of the estimators used.
    JEL: E24 N24
    Date: 2010
  31. By: Lenz, Rainer
    Abstract: Die Renditestruktur determiniert die Relation zwischen Zinsänderungsrisiko und Zinsertrag bei Investitionen und Finanzierungen und ist insofern für die Wahl der Laufzeit von fundamentaler Bedeutung. Mit Hilfe der impliziten Terminzinssätze ist es möglich, die Entscheidungssituation des Investors und des Finanziers zu modellieren. Dabei lassen sich aus der Analyse der drei gestaltgebenden Merkmale der Renditestrukturkurve Niveau, Steigung und Krümmung Entscheidungsregeln für das bewusste Eingehen eines Risikos bei entsprechendem Mehrertrag durch die Wahl der Laufzeit ableiten. The shape of the yield curve determines the relationship between interest rate risk and return of investments. Should the investor or financier choose short- or long term bonds or loans? The management decision of the “right” maturity depends on three form-giving factors of the yield curve: general level of interest rates, the slope and the curvature of the curve. By using implicit forward rates the decision situation of investors and financiers is modeled and general decision rules for financial managers are derived.
    Keywords: Renditestrukturkurve; yield curve; Laufzeitenstruktur; term structure of interest rates; implizite Forward rates; Erwartungstheorie; implicit forward rates; expectation theory
    JEL: E43 G31 G3 G32
    Date: 2010–09–15
  32. By: Magazzino, Cosimo; Forte, Francesco
    Abstract: Using time-series techniques and panels data, the paper analyses for the EU countries in the period 1970-2009 the existence and shape of the “BARS curve” (Barro, Armey, Rahn, and Scully), connecting the size of Government (measured by the share of public expenditure on GDP) to the rate of economic growth. Individual countries research has been conducted for 12 countries for whom enough time series were available, while panel analysis has been performed both for EU-27 and for subgroups, distinguished by their different socio-economic and monetary structures, and per capita GDP. BARS curves were generally found, and the shares of actual public expenditures generally exceed substantially those related to the maximization of GDP growth. However, great differences do emerge. For the 12 countries examined by time-series techniques, the difference between the actual level and the peak of the BARS curve ranges from 5.7 points for Germany and 18.1 points for Belgium. Panel data analysis for EU-27 shows a peak of the BARS curve at 37%, while the actual level is about 47%. While, panel data disaggregation shows a similar situation for the Western Continental Countries, with a smaller gap for Anglo-Saxon countries. For low per capita GDP countries the peak is higher than for the mature economies. So, further research may prove useful to show light on the disparities emerging in the empirical analysis of individual countries and of the panel sub-groups. However, the present research provides enough evidence that high GDP countries of EU have overcome the level of government size compatible with GDP growth rate maximization.
    Keywords: Government size; economic growth; BARS curve; public expenditure; EU-27.
    JEL: E62 H60 C23 C22 O40
    Date: 2010–09–01
  33. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University)
    Abstract: We compute the welfare cost of egalitarianism—a tax policy that equalizes wages for all. The benchmark “laissez-faire†economy has features a la Aiyagari (1994) with endogenous labor supply. A progressive income tax provides insurance against income risks but at the cost of efficiency: it undermines highly productive workers’ incentives to work. We find that in an economy with the labor-supply elasticity of 1, the welfare cost of egalitarianism, measured in consumption-equivalence units, is only 1% as the welfare gain from insurance against income risks nearly offsets the efficiency loss from distorting labor effort. However, with an elastic labor supply, the welfare cost of egalitarianism is as large as 7.5% of steady state consumption.
    Keywords: Egalitarianism; Welfare Cost; Equal-Wage Policy; Income Risks.
    JEL: E2 E6 J3
    Date: 2010–10
  34. By: Benedicte Vibe Christensen
    Abstract: In recent years, China has dramatically expanded its financing and foreign direct investment to Africa. This expansion has served the political and economic interests of China while providing Africa with much-needed technology and financial resources. This paper looks at China’s role in Africa from the Chinese perspective. [Working Paper No. 230].
    Keywords: china, chinese, africa, political, economic, technology, financial resources, macroeconoic, african, global environment, trade,
    Date: 2010
  35. By: James M. Malcomson; Sophocles Mavroeidis
    Abstract: This paper incorporates Nash bargaining, credible bargaining and efficiency wages as special cases of an over-arching model of wage determination in a matching model that is used to assess econometrically how well each fits US data. With Nash bargaining, estimates for worker bargaining power and the value of non-work activity are almost identical to those calibrated by Hagedorn and Manovskii (2008). However, the over-identifying restrictions are overwhelmingly rejected statistically, as they are for credible bargaining. Efficiency wages fit the data better, with the over-identifying restrictions not rejected statistically, and result in a lower, more plausible estimated value of non-work activity.
    Keywords: Matching frictions, wage bargaining, efficiency wages, unemployment, shirking
    JEL: E2 J3 J6
    Date: 2010
  36. By: Regina Escario (Universidad de Zaragoza)
    Abstract: En este trabajo se detalla y cuantifica la relación formal existente entre los agregados base monetaria y disponibilidades líquidas (o M3). La evolución de estas últimas se debe no sólo a la propia expansión de la base, sino también al efecto que el multiplicador monetario ejerce a través de los coeficientes de efectivo y de reservas. Así, tras revisar la trayectoria de la M3 se profundiza en el papel que el multiplicador ha jugado en su crecimiento, calculando las contribuciones de cada determinante e integrándolas en el contexto histórico que ofrece España entre 1874 y 1998. El peso del multiplicador en la expansión de las disponibilidades, mayor que el estimado para Italia o EE UU, resulta cercano al 20%, del que dos terceras partes corresponden al impacto del coeficiente de efectivo y un tercio al de reservas.
    Keywords: multiplicador monetario, coeficiente de efectivo, coeficiente de reservas, dinero
    JEL: E51 N14
    Date: 2010–11
  37. By: Forder, James
    Abstract: The ‘expectations critique’, usually attributed to Friedman or Phelps and dated towards the end of the 1960s, in fact originates much earlier. And rather than being an insight properly attributable to a particular individual, it was, by that time, a commonplace of economic discussion. This much is easy to establish. It is argued that the common attribution arises at least in part because the Keynesians unwisely chose to express their disagreement with Friedman in terms of expectations rather than in terms of the existence of the natural rate of unemployment. As a result, forty years later, it has become hard to see that two separate points ever existed.
    JEL: E31 B22
    Date: 2010
  38. By: Éric Tymoigne
    Abstract: Over the past 40 years, regulatory reforms have been undertaken on the assumption that markets are efficient and self-corrective, crises are random events that are unpreventable, the purpose of an economic system is to grow, and economic growth necessarily improves well-being. This narrow framework of discussion has important implications for what is expected from financial regulation, and for its implementation. Indeed, the goal becomes developing a regulatory structure that minimizes the impact on economic growth while also providing high-enough buffers against shocks. In addition, given the overarching importance of economic growth, economic variables like profits, net worth, and low default rates have been core indicators of the financial health of banking institutions. This paper argues that the framework within which financial reforms have been discussed is not appropriate to promoting financial stability. Improving capital and liquidity buffers will not advance economic stability, and measures of profitability and delinquency are of limited use to detect problems early. The paper lays out an alternative regulatory framework and proposes a fundamental shift in the way financial regulation is performed, similar to what occurred after the Great Depression. It is argued that crises are not random, and that their magnitude can be greatly limited by specific pro-active policies. These policies would focus on understanding what Ponzi finance is, making a difference between collateral-based and income-based Ponzi finance, detecting Ponzi finance, managing financial innovations, decreasing competitions in the banking industry, ending too-big-to-fail, and deemphasizing economic growth as the overarching goal of an economic system. This fundamental change in regulatory and supervisory practices would lead to very different ways in which to check the health of our financial institutions while promoting a more sustainable economic system from both a financial and a socio-ecological point of view.
    Keywords: Financial Crisis; Financial Regulation; Banking Supervision; Sustainability
    JEL: E12 E58 G18 G28 Q01
    Date: 2010–11
  39. By: Hautcoeur, Pierre-Cyrille; Lagneau-Ymonet, Paul; Riva, Angelo
    Abstract: Depuis le déchaînement de la crise, l’organisation des transactions boursières n’a pas vraiment fait l’objet de velléités réformatrices. Pourtant, les opportunités spéculatives, comme les risques encourus dépendent aussi de l’organisation des marchés sur lesquels on opère. La directive européenne « Marchés d’instruments financiers », en vigueur depuis 2007, témoigne d’une foi déraisonnable dans les vertus auto-organisatrices du marché. En introduisant la concurrence sur le marché des marchés financiers, elle a ainsi fragmenté la liquidité et accentué la privatisation des dispositifs d’échange et de transaction. Ses conséquences sont en train d’être évaluées par la recherche mais d’ores et déjà, nombre de parties prenantes dénoncent les limites et les dangers de cette nouvelle régulation. Mobilisant l’histoire financière, nous démontrons pourquoi et comment il faudrait, à l’échelle européenne, confier aux marchés réglementés une mission de service d’intérêt général comparable à celle qu’ils ont assumée par le passé sans cela ait nuit au développement économique : centraliser, traiter et diffuser l’information pré et post négociation qui constitue un bien public.
    Abstract: The organization of securities markets has not benefited from the feigned attempts of reform presented by authorities since the outbreak of the current crisis. However, speculative opportunities like the risks incurred also depend on the markets on which one operates. The Markets in Financial Instruments Directive of the European Union, effective since 2007, reflects an excessive faith in the self-organizing virtues of the market. It has unleashed a noxious competition on the market for financial markets that led to liquidity fragmentation and the privatization of market information. Drawing from financial history, we argue that regulated markets should be entrusted, at the European level, with a general interest mission, similar to the one they have long observed on a national level with no harm on economic development: they should centralize, consolidate and publicize post- as well as pre-trade information that are public goods.
    Keywords: directive européenne « Marchés d’instruments financiers »; Transactions boursières;
    JEL: E44 F36 G18 G28 H41 K23 L33 N23 N24 N44 N43
    Date: 2010
  40. By: Kevin X. D. Huang (Department of Economics, Vanderbilt University); Gregory W. Huffman (Department of Economics, Vanderbilt University)
    Abstract: The US tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This feature introduces a distortion which encourages households consume more medical services than they otherwise would, and likely results in the medical consumption taking up 17 percent total consumption, which is much higher than in other advanced economies. This unusual and unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. This paper presents a simple general equilibrium model to compare the outcomes for different systems for the provision of medical services. It is shown that the current tax system may be superior to an identical system in which the tax subsidy is absent. It also is shown that eliminating the tax subsidy for employer-provided medical insurance results in higher unemployment, lower output, and lower welfare. Furthermore, having the government raise taxes to finance the provision of medical care results in substantial decreases in employment, output and welfare.
    Keywords: Tax, employment, medical benefit, welfare
    JEL: E2 E6 H2 H3 I1
    Date: 2010–02
  41. By: Trabelsi, Emna
    Abstract: In earlier theoretical framework, Morris and Shin (2002) highlight the potential dangers of transparency policy. In particular, public announcements may be detrimental to social welfare. Later, Morris and Shin (2005) uphold that more precise communication can degrade the signal value of prices. Researchers suggest reducing the precision of public information or withholding it. Cornand and Heinemann (2008) suggest rather limiting the publicity degree. We found that the same effect can be reached by establishing fragmented public information, but in presence of private signal.
    Keywords: transparency ; central bank communication ; semi public information ; private information ; coordination
    JEL: E58 D83 D82
    Date: 2010–11–05
  42. By: Renee Fry (ANU); Adrian Pagan (QUT/UTS)
    Abstract: The paper provides a review of the estimation of structural VARs with sign restrictions. It is shown how sign restrictions solve the parametric identification problem present in structural systems but leave the model identification problem unresolved. A market and a macro model are used to illustrate these points. Suggestions have been made on how to find a unique model. These are reviewed, along with some of the difficulties that can arise in how one is to use the impulse responses found with sign restrictions.
    Keywords: Structural Vector Autoregressions, New Keynesian Model, Sign Restrictions
    JEL: E32 C51 C32
    Date: 2010–07–28

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