nep-mac New Economics Papers
on Macroeconomics
Issue of 2010‒12‒11
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary Policy in the presence of Informal Labour Markets By Paul Castillo; Carlos Montoro
  2. Inflation risk premia in the US and the euro area By Peter Hördahl; Oreste Tristani
  3. How Does Monetary Policy Change? Evidence on Inflation Targeting Countries By Jaromír Baxa; Roman Horvath; Borek Vasicek
  4. Nominal Rigidities and News-Driven Business Cycles in a Medium-Scale DSGE Economy By NUTAHARA Kengo
  5. Los Mecanismos de Transmisión de la Política Monetaria en Perú By Paul Castillo B.; Fernando Peréz F.; Vicente Tuesta R.
  6. Interest rate effects of demographic changes in a New-Keynesian life-cycle framework By Engin Kara; Leopold von Thadden
  7. Fiscal Policy and Economic Stability:Does PIGS stand for Procyclicality In Government. By Peter Claeys; Alessandro Maravalle
  8. Asset Prices and Monetary Policy in a Sticky-Price Economy with Financial Frictions By NUTAHARA Kengo
  9. Recent Developments in Monetary Policy By Peter Howells; Iris Biefang Frisancho-Mariscal
  10. World Food Prices and Monetary Policy By Luis Catão; Roberto Chang
  11. On monetary policy and stock market anomalies By Alexandros Kontonikas; Alexandros Kostakis
  12. Level, Slope, Curvature of Sovereign Yield Curve and Fiscal Behaviour By António Afonso; Manuel M. F. Martins
  13. The choice of adopting inflation targeting in emerging economies: Do domestic institutions matter? By Yannick Lucotte
  14. Monetary policy, capital inflows and the housing boom By Sa, Filipa; Wieladek, Tomasz
  15. "The Central Bank 'Printing Press': Boon or Bane? Remedies for High Unemployment and Fears of Fiscal Crisis" By Greg Hannsgen; Dimitri B. Papadimitriou
  16. The Long-Run Impact of Inflation in South Africa By Kafayat Amusa; Rangan Gupta; Shaakira Karaolia; Beatrice D. Simo Kengne
  17. Going for broke: New Century Financial Corporation, 2004-2006 By Landier, Augustin; Sraer, David; Thesmar, David
  18. The Indian Exchange Rate and Central Bank Action: A GARCH Analysis By Ashima Goyal; Sanchit Arora
  19. A country-risk approach to the business cycle. With an application to Argentina By Jorge Avila
  20. Deep habits and the macroeconomic effects of government debt By Aloui, Rym
  21. Reinforcing EU Governance in Times of Crisis: The Commission Proposals and beyond By Ansgar Belke
  22. Expectativas Inflacionárias e Inflação Implícita no Mercado Brasileiro By Flávio de Freitas Val; Claudio Henrique da Silveira Barbedo; Marcelo Verdini Maia
  23. The Effects Of Monetary Policy Shocks In Peru: Semi-Structural Identification Using A Factor-Augmented Vector Autoregressive Model By Erick Lahura
  24. The Wage-Productivity Gap Revisited: Is the Labour Share Neutral to Employment? By Marika Karanassou; Hector Sala Lorda
  25. Scarring Recessions and Credit Constraints: Evidence from Colombian Firm Dynamics By Marcela Eslava; Arturo Galindo; Marc Hofstetter; Alejandro Izquierdo
  26. Canadian Monetary Policy: Lessons from the Crisis By Angelo Melino
  27. Peru: Drivers of De-dollarization By Mercedes García-Escribano
  28. A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector By Francisco Vazquez; Benjamin M. Tabak; Marcos Souto
  29. The Option Of Last Resort: A Two-Currency Emu By Arghyrou, Michael G; Tsoukalas, John D.
  30. A Simple Model of the Relationship Between Productivity, Saving and the Current Account By Jean-Marc Fournier; Isabell Koske
  31. Remittances and Financial Openness By Michel Beine; Elisabetta Lodigiani; Robert Vermuelen
  32. Analysing Alternative Policy Response to High Oil Prices, Using an Energy Integrated CGE Microsimulation Approach for South Africa By Albert Touna Mama; Jacques Ewoudou
  33. Inequality and Economic Growth in China: pre and post-reform periods By W.Adrian Risso; Edgar J. Sanchez Carrera
  34. The political cost of reforms By Alessandra Bonfiglioli; Gino Gancia

  1. By: Paul Castillo (Banco Central de Reserva del Perú); Carlos Montoro (Banco Central de Reserva del Perú and Bank for International Settlements)
    Abstract: In this paper we analyse the effects of informal labour markets on the dynamics of inflation and on the transmission of aggregate demand and supply shocks. In doing so, we incorporate the informal sector in a modified New Keynesian model with labour market frictions as in the Diamond-Mortensen-Pissarides model. Our main results show that the informal economy generates a "buffer" effect that diminishes the pressure of demand shocks on aggregate wages and inflation. Finding that is consistent with the empirical literature on the e¤ects of informal labour markets in business cycle fluctuations. This result implies that in economies with large informal labour markets the interest rate channel of monetary policy is relatively weaker. Furthermore, the model produces cyclical flows from informal to formal employment consistent with the data.
    Keywords: Monetary Policy, New Keynesian Model, Informal Economy, Labour Market Frictions.
    JEL: E32 E50 J64 O17
    Date: 2010–09
  2. By: Peter Hördahl (Bank for International Settlements, Centralbahnplatz 2, CH-4002, Basel, Switzerland.); Oreste Tristani (European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US. JEL Classification: E43, E44.
    Keywords: Term structure of interest rates, inflation risk premia, central bank credibility.
    Date: 2010–12
  3. By: Jaromír Baxa (Institute of Economic Studies, Charles University, Prague and Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague); Roman Horvath (Czech National Bank and Institute of Economic Studies, Charles University, Prague); Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment- based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting.
    Keywords: Taylor rule, inflation targeting, monetary policy, time-varying parameter model,endogenous regressors.
    JEL: E43 E52 E58
    Date: 2010–09
  4. By: NUTAHARA Kengo
    Abstract: A news-driven business cycle is a positive comovement of consumption, output, labor, and investment from the news about the future. It is well-known that the standard real business cycle model cannot generate it. In this paper, we show that nominal rigidities, especially sticky prices, can cause it in an estimated medium-scale DSGE economy. We also find that sticky wages cannot cause it in our economy.
    Date: 2010–12
  5. By: Paul Castillo B. (Banco Central de Reserva del Perú); Fernando Peréz F. (Banco Central de Reserva del Perú); Vicente Tuesta R. (Prima AFP y CENTRUM Católica.)
    Abstract: This paper presents an extension of the model proposed by Bernanke and Mihov (1998), which includes financial dollarization, in order to estimate the effects of monetary policy in Peru for the period 1995-2009. The results show that the effects of monetary policy in a dollarized economy are similar to the ones observed in non-dollarized economies. In particular, after a restrictive monetary policy shock, interest rates rise, monetary aggregates decrease, exchange rate drops, aggregate demand slows and inflation diminishes. However, exchange rate shocks are important determinants of the money market. Additionally, there is evidence that after the adoption of the inflation targeting regime in 2002 the Central Bank reacts more importantly to money demand shocks than to exchange rate shocks.
    Keywords: Mercado Interbancario, Mecanismo de transmisión, Choques Monetarios, Choques Externos.
    JEL: E51 E52 E58 F31 F41
    Date: 2010
  6. By: Engin Kara (Economics Department, University of Bristol, 8 Woodland Road, BS8 1TN, Bristol.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a small-scale DSGE model which embeds a demographic structure within a monetary policy framework. We extend the tractable, though non-monetary overlapping-generations model of Gertler (1999) and present a small synthesis model which combines the set-up of Gertler with a New-Keynesian structure, implying that the short-run dynamics related to monetary policy are similar to the paradigm summarized in Woodford (2003). In sum, the model offers a New-Keynesian platform which can be used to investigate in a closed economy set-up the response of macroeconomic variables to demographic shocks, similar to technology, government spending or monetary policy shocks. Empirically, we use a calibrated version of the model to discuss a number of macroeconomic scenarios for the euro area with a horizon of around 20 years. The main finding is that demographic changes, while contributing slowly over time to a decline in the equilibrium interest rate, are not visible enough within the time horizon relevant for monetary policy-making to require monetary policy reactions. JEL Classification: D58, E21, E50, E63.
    Keywords: Demographic change, Monetary policy, DSGE modelling.
    Date: 2010–12
  7. By: Peter Claeys (Universitat de Barcelona,); Alessandro Maravalle (University of the Basque Country,)
    Abstract: The Financial Crisis has hit particularly hard countries like Ireland or Spain. Procyclical fiscal policy has contributed to a boom-bust cycle that undermined fiscal positions and deepened current account deficits during the boom. We set up an RBC model of a small open economy, following Mendoza (1991), and introduce the effect of fiscal policy decisions that change over the cycle. We calibrate the model on data for Ireland, and simulate the effect of different spending policies in response to supply shocks. Procyclical fiscal policy distorts intertemporal allocation decisions. Temporary spending boosts in booms spur investment, and hence the need for external finance, and so generates very volatile cycles in investment and the current account. This economic instability is also harmful for the steady state level of output. Our model is able to replicate the relation between the degree of cyclicality of fiscal policy, and the volatility of consumption, investment and the current account observed in OECD countries.
    Keywords: RBC, current account, small open economy, fiscal rule, spending
    JEL: E32 E62 F41 H62
    Date: 2010–12–02
  8. By: NUTAHARA Kengo
    Abstract: A recent study shows that equilibrium indeterminacy arises if monetary policy responds to asset prices, especially share prices, in a sticky-price economy. We show that equilibrium indeterminacy never arise if the working capital of firms is subject to their asset values by financial frictions.
    Date: 2010–12
  9. By: Peter Howells (University of the West of England, Bristol); Iris Biefang Frisancho-Mariscal (University of the West of England, Bristol)
    Abstract: In the fifteen years leading up to the financial crisis in 2008, there emerged a great deal of agreement on the optimal design of monetary policy. This policy ‘consensus’ was accompanied also by a widely-shared view of how macroeconomies worked as the ‘Keynesian’ versus ‘monetarist’ debates slipped into the past. This paper charts the emergence of this consensus and then looks at the way in which the apparently settled ideas of monetary policy have been disrupted by recent events. In particular, it looks at the way in which the crisis has forced a revision of both the targets and instruments of monetary policy.
    Keywords: Monetary policy, quantity theory, Phillips curve
    JEL: E4 E5
    Date: 2010–12
  10. By: Luis Catão; Roberto Chang
    Abstract: In recent years, large fluctuations in world food prices have renewed interest in the question of how monetary policy in small open economies should react to imported price shocks. We address this issue in an open economy setting similar to previous ones except that food plays a distinctive role in utility. A key novelty of our model is that the real exchange rate and the terms of trade can move in opposite directions in response to food price shocks. This has several consequences for observables and for policy. Under a variety of model calibrations, broad CPI targeting emerges as welfare-superior to alternative policy rules once the variance of food price shocks is as large as in real world data.
    JEL: E5 E6 F41
    Date: 2010–12
  11. By: Alexandros Kontonikas; Alexandros Kostakis
    Abstract: This study utilizes a macro-based VAR framework to investigate whether stock portfolios formed on the basis of their value, size and past performance characteristics are affected in a differential manner by unexpected US monetary policy actions during the period 1967-2007. Full sample results show that value, small capitalization and past loser stocks are more exposed to monetary policy shocks in comparison to growth, big capitalization and past winner stocks. Subsample analysis, motivated by variation in the realized premia and parameter instability, reveals that monetary policy shocks’ impact on these portfolios is significant and pronounced only during the pre-1983 period.
    Keywords: Monetary policy, Federal funds rate, Market anomalies, Credit channel, Risk premia
    JEL: E44 E58 G12
    Date: 2010–11
  12. By: António Afonso; Manuel M. F. Martins
    Abstract: We study fiscal behaviour and the sovereign yield curve in the U.S. and Germany in the period 1981:I-2009:IV. The latent factors, level, slope and curvature, obtained with the Kalman filter, are used in a VAR with macro and fiscal variables, controlling for financial stress conditions. In the U.S., fiscal shocks have generated (i) an immediate response of the short-end of the yield curve, associated with the monetary policy reaction, lasting between 6 and 8 quarters, and (ii) an immediate response of the longend of the yield curve, lasting 3 years, with an implied elasticity of about 80% for the government debt ratio shock and about 48% for the budget balance shock. In Germany, fiscal shocks entail no significant reactions of the latent factors and no response of the monetary policy interest rate. In particular, while (i) budget balance shocks created no response from the yield curve shape, (ii) surprise increases in the debt ratio caused some increase in the short-end and the long-end of the yield curve in the following 2nd and 3rd quarters.
    Keywords: yield curve, fiscal policy, financial markets.
    JEL: E43 E44 E62 G15 H60
    Date: 2010–11
  13. By: Yannick Lucotte (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)
    Abstract: Over the last decade, a growing number of emerging countries has adopted inflation targeting as monetary policy framework. In a recent paper, Freedman and Laxton (2009) ask the question “Why Inflation Targeting?”. This paper empirically investigates this question by analyzing a large set of institutional and political factors potentially associated with a country's choice of adopting IT. Using panel data on a sample of thirty inflation targeting and non-inflation emerging countries, for the period 1980-2006, our results suggest that central bank independence, policy-makers' incentives, and characteristics of political system play an important role in the choice of IT, while the level of financial development and political stability do not seem to matter. Empirical findings are confirmed by extensive robustness tests.
    Keywords: Inflation targeting; central bank independence; financial development; political institutions; emerging countries
    Date: 2010
  14. By: Sa, Filipa (Trinity College, University of Cambridge; IZA); Wieladek, Tomasz (Bank of England)
    Abstract: A range of hypotheses have been put forward to explain the boom in house prices that occurred in the United States from the mid-1990s to 2007. This paper considers the relative importance of two of these hypotheses. First, global imbalances increased liquidity in the US financial system, driving down long-term real interest rates. Second, the Federal Reserve kept interest rates low in the first half of the 2000s. Both factors reduced the cost of borrowing and may have encouraged the boom in house prices. This paper develops an empirical framework to separate the relative contributions of these two factors to the US housing market. The results suggest that capital inflows to the United States played a bigger role in generating the increase in house prices than monetary policy loosening. Using VAR methods, we find that compared to monetary policy, the effect of a capital inflows shock on US house prices and residential investment is about twice as large and substantially more persistent. Results from variance decompositions suggest that, at a forecast horizon of 20 quarters, capital flows shocks explain 15% of the variation in real house prices, while monetary policy shocks explain only 5%. In a simple counterfactual exercise, we find that if the ratio of the current account deficit to GDP had remained constant since the end of 1998, real house prices by the end of 2007 would have been 13% lower. Similar exercises with constant policy rates and the path of policy rates implied by the Taylor rule deliver smaller effects.
    Keywords: house prices; capital inflows; monetary policy
    JEL: E50 F30
    Date: 2010–11–29
  15. By: Greg Hannsgen; Dimitri B. Papadimitriou
    Abstract: In recent years, the US public debt has grown rapidly, with last fiscal year's deficit reaching nearly $1.3 trillion. Meanwhile, many of the euro nations with large amounts of public debt have come close to bankruptcy and loss of capital market access. The same may soon be true of many US states and localities, with the governor of California, for example, publicly regretting that he has been forced to cut bone, and not just fat, from the state's budget. Chartalist economists have long attributed the seemingly limitless borrowing ability of the US government to a particular kind of monetary system, one in which money is a "creature of the state" and the government can create as much currency and bank reserves as it needs to pay its bills (this is not to say that it lacks the power to impose taxes). In this paper, we examine this situation in light of recent discussions of possible limits to the federal government's use of debt and the Federal Reserve's "printing press." We examine and compare the fiscal situations in the United States and the eurozone, and suggest that the US system works well, but that some changes must be made to macro policy if the United States and the world as a whole are to avoid another deep recession.
    Keywords: Budget Deficit; Federal Debt; Debt Tolerances
    JEL: E00 E32 E50 E62 E63
    Date: 2010–12
  16. By: Kafayat Amusa (Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Shaakira Karaolia (Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa); Beatrice D. Simo Kengne (Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa)
    Abstract: This paper evaluates the hypothesis of long-run super-neutrality of money (LRSN) within the context of the South African economy. The long-run impact of inflation on the interest rate and subsequently, output is estimated by employing a trivariate structural vector autoregression model. The estimation results suggest that the hypothesis of LRSN cannot be rejected, thereby potentially supporting the arguments asserted by Sidrauski (1967).
    Keywords: money neutrality, structural vector autoregression
    JEL: E5 E31
    Date: 2010–12
  17. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: Using loan level data, we investigate the lending behavior of a large subprime mortgage issuer prior to its bankruptcy in the beginning of 2007. In 2004, this firm suddenly started to massively issue new loans contracts that featured deferred amortization ("interestonly loans") to high income and high FICO households. We document that these loans were not only riskier, but also that their returns were more sensitive to real estate prices than standard contracts. Implicitly, this lender dramatically increased its exposure to its own legacy asset, which is what a standard model of portfolio selection in distress would predict. We provide additional evidence on New Century’s lending behavior, which are consistent with a risk shifting strategy. Finally, we are able to tie this sudden change in behavior to the sharp monetary policy tightening implemented by the Fed in the spring of 2004. Our findings shed new light on the relationship between monetary policy and risk taking by financial institutions.
    Date: 2010–09
  18. By: Ashima Goyal; Sanchit Arora (Indira Gandhi Institute of Development Research)
    Abstract: We study, with daily and monthly data sets, the impact of conventional monetary policy measures such as interest rates, intervention and other quantitative measures, and of Central Bank communication on exchange rate volatility. Since India has a managed float, we also test if the measures affect the level of the exchange rate. Using dummy variables in the best of an estimated family of GARCH models, we find forex market intervention to be the most effective of all the CB instruments evaluated for the period of analysis. We also find that CB communication has a large potential but was not effectively used.
    Keywords: exchange rate volatility, monetary policy, intervention, communication, GARCH
    JEL: E52 E58 F31
    Date: 2010
  19. By: Jorge Avila
    Abstract: The paper holds that the country risk premium is the triggering factor of the business cycle in a small, financially open and highly volatile economy like that of Argentina. A rise of the premium determines a capital outflow, an aggregate demand contraction and a recession; a fall of the premium determines a capital inflow, an aggregate demand expansion and a boom. We build a model where country risk plays a central role in macroeconomic equilibrium. We evaluate the empirical relationship between country risk and GDP, consumption, investment, and the current account balance. We compare our country-risk model with those of various schools of macroeconomic thought. Main conclusions are: a) Country-risk perceptions of foreign and local investors determine the fraction of world income they like to spend in the small country and the country’s GDP adjusts passively to that fraction. b) Country risk causes a sort of labor unemployment that resembles involuntary unemployment. c) Openness softens the impact of a rise in country risk. d) Argentine time series for the period 1985-97 show a strong negative correlation between country risk and those aggregate variables, with causality going from the former to the latter.
    JEL: E32 F41
    Date: 2010–11
  20. By: Aloui, Rym
    Abstract: In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a micro-founded framework which combines time-varying markups, endogenous labor supply and overlapping generations based on infinitely-lived families. The main contribution of this paper is to provide a new transmission mechanism of public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of debt-financed tax cuts. We show that the interest rate rises, entailing higher markups, which imply a fall in employment and consumption. It is particularily noteworthy that, even without capital, a crowding out effect of government debt is obtained in the long run. However, the short-run expansionary effect of debt-financed tax cuts, which would eventually be expected in a non-Ricardian framework, fails to occur. This is due to our flexible-price framework. On the other hand, we show that incorporating sticky prices in our model causes debt-financed tax cuts to have a short-run expansionary effect while preserving the long-run contractionary effect. --
    Keywords: Wealth Effects,Fiscal Policy,Public Debt Shock,Deep Habits,Overlapping Generations,Monopolistic Competition
    JEL: E63 E52
    Date: 2010
  21. By: Ansgar Belke
    Abstract: The recent extensive package introduced by the Commission is the "most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union. Broader and enhanced surveillance of fiscal policies, but also macroeconomic policies and structural reforms are sought in the light of the shortcomings of the existing legislation. New enforcement mechanisms are foreseen for non-compliant Member States. In this very crucial and important package of 6 legislative dossiers this paper paper tries to identify critical missing or redundant and/or unworkable elements within the Commission package. Moreover it checks what (if anything) is missing outside and beyond the proposals in order to make the whole package of governance reform complete and workable as, for instance, crisis resolution mechanisms and debt restructuring, EMF, project bonds and Eurobonds.
    Keywords: EU governance, European Council, European Financial Stability Facility, European Monetary Fund, policy coordination, scoreboard, Stability and Growth Pact
    JEL: E61 E62 P48
    Date: 2010
  22. By: Flávio de Freitas Val; Claudio Henrique da Silveira Barbedo; Marcelo Verdini Maia
    Abstract: The trade volume of inflation indexed bonds has grown substantially in the treasury debt market. These bonds have been used as an important instrument for both diversifying investor´s portfolio, for managing firms´ liabilities and, mainly, for extracting inflation expectations by policymakers. This paper adds to the literature in twofold. First, we apply methodologies to obtain inflation expectations. Thus, we modified the method used in Durham (2007) to estimate the inflation risk premium. Second, we apply these methods in the Brazilian debt market for inflation indexed bonds issued from 2006 to 2008. Our results show that these methods perform better about inflation expectations, providing a more robust support for policymakers´ decisions.
    Date: 2010–11
  23. By: Erick Lahura (Central Bank of Peru and LSE)
    Abstract: The main goal of this paper is to analyze the effects of monetary policy shocks in Peru, taking into account two important issues that have been addressed separately in the VAR literature. The first one is the difficulty to identify the most appropriate indicator of monetary policy stance, which is usually assumed rather than determined from an estimated model. The second one is the fact that monetary policy decisions are based on the analysis of a wide range of economic and financial data, which is at odds with the small number of variables specified in most VAR models. To overcome the first issue, Bernanke and Mihov (1998) proposed a semi-structural VAR model from which the indicator of monetary policy stance can be derived rather than assumed. Meanwhile, the data problem has been resolved recently by Bernanke, Boivin and Eliasz (2005) using a Factor-Augmented Vector Autoregressive (FAVAR) model. In order to capture these two issues simultaneously, we propose an extension of the FAVAR model that incorporates a semi-structural identification approach a la Bernanke and Mihov, resulting in a VAR model that we denominate SS-FAVAR. Using data for Peru, the results show that the SS-FAVAR's impulse-response functions (IRFs) provide a more coherent picture of the effects of monetary policy shocks compared to the IRFs of alternative VAR models. Furthermore, it is found that innovations to nonborrowed reserves can be identified as monetary policy shocks for the period 1995-2003.
    Keywords: VAR, FAVAR, Monetary Policy, Semi-Structural Identification.
    JEL: C32 C43 E50 E52 E58
    Date: 2010–08
  24. By: Marika Karanassou (School of Economics and Finance, Queen Mary, University of London); Hector Sala Lorda (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: This paper challenges the prevailing view of the neutrality of the labour income share to labour demand, and investigates its impact on the evolution of employment. Whilst maintaining the assumption of a unitary long-run elasticity of wages with respect to productivity, we demonstrate that productivity growth affects the labour share in the long run due to frictional growth (that is, the interplay of wage dynamics and productivity growth). In the light of this result, we consider a stylised labour demand equation and show that the labour share is a driving force of employment. We substantiate our analytical exposition by providing empirical models of wage setting and employment equations for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960-2008 period. Our findings show that the timevarying labour share of these countries has significantly influenced their employment trajectories across decades. This indicates that the evolution of the labour income share (or, equivalently, the wage-productivity gap) deserves the attention of policy makers.
    Keywords: Wages, productivity, labour income share, employment.
    JEL: E24 E25 O47
    Date: 2010–07
  25. By: Marcela Eslava; Arturo Galindo; Marc Hofstetter; Alejandro Izquierdo
    Abstract: Using a rich dataset of Colombian manufacturing establishments between 1995 and 2004, we illustrate potential scarring effects of recessions operating through credit constraints. In contrast with the view that recessions are times of cleansing, we find that financially constrained businesses might be forced to exit the market during recessions even if they are highly productive. For instance, during recessions, an establishment with TFP at the lowest 10th percentile but not facing credit constraints has the same exit probability as a constrained plant with TFP at least as high as the 39th percentile. The gap is much smaller during expansions. The contribution of the paper is threefold. First, it evaluates the role played by credit constraints in explaining firm dynamics throughout the business cycle, a phenomenon the literature has dealt with mostly from a theoretical standpoint. Second, it sheds light on the implied long-run consequences of exits induced by lack of credit on efficiency. Finally, it is the only study we know of providing direct evidence to judge the empirical merits of proposed micro foundations behind the long-run consequences of crises.
    Date: 2010–08–31
  26. By: Angelo Melino (University of Toronto; The Rimini Centre for Economic Analysis (RCEA))
    Abstract: The following is a report from a panel of the same title held at the Rimini Conference in Economics and Finance, Rimini, Italy, 10-13 June 2010, and organized by the Rimini Conference for Economic Analysis (RCEA). Panel Chair: Angelo Melino (University of Toronto and RCEA). Panelists: David Andolfatto (Vice President and Economist, Federal Reserve Bank of St. Louis; Professor of Economics, Simon Fraser University; RCEA), David E.W. Laidler (Professor Emeritus, University of Western Ontario; Fellow-in-Residence, C.D. Howe Institute; FRSC; Honorary Senior Fellow RCEA), John Murray (Deputy Governor, Bank of Canada).
    Date: 2010–01
  27. By: Mercedes García-Escribano (International Monetary Fund)
    Abstract: Peru has successfully pursued a market-driven financial de-dollarization during the last decade. Dollarization of credit and deposit of commercial banks—across all sectors and maturities—has declined, with larger declines for commercial credit and time and saving deposits. The analysis presented in this paper confirms that de-dollarization has been driven by macroeconomic stability, introduction of prudential policies to better reflect currency risk (such as the management of reserve requirements), and the development of the capital market in soles. Further de-dollarization efforts could focus on these three fronts. Given the now consolidated macroeconomic stability, greater exchange rate flexibility could foster de-dollarization; additional prudential measures could further discourage banks’ lending and funding in foreign currency; while further capital market development in domestic currency would help overall financial de-dollarization.
    Keywords: Dollarization; de-dollarization; monetary policy
    JEL: E50 G20 G21 G28
    Date: 2010–11
  28. By: Francisco Vazquez; Benjamin M. Tabak; Marcos Souto
    Abstract: This paper proposes a model to conduct macro stress test of credit risk for the banking system based on scenario analysis. We employ an original bank level data set with disaggregated credit loans for business and consumer loans. The results corroborate the presence of a strong procyclical behavior of credit quality, and show a robust negative relationship between (the logistic transformation of) NPLs and GDP growth, with a lag response up to three quarters. The models also indicate substantial variations in the cyclical behavior of NPLs across credit types. Stress tests suggest that the banking system is well prepared to absorb the credit losses associated with a set of distressed macroeconomic scenarios without threatening financial stability.
    Date: 2010–11
  29. By: Arghyrou, Michael G (Cardiff Business School); Tsoukalas, John D.
    Abstract: This article, originally published at on 7 February 2010, spells out our two-currency EMU proposal as a plan of last resort for resolving the present EMU sovereign-debt crisis. The key ingredients of our proposal involve a temporary split of the euro into two currencies, both run by the European Central Bank. The hard euro will be maintained by the core-EMU members whereas periphery EMU countries will adopt for a suitable period of time the weak euro. All existing debts will continue to be denominated in strong-euro terms. The plan involves a one-off devaluation of the weak euro versus the strong one, simultaneously with the introduction of far-reaching reforms and rapid fiscal consolidation in the periphery EMU countries. We argue that due to enhanced market credibility, our two-tier euro plan has a realistic chance of success in resolving the EMU crisis, if all other approaches fail.
    Keywords: euro; two-currency EMU
    JEL: E44 F30
    Date: 2010–11
  30. By: Jean-Marc Fournier; Isabell Koske
    Abstract: This paper uses a simple dynamic stochastic general equilibrium model to explore the qualitative impact of productivity shocks on current account positions via their impact on the saving behaviour of households. The analysis shows that the direction of the impact is ambiguous from a theoretical point of view. This impact depends in particular on consumer’s willingness to shift consumption over time relative to their willingness to shift consumption between different types of goods, on whether they believe the shock to be temporary or permanent, and on the sector in which the shock occurs.<P>Un modèle simple reliant la productivité, l'épargne et la balance courante<BR>Cet article explore l’effet qualitatif de chocs de productivité sur la balance courante, via leur impact sur le comportement d’épargne des ménages, avec un modèle d’équilibre général stochastique simple. Cette analyse montre que le sens de l’effet est théoriquement ambigu. Cet effet dépend de la propension des consommateurs à modifier le niveau de leur consommation au cours du temps comparée à leur propension à modifier leur panier de biens, de la croyance par les agents que le choc est permanent ou temporaire, ou encore du secteur dans lequel le choc se produit.
    Keywords: productivity, current account adjustment, saving, productivité, épargne, ajustement de la balance courante
    JEL: E21 F32 O40
    Date: 2010–11–23
  31. By: Michel Beine (CREA, University of Luxembourg and CES-Ifo); Elisabetta Lodigiani (CREA, University of Luxembourg and Centro Studi Luca d’Agliano); Robert Vermuelen (CREA, University of Luxembourg and Maastricht University)
    Abstract: Remittances have greatly increased during recent years, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels that turn to be either less expensive or less risky. One way of doing so is to increase their financial openness, but this policy option might generate additional costs in terms of macroeconomic volatility. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We apply a two-step method akin to two stage least squares to deal with the endogeneity of remittances and potential measurement errors. We find a strong positive statistical and economic effect of remittances on financial openness.
    Keywords: remittances, nancial openness, government policy
    JEL: E60 F24 F41 O10
    Date: 2010–11–30
  32. By: Albert Touna Mama; Jacques Ewoudou
    Abstract: Since the seminal work of Jappelli (1990), it has become standard to identify as liquidity-constrained, borrowers who were either turned down for credit or did not apply because they might be turned down. In this paper, we show that the so-called “denied or discouraged” proxy does not capture accurately consumers’ credit access when consumers seek credit to finance expenditure on durable goods. Our sample is drawn from the Panel Study of Income Dynamics. We document systematic misclassification of unconstrained households as constrained. We argue that: for durables, this proxy captures best the intensity put forth by the borrower when shopping for a loan.
    Keywords: Borrowing constraints; Mortgage loans; Consumer search
    JEL: E21 D12
    Date: 2010
  33. By: W.Adrian Risso; Edgar J. Sanchez Carrera
    Abstract: This paper studies the long-run relationship between economic growth and income inequality in China during the pre- and post-reform periods: 1952-1978 and 1979-2007, respectively. Income inequality is measured by the Gini coe¢ cient and economic growth by real per capita GDP. The cointegration analysis shows that, for both periods the relationship is positive and the inequality-growth elasticity has grown in the second period. In addition, a more robust test of Granger-causality suggested by Toda and Yamamoto (1995) indicates that whereas in the .rst period there is unidirectional causality from inequality to growth, there is no directional causality in the second period.
    Keywords: Cointegration; Economic Growth; Gini Coe¢ cient.
    JEL: E62 N10 O11 O15 O40 R12
    Date: 2010–09
  34. By: Alessandra Bonfiglioli; Gino Gancia
    Abstract: This paper formalizes in a fully-rational model the popular idea that politicians perceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters. To do so, it proposes a model of elections where political ability is ex-ante unknown and investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians make too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannot be fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to the conventional wisdom, uncertainty makes reforms more politically viable and may, under some conditions, increase social welfare. The model is then used to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistent with a number of empirical regularities on the determinants of reforms and reelection. They are also consistent with a new stylized fact documented in this paper: economic uncertainty is associated to more reforms in a panel of 20 OECD countries.
    Keywords: Elections, Reforms, Asymmetric Information, Uncertainty.
    JEL: E6 H3
    Date: 2010–01

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