nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒01‒16
34 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation Targeting By Lars E.O. Svensson
  2. Learning about monetary policy rules when labor market search and matching frictions matter By Takushi Kurozumi; Willem Van Zandweghe
  3. Monetary Policy, inflation and unemployment By Nicolas Groshenny
  4. Macro-finance models of interest rates and the economy By Hess Chung; Jean-Philippe Laforte; David Reifschneider; John C. Williams
  5. Determinacy under inflation targeting interest rate policy in a sticky price model with investment (and labor bargaining) By Takushi Kurozumi; Willem Van Zandweghe
  6. تجربة الاتحاد النقدي الأوروبي في مجال التنسيق بين السياستين المالية والنقدية By Kamal, Mona
  7. How Are Inflation Targets Set? By Roman Horváth; Jakub Matějů
  8. The Impact of Oil Shocks on Qatar’s GDP By Al-mulali, Usama; Che Sab, Che Normee
  9. Fiscal Policy Rules and the Sustainability of Public Debt in Europe By Stefan Collignon
  10. The stability and growth pact: lessons from the great recession. By Larch, Martin; Van den Noord, Paul; Jonung, Lars
  11. Expansionary Monetary Policy Under Liquidity Trap: 2009 in Light of 1929. A Counterfactual Analysis. By Claude Diebolt; Antoine Parent; Jamel Trabelsi
  12. The Employment Effects of Fiscal Policy: How Costly are ARRA Jobs? By Byron Gangnes
  13. Investment-specific technology shocks and consumption By Francesco Furlanetto; Martin Seneca
  14. The Propagation of Regional Recessions By James D. Hamilton; Michael T. Owyang
  15. Fiscal Policy in Good and Bad Times By Candelon Bertrand; Lieb Lenard
  16. The Threat of 'Currency Wars': a European Perspective By Zsolt Darvas; Jean Pisani-Ferry
  17. Revisiting the 1929 Crisis: Was the Fed Pre-Keynesian? New Lessons from the Past. By Claude Diebolt; Antoine Parent; Jamel Trabelsi
  18. The Demand for Liquid Assets, Corporate Saving, and Global Imbalances By Bacchetta Philippe; Benhima Kenza
  19. Real Business Cycle Models of the Great Depression. By Luca Pensieroso
  20. The General Theory of Employment, Interest, and Money After 75 Years: The Importance of Being in the Right Place at the Right Time By Matthew N. Luzzetti; Lee E. Ohanian
  21. Capital taxation during the U.S. Great Depression By Ellen R. McGrattan
  22. Regional Economic Resilience, Hysteresis and Recessionary Shocks By Ron Martin
  23. Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices By Saroj Bhattarai; Raphael Schoenle
  24. Does Fiscal Policy Matter? Blinder and Solow Revisited By Roger E.A. Farmer; Dmitry Plotnikov
  25. A World Macro Saving Fact and an Explanation By Ray C. Fair
  26. Macroeconomic and policy implications of population aging in Brazil By Jorgensen, Ole Hagen
  27. The minimum liquidity deficit and the maturity structure of central banks' open market operations: lessons from the financial crisis By Jens Eisenschmidt; Cornelia Holthausen
  28. What drives core inflation? A dynamic factor model analysis of tradable and nontradable prices By Michael Kirker
  29. A Multi-Sector Version of the Post-Keynesian Growth Model By Ricardo Azevedo Araujo; Joanílio Rodolpho Teixeira
  30. Yield Curve Analysis: Choosing the optimal maturity date of investments and financing By Lenz, Rainer
  31. Fire Sales in Finance and Macroeconomics By Andrei Shleifer; Robert W. Vishny
  32. A Positive Framework to Analyze Sovereign Bail-outs within the EMU By Christian Fahrholz; Cezary Wójcik
  33. Trade and the Global Recession By Jonathan Eaton; Samuel Kortum; Brent Neiman; John Romalis
  34. A theoretical foundation for the Nelson and Siegel class of yield curve models, and an empirical application to U.S. yield curve dynamics By Leo Krippner

  1. By: Lars E.O. Svensson
    Abstract: Inflation targeting is a monetary-policy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and has, as of 2010, been adopted by about 25 industrialized and emerging-market economies. The chapter discusses the history, macroeconomic effects, theory, practice, and future of inflation targeting.
    JEL: E42 E43 E47 E52 E58
    Date: 2010–12
  2. By: Takushi Kurozumi; Willem Van Zandweghe
    Abstract: This paper examines implications of incorporating labor market search and matching frictions into a sticky price model for determinacy and E-stability of rational expectations equilibrium (REE) under interest rate policy. When labor adjustment takes place solely at the extensive margin, forecast-based policy that meets the Taylor principle is likely to induce indeterminacy and E-instability, regardless of whether it is strictly or flexibly inflation targeting. When labor adjustment takes place at both the extensive and intensive margins, the strictly inflation-forecast targeting policy remains likely to induce indeterminacy, but it generates a unique E-stable fundamental REE as long as the Taylor principle is satisfied. These results suggest that introducing the search and matching frictions alter determinacy properties of the strictly inflation-forecast targeting policy, but not its E-stability properties in the presence of the intensive margin of labor.
    Date: 2010
  3. By: Nicolas Groshenny (Reserve Bank of New Zealand)
    Abstract: To what extent did deviations from the Taylor rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, this paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1 - 2006:Q4 The paper finds that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero.
    JEL: E32 C51 C52
    Date: 2010–12
  4. By: Hess Chung; Jean-Philippe Laforte; David Reifschneider; John C. Williams
    Abstract: Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems. This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries. We conduct our analysis using a set of structural and time series statistical models. We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models. In contrast, the decline in inflation has been less surprising. We identify a number of factors that help to account for the degree to which models were surprised by recent events. First, uncertainty about model parameters and latent variables, which were typically ignored in past research, significantly increases the probability of hitting the ZLB. Second, models that are based primarily on the Great Moderation period severely understate the incidence and severity of ZLB events. Third, the propagation mechanisms and shocks embedded in standard DSGE models appear to be insufficient to generate sustained periods of policy being stuck at the ZLB, such as we now observe. We conclude that past estimates of the incidence and effects of the ZLB were too low and suggest a need for a general reexamination of the empirical adequacy of standard models. In addition to this statistical analysis, we show that the ZLB probably had a first-order impact on macroeconomic outcomes in the United States. Finally, we analyze the use of asset purchases as an alternative monetary policy tool when short-term interest rates are constrained by the ZLB, and find that the Federal Reserve's asset purchases have been effective at mitigating the economic costs of the ZLB. In particular, model simulations indicate that the past and projected expansion of the Federal Reserve's securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1-1/2 percentage points by 2012. In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.
    Keywords: Inflation (Finance) ; Macroeconomics - Econometric models
    Date: 2011
  5. By: Takushi Kurozumi; Willem Van Zandweghe
    Abstract: In a sticky price model with investment spending, recent research shows that inflation-forecast targeting interest rate policy makes determinacy of equilibrium essentially impossible. We examine a necessary and sufficient condition for determinacy under interest rate policy that responds to a weighted average of an inflation forecast and current inflation. This condition demonstrates that the average-inflation targeting policy ensures determinacy as long as both the response to average inflation and the relative weight of current inflation are large enough. We also find that interest rate policy which responds solely to past inflation guarantees determinacy when its response satisfies the Taylor principle and is not large. These results still hold even when wages and hours worked are determined by Nash bargaining.
    Date: 2010
  6. By: Kamal, Mona
    Abstract: This study presents the experience of the European Monetary Union (EMU) countries as an example for external coordination of fiscal and monetary policies under a fixed exchange rate regime. The Euro area is considered as a unique example since the coordination of the policies is achieved through an independent European Central Bank and the fiscal authorities of the member countries. This study reviews the coordinating arrangements and the mechanism required for the effectiveness of policy coordination.
    Keywords: The coordination of monetary and fiscal policies; the European Monetary Union(EMU)
    JEL: E0 E61 E60
    Date: 2010–12
  7. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Jakub Matějů (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: This paper aims to contribute to a better understanding on how inflation targets are set. For this reason, we first gather evidence from official central bank and government publications and from a questionnaire sent to central banks on how inflation targets are set; we then estimate the determinants of the level of inflation target in 19 inflation targeting countries using unbalanced panel interval regressions (to deal with the issue that targets are typically set as a range rather than as a point). Inflation targets are found to reflect macroeconomic fundamentals. Higher level as well as higher variability of inflation are associated with higher target. The setting of the inflation target is also found to have an important international dimension, as higher world inflation is positively correlated with inflation targets. Rapidly growing countries exhibit higher inflation targets. Our results also suggest that the larger width of inflation target is set in a more volatile macroeconomic environment. We find that central bank credibility is negatively associated with the level of inflation target, suggesting that less credible central banks are likely to recognize the risks related to anchoring inflation expectations at low levels. On the other hand, government party orientation does not matter even in less independent central banks.
    Keywords: inflation targeting, central bank, inflation, credibility, independence
    JEL: E31 E42 E52 E58
    Date: 2011–01
  8. By: Al-mulali, Usama; Che Sab, Che Normee
    Abstract: This study examines the impact of oil shocks on Qatar’s gross domestic product using time series data from the period 1970-2007 covering all the oil shocks. The Johansen-Juselius (JJ) cointegration test and VECM Granger causality test are employed in this study. From the results we concluded that oil price has a positive effect on Qatar’s gross domestic product, but at the expense of higher inflation. Qatar seems to have suffered from financial surpluses and rapid economic growth caused by sharp increases in the oil price. At the same time, with a fixed exchange regime and tight monetary policy to deal with these events, this has caused the price of assets to increase sharply, leading to high levels of inflation in Qatar. Based on the results, we recommend that the Qatari currency (riyal) be pegged to a basket of currencies so as to increase the role of monetary policy to deal with the external shocks (oil shocks).
    Keywords: Qatar;Oil Shocks;GDP;VAR model
    JEL: E00 Q4
    Date: 2010–10–24
  9. By: Stefan Collignon
    Abstract: In this paper, the sustainability of public debt is interpreted as the result of the interaction of fiscal policy with the economic environment, and not as a statistical concept as in most of the recent literature. If debt must not explode over time, policy makers have to respond to the changing conditions in the macroeconomic environment. This paper defines the conditions which will ensure compliance of fiscal policy with the intertemporal budget constraint in the context of Europe’s fiscal policy rules. The empirical part of the paper reveals that European public debt is sustainable in this respect, but questions regarding liquidity remain.
    Keywords: economic growth; economic integration; economic performance; Euro; fiscal policy; stability pact
    Date: 2010–12–15
  10. By: Larch, Martin; Van den Noord, Paul; Jonung, Lars
    Abstract: While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.
    Keywords: Stability and Growth Pact; EU; Europe; the euro; Great Recession; fiscal sovereignty
    JEL: E62 E63 H6
    Date: 2010–11
  11. By: Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.); Antoine Parent; Jamel Trabelsi
    Date: 2010
  12. By: Byron Gangnes (UHERO: Economic Research Organization at the University of Hawaii Research Organization)
    Abstract: The American Recovery and Reinvestment Act was intended to stimulate the U.S. economy and to create jobs. But at what cost? In this paper, we discuss the range of potential benefits and costs associated with counter-cyclical fiscal policy. Benefits and costs may be social, macroeconomic, systemic, and budgetary. They may depend importantly on timing and implementation. There may be very different implications over the business cycle horizon and in the medium to long term. We use simulations of the IHS Global Insight macro-econometric model to evaluate some of these costs and benefits in the U.S. economy, looking specifically at the impact of the ARRA program and potential alternative policies.
    Keywords: fiscal policy; employment; American Recovery and Reinvestment Act (ARRA); econometric model simulation.
    JEL: E37 E62 E65
    Date: 2010–12
  13. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Martin Seneca (Norges Bank (Central Bank of Norway))
    Abstract: Current business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that a positive investment-specific technology shock generally induces a negative consumption response. The objective of this paper is to investigate whether positive consumption responses to investment-specific technology shocks can be obtained in a modern business cycle model. We find that the answer to this question is yes. With a combination of nominal rigidities and non-separable preferences, the consumption response is positive for general parameterisations of the model.
    Keywords: Investment-specific technology shocks, Consumption, GHH preferences, Nominal rigidities, Comovement.
    JEL: E32
    Date: 2010–12–29
  14. By: James D. Hamilton; Michael T. Owyang
    Abstract: This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. We hypothesize that there exists a small number of cluster designations, with individual states in a given cluster sharing certain business cycle characteristics. We find that although oil-producing and agricultural states can sometimes experience a separate recession from the rest of the United States, for the most part, differences across states appear to be a matter of timing, with some states entering recession or recovering before others.
    JEL: E32
    Date: 2011–01
  15. By: Candelon Bertrand; Lieb Lenard (METEOR)
    Abstract: Using a Threshold Vector Autoregression framework identified via sign restrictions, we answer three questions: First, are fiscal policy shocks regime-dependent? Second, which variables are governing the regime? Third, what are the effects of fiscal policies on the main macroeconomic variables in each of these states? The linearity hypothesis is strongly rejected, with the two detected regimes clearly identifiable as recession and boom phases. We find that fiscal policy shocks have a stronger impact in times of economic stress than in times of expansion, and that direct spending policies are more efficient than tax-cut policies in stabilizing the economy in the short-run.
    Keywords: monetary economics ;
    Date: 2011
  16. By: Zsolt Darvas; Jean Pisani-Ferry
    Abstract: The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed’s policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro’s exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.
    Keywords: currency war, quantitative easing, currency intervention, international monetary system
    JEL: E52 E58 F31 F33
    Date: 2010–12–15
  17. By: Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.); Antoine Parent; Jamel Trabelsi
    Date: 2010
  18. By: Bacchetta Philippe; Benhima Kenza
    Abstract: In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with global imbalances and with a number of stylized facts such as high corporate saving rates in high-growth, high-investment, emerging countries.
    Keywords: capital flows; global imbalances; working capital; credit constraints
    JEL: E22 F21 F41 F43
    Date: 2010–12
  19. By: Luca Pensieroso (FNRS, IRES, Université catholique de Louvain (Belgique).)
    Abstract: This paper presents and assesses the recent application of models in the Real Business Cycle (RBC) tradition to the analysis of the Great Depression of the 1930s. The main conclusion is that the breaking of the depression taboo has been a desirable completion of the cliometric revolution: no historic event should be exempt from a dispassionate quantitative analysis. On the other hand, the substantive contribution of RBC models is not yet sufficient to establish a new historiography of the Great Depression.
    Date: 2010
  20. By: Matthew N. Luzzetti; Lee E. Ohanian
    Abstract: This paper studies why the General Theory had so much impact on the economics profession through the 1960s, why that impact began to wane in the 1970s, and why many economic policymakers cling to many of the tenets of the General Theory. We discuss three key elements along these lines, including the fact macroeconomic time series through the 1960s seemed to conform qualitatively to patterns discussed in the General Theory, that econometric developments in the area of simultaneous equations made advanced the General Theory to a quantitative enterprise, and that the General Theory was published during the Great Depression, when there was a search for alternative frameworks for understanding economic crises.
    JEL: E12 E32
    Date: 2010–12
  21. By: Ellen R. McGrattan
    Abstract: Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends.
    Date: 2010
  22. By: Ron Martin
    Abstract: The notion of 'resilience' has recently risen to prominence in several disciplines, and has also entered policy discourse. Yet the meaning and relevance of the concept are far from settled matters. This paper develops the idea of resilience and examines its usefulness as an aid to understanding the reaction of regional economies to major recessionary shocks. But in so doing, it is also argued that the notion of resilience can usefully be combined with that of hysteresis in order to more fully capture the possible reactions of regional economies to major recessions. These ideas are then used as the basis for a preliminary empirical analysis of the UK regions.
    Keywords: Regional economic growth, Recessionary shocks, Resilience Hysteresis
    JEL: E32 R0 R10 R11
    Date: 2010–12
  23. By: Saroj Bhattarai (Pennsylvania State University); Raphael Schoenle (Department of Economics, Brandeis University)
    Abstract: In this paper, we establish three new facts about price-setting by multi-product firms and contribute a model that can explain our findings. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multi-product firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings.
    Keywords: Multi-Product Firms, Number of Goods, State-Dependent Pricing, U.S. Producer Prices
    JEL: E30 E31 L11
    Date: 2010–12
  24. By: Roger E.A. Farmer; Dmitry Plotnikov
    Abstract: This paper uses the old-Keynesian representative agent model developed in Farmer (2010b) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer (2010b). However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.
    JEL: E0 E12 E62
    Date: 2010–12
  25. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: The world macro saving fact concerns the total financial saving of the world's private sector divided by world GDP. Relative to changes before 1994, there was a huge fall in this ratio between 1995 and 2000, a huge increase between 2000 and 2003, a huge fall between 2003 and 2006, and a huge increase between 2006 and 2009. The explanation is that these fluctuations appear to be driven in large part by fluctuations in stock prices and housing prices.
    Keywords: Financial saving, World economy
    JEL: E21 E44 F41
    Date: 2011–01
  26. By: Jorgensen, Ole Hagen
    Abstract: This paper analyzes the macroeconomic implications of population aging in Brazil. Three alternative yet complementary methodologies are adopted, and depending on policy responses to the fiscal implications of aging, there are two main findings: First, saving rates could increase and not necessarily fall as a consequence of aging in Brazil -- thus contradicting conventional views. Second, lifetime wealth across generations could increase -- as capital deepening generates a second demographic dividend. Two policy responses to aging are emphasized: First, a structural policy response of linking mandatory retirement (or entitlement) ages to increasing life expectancy would boost labor supply and reduce the fiscal costs of aging. Second, in terms of preferable parametric policy responses, the second demographic dividend will be promoted to the highest extent by keeping taxes and debt unchanged while allowing public pensions to adjust downward. Such a policy response would keep pensions from further crowding out private saving -- thus balancing capital accumulation with intergenerational income distribution. In conclusion, Brazil will not necessarily experience a fall in saving and growth, but if government policies are appropriately, adequately, and timely formulated, population aging is likely to lead to substantial capital deepening and increases in lifetime income, wealth, and welfare.
    Keywords: Emerging Markets,Access to Finance,Population Policies,Economic Theory&Research,Debt Markets
    Date: 2011–01–01
  27. By: Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Cornelia Holthausen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies the relationship between the size of the banking sector’s refinancing needs vis-à-vis the central bank and auction rates in its open market operations in times of financial market stress. In a theoretical model, it is found that marginal rates at central bank auctions may increase if the share of troubled banks becomes too high relative to the total size of the banking sector’s refinancing needs. An empirical analysis then aims at determining the size of open market operations needed to absorb large stress levels in interbank money markets and hence contain central bank auction rates. Finally, the paper analyses effects of the composition of open market operations of different maturities on auction rates. It is found that a too high share of longer-term refinancing induces a rise in auction rates which is undesirable. Therefore, the analysis suggests that there is a lower bound for the amount of liquidity provided through short-term operations. JEL Classification: G01, G10, G21.
    Keywords: central bank, money market, open market operations, financial crisis.
    Date: 2010–12
  28. By: Michael Kirker (Reserve Bank of New Zealand)
    Abstract: I develop a new estimate of core inflation for New Zealand and Australia based on a dynamic factor model. By using an over-identification restriction, the factors of the model are classified as tradable and nontradable factors. This innovation allows us to examine the relative contributions of tradable and nontradable prices towards core inflation. The results show that core inflation in both countries is primarily driven by the nontradable factor. The nontradable factor also explains significantly more of the variance in headline inflation relative to the tradable factor. Finally, both the tradable and nontradable factors show similar profiles across both countries suggesting common drivers.
    JEL: C11 E31 E52
    Date: 2010–12
  29. By: Ricardo Azevedo Araujo (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília); Joanílio Rodolpho Teixeira (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília)
    Abstract: With this inquiry we seek to develop a disaggregated version of the post-Keynesian approach to economic growth, by showing that indeed it can be treated as a particular case of the Pasinettian model of structural change and economic expansion. By relying upon vertical integration becomes possible to carry out the analysis initiated by Kaldor (1956) and Robinson (1956, 1962), and followed by Dutt (1984), Rowthorn (1982) and later Bhaduri and Marglin (1990) in a multi-sectoral model in which demand and productivity increase at different rates in each sector. By adopting this approach it is possible to show that the structural economic dynamics is conditioned not only to patterns of evolution of demand and diffusion of technological progress but also to the distributive features of the economy that can give rise to different regimes of economic growth. Besides we find it possible to determine the natural rate of profit that makes the mark-up rate to be constant over time.
    Keywords: Post-Keynesian growth model, structural change, multi-sector models
    JEL: E21 O11
    Date: 2010–11
  30. By: Lenz, Rainer
    Abstract: The shape of the yield curve determines the relationship between interest rate risk and return of investments. The analysis of the yield curve can help the investor or financier decide whether to take a short- or long term bond or loan. The management decision of choosing an optimal maturity depends on three form-giving factors of the yield curve: the 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: yield curve; term structure of interest rates; implicit forward rates; expectation theory; optimal maturity of investments;
    JEL: E43 G31 G3 G32
    Date: 2010–12–30
  31. By: Andrei Shleifer; Robert W. Vishny
    Abstract: Fire sales are forced sales of assets in which high-valuation bidders are sidelined, typically due to debt overhang problems afflicting many specialist bidders simultaneously. We overview theoretical and empirical research on asset fire sales, which shows how they can arise, how they can lead to asset under-valuations, how contracts and bankruptcy regimes adjust to the risk of fire sales, how fire sales can lead to downward spirals or cascades in asset prices, how arbitrage fails in the presence of fire sales, and how fire sales can reduce productive investment. We conclude by showing how asset fire sales shed light on several aspects of the recent financial crisis, and can account for the success of the liquidity provision and asset purchase policies of the Federal Reserve.
    JEL: E44 E51 G21 G32 G33
    Date: 2010–12
  32. By: Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Cezary Wójcik
    Abstract: We propose a positive formal framework for analyzing sovereign bail-outs in the context of the European Monetary Union (EMU) with a view to making policy recommendations regarding improvements to the EMU institutional architecture. We build our analysis on a political economic game-theoretic model that allows tracing analytically the dynamics of the political process as well as the conditions and parameters on which the scope and limits of the bail-outs depend. In doing so, we formally take account of the negative externality' problem that has been central to policy debates related to the EMU's institutional design and has played an important role in the recent crisis. Contrary to the existing literature, we do not only focus on the economic aspects of such a negative externality, but also look at where they emanate from and interact with the dynamics of the political formation within the EMU. The analysis suggests that, under the present political-economic set-up of the EMU, the bail-outs were inevitable, i.e. a threat of default by one member must, under identifiable conditions, result in sharing the costs of fiscal adjustment by the rest of the members.
    Keywords: Sovereign debt crisis, bail-out, negative externality, political economics, game theory, euro, EMU
    JEL: E62 F33 H77 C70
    Date: 2011–01–10
  33. By: Jonathan Eaton; Samuel Kortum; Brent Neiman; John Romalis
    Abstract: Global trade fell 30 percent relative to GDP during the Great Recession of 2008-2009. Did this collapse result from factors impeding international transactions or did it simply reflect the greater severity of the recession in highly traded sectors? We answer this question with detailed international data, interpreted within a general-equilibrium trade model. Counterfactual simulations of the model show that a shift in spending away from manufactures, particularly durables, accounts for more than 80 percent of the drop in trade/GDP. Increased trade impediments reduced trade in some countries, but globally the impact of these changes largely cancels out.
    JEL: E3 F1 F4
    Date: 2011–01
  34. By: Leo Krippner (Reserve Bank of New Zealand)
    Abstract: This article establishes that most yield curve models within the popular Nelson and Siegel (1987, hereafter NS) class may be obtained as a formal Taylor approximation to the dynamic component of the generic Gaussian affine term structure model outlined in Dai and Singleton (2002). That fundamental theoretical foundation provides an assurance to users of NS models that they correspond to a well-accepted set of principles and assumptions for modeling the yield curve and its dynamics. Indeed, arbitrage-free NS models will parsimoniously and reliably represent the data generated by any Gaussian affine term structure model regardless of its true number of underlying factors and specification, and even non-arbitrage-free NS models will adequately capture the dynamics of the state variables. Combined with the well-established practical benefits of applying NS models, the theoretical foundation provides a compelling case for applying NS models as standard tools for yield curve modeling and analysis in economics and finance. As an illustration, this article develops a two-factor arbitrage-free NS model and applies it to testing for changes in United States yield curve dynamics. The results confirm those of Rudebusch and Wu (2007) based on a latent two-factor essentially affine term structure model: there was a material change in the behavior of the yield curve between the sample prior to 1988 and the sample from 1988 onwards.
    JEL: E43 G12
    Date: 2010–12

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