nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒01‒30
28 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Quantitative and credit easing policies at the zero lower bound on the nominal interest rate By Dai, Meixing
  2. Sources of Unemployment Fluctuations in the USA and in the Euro Area in the Last Decade By Antonio Ribba
  3. A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area By Harashima, Taiji
  4. "Fiscal Policy Effectiveness: Lessons from the Great Recession" By Pavlina R. Tcherneva
  5. Why Are Target Interest Rate Changes So Persistent? By Olivier Coibion; Yuriy Gorodnichenko
  6. An Estimated DSGE Model of the Indian Economy By Vasco Gabriel; Paul Levine; Joseph Pearlman; Bo Yang
  7. Government Size and Macroeconomic Stability: Sub-National Evidence from China By Li, Cheng
  8. Optimal indexation of government bonds and monetary policy By Hatcher, Michael C.
  9. Credit Risk Transfers and the Macroeconomy By Ester Faia
  10. The Implementation of Scenarios using DSGE Models By Igor Vetlov; Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou; Lukas Reiss; Martin Schneider
  11. Estimating Inflation-at-Risk (IaR) using Extreme Value Theory (EVT) By Santos, Edward P.; Mapa, Dennis S.; Glindro, Eloisa T.
  12. Trend Growth and the Dynamic Effects of Government Spending By Mewael F. Tesfaselassie
  13. The confidence channel for the transmission of shocks By Fei, S.
  14. "Fiscal Policy: Why Aggregate Demand Management Fails and What to Do about It" By Pavlina R. Tcherneva
  15. What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices? By Harrison Hong; Motohiro Yogo
  16. Fiscal Policy and Public Debt Dynamics in Italy By Piergallini, Alessandro; Postigliola, Michele
  17. The Impact of Plant-level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth By Amil Petrin; T. Kirk White; Jerome P. Reiter
  18. Regional Mismatch and Unemployment: Theory and Evidence from Italy, 1977-1998 By MANACORDA, Marco; PETRONGOLO, Barbara
  19. Wake up economists! - Currency-issuing central governments have no budget constraint By Lawn, Philip
  20. The Benefits and Importance of Commercial Real Estate By Shaukat, Mughees
  21. A Neoclassical Growth Model with Public Spending By Oliviero Carboni; G. Medda
  22. Stocks as hedge against inflation in Pakistan: Evidence from ARDL approach By Shahbaz, Muhammad; Islam, Faridul
  23. From IRAP to CBIT: tax distortions and redistributive effects By Manzo, Marco; Monteduro, Maria Teresa
  24. "How Does Yield Curve Predict GDP Growth? A Macro-Finance Approach Revisited" By Junko Koeda
  25. The Fall of the Vanishing Interim Regime Hypothesis: Towards a New Paradigm of the Choice of the Exchange Rate Regimes By Michal Jurek
  26. A New Framework for Output-Unemployment Relationship: Okun’s Law Revisited By Ismihan, Mustafa
  27. Government Size and Growth: A Survey and Interpretation of the Evidence By Bergh, Andreas; Henrekson, Magnus
  28. Why Has Unemployment in Algeria Been Higher than in MENA and Transition Countries? By Kangni Kpodar

  1. By: Dai, Meixing
    Abstract: Using a New-Keynesian model extended to include credit, money and reserve markets, we examine the dynamics of inflation and output gap under some monetary policy options adopted when the economy is hit by large negative real, financial and monetary shocks. Relaxing the assumption that market interest rates are perfectly controlled by the central bank using the funds rate operating procedure, we have shown that the equilibrium at the zero lower bound on the nominal discount rate is stable (or cyclically stable, depending on monetary and financial parameters) and constitutes a liquidity trap, making the central bank’s communication skills useless in the crisis management. While the quantitative easing policy allows attenuating the effects of crisis, it is not always sufficient to restore the normal equilibrium. Nevertheless, quantitative and credit easing policies coupled with the zero discount rate policy could stabilize the economy and make central bank’s communication potentially credible during the crisis.
    Keywords: Zero lower bound (ZLB) on the nominal interest rate; zero interest rate policy; liquidity trap; quantitative easing policy; credit easing policy; dynamic stability.
    JEL: E43 E51 E58 E52 E44
    Date: 2011
  2. By: Antonio Ribba
    Abstract: The aim of this paper is to investigate the role played by macroeconomic shocks in shaping unemployment fluctuations, both in the USA and in the Euro area, in the recent, European Monetary Union, period. The task is accomplished by estimating a VAR model which jointly considers US and European variables. We identify the structural disturbances through sign restrictions on the dynamic response of variables. Our results show that there are real effects of monetary policy shocks and of non-monetary policy, financial shocks in both economic areas. Moreover, a significant role is also exerted by business cycle, adverse aggregate demand shocks. We provide an estimation of the relative importance of the identified structural shocks in explaining the variability of inflation and unemployment. Not surprisingly, in the last decade an important role has been played by financial shocks.
    Keywords: Structural VARs; Euro Area; Monetary Policy; Unemployment
    JEL: C32 E40
    Date: 2010–04
  3. By: Harashima, Taiji
    Abstract: This paper examines the mechanism of persistent inflation differentials, current account imbalances, and fiscal deficits in the euro area by constructing a multi-country model in which the optimization behaviors of governments as well as those of households, firms, and the European Central Bank are explicitly incorporated. The model indicates that governments can temporarily adhere to their own intrinsic preferences because fiscal policies are not unified in the euro area. This behavior generates problems, such as inflation differentials, and the stability and growth pact does not appear to be sufficiently effective in preventing such deviations. The results in this paper imply that the balance between national sovereignty and economic stability should be shifted more to the side of stability and that the euro area has to become more politically unified. In addition, the inflation differentials provide clear evidence that inflation acceleration is not caused by monetary policies but by government behavior because monetary policies are unified in the euro area whereas fiscal policies are not.
    Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal deficit; Time preference; The European Central Bank; The stability and growth pact
    JEL: E58 E63 F33 O52 N14
    Date: 2011–01–18
  4. By: Pavlina R. Tcherneva
    Abstract: This paper reconsiders fiscal policy effectiveness in light of the recent economic crisis. It examines the fiscal policy approach advocated by the economics profession today and the specific policy actions undertaken by the Bush and Obama administrations. An examination of the labor market renders the contemporary aggregate demand–management approach wholly inadequate for achieving certain macroeconomic objectives, such as the stabilization of investment and investor expectations, the generation and maintenance of full employment, and the equitable distribution of incomes. The paper reconsiders the policy effectiveness of alternative fiscal policy approaches, and argues that a policy that directly targets the labor demand gap (as opposed to the output gap) is far more effective in stabilizing employment, incomes, investment, and balance sheets.
    Keywords: The Great Recession; Fiscal Policy; Macroeconomic Stabilization; Employment
    JEL: E24 E25 E65 J08 J6
    Date: 2011–01
  5. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We investigate the source of the high persistence in the Federal Funds Rate relative to the predictions of simple Taylor rules. While much of the literature assumes that this reflects interest-smoothing on the part of monetary policy-makers, an alternative explanation is that it represents persistent monetary policy shocks. Applying real-time data of the Federal Reserve’s macroeconomic forecasts, we document that the empirical evidence strongly favors the interest-smoothing explanation. This result obtains in nested specifications with higher order interest smoothing and persistent shocks, a feature missing in previous work. We also show that policy inertia is present in response to economic fluctuations not driven by exogenous monetary policy shocks. Finally, we argue that the predictability of future interest rates by Greenbook forecasts supports the policy inertia interpretation of historical monetary policy actions.
    JEL: E4 E5 E6
    Date: 2011–01
  6. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University); Bo Yang (University of Surrey and London Metropolitan University)
    Abstract: We develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian Maximum Likelihood methods using Dynare. We build up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward and backward-looking components. We find that, in terms of model posterior probabilities and standard moments criteria, inclusion of the above financial frictions and an informal sector significantly improves the model fit.
    Keywords: Indian economy, DSGE model, Bayesian estimation, monetary interest rate rules, financial frictions
    JEL: E52 E37 E58
    Date: 2010–09
  7. By: Li, Cheng
    Abstract: Both theoretical predictions of Keynesian view and a large body of empirical studies on developed countries suggest that business cycle fluctuations can be partially smoothed by counter-cyclical fiscal policies. Our paper extends this strand of literature by considering the nexus between output fluctuations and government size in the context of Chinese fiscal federalism. Using a sample of 29 Chinese provinces for the period of 1994-2007, we fail to provide consistent evidence for the stabilizing effect of fiscal policies. In particular, we find that under the tax assignment system (fen shui zhi), neither the central government’s fiscal transfers nor the provincial budgetary and extra-budgetary revenues help reduce economic volatility. Such results are shown to be robust across different model specifications, volatility measures and estimation techniques.
    Keywords: business cycles; government size; fiscal federalism; China
    JEL: E62 E32 H5
    Date: 2010
  8. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: Using an overlapping generations model in which the young save for old age using indexed and nominal government bonds, this paper investigates how optimal indexation is influenced by monetary policy. In order to do so, two monetary policies with markedly different long run implications are examined: inflation targeting and price-level targeting. Optimal indexation differs significantly under the two regimes. Under inflation targeting, long-term inflation uncertainty is substantial due to base-level drift in the price level. Nominal bonds are thus a poor store of value and optimal indexation is relatively high (76 per cent). With price-level targeting, by contrast, long-term inflation uncertainty is minimal because the price level is trend-stationary. This makes nominal bonds a better store of value compared to indexed bonds, reducing optimal indexation somewhat (26 per cent). Importantly for these results, the model captures two imperfections of indexation (indexation bias and lagged indexation) that are calibrated to the UK case.
    Keywords: optimal indexation; government bonds; inflation targeting; price-level targeting
    JEL: E52 E58
    Date: 2011–01
  9. By: Ester Faia
    Abstract: The recent financial crisis has highlighted the limits of the “originate to distribute“ model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare
    JEL: E3 E5 G3
    Date: 2011–01
  10. By: Igor Vetlov (Bank of Lithuania); Ricardo Mourinho Felix; Laure Frey; Tibor Hledik; Zoltan Jakab; Niki Papadopoulou (Central Bank of Cyprus); Lukas Reiss; Martin Schneider
    Abstract: The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.
    Keywords: Business fluctuations, monetary policy, fiscal policy, forecasting and simulation
    JEL: E32 E52 E62 E37
    Date: 2010–12
  11. By: Santos, Edward P.; Mapa, Dennis S.; Glindro, Eloisa T.
    Abstract: The Bangko Sentral ng Pilipinas (BSP) has the primary responsibility of maintaining stable prices conducive to a balanced and sustainable economic growth. The year 2008 posed a challenge to the BSP’s monetary policy making as inflation hit an official 17-year high of 12.5 percent in August after 10 months of continuous acceleration. The alarming double-digit inflation rate was attributed to rising fuel and food prices, particularly the price of rice. A high inflation rate has impact on poverty since inflation affects the poor more than the rich. From a macroeconomic perspective, high level of inflation is not conducive to economic growth. This paper proposes a method of estimating Inflation-at-Risk (IaR) similar to the Value-at-Risk (VaR) used to estimate risk in the financial market. The IaR represents the maximum inflation over a target horizon for a given low pre-specified probability. It can serve as an early warning system that can be used by the BSP to identify whether the level of inflation is extreme enough to be considered an imminent threat to its inflation objective. The extreme value theory (EVT), which deals with the frequency and magnitude of very low probability events, is used as the basis for building a model in estimating the IaR. The estimates of the IaR using the peaks-over-threshold (POT) model suggest that the while the inflation rate experienced in 2008 can not be considered as an extreme value, it was very near the estimated 90 percent IaR.
    Keywords: Inflation-at-Risk (IaR); Extreme Value Theory (EVT); Peaks-over-Threshold (POT)
    JEL: E31 C52 C01
    Date: 2011–01
  12. By: Mewael F. Tesfaselassie
    Abstract: The paper studies the macroeconomic effects of government spending shocks in an economy characterized by positive trend growth. It shows that the lower is the trend growth rate the less inflationary are government spending shocks and vice versa. Moreover, on impact output is higher but exhibits less persistence the lower is trend growth, an effect that also characterizes consumption and the fiscal multiplier given that consumption and labor are somewhat complementary
    Keywords: trend growth, government spending, fiscal multiplier
    JEL: E21 E62 H31
    Date: 2011–01
  13. By: Fei, S.
    Abstract: It is widely known that agents confidence is closely linked to macroeconomic cycles. A confidence channel may therefore have a significant impact in accelerating and amplifying the transmission of shocks accross borders. We endeavor to find empirical proof of the existence of a confidence channel between G7 countries (and Spain). This paper centers around the concept of a contagion of confidence from “large countries” to “small countries”. I apply instrumental-variable regressions to OECD standardized Consumers and Business Confidence measures, in order to investigate the relationship between the confidence series of all G7 countries, and Spain. Macroeconomic variables are included in these regressions to control for domestic causes of confidence changes. We find that, even after having controlled for domestic macroeconomic causes of confidence level variations, the level of confidence of agents in large countries does have an influence on the level of confidence of agents in smaller countries.
    Keywords: confidence channel, contagion, confidence shock.
    JEL: E32
    Date: 2011
  14. By: Pavlina R. Tcherneva
    Abstract: This paper argues for a fundamental reorientation of fiscal policy, from the current aggregate demand management model to a model that explicitly and directly targets the unemployed. Even though aggregate demand management has several important benefits in stabilizing an unstable economy, it also has a number of serious drawbacks that merit its reconsideration. The paper identifies the shortcomings that can be observed during both recessions and economic recoveries, and builds the case for a targeted demand-management approach that can deliver economic stabilization through full employment and better income distribution. This approach is consistent with Keynes's original policy recommendations, largely neglected or forgotten by economists across the theoretical spectrum, and offers a reinterpretation of his proposal for the modern context that draws on the work of Hyman Minsky.
    Keywords: Labor Demand Targeting; Aggregate Demand Management; Full Employment; Income Inequality; Poverty
    JEL: E25 J2 J45 I38
    Date: 2011–01
  15. By: Harrison Hong; Motohiro Yogo
    Abstract: Open interest, or the amount of contracts outstanding in futures markets, has remarkable power to forecast commodity, currency, bond, and stock prices. Changes in open interest are highly pro-cyclical and predict asset-price fluctuations better than a number of alternative variables including past prices. In commodity markets, rising open interest predicts rising commodity prices, falling bond prices, and a rising short rate. In currency markets, rising open interest predicts appreciation of foreign currencies relative to the U.S. dollar. In bond and stock markets, rising open interest predicts falling bond prices and rising stock prices, respectively. We offer a theoretical explanation of our empirical findings. Open interest is a more informative signal of future economic activity and inflation than past prices because of hedging demand and downward-sloping demand curves in futures markets.
    JEL: E31 E37 F31 G12 G13
    Date: 2011–01
  16. By: Piergallini, Alessandro; Postigliola, Michele
    Abstract: We examine the historical dynamics of government debt in Post-Unification Italy, from 1861 to 2009. Unit root tests for the debt-GDP ratio are unable to reject either the non stationarity or the stationarity null hypothesis. Controlling debt dynamics for fiscal feedback policies of the Barro-Bohn style, however, the debt-GDP ratio is found to be mean-reverting. Mean-reversion in the debt-GDP ratio is due not only to a nominal growth dividend, but also to a positive response of primary surpluses to variations in outstanding debt. There is indeed significant evidence that, over the history of Italy, fiscal policy makers have reacted to the accumulation of debt, taking corrective measures to rule out potential long-term sustainability problems.
    Keywords: Fiscal Policy; Public Debt; Fiscal Sustainability.
    JEL: E62 H6 C2
    Date: 2011–01–18
  17. By: Amil Petrin; T. Kirk White; Jerome P. Reiter
    Abstract: We build up from the plant level an "aggregate(d)" Solow residual by estimating every U.S. manufacturing plant's contribution to the change in aggregate final demand between 1976 and 1996. Our framework uses the Petrin and Levinsohn (2010) definition of aggregate productivity growth, which aggregates plant-level changes to changes in aggregate final demand in the presence of imperfect competition and other distortions/frictions. We decompose these contributions into plant-level resource reallocations and plant-level technical efficiency changes while allowing in the estimation for 459 different production technologies, one for each 4-digit SIC code. On average we find positive aggregate productivity growth of 2.2% in this sector during this period of declining share in U.S. GDP. We find that aggregate reallocation made a larger contribution to growth than aggregate technical efficiency. Our estimates of the contribution of reallocation range from 1.7% to 2.1% per year, while our estimates of the average contribution of aggregate technical efficiency growth range from 0.2% to 0.6% per year. In terms of cyclicality, the aggregate technical efficiency component has a standard deviation that is roughly 50% to 100% larger than that of aggregate total reallocation, pointing to an important role for technical efficiency in macroeconomic fluctuations. Aggregate reallocation is negative in only 3 of the 20 years of our sample, suggesting that the movement of inputs to more highly valued activities on average plays a stabilizing role in manufacturing growth. Our results have implications for both the theoretical literature on growth and alternative indexes of aggregate productivity growth based only on technical efficiency.
    JEL: E32 L6 O47
    Date: 2011–01
  18. By: MANACORDA, Marco (CEP – London School of Economics); PETRONGOLO, Barbara (CEP – London School of Economics)
    Abstract: This paper describes the functioning of a two-region economy characterized by asymmetric wage-setting. Labor market tightness in one region (the leading-region) affects wages in the whole economy. In equilibrium, net labor demand shifts towards the leading region raise unemployment in the rest of the economy and leave regional wages unchanged, causing an increase in aggregate unemployment. This model has some success in explaining the evolution of regional unemployment rates in Italy during the period 1977-1998. Based on SHIW micro data on earnings and ISTAT data on unemployment rates we find strong evidence that wages in Italy only respond to labor market tightness in the North. We estimate that around one third of the increase in aggregate unemployment in Italy can be explained by regional mismatch, mainly due to an excess labor supply growth in the South.
    Keywords: regional imbalances; wage curve; unemployment.
    JEL: E24 J23 J31
    Date: 2011–01–18
  19. By: Lawn, Philip
    Abstract: Abstract: Despite what mainstream economists preach, currency-issuing central governments have no budget constraint. It is therefore incumbent upon them to use their unique spending and taxing powers to achieve the broader goal of sustainable development. Their failure to do so has meant that nations have fallen well short of realising their full potential. Rather than accept the neo-liberal myth that ‘small government is best’, the citizens of a nation should welcome the central-government’s responsible use of their unique spending and taxing powers to provide sufficient public goods and critical infrastructure, achieve and maintain full employment, resolve critical social and environmental concerns, and meet the requirements of an aging population. Should central governments fail in their responsibility to prudently use their unique powers, public disapproval is best registered through the ballot box, not through degenerative debates that distort the facts about the operation of a modern, fiat-currency economy.
    Keywords: Keywords: Central governments; government budgets; fiscal and monetary policy; sustainable development
    JEL: E62 B50
    Date: 2011–01–05
  20. By: Shaukat, Mughees
    Abstract: The economic climate of late has battered investment classes across the board, including commercial real estate. Aside from the usual arguments about including real estate in a well-diversified portfolio, there are compelling reasons to invest in commercial real estate in the current environment. Though the risks are real, income and return characteristics of commercial real estate investment provide a buffer through annuitized cash flow, and savvy investors who “dollar cost average” into the real estate cycle maybe able to acquire assets at prices that will deliver attractive returns over the long time. The Islamic dictum stands side by side on this notion and with the Shariah compliant version in form of „i-REITS‟, it has indeed made its presence felt, but still it leaves a lot to be explored in this sector which mars an ideal potential for a new found.
    Keywords: Commercial Real Estate; I-REITs
    JEL: E22
    Date: 2010–11–25
  21. By: Oliviero Carboni; G. Medda
    Abstract: This paper analyses the effect of public expenditures in the context of a modified Solow model of capital accumulation with optimising agents. The model identifies optimal government size and optimal composition of public expenditures which maximize the rate of growth in the dynamics to the steady state and maximize the long run level of per capita income. Different allocations of public resources lead to different growth rates in the transitional dynamics depending on their elasticity. However effects from fiscal policy are only temporary and disappear in the steady state. Finally we argue that neglecting the non- linear nature of the relationship between government spending and growth may lead empirical studies to biased results.
    Keywords: neoclassical and augmented growth models; fiscal policy; public spending composition.
    JEL: E13 E62 H20 H50 O40
    Date: 2010
  22. By: Shahbaz, Muhammad; Islam, Faridul
    Abstract: The paper implements ARDL bounds testing approach to cointegration to explore whether or not stocks are good hedge against inflation in the case of a transition economy such as Pakistan, using annual data for the period 1971 – 2008. Ng-Peron (2001) unit root test is applied to determine the stationarity of the series. The results suggest that stocks act as good hedge against inflation in Pakistan both in the long and the short run. The findings should help formulate appropriate policy to encourage investment in financial markets and thereby promote economic growth.
    Keywords: Stock Returns; Inflation; ARDL Bounds Testing; Ng-Perron Test
    JEL: E31 N20 C02
    Date: 2011–01–12
  23. By: Manzo, Marco; Monteduro, Maria Teresa
    Abstract: The paper explores the differences between IRAP (the Regional Tax on Productive Activities) and CBIT (the Comprehensive Business Income Tax), which approximately corresponds to allow the deduction of labor cost from the taxable base of IRAP. By developing a DSGE model that ncorporates business taxes, like IRAP or CBIT, we find that tax distortions due to IRAP are more contractionary than those caused by the presence of CBIT. Empirically, tax revenues and redistributive effects are more carefully analyzed. We implement a microsimulation model (MSM) based on a dataset of more than 150,000 incorporated firms. We show that small incorporated firms are particularly harmed by IRAP, especially when business run a loss instead of a profit. This is due to the fact that IRAP is a business tax on value added, which does not allow for the deduction of labor cost. For this purpose, we focus on the introduction of a reform based on the CBIT principle. Our result is that CBIT is particularly costly and more able to enhance the profitability for larger enterprises. Moreover, the tax design of CBIT is more regressive compared to the IRAP including tax allowances. Consequently, an efficiency-equity trade-off between IRAP and CBIT might be emphasized
    Keywords: business cycles; tax distortions; micro-simulations models; distributive effects; Italy.
    JEL: E62 E32 H25 H32
    Date: 2010–08
  24. By: Junko Koeda (Faculty of Economics, University of Tokyo)
    Abstract: This note analyzes the yield-curve predictability for GDP growth by modifying the time-series property of the interest rate process in Ang, Piazzesi, and Wei (2006). When interest rates have a unit root and term spreads are stationary, the short rate's forecasting role changes, and the combined information from the short rate and term spread intuitively reveals the relationship between the shift of yield curves and GDP growth.
    Date: 2011–01
  25. By: Michal Jurek (The Poznan University of Economics, Banking Department)
    Abstract: This paper verifies strong and weak versions of the vanishing interim regime hypothesis (so-called bipolar view). It is shown herein that the strong as well as weak version of this hypothesis can be discredited. Empirical observations support the bipolar view only for the advanced countries, but not for emerging and developing ones. On the contrary – the number of interim regimes, used by emerging and developing countries more than doubled in the 1999–2008 period. Results of the logistic regression analysis also challenge a bipolar view. Moreover, they provide a strong support for the view that the probability of the use of interim regimes in emerging and developing countries significantly differs in various regions of the world. This can be treated as an evidence of the existence of other factors that influence these countries’ choices concerning exchange rate regimes, partly resulting from differences in institutional fundamentals and different economic structures as well as macroeconomic policy stabilization programs.
    Keywords: bipolar view, exchange rate regimes, monetary policy
    JEL: E42 E52 F31
    Date: 2010
  26. By: Ismihan, Mustafa
    Abstract: This paper provides a new and useful framework for developing various models to investigate the output-unemployment relationship. By using this framework, a simple but reasonable theoretical background to Okun’s law is derived. This theoretical background, in turn, facilitates the decomposition of Okun’s law coefficient into several quantifiable and interpretable components that incorporate main insights from Arthur Okun’s original analysis. The empirical decomposition exercise indicates that Okun’s law has an inherent tendency to vary substantially over time, especially, in response to the structural changes in legal, institutional and other related characteristics of labor and goods markets.
    Keywords: output-unemployment relationship; Okun’s law
    JEL: E32 E24 C2
    Date: 2010–12
  27. By: Bergh, Andreas (Research Institute of Industrial Economics (IFN)); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach—of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time—reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.
    Keywords: Government size; Government expenditure; Economic growth; Economic freedom; Globalization; Taxation; Cross-country regressions
    JEL: E62 H11 H20 O23 O43
    Date: 2011–01–03
  28. By: Kangni Kpodar (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This paper analyzes the determinants of labor market performance in Algeria. When the model is estimated with panel data on a sample of MENA and transition countries for 1995–2005, the results suggest that lower growth in labor productivity in Algeria is associated with higher unemployment than the sample average, though recent positive terms of trade shocks have helped Algeria reduce the differential. Labor market rigidities and labor taxation do not seem to explain why unemployment is higher in Algeria than in other countries. The results are robust to various panel econometric methods and instrumental variable estimates.
    Keywords: Unemployment;Labor market institutions;Macroeconomic shocks
    Date: 2011–01–18

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