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on Macroeconomics |
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Issue of 2011‒02‒05
37 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute); Pascal Jacquinot (European Central Bank); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics) |
| Abstract: | Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare. |
| Keywords: | boom-bust cycles, euro area accession, dynamic general equilibrium models |
| JEL: | E52 E58 E63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:79&r=mac |
| By: | Lena Dräger (University of Hamburg and ETH Zurich) |
| Abstract: | Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule. |
| Keywords: | Endogenous sticky information, heterogeneous expectations, DSGE models. |
| JEL: | E31 E52 E61 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201002&r=mac |
| By: | Schmidt, Sandra; Nautz, Dieter |
| Abstract: | This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis. -- |
| Keywords: | Central bank communication,Interest rate forecasts,Survey expectations,Panel random coefficient model |
| JEL: | E47 E52 E58 C23 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201029&r=mac |
| By: | Cem Cebi |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1104&r=mac |
| By: | Marco Airaudo; Luis-Felipe Zanna |
| Abstract: | In this paper we present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to changes in inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on particular characteristics of open economies, including the degree of trade openness and the degree of exchange rate pass-through into import prices. For instance, in our model, we find that a rule that responds to expected future inflation is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through. |
| Keywords: | Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Endogenous Fluctuations |
| JEL: | E32 E52 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:171&r=mac |
| By: | Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley) |
| 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 interestsmoothing 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. |
| Keywords: | Taylor rules, interest rate smoothing, monetary policy shocks. |
| JEL: | E3 E4 E5 |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:106&r=mac |
| By: | Guillaume Rocheteau |
| Abstract: | I apply mechanism design to quantify the cost of inflation that can be attributed to monetary frictions alone. In an environment with pairwise meetings, the money demand that is consistent with a constrained-efficient allocation takes the form of a continuous correspondence that can fit the data over the period 1900-2006. For such parameterizations, the cost of moderate inflation is zero. This result is robust to different assumptions regarding the observability of money holdings, the introduction of match-specific heterogeneity, and endogeneous participation decisions. |
| Keywords: | Inflation (Finance) - Mathematical models ; Demand for money ; Monetary theory |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1103&r=mac |
| By: | Rao, B. Bhaskara; Paradiso, Antonio |
| Abstract: | This paper uses recent US data to estimate the new Keynesian Phillips curve (NKPC) with three modifications. Firstly, the variables in the NKPC are found to be nonstationary. Therefore, it is estimated with the time series methods and the cointegrating equations are tested for structural breaks. Secondly, inflationary expectations are proxied with the survey data. Thirdly, unlike in the hybrid NKPC, the effects of the lagged inflation rates are introduced into the dynamic adjustment equations. This offers an opportunity to estimate these dynamic effects with a more general specification instead of the restricted partial adjustment mechanism underlying the hybrid NKPC. Our NKPC, with these changes, is consistent with its underlying micro foundations and forward looking expectations. The results of our NKPC can explain the dynamics of the US inflation rate as well as any other alternative model. |
| Keywords: | US New Keynesian Phillips Curve; Forward looking expectations; Survey data; Wage share; Cointegration |
| JEL: | E31 |
| Date: | 2011–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28413&r=mac |
| By: | George W. Evans |
| Abstract: | In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed. |
| Keywords: | Stagnation, fiscal and monetary policy, deflation trap |
| JEL: | E63 E52 E58 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1101&r=mac |
| By: | Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | According to the literature, in an expectations-augmented Phillips curve model, opacity is always preferred to transparency on central bank forecasts. By modelling the private sector's behavior explicitly, we show that transparency reduces the shocks. Consequently, transparency can be preferred. |
| Keywords: | central bank, transparency, Phillips curve, shocks. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00560261&r=mac |
| By: | Gerberding, Christina; Gerke, Rafael; Hammermann, Felix |
| Abstract: | Recent research has shown that optimal monetary policy may display considerable price-level drift. Proponents of price-level targeting have argued that the costs of eliminating the price-level drift may be reduced if the central bank responds flexibly by returning the price level only gradually to the target path (Gaspar et al., 2010). We revisit this argument in two variants of the New Keynesian model. We show that in a two-sector version of the model which allows for changes in relative prices across sectors, the costs of stabilisation under price-level targeting remain much higher than under inflation targeting for all policy-relevant horizons. Our conclusion is that extending the policy horizon is not a panacea to reduce the costs of eliminating pricelevel drift. -- |
| Keywords: | price-level targeting,optimal monetary policy,commitment |
| JEL: | E58 E42 E31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201023&r=mac |
| By: | Robert Kollmann; Zeno Enders; Gernot J. Mueller |
| Abstract: | This paper incorporates a global bank into a two-country business-cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the U.S. and the euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis. |
| Keywords: | Equity ; Bank capital ; Productivity ; Default (Finance) ; Loans |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:72&r=mac |
| By: | Guillaume Rocheteau; Pierre-Olivier Weill |
| Abstract: | On November 14-15, 2008, the Federal Reserve Bank of Cleveland hosted a conference on “Liquidity in Frictional Asset Markets.” In this paper we review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference in the context of this literature. We will show the diversity of topics covered in this literature, e.g., the dynamics of housing and credit markets, the functioning of payment systems, optimal monetary policy and the cost of inflation, the role of banks, the effect of informational frictions on asset trading. |
| Keywords: | Liquidity (Economics) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1105&r=mac |
| By: | Ibrahim Elbadawi; Raimundo Soto Author-X-Name-First: Raimundo |
| Abstract: | This paper asks the question as to whether the choice of the exchange rate regime matters for post-conflict economic recovery and macro stabilization. Though an important aspect of the macroeconomic agenda for post-conflict, it has however, been largely ignored by the literature. We identify three main exchange rate regimes (fixed, managed floating and free float) and estimate their marginal contributions to post-conflict economic recovery and macro stabilization in the context of fully specified models of four pivotal macroeconomic variables: per capita GDP and export growth, the demand for money balances and inflation. The paper estimates extended versions of these models in a panel over 1970-2008 covering 132 countries, including the 38 post-conflict countries and 94 peaceful ones as a control group. The evidence suggests that the managed floating regime appears to have an edge on some critical areas of economic performance for post-conflict reconstruction. |
| Keywords: | Monetary Policy, Civil Wars, Transition, Economic Growth. |
| JEL: | E52 O43 N40 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:392&r=mac |
| By: | Larch, Martin (Directorate General for Economic and Financial Affairs, European Commission); van den Noord, Paul (Organisation for Economic Co-operation and Development (OECD)); Jonung, Lars (School of Economics and Management) |
| 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 H60 |
| Date: | 2011–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2011_006&r=mac |
| By: | George J. Hall (Department of Economics, Brandeis University); Thomas J. Sargent (Department of Economics, New York University) |
| Abstract: | This paper uses a sequence of government budget constraints to motivate estimates of returns on the U.S. Federal government debt. Our estimates differ conceptually and quantitatively from the interest payments reported by the U.S. government. We use our estimates to account for contributions to the evolution of the debt-GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities. |
| Keywords: | Holding period returns, capital gains, inflation, growth, debt- GDP ratio, government budget constraint |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:01&r=mac |
| By: | Rao, B. Bhaskara; Paradiso, Antonio |
| Abstract: | This paper distinguishes between the long run and short run Phillips curve (PC) and uses the micro theory based specification, with forward looking expectations, for the long run PC. The long run and the implied short run dynamic equations are estimated in one step with the general to specific method (GETS). Our approach has two distinct advantages. Firstly, classical estimation methods can be used, irrespective of the stationarity properties of the variables. Secondly, instead of arbitrarily adding the lagged inflation rate to the theory based long run PC to capture persistence in inflation, our approach shows that persistence effects can also be captured through the dynamic adjustment equations. This has an added advantage because it offers a more flexible lag structure to estimate dynamic adjustments compared to the partial adjustment process in the hybrid NKPC. |
| Keywords: | US New Keynesian Phillips Curve; Forward looking expectations; Alternative measures of the Driving Forces; GETS |
| JEL: | E31 B22 C22 |
| Date: | 2011–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28411&r=mac |
| By: | Kimberly Beaton; Brigitte Desroches |
| Abstract: | The authors investigate financial spillovers across countries with an emphasis on the effect of shocks to financial conditions in the United States on financial conditions and economic activity in Canada. These questions are addressed within a global vector autoregression model. The framework links individual country vector autoregression models in which the domestic variables are related to the country-specific foreign variables. The authors' results highlight the importance of financial variables in the transmission of shocks to real activity and financial conditions in the United States to Canada. First, they show that shocks to U.S. output are transmitted quickly to Canada, with important implications for financial conditions. Second, they show that the most important source of financial transmission between the United States and Canada is through shocks to U.S. equity prices. Financial transmission through movements in the quantity of U.S. credit is also important for Canada. |
| Keywords: | Business fluctuations and cycles; Economic models; Financial stability; International topics |
| JEL: | E27 E32 F36 F40 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:11-1&r=mac |
| By: | Jaromír Baxa (Institute of Economic Studies, Charles University, Prague and Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic); Roman Horváth (Czech National Bank and Institute of Economic Studies, Charles University, Prague); Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) |
| Abstract: | We examine whether and how main central banks responded to episodes of financial stress over the last three decades. We employ a new methodology for monetary policy rules estimation, which allows for time-varying response coefficients as well as corrects for endogeneity. This flexible framework applied to the U.S., U.K., Australia, Canada and Sweden together with a new financial stress dataset developed by the International Monetary Fund allows not only testing whether the central banks responded to financial stress but also detects the periods and type of stress that were the most worrying for monetary authorities and to quantify the intensity of policy response. Our findings suggest that central banks often change policy rates: mainly decreasing it in the face of high financial stress. However, the size of a policy response varies substantially over time as well as across countries, with the 2008-2009 financial crisis being the period of the most severe and generalized response. With regards to the specific components of financial stress, most central banks seemed to respond to stock market stress and bank stress, while exchange rate stress is found to drive the reaction of central banks only in more open economies. |
| Keywords: | financial stress, Taylor rule, monetary policy, time-varying parameter model, endogenous regressors. |
| JEL: | E43 E52 E58 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea1101&r=mac |
| By: | Frankel, Jeffrey (Harvard Kennedy School) |
| Abstract: | The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models. Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994-2001, the conventional wisdom anointed Inflation Targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007-09 have revealed limitations to the choice of CPI for the role of price index. The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections; few economists thought this inappropriate. With the global crisis of 2007-09, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets. |
| JEL: | E00 E50 F41 O16 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-003&r=mac |
| By: | Daniel Tortorice (Department of Economics, Brandeis University) |
| Abstract: | I compare unemployment expectations from the Michigan Survey of Consumers to VAR forecastable movements in unemployment. I document three key facts. First, one- half to one-third of the population expects unemployment to rise when it is falling at the end of a recession even though the VAR is able to predict the fall in unemployment. Second, more people expect unemployment to rise when it is falling at the end of a recession than expect it to rise when it is rising at the beginning of a recession even though these movements are predictable with the VAR. Finally, the lag change in unemployment is as important as the VAR prediction of the future unemployment change in predicting the fraction of the population that expects unemployment to rise. Least squares learning or real time expectations do little to help explain these facts. However, delayed updating of expectations can addresses some of these puzzles and extrapolative expectations addresses these puzzles the best. Individuals with higher income or education are only slightly less likely to make these expectational errors and those who makes these errors are 8-10 percent less likely to believe it is a good time to make a major purchase. |
| Keywords: | Consumer Sentiment, Rational Expectations, Business Fluctuations, Cycles |
| JEL: | E32 E37 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:05&r=mac |
| By: | Pennings, Steven (Department of Economics); Ramayandi, Arief (Asian Development Bank); Tang, Hsiao Chink (Asian Development Bank) |
| Abstract: | This paper estimates the impact of monetary policy on exchange rates and stock markets for eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia and Thailand. On average across these countries, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 1% fall in stock market indices. The effect on exchange rates is notably weaker in the non-Organization for Economic Cooperation and Development (OECD) countries with a managed float. For the OECD countries, there is no robust evidence of a change in the effect of policy during the global financial crisis. For the non-OECD countries, there is some evidence of a stronger effect of policy on stock markets during the crisis, although further research is needed to investigate whether this is a result of measurement issues. |
| Keywords: | Monetary policy effectiveness; exchange rate; stock prices; crisis; Asian economies |
| JEL: | E44 E52 G14 |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0072&r=mac |
| By: | Krause, Michael; Lubik, Thomas |
| Abstract: | We demonstrate the possibility of indeterminacy and non-existence of equilibrium dynamics in a standard business cycle model with search and matching frictions in the labor market. Our results arise for empirically plausible parametrizations and do not rely upon a mechanism such as increasing returns. -- |
| Keywords: | search and matching,indeterminacy,match elasticity |
| JEL: | E24 E32 J64 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201025&r=mac |
| By: | Fredy Alejandro Gamboa Estrada |
| Abstract: | This research studies the forecasting performance of conventional and more recent exchange rate models in Colombia. The purpose is to explain which have been the main exchange rate determinants under an Inflation Targeting regime and a completely floating exchange rate scheme. Compared to similar studies, this paper includes conventional specifications and Taylor rule approaches that assume exogenous and endogenous monetary policy respectively. Based on the Johansen multivariate cointegration methodology, the results provide evidence for the existence of cointegration in all specifications except in the Sticky-Price Monetary Model and the Taylor Rule model that includes the real exchange rate. In addition, out of sample forecasting performance is analyzed in order to compare if all specifications outperform the drift less random walk model. All models outperform the random walk at one month horizon. However, the Flexible Price Monetary Model and the Uncovered Interest Parity Condition have superior predictive power for longer horizons. |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:007870&r=mac |
| By: | Alrubaie, falah.K.Ali |
| Abstract: | Economic policy, especially fiscal policy are Gaining exceptional importance, in the Iraqi economy in the current circumstances , where are the Revenues of oil center of gravity in the movements of each of the budget, internal and external, and leave it from the shocks of external display negative or positive. After that increased government intervention in economic activity, and increased monetary effects of fiscal policy, which is reflected in particular on the general level of prices and money supply and credit volume and interest rates. Reveal Reviewed scrutinizing economic policy in Iraq for the critical role of fiscal policies as a result of the misuse of oil revenues, and the consequent prevalence of the manifestations of backwardness, declining standards of production and productivity in various economic activities, and the accompanying dominance of the oil sector on the major contributors to the GDP, and falling the role of the commodity sectors, particularly the industrial sector, agriculture and the growing sectors, parasitic, and deepen the manifestations of the imbalances and distortions in the economic structure as well as distortions in the exchange rate of the dinar, and distortions in the tax system, distortion in prices, and distortions in the distribution of income and wealth that resulted from poor coordination between monetary policies and Finance |
| Keywords: | السياسة الاقتصادية ، النفط ، الاقتصاد العراقي ،التنمية |
| JEL: | E60 |
| Date: | 2010–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28371&r=mac |
| By: | Siregar, Reza; Lim, Vincent, C.S. |
| Abstract: | The deepening financial liberalisation and the tightening of financial integration globally have made it more challenging to manage macroeconomic policies in general, and to contain the spread of financial turbulence in particular. The financial sector has been shown to be inherently pro-cyclical and capable of amplifying macroeconomic volatilities, making management of monetary policy increasingly complex. In these ever changing financial landscapes, the success of monetary policy and macroeconomic policies, in general, hinges on the ability of policy makers to design policies that explicitly take into account macro-financial channels, and to interpret more cautiously the potential risk in financial system disruptions that can rapidly destabilise macroeconomic stability. The objective of this study is to take stock and examine the impact of linkages between macroeconomic development and financial market condition with a special focus on the SEACEN economies. |
| Keywords: | Macro-financial linkages; Macro-prudential; Stress-testing; Cross-border supervision; Basel III. |
| JEL: | E58 G18 G28 |
| Date: | 2011–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28417&r=mac |
| By: | Seppo Honkapohja; Kaushik Mitra; George W. Evans |
| Abstract: | These notes try to clarify some discussions on the formulation of individual intertemporal behavior under adaptive learning in representative agent models. First, we discuss two suggested approaches and related issues in the context of a simple consumption-saving model. Second, we show that the analysis of learning in the NewKeynesian monetary policy model based on "Euler equations" provides a consistent and valid approach. |
| Keywords: | Euler equation, NewKeynesian, Adaptive learning |
| JEL: | E4 E5 E6 E52 E58 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1102&r=mac |
| By: | Ronald Heijmans; Richard Heuver; Daniëlle Walraven |
| Abstract: | We investigate the euro unsecured interbank money market during the current financial crisis. To identify the loans traded in this market and settled in TARGET2, we extend the algorithm developed by Furfine (1999) and adapt it to the European interbank loan market with maturity up to one year. This paper solves the problem of systematic errors which occur when you only look at overnight loans (as the Furfine algorithm does). These errors especially occur in times of (very) low interest rates. The algorithm allows us to track the actual interest rates rather than quoted interest rates on liquidity trading by participants of the Dutch part of the euro large value payment system (TARGET2-NL). The algorithm enables us to constitute the Dutch part of the EONIA, making it possible to compare the interest rates developments in the Dutch market to the European average ones. Based on the new algorithm, we develop a policy tool to monitor the interbank money market, both at macro level (whole market) and individual bank level (Money Market Monitoring Dashboard). |
| Keywords: | payment systems; financial stability; experiment; decision making |
| JEL: | E42 E44 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:276&r=mac |
| By: | Islam, Faridul; Shahbaz, Muhammad; Shabbir, Muhammad |
| Abstract: | The paper explores the existence and the stability of Phillips curve for North Cyprus, a small developing economy, using time series data. ADF unit root test is employed to check for stationarity. ARDL and DOLS approaches to cointegration have been used to explore the long run relation and ECM to understand short run dynamics. The predictive properties DOLS are better than those of the conventional methods. The estimates point to the existence of Phillips curve both in the long and the short run. CUSUM and CUSUMsq tests confirm a stable relation. |
| Keywords: | Inflation; Unemployment; ADF; Cointegration; DOLS |
| JEL: | E24 E31 C22 |
| Date: | 2011–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28397&r=mac |
| By: | Sebastian Barnes; Romain Bouis; Philippe Briard; Sean Dougherty; Mehmet Eris |
| Abstract: | This paper presents a framework to assess the impact of a wide range of structural policy reforms on GDP per capita at various horizons by linking together previous empirical studies mostly carried out by the OECD. The simple accounting framework consists of reduced-form equations and offers a more tractable and realistic alternative to an estimated general equilibrium model. This comes at the expense of several potential shortcomings including inter alia insufficient account of interrelationships between policies or spillover effects, risks of double-counting the effects of certain reforms, endogeneity issues and the omission of interactions across different policy areas. Bearing these caveats in mind, the plausible scenarios suggest that the largest long-run GDP per capita gains may be obtained from reforms that would raise the quantity and quality of education, strengthen competition in product markets, reduce the level and/or duration of unemployment benefits, cut labour tax wedges and relax employment protection legislation. Past reforms in these areas might also have contributed to as much as half of GDP per capita growth in OECD countries in the decade prior to the recent financial and economic crisis. Simulations further indicate that addressing all policy weaknesses in each OECD country by aligning policy settings on the OECD average could raise GDP per capita by as much as 25% in the typical country.<P>L'impact des réformes sur le PIB : un cadre simple de simulation<BR>Cet article présente un cadre d’analyse pour évaluer l’impact sur le PIB par tête à différents horizons d’un large éventail de réformes de politiques structurelles en reliant ensemble des études empiriques précédemment réalisées pour la plupart par l’OCDE. Le cadre comptable simplifié est constitué d’équations sous forme réduite et offre une alternative plus flexible et plus réaliste qu’un modèle estimé d’équilibre général. Ceci présente néanmoins plusieurs limites potentielles incluant entre autres une prise en compte insuffisante des interrelations entre les politiques et les effets de retombées, des risques de double comptage des effets de certaines réformes, des problèmes d’endogénéité et l’omission des interactions au sein des différents domaines de politiques. Conscient de ces mises en garde, les scénarios plausibles suggèrent que les gains en PIB par tête à long terme les plus élevées pourraient provenir des réformes augmentant la quantité et la qualité de l’éducation, renforçant la concurrence sur le marché des produits, réduisant le niveau et/ou la durée des allocations chômage, diminuant le coin salarial et assouplissant la législation sur la protection de l’emploi. Les réformes passées dans ces domaines pourraient avoir contribué jusqu’à la moitié de la croissance du PIB par tête dans les pays de l’OCDE au cours de la décennie précédant la crise financière et économique récente. Les simulations indiquent en outre que traiter l’ensemble des points faibles de chaque pays de l’OCDE en alignant les positions des politiques sur la moyenne de l’OCDE pourrait accroître le PIB par tête jusqu’à 25% dans le pays moyen. |
| Keywords: | growth, productivity, employment, structural reforms, productivité, croissance, réforme structurelle, emploi |
| JEL: | E27 O43 O47 |
| Date: | 2011–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:834-en&r=mac |
| By: | Hasan, Zubair |
| Abstract: | This paper deals with familiar facts in monetary economics from an unfamiliar angle. It argues that it is not factual to regard the legal tender money and bank credit as of different genus: they work in tandem to the same ends in an economy, conventional or Islamic. Also, it does not matter what serves as money – solid gold or flimsy paper – for keeping its value stable; only the blind would argue that staff is indispensable for walking. Money is just an instrument: it was never nor can ever be classified into Islamic and non-Islamic. What it does – good or bad – depends on how we use it. Money does not generate crises; its mismanagement does. It follows that the refuge the world is searching today from recurring financial crises does not lie in money substance: history testifies that national economies could not remain turmoil-free during the centuries of the yellow metal sway over the monetary scene. The paper concludes that it is the human factor that has been the source of good or evil for mankind including money matters. And the quality of human factor true religion can alone improve: morality without faith is rudderless. |
| Keywords: | Key words: Monetary policies; Gold standard; managed currency; Islamic banking; Central banks |
| JEL: | E62 E42 E58 B50 B25 |
| Date: | 2011–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28366&r=mac |
| By: | Nikolov, Kalin |
| Abstract: | I examine whether a benevolent government can improve on the free market allocation by setting capital requirements for private borrowers in a stochastic model with collateral constraints. Previous theoretical studies have found that when asset prices enter into bor- rowing constraints, pecuniary externalities between atomistic agents can make the laissez faire equilibrium constrained ine¢ cient. For reasonable parameter values, I find that, quan- titatively, the answer is 'no', private and government leverage choices coincide. Limiting private leverage by imposing capital requirements has the beneficial e¤ect of dampening the effects of the collateral amplification mechanism. This reduces fire sales in recessions and limits the negative externality that individual asset sales have on other credit constrained borrowers. However, we find that capital requirements are a blunt tool. They tax the activities of highly productive entrepreneurs and reduce the amount they produce in equilibrium. This reduces total factor productivity and steady state consumption. In the end, society faces a choice between high but unstable consumption in the free borrowing world and low but stable consumption in the regulated world. The government chooses the former. |
| Keywords: | Collateral constraints; Capital Requirements |
| JEL: | E21 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28407&r=mac |
| By: | Tullio Jappelli (University of Naples Federico II, CSEF and CEPR); Mario Padula (University “Ca’ Foscari” of Venice and CSEF) |
| Abstract: | We present an intertemporal consumption model of consumer investment in financial literacy. Consumers benefit from such investment because their stock of financial literacy allows them to increase the returns on their wealth. Since literacy depreciates over time and has a cost in terms of current consumption, the model determines an optimal investment in literacy. The model shows that financial literacy and wealth are determined jointly, and are positively correlated over the life cycle. Empirically, the model leads to an instrumental variables approach, in which the initial stock of financial literacy (as measured by math performance in school) is used as an instrument for the current stock of literacy. Using microeconomic and aggregate data, we find a strong effect of financial literacy on wealth accumulation and national saving, and also show that ordinary least squares estimates underestate the impact of financial literacy on saving. |
| Keywords: | Financial Literacy, Cognitive Abilities, Human Capital, Saving. |
| JEL: | E2 D8 G1 J24 |
| Date: | 2011–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:272&r=mac |
| By: | Kaas, Leo (University of Konstanz); Kircher, Philipp (London School of Economics) |
| Abstract: | The introduction of firm size into labor search models raises the question how wages are set when average and marginal product differ. We develop and analyze an alternative to the existing bargaining framework: Firms compete for labor by publicly posting long- term contracts. In such a competitive search setting, firms achieve faster growth not only by posting more vacancies, but also by offering higher lifetime wages that attract more workers which allows to fill vacancies with higher probability, consistent with empirical regularities. The model also captures several other observations about firm size, job flows, and pay. In contrast to bargaining models, efficiency obtains on all margins of job creation and destruction, both with idiosyncratic and aggregate shocks. The planner solution allows a tractable characterization which is useful for computational applications. |
| Keywords: | labor market search, multi-worker firms, job creation and job destruction |
| JEL: | E24 J64 L11 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5452&r=mac |
| By: | Romain Bouis; Romain Duval |
| Abstract: | This paper provides an illustrative assessment of the impacts on potential GDP over a 5 to 10-year horizon of structural reform scenarios in the areas of product and labour markets, relying on existing OECD empirical studies. Results of simulations suggest that a gradual alignment of product market regulations to best practice in a broad range of non-manufacturing sectors could boost aggregate labour productivity levels by several per cent over the next decade in many OECD countries, and by over five per cent across most of continental Europe, as well as for the BRIICS. Relaxation of job protection legislation could also raise productivity growth for a while in many OECD and non-OECD G20 countries, although the effects are estimated to be smaller than those from product market reforms. In a scenario under which they would be phased in relatively quickly, labour market reforms in the areas of unemployment benefit systems, activation policies, labour taxes and pension systems could raise employment rates by several percentage points in a number of OECD countries over a 10-year horizon. Large continental European countries would have the largest benefits to reap from reforms. The overall potential GDP gain for the average OECD country from undertaking the full range of reforms considered here might come close to 10% at a 10-year horizon, indicating the presence of ample room for structural reforms to offset the permanent GDP losses from the recent crisis.<P>Augmenter la croissance potentielle après la crise : une évaluation quantitative des gains potentiels de différentes réformes structurelles au sein de l'OCDE et au-delà<BR>Cet article fourni une évaluation illustrative des impacts sur le PIB potentiel à des horizons de 5 et 10 ans de scénarios de réformes structurelles dans les domaines des marchés des produits et du travail, à partir de travaux empiriques de l’OCDE. Les résultats des simulations suggèrent qu’un alignement graduel des réglementations du marché des produits dans un large ensemble de secteurs non manufacturiers aux meilleurs pratiques pourrait augmenter la productivité agrégée du travail de plusieurs pour cent au cours de la prochaine décennie dans plusieurs pays de l’OCDE, et de plus de cinq pour cent au sein de la plupart des pays d’Europe continentale, ainsi que dans les BRIICS. Un relâchement de la législation sur la protection de l’emploi pourrait augmenter la croissance de la productivité d’un montant non négligeable dans plusieurs pays de l’OCDE et pays non OCDE membres du G20, bien que les effets estimés soient plus faibles que ceux attendus de réformes du marché des produits. Dans un scénario dans lequel elles seraient mises en oeuvre assez rapidement, les réformes du marché du travail dans les domaines des systèmes d’indemnisation chômage, de politiques d’activation, de fiscalité du travail et de systèmes de retraite pourraient augmenter les taux d’emploi de plusieurs points de pourcentage dans plusieurs pays de l’OCDE à un horizon de 10 ans sous un scénario de mise en oeuvre rapide. Le gain en PIB potentiel pour le pays moyen de l’OCDE d’une mise en oeuvre de l’ensemble des réformes considérées ici pourrait approcher 10 % à un horizon de 10 ans, indiquant la présence de gains substantiels liés aux réformes structurelles susceptibles de compenser les pertes définitives en PIB consécutives à la crise récente. |
| Keywords: | growth, productivity, employment, structural reforms, productivité, croissance, réforme structurelle, emploi |
| JEL: | E27 O43 |
| Date: | 2011–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:835-en&r=mac |
| By: | Poterba, James M. (NBER); Venti, Steven F. (Dartmouth College); Wise, David A. (Harvard Kennedy School) |
| Abstract: | This paper examines the correlation between poor health and asset accumulation for households in the first nine waves of the Health and Retirement Survey. Rather than enumerating the specific costs of poor health, such as out of pocket medical expenses or lost earnings, we estimate how the evolution of household assets is related to poor health. We construct a simple measure of health status based on the first principal component of HRS survey responses on self-reported health status, diagnoses, ADLs, IADL, and other indicators of underlying health. Our estimates suggest large and substantively important correlations between poor health and asset accumulation. We compare persons in each 1992 asset quintile who were in the top third of the 1992 distribution of latent health with those in the same 1992 asset quintile who were in the bottom third of the latent health distribution. By 2008, those in the top third of the health distribution had accumulated, on average, more than 50 percent more assets than those in the bottom third of the health distribution. This "asset cost of poor health" appears to be larger for persons with substantial 1992 asset balances than for those with lower balances. |
| JEL: | E21 H10 J14 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-005&r=mac |
| By: | Mária Vojtková (University of Economics in Bratislava, Faculty of National Economy, Department of Banking and International Finance) |
| Abstract: | In the study we focus on theoretical and practical aspects of the role of the U.S. dollar in current international monetary system. We shortly describe the historical evolution of monetary system when it comes to the dollar position in it. Subsequently, we assess current status of the U.S. dollar in financial markets and its share on international foreign exchange reserves. In the application part, we examine how changes in the U.S. dollar exchange rate affect countries operating in the pegged exchange regime. At the same time, we focus on the problem of current account deficit of the U.S. balance of payments and its relationship to the export-oriented countries pegged to the U.S. dollar. |
| Keywords: | Bretton-Wood monetary system, U.S. dollar, pegged exchange regime, fixed exchange regime, balance of payment, terms of trade |
| JEL: | E42 E52 F30 F33 |
| Date: | 2011–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:brt:wpaper:002&r=mac |