nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒02‒12
27 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Third Quarter Review of Monetary Policy 2010-11 By D Subbarao
  2. The Impact of the Global Business Cycle on Small Open Economies: A FAVAR Approach for Canada By Garima Vasishtha; Philipp Maier
  3. Modelling Monetary and Fiscal Policy in the US: A Cointegration Approach By J. James Reade
  4. Financial volatility and optimal instrument choice: A revisit to Poole’s analysis By Dai, Meixing
  5. How to measure inflation in India? By Patnaik, Ila; Shah, Ajay; Veronese, Giovanni
  6. The Dynamic Effects of U.S. Monetary Policy on State Unemployment By Dimitris Korobilis; Michelle Gilmartin
  7. International Transmission of Business Cycles By Siedschlag, Iulia
  8. Monetary policy and its impact on stock market liquidity: Evidence from the euro zone By Octavio Fernández-Amador; Martin Gächter; Martin Larch; Georg Peter
  9. Monetary policy transmission in an emerging market setting. By Bhattacharya, Rudrani; Patnaik, Ila; Shah, Ajay
  10. Systemic financial fragility and the monetary circuit: a stock-flow consistent approach By Marco, Passarella
  11. On the monetary nature of the interest rate in Keynes’s thought By Giancarlo Bertocco
  12. Sorting and the Output Loss Due to Search Frictions By Gautier, Pieter; Teulings, Coen
  13. Regulating Asset Price Risk By Philippe Bacchetta, Cédric Tille, Eric van Wincoop
  14. Macroprudential policy - a literature review By Gabriele Galati; Richhild Moessner
  15. Mean-Variance Cointegration and the Expectations Hypothesis By Till Strohsal; Enzo Weber
  16. Central-Bank Government Relationship in the Context of Emerging Economic Environment By P. B. Jauasundera
  17. A simplified stock-flow consistent dynamic model of the systemic financial fragility in the 'New Capitalism' By Marco, Passarella
  18. Δυναμική του δημοσίου χρέους, οικονομική πολιτική και κοινωνική συνοχή στην Ελλάδα: μία σημείωση By Mariolis, Theodore; Papoulis, Κostas
  19. Equity Issuance and Divident Policy under Commitment By Alexis Anagnostopoulos; Eva Carceles-Poveda; Albert Marcet
  20. Macroeconomic and Financial Determinants of the Term Premium By Dewachter, Hans; Iania, Leonardo; Lyrio, Marco
  21. Housing Prices and Fundamentals: The Role of a Supply Shifter By Durmaz, Nazif
  22. OECD Educationtoday Crisis Survey 2010: The Impact of the Economic Recession and Fiscal Crisis on Education in OECD Countries By Dirk Van Damme; Kiira Karkkainen
  23. Measuring the Welfare Gain from Personal Computers: A Macroeconomic Approach By Jeremy Greenwood; Karen A. Kopecky
  24. Financial crisis response plan By Aldean, Cory
  26. Noi provocări pentru stabilitatea financiară în contextul crizei internaționale By Avadanei, Anamaria
  27. Surse ale instabilitatii financiare in contextul crizei internationale. A Literature Review By Avadanei, Anamaria

  1. By: D Subbarao
    Abstract: This statement sets out the Reserve Bank’s assessment of the current macroeconomic situation and forward projections.
    Keywords: monetary policy, inflation, growth, credit, reserve bank, India, macroeconomic, projections,
    Date: 2011
  2. By: Garima Vasishtha; Philipp Maier
    Abstract: Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we use a factor-augmented VAR (FAVAR) model with more than 260 series for 20 OECD countries to analyze how global developments affect the Canadian economy. We focus on several sources of shocks, including commodity prices, foreign economic activity, and foreign interest rates. We evaluate the impact of each shock on key Canadian macroeconomic variables to provide a comprehensive picture of the effect of international shocks on the Canadian economy. Our findings indicate that Canada is primarily exposed to shocks to foreign activity and to commodity prices. In contrast, the impact of shocks to global interest rates or global inflation is substantially lower. Our findings also expose the different channels through which higher commodity prices impact the Canadian economy: Canada benefits from higher commodity prices through a positive terms of trade shock, but at the same time, higher commodity prices tend to lower global economic activity, hurting demand for Canadian exports.
    Keywords: International topics; Econometric and statistical methods; Business fluctuations and cycles
    JEL: C32 F41
    Date: 2011
  3. By: J. James Reade
    Abstract: As governments and economists worldwide reflect on the unprecedented peacetime build-ups of government deficits and debts since 2008 and the Great Recession, the importance of fiscal and monetary policy interactions and their sustainability is key. This involves both thorough theoretical and careful econometric analysis. This paper provides the latter. We use multivariate cointegration methods to investigate monetary and fiscal interactions using the example of the United States since the early 1980s. Using survey data for inflation expectations, we find that monetary policymaking is heavily forward looking, and passive in the sense that it responds to policy rule. Fiscal policy is found to be active in that it does not respond to the fiscal policy rule discovered in the data. Entering into debates on the efficacy of fiscal policy, we find that in the long-term fiscal deficits are very harmful to growth, but in the short run fiscal stimuli can be effective in restoring the economy to equilibrium. The interactions between the two policy spheres appear somewhat limted in that neither policy tool enters the policy rule of the other policy sphere, but the more passive monetary policy does movwe in reaction to fiscal policy movements - the two policy spheres are complementary in that both respond in the same direction to revive and restrain the economy in downturns and boom times respectively.
    Keywords: Monetary policy, fiscal policy, policy interactions, cointegrated VAR method
    JEL: E52 E62 C01
    Date: 2011–01
  4. By: Dai, Meixing
    Abstract: In this paper, using an IS-LM model with reserve market, we examine weather the operating procedure actually adopted by many central banks in the world, i.e. targeting directly short run interest rates and hence indirectly market interest rates, is more efficient in stabilizing output than a monetary base operating procedure if shocks affecting the interest rate policy are taken into account. Our results suggest that for an interest rate policy to be more efficient than a monetary aggregate oriented policy, central banks should directly target market interest rates which are narrowly linked to the aggregate spending.
    Keywords: Poole’s analysis; optimal instrument choice; financial volatility; monetary policy operating procedures.
    JEL: E58 E51 E52 E44
    Date: 2010–02–18
  5. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy); Veronese, Giovanni (Bank of Italy)
    Abstract: What is the best inflation measure in India? What inflation measure is most relevant for monetary policy making in India? Questions of timeliness, weights in the price index, accuracy of food price measurement, and inclusion of services prices are relevant to the choice of measure. We show that under present conditions of measurement, the Consumer Price Index for Industrial Workers (CPI-IW) is preferable to either the Wholesale Price Index or the GDP deflator.
    Keywords: Monetary policy ; Inflation measure ; Statistical system
    JEL: E52 E58
    Date: 2011–02
  6. By: Dimitris Korobilis (Université Catholique de Louvain); Michelle Gilmartin (University of Strathclyde)
    Abstract: This paper studies the transmission of monetary shocks to state unemployment rates, within a novel structural factor-augmented VAR framework with a timevarying propagation mechanism. We find evidence of large heterogeneity over time in the responses of state unemployment rates to monetary policy shocks, which do not necessarily comply with the response of the national unemployment rate. We also find evidence of heterogeneity over the spatial dimension, although geographical proximity seems to play an important role in the transmission of monetary shocks.
    Keywords: regional unemployment, structural VAR, factor model, monetary policy
    JEL: R15 C11 E52
    Date: 2011–02
  7. By: Siedschlag, Iulia
    Date: 2010–10
  8. By: Octavio Fernández-Amador; Martin Gächter; Martin Larch; Georg Peter
    Abstract: The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. To capture effects both at the micro and macro level of stock markets, we apply panel estimations and vector autoregressive models. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of stock market liquidity in the German, French and Italian markets. These findings are robust for seven proxies of liquidity and two measures of monetary policy.
    Keywords: Stock liquidity, monetary policy, euro zone
    JEL: E44 E51 E52 G12
    Date: 2011–02
  9. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: Some emerging economies have a relatively ineffective monetary policy transmis- sion owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchange-rate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.
    Keywords: Monetary policy transmission ; Exchange rate pass-through ; Exchange rate regime ; Financial development ; India
    JEL: E31 E52
    Date: 2011–01
  10. By: Marco, Passarella
    Abstract: In the last few years, a number of scholars has referred to the crop of contributions of Hyman P. Minsky as required readings to understanding the tendency of the capitalist economies to fall into recurring crises. The so-called ‘financial instability hypothesis’ of Minsky relies, however, on very disputed assumptions. Moreover, Minsky’s analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to overcome these theoretical difficulties, section 2 of the paper deals with the analytical structure of the financial instability theory, showing why this latter cannot be regarded as a general theory of the business cycle. Sections 3, 4 and 5 deal with a simplified, but consistent, re-formulation of some of the most disputed aspects of Minsky’s theory by cross-breeding it with inputs from the ‘Circuitist’ approach and the current Post Keynesian literature. In sections 6 and 7 we analyze the impact of both capital-asset inflation and consumer credit on the financial ‘soundness’ of the economy, within a simplified stock-flow consistent monetary circuit model. Some concluding remarks are provided in the last part of the paper (section 8).
    Keywords: Financial Instability; Stock-Flow Consistency; Monetary Theory of Production
    JEL: E32 E12 B50 E44
    Date: 2011–01–28
  11. By: Giancarlo Bertocco (Department of Economics, University of Insubria, Italy)
    Abstract: Keynes in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this paper is twofold. Fist, to point out the limits of an explanation of the monetary nature of the interest rate and thus of the non-neutrality of money based on the liquidity preference theory. Second, to present a different explanation of the monetary nature of the interest rate based on the arguments with which Keynes, following the General Theory, responded to the criticism levelled at the liquidity preference theory by supporters of the loanable funds theory such as Ohlin and Robertson. It is shown that this explanation is consistent with the definition of the non-neutrality of money that Keynes presented in his 1933 works in which he underlines the need to elaborate a monetary theory of production (Keynes 1933a, 408) in order to explain the phenomena of the crisis and the fluctuations in income and employment
    Date: 2011–02
  12. By: Gautier, Pieter (VU University Amsterdam); Teulings, Coen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We analyze a general search model with on-the-job search and sorting of heterogeneous workers into heterogeneous jobs. This model yields a simple relationship between (i) the unemployment rate, (ii) the value of non-market time, and (iii) the max-mean wage differential. The latter measure of wage dispersion is more robust than measures based on the reservation wage, due to the long left tail of the wage distribution. We estimate this wage differential using data on match quality and allow for measurement error. The estimated wage dispersion and mismatch for the US is consistent with an unemployment rate of 4-6%. We find that without search frictions, output would be between 7.5% and 18.5% higher, depending on whether or not firms can ex ante commit to wage payments.
    Keywords: search, sorting, wage dispersion, on-the-job search, unemployment
    JEL: E24 J62 J63 J64
    Date: 2011–02
  13. By: Philippe Bacchetta, Cédric Tille, Eric van Wincoop (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: There has been a long debate about whether speculators are stabilizing or not. We consider a model where speculators have a stabilizing role in normal times, but may also provoke large risk panics. The very feature that makes arbitrageurs liquidity providers in normal times, namely their tolerance of risk, enables a large increase in asset price risk during a financial panic. We show that a policy that discourages balance sheet risk reduces the magnitude of financial panics, as well as asset price risk in both normal and panic states.
    Keywords: Asset Pricing, Risk Management, Leverage.
    JEL: E44 G11 G18
    Date: 2011–01
  14. By: Gabriele Galati; Richhild Moessner
    Abstract: The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. In recent months, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.
    Keywords: macroprudential policy
    Date: 2011–02
  15. By: Till Strohsal; Enzo Weber
    Abstract: The present paper sheds further light on a well-known (alleged) violation of the expec- tations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We show that the EHT implies (i) that the nonstationarity stems from the holding premium, which is hence (ii) cointegrated with the spread. In a stochas- tic discount factor framework we model the premium as being driven by the integrated variance of excess returns. Introducing the concept of mean-variance cointegration we actually find cointegration relations between spreads and premia in US data.
    Keywords: Expectations Hypothesis, Holding Premium, Persistence, Cointegration, GARCH
    JEL: E43 C32
    Date: 2011–02
  16. By: P. B. Jauasundera
    Abstract: The relationship between the Central Bank and the Government is based not on a mere legal framework, but also on multifaceted political economic considerations. Although in many respects the Central Bank is independent, it has become an integral part of the Government, particularly in managing macroeconomic challenges. The recent financial crisis in most advanced countries has put the Central Banks and Governments on to one mission and to work in close collaboration. [60th Anniversary Oration of the Bank of Sri Lanka]
    Keywords: central bank, financial crisis, central bank-government relationship, South Asia, Sri Lanka
    Date: 2011
  17. By: Marco, Passarella
    Abstract: In the last few years, many financial analysts and heterodox economists (but even some ‘dissenters’ among orthodox economists) have referred to the contribution of Hyman P. Minsky as fundamental to understanding the current crisis. However, it is well-known that the traditional formulation of Minsky’s ‘financial instability hypothesis’ shows serious internal logical problems. Furthermore, Minsky’s analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to overcome these theoretical and empirical troubles, this paper, first, introduces the reader to the ‘mechanics’ of the financial instability theory, according to the formulation of the traditional Minskian literature (section 2). Second, it shows ‘why’ Minsky’s theory cannot be regarded as a general theory of the business cycle (section 3). Third, the paper attempts to supply a simplified, but consistent, re-formulation of Minsky’s theory by inter-breeding it with inputs coming from the ‘New Cambridge’ theories and the current ‘formal Minskian literature’. The aim of this is to analyze the impact of both capital-asset inflation and consumer credit on the financial ‘soundness’ of the non-financial business sector (sections 4-7). Some concluding remarks are provided in the last part of the paper (section 8).
    Keywords: Financial Instability; Stock-Flow Consistency; Capital-asset Inflation
    JEL: E32 E12 B50 E44
    Date: 2011–01–19
  18. By: Mariolis, Theodore; Papoulis, Κostas
    Abstract: This paper explores the dynamics of the Greek public debt. It supports that, first, the public debt is unsustainable and, second, the reduction in government expenditures and the cut in unit labour costs in the private sector seems to be the only available, al-though too little too late ‘remedy’.
    Keywords: Debt dynamics; economic policy; EMU; international competitiveness; social cohesion
    JEL: E62 E12 F41 H68
    Date: 2010–12
  19. By: Alexis Anagnostopoulos (Department of Economics, Stony Brook University); Eva Carceles-Poveda (Department of Economics, Stony Brook University); Albert Marcet (Department of Economics, The London School of Economics and Political Science)
    Abstract: This paper studies a model of corporate finance in which firms use stock issuance to finance investment. Since the firm recognizes the relationship between future dividends and stock prices, future variables enter in the constraints and optimal policy is in general time inconsistent. We discuss the nature of time inconsistency and show that it arises because managers promise to incorporate value maximization gradually into their objective function. This shows how one could change managers’ incentives in order to enforce the optimal contract under full commitment. We then characterize several cases where time consistency arises and we study different examples where policy is time inconsistent. This allows us to address some outstanding issues in the literature about dividend policy and equity issuance. In particular, our results suggest that growing firms that can credibly commit will pay lower dividends at the beginning and promise higher dividends in the future, consistent with empirical evidence. Our results also suggests that compensation that is tied to stock options creates incentives to inflate prices and pay lower dividends. This is consistent with the empirical evidence of increased stock option compensation and payout through repurchases instead to dividends during the last decades.
    Keywords: Stock Issuance; time inconsistency; dividend policy
    JEL: E44 G32
    Date: 2010–12
  20. By: Dewachter, Hans; Iania, Leonardo; Lyrio, Marco
    Date: 2011–10
  21. By: Durmaz, Nazif
    Abstract: This paper empirically investigates cointegrating relation between housing prices and economic fundamental variables in the US housing market. Employing simple yet rigorous econometric techniques, the present paper finds strong evidence in favor of cointegrating relations in most US states when both the demand and supply side fundamental variables are included in the cointegrating regression. This casts doubt on the previous empirical work that reported weak or no cointegrating relation of housing prices with mostly demand-side fundamental variables, which may have a misspecification problem. Further, cointegrating vector estimates seem consistent with economic theories only when both side fundamental variables are used.
    Keywords: Housing prices, cointegration
    JEL: E32 R31
    Date: 2011–02–01
  22. By: Dirk Van Damme; Kiira Karkkainen
    Abstract: The OECD Directorate for Education surveyed the impact of the economic recession on education for the first time in June 2009. Responses were received from seventeen OECD member countries, the Flemish Community of Belgian and two Canadian provinces. The results of the survey reflect the observations of officials in education ministries and public agencies in member countries regarding various aspects of the impact of the economic recession and fiscal crisis on education.
    Date: 2011–02
  23. By: Jeremy Greenwood (University of Pennsylvania); Karen A. Kopecky (Federal Reserve Bank of Atlanta)
    Abstract: The welfare gain to consumers from the introduction of personal computers is estimated here. A simple model of consumer demand is formulated that uses a slightly modified version of standard preferences. The modification permits marginal utility, and hence total utility, to be finite when the consumption of computers is zero. This implies that the good won't be consumed at a high enough price. It also bounds the consumer surplus derived from the product. The model is calibrated/estimated using standard national income and product account data. The welfare gain from the introduction of personal computers is in the range of 2 to 3 percent of consumption expenditure.
    Keywords: Compensating Variation, Computers, Electricity, Equivalent Variation, Technological Progress, Tornqvist Price Index, Welfare Gain.
    JEL: E01 E21 O33 O47
    Date: 2011–01
  24. By: Aldean, Cory
    Abstract: Despite the recent highs and lows in international finance, the need for better understanding on the part of policy-makers, business leaders and the general public is evident to address future crisis. The study of other countries’ financial difficulties in recent history seems to be a key element missing in our nation’s response. The economy is too important to leave up to an ill prepared ad hoc emergency meeting. Rather than throwing together a government response, just-in-time at best, it would be advantageous to have a plan ready to pull off the shelf. For such a plan, this paper suggests guiding principles, a plan outline, and options available to the policy-maker in the form of a Financial Crisis Response Plan (FCRP). It should mirror a typical government disaster response plan to some extent, but tailored to assist the Federal government’s response to a myriad of financial crises. The guiding principles for any financial response could be used for a just-in-time response, or for planning and writing plans in between crisis. The plan should be one that is A-political in nature, clearly identifies the problems, considers legal options available, and roles of responders. Such a plan should have strong measurable goals, and strive for universal application, cost savings to the tax-payer, consider all parties welfare including overseas counterparts, and a return to profitable business operations. Any plan developed must be comprehensive to all participating parties, with scheduled training and exercises. Study of past crises and non-traditional sources will not replace but supplement existing principles utilized by government institutions. Several historical works of economists as well as more recent writings like those of Reinhart & Rogoff (2008) touch on financial crisis. The bulk of research for this paper was through foreign central bankers. Central banks have been through similar crises, and have suggested courses of action similar to the FCRP. Additionally, lesser known writers or economists, particularly those outside government payroll or Wall Street, have some value in the discussion. No one person will have all the answers and no single plan will be the ultimate government response, but many options should be explored. Thus, the plan here-in will not attempt to provide all the answers, but a framework for policy-makers (locally and globally) to arrive at those solutions.
    Keywords: The paper recommends a government Financial Crisis Response Plan; with several options and guidelines described.
    JEL: E61
    Date: 2010–05
  25. By: Eleonora Pierucci; Luigi Ventura
    Abstract: By means of panel and time series regression analyses, and by resorting to a variance decomposition due to Asdrubali et al. (1996) we show that income flows to and from abroad did not play, in general, a large risk sharing role for a pool of EU countries over the horizon 1976-2007. This is particularly true in a pre-globalization period, but remains true for some countries, even in the finance globalization era. We then extend the analysis to consider a measure of cash flow, instead of income, available for consumption, and observe that capital flows to and from abroad have played a largely destabilizing role, to an extent that one might have not expected beforehand. Key to this result is also the study of asymmetries in smoothing positive and negative shocks by the different possible channels. These findings seem to provide some useful insights onto the origin of the recent global financial crisis.
    Keywords: Risk Sharing, Financial Globalization, Capital Flows
    JEL: E2 E6 F15
    Date: 2011–01
  26. By: Avadanei, Anamaria
    Abstract: Abstract: The recent global financial crisis has exposed weaknesses in economic policy and financial structure on a national and international level. The aim of this paper is to underline how the present financial crisis affects the financial stability. The study is structured on chapters that present theories of the financial instability, main features of the threatening factors for the financial stability in the opinion of the specialists, the associated risks and the potential effects, the solutions and the recovery measures proposed by the economists and applied by the financial institutions. To conclude, deep reforms are needed, the major directions to improve are cooperation, efficient risk management, information transparency, governance change and health of the financial components.
    Keywords: financial crisis; risks; financial stability; financial reform.
    JEL: E44 G32
    Date: 2010–12–07
  27. By: Avadanei, Anamaria
    Abstract: Abstract: Nowadays, the countries still face new challenges in sustaining their own financial systems, designing a credible regulatory framework, a better cooperation line and a solid cross-border crisis management. The aim of this paper is to underline the main sources of financial instability in the context of the international crisis. The study is structured on two sections: the first one presents the theories of the financial instability, developed by the economists; the second part summarizes the opinions of the bankers, researchers and practitioners regarding traditional and modern causes of the financial instability in the actual framework. To conclude, defining the threatening factors must consider the characteristics of the national economies, the level of exposure and the historical experience.
    Keywords: financial instability; financial crisis; risks
    JEL: E44 G32
    Date: 2010–11–19

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