nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒02‒26
sixty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Optimal Central Bank Lending By Andreas Schabert
  2. Monetary Policy, Trend Inflation and Inflation Persistence By Fang Yao
  3. The Role of Macroeconomic Policy in Rebalancing Growth By J. Morgan, Peter
  4. Firm Entry, Inflation and the Monetary Transmission Mechanism By Vivien LEWIS; Céline POILLY
  5. Firm entry, inflation and the monetary transmission mechanism By Vivien Lewis; Céline Poilly
  6. The Opportunistic approach to monetary policy and financial markets By Kasai Ndahiriwe; Ruthira Naraidoo
  7. Targets, Policy Lags and Sticky Prices in a Two-Equation Model of US Stabilization Policy By David Kiefer
  8. Quantitative easing in the United States after the crisis: conflicting views. By Domenica Tropeano
  9. The Effects of Housing Prices and Monetary Policy in a Currency Union By Pau Rabanal; Oriol Aspachs-Bracons
  10. Temporarily Unstable Government Debt and Inflation By Troy Davig; Eric M. Leeper
  11. Optimal Monetary and Fiscal Policies in a Search-Theoretic Model of Money and Unemployment By Pedro Gomis-Porqueras; Benoit Julien; Chengsi Wang
  12. Macroeconomics as a Science By Apostolos Serletis
  13. Monetary policy transmission in an emergingmarket setting By Ila Patnaik; Ajay Shah; Rudrani Bhattacharya
  14. Learning About Inflation Measures for Interest Rate Rules By Luis-Felipe Zanna; Marco Airaudo
  15. The Impact of Fiscal Consolidation and Structural Reforms on Growth in Japan By Pelin Berkmen
  16. Inflation and unemployment in Switzerland: from 1970 to 2050 By Kitov, Oleg; Kitov, Ivan
  17. Money and Keynesian Uncertainty By Lucarelli, B.
  18. The Great Recession: US dynamics and spillovers to the world economy By Fabio Bagliano; Claudio Morana
  19. An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy By Tigran Poghosyan; Samya Beidas-Strom
  20. The Employment Effects of Fiscal Policy: How Costly Are ARRA Jobs? By F. Gerard Adams; Byron Gangnes
  21. Macroeconomic Effects of Public Pension Reforms By Anita Tuladhar; Philippe D Karam; Dirk Muir; Joana Pereira
  22. Globalization, the Business Cycle, and Macroeconomic Monitoring By M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
  23. Inflation Perceptions and Expectations in Sweden - Are Media Reports the ‘Missing Link’? By Lena Dräger
  24. Sorting and the Output Loss due to Search Frictions By Pieter A. Gautier; Coen N. Teulings
  25. Strengthening Chile's Rule-Based Fiscal Framework By Teresa Dabán Sánchez
  26. What are the Effects of Monetary Policy Shocks? Evidence from Dollarized Countries By Tim Willems
  27. Pensions, Debt and Inflation Risk in a Monetary Union By Yvonne Adema
  28. Anticipated Alternative Policy-Rate Paths in Policy Simulations By Laséen, Stefan; Svensson, Lars E.O.
  29. Do Financial Variables Help Predict Macroeconomic Environment? The Case of the Czech Republic By Tomas Havranek; Roman Horvath; Jakub Mateju
  30. Aggregation in Large Dynamic Panels By Pesaran, Hashem; Chudik, Alexander
  31. Reversing the Financial Accelerator: Credit Conditions and Macro-Financial Linkages By Reginald Darius; Tamim Bayoumi
  32. The Impact of Monetary Policy on Economic Activity - Evidence from a Meta-Analysis By Masagus M. Ridhwan; Henri L.F. de Groot; Peter Nijkamp
  33. Identifying the Weights in Exchange Market Pressure By Franc Klaassen
  34. The Relationship Between Financial Risk Premia and Macroeconomic Volatility: Issues and Perspectives on the Run-Up to the Turmoil By M. Marzo; L. Zhoushi; P. Zagaglia
  35. Data Revisions and the Output Gap By Juan Manuel Julio
  36. Overborrowing, Financial Crises and ‘Macro-prudential’ Policy? By Javier Bianchi; Enrique G. Mendoza
  38. Food and energy prices, government subsidies and fiscal balances in south Mediterranean countries By Albers, Ronald; Peeters, Marga
  39. The Cyclicality of Effective Wages within Employer-Employee Matches in a Rigid Labor Market By Anger, Silke
  40. Recession and Policy Transmission to Latin American Tourism: Does Expanded Travel to Cuba Offset Crisis Spillovers? By Rafael Romeu; Andrew M. Wolfe
  41. The Macroeconomics of the Credit Crisis: In Search of Externalities for Macro-Prudential Supervision By Frank A.G. den Butter
  42. The Impact of Oil Prices in Turkey on Macroeconomics By Aktas, Erkan; Özenç, Çiğdem; Arıca, Feyza
  43. To Fire or to Hoard? Explaining Japan’s Labor Market Response in the Great Recession By Chad Steinberg; Masato Nakane
  44. Exchange Rate Policy under Sovereign Default Risk By Andreas Schabert
  45. Estimates of the Sticky-Information Phillips Curve for the USA with the General to Specific Method By Paradiso, Antonio; Rao, B. Bhaskara; Ventura, Marco
  46. Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies By Charlot, Olivier; Malherbet, Franck; Terra, Cristina
  47. Germany's Short Time Compensation Program: macroeconom(etr)ic insight By Henner Will
  48. Structural Transformation in China and India: The Role of Macroeconomic Policies By Codrina Rada and Rudiger von Arnim
  49. Inventory investment and production in Europe: Is there a pattern? By Yngve Abrahamsen; Jochen Hartwig
  50. Macroeconomic Aspects of Italian Pension Reforms of 1990s By Tetyana Dubovyk
  51. Historical Oil Shocks By James D. Hamilton
  52. Identifying the Weights in Exchange Market Pressure By Franc Klaassen
  53. Social Security Tax and Endogenous Technical Change in an Economy with an Aging Population By Codrina Rada
  54. Capital Controls: Myth and Reality - A Portfolio Balance Approach By Nicolas E. Magud; Carmen M. Reinhart; Kenneth S. Rogoff
  55. The promise and performance of the Federal Reserve as Lender of Last Resort 1914-1933 By Michael D. Bordo; David C. Wheelock
  56. Linkages between the Financial and the Real Sector of the Economy: A Literature Survey By Peter Broer; Jürgen Antony
  57. China in Africa: A Macroeconomic Perspective - Working Paper 230 By Benedicte Vibe Christensen
  58. India's financial globalisation By Ila Patnaik; Ajay Shah
  59. Market Timing, Investment, and Risk Management By Patrick Bolton; Hui Chen; Neng Wang
  60. Human Capital Formation on Skill-Specific Labor Markets By Runli Xie
  61. Banking risk and regulation: Does one size fit all? By Jeroen Klomp
  62. Pricing, Advertising, and Market Structure with Frictions By Pedro Gomis-Porqueras; Benoit Julien; Chengsi Wang
  63. International Risk Sharing in the Short Run and in the Long Run By Marianne Baxter
  64. Are Panel Unit Root Tests Useful for Real-Time Data? By Gengenbach Christian; Hecq Alain; Urbain Jean-Pierre
  65. Optimal Management with Potential Regime Shifts By Stephen Polasky; Aart de Zeeuw; Florian Wagener
  66. The optimal rate of inequality: A framework for the relationship between income inequality and economic growth By Charles-Coll, Jorge A.

  1. By: Andreas Schabert (Dortmund University, and University of Amsterdam)
    Abstract: We analyze optimal monetary policy in a sticky price
    Keywords: Optimal monetary policy; central bank instruments; collateralized lending; liquidity premium; inflation
    JEL: E4 E5 E32
    Date: 2010–06–21
  2. By: Fang Yao
    Abstract: This paper presents a new mechanism through which monetary policy rules affect inflation persistence. When assuming that price reset hazard functions are not constant, backward- looking dynamics emerge in the NKPC. This new mechanism makes the traditional demand channel of monetary transmission have a long-lasting effect on inflation dynamics. The Calvo model fails to convey this insight, because its constant hazard function leads those important backward-looking dynamics to be canceled out. I first analytically show how it works in a simple setup, and then solve a log-linearized model numerically around positive trend inflation. With realistic calibration of trend inflation and the monetary policy rule, the model can account for the pattern of changes in inflation persistence observed in the post-wwii U.S. data. In addition, with increasing hazard functions, the "Taylor principle" is sufficient to guarantee the determinate equilibrium even under extremely high trend inflation.
    Keywords: Intrinsic inflation persistence, Hazard function, Trend inflation, Monetary policy, New Keynesian Phillips curve
    JEL: E31 E52
    Date: 2011–02
  3. By: J. Morgan, Peter (Asian Development Bank Institute)
    Abstract: The aftermath of the global financial crisis of 2007–2009 has called the export-led growth model of Asian economies into question. This paper describes the contribution that macroeconomic policy can make to promote a rebalancing of growth away from dependence on exports to developed economies to a more sustainable pattern of growth centered on domestic and regional demand. This represents a significant departure from the traditional uses of macroeconomic policy to stabilize the economic cycle and achieve stable and low inflation. The evidence suggests that macroeconomic policy can successfully contribute to growth rebalancing. Policy measures not only can affect aggregate demand directly, but can also affect it indirectly via their “microeconomic” impacts on private sector behavior. Although in the long-term fiscal policy should be balanced to maintain government debt stability and avoid crowding out of private investment, there may be substantial scope to expand monetary and fiscal policy in the medium-term to offset the deflationary effects of an appreciating currency during periods of current account reversal. Previous experience suggests that most of the needed stimulus can be provided by monetary policy, with only a supplementary role to be played by fiscal policy. Moreover, Asian economies with large current account surpluses tend to have sufficient fiscal space.
    Keywords: economic growth rebalancing; macroeconomic policy; sustainable economic growth
    JEL: E21 E52 E58 E62 E64 F31 F32 H50 H55 I38
    Date: 2011–02–17
  4. By: Vivien LEWIS (Ghent University and Goethe University Frankfurt, IMFS); Céline POILLY (UNIVERSITE CATHOLIQUE DE LOUVAIN, IMMAQ, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased firm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.
    Keywords: entry, inflation, monetary transmission, monetary policy, extensive margin
    JEL: E32 E52
    Date: 2011–02–08
  5. By: Vivien Lewis (Postdoctoral Fellow of the Fund for Scientific Research - Flanders (FWO); Institute for Monetary and Financial Stability (Department of Money and Macroeconomics), Goethe University Frankfurt; House of Finance, Frankfurt am Main, Germany); Céline Poilly (Université catholique de Louvain, Department of Economics)
    Abstract: This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased firm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.
    Keywords: entry, inflation, monetary transmission, monetary policy, extensive margin
    JEL: E32 E52
    Date: 2011–02
  6. By: Kasai Ndahiriwe (Department of Economics, University of Pretoria); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: We test the concept of the Opportunistic Approach to monetary policy in South Africa post 2000 inflation targeting regime. Our findings support the two features of the opportunistic approach. First, we find that the models that include an intermediate target that reflects the recent history of inflation rather than simple inflation target improve the fit of the models. Second, the data supports the view that the South African Reserve Bank (SARB) behaves with some degree of nonresponsiveness when inflation is within the zone of discretion but react aggressively otherwise. Recursive estimates from our preferred model reveal that overall there has been a subdued reaction to inflation, output and financial conditions amidst the increased economic uncertainty of the 2007- 2009 financial crisis.
    Keywords: monetary policy, opportunistic approach, intermediate inflation, financial conditions
    JEL: C51 C52 C53 E52 E58
    Date: 2011–02
  7. By: David Kiefer
    Abstract: Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy. One equation is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by a Phillips curve PC. Central banks attempt to implement these objectives by setting interest rates along an IS curve. They label this the IS-PC-MR model. Observing that governments have more tools than just the interest rate, we drop the IS equation, simplifying their model to 2 equations. Adding a random walk model of the unobserved potential growth, we develop their PC-MR model into a state space specification of the short-run political economy. This is an appropriate econometric method because it incorporates recursive forecasts of unobservable state variables based on contemporaneous information measured with real-time data. Our results are generally consistent with US economic history. One qualification is that governments are more likely to target growth rates than output gaps. Another is that policy affects outcomes after a single lag. This assumption fits the data better than an alternative double-lag timing: one lag for output, plus a second for inflation has been proposed. We also infer that inflation expectations are more likely to be backward rather than forward looking.
    Keywords: new Keynesian stabilization, policy targets, microfoundations, real-time data
    JEL: E3 E6
    Date: 2011
  8. By: Domenica Tropeano (University of Macerata)
    Abstract: <p>The paper deals with the conflicting interpretations of the monetary policy carried out by the Federal Reserve during and after the financial crisis of 2007-08. That policy has been labelled as quantitative easing. The first interpretation of that policy is that the central bank will continue to flood the market with money to cause inflation or at least inflationary expectations. A depreciation would eventually do the same job too. Another interpretation, partially based on Minsky's theory of investment, is that easy monetary policy carried out beyond the lender-of-last-resort intervention might have the aim of sustaining the price of investment and validating firms' plans. In other words, it would be complementary to fiscal policy with the aim of sustaining profits and investment. The problem is that the Kaleckian model Minsky was using hardly corresponds to the present situation of the U.S. economy. The interpretation here proposed is that the aim of monetary policy is the recovery of financial asset prices to sustain banks profits and to restore the value of household wealth. This design might be considered as successful if we look at the recent data. But those signals are not encouraging if we look at long term sustainability of policies. The recovery of stock prices has encouraged speculation on anything possible by the big banks. Moreover the recovery of financial asset prices in<br />contrast to the slow motion of housing prices might increase the already high inequality in wealth distribution.</p>
    Date: 2011–02
  9. By: Pau Rabanal; Oriol Aspachs-Bracons
    Abstract: The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.
    Keywords: Demand , Economic models , European Economic and Monetary Union , External shocks , Housing , Housing prices , Interest rates , Labor markets , Monetary policy , Spain ,
    Date: 2011–01–07
  10. By: Troy Davig; Eric M. Leeper
    Abstract: Many advanced economies are heading into an era of fiscal stress: populations are aging and governments have made substantially more promises of old-age benefits than they have made provisions to finance. This paper models the era of fiscal stress as stemming from relentlessly growing promised government transfers that initially are fully honored, being financed by new sales of government debt that bring forth higher future income taxes. As debt levels and tax rates rise, the population's tolerance for taxation declines and the probability of reaching the fiscal limit increases. At the limit a fixed tax rate is adopted, adjustments in taxes no longer stabilize debt, and some new stabilizing combination of policies must arise. We examine how, in the period before the fiscal limit, rapidly rising debt interacts with expectations of how and when policies will adjust. Temporarily explosive debt has no effect on inflation if households expect all adjustments to occur through entitlements reform, but if households believe it is possible that in the future monetary policy will shift from targeting inflation to stabilizing debt, then debt feeds directly into the path of inflation and monetary policy can no longer control inflation. News that reduces expected primary surpluses can bring future inflation into the present, well before the news shows up in fiscal measures.
    JEL: E31 E52 E62 E63
    Date: 2011–02
  11. By: Pedro Gomis-Porqueras (School of Economics, Australian National University); Benoit Julien (School of Economics, University of New South Wales); Chengsi Wang (School of Economics, University of New South Wales)
    Abstract: In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios’ rule does not hold.
    Keywords: Search and matching; Fiscal polices; Money; Unemployment; Efficiency
    JEL: E52 E63
    Date: 2010–11
  12. By: Apostolos Serletis
    Abstract: This is a Foreword to William A. Barnett, “Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy,†The MIT Press (forthcoming, 2011).
    Keywords: Monetary statistics, Monetary aggregation, Financial crisis, Great recession
    JEL: C3 C13 C51
    Date: 2011–02–17
  13. By: Ila Patnaik; Ajay Shah; Rudrani Bhattacharya
    Abstract: Some emerging economies have a relatively ineffective monetary policy transmission 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 exchangerate 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: Economic models , Emerging markets , Exchange rates , Monetary policy , Monetary transmission mechanism ,
    Date: 2011–01–06
  14. By: Luis-Felipe Zanna; Marco Airaudo
    Abstract: Empirical evidence suggests that goods are highly heterogeneous with respect to the degree of price rigidity. We develop a DSGE model featuring heterogeneous nominal rigidities across two sectors to study the equilibrium determinacy and stability under adaptive learning for interest rate rules that respond to inflation measures differing in their degree of price stickiness. We find that rules responding to headline inflation measures that assign a positive weight to the inflation of the sector with low price stickiness are more prone to generate macroeconomic instability than rules that respond exclusively to the inflation of the sector with high price stickiness. By this we mean that they are more prone to induce non-learnable fundamental-driven equilibria, learnable self-fulfilling expectations equilibria, and equilibria where fluctuations are unbounded. We discuss how our results depend on the elasticity of substitution across goods, the degree of heterogeneity in price rigidity, as well as on the timing of the rule.
    Keywords: Economic models , Inflation , Inflation rates , Price stabilization , Stabilization measures ,
    Date: 2010–12–22
  15. By: Pelin Berkmen
    Abstract: With Japan’s public debt reaching historical levels, the need for fiscal consolidation and structural reforms have increased. As fiscal consolidation will require a sustained and large adjustment in the fiscal balance, its growth effect is a concern particularly for the short run. This paper uses the IMF’s Global Integrated Monetary and Fiscal Model to analyze the growth impact of fiscal consolidation and structural reforms. Although fiscal consolidation has short-term costs, the potential long-term benefits are considerable, and reforms that raise potential growth could support consolidation. Simulations show that the external environment also matters but domestic policies should be the priority.
    Keywords: Economic growth , Economic models , Fiscal consolidation , Fiscal policy , Fiscal reforms , Japan , Monetary policy , Taxes ,
    Date: 2011–01–13
  16. By: Kitov, Oleg; Kitov, Ivan
    Abstract: An empirical model is presented linking inflation and unemployment rate to the change in the level of labour force in Switzerland. The involved variables are found to be cointegrated and we estimate lagged linear deterministic relationships using the method of cumulative curves, a simplified version of the 1D Boundary Elements Method. The model yields very accurate predictions of the inflation rate on a three year horizon. The results are coherent with the models estimated previously for the US, Japan, France and other developed countries and provide additional validation of our quantitative framework based solely on labour force. Finally, given the importance of inflation forecasts for the Swiss monetary policy, we present a prediction extended into 2050 based on official projections of the labour force level.
    Keywords: Inflation; Unemployment; Labour force; Forecasting; Switzerland
    JEL: J21 E6 E3
    Date: 2011–02–14
  17. By: Lucarelli, B.
    Abstract: Keynes’s theory of a monetary economy and his liquidity preference theory of investment will be examined in order to highlight the essential properties of money under the conditions of uncertainty, which inevitably prefigures the existence of involuntary unemployment and could – within a laissez faire, deregulated financial system – induce phases of endemic financial instability and crises.
    Keywords: uncertainty; money; liquidity preference; crisis; investment
    JEL: B10 D53 B31 A20 B50 B22 A10
    Date: 2010–06–26
  18. By: Fabio Bagliano (University of Turin and CeRP); Claudio Morana (Università del Piemonte Orientale and CeRP)
    Abstract: The paper aims at assessing the mechanics of the Great Recession, considering both its domestic propagation within the US, as well as its spillovers to advanced and emerging economies. A total of 50 countries has been investigated by means of a large-scale open economy macroeconometric model, providing an accurate assessment of the international macro/finance interface over the whole 1980-2009 period. It is found that a boom-bust credit cycle interpretation of the crisis is consistent with the empirical evidence. Moreover, concerning the real effects of the crisis within the US, stronger evidence of an asset prices channel, rather than a liquidity channel, has been detected. The results also support the effectiveness of the expansionary fiscal/monetary policy mix implemented by the Fed and the US government. Concerning the spillovers to the world economy, it is found that while the financial shock has spilled over to foreign countries through US housing and stock price dynamics, as well as excess liquidity creation, the trade channel likely is the key transmission mechanism of the real shock.
    Keywords: Great Recession, financial crisis, economic crisis, boombust, credit cycle, international business cycle, factor vector autoregressive models
    JEL: C22 E32 F36
    Date: 2010–11
  19. By: Tigran Poghosyan; Samya Beidas-Strom
    Abstract: This paper presents and estimates a small open economy dynamic stochastic general-equilibrium model (DSGE) for the Jordanian economy. The model features nominal and real rigidities, imperfect competition and habit formation in the consumer’s utility function. Oil imports are explicitly modeled in the consumption basket and domestic production. Bayesian estimation methods are employed on quarterly Jordanian data. The model’s properties are described by impulse response analysis of identified structural shocks pertinent to the economy. These properties assess the effectiveness of the pegged exchange rate regime in minimizing inflation and output trade-offs. The estimates of the structural parameters fall within plausible ranges, and simulation results suggest that while the peg amplifies output, consumption and (price and wage) inflation volatility, it offers a relatively low risk premium.
    Keywords: Income , Monetary policy , Exchange rate depreciation , Exchange rate appreciation , Economic models , External shocks , Demand , Oil prices , Price adjustments , Wage policy , Consumption , Exchange rate policy ,
    Date: 2011–02–02
  20. By: F. Gerard Adams (University of Pennsylvania (Emeritus), Economics Department); Byron Gangnes (University of Hawaii at Manoa, Economics Department)
    Abstract: The American Recovery and Reinvestment Act was intended to stimulate the U.S.economy and to create jobs. But at what cost? In this paper, we discuss the range of potential benefits and costs associated with counter-cyclical fiscal policy. Benefits and costs may be social, macroeconomic, systemic, and budgetary. They may depend importantly on timing and implementation. There may be very different implications over the business cycle horizon and in the medium to long term. We use simulations of the IHS Global Insight macro-econometric model to evaluate some of these costs and benefits in the U.S. economy, looking specifically at the impact of the ARRA program and potential alternative policies.
    Keywords: fiscal policy; employment; American Recovery and Reinvestment Act (ARRA); econometric model simulation.
    JEL: E37 E62 E65
    Date: 2010–12–20
  21. By: Anita Tuladhar; Philippe D Karam; Dirk Muir; Joana Pereira
    Abstract: The paper explores the macroeconomic effects of three public pension reforms, namely an increase in retirement age, a reduction in benefits and an increase in contribution rates. Using a five-region version of the IMF‘s Global Integrated Monetary and Fiscal model (GIMF), we find that public pension reforms can have a positive effect on growth in both the short run, propelled by rising consumption, and in the long run, due to lower government debt crowding in higher investment. We also find that a reform action undertaken cooperatively by all regions results in larger output effects, reflecting stronger capital accumulation due to higher world savings. An increase in the retirement age reform yields the strongest impact in the short run, due to the demand effects of higher labor income and in the long run because of supply effects.
    Keywords: Aging , Asia , Cross country analysis , Developed countries , Emerging markets , Euro Area , Fiscal policy , Monetary policy , Pension reforms , Pensions , Public sector , United States ,
    Date: 2010–12–22
  22. By: M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
    Abstract: We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are released and revisions become available. We apply the framework to the G-7 countries and study various aspects of national and global business cycles, obtaining three main results. First, our measure of the global business cycle, the common G-7 real activity factor, explains a significant amount of cross-country variation and tracks the major global cyclical events of the past forty years. Second, the common G-7 factor and the idiosyncratic country factors play different roles at different times in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time.
    Keywords: Business cycles , Cross country analysis , Globalization , Group of seven ,
    Date: 2011–02–01
  23. By: Lena Dräger (University of Hamburg, Deutchland, and KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Using quantitative survey data from the Swedish Consumer Tendency Survey as well as a unique data set on media reports about inflation, we analyze the formation process of inflation perceptions and expectations as well as interrelations between the variables. Throughout the analysis, the role of media reports about inflation is emphasized and results for the low inflation period January 1998 to December 2007 are compared to those including the high inflation year 2008. Rejecting rationality, we find that perceptions, but not expectations, are affected asymmetrically by news, where media effects are generally stronger in times of high and volatile inflation. For the low inflation sample period, inflation expectations are more affected by shocks to perceptions than vice versa, but Granger causality runs from expectations to perceptions. Including more volatile inflation, we find more feed-back between the variables and a strong media effect especially on perceptions.
    Keywords: Inflation expectations, inflation perceptions, media reports
    JEL: C32 E31 E37
    Date: 2011–02
  24. By: Pieter A. Gautier (VU University Amsterdam); Coen N. Teulings (Netherlands Bureau of Policy Analysis CPB, The Hague, and University of Amsterdam)
    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 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: Sorting; search frictions; wage dispersion; unemployment; mismatch; on-the-job search; output loss; business stealing
    JEL: E24 J62 J63 J64
    Date: 2011–01–14
  25. By: Teresa Dabán Sánchez
    Abstract: The cornerstone of Chile’s impressive fiscal performance has been its structural balance rule. By insulating public spending from short-term copper price fluctuations and the business cycle, the rule has helped preserve fiscal discipline. However, the implementation of the rule in recent years has revealed certain challenges, and in May 2010, the government established a high-level commission to recommend reforms that could make the rule even more effective. This paper assesses the scope for improving the design and implementation of the structural balance rule in light of best practices and OECD country experience with fiscal rules. This assessment suggests several options to strengthen Chile’s fiscal rule, including by simplifying the calculation of the structural balance; enhancing the rule’s flexibility, transparency and accountability; and complementing it with a medium-term fiscal framework.
    Keywords: Chile , Commodity prices , Copper , Cross country analysis , External shocks , Fiscal policy , OECD ,
    Date: 2011–01–26
  26. By: Tim Willems (University of Amsterdam)
    Abstract: Traditional ways of analyzing the effects of monetary policy shocks via structural vector autoregressions require the use of unrealistic identifying assumptions: they either do not allow for a response of output and prices on impact of the shock, or they exclude contemporaneous values of these variables from the monetary authority's information set. This paper relaxes these incredible restrictions by exploiting a convenient natural setting, namely the fact that we can use data from dollarized countries. The fact that non-monetary US shocks do not seem to be transmitted to these countries, has the additional advantage that it makes the exercise less vulnerable to potential misidentification of the US monetary policy shock. The results obtained in this way suggest that prices fall quite rapidly after a monetary contraction. Consistent with this finding, the effects of monetary policy shocks on output seem to be small.
    Keywords: Monetary policy effects; Price puzzle; Structural VARs; Identification; Block exogeneity
    JEL: E52 E31 C32
    Date: 2010–10–01
  27. By: Yvonne Adema (Erasmus University Rotterdam, and Netspar)
    Abstract: This paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the other country has funded pensions. The paper shows that the PAYG country can shift part of its long-term debt burden to the funded country. Moreover, the PAYG country gains from unexpected inflation at the cost of the funded country. In response to these conflicting interests about inflation, inflation risk may rise with the level of debt in the PAYG country. Higher inflation risk harms both countries. Actually, in contrast to the debt burden, the PAYG country cannot share the negative effects of a rise in inflation risk with the funded country. The scenarios analysed might be especially relevant for the years to come.
    Keywords: spillovers; pensions; debt; inflation
    JEL: E31 F41 G11 G12 H55 H63
    Date: 2010–10–29
  28. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Svensson, Lars E.O. (Sveriges Riksbank)
    Abstract: This paper specifies a new convenient algorithm to construct policy projections conditional on alternative anticipated policy-rate paths in linearized dynamic stochastic general equilibrium (DSGE) models, such as Ramses, the Riksbank's main DSGE model. Such projections with anticipated policy-rate paths correspond to situations where the central bank transparently announces that it, conditional on current information, plans to implement a particular policy-rate path and where this announced plan for the policy rate is believed and then anticipated by the private sector. The main idea of the algorithm is to include among the predetermined variables (the "state" of the economy) the vector of nonzero means of future shocks to a given policy rule that is required to satisfy the given anticipated policy-rate path.
    Keywords: Optimal monetary policy; instrument rules; policy rules; optimal policy projections
    JEL: E52 E58
    Date: 2011–01–01
  29. By: Tomas Havranek; Roman Horvath; Jakub Mateju
    Abstract: In this paper, we 1) examine the interactions of financial variables and the macroeconomy within the block-restriction vector autoregression model and 2) evaluate to what extent the financial variables improve the forecasts of GDP growth and inflation. For this reason, various financial variables are examined, including those unexplored in previous literature, such as the share of liquid assets in the banking industry and the loan loss provision rate. Our results suggest that financial variables have a systematic and statistically significant effect on macroeconomic fluctuations. In terms of forecast evaluation, financial variables in general seem to improve the forecast of macroeconomic variables, but the predictive performance of individual financial variables varies over time, in particular during the 2008–2009 crisis.
    Keywords: Forecasting, macroeconomic and financial linkages, vector autoregressions.
    JEL: E44 E58 E47
    Date: 2010–12
  30. By: Pesaran, Hashem (University of Cambridge); Chudik, Alexander (University of Cambridge)
    Abstract: This paper considers the problem of aggregation in the case of large linear dynamic panels, where each micro unit is potentially related to all other micro units, and where micro innovations are allowed to be cross sectionally dependent. Following Pesaran (2003), an optimal aggregate function is derived, and the limiting behavior of the aggregation error is investigated as N (the number of cross section units) increases. Certain distributional features of micro parameters are also identified from the aggregate function. The paper then establishes Granger's (1980) conjecture regarding the long memory properties of aggregate variables from 'a very large scale dynamic, econometric model', and considers the time profiles of the effects of macro and micro shocks on the aggregate and disaggregate variables. Some of these findings are illustrated in Monte Carlo experiments, where we also study the estimation of the aggregate effects of micro and macro shocks. The paper concludes with an empirical application to consumer price inflation in Germany, France and Italy, and re-examines the extent to which ‘observed’ inflation persistence at the aggregate level is due to aggregation and/or common unobserved factors. Our findings suggest that dynamic heterogeneity as well as persistent common factors are needed for explaining the observed persistence of the aggregate inflation.
    Keywords: aggregation, large dynamic panels, long memory, weak and strong cross section dependence, VAR models, impulse responses, factor models, inflation persistence
    JEL: C43 E31
    Date: 2011–02
  31. By: Reginald Darius; Tamim Bayoumi
    Abstract: This paper examines the role of credit markets in the transmission of U.S. macro-financial shocks through the prism of a financial conditions index (FCI) based on a vector autoregression (VAR) methodology. It explores the relative predictive power of market variables compared to credit standards/conditions. The main conclusion is that under plausible specifications credit conditions dominate market variables, highlighting the importance of credit supply. The fact that direct measures of credit conditions anticipate future movements in asset prices has an extremely important implication. Most models of the credit channel see it as an amplifier of underlying changes in financial wealth. The impact of credit conditions on growth compared to other market variables implies that credit supply drives other financial variables rather than responding to them.
    Keywords: Asset prices , Business cycles , Capital markets , Credit , Economic models ,
    Date: 2011–02–01
  32. By: Masagus M. Ridhwan (VU University Amsterdam, Bank Indonesia); Henri L.F. de Groot (VU University Amsterdam); Peter Nijkamp (VU University Amsterdam)
    Abstract: This paper presents the findings a meta-analysis identifying the causes of variation in the impact of monetary policies on economic development. The sample of observations included in our meta-analysis is drawn from primary studies that uniformly employ Vector Autoregressive (VAR) models. Our findings reveal that capital intensity, financial deepening, the inflation rate, and economic size are important in explaining the variation in outcomes across regions and over time. Differences in the type of models used in the primary studies also significantly contribute to the explanation of the variation in study outcomes.
    Keywords: Monetary policy; Economic development; Meta-analysis
    JEL: E52 R11
    Date: 2010–04–21
  33. By: Franc Klaassen (University of Amsterdam)
    Abstract: Exchange market pressure (EMP) measures the pressure on a currency
    Keywords: currency crisis models; ERM crisis; exchange rate regime; instrumental variables; monetary policy; persistence
    JEL: E42 E58 F31 F33
    Date: 2011–02–11
  34. By: M. Marzo; L. Zhoushi; P. Zagaglia
    Abstract: This note sketches the issues that arise while interpreting the relation between macroeconomic volatility and financial risk premia from the perspective of the standard consumption-based asset pricingmodel. The relation arises from the fact that all assets are priced by the same "pricingkernel", given by the inter-temporal marginal rate of substitution in consumption of the representative investor. Since the pricing kernel is a function of aggregate consumption, financial risk premia are positively related to consumption growth volatility. Therefore, from the perspective of this workhorse often employed in the academic debate, the persistent reduction in macroeconomic volatility can be considered a cause for the low average risk premia prevailing during the so-called Great Moderation, namely the period preceding the recent turmoil in financial markets. We challenge this view by shedding light on the issues that generate an inconsistent interpretation of the model outcomes. In particular, since the consumption-based model is geared towards asset prices consistent with macroeconomic fundamentals, we argue that it is not suited for interpreting current developments where underestimation of risk may have subsidized asset prices. In particular, according to the evidence for the Great Moderation, the model view suffers from observational equivalence.
    JEL: E43 G12
    Date: 2011–02
  35. By: Juan Manuel Julio
    Abstract: Preliminary and delayed Colombian GDP reports are replaced with optimal in-sample now-casts of “true” GDP figures derived from a model for data revisions. The new GDP time series is augmented with optimal out-of-sample forecasts and back-casts of the “true” GDP figures derived from the same model. The trend-cycle component of the augmented GDP series is filtered. The resulting gap is more resistant than the ordinary HP filter to the end of sample optimal filtering problem as well as to GDP revisions and delays. The short term noise of the final output gap estimate is also reduced. Adjusting for data revisions and delays reduce the uncertainty of estimated gaps. The extended and further extended HP estimates of the output gap show an impressive efficiency gain with respect to the ordinary HP gap, 43% and 47% respectively, on average. The new extension increases the efficiency in 7.4%, on average, with respect to extended HP estimates. These results constitute a benchmark to future work on real time estimation of the output gap under GDP revisions and delays in Colombia.
    Date: 2011–02–15
  36. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: This paper studies overborrowing, financial crises and macro-prudential policy in an equilibrium model of business cycles and asset prices with collateral constraints. Agents in a decentralized competitive equilibrium do not internalize the negative effects of asset fire-sales on the value of other agents' assets and hence they borrow too much" ex ante, compared with a constrained social planner who internalizes these effects. Average debt and leverage ratios are slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises are much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. State-contigent taxes on debt and dividends of about 1 and -0.5 percent on average respectively support the planner’s allocations as a competitive equilibrium and increase social welfare.
    Keywords: Borrowing , Business cycles , Credit , Economic models , Financial crisis , Global Financial Crisis 2008-2009 ,
    Date: 2011–02–01
  37. By: Jean Pisani-Ferry; Adam Posen
    Abstract: The response in 2008-09 to the global financial crisis was inmany ways a high water mark for transatlantic policy coordination.The major economies of the EU and the US rapidly agreedon a series of measures to limit the crisis. However, the commonapproach has since unraveled. This paper explores why the'London consensus? has not survived for much more than a year.? We identify four non-competing explanations: (a) divergence ineconomic developments, especially the productivity responseto the recession; (b) domestic political economy factors, notablythe pressure to act against unemployment in the US; (c) differencesin beliefs as regards the nature of the recovery fromthe common shock, about which there is much more supplysideoptimism in the US ; (d) institutional factors such as thelack of a central fiscal authority in the EU.? In response to this situation we suggest a critical quantum ofcoordination. Key measures include a commitment to avoidingdeliberate currency depreciation and unilateral intervention;agreement to give the IMF an enhanced monitoring role; theadoption by parliaments of medium-term fiscal plans ; and cooperationon the issue of Chinese undervaluation.
    Date: 2011–02
  38. By: Albers, Ronald; Peeters, Marga
    Abstract: Just before the global crisis soaring commodity prices pushed up inflation significantly, not least in EU neighbour countries at the Mediterranean. These price shocks affected public finances in the southern Mediterranean region, notably via government subsidies. Partly due to lags in the transmission of commodity prices into prices for final users the subsidies burden continued to be felt, despite the price falls registered in the wake of the credit crisis. We show that downward price rigidities play a role. Recently, commodity price pressures have re-emerged. We focus on food prices and analyse recent developments in food inflation in Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the occupied Palestinian territories, Syria and Tunisia in comparison with other middle income economies. Subsidies on food and fuel are quantified per country for the period 2002-2010. The incremental government subsidies entail an estimated deterioration of the government balances of up to more than 2% of GDP in 2008 and, for most countries only slight improvements in the global recession year 2009. Ensuing longer-term challenges for public finances remain as inflation rises on the back of higher global economic growth. As recent events in Tunisia and Egypt illustrate, these can have important political implications. Finally, the paper discusses some options that can lead to more efficient government spending, even in the event of sharp swings in prices of basic necessities.
    Keywords: food prices; energy prices; inflation; public finances; government subsidies
    JEL: E62 L71 L66 H2 E3
    Date: 2011–01
  39. By: Anger, Silke (DIW Berlin)
    Abstract: This study analyzes real wage cyclicality for male full-time workers within employer-employee matches in Germany over the period 1984-2004. Five different wage measures are compared: the standard hourly wage rate; hourly wage earnings including overtime and bonus pay; the effective wage, which takes into account unpaid overtime; and monthly earnings, with and without additional pay. None of the hourly wage measures exhibits cyclicality except for the group of salaried workers with unpaid overtime. Their effective wages show a strongly procyclical reaction to changes in unemployment. Despite acyclical wage rates, salaried workers without unpaid overtime experienced procyclical earnings movements if they had income from extra pay. Monthly earnings were also procyclical for hourly paid workers with overtime pay. These findings suggest that cyclical earnings movements are generated by variable pay components, such as bonuses and overtime, and by flexible working hours. The degree of earnings procyclicality revealed for the German labor market is comparable to the United States.
    Keywords: real wage cyclicality, effective wages, unpaid overtime, bonus payments, firm stayers
    JEL: E32 J31
    Date: 2011–02
  40. By: Rafael Romeu; Andrew M. Wolfe
    Abstract: This study measures the impact of changing economic conditions in OECD countries on tourist arrivals to countries/destinations in Latin America and the Caribbean. A model of utility maximization across labor, consumption of goods and services at home, and consumption of tourism services across monopolistically competitive destinations abroad is presented. The model yields estimable equations arrivals as a function of OECD economic conditions and the elasticity of substitution across tourist destinations. Estimates suggest median tourism arrivals decline by at least three to five percent in response to a one percent increase in OECD unemployment, even after controlling for declines in OECD consumption and output gaps. Arrivals to individual destination are driven by differing exposure to OECD country groups sharing similar business cycle characteristics. Estimates of the elasticity of substitution suggest that tourism demand is highly price sensitive, and that a variety of costs to delivering tourism services drive market share losses in uncompetitive destinations. One recent cost change, the 2009 easing of restrictions on U.S. travel to Cuba, supported a small (countercyclical) boost to Cuba’s arrivals of U.S. non-family travel, as well as a pre-existing surge in family travel (of Cuban origin). Despite the US becoming Cuba’s second highest arrival source, Cuban policymakers have significant scope for lowering the relatively high costs of family travel from the United States.
    Keywords: Business cycles , Caribbean , Cuba , Demand , Developed countries , Economic models , Economic policy , Economic recession , Latin America , OECD , Spillovers , Tourism , Travel , United States ,
    Date: 2011–02–08
  41. By: Frank A.G. den Butter (VU University Amsterdam)
    Abstract: In the analysis of the credit crisis of 2007-2010 a clear distinction should be made between (i) the initial shock; (ii) the propagation and amplification of the initial shock to the systemic crisis of the financial markets; and (iii) the transmission of the credit crisis to the real economic sector causing a major cyclical downturn now known as the great recession. This paper argues that banking supervision failed to anticipate and repair the market failure that caused the huge amplification of the relatively small initial shock. As the repair of market failure is the only sound economic argument for regulation, banking supervisors should now focus on the externalities that caused the amplification of the shock and use that knowledge for adequate macro-prudential supervision in the future. Macro-economic models can be helpful in this search for externalities. The character and timing of future shocks are unpredictable, but contagion in the propagation mechanisms should be mitigated as much as possible.
    Keywords: credit crisis; externalities; macro-prudential supervision; contagion; fallacy of composition
    JEL: E42 E58 G38
    Date: 2010–05–17
  42. By: Aktas, Erkan; Özenç, Çiğdem; Arıca, Feyza
    Abstract: This study explores the impact of fluctuations in oil prices on Turkey's economy. The data used in this study covers the years from 1991 to 2008. Macro-economic variables used in this study are GNP, inflation, unemployment and the ratio of exports to imports. VAR model is used in estimating the macro-economic impact of oil prices. Based on the results of the analysis conducted, a meaningful relationship of oil prices with inflation, unemployment and the ratio of exports to imports is estimated. However, it is observed that a rise in oil prices do not have any substantial impact on macro-economic variables. While an inverse relationship of oil prices with the ratio of exports to imports and unemployment is estimated, a direct relationship between oil prices and inflation emerged. The results of impulse-response analysis shows that the responses of macro-economic variables to oil price shocks become stable only after one year.
    Keywords: Oil prices; VAR; Macroeconomics; Turkey
    JEL: C32 E6
    Date: 2010–02–18
  43. By: Chad Steinberg; Masato Nakane
    Abstract: The Great Recession pushed Japan’s unemployment rate to historic highs, but the increase has been small by international standards and small relative to the large output shock. This paper explores Japan’s cyclical labor market response to the global financial crisis. Our findings suggest that: (i) employment responsiveness has been historically low but rising over time with the increasing importance of the non-regular workforce; (ii) the labor market response was consistent with historical patterns once we control for the size of the output shock; and (iii) the comparatively lower employment response vis-à-vis other countries can in part be explained by the quick implementation of an employment subsidy program, a more flexible wage system, and a corporate governance structure that places workers rights above shareholders.
    Keywords: Business cycles , Economic recession , Employment , Global Financial Crisis 2008-2009 , Japan , Labor markets , Manufacturing sector , Unemployment ,
    Date: 2011–01–24
  44. By: Andreas Schabert (TU Dortmund University, and University of Amsterdam)
    Abstract: We examine monetary policy options for a small open economy where sovereign default might occur due to intertemporal insolvency. Under interest rate policy and floating exchange rates the equilibrium is indetermined. Under a fixed exchange rate the equilibrium is uniquely determined and independent of sovereign default.
    Keywords: Exchange rate peg; interest rate policy; equilibrium determination; sovereign default; public debt
    JEL: E52 E63 F31 F41
    Date: 2011–02–11
  45. By: Paradiso, Antonio; Rao, B. Bhaskara; Ventura, Marco
    Abstract: This paper tests for the time series properties of the variables in the sticky information Phillips curve and estimates it for the US with the general to specific method (GETS). Our results show that the estimates of the stickiness parameter range from 0.25 to 0.42.
    Keywords: Sticky information Phillips curve; General to specific method; Stickiness parameter
    JEL: E3
    Date: 2011–02–12
  46. By: Charlot, Olivier (University of Cergy-Pontoise); Malherbet, Franck (University of Rouen); Terra, Cristina (University of Cergy-Pontoise)
    Abstract: This paper studies the impact of product and labor market regulations on informality and unemployment in a general framework where formal and informal firms are subject to the same externalities, differing only with respect to some parameter values. Both formal and informal firms have monopoly power in the goods market, they are subject to matching friction in the labor market, and wages are determined through bargaining between large firms and their workers. The informal sector is found to be endogenously more competitive than the formal one. We find that lower strictness of product or labor market regulations lead to a simultaneous reduction in informality and unemployment. The difference between these two policy options lies on their effect on wages. Lessening product market strictness increases wages in both sector but also increases the formal sector wage premium. The opposite is true for labor market regulation. Finally, we show that the so-called overhiring externality due to wage bargaining translates into a smaller relative size of the informal sector.
    Keywords: informality, product and labor market imperfections, firm size
    JEL: E24 E26 J60 L16 O1
    Date: 2011–02
  47. By: Henner Will (Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation)
    Abstract: Short Time Compensation [STC] was a key program in Germany to fight the crisis. However, STC is quite an old tool: in the past 100 years it has been used quite often and is very multifunctional. It stabilized employment in every kind of macroeconomic shock. After a brief look into the institutional and quantitative development of STC in Germany, this paper tries to answer the question whether STC prevents Schumpeterian creative destruction and structural change in economic downturns. With the help of a VAR-Model we can analyze interdependencies between the business cycle, STC and unemployment, finding evidence for a bridging function of STC. A closer look at the pro-cyclical average stoppage supports the thesis that most of the enterprises using STC are fundamentally economically healthy, that is, STC does not prevent structural change in downturns.
    Keywords: Short Time Compensation, VAR, Paradox, structural change
    JEL: E24 E32 C32 J38 N44
    Date: 2011
  48. By: Codrina Rada and Rudiger von Arnim
    Abstract: This paper explores macroeconomic policies that can sustain structural change in China and India. A two--sector open--economy model with endogenous productivity growth, demand driven output and income distribution as an important determinant of economic activity is calibrated to a 2000 SAM for China and a 1999/2000 SAM for India. Short-- run analysis concerns temporary equilibria for output, productivity and employment growth rates in the formal sector. In the long--run, the model allows for multiple equilibria which can describe cases of (a) underdevelopment and structural heterogeneity or (b) sustained growth and development. Several simulation exercises are conducted. Specifically, we consider how changes in investment, wages, labor productivity trend and a depreciation of currency affect the macroeconomy and job creation in the formal sector.
    Keywords: Structural change, endogenous productivity, dual economy, China, India JEL Classification: O11, O41, E26
    Date: 2011
  49. By: Yngve Abrahamsen (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The paper investigates the nexus between inventory investment and the change in aggregate production for 29 European countries over the period 2000-2009. A special interest is taken in the “Great Recession” of 2008/09. For most countries, a fairly uniform pattern emerges. Inventory investment is positively correlated with changes in production and follows the latter with a time-lag of two to three quarters. Therefore, there is no evidence that inventory investment either drives or smoothes the business cycle. Very few countries – Austria, Greece, Spain, and Switzerland – diverge from the typical pattern. This might hint to problems with respect to data quality.
    Keywords: Inventory investment, production, business cycle, “Great Recession” in Europe
    JEL: E22 E32 O52
    Date: 2011–02
  50. By: Tetyana Dubovyk (CeRP-Collegio Carlo Alberto)
    Abstract: In 1990s, several pension reforms had been adopted to insure financial sustainability of Italian Social Security system. This paper studies two main features of Amato and Dini reforms: (i) adoption of notional defined contributions formula; (ii) price indexation of benefits as compared to wage indexation prior to 1992. As the reforms envision a long phase-in period, I consider the effect of the reforms on different generations. This paper studies household decisions and welfare consequences of the reforms using general equilibrium overlapping generations framework. The major focus is on time allocation and human capital accumulation decisions of transition generations. The economic and demographic structure of the economy is calibrated to (i) Italian macroeconomic variables in 1992, (ii) observed earnings profiles in Survey of Household Income and Wealth by Banca d'Italia (SHIW). The reforms decrease financial obligations of the pension system. The paper quantifies the effect of the reforms on transition generations.
    Date: 2010–11
  51. By: James D. Hamilton
    Abstract: This paper surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Although oil was used much differently and was substantially less important economically in the nineteenth century than it is today, there are interesting parallels between events in that era and more recent developments. Key post-World-War-II oil shocks reviewed include the Suez Crisis of 1956-57, the OPEC oil embargo of 1973-1974, the Iranian revolution of 1978-1979, the Iran-Iraq War initiated in 1980, the first Persian Gulf War in 1990-91, and the oil price spike of 2007-2008. Other more minor disturbances are also discussed, as are the economic downturns that followed each of the major postwar oil shocks.
    JEL: E32 Q41 Q43
    Date: 2011–02
  52. By: Franc Klaassen (University of Amsterdam)
    Abstract: Exchange market pressure (EMP) measures the pressure on a currency to depreciate. It adds to the actual depreciation a weighted combination of policy instruments used to ward off depreciation, such as interest rates and foreign exchange interventions, where the weights are their effectiveness. The key difficulty in the literature is how to identify these weights. We exploit the persistence of pressure and add instruments based on currency crisis theories to identify the weights, and we propose a simple IV regression to estimate them. An application to the European Monetary System crisis in 1992-1993 shows that a one percentage point higher interest rate wards off a depreciation of about 0.2 percent.
    Keywords: currency crisis models; ERM crisis; exchange rate regimes; instrumental variables; monetary policy; persistence
    JEL: E42 E58 F31 F33
    Date: 2011–02–11
  53. By: Codrina Rada
    Abstract: This paper presents a classical model of economic growth which incorporates class conflict and induced technological change to show how demographic changes can affect future income distribution and production relations in industrialized countries. Specifically, I use an extended real wage Phillips curve to account for the effects of a social security tax on income distribution and therefore on capital accumulation and employment. In this framework output growth is determined from the supply side by available savings. Analytical and simulation results indicate that the sustainability of an economy with fast population aging over transient paths hinges upon improvements in labor productivity, hence, the specific mechanism of technical progress in place.
    Keywords: Population aging; Social security tax; Endogenous technical change
    JEL: E62 E24 O30
    Date: 2011
  54. By: Nicolas E. Magud; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology-furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short–term capital flows.
    JEL: E44 E5 F3 F30 F32 F34 F41
    Date: 2011–02
  55. By: Michael D. Bordo (Rutgers University and NBER); David C. Wheelock (Federal Reserve Bank of St. Louis)
    Abstract: This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an “inelastic” currency and the absence of an effective lender of last resort. As conceived by Paul Warburg and Nelson Aldrich at Jekyll Island in 1910, the Fed’s discount window and bankers acceptance-purchase facilities were expected to solve the problems that had caused banking panics in the National Banking era. Banking panics returned with a vengeance in the 1930s, however, and we examine why the Fed failed to live up to the promise of its founders. Although many factors contributed to the Fed’s failures, we argue that the failure of the Federal Reserve Act to faithfully recreate the conditions that had enabled European central banks to perform effectively as lenders of last resort, or to reform the inherently unstable U.S. banking system, were crucial. The Fed’s failures led to numerous reforms in the mid-1930s, including expansion of the Fed’s lending authority and changes in the System’s structure, as well as changes that made the U.S. banking system less prone to banking panics. Finally, we consider lessons about the design of lender of last resort policies that might be drawn from the Fed’s early history.
    Keywords: Federal Reserve Act, lender of last resort, discount window, banking panics, Great Depression
    JEL: E58 G28 N21 N22
    Date: 2011–02–15
  56. By: Peter Broer; Jürgen Antony
    Abstract: This document reviews the literature on the relationship between financial markets and the real economy. In the light of the recent financial crises, we focus on channels that are likely to be important in times of financial stress.
    JEL: E44 E37 F40
    Date: 2010–12
  57. By: Benedicte Vibe Christensen
    Abstract: In recent years, China has dramatically expanded its financing and foreign direct investment to Africa. This expansion has served the political and economic interests of China while providing Africa with much-needed technology and financial resources. This paper looks at China's role in Africa from the Chinese perspective. the main conclusion is that China, as an emerging global player and one of Africa's largest trading and financial partners, can no longer ignore the macroeconomic impact of its operations on African economies. Indeed, it is in China's interest that its engagement leads to sustainable economic development on the contnent. Trade, financing, and technology transfer must continue at a pace that African economies can absorb without running up against institutional constraints, the capacity to service the costs to future budgets, or the balance of payments. A key corollary is that China should show good governance in its own operations in Africa. Finally, macroeconomic analysis needs to be supported by better analytical data and organization of decision making to support China's engagement in Africa.
    Keywords: China and Africa, Foreign Direct Investment
    Date: 2010–11
  58. By: Ila Patnaik; Ajay Shah
    Abstract: India embarked on reintegration with the world economy in the early 1990s. At first, a certain limited opening took place emphasising equity flows by certain kinds of foreign investors. This opening has had myriad interesting implications in terms of both microeconomics and macroeconomics. A dynamic process of change in the economy and in economic policy then came about, with a co-evolution between the system of capital controls, macroeconomic policy, and the internationalisation of firms including the emergence of Indian multinationals.Through this process, de facto openness has risen sharply. De facto openness has implied a loss of monetary policy autonomy when exchange rate pegging was attempted. The exchange rate regime has evolved towards greater flexibility.
    Keywords: Capital controls , Capital flows , Economic integration , Exchange rate regimes , External borrowing , Financial sector , Foreign direct investment , Globalization , India , Monetary policy ,
    Date: 2011–01–07
  59. By: Patrick Bolton; Hui Chen; Neng Wang
    Abstract: Firms face uncertain financing conditions and are exposed to the risk of a sudden rise in financing costs during financial crises. We develop a tractable model of dynamic corporate financial management (cash accumulation, investment, equity issuance, risk management, and payout policies) for a financially constrained firm facing time-varying external financing costs. Firms value financial slack and build cash reserves to mitigate financial constraints. However, uncertainty about future financing opportunities also induce firms to rationally time the equity market, even if they have no immediate needs for cash. The stochastic financing conditions have rich implications for investment and risk management: (1) investment can be decreasing in financial slack; (2) firms may invest less as expected future financing costs fall; (3) investment-cash sensitivity, marginal value of cash, and firm's risk premium can all be non-monotonic in cash holdings; (4) speculation (as opposed to hedging) can be value-maximizing for financially constrained firms.
    JEL: E22 G12 G3
    Date: 2011–02
  60. By: Runli Xie
    Abstract: This paper focuses on the dynamic link between skill-specific labor markets with search frictions. Human capital investment is formed through households' endogenous decision, and competes with physical capital investment. Idiosyncratic shock shifts the skilled labor share and changes tightness in both skilled and unskilled markets. Given inelastic labor participation, the model can generate downward-sloping Beveridge curves in aggregate, skilled and unskilled labor markets. Upon a neutral shock, total unemployment decrease is two-staged: firstly with a reduction in unskilled unemployment, and then due to a sharp decline of skilled unemployment when skill substitution dominates. A higher elasticity of substitution between two types of labor leads to higher volatility of the model variables and higher u - v correlation.
    Keywords: skill-specific unemployment, human capital investment, idiosyncratic shock, skill substitution, search and matching
    JEL: E24 E32 J24 J63
    Date: 2011–02
  61. By: Jeroen Klomp
    Abstract: Using data for more than 200 banks from 21 OECD countries for the period 2002 to 2008, we examine the impact of bank regulation and supervision on banking risk.
    JEL: E44 G2
    Date: 2010–12
  62. By: Pedro Gomis-Porqueras (School of Economics, Australian National University); Benoit Julien (School of Economics, University of New South Wales); Chengsi Wang (School of Economics, University of New South Wales)
    Abstract: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers’ search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.
    Keywords: Directed searching; Advertising; Pricing; Market structure
    JEL: E52 E63
    Date: 2010–11
  63. By: Marianne Baxter
    Abstract: International risk-sharing has far-reaching implications both for economic policy and for basic research in economics. When countries do not share risk, individuals in those countries experience fluctuations in their consumption levels that are undesirable and possibly unnecessary. This paper extends and refines the study of international risk-sharing in two dimensions. First, this paper investigates risk-sharing at short vs. long horizons. Countries might, for example, pool risks associated with high-frequency shocks (e.g., seasonal fluctuations in crop yields) but might not share risks associated with low frequency shocks (e.g., different long-run national growth rates). Second, this paper studies bilateral risk-sharing, which is different from the approach taken in most previous studies. We find that there is evidence of substantial international risk-sharing at medium and low frequencies. There is evidence of high and increasing risk-sharing within Europe that is not apparent for other regions of the world.
    JEL: E2 E21 E32 F11 F15 F2 F4 F41
    Date: 2011–02
  64. By: Gengenbach Christian; Hecq Alain; Urbain Jean-Pierre (METEOR)
    Abstract: With the development of real-time databases, N vintages are available for T observations instead of a single realization of the time series process. Although the use of panel unit root tests with the aim to gain in efficiency seems obvious, empirical and simulation results shown in this paper heavily mitigate the intuitive perspective.
    Keywords: macroeconomics ;
    Date: 2011
  65. By: Stephen Polasky (University of Minnesota); Aart de Zeeuw (Tilburg University); Florian Wagener (University of Amsterdam)
    Abstract: We analyze how the threat of a potential future regime shift affects optimal management. We use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics, and exogenous versus endogenous probabilities of regime shift. Prior work has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions about the effect of potential regime shift on optimal management. We show that all other cases yield unambiguous results. In particular, with endogenous probability of regime shift that affects system dynamics the potential for regime shift causes optimal management to become precautionary.
    Keywords: optimal management; growth; renewable resources; regime shift
    JEL: E61 O40 Q20 C61
    Date: 2010–11–04
  66. By: Charles-Coll, Jorge A.
    Abstract: This paper contributes to the debate over the relationship between inequality and growth by proposing that the disparities in empirical studies derive from the fact that they have not accounted for the level of inequality as a factor that can affect the sign of the relationship. An inverted “U” shaped relationship is demonstrated, showing that low levels of inequality exert a positive correlation with economic growth while high levels have a negative one. Additionally, and more importantly, it is demonstrated the existence of an optimal rate of inequality (ORI) that maximizes growth rates and releases the economy from any distortion generated by elevated inequality or taxation. Empirical evidence from a broad panel of countries as well as a bibliometric analysis is presented to validate these propositions.
    Keywords: Inequality, Growth, Redistribution, Optimal Rate of Inequality
    JEL: E25 D31 D33 O15
    Date: 2010–08–27

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