nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒03‒12
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inventories, Markups and Real Rigidities in Sticky Price Models of the Canadian Economy By Oleksiy Kryvtsov; Virgiliu Midrigan
  2. Capital Regulation, Monetary Policy and Financial Stability By Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
  3. When is Quantitative Easing effective? By Markus Hoermann; Andreas Schabert
  4. Comparing the delegation of monetary and fiscal policy By Simon Wren-Lewis
  5. The Role of Monetary Policy Uncertainty in the Term Structure of Interest Rates By Junko Koeda; Ryo Kato
  6. Measuring disagreement in UK consumer and central bank inflation forecasts By Richhild Moessner; Feng Zhu; Colin Ellis
  7. Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia By Abdul Majid, Muhamed Zulkhibri
  8. Inflation and unemployment in Switzerland: from 1970 to 2050 By Oleg Kitov; Ivan Kitov
  9. Communication Matters: U.S. Monetary Policy and Commodity Price Volatility By Bernd Hayo; Ali M. Kutan; Matthias Neuenkirch
  10. Boosting Confidence: Is there a Role for Fiscal Policy? By Panagiotis Konstantinou; Athanasios Tagkalakis
  11. Estimating a High-Frequency New-Keynesian Phillips Curve By Steffen Ahrens; Stephen Sacht
  12. A Macroprudential Perspective in Central Banking By Shigenori Shiratsuka
  13. Expectations Traps and Monetary Policy with Limited Commitment By Christoph Himmels; Tatiana Kirsanova
  14. Cycles Inside Cycles. Spanish Regional Aggregation By Maria Dolores Gadea; Ana Gomez Loscos; Antonio Montañes
  15. "The Dismal State of Macroeconomics and the Opportunity for a New Beginning" By L. Randall Wray
  16. Optimal inflation and firms' productivity dynamics By Henning Weber
  17. The Term Structure of Interest Rates in Small Open Economy DSGE Model By Aleš Maršál
  18. The threat of 'currency wars': A European perspective By Zsolt Darvas; Jean Pisani-Ferry
  19. Financial Innovation and Regional Money By Nagayasu, Jun
  20. Asian Business Cycle Synchronisation By Dong He; Wei Liao
  21. Fiscal Policy Coordination in Europe By Calmfors, Lars
  22. What should fiscal councils do? By Lars Calmfors; Simon Wren-Lewis
  23. Money and risk aversion in a DSGE framework By Jonathan Benchimol; André Fourçans
  24. A Financial Crisis in a Monetary Economy By KOBAYASHI Keiichiro
  25. Le ciblage d'inflation : un essai de comparaison internationale By Zied Ftiti; Jean-François Goux
  26. Reoccurring Financial Crises in the United States By Yochanan Shachmurove
  27. Can We Predict Recessions? By Don Harding; Adrian Pagan
  28. Credit Termination and the Technology Bubbles By Jin, Yu
  29. "Measuring Macroprudential Risk: Financial Fragility Indexes" By Éric Tymoigne
  30. The Financial Crisis from a Forecaster’s Perspective By Katja Drechsel; Rolf Scheufele
  31. Wirtschafts- und finanzpolitische Koordinierung in der EU – Erfahrungen aus einem Jahrzehnt Politikkoordinierung By Ebert, Werner; Eckardt, Martina
  32. BASEL III: Long-term impact on economic performance and fluctuations By Paolo Angelini; Laurent Clerc; Vasco Cúrdia; Leonardo Gambacorta; Andrea Gerali; Alberto Locarno; Roberto Motto; Werner Roeger; Skander Van den Heuvel; Jan Vlcek
  33. New measures of the costs of unemployment: Evidence from the subjective well-being of 2.3 million Americans By Helliwell, John; Huang, Haifang
  34. Have Consumption Risks in the G7 Countries Become Diversified? By Nikolaos Antonakakis; Johann Scharler
  35. Will a Growth Miracle Reduce Debt in Japan? By Selahattin Imrohoroglu; Nao Sudo
  36. Capital Controls: Myth and Reality--A Portfolio Balance Approach By Nicolas E. Magud E.; Carmen M.; Kenneth S. Rogoff
  37. Palestine: a theoretical model of an Investment-Constrained Economy By Alberto Botta; Gianni Vaggi
  38. Entrepreneurship, Innovation and Institutions By Erik Stam; Bart Nooteboom

  1. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Recent New Keynesian models of macroeconomy view nominal cost rigidities, rather than nominal price rigidities, as the key feature that accounts for the observed persistence in output and inflation. Kryvtsov and Midrigan (2010a,b) reassess these conclusions by combining a theory based on nominal rigidities and storable goods with direct evidence on inventories for the U.S. This paper applies Kryvtsov and Midrigan’s model to the case of Canada. The model predicts that if costs of production are sticky and markups do not vary much in response to, say, expansionary monetary policy, firms react by excessively accumulating inventories in anticipation of future cost increases. In contrast, in the Canadian data inventories are fairly constant over the cycle and in response to changes in monetary policy. Similarly to Kryvtsov and Midrigan, we show that markups must decline sufficiently in times of a monetary expansion in order to reduce firms’ incentive to hold inventories and thus bring the model’s inventory predictions in line with the data. The model consistent with salient features of the dynamics of inventories in the Canadian data implies that countercyclical markups account for a sizable (50-80%) fraction of the response of real variables to monetary shocks.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2011
  2. By: Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
    Abstract: This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker's concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps.
    Date: 2011
  3. By: Markus Hoermann (TU Dortmund University); Andreas Schabert (University of Amsterdam, and TU Dortmund University)
    Abstract: We present a simple macroeconomic model with open market operations that allows examining the effects of quantitative and credit easing. The central bank controls the policy rate, i.e. the price of money in open market operations, as well as the amount and the type of assets that are accepted as collateral for money. When the policy rate is sufficiently low, this set-up gives rise to an (il-)liquidity premium on non-eligible assets. Then, a quantitative easing policy, which increases the size of the central bank's balance sheet, can increase real activity and prices, while a credit easing policy, which changes the composition of the balance sheet, can lower interest rate spreads, stimulate real activity, and reduce prices. The effectiveness of quantitative and credit easing is however limited to the extent that eligible assets are scarce. Nevertheless, they can help escaping from the zero lower bound.
    Keywords: Monetary policy; collateralized lending; quantitative easing; credit easing; liquidity premium; zero lower bound
    JEL: E4 E5 E32
    Date: 2011–01–04
  4. By: Simon Wren-Lewis
    Abstract: The apparent success of independent central banks in conducting monetary policy has led many to argue that some form of policy delegation should also be applied to the macroeconomic aspects of fiscal policy. A number of countries have recently established Fiscal Councils, although their role is typically to give advice on paths for government debt and deficits rather than decide upon and implement policy. This paper examines how useful a comparison between monetary and fiscal policy can be in motivating and guiding Fiscal Councils. Simple analogies between inflation bias and deficit bias can be misleading, and the motives for delegating aspects of fiscal policy may be rather different from those generally associated with monetary policy. In addition, lack of knowledge about the desirable goals of long run debt policy, compared to a greater understanding of the objectives of monetary policy, may help explain key differences in the nature of delegation between the two. The paper ends by making some comparisons between the delegation of monetary and fiscal policy in the United Kingdom.
    Keywords: Delegation, fiscal councils, deficit bias, government debt
    JEL: E62 E65
    Date: 2011
  5. By: Junko Koeda (Assistant Professor, Department of Economics, University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo, Japan. Tel: +81-3- 5841-5649, (E-mail:; Ryo Kato (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. In contrast to the assumption of many macro-finance models, policy-shock processes appear to be time varying and persistent. We allow for this heteroskedasticity by constructing a no-arbitrage GARCH affine term structure model, in which policy-shock volatility is defined as the conditional volatility of the error term in a Taylor rule. We find that an increase in monetary policy uncertainty raises the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
    Keywords: GARCH, Estimation, Term Structure of Interest Rates, Financial Markets and the Macro-economy, Monetary Policy
    JEL: C13 C32 E43 E44 E52
    Date: 2010–10
  6. By: Richhild Moessner; Feng Zhu; Colin Ellis
    Abstract: We provide a new perspective on disagreement in inflation expectations by examining the full probability distributions of UK consumer inflation forecasts based on an adaptive bootstrap multimodality test. Furthermore, we compare the inflation forecasts of the Bank of England's Monetary Policy Committee (MPC) with those of UK consumers, for which we use data from the 2001-2007 February GfK NOP consumer surveys. Our analysis indicates substantial disagreement among UK consumers, and between the MPC and consumers, concerning one-year- ahead inflation forecasts. Such disagreement persisted throughout the sample, with no signs of convergence, consistent with consumers' inflation expectations not being "well-anchored" in the sense of matching the central bank's expectations. UK consumers had far more diverse views about future inflation than the MPC. It is possible that the MPC enjoyed certain information advantages which allowed it to have a narrower range of inflation forecasts.
    Keywords: Adaptive kernel method, adaptive multimodality test, consumer survey, inflation forecasts, nonparametric density estimation
    Date: 2011–02
  7. By: Abdul Majid, Muhamed Zulkhibri
    Abstract: The paper explores the measurement of monetary condition in Malaysia to augment the existing monetary policy framework. As an open economy, Monetary Condition Index (MCI) and Financial Condition Index (FCI) are applicable to understand the monetary condition especially in the era of financial deregulation and liberalisation. The results obtained suggest that the index is most useful when the exchange market exhibits stable conditions, and would be a constructive tool in the simultaneous management of the foreign currency and domestic money markets. However, the frequent experience of instability caused by supply and demand shocks with persistent and large inertia in the economy complicates the practical use of MCI and FCI in Malaysia. While this approach obviously does not provide answers to every question and as a leading indicator for inflation, it nonetheless makes it possible to measure the monetary condition in the Malaysian economy.
    Keywords: Monetary condition index; Monetary Policy; Malaysia
    JEL: E58 E44
    Date: 2010–09–01
  8. By: Oleg Kitov; Ivan Kitov
    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.
    Date: 2011–02
  9. By: Bernd Hayo (Philipps-University Marburg); Ali M. Kutan (Southern Illinois University Edwardsville; The Emerging Markets Group, London; William Davidson Institute, Michigan); Matthias Neuenkirch (Philipps-University Marburg)
    Abstract: Using a GARCH model, we analyze the influence of U.S. monetary policy action and communication on the price volatility of commodities for the period 1998–2009. We find, first, that U.S. monetary policy events have an economically significant impact on price volatility. Second, expected target rate changes and communications decrease volatility, whereas target rate surprises and unorthodox monetary policy measures increase it. Third, we find a change in reaction to central bank communication during the recent financial crisis: the “calming” effect of communication found for the whole sample is partly offset during that period.
    Keywords: Central Bank Communication, Commodities, Federal Reserve Bank, Monetary Policy, Price Volatility
    JEL: E52 E58 G14 Q10 Q40
    Date: 2011
  10. By: Panagiotis Konstantinou (Department of Economics, University of Macedonia); Athanasios Tagkalakis (Economic Research Department, Bank of Greece)
    Abstract: This paper investigates the widely held view that expansionary fiscal policy can boost consumer and business confidence, which will stimulate private spending and sustain economic activity. We find evidence in favor of this conjecture, i.e., cuts in direct taxes generate a positive effect on consumer and business confidence, while the same applies in cases of higher non-wage government consumption. However, higher government wage bills and government investment reduce confidence, with the effect being more pronounced when the debt to GDP ratio is high, possibly because they entail a permanent increase in the size of the public sector, which would have to be financed by higher future taxes.
    Keywords: Fiscal Policy, Consumer Confidence, Business Confidence, Fiscal Stimulus of Confidence.
    JEL: E62 H31 H32
    Date: 2011–03
  11. By: Steffen Ahrens; Stephen Sacht
    Abstract: This paper estimates a high-frequency New Keynesian Phillips curve via the Generalized Method of Moments. Allowing for higher-thanusual frequencies strongly mitigates the well-known problems of smallsample biases and structural breaks. Applying a daily frequency allows us to obtain eventspecific estimates for the Calvo parameter of nominal rigidity - for instance for the recent financial and economic crisis -, which can be easily transformed into their weekly, monthly and quarterly equivalences to be employed for the analysis of eventspecific monetary and fiscal policy. With Argentine data from the end of 2007 to the beginning of 2011, we find the daily Calvo parameter to vary in a very close range around 0.97, which implies averagely fixed prices of approximately 40 days or equivalently one and a half month or a little less than half a quarter. This has strong implication for the modeling of monetary policy analysis since it implies that at a quarterly frequency a flexible price model has to be employed. In the same vein, to analyze monetary policy in a sticky price framework, a monthly model seems more appropriate
    Keywords: Calvo Staggering, High-Frequency NKM, GMM
    JEL: C63 E31
    Date: 2011–03
  12. By: Shigenori Shiratsuka (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper explores a policy framework for central banks from a macroprudential perspective, to pursue price and financial system stability in a consistent and sustainable manner. Triggered by the recent financial crisis, fundamental reform of the financial system is advocated to establish more stable foundations for supporting sustainable growth in the global economy. Achieving higher stability purely by more stringent microprudential regulations tends to result in lower efficiency in financial intermediation. Crises are fundamentally endogenous to the financial system and arise from exposure to common risks among financial institutions, underpinned by complicated incentives at both the micro and macro levels. In that context, macroprudential policy is often pointed out as a missing element in the current policy framework in order to strike a balance between the efficiency and stability of the financial system as a whole. Pursuing both price and financial system stability in a consistent and sustainable manner requires combination of monetary and prudential policies, especially macroprudential policy. To that end, this paper proposes to extend constrained discretion for monetary policy, proposed as the conceptual basis for flexible inflation targeting, to overall central banking, encompassing monetary and macroprudential policies.
    Keywords: Macroprudential policy, Procyclicality, Financial imbalances, Asset-price and credit bubble, Constrained discretion.
    JEL: E58 G28
    Date: 2011–02
  13. By: Christoph Himmels (Department of Economics, University of Exeter); Tatiana Kirsanova (Department of Economics, University of Exeter)
    Abstract: We study the existence and uniqueness properties of monetary policy with limited commitment in LQ RE models. We use a New Keynesian model with debt accumulation in the spirit of Leeper (1991) as a `lab', because this model generates multiple equilibria under pure discretion, and under full commitment there are two distinct determinate regimes. We study how these properties change over the continuum of intermediate cases between commitment and discretion. We find that although multiple equilibria exist for high degrees of precommitment, even a small degree of precommitment selects a unique equilibrium for a wide range of parameters. We discuss the stability properties of policy equilibria which can be used to design an equilibrium selection criterion. We also demonstrate very different welfare implications for different policy equilibria.
    Keywords: Limited Commitment, Commitment, Discretion, Multiple Equilibria
    JEL: E31 E52 E58 E61 C61
    Date: 2011
  14. By: Maria Dolores Gadea; Ana Gomez Loscos; Antonio Montañes (University of Zaragoza)
    Abstract: This paper sets out a comprehensive framework to identify regional business cycles within Spain and analyses their stylised features and the degree of synchronisation among them and the Spanish economy. We show that the regional cycles are quite heterogeneous although they display some degree of synchronisation that can be partially explained using macroeconomic variables. We also propose a dynamic factor model to cluster the regional co-movements and test if the country cycle is simply the aggregation of the regional ones. We find that the Spanish business cycle is not shared by the 17 regions, but is the sum of the different regional behaviours. The implications derived from our results are useful both for policy makers and analysts.
    Keywords: Business Cycle. Synchronisation measures. Dynamic factor models
    Date: 2011–03–01
  15. By: L. Randall Wray
    Abstract: The Queen of England famously asked her economic advisers why none of them had seen "it" (the global financial crisis) coming. Obviously, the answer is complex, but it must include reference to the evolution of macroeconomic theory over the postwar period—from the "Age of Keynes," through the Friedmanian era and the return of Neoclassical economics in a particularly extreme form, and, finally, on to the New Monetary Consensus, with a new version of fine-tuning. The story cannot leave out the parallel developments in finance theory-with its efficient markets hypothesis-and in approaches to regulation and supervision of financial institutions. This paper critically examines these developments and returns to the earlier Keynesian tradition to see what was left out of postwar macro. For example, the synthesis version of Keynes never incorporated true uncertainty or "unknowledge," and thus deviated substantially from Keynes's treatment of expectations in chapters 12 and 17 of the General Theory. It essentially reduced Keynes to sticky wages and prices, with nonneutral money only in the case of fooling. The stagflation of the 1970s ended the great debate between "Keynesians" and "Monetarists" in favor of Milton Friedman's rules, and set the stage for the rise of a succession of increasingly silly theories rooted in pre-Keynesian thought. As Lord Robert Skidelsky (Keynes's biographer) argues, "Rarely in history can such powerful minds have devoted themselves to such strange ideas." By returning to Keynes, this paper attempts to provide a new direction forward.
    Keywords: Efficient Markets Hypothesis, Keynesian Economics, Orthodoxy, Heterodox Economics, Minsky, Uncertainty, Rational Expectations, New Classical, New Monetary Consensus, Monetary Theory of Production, Effective Demand, Special Properties of Money, the End of Laissez-Faire, Financial Instability Hypothesis
    JEL: A2 B15 B22 B50 E11 E12
    Date: 2011–03
  16. By: Henning Weber
    Abstract: Empirical data indicate that firms tend to have below-average productivity upon entry and that they tend to experience post-entry productivity growth. I present a New Keynesian model with growth in firm-specific productivity and firm turnover that captures these two phenomena. The model predicts that the optimal rate of long-run inflation is positive and equal to growth in firm-specific productivity. When linearized at positive optimal inflation, the model is observationally equivalent to the basic New Keynesian model with homogenous productivity linearized at zero inflation. Optimal stabilization policies are the same in both models, and the Taylor principle ensures determinacy in either model
    Keywords: Optimal long-run inflation, trend inflation, heterogenous firms
    JEL: E01 E31 E32
    Date: 2011–02
  17. By: Aleš Maršál (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: I lay out small open economy model with nominal rigidities to study the implication of model dynamics on the term structure of interest rates. It has been shown that in order to obtain at least moderate match simultaneously of the macro and finance data, one has to introduce long-memory habits in consumption together with a large number of highly persistent exogenous shocks. These elements of the model however worsen the fit of macro data. I find that in the open economy framework the foreign demand channel allows us to match some of the data features even without including habits and a large number of exogenous shocks.
    Keywords: DSGE small open economy model, term structure of interest rates, perturbation method, second order approximation
    JEL: G12 E17
    Date: 2011–02
  18. By: Zsolt Darvas (Institute of Economics Hungarian Academy of Sciences); Jean Pisani-Ferry (Bruegel, Brussels)
    Abstract: The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed's policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro's exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.
    Keywords: currency war; quantitative easing; currency intervention; international monetary system
    JEL: E52 E58 F31 F33
    Date: 2011–01
  19. By: Nagayasu, Jun
    Abstract: This paper studies the effect that financial innovation, which seems very prominent in recent years, has on money. Using Japanese regional data and the money demand specification, we first provide evidence of instability in the simple money-output relationship. However, when this relationship is extended to include a proxy for a comprehensive measure of financial innovation, the model is found to be stable. Furthermore, consistent with economic theory, evidence is obtained of financial innovation leading to decreased demand for liquid financial assets. In this respect, demand deposits seem to possess very similar characteristics to cash in Japan in recent years.
    Keywords: Regional money; panel cointegration
    JEL: E41
    Date: 2011–01
  20. By: Dong He (Hong Kong Institute for Monetary Research); Wei Liao (Hong Kong Institute for Monetary Research)
    Abstract: This paper develops a multi-level structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural VAR with a multi-level factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering nine emerging Asian economies and G-7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that, while the role of the global factors has intensified over the past fifteen years for most of the economies, output fluctuations in Asia have remained less synchronised with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Thus while emerging Asian economies cannot "decouple" completely from the advanced economies, they have nonetheless sustained a strong independent cycle among themselves. We also find that synchronised supply shocks contributed more to the observed synchronisation in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement through vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronisation in emerging Asia.
    Keywords: Business Cycle Synchronization, Asia's External Dependency, Decoupling, Multi-Level Factor Model, Structural VAR
    Date: 2011–02
  21. By: Calmfors, Lars (Institute for International Economic Studies, Stockholm University)
    Abstract: A fundamental overhaul of EU economic governance is needed. The most important reform is a strengthening of national fiscal frameworks, including the establishment of independent fiscal watchdogs in Member States that do not yet have such institutions. At the European level, a permanent crisis resolution mechanism should be integrated with both broader macroeconomic surveillance and the sanction system. An independent European fiscal council could, based on macroeconomic risk considerations, decide in advance appropriate haircuts in the event of future sovereign debt restructuring.
    Keywords: EU; economic governance; fiscal policy; macroeconomics
    JEL: A00 E62
    Date: 2010–08–18
  22. By: Lars Calmfors; Simon Wren-Lewis
    Abstract: Fiscal councils now exist in a number of countries. This paper first considers the extent of deficit bias, potential explanations for it, and how independent institutions could help reduce it. Are fiscal councils complements to or substitutes for fiscal rules, and why do none at present have any formal control over fiscal decisions? The paper then outlines the specific tasks that a fiscal council might undertake, and examines how these are combined in eleven fiscal councils. A more detailed examination is undertaken of the fiscal councils in Sweden and the UK. The paper draws some conclusions on the role of fiscal forecasting, ensuring independence, and the provision of policy advice.
    Keywords: Fiscal policy, debt, deficit bias, fiscal council
    JEL: E62 E65
    Date: 2011
  23. By: Jonathan Benchimol (Economics Department - ESSEC Business School); André Fourçans (Economics Department - ESSEC Business School)
    Abstract: Cet article présente un modèle théorique et empirique de la zone euro, en mettant en perspective le rôle de la monnaie. Le modèle s'inscrit dans le cadre « Nouveaux Keynésiens-DSGE », la monnaie étant introduite dans la fonction d'utilité des ménages sous une forme non-séparable. En testant le modèle selon la méthode bayésienne nous expliquons la variance de la production et de l'inflation, mais aussi du taux d'intérêt, des balances réelles, de la production et des balances réelles en prix flexibles. Le rôle de la monnaie est analysé plus particulièrement. Nous montrons que son impact sur la production dépend du degré d'aversion au risque des agents, qu'il augmente avec ce degré, et qu'il devient significatif quand l'aversion au risque inter-temporel est suffisamment élevée. L'impact direct de la monnaie est en revanche très limité pour expliquer la variance de l'inflation, la politique monétaire, via le taux d'intérêt, constituant le facteur dominant.
    Keywords: Estimation bayésienne ; Modèle DSGE ; Monnaie ; Zone euro
    Date: 2010–04
  24. By: KOBAYASHI Keiichiro
    Abstract: We generalize Lagos and Wright's (2005) framework for a monetary economy in a way that there exist two technologies, "high" and "low," for producing the goods in a decentralized matching market. The high technology is more productive than the low technology, while the agents who use the high technology cannot commit in advance to deliver the goods. The lack of commitment makes it infeasible to produce the goods with the high technology if trade is conducted via a simple cash payment. To use the high technology, private valuable assets, e.g., residential property, should be put up as a "hostage" à la Williamson (1983) in the transaction. In this setting, a deterioration in the balance sheet due to a financial crisis leads to the disappearance of residential assets which are not yet put up as collateral, and hinder the usage of the high technology, leading to a decline in aggregate productivity. In this case, monetary injections cannot restore productivity after a financial crisis.
    Date: 2011–02
  25. By: Zied Ftiti (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon); Jean-François Goux (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: La politique de ciblage d'inflation est un régime monétaire qui vise l'inflation. Sa pratique a été marquée par une grande stabilité observée aux débuts des années 90 et 2000. Un débat émerge sur l'efficacité et la performance économique de ce régime. De nombreuses recherches se sont intéressées à cette question sans pouvoir pour autant parvenir à un consensus ultime. L'objectif de ce papier est de contribuer à ce débat en clarifiant l'origine de ce régime monétaire et en proposant, par la suite, notre propre grille d'analyse quantitative. Nous avons recours à l'analyse de deux agrégats macroéconomique : l'inflation et la croissance économique selon différents échantillons. Dans un premier temps, nous évaluons l'évolution de ces deux grandeurs, dans tous les pays à ciblage d'inflation, entre la période précédant son adoption et la période post-adoption. Les résultats de cette première comparaison montrent sans exception que tous les pays à ciblage d'inflation ont eu un taux d'inflation plus faible et moins volatile. De même, nous prouvons que le ciblage d'inflation ne sacrifie pas la croissance économique en contre partie d'une faible volatilité d'inflation. Dans un second temps et pour des raisons de robustesse nous procédons à une comparaison des pays voisins deux à deux, dont l'un adoptant le régime de ciblage d'inflation et l'autre pratiquant une politique monétaire différente. Cette seconde comparaison montre que tous les pays à ciblage d'inflation sans exception ont connu de meilleures performances macroéconomiques que leurs voisins de non ciblage. A partir de ces résultats nous concluons à l'efficacité et la performance économique de cette politique monétaire à la fois pour les pays industrialisés et les pays émergents.
    Keywords: ciblage d'inflation, performance, efficacité, stabilité
    Date: 2011
  26. By: Yochanan Shachmurove (Department of Economics, University of Pennsylvania and The City College of The City University of New York)
    Abstract: The economic history of the United States is riddled with financial crises and banking panics. During the nineteenth-century, eight major such episodes occurred. In the period following World War II, some believed that these crises would no longer happen, and that the U.S. had reached a time of everlasting financial stability and sustainable growth. The Savings and Loans Crisis of the 1980s, the 2001 dot-com bust and the 2007 housing bubble that led to the current global financial crises demonstrate that these phenomena are still reoccurring. Regulators and policy makers should keep aware of the recurrence of such crises.
    Keywords: Financial Crises; Financial Regulations and Reforms; Banking Panics; Banking Runs; Nineteenth and Twentieth Century Crises; Bankruptcies; Federal Reserve Bank; Subprime Mortgage; Troubled Asset Relief Program (TARP); Collateralized Debt Obligations (CDO); Mortgage Backed Securities (MBO); Glass-Steagall Act; J.P. Morgan Chase; Bear Stearns; Augustus Heinze; Timothy Geithner; Paul Volcker.
    JEL: E0 E3 E44 E5 E6 N0 N1 N2 G0 G18 G38
    Date: 2011–07–01
  27. By: Don Harding (La Trobe University); Adrian Pagan (QUT and UTS)
    Abstract: The fact that the Global Financial Crisis, and the Great Recession it ushered in, was largely unforeseen, has led to the common opinion that macroeconomic models and analysis is deficient in some way. Of course it has probably always been true that businessmen, journalists and politicians have agreed on the proposition that economists canÂ’t forecast recessions. Yet we see an enormous published literature that presents results which suggest it is possible to do so, either with some new model or some new estimation method e.g. Kaufman (2010), Galvao (2006), Dueker (2005), Wright (2006) and Moneta (2005). Moreover, there seem to be no shortage of papers still emerging that make claims along these lines. So a question that naturally arises is how one is to reconcile the existence of an expanding literature on predicting recessions with the scepticism noted above?
    Keywords: Global Financial Crisis, Great Recession,
    Date: 2010–12–09
  28. By: Jin, Yu
    Abstract: We study the role of firms' credit histories in a business cycle model. Loans are dynamic contracts between banks and firms, and credit terminations are used as an incentive device. Banks deny future loans to an entrepreneur according to his credit histories in order to affect his choice of project ex ante. This will generate fluctuations from technology shocks to the riskiness of different types of projects as occurred during the technology bubbles. The model is used to explain the boom-and-bust of the dot-com bubble, one leading example of technology bubbles in the economy, in the late 1990s.
    Keywords: credit terminations; technology bubbles
    JEL: E32 G21
    Date: 2010–11
  29. By: Éric Tymoigne
    Abstract: With the Great Recession and the regulatory reform that followed, the search for reliable means to capture systemic risk and to detect macrofinancial problems has become a central concern. In the United States, this concern has been institutionalized through the Financial Stability Oversight Council, which has been put in charge of detecting threats to the financial stability of the nation. Based on Hyman Minsky's financial instability hypothesis, the paper develops macroeconomic indexes for three major economic sectors. The index provides a means to detect the speed with which financial fragility accrues, and its duration; and serves as a complement to the microprudential policies of regulators and supervisors. The paper notably shows, notably, that periods of economic stability during which default rates are low, profitability is high, and net worth is accumulating are fertile grounds for the growth of financial fragility.
    Keywords: Financial Fragility; Financial Regulation; Financial Crises; Macroprudential Risk; Debt-Deflation Process; Ponzi Finance
    JEL: E32 G18 G28 G38
    Date: 2011–03
  30. By: Katja Drechsel; Rolf Scheufele
    Abstract: This paper analyses the recession in 2008/2009 in Germany, which is very different from previous recessions, in particular regarding its cause and magnitude. We show to what extent forecasters and forecasts based on leading indicators fail to detect the timing and the magnitude of the recession. This study shows that large forecast errors for both expert forecasts and forecasts based on leading indicators resulted during this recession which implies that the recession was very difficult to forecast. However, some leading indicators (survey data, risk spreads, stock prices) have indicated an economic downturn and hence, beat univariate time series models. Although the combination of individual forecasts provides an improvement compared to the benchmark model, the combined forecasts are worse than several individual models. A comparison of expert forecasts with the best forecasts based on leading indicators shows only minor deviations. Overall, the range for an improvement of expert forecasts during the crisis compared to indicator forecasts is relatively small.
    Keywords: leading indicators, recession, consensus forecast, non-linearities
    JEL: E37 C53
    Date: 2011–03
  31. By: Ebert, Werner; Eckardt, Martina
    Abstract: The year 2010 showed how prone to crisis the Euro zone is. To a great extent this results from insufficient public policy coordination of EU member states’ public and fiscal policies. This paper discusses the main reform proposals related to fiscal, public and structural policy against the background of the underlying collective coordination problem. In addition it also considers the suggestions made for introducing a crisis mechanism. Although the main actors in the Euro zone seem to be aware of the problems of the existing coordination mechanisms, it is still doubtful whether the measures finally taken will be effective enough.
    Keywords: EU policy coordination; fiscal policy
    JEL: E62 E61
    Date: 2011–02
  32. By: Paolo Angelini; Laurent Clerc; Vasco Cúrdia; Leonardo Gambacorta; Andrea Gerali; Alberto Locarno; Roberto Motto; Werner Roeger; Skander Van den Heuvel; Jan Vlcek
    Abstract: We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b).
    Keywords: Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential
    Date: 2011–02
  33. By: Helliwell, John (University of British Columbia); Huang, Haifang (University of Alberta, Department of Economics)
    Abstract: By exploiting two very large samples of US subjective well-being data we are able to obtain comparable estimates of the monetary and other costs of unemployment on the unemployed themselves, while simultaneously estimating the effects of local employment on the subjective well-being of the rest of the population. For those who are unemployed, the subjective well-being consequences can be divided into income and non-income effects, with the latter being five times larger than the former. This is similar to what has been found in many countries, as is our finding that the non-income effects are lower for individuals living in areas of high unemployment. Most importantly, we are able to use the large sample size and variety of questions in the BRFSS and Gallup daily polls to reconcile, and extend to the United States, what had previously seemed to be contradictory results on the size and nature of the spillover effects of unemployment on subjective well-being. At the population level the spillover effects are twice as large as the direct effects, making the total well-being costs of unemployment fifteen times larger than those directly due to the lower incomes of the unemployed.
    Keywords: unemployment; well-being
    JEL: E24 H23 J64 J68
    Date: 2011–02–24
  34. By: Nikolaos Antonakakis; Johann Scharler
    Abstract: This paper studies the dynamics of international consumption risk sharing among the G7 countries. Based on the dynamic conditional correlation model due to Engle (2002), we construct a time-varying, consumption-based measure of risk sharing. We find that although the exposure to countryspecific shocks has declined in the G7 countries, with Japan being an exception, the evolution of risk sharing is rather heterogeneous across countries.
    Keywords: Dynamic conditional correlation, consumption risk sharing
    JEL: E3 F4
    Date: 2011–02
  35. By: Selahattin Imrohoroglu (Professor, Department of Finance and Business Economics, Marshall School of Business, University of Southern California (E-mail:; Nao Sudo (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Japan has the highest debt to GDP ratio among the developed nations. In addition, the population is projected to age rapidly over the next few decades, which will significantly increase the ratio of government expenditures to GDP. In this paper, we explore the effect of economic growth driven by total factor productivity on Japanese debt in the face of higher future social security expenditures. Our main finding is that a decade of unprecedentedly fast growth of total factor productivity, at an average of 6% per year, is needed in order for Japan to eliminate its debt. Since this is very unrealistic, what is needed is a significant reduction in government expenditures together with an increase in the consumption tax rate, to eliminate debt in forty years.
    Keywords: Government Debt, Productivity, Fiscal Policy
    JEL: E00 H20 H50
    Date: 2011–01
  36. By: Nicolas E. Magud E. (International Monetary Fund); Carmen M. (Peterson Institute for International Economics); Kenneth S. Rogoff (Harvard University - Department of Economics)
    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.
    Keywords: Capital Controls
    JEL: E44 E5 F3 F30 F32 F34 F41
    Date: 2011–03
  37. By: Alberto Botta; Gianni Vaggi (Department of Economics, University of Insubria, Italy)
    Abstract: The sixty-year-old Israeli-Palestinian conflict has deeply influenced the evolution of the Palestinian economy. In the last two decades persisting political instability and the Israeli closure policy have been sources of protracted economic stagnation and poor capital formation. The paper describes the consequences on the Palestinian economy of two particular conditions: high transaction costs and market fragmentation. We use a simple one-sector model which describes Palestine as a demand-driven economy and Palestinian capital accumulation as linked to desired investments by Palestinian firms. Into this framework, we show that high transaction costs discourage capital formation by curtailing expected profitability. Market fragmentation further reduces domestic investments by reducing the size of the market and depressing entrepreneurs’ animal spirits. We show that in the short-run, where expectations are given, the two above facts induce low levels of capacity utilization and of capital accumulation. The situation is even more worrying in the long-run when entrepreneurs can adapt their expectations. Depressed animal spirits and low levels of capacity use feed back into each other and give rise to a low-growth trap from which Palestine can hardly escape. We also highlight the possible positive impact of the removal of high transaction cost and of market fragmentation and the ensuing benefits on the long run equilibrium values of both capital accumulation and capacity utilization. The conclusions try to set this analytical results into the historical situation of the Palestinian economy and to envisage the roles of economics and politics in order to establish a sustained process of development.
    Keywords: Palestine, low-growth trap, post-Keynesian models
    Date: 2011–02
  38. By: Erik Stam; Bart Nooteboom
    Abstract: This paper discusses the nature of entrepreneurship and its relation to innovation along a cycle in which exploration and exploration follow upon each other. We place the roles of entrepreneurship in innovation policy within this cycle of innovation. Different types of innovation along the cycle of innovation are realized with different forms of entrepreneurship, which are constrained or enabled by different legal institutions. One of the key roles of governments is to design, change or destruct institutions in order to improve societal welfare. The question is what governments should do in the context of innovation policy. Here, social scientists can make a contribution by providing insight into what entrepreneurship and innovation is (theories about these phenomena), and how institutions affect them in reality (empirical evidence about their effects). This requires social scientists to be engaged scholars and to provide new policy options as an honest broker between the academic world and the policy world. The key question of this paper is: How can policy best enable innovation based entrepreneurship? The answer is derived from looking at both theoretical tenets and empirical evidence using an institutional design perspective, which aims at providing arguments for the design, change and/or destruction of institutions, given the goals of the governments. We provide an overview of some (empirically tests of) institutions that enable or restrain particular types of entrepreneurship. Examples of these institutions are intellectual property rights and the Small Business Innovation Research program, employment protection, and non-compete covenants.
    Keywords: entrepreneurship, innovation, institutions, innovation policy
    JEL: E61 G38 H57 K29 L26 L53 M13 O12 O31 O33 O38
    Date: 2011–02

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