nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒03‒19
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Financial frictions and the zero lower bound on interest rates: a DSGE analysis By Merola, Rossana
  2. Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation By Giorgio Motta; Patrizio Tirelli
  3. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Barbara Annicchiarico; Alessandra Pelloni; Lorenza Rossi
  4. Real indeterminacy and the timing of money in open economies By Stephen McKnight
  5. Leaning Against Boom-Bust Cycles in Credit and Housing Prices By Luisa Lambertini; Caterina Mendicino; Maria Teresa Punzi
  6. Overdeterminacy and endogenous cycles: Trygve Haavelmo’s business cycle model and its implications for monetary policy By Kallåk Anundsen , André; Sigurd Holmsen Krogh, Tord; Nymoen, Ragnar; Vislie, Jon
  7. Learning and judgment shocks in U.S. business cycles By Murray, James
  8. Non-stationary inflation and panel estimates of the n ew Keynesian Phillips curve for Australia By Rao, B. Bhaskara; Paradiso, Antonio; Esposito, Piero
  9. How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks By Heutel, Garth
  10. How do inflation expectations form? New insights from a high-frequency survey By Gabriele Galati; Peter Heemeijer; Richhild Moessner
  11. Expectations Traps and Monetary Policy with Limited Commitment By Himmels, Christoph; Kirsanova, Tatiana
  12. Monetary Shocks and the Cyclical Behavior of Loan Spreads By Pierre-Richard Agénor; George Bratsiotis; D. Pfajfar
  13. Time- or State-Dependence? An Analysis of Inflation Dynamics using German Business Survey Data By Carstensen, Kai; Schenkelberg, Heike
  14. Endogenous Market Structures and Labor Market Dynamics By Colciago, Andrea; Rossi, Lorenza
  15. Price dispersion in Europe: Does the business cycle matter? By Marco Hoeberichts; Ad Stokman
  16. Monetary disorder and financial regimes - The demand for money in Argentina, 1900-2006 By Matteo Mogliani; Giovanni Urga; Carlos Winograd
  17. The role of monetary policy in managing the euro - dollar exchange rate By Mylonidis, Nikolaos; Stamopoulou, Ioanna
  18. Motivations for Remittances: Evidence from Moldova By Keisuke Otsu; Masashi Saito
  19. 28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession By de Carvalho Filho, Irineu
  20. Electoral Business Cycles in OECD Countries By Canes-Wrone, Brandice; Park, Jee-Kwang
  21. On the stability properties of optimal interest rules under learning By Michele Berardi
  22. The macroeconomic impact of Basel III on the Italian economy By Alberto Locarno
  23. Reverse Electoral Business Cycles and Housing Markets By Canes-Wrone, Brandice; Park, Jee-Kwang
  24. Monetary Union Stability: The Need for a Government Banker and the Case for a European Public Finance Authority By Thomas I. Palley
  25. 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
  26. Introduction to Macroeconomic Dynamics Special Issue on Oil Price Shocks By Apostolos Serletis; John Elder
  27. Economy wide risk diversification in a three-pillar pension system By Cai Cai Du; Joan Muysken; Olaf Sleijpen
  28. The possible shapes of recoveries in Markov-Switching models By Bec Frederique; Othman Bouabdallah; Laurent Ferrara
  29. Product market regulation, firm size, unemployment and informality in developing economies By Charlot Olivier; Malherbet Franck; Terra Cristina
  30. The Irish Crisis By Lane, Philip R.
  31. The Role of Housing Tax Provisions in the 2008 Financial Crisis By Thomas Hemmelgarn; Gaetan Nicodeme; Ernesto Zangari
  32. Did Housing Policies Cause the Post-War Boom in Homeownership? A General Equilibrium Analysis By Matthew Chambers; Carlos Garriga; Don E. Schlagenhauf
  33. Debt Stabilization in a Non-Ricardian Economy By Campbell Leith; Ioana Moldovan; Simon Wren-Lewis
  34. Credit availability and investment in Italy: lessons from the "Great Recession" By Eugenio Gaiotti
  35. Küresel Finans Krizinin Türkiye'ye Etkileri By Kibritçioğlu, Aykut
  36. Testing for Parameter Stability in DSGE Models. The Cases of France, Germany and Spain By Jerger, Jürgen; Röhe, Oke
  37. Politique budgétaire et discipline budgétaire renforcée dans une union monétaire. By Irem Zeyneloglu
  38. Learning the optimal buffer-stock consumption rule of Carroll By Murat YILDIZOGLU (GREQAM, CNRS, UMR 6579); Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113); Isabelle SALLE (GREThA, CNRS, UMR 5113); Martin ZUMPE (GREThA, CNRS, UMR 5113)
  39. Growth Effects of Fiscal Policies: A Critical Appraisal of Colombier’s (2009) Study By Bergh, Andreas; Öhrn, Nina
  40. Co-operative Credit Delinquency: Identification of Factors Discriminating Defaulters By Justin, Nelson Michael

  1. By: Merola, Rossana
    Abstract: Recent developments in Canada, the United Kingdom, the euro area, Japan, Sweden, Switzerland and the United States have triggered a debate on whether monetary policy is effective when the nominal interest rate is close to zero. In this context, the monetary authority is no longer in a position to pursue a policy of monetary easing by lowering nominal interest rates further. However, some economists have down-played the risk of hitting the zero lower bound, at least for the US economy. In this paper, I assess the implications of the zero lower bound in a DSGE model with financial frictions. The financial accelerator mechanism is formalized as in Bernanke, Gertler and Gilchrist (1995). The paper attempts to address three main issues. First, I evaluate whether the zero lower bound -- by limiting the use of the nominal interest rate as a policy instrument -- might hamper the monetary authority from offsetting the negative effects of an adverse shock. Second, I analyze whether price-level targeting, through the stabilization of private sector expectations, might be a better monetary rule than inflation targeting in order to avoid the "liquidity trap". Third, I investigate the effectiveness of fiscal stimulus (namely, an increase in government expenditure) when financial markets are imperfect and the nominal interest rate is close to its zero lower bound. In this context, two questions will be addressed: first, do financial frictions weaken the effect of a fiscal expansion? Second, how are results affected when the zero lower bound is binding? To address these questions, I introduce a negative demand shock and an adverse financial shock. I find that by adopting a price-level targeting rule, the monetary authority might alleviate the recession generated by the interaction of financial frictions and lower-bounded nominal interest rates. Alternatively, an increase in government expenditure has a positive impact on output, but fiscal multipliers are below one, due to a strong crowding-out effect of private consumption. This effect is muted when the nominal interest rate is lower bounded. In analyzing discretionary fiscal policy, this paper does also focus on two crucial aspects: the duration of the fiscal stimulus and the presence of implementation lags.
    Keywords: Optimal monetary policy; financial accelerator; lower bound on nominal interest rates; price-level targeting; fiscal stimulus.
    JEL: E31 E58 E52 E44
    Date: 2010–07
  2. By: Giorgio Motta; Patrizio Tirelli
    Abstract: When the central bank is the sole policymaker, the combination of limited asset market participation and consumption habits can have dramatic implications for the optimal monetary policy rule and for stability properties of a business cycle model characterized by price and nominal wage rigidities. In this framework, a simple countercyclical fiscal rule plays a twofold role. On the one hand it ensures uniqueness of the rational expectations equilibrium when monetary policy follows a standard Taylor rule. On the other hand it brings aggregate dynamics substantially closer to their socially efficient levels.
    Keywords: Rule of Thumb Consumers, DSGE, Determinacy, Limited Asset Market Participation, Taylor Principle, Optimal Simple Rule
    JEL: E52
    Date: 2011–03
  3. By: Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Lorenza Rossi (University of Pavia)
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth, volatility, business cycle, monetary policy
    JEL: E32 E52 O42
    Date: 2011–03–08
  4. By: Stephen McKnight (El Colegio de México)
    Abstract: Should central banks target producer price inflation or consumer price inflation in the setting of monetary policy? Previous studies suggest that in order to avoid real indeterminacy and self-fulfilling fluctuations, the interest rate rule for open economies should react to producer price inflation. However, as this paper shows, the preference towards a particular inflation index crucially depends upon the timing assumption on money employed in the determinacy analysis. This timing assumption importantly determines the transactions-facilitating services of money. It is shown that the conclusions of the existing literature, that advocate targeting producer price inflation, is a by-product of adopting end-of-period timing, i.e. what matters for transactions purposes is the money one leaves the goods market with. However, we find that the conditions for equilibrium determinacy change significantly once cash-in-advance timing is adopted, i.e. what matters for current transactions is the money one enters the goods market with. Thus in stark contrast to previous studies, we show that under cash-in-advance timing, targeting consumer price inflation is preferable to targeting producer price inflation in preventing self-fulfilling expectations.
    Keywords: real indeterminacy, open economy monetary models, trade openness, interest rate rules
    JEL: E32 E43 E53 E58 F41
    Date: 2011–03
  5. By: Luisa Lambertini (EPFL); Caterina Mendicino (Bank of Portugal); Maria Teresa Punzi (Central Bank of Ecuador)
    Abstract: This paper studies the potential gains of monetary and macro-prudential policies that lean against news-driven boom-bust cycles in housing prices and credit generated by expectations of future macroeconomic developments. First, we find no trade-off between the traditional goals of monetary policy and leaning against boom-bust cycles. An interest-rate rule that completely stabilizes inflation is not optimal. In contrast, an interest-rate rule that responds to financial variables mitigates macroeconomic and financial cycles and is welfare improving relative to the estimated rule. Second, counter-cyclical Loan-to-Value rules that respond to credit growth do not increase in ation volatility and are more effective in maintaining a stable provision of financial intermediation than interest-rate rules that respond to financial variables. Heterogeneity in the welfare implications for borrowers and savers make it dicult to rank the two policy frameworks.
    Date: 2011
  6. By: Kallåk Anundsen , André (Dept. of Economics, University of Oslo); Sigurd Holmsen Krogh, Tord (Dept. of Economics, University of Oslo); Nymoen, Ragnar (Dept. of Economics, University of Oslo); Vislie, Jon (Dept. of Economics, University of Oslo)
    Abstract: This paper presents the business cycle model that Trygve Haavelmo developed as part of his research program in macroeconomic and monetary theory. Driven by a mismatch between the marginal return to capital and the rate of return required by capital owners, this model generates endogenous cycles. The theory leads to a distinct analysis of the scope and limitations of monetary policy. A main message of the model is that care should be taken when conducting 'autonomous' monetary policy and that special emphasis should be put on the soundness of nancial mar- kets. Adopting a strict nominal anchor as the main objective of monetary policy might generate imbalances in the capital market.
    Keywords: investments; business cycles; monetary policy
    JEL: E22 E32 E44 E52
    Date: 2011–03–10
  7. By: Murray, James
    Abstract: This paper examines the role of judgment shocks in combination with other structural shocks in explaining post-war economic volatility within the context of a New Keynesian model. Agents form expectations using constant gain learning then augment these forecasts with judgment. These judgments may be interpreted as a reaction to current news stories or policy announcements that would influence people's expectations. I allow for the possibility that these judgments be informatively based on information about structural shocks, but judgment itself may also be subject to its own stochastic shocks. I estimate a standard New Keynesian model that includes these shocks using Bayesian simulation methods. To aid in identifying expectational shocks from other structural shocks I include data on professional forecasts along with data on output gap, inflation, and interest rates. I find judgment is largely not informed by macroeconomic fundamentals; most of the variability in judgment is explained by its own stochastic shocks. Impulse response functions from the estimated model illustrate how shocks to judgment destabilize the economy and explain business cycle fluctuations.
    Keywords: Learning; judgment; add-factors; New Keynesian model; Metropolis-Hastings
    JEL: C13 E32 E31 E50
    Date: 2011–03–02
  8. By: Rao, B. Bhaskara; Paradiso, Antonio; Esposito, Piero
    Abstract: This paper uses a recent panel method of Russell and Banerjee (2008) to estimate the new Keynesian Phillips curve for Australia. Our estimates show that while the hybrid new Keynesian Phillips curve and backward looking conventional Phillips curve are well determined, estimates of the Phillips curve with the pure forward looking expectations are unsatisfactory.
    Keywords: Panel data estimates; new Keynesian Phillips curve; Australia and Unit roots in the rate of inflation.
    JEL: E31
    Date: 2011–03–02
  9. By: Heutel, Garth (University of North Carolina at Greensboro, Department of Economics)
    Abstract: How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions. However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.
    Keywords: Climate change; Environmental policy
    JEL: E32 Q54 Q58
    Date: 2011–03–08
  10. By: Gabriele Galati; Peter Heemeijer; Richhild Moessner
    Abstract: We provide new insights on the formation of inflation expectations – in particular at a time of great financial and economic turmoil – by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB’s definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and mediumterm inflation expectations but had only a very small impact on long-term expectations. By contrast, long-term expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of time-variant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons.
    Keywords: Inflation expectations; monetary policy; crisis
    JEL: E31 E32 E37 E52 C53
    Date: 2011–03
  11. By: Himmels, Christoph; Kirsanova, Tatiana
    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: E58 E52 C61 E63 E61
    Date: 2011–02–28
  12. By: Pierre-Richard Agénor; George Bratsiotis; D. Pfajfar
    Abstract: This paper examines the impact of monetary shocks on the loan spread in a DSGE model that combines the cost channel effect of monetary transmission with the role of collateral under asymmetric information. Its key feature is the endogenous derivation of the default probability that results in a lending rate being set as a countercyclical risk premium over the cost of borrowing from the central bank. The endogenous probability of default is shown to provide an accelerator effect through which monetary shocks can amplify the loan spread The behavior of the spread appears to be consistent with existing empirical evidence.
    Date: 2011
  13. By: Carstensen, Kai; Schenkelberg, Heike
    Abstract: This paper evaluates the predictions of different price setting theories using a new dataset constructed from a large panel of business surveys of German retail firms over the period 1970-2010. The dataset contains firm-specific information on both price realizations and expectations. Aggregating the price data we find clear evidence in favor of state-dependence; for periods of relatively high and volatile inflation not only the size of price changes (intensive margin) but also the fraction of price adjustment (extensive margin) is important for aggregate inflation dynamics. Moreover, at the business cycle frequency, variations in the extensive margin explain a large fraction of inflation variability even for moderate inflation periods. This holds both for price realizations and expectations suggesting a role for state-dependent sticky plan models. Moreover, results from a structural sign-restriction VAR model show that the extensive margin reacts significantly to a monetary policy shock and is more important for the response of overall inflation than the intensive margin conditional on the shock. These findings confirm the validity of state-dependent pricing models that stress the importance of the extensive margin - even for low inflation periods.
    Keywords: Price setting behavior; time dependent pricing; state dependent pricing; monetary policy transmission
    JEL: E31 E32 E50
    Date: 2011–03–07
  14. By: Colciago, Andrea; Rossi, Lorenza
    Abstract: We propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously. The interplay between firms endogenous entry, strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables, and helps addressing the unemployment-volatility puzzle. Consistently with U.S. evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net firms' entry is procyclical and the price mark up is countercyclical.
    Keywords: Endogenous Market Structures; Firms' Entry; Search and Matching Frictions
    JEL: E32 L11 E24
    Date: 2011–02
  15. By: Marco Hoeberichts; Ad Stokman
    Abstract: We analyze the effect of the business cycle on price dispersion in Europe . Five decades of price level dispersion data for Europe enable us to distinguish short-term influences from long-term influences like market integration. We find that at the business cycle frequency, price dispersion across EMU member countries over the 1960 - 2009 period is significantly lower during economic downturns. This confirms on a macroeconomic level the evidence from micro and survey studies that markets become more competitive with falling demand, reducing deviations from the Law of One Price. Our model replicates most of the major drops in price level dispersion during severe economic recessions of the early 1970s, 1980s and 1990s, as well as the small change during the recent financial crisis.
    Keywords: economic integration; price level convergence; Law of One Price; EMU; business cycle
    JEL: E31 E50 F15 F41
    Date: 2011–03
  16. By: Matteo Mogliani (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris); Giovanni Urga (Cass Business School - City University London - City University London, University of Bergamo - University of Bergamo); Carlos Winograd (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris, Université d'Evry - Val d'Essonne - Université d'Evry - Val d'Essonne)
    Abstract: Argentina is a unique experience of protracted economic instability and monetary disorder. In the framework of a long-term view, we investigate the demand for narrow money in Argentina from 1900 to 2006, shedding some light on the existence of money demand equilibria in extremely turbulent economies. The paper examines the effect of monetary regime changes by dealing with the presence of structural breaks in long-run equations. We estimate and test for regime changes through a sequential approach and we embed breaks in long-run models. A robust cointegration analysis can be hence performed in a single-equation framework. We find that estimated parameters are in sharp contrast with those reported in the literature for Argentina, but in line with those reported for industrialized countries, while significant structural breaks appear consistent with major policy shocks that took place in Argentina during the 20th century.
    Keywords: money demand ; financial regimes ; structural breaks ; single-equation cointegration ; cointegration test ; Argentina monetary history
    Date: 2011–03–09
  17. By: Mylonidis, Nikolaos; Stamopoulou, Ioanna
    Abstract: The US Federal Reserve’s new relaxed monetary policy (the so-called quantitative easing) has triggered controversy among economists and policy makers about its effectiveness. This paper investigates the role of monetary policy in managing the euro – dollar exchange rate via alternative cointegration tests and impulse response functions. It is found that monetary fundamentals have neither long- nor short-run impact on the exchange rate. This implies that the Fed’s quantitative easing schemes are unlikely to have any significant impact on the euro – dollar rate.
    Keywords: Exchange rates; Monetary model; Cointegration; Impulse response functions
    JEL: E52 F31
    Date: 2011–03–01
  18. By: Keisuke Otsu; Masashi Saito
    Abstract: This paper constructs a dynamic stochastic general equilibrium model in which labor reallocations between production and organizational tasks generate endogenous TFP movements and also amplify and propagate the effects of exogenous shocks on macroeconomic activity. Organizational tasks in our model enhances financial relationships between firms and lenders, which lowers the credit spread. We calibrate and estimate the model using Japanese data and conduct a quantitative analysis. Our results suggest that the labor reallocation channel considered in this paper contributes greatly to the observed movements in the measured TFP, and serves as a quantitatively important amplification and propagation mechanism in aggregate fluctuations.
    Keywords: Labor Reallocations; Financial Relationship; Organizational Capital; TFP; Aggregate Fluctuations
    JEL: E13 E32
    Date: 2011–02
  19. By: de Carvalho Filho, Irineu
    Abstract: Twenty-eight months after the onset of the global financial crisis of August 2008, the evidence on post-crisis GDP growth emerging from a sample of 51 advanced and emerging countries is flattering for inflation targeting countries relative to their peers. The positive effect of IT is not explained away by plausible pre-crisis determinants of post-crisis performance, such as growth in private credit, ratios of short-term debt to GDP, reserves to short-term debt and reserves to GDP, capital account restrictions, total capital inflows, trade openness, current account balance and exchange rate flexibility, or post-crisis drivers such as the growth performance of trading partners and changes in terms of trade. We find that inflation targeting countries lowered nominal and real interest rates more sharply than other countries; were less likely to face deflation scares; and had sharp real depreciations without a relative deterioration in their risk assessment by markets. While the task of establishing causal relationships from cross-sectional macroeconomics series is daunting, our reading of this evidence is consistent with the resilience of IT countries being related to their ability to loosen their monetary policy when most needed, thereby avoiding deflation scares and the zero lower bound on interest rates.
    Keywords: Inflation targeting; economic crisis; monetary policy; Great Recession
    JEL: E00 E4 E3
    Date: 2011–03
  20. By: Canes-Wrone, Brandice (Princeton University); Park, Jee-Kwang (Princeton University)
    Abstract: Studies of OECD countries have generally failed to detect real economic expansions in the pre-election period, casting doubt on the existence of opportunistic political business cycles. We develop a theory that predicts a substantial portion of the economy experiences a real decline in the pre-election period. Specifically, the political uncertainty created by elections induces private actors to postpone investments with high costs of reversal. The resulting declines, referred to as reverse electoral business cycles, are larger the more competitive the electoral race and the greater the polarization between major parties. We test these predictions using quarterly data on private fixed investment in ten OECD countries between 1975 and 2006. The results suggest that reverse electoral business cycles exist, and as expected, depend on electoral competitiveness and partisan polarization. Moreover, simply by removing private fixed investment from gross domestic product (GDP), we uncover robust evidence of opportunistic cycles.
    Date: 2010–09
  21. By: Michele Berardi
    Abstract: In recent literature on monetary policy, it has been argued that a sensible policy rule should be able to induce learnability of the fundamental equilibrium: if private agents update their beliefs over time using adaptive learning technques, they should be able to converge towards rationality. Evans and Honkapohja (2003) showed that in a New Keynesian model an expectations based rule has such a desirable property, while a fundamentals based one does not. In order to implement an expectations based rule, though, the policymaker needs to observe private sector expectations. We show that there exists an alternative rule, based only on fundamentals, that can achieve the same positive results in terms of stability of private sector?s learning dynamics. Moreover, such a rule is learnable by the policymaker, and the combined learning dynamics of the private sector and the central bank make the economy converge to the fundamental equilibrium.
    Date: 2011
  22. By: Alberto Locarno (Banca d'Italia)
    Abstract: This paper provides an assessment of the costs of complying with Basel III for the Italian economy. The main findings are the following. For each percentage point increase in the capital ratio implemented over an eight-year horizon, the level of GDP would decline by 0.00-0.33% (0.03-0.39% if credit rationing is also accounted for), corresponding to a reduction of annual output growth in the transition period of 0.00-0.04% (0.00-0.05% if credit rationing is considered as well). Compliance with the new liquidity standards causes an additional slowdown of annual GDP growth of at most 0.02%. If banks felt forced to speed up the transition to the new capital rules by the beginning of 2013, the fall in output would be larger and would take place beforehand. Long-run costs of achieving the new capital standards are even lower, slightly less than 0.2%; those needed to comply with the target liquidity ratio are of a similar size. The above estimates suggest that the economic costs of Basel III are not huge and become negligible if compared with the potential benefits that can be reaped from reducing the frequency of systemic crises and the amplitude of boom-bust cycles.
    Keywords: Basel III, Modigliani-Miller theorem, flow/stock costs of equity finance, capital/liquidity requirements
    JEL: E44 E61 G21 G38
    Date: 2011–02
  23. By: Canes-Wrone, Brandice (Princeton University); Park, Jee-Kwang (Princeton University)
    Abstract: We argue that the political uncertainty generated by elections encourages private actors to delay investments that entail high costs of reversal, creating a pre-election decline in economic activity entitled a "reverse electoral business cycle." This incentive for delay becomes greater as policy differences between parties/candidates increase. Using new survey and observational data from the United States, we test these arguments. The individual-level analysis assesses whether respondents' perceptions of presidential candidates' policy differences increased the likelihood of postponing certain actions and purchases. For one of these items, housing, we collected observational data to examine whether electoral cycles indeed induce a pre-election decline in economic activity. The findings support the predictions and cannot be explained by existing theories of political business cycles.
    Date: 2010–09
  24. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper argues monetary union stability requires a government banker that manages the bond market and it offers a specific proposal for stabilizing the euro that does not violate the “no country bail-out” clause. There is accumulating evidence that the euro’s current architecture is unstable. The source of instability is high interest rates on highly indebted countries which creates unsustainable debt burdens. Remedying this problem requires a central bank that acts as government banker and pushes down government bond interest rates to sustainable levels. That can be accomplished by creation of a European Public Finance Authority (EPFA) that issues public debt which the European Central Bank (ECB) is allowed to trade. The debate over the euro’s financial architecture also has significant political implications. That is because the current neoliberal inspired architecture, which imposes a complete separation between the central bank and public finances, puts governments under continuous financial pressures. Over time, that pressure makes it difficult to maintain the European social democratic welfare state. This gives a political reason for reforming the euro and creating an EPFA that supplements the economic case for reform.
    Keywords: monetary union, stability, government banker, euro.
    Date: 2011
  25. By: Paolo Angelini (Bank of Italy); Laurent Clerc (Banque de France); Vasco Cúrdia (Federal Reserve Bank of New York); Leonardo Gambacorta (Bank for International Settlements); Andrea Gerali (Bank of Italy); Alberto Locarno (Bank of Italy); Roberto Motto (European Central Bank); Werner Roeger (European Commission); Skander Van den Heuvel (Board of Governors of the Federal Reserve System); Jan Vlcek (International Monetary Fund)
    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
    JEL: E44 E61 G21
    Date: 2011–02
  26. By: Apostolos Serletis; John Elder
    Abstract: This special issue of Macroeconomic Dynamics is devoted to papers that use recent advances in macroeconometrics and Â…financial econometrics to investigate the effects of oil price shocks and uncertainty about the price of oil on the level of economic activity.
    JEL: G31 E32 C32
    Date: 2011–01–01
  27. By: Cai Cai Du; Joan Muysken; Olaf Sleijpen
    Abstract: We model a three-pillar pension system and analyse in this context the impact of exogenous shocks on an open economy, using an overlapping generations model where individuals live for two periods. The three-pillar pension system consists of (1) a PAYG pension system, (2) a defined benefit pension fund, and (3) private savings. The economy is exposed to an ageing trend, inflation and a stock market crash. We show that in the three-pillar pension system the impact of these shocks on the economy is mitigated when compared to a two- pillar system, since each shock has a different impact on the three pillars. In order to illustrate the working of the model with respect to the impact of these shocks, both in magnitude and the development over time, we provide simulation results for the Netherlands.
    Date: 2011–03
  28. By: Bec Frederique; Othman Bouabdallah; Laurent Ferrara (THEMA, Universite de Cergy-Pontoise and CREST; Banque de France, DGEI-DCPM.; Banque de France, DGEI-DERIE.)
    Abstract: This paper explores the various shapes the recoveries may exhibit within a Markov- Switching model. It relies on the bounce-back effects first analyzed by Kim, Morley and Piger (2005) and extends the methodology by proposing i) a more flexible bounce-back model, ii) explicit tests to select the appropriate bounce-back function, if any, and iii) a suitable measure of the permanent impact of recessions. This approach is then applied to post-WWII quarterly growth rates of US, UK and French real GDPs.
    Keywords: Markov-Switching models; bounce-back effects; asymmetric business cycles.
    JEL: E32 C22
    Date: 2011
  29. By: Charlot Olivier; Malherbet Franck; Terra Cristina (THEMA, Universite de Cergy-Pontoise; Universit´e de Rouen, CECO - Ecole Polytechnique, fRDB and IZA.; THEMA, Universite de 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
  30. By: Lane, Philip R.
    Abstract: This paper has three goals. First, it seeks to explain the origins of the Irish crisis. Second, it provides an interim assessment of the Irish government’s management of the crisis. Third, it evaluates the lessons from Ireland for the macroeconomics of monetary unions.
    Keywords: EMU; Irish crisis
    JEL: E5 F4
    Date: 2011–03
  31. By: Thomas Hemmelgarn (European Commission); Gaetan Nicodeme (European Commission); Ernesto Zangari (Banca d'Italia)
    Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, ending into deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between housing tax provisions and the financial crisis. In particular, it reviews the existing evidence on the links between capital gains taxation of houses, interest mortgage deductibility and characteristics of the crisis.
    Keywords: financial crisis, tax policy, housing, interest deductibility, capital gains
    JEL: E62 G21 H24 H31
    Date: 2011–03
  32. By: Matthew Chambers (Department of Economics, Towson University); Carlos Garriga (Federal Reserve Bank of St. Louis); Don E. Schlagenhauf (Department of Economics, Florida State University)
    Abstract: The objective of this paper is to understand the sources of the boom in home ownership between 1940 and 1960. The increase over this period was five times larger than the recent episode 1996-2004. In the post-depression period the government opted to intervene and regulate housing finance, provide assistance programs (i.e. through the Veteran Administration), and change tax provision towards housing. The result was a change in the maturity structure of mortgage loans, downpayment requirements and increase of credit. In addition, the economy underwent important changes in the demographic structure, the income distribution. The relative importance of these different driving forces is analyzed using a quantitative general equilibrium overlapping generation model with housing. The parameterized model is consistent with key aggregate and distributional features in the U.S. in 1940. In contrast to the recent episode, income and demographics are the crucial variables in accounting for the increase in homeownership. Essentially, the level and shape of income over the life-cycle are a precondition for the government reforms in housing markets and housing finance to play an important role in generating an increase in the aggregate home ownership. The increase in life expectancy and the shift in the distribution of age cohort also had a significant effect in the demand for housing.
    Keywords: Housing Finance, First-time buyers, life-cycle.
    JEL: E2 E6
    Date: 2011–02
  33. By: Campbell Leith; Ioana Moldovan; Simon Wren-Lewis
    Abstract: In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker’s rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future. Moreover, the level of the capital stock (and therefore output and consumption) in these economies is likely to be sub-optimally low, and reducing government debt will ‘crowd in’ additional capital. Using an elaborated version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1985), we derive the optimal steady state level of government assets. We show how and why this level of government assets falls short of the level of debt that achieves the optimal capital stock and the level that eliminates income taxes.
    Keywords: Non-Ricardian consumers, macroeconomic stability, distortionary taxes
    JEL: E21 E32 E63
    Date: 2011
  34. By: Eugenio Gaiotti (Bank of Italy)
    Abstract: The paper argues that the traditional difficulty encountered in finding evidence on the effects of credit availability on economic activity depends on the fact that these effects are powerful but rare and vary with the cycle. The global financial crisis offers an opportunity to test this assumption. The paper exploits a unique dataset, including direct information on credit rationing for 1,200 Italian firms over the last twenty years. We find that the elasticity of a firm’s investment to the availability of bank credit has been significant in periods of economic contraction, but not in other periods; that the ability to tap alternative sources of finance is crucial to this result; that during the global crisis the impact of credit constraints on Italian investment in manufacturing was significant.
    Keywords: credit availability; credit channel; Great Recession
    JEL: E22 E44 E51
    Date: 2011–02
  35. By: Kibritçioğlu, Aykut
    Abstract: Following the US financial crisis of 2006-2007, the global economy suffered from negative spillover effects of it since fall 2008. In this study, the effects of global financial crsis on Turkish economy (2008-2010) and the macroeconomic performance of the Turkish government (before and) during the crisis (2005-2010) are briefly discussed.
    Keywords: Global crisis; economic crisis; financial crisis; Turkish economy; macroeconomic performance; unemployment; short-run economic growth
    JEL: E62 F30 F01 E50 E60
    Date: 2010–09–24
  36. By: Jerger, Jürgen; Röhe, Oke
    Abstract: We estimate a New Keynesian DSGE model on French, German and Spanish data. The main aim of this paper is to check for the respective sets of parameters that are stable over time, making use of the ESS procedure ( â€Estimate of Set of Stable parameters“) developed by Inoue and Rossi (2011). This new econometric technique allows to address the stability properties of each single parameter in a DSGE model separately. In the case of France and Germany our results point to structural breaks after the beginning of the second stage of EMU in the mid-nineties, while the estimates for Spain show a significant break just before the start of the third stage in 1998. Specifically, there are significant changes in monetary policy behavior for France and Spain, while monetary policy in Germany seems to be stable over time.
    Keywords: DSGE; EMU; Monetary Policy; Structural Breaks
    JEL: E31 E32 E52
    Date: 2011–03–07
  37. By: Irem Zeyneloglu
    Abstract: L’article utilise un modèle à générations imbriquées pour analyser les effets d’une relance budgétaire mise en oeuvre dans une union monétaire par un gouvernement qui doit tenir compte de la nécessité de réduire ses dépenses publiques dans le futur conformément à une règle de discipline budgétaire. Cette discipline peut être faible, comme celle qui correspond à l’application souple du pacte de stabilité et de croissance dans la zone euro depuis 1999 ou elle peut être forte comme celle préconisée par le Conseil européen en 2010. L’article montre qu’une relance budgétaire détermine une hausse plus importante de la production et de la consommation de court terme si elle est soumise à une discipline forte que si elle respecte une discipline faible. Par contre, à moyen terme, la discipline forte entraîne une récession dans l’union, alors que la discipline faible permet d’éviter cet effet au prix d’un déficit et d’un endettement publics permanents, mais stables. Le papier montre également qu’une expansion budgétaire peut évincer la consommation privée des détenteurs de titres ou la stimuler selon le degré de discipline budgétaire. De plus, la structure du modèle permet d’évaluer les effets d’une relance budgétaire financée par emprunt sur la consommation des générations futures.
    Keywords: politique budgétaire, règle budgétaire, dette publique, union monétaire.
    JEL: E62 F41 H62 H63
    Date: 2011
  38. By: Murat YILDIZOGLU (GREQAM, CNRS, UMR 6579); Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113); Isabelle SALLE (GREThA, CNRS, UMR 5113); Martin ZUMPE (GREThA, CNRS, UMR 5113)
    Abstract: This article questions the rather pessimistic conclusions of Allen et Carroll (2001) about the ability of consumer to learn the optimal buffer-stock based consumption rule. To this aim, we develop an agent based model where alternative learning schemes can be compared in terms of the consumption behaviour that they yield. We show that neither purely adaptive learning, nor social learning based on imitation can ensure satisfactory consumption behaviours. By contrast, if the agents can form adaptive expectations, based on an evolving individual mental model, their behaviour becomes much more interesting in terms of its regularity, and its ability to improve performance (which is as a clear manifestation of learning). Our results indicate that assumptions on bounded rationality, and on adaptive expectations are perfectly compatible with sound and realistic economic behaviour, which, in some cases, can even converge to the optimal solution. This framework may therefore be used to develop macroeconomic models with adaptive dynamics.
    Keywords: Consumption decisions; Learning; Expectations; Adaptive behaviour, Computational economics
    JEL: E21 D91 D83 D84
    Date: 2011
  39. By: Bergh, Andreas (Research Institute of Industrial Economics (IFN)); Öhrn, Nina (Research Institute of Industrial Economics (IFN))
    Abstract: In a recent paper, Colombier (2009) uses a robust estimation technique and claims to find empirical evidence that government size has not been detrimental to growth for OECD countries during the 1970 to 2001 period, and that endogenous growth theory is not corroborated. We examine the robustness of these findings, and show that Colombier’s results differ from those in other recent papers not because of the estimator used, but because of the exclusion of other control variables. Adding time fixed effects to Colombier’s data set, and using the same econometric method, we obtain results in line with other findings, corroborating endogenous growth theory. Adding further control variables illustrates the robustness of the negative correlation between total tax revenue and economic growth for both instrumented and non-instrumented regressions.
    Keywords: Economic growth; Government size; Taxation; Robust estimators; Panel data
    JEL: E62 H11 H20 O43
    Date: 2011–03–03
  40. By: Justin, Nelson Michael
    Abstract: Co-operative movement dawned in India a century ago to eradicate indebtedness and to accelerate agricultural production in India. Co-operatives are eminently suited to achieve social, economic changes in rural India. However, credit risk is acute in co-operative credit system, predominantly manifested in short-term credit. Delinquency of co-operative credit is the object of enquiry for many committees and researches. Mounting overdues at the level of Primary Agricultural Co-operative Banks (PACB) contribute to the accumulation of Non-performing Assets (NPA) in the Central Co-operative Banks (CCB). Willful default has been identified as the main reason for mounting overdues. This empirical study of defaulters of co-operative credit has examined the factors discriminating default of co-operative credit, which subsequently increase NPA. Univariate Analysis and Discriminant Function analysis was carried out to identify the factors. Such identification of factors discriminating credit default is crucial to reduce credit delinquency in co-operative credit system.
    Keywords: credit risk; credit delinquency; co-operative credit; willful default
    JEL: E51 G32 G21
    Date: 2010–11–03

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