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on Macroeconomics |
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Issue of 2011‒04‒09
43 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Nutahara, Kengo |
| Abstract: | Carlstrom and Fuerst (2007) [``Asset prices, nominal rigidities, and monetary policy,'' Review of Economic Dynamics 10, 256--275] find that monetary policy response to share prices is a source of equilibrium indeterminacy because an increase in inflation implies a high real marginal cost and low share prices in a sticky-price economy. We find that if the New Keynesian Phillips curve has a lagged inflation term caused by price indexation, this effect is weakened. Moreover, equilibrium indeterminacy caused by monetary policy response to share prices never arises if all the firms that cannot re-optimize their prices follow price indexation. |
| Keywords: | asset prices; monetary policy; equilibrium determinacy; price indexation |
| JEL: | E32 E31 E52 E44 |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29859&r=mac |
| By: | Matthias Gubler (Faculty of Business and Economics, University of Basel, Switzerland); Matthias S. Hertweck (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper develops a 9-dimensional SVAR to investigate the sources of the U.S. business cycle. We extend the standard set of identified shocks to include unexpected changes in commodity prices. Our main result is that commodity price shocks are a very important driving force of macroeconomic fluctuations, second only to investment-specific technology shocks. In particular, we find that commodity price shocks explain a large share of cyclical movements in inflation. Neutral technology shocks and monetary policy shocks seem less relevant at business cycle frequencies. The impulse response dynamics provide support for medium-scale DSGE models, but not for strong price rigidities. |
| Keywords: | business cycles, commodity price shocks, structural VAR |
| JEL: | C32 E32 E52 Q43 |
| Date: | 2011–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1103&r=mac |
| By: | Stéphane Auray (CNRS – THEMA (UMR 8184), EQUIPPE (EA 4018) – Universités Lille Nord de France (ULCO), Université de Sherbrooke (GREDI) and CIRPEE, Canada); Aurélien Eyquem (GATE LSE, Université de Lyon, and Ecole Normale Supérieure de Lyon, France, and GREDI, Université de Sherbrooke, Canada) |
| Abstract: | This paper examines if taking into account changes in the number of producers, or equivalently changes in the product variety space over the business cycle, helps to understand and replicate international business cycle facts. To this end, we develop a two-country model in which the economy is driven by real and monetary policy shocks. It is characterized by an endogenous number of firms and varieties, sticky prices and financial markets incompleteness. We show that these features are crucial to reproduce international business cycle statistics. We also evaluate the welfare implications of various monetary policies and highlight the importance for monetary policymakers to respond moderately to output fluctuations. |
| Keywords: | International Business Cycles, Endogenous Entry, Financial Markets Incompleteness, Sticky Prices, Monetary Policy, Welfare |
| JEL: | E51 E58 F36 F41 |
| Date: | 2011–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:11-05&r=mac |
| By: | Stéphane Auray (CNRS, THEMA, EQUIPPE, Universités Lille Nord de France (ULCO),Université de Sherbrooke (GREDI) and CIRPEE, Canada.); Aurélien Eyquem (Université de Lyon, Lyon, F-69003, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | This paper examines if taking into account changes in the number of producers, or equivalently changes in the product variety space over the business cycle, helps to understand and replicate international business cycle facts. To this end, we develop a two-country model in which the economy is driven by real and monetary policy shocks. If it is characterized by an endogenous number of firms and varieties, sticky prices and financial markets incompleteness. We show that these features are crucial to reproduce international business cycle statistics. We also evaluate the welfare implications of various monetary policies and highlight the importance for monetary policymakers to respond moderately to output fluctuations. |
| Keywords: | International business cycles, Endogenous entry, Financial markets incompleteness, Sticky prices, Monetary policy, Welfare |
| JEL: | C92 D62 D63 D64 D74 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1114&r=mac |
| By: | Stéphane Auray (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université des Sciences et Technologies de Lille - Lille I); Aurélien Eyquem (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| Abstract: | This paper examines if taking into account changes in the number of producers, or equivalently changes in the product variety space over the business cycle, helps to understand and replicate international business cycle facts. To this end, we develop a two-country model in which the economy is driven by real and monetary policy shocks. If it is characterized by an endogenous number of firms and varieties, sticky prices and financial markets incompleteness. We show that these features are crucial to reproduce international business cycle statistics. We also evaluate the welfare implications of various monetary policies and highlight the importance for monetary policymakers to respond moderately to output fluctuations. |
| Keywords: | International business cycles; Endogenous entry; Financial markets incompleteness; Sticky prices; Monetary policy; Welfare |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00581165&r=mac |
| By: | William Poole; Robert H. Rasche; David C. Wheelock |
| Abstract: | The Shadow Open Market Committee was formed in 1973 in response to rising inflation and the apparent unwillingness of U.S. policymakers to implement policies necessary to maintain price stability. This paper describes how the Committee’s policy views differed from those of most Federal Reserve officials and many academic economists at the time. The Shadow argued that price stability should be the primary goal of monetary policy and favored gradual adjustment of monetary growth to a rate consistent with price stability. This paper evaluates the Shadow’s policy rule in the context of the New Keynesian macroeconomic model of Clarida, Gali, and Gertler (1999). Simulations of the model suggest that the gradual stabilization of monetary growth favored by the Shadow would have lowered inflation with less impact on output growth and less variability in inflation or output than a one-time reduction in monetary growth. We conclude that the Shadow articulated a policy that would have outperformed the policies actually implemented by the Federal Reserve during the Great Inflation era. |
| JEL: | E31 E32 E37 E41 E52 E58 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16910&r=mac |
| By: | Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella |
| Abstract: | We challenge the widely held belief that New-Keynesian models cannot predict optimal positive in‡ ations. We finnd that these are justified by the Phelps argument. This mainly happens because we also consider distortionary expects of public transfers. Our predictions are broadly consistent with recent estimates of the Fed inflation targets. We also contradict theview that the Ramsey policy should minimize inflation volatility and induce near-random walk dynamics of public debt in the long-run. It should instead stabilize debt-to-GDP ratios to mitigate steady-state distortions. This latter result is strikingly similar to policy analyses in the aftermath of the 2008 crisis. |
| Keywords: | trend inflation, monetary and fiscal policy, Ramsey plan. |
| JEL: | E52 E58 J51 E24 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:208&r=mac |
| By: | Sushanta K. Mallick (Queen Mary University of London); Ricardo M. Sousa (Universidade do Minho - NIPE) |
| Abstract: | Using two identification strategies based on a Bayesian Structural VAR and a Sign-Restriction VAR, we examine the real effects of financial stress in the Eurozone. In particular, we assess the macroeconomic impact of: (i) a monetary policy shock; and (ii ) a financial stress shock. We find that a monetary policy contraction strongly deteriorates financial stress conditions. In addition, unexpected variation in the Financial Stress Index (FSI) plays an important role in explaining output fluctuations, and also demands an aggressive response by the monetary authority to stabilise output indicating a preference shift from targeting inflation as it is currently happening in major economies. Therefore, our paper reveals the importance of adopting a vigilant posture towards financial stress conditions, as well as the urgency of macro-prudential risk management. |
| Keywords: | monetary policy, financial stress, Bayesian Structural VAR, Sign-Restrictions, Euro-zone. |
| JEL: | E37 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:12/2011&r=mac |
| By: | Noussair, C.N.; Pfajfar, D.; Zsiros, J. (Tilburg University, Center for Economic Research) |
| Abstract: | New Keynesian dynamic stochastic general equilibrium models are the principal paradigm currently employed for central bank policymaking. In this paper, we construct experimental economies, populated with human subjects, with the structure of a New Keynesian DSGE model. We give individuals monetary incentives to maximize the objective functions in the model, but allow scope for agents' boundedly rational behavior and expectations to influence outcomes. Subjects participate in the roles of consumer/workers, producers, or central bankers. Our objective is twofold. The first objective is general, and is to create an experimental environment for the analysis of macroeconomic policy questions. The second objective is more focused and is to consider several specific research questions relating to the persistence of shocks, the behavior of human central bankers, and the pricing behavior of firms, using our methodology. We find that the presence of menu costs is not necessary to generate persistence of output shocks, but rather that monopolistic competition in the output market is sufficient. Interest rate policies of human discretionary central bankers are characterized by persistence in interest rate shocks, the use of the Taylor principle, and lower output and welfare than under an automated instrumental rule. Pattens in price changes conform closely to stylized empirical facts. |
| Keywords: | Experimental Economics;DSGE economy;Monetary Policy;Menu costs. |
| JEL: | C91 C92 E31 E32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011030&r=mac |
| By: | Vilmi, Lauri (Department of Economics) |
| Abstract: | We explore the implications of endogenous firm entry and exit for business cycle dynamics and optimal fiscal policy. We first show that when the firm exit rate is endogenous, negative technology shocks lead to reductions in the number of firms. Technology shocks therefore have additional effects on household welfare relative to an economy with only endogenous entry. Second, endogenous firm exit creates a new channel for monetary policy when debt contracts are written in nominal terms, as monetary shocks affect the rate of firm defaults. Monetary shocks therefore have real effects also when prices and wages are flexible. Third, we show that endogenous firm exit creates a new role for fiscal policy to increase efficiency and welfare by subsidizing firms and decreasing the number of defaults. Finally, we demonstrate that endogenous firm exit implies that non-persistent shocks to technology and money supply have persistent effects on labor productivity. This has implications for the estimated persistence of technology shocks. |
| Keywords: | firm defaults; money supply shock; labor productivity |
| JEL: | E32 E52 |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0250&r=mac |
| By: | Hongfei Sun (Queen's University) |
| Abstract: | I construct a unified macroeconomic framework by incorporating frictional markets in a neoclassical environment. This framework formalizes a theory that the variety and the functioning of markets reflect the status of national income. In the model, households have free access to markets with and without trading frictions. Uninsurable income risks generate money distributions and price dispersions. In equilibrium, the frictionless markets are generically used to smooth consumption and the frictional markets are only used when households have sufficiently high expected real income. Income inequality critically determines the equilibrium trading protocols across frictional markets. The optimal policy program consists of money growth, proportional income taxes and sales subsidies. Policy coordination is critical. It can be welfare-improving for the government to alleviate income taxes when the monetary authority is running deflation and to elevate income taxes under inflation. |
| Keywords: | markets, frictions, income, policy, competitive search |
| JEL: | E0 E4 E5 E6 H2 H3 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1262&r=mac |
| By: | Kitov, Oleg; Kitov, Ivan |
| Abstract: | The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterisation of such breaks has been a major econometric task ever since. We have developed an integral technique similar to CUSUM using an empirical model quantitatively linking the rate of inflation and unemployment to the change in the level of labour force in Canada. Inherently, our model belongs to the class of Phillips curve models, and the link between the involved variables is a linear one with all coefficients of individual and generalized models obtained by empirical calibration. To achieve the best LSQ fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements (integral) method. The distance between the cumulative curves (in L2 metrics) is very sensitive to structural breaks since it accumulates true differences and suppresses uncorrelated noise and systematic errors. Our previous model of inflation and unemployment in Canada is enhanced by the introduction of structural breaks and is validated by new data in the past and future. The most exiting finding is that the introduction of inflation targeting as a new monetary policy in 1991 resulted in a structural break manifested in a lowered rate of price inflation accompanied by a substantial fall in the rate of unemployment. Therefore, the new monetary policy in Canada is a win-win one. |
| Keywords: | structural break; inflation; unemployment; labour force; modelling; Canada; monetary policy |
| JEL: | E31 J21 E61 |
| Date: | 2011–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29975&r=mac |
| By: | Stéphane Auray (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université des Sciences et Technologies de Lille - Lille I); Beatriz De Blaz (Departamento de Teoría Económica e Historia Económica - Universidad Autónoma de Madrid); Aurélien Eyquem (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| Abstract: | This paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices. We allow for trade in consumption goods under perfect international risk sharing. We consider balanced-budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate. First, as long as a symmetric equilibrium is considered, the steady state in an open economy is isomorphic to that of a closed economy. second, whereas sticky prices allocations are almost indistinguishable from flexible prices allocations, the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes. Fluctuations in terms of trade implied by complete international financial markets affect (i) consumption through changes in the consumption price index (CPI), (ii) hours through changes in the CPI-based real wage and (iii) capital accumulation through the relative price of capital goods. These wedges affect the volatility and persistence of optimal tax rates, and resulting allocations are quite different, as compared to a closed economy. |
| Keywords: | small open economy; sticky prices; optimal monetary and fiscal policies |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00581173&r=mac |
| By: | Jesús Crespo-Cuaresma; Michael Pfaffermayr; Octavio Fernández Amador; Catherine Keppel |
| Abstract: | We analyze the role of fiscal policy and intra-European trade in business cycle synchronization in the EU for the period 1995-2008. There is a broad consensus that the relationship between fiscal policy and business cycle comovements and between trade integration and cyclical synchronization are subject to endogeneity problems. We instrument fiscal budget surplus by means of (exogenous) political determinants of fiscal policy acknowledged by the literature, while trade integration is instrumented using covariates which summarize the integration status of countries in the sample, GDP per capita differences with respect to the EU and trade specialization within the EU framework. Our results show that both fiscal policy and trade integration are important determinants of cyclical synchronization. We can conclude that once a high degree of trade integration is reached by countries involved in the European integration process, the role of fiscal policy is particularly relevant and differences in fiscal shocks should be analyzed in detail as a source of coherence in cyclical comovements in Europe. Furthermore, fiscal deficits are shown to be an important potential source of idiosyncratic macroeconomic fluctuations, especially in the eurozone. Our results confirm the rationale of monitoring fiscal developments to assess the adequacy of potential future EMU countries and the need for a broad agreement concerning fiscal policy at the EU level. |
| Keywords: | Monetary union, business cycles, synchronization, trade integration, fiscal policy |
| JEL: | E32 E62 F15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:ecbook:2011:i:iii-004&r=mac |
| By: | Xiaoshan Chen; Ronald MacDonald |
| Abstract: | This paper conducts a systematic investigation of parameter instability in a small open economy DSGE model of the UK economy over the past thirty-five years. Using Bayesian analysis, we find a number of Markov-switching versions of the model provide a better fit for the UK data than a model with time-invariant parameters. The Markov-switching DSGE model that has two independent Markov-chains - one governing the shifts in UK monetary policy and nominal price rigidity and one governing the standard deviations of shocks - is selected as the best fitting model. The preferred model is then used to evaluate and design monetary policy. For the latter, we use the Markov-Jump-Linear-Quadratic (MJLQ) model, as it incorporates abrupt changes in structural parameters into derivations of the optimal and arbitrary policy rules. It also reveals the entire forecasting distribution of the targeted variables. To our knowledge, this is the first paper that attempts to evaluate and design UK monetary policy based on an estimated open economy Markov-switching DSGE model. |
| Keywords: | DSGE models; Markov-switching; Bayesian analysis |
| JEL: | C11 C32 C51 C52 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2011_04&r=mac |
| By: | Bank, Alexander |
| Abstract: | This paper analyses the effects of discretionary fiscal policy by presenting new empirical evidence for Germany within a structural vector autoregression (SVAR) framework. Following Blanchard and Perotti (2002), the SVAR model is identified by applying institutional information. We find no compelling evidence for the effectiveness of discretionary fiscal policy. Cutting taxes does not tend to stabilise the business cycle. Increasing government expenditure has an ambiguous effect on GDP for the basic specification. However, by controlling for the influence of inflation, higher government expenditure does not either tend to stabilise economic activity. The results are robust to various modifications. |
| Keywords: | Discretionary fiscal policy, Germany, structural vector autoregression |
| JEL: | C32 E62 H30 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-470&r=mac |
| By: | Lanne, Markku; Luoto, Jani |
| Abstract: | We propose an estimation method of the new Keynesian Phillips curve (NKPC) based on a univariate noncausal autoregressive model for the inflation rate. By construction, our approach avoids a number of problems related to the GMM estimation of the NKPC. We estimate the hybrid NKPC with quarterly U.S. data (1955:1-2010:3), and both expected future inflation and lagged inflation are found important in determining the inflation rate, with the former clearly dominating. Moreover, inflation persistence turns out to be intrinsic rather than inherited from a persistent driving process. |
| Keywords: | Noncausal time series; Non-Gaussian time series; inflation; Phillips curve |
| JEL: | C51 E31 C22 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29801&r=mac |
| By: | Oleg Kitov; Ivan Kitov |
| Abstract: | The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterisation of such breaks has been a major econometric task ever since. We have developed an integral technique similar to CUSUM using an empirical model quantitatively linking the rate of inflation and unemployment to the change in the level of labour force in Canada. Inherently, our model belongs to the class of Phillips curve models, and the link between the involved variables is a linear one with all coefficients of individual and generalized models obtained by empirical calibration. To achieve the best LSQ fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements (integral) method. The distance between the cumulative curves (in L2 metrics) is very sensitive to structural breaks since it accumulates true differences and suppresses uncorrelated noise and systematic errors. Our previous model of inflation and unemployment in Canada is enhanced by the introduction of structural breaks and is validated by new data in the past and future. The most exiting finding is that the introduction of inflation targeting as a new monetary policy in 1991 resulted in a structural break manifested in a lowered rate of price inflation accompanied by a substantial fall in the rate of unemployment. Therefore, the new monetary policy in Canada is a win-win one. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.5994&r=mac |
| By: | Sébastien Kraenzlin; Thomas Nellen |
| Abstract: | Based on real-time trade data from the Swiss franc overnight interbank repo market and SIX Interbank Clearing (SIC) - the Swiss real-time gross settlement (RTGS) system - we are able to gain valuable insights on the daytime value of money and its determinants: First, an implicit hourly interbank interest rate can be derived from the intraday term structure of the overnight rate. We thereby provide evidence that an implicit intraday money market exists. Second, we show that after the introduction of the foreign exchange settlement system CLS the value of intraday liquidity has increased during the hours of the CLS settlement cycle. Third, the turnover as well as the liquidity in SIC influence the intraday rate correspondingly. These facts provide evidence for the cost of immediacy. Features like RTGS, delivery-versus-payment and payment-versus-payment substitute credit risk with liquidity risk which in turn increases the value of intraday liquidity. The analysis is central bank policy relevant insofar as different designs of intraday liquidity facilities and different collateral policies result in different intraday term structures for the overnight money market. |
| Keywords: | interbank money market, intraday credit, term structure |
| JEL: | E58 G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2010-06&r=mac |
| By: | Mario Forni; Luca Gambetti; Luca Sala |
| Abstract: | This paper uses a structural, large dimensional factor model to evaluate the role of `news' shocks (shocks with a delayed effect on productivity) in generating the business cycle. We find that (i) existing small-scale VECM models are affected by `non-fundamentalness' and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a limited role in explaining the business cycle; (iii) their effects are in line with what predicted by standard neoclassical theory; (iv) the bulk of business cycle fluctuations are explained by shocks unrelated to technology. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:383&r=mac |
| By: | Paolo Zagaglia (Department of Economics, University of Bologna) |
| Abstract: | This paper studies the forecasting performance of the general equilibrium model of bond yields of Marzo, Söderström and Zagaglia (2008), where long-term interest rates are an integral part of the monetary transmission mechanism. The model is estimated with Bayesian methods on Euro area data. I compare the out-of-sample predictive performance of the model against a variety of competing specifications, including that of De Graeve, Emiris and Wouters (2009). Forecast accuracy is evaluated through both univariate and multivariate measures. I also control the statistical significance of the forecast differences using the tests of Diebold and Mariano (1995), Hansen (2005) and White (1980). I show that taking into account the impact of the term structure of interest rates on the macroeconomy generates superior out-of-sample forecasts for both real variables, such as output, and inflation, and for bond yields. |
| Keywords: | Yield curve, general equilibrium models, Bayesian estimation, forecasting |
| JEL: | E43 E44 E52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:19_11&r=mac |
| By: | Rodrigo Cerda; Rolf Lüders |
| Abstract: | We study the relation between inflation rate and relative price variability using data of prices on 23 disaggregated food items since 1960 to 2003 in Chile. The behavior of inflation rate is quite variable in that country during that time span and more interestingly, there are periods of time in which prices were determined (fixed) by the economic authorities. We find consistent evidence that a larger inflation rate causes a larger relative price variability and this effect is much larger in periods in which prices were fixed. We interpret that result as firms over-reacting to inflation when setting their relative prices if they assume that it is unlikely to reset their prices in the near future. That result holds even if we follow different econometric approaches and it holds for all the food products considered. |
| Keywords: | Wage premium, Skill Upgrading, Trade Openness, Skill Biased Technical Change, Chile, Latin America. |
| JEL: | E3 N1 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:395&r=mac |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules. |
| Keywords: | Linear-quadratic approximation; unconditional expectations;optimal monetary policy; ranking simple policy rules. |
| JEL: | E20 E32 F32 F41 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1102&r=mac |
| By: | Dang, Jing; Gillman, Max (Cardiff Business School); Kejak, Michal |
| Abstract: | A positive joint two-sector productivity shock causes Rybczynski (1955) and Stolper and Samuelson (1941) effects that release leisure time and initially raises the relative price of human capital investment so as to favor it over goods production. This enables a basic RBC model, modified by having the household sector produce human capital investment sector, to succeed along related major dimensions of output, consumption, investment and labor, similar to the international approach of Maodifying the dynamics relative to the important work of Jones et al. (2005), two key US facts stressed by Cogley and Nason (1995) are captured: persistent movements in the growth rates of output and hump-shaped impulse responses of output. Further, physical capital investment has data consistent persistence within a hump-shaped impulse response. And Gali's (1999) challenging empirical finding that labour supply decreases upon impact of a positive productivity shock is reproduced, while volatility in working hours is also data-consistent because of the substitution between market and nonmarket sectors. |
| Keywords: | Real business cycle; human capital; persistence; volatility; labor |
| JEL: | E24 E32 O41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/8&r=mac |
| By: | Zhang, Hongru (Cardiff Business School) |
| Abstract: | This paper extends Nolan and Thoenissen (2009), hence NT, model with an explicit financial intermediary that transfer funds from households to entrepreneurs subject to a well defined loan production function. The loan productivity shock is treated as the supply side financial disturbance. Together with NT.s net worth shock that resembles the credit demand perturbation, both of the two-sided shocks are robustly extracted by combining the model with US quarterly data. The two shocks are found to be tightly linked with the post-war recessions. Each recession happens when both of the two shocks become contractionary. A few potential economic downturns seem to have been avoided because of the expansion of credit which offset the simultaneous contraction of entrepreneurial net wealth. This new introduced shock has significant explanatory power for the variance of EFP and the model simulated EFP holds high correlation with various spreads as proxies for empirical EFP. |
| Keywords: | DSGE modeling; corporate net wealth shock; loan productivity shock; external financing; shock construction; historical decomposition; variance decomposition |
| JEL: | E32 E44 G21 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/7&r=mac |
| By: | Huixin Bi |
| Abstract: | We develop a closed economy model to study the interactions among sovereign risk premia, fiscal limits, and fiscal policy. The stochastic fiscal limits, which measure the ability and willingness of the government to service its debt, arise endogenously from a dynamic Laffer curve. The distribution of fiscal limits is country-specific, depending on the size of the government, the degree of countercyclical policy responses, economic diversity, and political uncertainty, among other characteristics. The model rationalizes different sovereign ratings across developed countries. A nonlinear relationship between sovereign risk premia and the level of government debt, which emerges in equilibrium, is consistent with the empirical evidence that once risk premia begin to rise, they do so rapidly. Movements in default risk premia for long-term bonds precede those for shortterm bonds, providing early warnings of increasing probabilities of sovereign defaults. |
| Keywords: | Fiscal policy; International topics |
| JEL: | E62 H30 H60 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-10&r=mac |
| By: | kevin dowd; john cotter |
| Abstract: | This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.5659&r=mac |
| By: | António Afonso; Jaromír Baxa; Michal Slavík |
| Abstract: | We use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, we investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically we employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that (i) the use of a nonlinear framework with regime switches is corroborated by nonlinearity tests; (ii) the responses of economic growth to a fiscal shock are mostly positive in both financial stress regimes; (iii) financial stress has a negative effect on output growth and worsens the fiscal position; (iv) the nonlinearity in the response of output growth to a fiscal shock is mainly associated with different behaviour across regimes; (v) the size of the fiscal multipliers is higher than average in the last crisis. |
| Keywords: | fiscal policy, financial markets, threshold VAR. |
| JEL: | E62 G15 H60 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp112011&r=mac |
| By: | Basil Guggenheim; Sébastien Philippe Kraenzlin; Silvio Schumacher |
| Abstract: | To date, various central banks have lacked detailed statistical evidence on developments in the unsecured interbank money market. Furfine (1999) introduced the idea of calculating unsecured overnight interbank lending by using data of a RTGS system. Based on data from the Swiss payment system (SIC) we developed an algorithm to identify unsecured interbank loans in Swiss francs. In contrast to Furfine (1999) we also identify longer-term transactions. We thereby gain a deeper insight on the size and structure of the unsecured interbank money market in Swiss francs. This is the first time that SIC data have been used to identify transactions and market rates in the unsecured Swiss franc money market. Overall, the estimates show that after the collapse of Lehman Brothers loss of confidence led to a freezing-up of the market for several months and a decrease in daily turnover. |
| Keywords: | unsecured interbank money market, development,money market turmoil, financial stability, Switzerland |
| JEL: | E40 E42 E44 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2011-05&r=mac |
| By: | Dunne, Peter (Central Bank of Ireland); Fleming, Michael J. (Federal Reserve Bank of New York); Zholos, Andrey (Queen’s University Management School) |
| Abstract: | The financial turmoil that began in mid-2007 produced severe stress in interbank markets and prompted significant changes in central banks’ funding operations. We examine the changing characteristics of ECB official interventions through the crisis and assess how they affected the efficiency and reliability of the secondary repo market as a mechanism for the distribution of interbank funding. The limit orderbook from the BrokerTec electronic repo trading platform is reconstructed to provide a range of indicators of participating banks’ aversion to the risk of failing to fund their liquidity needs. These indicators anticipate similar variables from ECB reverse repo auctions and are also affected by surprise outcomes of auctions. |
| Keywords: | Repo, Financial crisis, liquidity, market microstructure, monetary policy operations |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:8/rt/11&r=mac |
| By: | Marc Flandreau (Graduate Institute of International and Development Studies, Geneva); Stefano Ugolini (Scuola Normale Superiore, Pisa) |
| Abstract: | The National Monetary Commission was deeply concerned with importing best practice. One important focus was the connection between the money market and international trade. It was said that Britain’s lead in the market for “acceptances” originating in international trade was the basis of its sterling predominance. In this article, we use a so-far unexplored source to document the portfolio of bills that was brought up to the Bank of England for discount and study the behavior of the Bank of England during the crisis of 1866 (the so-called Overend-Gurney panic) when the Bank began adopting lending of last resort policies (Bignon, Flandreau and Ugolini 2011). We compare 1865 (a “normal” year) to 1866. Important findings include: (a) the statistical predominance of foreign bills in the material brought to the Bank of England; (b) the correlation between the geography of bills and British trade patterns; (c) a marked contrast between normal times lending and crisis lending in that main financial intermediaries and the “shadow banking system” only showed up at the Bank’s window during crises; (d) the importance of money market investors (bills brokers) as chief conduit of liquidity provision in crisis; (e) the importance of Bank of England’s supervisory policies in ensuring lending-of-last-resort operations without enhancing moral hazard. An implication of our findings is that Bank of England’s ability to control moral hazard for financial intermediaries involved in acceptances was another reason for the rise of sterling as an international currency. |
| Keywords: | Financial crises, lending of last resort, history of monetary policy, shadow banking system, banking supervision. |
| JEL: | E42 E58 N13 |
| Date: | 2011–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_03&r=mac |
| By: | Pedro Leao; Alfonso Palacio-Vera |
| Abstract: | The creation of the Economic and Monetary Union (EMU) has not brought significant gains to the Portuguese economy in terms of real convergence with wealthier eurozone countries. We analyze the causes of the underperformance of the Portuguese economy in the last decade, discuss its growth prospects within the EMU, and make two proposals for urgent institutional reform of the EMU. We argue that, under the prevailing institutional framework, Portugal faces a long period of stagnation, high unemployment, and painful structural reform, and conclude that, in the absence of institutional reform of the EMU, getting out of the eurozone represents a serious political option for Portugal. |
| Keywords: | Nominal Wage Cuts; Eurozone; Relative Unit Labor Costs; Zero-sum Game |
| JEL: | E32 E65 F32 F41 J50 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_664&r=mac |
| By: | Patrick Bolton; Olivier Jeanne |
| Abstract: | We analyze contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country's sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex post. We show that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt. The safest governments inefficiently restrict the amount of high quality debt that could be used as collateral in the financial system and the riskiest governments issue too much debt, as they do not take account of the costs of contagion. Those inefficiencies can be removed by various forms of fiscal integration, but fiscal integration typically reduce the welfare of the country that provides the "safe-haven" asset below the autarky level. |
| JEL: | E44 E62 F15 F34 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16899&r=mac |
| By: | Sussangkarn, Chalongphob (Asian Development Bank Institute); Nikomborirak, Deunden (Asian Development Bank Institute) |
| Abstract: | Since the Asian financial crisis in 1997, Thailand has become highly dependent on export as the engine of economic recovery and growth. In 2008, the ratio of export to gross domestic product (GDP) was 76.5%. The global economic crisis triggered by the sub-prime loans debacle in the United States has prompted Thailand to rethink her export-led growth strategy. Year-on-year export growth plunged from a positive 22.7% in the third quarter of 2008 to a negative 7.75% in the fourth quarter and remained negative for another four quarters, leading to a negative growth of GDP for five consecutive quarters. This paper examines the options for external and internal economic rebalancing strategies for Thailand. External rebalancing will require Thailand to rely less on the US market for her exports. The paper thus examines the possibility of promoting greater regional trade by means of trade agreements and exchange rate coordination. As for internal rebalancing, the paper emphasizes the need to boost domestic public and private investment in terms of both quantity and quality in order to narrow the current savings–investment gap, bearing in mind the need to ensure fiscal sustainability. Finally, the paper examines broader rebalancing strategies that will help Thailand to become less dependent on exports. These include the need to (1) improve productivity by means of technological acquisition, innovation, and skills development; (2) increase economic efficiency by exposing the non-traded sectors, in particular the service sector, to greater competitive pressures; (3) deepen the production structure and create new dynamic industries; and (4) generate new growth poles. |
| Keywords: | asian financial crisis; global economic crisis; global financial crisis; economic growth rebalancing; thailand growth rebalancing; thai economy |
| JEL: | E21 E22 E65 E66 F31 F40 H54 H60 |
| Date: | 2011–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0273&r=mac |
| By: | André K. Anundsen and Eilev S. Jansen (Statistics Norway) |
| Abstract: | The interaction between housing prices and household borrowing in Norway is estimated in a simultaneous setting in the long and the short run. The long run dependence is analyzed within a cointegrated vector autoregression in real housing prices, real disposable household income and real household debt, conditioning on the real after tax interest rate, the number of house transactions and the volume of housing capital. We identify two cointegrating equations which determine equilibrium housing prices and household debt, respectively. The long run equations are embedded in a system of two error-correction equations which is estimated simultaneously. The model yields meaningful short and long term effects when estimated on the sample 1986q2-2008q4 and impulse responses demonstrate that there are self reinforcing feedback effects between the two variables of interest. |
| Keywords: | Housing prices; household borrowing; financial accelerator |
| JEL: | E44 G21 G28 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:651&r=mac |
| By: | Fan, Jingwen (Cardiff Business School); Arghyrou, Michael G (Cardiff Business School) |
| Abstract: | We test for fiscal policy sustainability in the UK for the period 1955-2006. We find evidence of sustainability with three structural breaks, respectively occurring in the early 1970s, early 1980s and late 1990s. UK fiscal policy has been sustainable throughout the sample period except from 1973-1981 when a non-Ricardian regime applied. For the remaining periods correction of fiscal disequilibrium occurs through adjustments in public revenue rather than expenditure. Finally, we find evidence of non-linear fiscal adjustment, with UK authorities not reacting to relatively small deficits; but correcting exceedingly large deficits and any temporary surpluses relatively fast. |
| Keywords: | Fiscal policy; Sustainability; UK; Structural breaks; Non-linear adjustment |
| JEL: | E62 H60 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/9&r=mac |
| By: | Helke Waelde (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany) |
| Abstract: | Group lending programs are said to be the key factor of success of microÂ…nance. They are said to reduce information asymmetries in credit contracts and to increase repayment rates. Despite that, in recent years more and more individual credits without collateral are given, even if there is no mutual monitoring of the borrowers. We use basic descriptive statistics on individual- and group panel data, which we construct out of a World Bank data set. We provide Â…rst evidence that individuals that are not participating in group credits accumulate wealth more quickly than participants of group credit programs. |
| JEL: | E43 E52 E58 D44 |
| Date: | 2010–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:1101&r=mac |
| By: | Yusuke Kinai (Graduate School of Economics, Osaka University) |
| Abstract: | In analyzing economic policies, a severe problem is the time-inconsistency problem. In this regard, the choice of commitment vs. discretion engenders a tradeoff of flexibility and credibility. Therefore, it might be necessary and acceptable to adopt a discretionary policy to some degree, but past studies do not clarify the degree to which a government exercises such a discretionary option. This paper clarifies the optimal degree of commitment using the framework of a repeated game reported by Chari and Kehoe (1990). We point out the relation between the optimal degree of commitment and the rate of time preference. |
| Keywords: | Commitment vs. Flexibility; Degree of Commitment; Imperfect Public Monitoring; Repeated Games; Tax Policy. |
| JEL: | E61 E62 H11 H30 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1111&r=mac |
| By: | Yusuke Kinai (Graduate School of Economics, Osaka University) |
| Abstract: | This paper specifically examines intergenerational conflict and analyzes an overlapping generations model of public goods provision from the viewpoint of time-consistency. Public goods are financed through labor-income and capital-income taxation, thereby distorting savings and the labor supply. Taxes redistribute income across generations in the form of public goods. Under such a situation, there emerge dual intergenerational conflicts: the first is related to the amount of public goods and the second is the tax burden. We then contrast the politico-economic equilibrium with commitment allocation, and analyze the sources of conflict and time-inconsistency, and attempt to resolve such a conflict by introducing the concept of eintergenerational bargainingf. Our main findings are the following. First, taxation derived using Lagrange method fails to be time-consistent. Second, depending on bargainingpower, taxation based on intergenerational bargaining can be time-consistent. Third, we portray the properties of taxation and public goods provision rules based on intergenerational bargaining. |
| Keywords: | Dual Intergenerational Conflicts; Intergenerational Bargaining;Time-inconsistency; Modified Public Goods Provision Rule. |
| JEL: | E61 E62 H41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1110&r=mac |
| By: | Geza, Paula; Giurca Vasilescu, Laura |
| Abstract: | One of the most important issues of monetary policy is to find out whether the state should intervene among the exchange rates, taking into account the fact that changes in the exchange rates represent a significant transmission channel of the effects generated by the monetary policy. Taking into consideration the failure of fixed exchange rate regimes and the recent improvement of financial markets, the return in the near future to such a regime – as for example the Bretton Woods system – is probably almost impossible. |
| Keywords: | Fixed exchange rate; floating exchange rate; Bretton Woods system |
| JEL: | E42 F31 |
| Date: | 2011–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29932&r=mac |
| By: | Kumar, Rajiv (Asian Development Bank Institute); Vashisht, Pankaj (Asian Development Bank Institute) |
| Abstract: | With the revival of global economy, the issues of “exit policies” and rebalancing global growth have taken center stage in policy discussions. Since many emerging Asian economies presently have large current account surpluses, the issue of rebalancing has special significance for Asia. While India, like other Asian economies, suffered only an indirect impact from the financial crisis, its current policy challenges appear to be different from those facing the People’s Republic of China (PRC) and other East Asian economies, which have relied heavily on external demand and access to the United States market for their growth momentum. With a negative contribution of net exports to gross domestic product growth along with foreign exchange reserves, which amount to a mere one-ninth of the PRC’s, the issue of Trans-Pacific rebalancing of economic growth does not have the same connotations for India as it does for other East Asian economies. However, this paper argues that, given its large domestic market, India could help other East Asian economies in their efforts to achieve greater export diversification and rebalancing of growth. |
| Keywords: | global financial crisis; rebalancing economic growth; indian economy; export diversification |
| JEL: | E66 F15 |
| Date: | 2011–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0272&r=mac |
| By: | Lilia Karnizova (Department of Economics, University of Ottawa); Hashmat U. Khan (Department of Economics, Carleton University) |
| Abstract: | This paper provides new evidence on the relations between the stock market and consumer behavior in Canada. It differentiates between two channels of stock price transmission: a direct wealth channel that operates through changes in wealth and an indirect consumer confidence channel that affects consumption through changes in consumer optimism. The two channels are evaluated by testing the ability of stock prices to predict consumer confidence measures. The hypothesis that stock prices are transmitted only through the wealth channel is rejected at the national and regional levels. Furthermore, confidence measures respond more strongly to stock prices declines than to increases. |
| Keywords: | Stock market, Consumer confidence, Wealth, Asymmetry |
| JEL: | E21 E44 |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:10-08&r=mac |
| By: | Yusuke Kinai (Graduate School of Economics, Osaka University) |
| Abstract: | This paper presents consideration of how the social security system evolves as the attributes of voters change. In our setting, policy determination is based on majority voting. The government has two components of social security policy: a pension system and unemployment insurance. When workers constitute most voters, the pension system is supported and when unemployed people are the majority, unemployment insurance is adopted. Under this setting, employing the concept of structure-induced equilibrium developed by Shepsle (1979), the present paper describes how the contents of the social security system evolve depending on the dynamics of capital accumulation and the unemployment rate, and demonstrates the possibility that one or the other social security system ceases to exist in certain instances. |
| Keywords: | Social Security, Pension System vs. Unemployment Insurance, Majority Voting, Structureinduced equilibrium. |
| JEL: | E61 H53 H55 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1112&r=mac |