nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒04‒16
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Fiscal policy, pricing frictions and monetary accommodation By Fabio Canova; Evi Pappa
  2. What lies beneath? A time-varying FAVAR model for the UK transmission mechanism By Haroon Mumtaz; Pawel Zabczyk; Colin Ellis
  3. Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy By Gonzalez-Astudillo, Manuel
  4. Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations By Thomas I. Palley
  5. Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium By Dai, Meixing; Sidiropoulos, Moïse
  6. Imperfect information, real-time data and monetary policy in the euro area By Stefano Neri; Tiziano Ropele
  7. Monetary and macroprudential policies By Paolo Angelini; Stefano Neri; Fabio Panetta
  8. A note on expectational stability under non-zero trend inflation By Teruyoshi Kobayashi; Ichiro Muto
  9. Iceland's Economic and Financial Crisis: Causes, Consequences and Implications By Spruk, Rok
  10. Fixing Canada’s CPI: A Simple and Sensible Policy Change for Minister Flaherty By Christopher Ragan
  11. The efficiency wages Phillips curve: closed economy versus open economy By Andrea Vaona
  12. Can Fiscal Policy Stimulus Boost Economic Recovery? By Agnello, L.; Sousa, R.
  13. The new rules of the Stability and Growth Pact. Threats from heterogeneity and interdependence By Roberto Tamborini
  14. Mediterranean business cycles: structure and characteristics By Fabio Canova; Alain Schlaepfer
  15. Ordering Policy Rules with an Unconditional Welfare Measure By Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
  16. Bank-characteristics, lending channel and monetary policy in Malaysia: evidence from bank-level data By Abdul Majid, Muhamed Zulkhibri
  17. Forecasting macroeconomic variables using disaggregate survey data By Kjetil Martinsen; Francesco Ravazzolo; Fredrik Wulfsberg
  18. The ECB's New Multi-Country Model for the euro area: NMCM - simulated with rational expectations By Alistair Dieppe; Alberto González Pandiella; Alpo Willman
  19. Macroeconomic determinants of bad loans: evidence from Italian banks By Marcello Bofondi; Tiziano Ropele
  20. Macro-financial vulnerabilities and future financial stress - Assessing systemic risks and predicting systemic events By Lo Duca, Marco; Peltonen, Tuomas
  21. European countries with a diagnosis of financial default: expectancy and fear of its announcement in Ukraine By Konchyn, Vadym
  22. Trade, Exchange Rate Regimes and Output Co-Movement: Evidence from the Great Depression By Gabriel P. Mathy; Christopher M. Meissner
  23. Household Debt and Labor Market Fluctuations By Javier Andrés; José Emilio Boscá; Javier Ferri
  24. Lessons from the financial crisis: Funded pension funds should invest conservatively By Du Caicai; Muysken Joan; Sleijpen Olaf
  25. "It's Time to Rein In the Fed" By Scott Fullwiler; L. Randall Wray
  26. Impact of Interest Rates on Islamic and Conventional Banks: The Case of Turkey By Etem Hakan, Ergeç; Bengül Gülümser, Arslan
  27. The ECB's New Multi-Country Model for the euro area: NMCM - with boundedly rational learning expectations By Alistair Dieppe; Alberto González Pandiella; Stephen Hall; Alpo Willman
  28. Perspectives on Fulfilling the Nominal and Real Convergence Criteria by Romania for the Adoption of Euro Currency By Geza, Paula; Giurca Vasilescu, Laura
  29. South Sudan Referundum: A Macroeconomic Analysis of Post-Secession Scenario By Onour, Ibrahim
  30. Testable Implications of Affine Term Structure Models By James D. Hamilton; Jing Cynthia Wu
  31. Labour Market Institutions and Unemployment: Does Finance Matter? By Rault, Christophe; Vaubourg, Anne-Gaël
  32. Trust in public institutions over the business cycle By Betsey Stevenson; Justin Wolfers
  33. Welfare improving taxation on saving in a growth model By Long Xin; Pelloni Alessandra
  34. Financial Development in Emerging Markets: The Indian Experience By Krishnan, K.P.
  35. Macroeconomic Effects of the Stock Management for Irrigation and Drainage Facilities in Japan: Application of Recursive- Dynamic CGE model By Kunimitsu, Yoji
  36. The Ryan Medicare Plan: Winners and Losers By Dean Baker; David Rosnick
  37. International Trade and Net Investment: Theory and Evidence By Lucas Bretschger; Simone Valente
  38. Scrap the lot and start again By Kakarot-Handtke, Egmont
  39. The Wage and Employment Impact of Minimum-Wage Laws in Three Cities By John Schmitt; David Rosnick
  40. Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue? By von Furstenberg, George M.
  41. Can Economic Crises Be Good for Your Diet? By Dimova, Ralitza; Gang, Ira N.; Gbakou, Monnet Benoit Patrick; Hoffman, Daniel
  42. An Empirical Analysis of Current Account Determinants in Emerging Asian Economies By Yang, Lucun

  1. By: Fabio Canova; Evi Pappa
    Abstract: We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.
    Keywords: Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics
    JEL: C32 E62 E63
    Date: 2011–03
  2. By: Haroon Mumtaz (Centre for Central Banking Studies, Bank of England.); Pawel Zabczyk (Bank of England and European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Colin Ellis (University of Birmingham and BVCA.)
    Abstract: This paper uses a time-varying Factor Augmented VAR to investigate the evolving transmission of monetary policy and demand shocks in the UK. Simultaneous estimation of time-varying impulse responses of a large set of macroeconomic variables and disaggregated prices suggest that the response of inflation, money supply and asset prices to monetary policy and demand shocks has changed over the sample period. In particular, during the post-1992 inflation targeting period, monetary policy shocks started having a bigger impact on prices, a smaller impact on activity and began contributing more to overall volatility. In contrast, demand shocks had the largest impact on these variables before the 1990s. We also document changes in the response of disaggregated prices, with the median reaction to contractionary policy shocks becoming more negative and the distribution more dispersed post-1992. JEL Classification: C38, E44, E52.
    Keywords: Transmission mechanism, monetary policy, Factor Augmented VAR, timevarying coefficients, sign restrictions.
    Date: 2011–04
  3. By: Gonzalez-Astudillo, Manuel
    Abstract: In this paper I formulate, solve and estimate an endowment version of a macroeconomic dynamic stochastic general equilibrium model with monetary and fiscal policy rules whose coefficients are time-varying and contemporaneously correlated. The aim of the paper is to identify from data the interactions between monetary and fiscal policies that have prevailed in the U.S. economy. The monetary authority uses a Taylor rule and the fiscal authority uses a rule in which taxes respond to lagged debt deviations. Policy rule coefficients are modeled as logistic functions of stationary correlated latent factors, introducing long-run interactions between monetary and fiscal policies. There are three main findings of the paper: First, monetary policy has reacted strongly to inflation deviations along, almost, the entire analyzed period, with a loose policy only during the periods 1979:1-1981:3 and 2008:4-2009:2. Second, regimes under which a determinacy condition is in place occur 54.25% of the time, while regimes with exploding local dynamics occur 45.34% of the time, and there is an association between the duration of these unstable regimes and the volatility of inflation. Third, tightening monetary policy in terms of increasing the reaction of the central bank with respect to inflation deviations, given the situation of the economy in the third quarter of 2010, implies an increase in inflation of the order of 3%.
    Keywords: Time-varying policy rules, Monetary and fiscal policy interactions, Nonlinear state-space models.
    JEL: C32 E63 C11
    Date: 2011–03–30
  4. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper examines the theory of the Phillips curve, focusing on the distinction between "formation" of inflation expectations and "incorporation" of inflation expectations. Phillips curve theory has largely focused on the former. Explaining the Phillips curve by reference to expectation formation keeps Phillips curve theory in the policy orbit of natural rate thinking where there is no welfare justification for higher inflation even if there is a permanent inflation - unemployment trade-off. Explaining the Phillips curve by reference to incorporation of inflation expectations breaks that orbit and provides a welfare economics rationale for Keynesian activist policies that reduce unemployment at the cost of higher inflation.
    Keywords: Phillips curve, formation of inflation expectations, incorporation of inflation expectations, backward bending Phillips curve.
    JEL: E00 E31 E52
    Date: 2011
  5. By: Dai, Meixing; Sidiropoulos, Moïse
    Abstract: In a Stackelberg equilibrium, central bank opacity has a fiscal disciplining effect in the sense that it induces the government to reduce taxes and public expenditures, leading hence to lower inflation and output distortions. This effect could disappear or be dominated by the direct effect of opacity when the fiscal and monetary authorities play a Nash game.
    Keywords: Distortionary taxes; output distortions; central bank transparency (opacity); fiscal disciplining effect.
    JEL: E62 E58 E52 H30 E63
    Date: 2011
  6. By: Stefano Neri (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: An important concern for the European Central Bank (ECB), and all central banks alike, is the necessity of making decisions in real time under conditions of great uncertainty about the underlying state of the economy. We address this concern by estimating on real-time data a New Keynesian model for the euro area under the assumption of imperfect information. In comparison to models that maintain the assumption of perfect information and are estimated on ex-post revised, we find that: (i) the estimated policy rule becomes more inertial and less aggressive towards inflation; (ii) the ECB is confronted with a more severe trade-off in the stabilization of inflation and the output gap.
    Keywords: monetary policy, imperfect information, real-time data
    JEL: E47 E52 E58
    Date: 2011–03
  7. By: Paolo Angelini (Banca d'Italia); Stefano Neri (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial or housing market shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability.
    Keywords: macroprudential policy, monetary policy, capital requirements
    JEL: E44 E58 E61
    Date: 2011–03
  8. By: Teruyoshi Kobayashi (Graduate School of Economics, Kobe University); Ichiro Muto (Bank of Japan)
    Abstract: This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.
    Keywords: Adaptive learning, E-stability, Taylor rule, trend inflation
    JEL: D84 E31 E52
    Date: 2011–04
  9. By: Spruk, Rok
    Abstract: Iceland experienced a significant financial meltdown and subsequent economic downturn after the 2008/2009 financial crisis struck the country. It had been the worst crisis ever experienced by a small country from the late 20th century onwards. Since 1980s, Iceland's macroeconomic stability had been constantly deteriorated by the most volatile annual CPI and asset-price inflation dynamics in the OECD. More than a decade of robust growth dynamics left behind an internationally over-exposed banking sector which exceeded the size of country's GDP by nearly 10 times. The failure of Lehman Brothers and a global credit crunch, in turn, raised CDS rates on Icelandic banks which immediately declared insolvency after the global interbank lending froze. The paper provides a comprehensive analysis of the macroeconomic, banking and financial background of the crisis. It also provides a short-term analysis of Iceland's macroeconomic outlook. The main findings of the article conclude that the depth of financial crisis is attributed to the recent decade of unadjusted monetary policy which failed to prevent sharp appreciation of the krona and thus created sufficient conditions for significant asset-price inflation, high interest rate differential and the largest banking collapse in small and open economies. As the size of the banking sector was several times the country's GDP, Icelandic central bank failed to act as a lender of the last resort. The paper concludes that, to prevent future crises of similar proportions, it is impossible for a small country to have a large international banking sector, its own currency and an independent monetary policy.
    Keywords: Iceland; Financial Crisis; Financial Macroeconomics; International Finance; Monetary Policy; Currency Crisis
    JEL: E62 E52 E44 E6 F31 G21
    Date: 2010–02–23
  10. By: Christopher Ragan (McGill University)
    Abstract: Fixing measurement errors in the Consumer Price Index is a small idea that offers big payoffs to Canadians and the government. In this paper, the author says if the upcoming federal budget devoted the resources needed to improve Statistics Canada’s measurement of the Consumer Price Index, Canadians would have a truer sense of changes in the cost of living, monetary policy would be guided by a more accurate measure of inflation, and Minister Flaherty would more easily achieve the government’s commitment to balance the federal budget by 2015/16.
    Keywords: Monetary Policy, Consumer Price Index (CPI), Statistics Canada, inflation rate
    JEL: E31
    Date: 2011–03
  11. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: The paper extends the efficiency wages Phillips curve from a closed economy context to an open economy one with both commodity trade and capital mobility. Opening the trade account does not alter the slope of the Phillips curve, but it makes its position a function of the change of foreign and domestic outputs. Opening the capital account also alters the slope of the Phillips curve.
    Keywords: efficiency wages, money growth, Phillips curve, inflation
    JEL: E3 E20 E40 E50
    Date: 2011–04
  12. By: Agnello, L.; Sousa, R.
    Abstract: We assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, we show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. Consequently, the attempts of fiscal policy to mitigate stock price developments (e.g. via taxes on capital gains) may severely de-stabilize housing markets. The empirical findings also point to significant fiscal multiplier effects in the context of severe housing busts, which gives rise to the importance of the implementation of fiscal stimulus packages. In addition, our results suggest that when governments run a budget deficit, they place an upward pressure on real interest rates, which "crowds-out" private consumption and investment. In contrast, during bust periods, unexpected variation in the fiscal stance crowds-in private spending, which reflects the "direct" and "indirect" effects of policy actions impact arising from a downward movement in real interest rates and an upward revision in price level expectations.
    Keywords: Fiscal policy, asset prices, panel VAR.
    JEL: E62 H30
    Date: 2011
  13. By: Roberto Tamborini
    Abstract: This paper examines the new SGP rules that should govern fiscal policies of the EMU member countries by means of dynamic models of the debt/GDP ratio. The focus is on factors of heterogeneity and interdependence in the three key variables that may affect the debt/GDP evolution in a multi-country setup like a monetary union: the real growth rate, the inflation rate and the nominal interest rate on the sovereign debt stock. These factors are almost ignored in the SGP intellectual and institutional framework, but they can jeopardize the main goal of fostering convergence and keeping debt/GDP ratios equalized and stable over time. Even the return of growth, inflation and interest rates to their pre-crisis tendential values, a not so likely and imminent event, will probably be insufficient to create a favourable environment for smooth debt/GDP convergence across EMU countries.
    Keywords: Stability and Growth Pact, Public debt management
    JEL: E6
    Date: 2011
  14. By: Fabio Canova; Alain Schlaepfer
    Abstract: We date turning points of the reference cycle for 19 countries in the Mediterranean, for selected regions, and for the area. Cycles phases are asymmetric, with expansions lasting, on average, much longer than recessions. Cyclical fluctuations are volatile and not highly correlated across countries. Recessions are not very deep and output losses limited. Heterogeneities across countries and regions are substantial. There are time variations in features of Mediterranean business cycles not clearly linked with the Euro-Mediterranean partnership process. The concordance of cyclical fluctuations in the region is poorly linked to trade as is its evolution over time.
    Keywords: Turning point dates, Reference cycle, Euro Mediterranean partnership, Trade interdependences
    JEL: E32 C32
    Date: 2011–02
  15. By: Tatjana 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: 2011–03
  16. By: Abdul Majid, Muhamed Zulkhibri
    Abstract: Based on a bank-level panel dataset for Malaysian banks from 1997 to 2005, this paper analyzes the effects of bank-specific characteristics, bank specialization and portfolio concentrations on the transmission of monetary policy via bank lending channel in a fairly well-developed financial system. The dynamic panel regression results provide evidence in favour of the bank lending channel theory and consistent with other empirical evidences that the bank lending channel operating via small and low liquidity banks. Furthermore, the evidence suggests that the dividing lines between different categories of financial institutions distinguished by differences in both market structure and regulatory, influence the way financial institutions react to monetary policy shock with finance companies react stronger than commercial banks to monetary shock. The results also suggest that banks with higher concentration of corporate loans seem to face greater financial constraint and limited access to other sources finance.
    Keywords: Banking Lending; Credit Channels; Monetary Policy; Malaysia
    JEL: E58 E52 E44
    Date: 2010–09–01
  17. By: Kjetil Martinsen (Norges Bank (Central Bank of Norway)); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Fredrik Wulfsberg (Norges Bank (Central Bank of Norway))
    Abstract: We assess the forecast ability of Norges Bank’s regional survey for inflation, GDP growth and the unemployment rate in Norway. We propose several factor models based on regional and sectoral information given by the survey. The analysis identifies which information extracted from the ten sectors and the seven regions performs particularly well at forecasting different variables and horizons. Results show that several factor models beat an autoregressive benchmark in forecasting inflation and unemployment rate. However, the factor models are most successful in forecasting GDP growth. Forecast combinations based on past performance give in most cases more accurate forecasts than the benchmark, but they never give the most accurate forecasts.
    Keywords: Keywords: Factor models; macroeconomic forecasting; qualitative survey data.
    JEL: C53 C80
    Date: 2011–04–11
  18. By: Alistair Dieppe (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alberto González Pandiella (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alpo Willman (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The model presented here is a New estimated medium-scale Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenarios analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical progress and heterogeneous sectors with differentiated price and income elastiticites of demand across sectors. Furthermore, it has the explicit inclusion of expectations on the basis of three optimising private sector decision making units: i.e. firms, trade unions and households, where output is in the short run demand-determined and monopolistically competing firms set prices and factor demands. Labour is indivisible and monopoly-unions set wages and households make consumption/saving decisions. We assume agents optimise under limited information where each agent knows only the parameters related to his/her optimization problem. Therefore we estimate with GMM, which implicitly assumes limited information boundedly rational expectations. In this paper we provide some simulation results under the assumption of model-consistent rational expectations, we show that there is some heterogeneity across countries and that the reactions of the economies to shocks depends strongly on whether the shocks are pre-announced, announced and credible or unannounced and uncredible. JEL Classification: C51, C6, E5.
    Keywords: Macro model, Open-economy macroeconomics, Rational expectations.
    Date: 2011–04
  19. By: Marcello Bofondi (Banca d'Italia); Tiziano Ropele (Banca d'Italia)
    Abstract: In this paper we use a single-equation time series approach to examine the macroeconomic determinants of banks’ loan quality in Italy in the past twenty years, as measured by the ratio of new bad loans to the outstanding amount of loans in the previous period. We analyse the quality of loans to households and firms separately on the grounds that macroeconomic variables may affect these two classes of borrowers differently. According to our estimated models: i) the quality of lending to households and firms can be explained by a small number of macroeconomic variables mainly relating to the general state of the economy, the cost of borrowing and the burden of debt; ii) changes in macroeconomic conditions generally affect loan quality with a lag; and iii) the out-of-sample prediction accuracy of the models is quite satisfactory and proved to be robust to the recent financial crisis.
    Keywords: bad loans, macroeconomic determinants, Italian banking system
    JEL: G21 C22
    Date: 2011–03
  20. By: Lo Duca, Marco (BOFIT); Peltonen, Tuomas (BOFIT)
    Abstract: This paper develops a framework for assessing systemic risks and for predicting (out-of-sample) systemic events, i.e. periods of extreme financial instability with potential real costs. We test the ability of a wide range of “stand alone” and composite indicators in predicting systemic events and evaluate them by taking into account policy makers’ preferences between false alarms and missing signals. Our results highlight the importance of considering jointly various indicators in a multivariate framework. We find that taking into account jointly domestic and global macro-financial vulnerabilities greatly improves the performance of discrete choice models in forecasting systemic events. Our framework shows a good out-of-sample performance in predicting the last financial crisis. Finally, our model would have issued an early warning signal for the United States in 2006Q2, 5 quarters before the emergence of money markets tensions in August 2007.
    Keywords: early warning indicators; asset price booms and busts; financial stress; macro-prudential policies
    JEL: E44 E58 F01 F37
    Date: 2011–04–05
  21. By: Konchyn, Vadym
    Abstract: Abstract. This paper reviews the economic situation of European countries that today are in deep external debt crisis and drew close to financial default, that can be announced by the foreign creditors and investors who can not for some reason get in time or on demand their money (the principal amount provided for use funds and (or) interest on them). However, in the article the situation of Ukraine's foreign debt is considered, which significantly increased as a result of financial management of banks, business entities and due to government and central bank policies during the Orange epoch. The prospects for economic development in Ukraine are outlined in view of external debt problem after coming into power the command of the Party of Regions.
    Keywords: Key words: total external debt of country, governmental external debt, external debt of monetary authority, private external debt, international investment position, balance of payments, foreign exchange reserves, financial default, toxic assets, PIGS-countries, restrictive fiscal policy, restructuring of external debt.
    JEL: E62 E58 E42 G15
    Date: 2011–03–30
  22. By: Gabriel P. Mathy; Christopher M. Meissner
    Abstract: A large body of cross-country empirical evidence identifies monetary policy and trade integration as key determinants of business cycle co-movement. Partially consistent with this, many argue that the re-emergence of the gold standard allowed for the global transmission of a deflationary shock in 1929 that culminated in the Great Depression. It is puzzling then to see decreased co-movement between 1920 and 1927 when international integration increased and nations returned to the gold standard. Fixed exchange rates and global trade were also on the rise after 1932, but co-movement declined again. Our empirical results shows that exchange rate regimes and trade were associated with higher co-movement at the bilateral level while common shocks and exchange control policies also mattered. Much of the fall after 1932 was driven by the rise of smaller blocs of monetary and trade cooperation and an inter-bloc fall in co-movement.
    JEL: E32 E42 F42 N1 N12 N14
    Date: 2011–04
  23. By: Javier Andrés (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain)
    Abstract: The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of a continuous increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years.
    Keywords: business cycle, labor market, borrowing restrictions
    JEL: E24 E32 E44
    Date: 2011–04
  24. By: Du Caicai; Muysken Joan; Sleijpen Olaf (METEOR)
    Abstract: We model a three-pillar pension system and analyse in this context the impact of the financial crisis on the aggregate economy, using an overlapping generations model where individuals live for two periods. The system consists of (1) a PAYG pension system, (2) a Defined Benefit pension fund, and (3) private savings. We show that in this pension system the impact of the financial crisis on the economy is mitigated in case the funded pension funds have invested in more risk averse assets and savings are invested in more risky assets. In order to illustrate the working of the model with respect to the impact of the financial crisis, both in terms of size and development over time, we provide simulation results for the Netherlands. We argue that the lesson from the financial crisis is that pension funds should always invest in relatively risk-free assets, while private savings can be invested in more risky assets.
    Keywords: macroeconomics ;
    Date: 2011
  25. By: Scott Fullwiler; L. Randall Wray
    Abstract: Scott Fullwiler and Senior Scholar L. Randall Wray review the roles of the Federal Reserve and the Treasury in the context of quantitative easing, and find that the financial crisis has highlighted the limited oversight of Congress and the limited transparency of the Fed. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is whether the Fed should be able to commit the public purse in times of national crisis.
    Date: 2011–04
  26. By: Etem Hakan, Ergeç; Bengül Gülümser, Arslan
    Abstract: Identifying the impact of the interest rates upon Islamic banks is key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyzes and investigates the impact of interest rate shock upon the deposits and loans held by the conventional and Islamic banks with particular reference to the period between December 2005 and July 2009 based on Vector Error Correction (VEC) methodology. It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates.
    Keywords: Interest-free banking; monetary policy
    JEL: E52 G21
    Date: 2011–01
  27. By: Alistair Dieppe (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alberto González Pandiella (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Stephen Hall (National Institute of Economic and Social Research and University of Leicester.); Alpo Willman (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by using the correctly specified reduced form model of the economy, the minimal state variable solution (MSV), but they do not know the parameters. However, with medium-sized and large models the closed-form MSV solutions are difficult to attain given the large number of variables that could be included. Therefore, agents base expectations on a misspecified MSV solution. In contrast, we assume agents know the deep parameters of their own optimising frameworks. However, they are not assumed to know the structure nor the parameterisation of the rest of the economy, nor do they know the stochastic processes generating shocks hitting the economy. In addition, agents are assumed to know that the changes (or the growth rates) of fundament variables can be modelled as stationary ARMA(p,q) processes, the exact form of which is not, however, known by agents. This approach avoids the complexities of dealing with a potential vast multitude of alternative mis-specified MSVs. Using a new Multi-country Euro area Model with Boundedly Estimated Rationality we show this approach is compatible with the same limited information assumption that was used in deriving and estimating the behavioral equations of different optimizing agents. We find that there are strong differences in the adjustment path to the shocks to the economy when agent form expectations using our learning approach compared to expectations formed under the assumption of strong rationality. Furthermore, we find that some variation in expansionary fiscal policy in periods of downturns compared to boom periods. JEL Classification: C51, D83, D84, E17, E32.
    Keywords: Expectation, bounded rationality, learning, imperfect information, heterogeneity, macro modelling, open-economy macroeconomics.
    Date: 2011–04
  28. By: Geza, Paula; Giurca Vasilescu, Laura
    Abstract: In the present, Romania is considered a fragile state. While the lowest point of recession seems to have been exceed, the instability continues to characterize for a period all efforts and steps taken for economic recovery. Regarding the real convergence criteria, on December 2010 Romania presently continues to meet only the criterion regarding the sustainability of fiscal position while the assessment of the criterion related to the stability of the exchange rate cannot be performed accurately as long as the national currency – Leu - does not participate to the Exchange Rate Mechanism II (ERM II).
    Keywords: Real convergence criteria; Nominal convergence criteria; Euro adoption; Romania
    JEL: E42 F36
    Date: 2011–04–01
  29. By: Onour, Ibrahim
    Abstract: The purpose of this paper to analyse financial stability in small open economy, with dual foreign exchange markets, enduring political uncertainty and facing the likelihood of perminant adverse export shock. The finding in the paper indicate, given capital outflow is maintained at minimal level, there exist stable equilibrium exchange rates, despite the adverse export shock. However, for the foreign exchange market to adjust more quickly towards a new steady state equilibrium the central bank need to build sufficient foreign exchange reserves. If the reserve level remains at low levels the recovery process from the adverse shock will take longer time, as periodic devaluation of the official rate remain the only available tool for the central bank. When expanding fiscal deficit and declining official reserves force the government adopting a floating exchange rate system, our model predict depreciation of foreign exchange rate is identical to domestic money growth.
    Keywords: parallel rate; official rate; Stability; Steady-state
    JEL: E0 C02 E44
    Date: 2010–10–27
  30. By: James D. Hamilton; Jing Cynthia Wu
    Abstract: Affine term structure models have been used to address a wide range of questions in macroeconomics and finance. This paper investigates a number of their testable implications which have not previously been explored. We show that the assumption that certain specified yields are priced without error is testable, and find that the implied measurement or specification error exhibits serial correlation in all of the possible formulations investigated here. We further find that the predictions of these models for the average levels of different interest rates are inconsistent with the observed data, and propose a more general specification that is not rejected by the data.
    JEL: E43 G12
    Date: 2011–04
  31. By: Rault, Christophe (University of Orléans); Vaubourg, Anne-Gaël (University of Orléans)
    Abstract: We explore whether finance influences the impact of labour market institutions on unemployment. Using a data set of 18 OECD countries over 1980-2004, we estimate a panel VectorAutoRegressive model. We check whether causalities from labour market variables to unemployment are affected by financial factors. In Belgium, Italy, Australia, Japan and Spain, accounting for financial indicators mitigates the benefits of labour market flexibilization or makes it harmful to employment. In Austria, Canada, Finland and Portugal, it reduces its detrimental impact or makes it beneficial. In Ireland and Netherlands, both effects prevail, depending on the labour market indicator used.
    Keywords: unemployment, labour market, financial factors, institutional interactions, panel VAR
    JEL: E24 J23 P17
    Date: 2011–03
  32. By: Betsey Stevenson; Justin Wolfers
    Abstract: We document that trust in public institutions—and particularly trust in banks, business and government—has declined over recent years. U.S. time series evidence suggests that this partly reflects the pro-cyclical nature of trust in institutions. Cross-country comparisons reveal a clear legacy of the Great Recession, and those countries whose unemployment grew the most suffered the biggest loss in confidence in institutions, particularly in trust in government and the financial sector. Finally, analysis of several repeated cross-sections of confidence within U.S. states yields similar qualitative patterns, but much smaller magnitudes in response to state-specific shocks.
    Date: 2011
  33. By: Long Xin; Pelloni Alessandra
    Abstract: We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labour to capital will increase the employment rate in equilibrium. This has opposite effects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the bene?ts of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, taxing capital more heavily than labour can be welfare increasing.
    Keywords: Capital income taxes, R&D, growth effect, welfare Effect
    JEL: E62 H21 O41
    Date: 2011–03
  34. By: Krishnan, K.P. (Asian Development Bank Institute)
    Abstract: Financial markets that function well are crucial for the long-run economic growth of a country. This paper, in the first instance, looks at how the financial development of an economy can be measured. It then traces the financial development of India through the 1990s to the present, assessing the development of each segment of financial markets. In doing so, it highlights the dualistic development of the financial sector. Finally, the paper makes an attempt to offer an explanation of this dualistic development and proposes a road map for the future development of financial markets in India.
    Keywords: financial development; india financial development; india financial sector; india financial markets; emerging market economies; india economic growth
    JEL: E44 G18 G28 N25
    Date: 2011–04–08
  35. By: Kunimitsu, Yoji
    Abstract: The stock management of irrigation and drainage facilities was macro-economically evaluated. The recursive-dynamic CGE model was developed and used for policy simulation. Results demonstrated that effects of activity spread to other industries and total benefit calculated by the consumersâ surplus change was more than the total costs.
    Keywords: Computable General Equilibrium Model, Recursive dynamic model, Consumersâ surplus, Cost-benefit ratio, Agricultural and Food Policy, Community/Rural/Urban Development, Demand and Price Analysis, Production Economics, Public Economics, H30, Q12, Q14, Q18,
    Date: 2011–01–01
  36. By: Dean Baker; David Rosnick
    Abstract: Representative Paul Ryan's proposed 2012 budget has been lauded as a path to prosperity, with much attetion given to his overhaul of the medicare system. Using data from the CBO analysis of the Ryan plan, this issue brief demonstrates that any savings to the government under the revamped medicare system places the burden of rising healthcare costs more squarely on the shoulders of beneficiaries.
    Keywords: Medicare, Ryan budget
    JEL: E E6 E62 I I1 I18 H H5 H51 H6 H63 H68
    Date: 2011–04
  37. By: Lucas Bretschger (ETH Zurich, Switzerland); Simone Valente (ETH Zurich, Switzerland)
    Abstract: The theory of welfare accounting shows that comprehensive measures of net investment can be used to test whether an economy is following unsustainable paths of consumption. However, the notion of net investment used in most applied studies rules out technological progress and terms-of-trade gains from international trade. This paper considers an augmented expression of net investment derived from a dynamic growth model featuring international trade in different types of resource inputs, exogenous productivity growth in final sectors, and cost-reducing progress in resource extraction. Calculating augmented net investment for the world's top twenty oil producers, we show that the difference with standard non-augmented measures can be large and may even revert some established con- clusions regarding sustainability: prospects are more favorable than previously thought in oil-exporting countries endowed with large reserves like Angola, Azerbaijan, Kuwait, Saudi Arabia and Venezuela. In oil-importing economies, future consumption possibilities are limited by the lack of expected rental incomes from future resource exports.
    Keywords: International Trade, Natural Resources, Net Investment, Sustainability, Technological Progress
    JEL: E22 F11 O11
    Date: 2011–04
  38. By: Kakarot-Handtke, Egmont
    Abstract: In the wake of the recent financial crisis heterodox economists have taken up a time-honored refrain and proposed to abandon the axiomatic method. The present paper argues that this proposal is self-defeating
    Keywords: Axiomatization; Keynesianism
    JEL: E12 E00 B41
    Date: 2011–03–11
  39. By: John Schmitt; David Rosnick
    Abstract: This report analyzes the wage and employment effects of the first three city-specific minimum wages in the United States –San Francisco (2004), Santa Fe (2004), and Washington, DC (1993). We use data from a virtual census of employment in each of the three cities, surrounding suburbs, and nearby metropolitan areas, to estimate the impact of minimum-wage laws on wages and employment in fast food restaurants, food services, retail trade, and other low-wage and small establishments.
    Keywords: minimum wage, employment
    JEL: E E2 E24 E6 E64 E65 J J2 J21 J3 J31 J33 J38
    Date: 2011–03
  40. By: von Furstenberg, George M.
    Abstract: This study examines the promise of reducing expected resolution costs of financial institutions through either voluntary or mandated addition of contingently convertible debt securities to their long-term financing mix. I model the stochastic process by which an initially very well capitalized banking firm may come to violate its minimum capital maintenance requirement. Conversion of cocos then provides a second chance because the firm's initial capitalization is restored. Although regulatory insolvency remains a distant threat, the expected reductions in the cost of bankruptcy and hence the cost of capital are such that cocos may win a place in the liability structure of financial institutions without the need for mandates. --
    Keywords: financial reforms,regulatory insolvency,contingent capital,bank regulations,cocos
    JEL: E44 G33 G38
    Date: 2011
  41. By: Dimova, Ralitza (University of Manchester); Gang, Ira N. (Rutgers University); Gbakou, Monnet Benoit Patrick (University of Hohenheim); Hoffman, Daniel (Rutgers University)
    Abstract: With fortuitously timed data – collected before, during and after a major macro-financial crisis in Bulgaria – we revisit several hypotheses in the economics and nutritional literature related to the tendency of households to smooth their nutritional status over time. We explore the dietary impact of both falling real incomes in the context of hyperinflation and crisis and changing relative prices and the changing responsiveness of different groups of people to these incomes and prices over six year of fundamental structural reforms of the economy. Our results highlight large and dramatically changing food and nutrient elasticities, which challenge the perception of household ability to smooth their nutrient stream during economic crises and transitions.
    Keywords: crisis, diet, fluctuation, health, nutrition
    JEL: E32 I12 P23 P24 P36
    Date: 2011–03
  42. By: Yang, Lucun (Cardiff Business School)
    Abstract: Limited empirical work has been done to the diverging current account balances of the individual emerging Asian economies. Based on the intertemporal approach to current account, this paper empirically examines both the long-run and short-run impacts of initial stock of net foreign assets, degree of openness to international trade, real exchange rate and relative income on current account balances for eight selected emerging Asian economies over the period 1980-2009, making use of the cointegrated VAR (Vector Autoregression) methodology. This paper finds that current account behaviours in emerging Asian economies are heterogeneous. Initial stock of net foreign assets and degree of openness to international trade are important factors in explaining the long-run behaviour of current accounts. Moreover, the current accounts of all sample economies have a self-adjusting mechanism except China. Short-run current account adjustment towards long-run equilibrium path is gradual, with the disequilibrium term being the main determinant of the short-run current account variations.
    Keywords: Current account; Emerging Asia; Structural and macroeconomic determinants; Saving-investment balance; Cointegration
    JEL: E21 F10 F32 F41
    Date: 2011–04

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