|
on Macroeconomics |
|
Issue of 2011‒05‒07
thirty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Herro, Nicholas; Murray, James |
| Abstract: | A large literature lauds the benefits of central bank transparency and credibility, but when a central bank like the U.S. Federal Reserve has a dual mandate, is not specific to the extent it targets employment versus price stability, and is not specific to the magnitude interest rates should change in response to these targets, market participants must depend largely on past data to form expectations about monetary policy. We suppose market participants estimate a Taylor-like regression equation to understand the conduct of monetary policy, which likely guides their short-run and long-run expectations. When the Federal Reserve's actions deviate from its historical targets for macroeconomic variables, an environment of greater uncertainty may be the result. We quantify this degree of uncertainty by measuring and aggregating recent deviations of the federal funds rate from econometric forecasts predicted by constant gain learning. We incorporate this measure of uncertainty into a VAR model with ARCH shocks to measure the effect monetary policy uncertainty has on inflation, output growth, unemployment, and the volatility of these variables. We find that a higher degree of uncertainty regarding monetary policy is associated with greater volatility of output growth and unemployment. |
| Keywords: | Uncertainty; learning; volatility; Taylor rule; vector autoregression; ARCH. |
| JEL: | E32 E31 E58 |
| Date: | 2011–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30387&r=mac |
| By: | Jagjit S. Chadha; Sean Holly |
| Abstract: | We assess recent developments in monetary policy practice following the financial crisis drawing on papers from a specially convened conference in March 2010. In particular, we consider why central banks throughout the world have injected substantial quantities of liquidity into the financial system and seen their balance sheets expand to multiples of GDP. We outline the rationale for balance sheet operations: (i) portfolio balance of the non-bank financial sector; (ii) an offset for the zero bound; (iii) signalling mechanism about medium term inflation expectations and (iv) the alleviation of the government's budget constraint. We briefly outline the recent experience with QE and draw a distinction between liquidity and macroeconomic stabilisation operations. |
| Keywords: | zero bound, open-market operations, quantitative easing, monetary policy |
| JEL: | E31 E40 E51 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1109&r=mac |
| By: | Pierre-Richard Agénor; K. Alper; Luiz A. Pereira da Silva |
| Abstract: | This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic (financial) stability is defined in terms of the volatility of nominal income (real house prices). Numerical experiments show that even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of interest rate smoothing, and the stronger the policymaker’s concern with macroeconomic stability, the larger is the sensitivity of the regulatory rule to credit growth gaps. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:237&r=mac |
| By: | Mukherjee, Sanchita |
| Abstract: | This paper analyzes the impact of capital market openness on exchange rate pass-through and subsequently on the social loss in an inflation targeting small open economy under a pure commitment policy. Applying the intuition behind the macroeconomic trilemma, I examine whether a more open capital market in an inflation targeting country improves the credibility of the central bank and consequently reduces exchange rate pass-through. First, I empirically examine the effect of capital openness on exchange rate pass-through using a New Keynesian Phillips curve. The empirical investigation reveals that limited capital openness leads to greater pass-through from the exchange rate to domestic inflation, which raises the marginal cost of deviation from the inflation target. This subsequently worsens the inflation output-gap trade-off and increases the social loss of the inflation targeting central bank under pure commitment. However, the calibration results suggest that the inflation output-gap trade-off improves and the social loss decreases even in the presence of larger exchange rate pass-through if the capital controls are effective at insulating the exchange rate from interest rate and risk-premia shocks. |
| Keywords: | Monetary policy; Inflation Targeting; Exchange rate pass-through; Capital account openness; Small open economy |
| JEL: | E58 E52 F47 F41 E44 |
| Date: | 2011–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30478&r=mac |
| By: | Heiner Mikosch (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | By using a model of trade union behaviour Grüner (2010) argues that the introduction of the European Monetary Union (EMU) led to lower wage growth and lower unemployment in participating countries. Following Grüner’s model, monetary centralization lets the central bank react less flexibly to national business cycle movements. This increases the amplitude of national business cycles which, in turn, leads to higher unemployment risk. In order to counter-balance this effect, trade unions lower their claims for wage mark-ups resulting in lower wage growth and lower unemployment. This paper uses macroeconomic data on OECD countries and a difference-in-differences approach to empirically test the implications of this model. Although we come up with some weak evidence for increased business cycle amplitudes within the EMU, we neither find a significant general effect of the EMU on wage growth nor on unemployment. |
| Keywords: | Common currency areas, EMU, Phillips curve, unemployment, wages |
| JEL: | E52 E58 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:11-280&r=mac |
| By: | Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar |
| Abstract: | The last decade has seen a worldwide move by emerging markets to adopt explicit or implicit inflation targeting regimes. A notable and often discussed exception to this trend, of course, is China which follows pegged exchange rate regime supported by capital controls. Another major exception is India. It is not clear how to characterize the monetary regime or identify the nominal monetary anchor in India. Is central bank policy in India following a predictable rule that is heavily influenced by a quasi inflation target? To address this point, we investigate monetary policy regime change in India using a Markov switching model to estimate a time-varying Taylor-type rule for the Reserve Bank of India. We find that the conduct of monetary policy over the last two decades can be characterized by two regimes, which we term ‘hawk’ and ‘dove.’ In the first of these regimes, the central bank reveals a greater relative (though not absolute) weight on controlling inflation vis-à-vis narrowing the output gap. The central bank was in the “dove” regime about half of the sample period, during these episodes focusing more on the output gap and exchange rate targets to stimulate exports, rather than on moderating inflation. India is following its own direction in the conduct of monetary policy, seemingly not overly influenced by the emphasis on quasi-inflation targeting seen in many emerging markets. |
| Keywords: | Monetary policy; Regime switches; Central banking; Inflation targeting |
| JEL: | E0 E58 F3 E52 E5 E4 |
| Date: | 2011–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30423&r=mac |
| By: | Evren Caglar; Jagjit S. Chadha; Jack Meaning; James Warren; Alex Waters |
| Abstract: | At the zero lower bound, the scale and scope of non-conventional monetary policies have become the key decision variables for monetary policy makers. In the UK, quantitative easing has involved the creation of a fund to purchase medium term dated government bonds with borrowed central bank reserves and so has increased the liquidity of the non-bank financial sector and temporarily eased the budget constraint of HMT. Some of these reserves have been used to increase the extent of capital held by banks and there have also been direct injections of capital into the banking system. We assess some of the issues arising from the three policies by using three separate DSGE models, which take seriously the role of financial frictions. We find that it is possible to correct the effects of a lower zero bound in DSGE models, by (i) offsetting the liquidity premium embedded in long term bonds and/or (ii) adopting countercyclical subsidies to bank capital able and/or (iii) the creation of central bank reserves that reduce the costs of loan supply. But the correct quantitative response and ongoing interaction with standard monetary policy remains an open question. |
| Keywords: | zero bound, open-market operations, quantitative easing |
| JEL: | E31 E40 E51 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1110&r=mac |
| By: | Jagjit S. Chadha; Luisa Corrado |
| Abstract: | The financial crisis has led to the development of an active debate on the use of macro-prudential instruments for regulating the banking system, in particular for liquidity and capital holdings. Within the context of a micro-founded macroeconomic model, we allow commercial banks to choose their optimal mix of assets, apportioning these either to reserves or private sector loans. We examine the implications for quantities, relative non-financial and financial prices from standard macroeconomic shocks alongside shocks to the expected liquidity of banks and to the efficiency of the banking sector. We focus on the response by the monetary sector, in particular the optimal reserve-deposit ratio adopted by commercial banks over the business cycle. Overall we find some rationale for Basel III in providing commercial banks with an incentive to hold a greater stock of liquid assets, such as reserves, but also to provide incentives to increase the cyclical variation in reserves holdings as this acts to limit excessive procyclicality of lending to the private sector. |
| Keywords: | Liquidity, interest on reserves, policy instruments, Basel |
| JEL: | E31 E40 E51 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1108&r=mac |
| By: | Mehrotra, Aaron (BOFIT); Nuutilainen, Riikka (BOFIT); Pääkkönen, Jenni (BOFIT) |
| Abstract: | We construct a small-scale dynamic stochastic general equilibrium (DSGE) model that features price rigidities, habit formation in consumption and costs in capital adjustment, and calibrate the model with data for the Chinese economy. Our interest centers on the impact of technology and monetary policy shocks for different structures of the Chinese economy. In particular, we evaluate how a rebalancing of the economy from investment-led to consumption-led growth would affect the economic dynamics after a shock occurs. Our findings suggest that a rebalancing would reduce the volatility of the real economy in the event of a technology shock, which provides support for policies aiming to increase the consumption share in China. |
| Keywords: | DSGE; rebalancing; monetary policy shocks; technology shocks; China |
| JEL: | E52 E60 |
| Date: | 2011–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_005&r=mac |
| By: | Bellou, Andriana; Kaymak, Baris |
| Abstract: | We study the wage growth of job stayers over the business cycle, and show that wage adjustments within a job spell display significant history dependence. This is at odds with the spot market model, which implies that the wage growth of a worker within a job spell depends solely on the change in the contemporaneous economic conditions. Instead, we find that workers hired during recessions, or those who experienced unfavorable economic conditions since they were hired, receive larger wage raises during expansions, and are subject to smaller wage cuts during downswings. The change in the contemporaneous conditions, on the other hand, is not a significant determinant of wage growth. Our findings are consistent with a model of implicit insurance contracts where neither the employer nor the worker can fully commit to the contract. |
| Keywords: | Business Cycles;Wage Rigidity; Implicit Contracts; Cyclical Selection |
| JEL: | E32 J31 J41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30401&r=mac |
| By: | Leonardo Gambacorta; David Marques-Ibanez |
| Abstract: | The 2007-2010 financial crisis highlighted the central role of financial intermediaries' stability in buttressing a smooth transmission of credit to borrowers. While results from the years prior to the crisis often cast doubts on the strength of the bank lending channel, recent evidence shows that bank-specific characteristics can have a large impact on the provision of credit. We show that new factors, such as changes in banks' business models and market funding patterns, had modified the monetary transmission mechanism in Europe and in the US prior to the crisis, and demonstrate the existence of structural changes during the period of financial crisis. Banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. These findings support the Basel III focus on banks' core capital and on funding liquidity risks. They also call for a more forward-looking approach to the statistical data coverage of the banking sector by central banks. In particular, there should be a stronger focus on monitoring those financial factors that are likely to influence the functioning of the monetary transmission mechanism particularly in a period of crisis. |
| Keywords: | bank lending channel, monetary policy, financial innovation |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:345&r=mac |
| By: | Kaszab, Lorant (Cardiff Business School) |
| Abstract: | This paper uses a simple new-Keynesian model (with and without capital) and calculates multipliers of four types. That is, we assume either an increase in government spending or a cut in sales/labor/capital tax that is financed by lump-sum taxes (Ricardian evidence holds). We argue that multipliers of a temporary fiscal stimulus for separable preferences and zero nominal interest rate results in lower values than what is obtained by Eggertsson (2010). Using Christiano et al. (2009) non-separable utility framework which they used to calculate spending multipliers we study tax cuts as well and find that sales tax cut multiplier can be well above one (joint with government spending) when zero lower bound on nominal interest binds. In case of a permanent stimulus we show in the model without capital and assuming non-separable preferences that it is the spending and wage tax cut which produce the highest multipliers with values lower than one. In the model with capital and assuming that the nominal rate is fixed for a one-year (or two-year) duration we present an impact multiplier of government spending that is very close to the one in Bernstein and Romer (2009) but later declines with horizon in contrast to their finding and in line with the one of Cogan et al. (2010). We also demonstrate that the long-run spending multiplier calculated similarly to Campolmi et al. (2010) implies roughly the same value for both types of preferences for particular calibrations. For comparison, we also provide long-run multipliers using the method proposed by Uhlig (2010). |
| Keywords: | New-Keynesian model; fiscal multipliers; zero lower bound; monetary policy; government spending; tax cut; permanent; transitory |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/11&r=mac |
| By: | Gianni De Nicolò; Marcella Lucchetta |
| Abstract: | This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4-2009Q1. |
| JEL: | E17 E44 G21 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16998&r=mac |
| By: | Vitor Castro (University of Coimbra, GEMF and NIPE) |
| Abstract: | his paper tries to identify, for the first time, a chronology for the Portuguese business cycle and test for the presence of duration dependence in the respective phases of expansion and contraction. A duration dependent Markov-switching vector autoregressive model is employed in that task. This model is estimated over monthly and year-on-year (monthly) growth rates of a set of relevant economic indicators, namely, industrial production, a composite leading indicator and, additionally, civilian employment. The estimated specifications allow us to identify four main periods of contraction during the last three decades and the presence of positive duration dependence in contractions, but not in expansions. |
| Keywords: | business cycles; duration dependence; Markov-switching. |
| JEL: | E32 C41 C24 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2011-07&r=mac |
| By: | Philip Hans Franses (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Rianne Legerstee (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute) |
| Abstract: | Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are typically based on econometric model forecasts jointly with human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC. |
| Keywords: | Macroeconomic forecasts, econometric models, human intuition, biased forecasts, forecast performance, forecast evaluation, forecast comparison. |
| JEL: | C22 C51 C52 C53 E27 E37 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:771&r=mac |
| By: | Philip Hans Franses (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit); Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).); Rianne Legerstee: (Nyenrode Business Universiteit) |
| Abstract: | Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are typically based on econometric model forecasts jointly with human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC. |
| Keywords: | Macroeconomic forecasts, econometric models, human intuition, biased forecasts, forecast performance, forecast evaluation, forecast comparison. |
| JEL: | C22 C51 C52 C53 E27 E37 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1111&r=mac |
| By: | Gachet, Ivan; Maldonado, Diego; Oliva, Nicolas; Ramirez, Jose |
| Abstract: | This paper presents some short-term and long term stylized facts of the Ecuadorian economy, and gives a brief explanation of the circumstances under which these empirical regularities developed. To do so, we analyze macroeconomic aggregates from the real and fiscal sectors, and examine price variables in relation to the economic cycle. It is difficult have a high quality quarterly series in real terms for all variables so we use both quarterly and monthly time series. In the case of monthly data, we make use of the Index of Economic Activity (IDEAC, Spanish acronym) as a proxy for the GDP. The ultimate goal of this paper is to identify the interrelation of key macroeconomic variables and to lay down the empirical basis for the development of dynamic models consistent with the behavior of the Ecuadorian economy. |
| Keywords: | Hechos Estilizados; Ciclos Económicos; Filtro Hodrick y Prescott; Ecuador |
| JEL: | E32 E3 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30280&r=mac |
| By: | Jean Pisani-Ferry; Zsolt Darvas |
| Abstract: | This Policy Contribution was prepared as a briefing paper for the European Parliament Economic and Monetary Affairs Committee's Monetary Dialogue, entitled The threat of currency wars?: global imbalances and their effect on currencies,? held on 30 November 2010. Bruegel Fellows Jean Pisani-Ferry and Zsolt Darvas argue the so-called currency war? is manifested in three ways: 1) the inflexible pegs of undervalued currencies; 2) attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a beggar-thy-neighbour? policy as long as the Fed's policy is geared towards price stability. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures, as current US inflationary expectations are at historically low levels. Finally, the exchange rate of the Euro has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:482&r=mac |
| By: | Ko, Jun-Hyung |
| Abstract: | Why does the hours worked show a decreasing pattern in the postwar Japanese economy? This paper answers this question in the background of the changing pattern of government spending and tax-imposing behaviors. We construct and simulate a standard optimal growth model with the following key features: various taxes and subsidies. Our main findings are as follows. First, we quantitatively find that the increasing pattern of taxes on labor income played a crucial role in influencing the declining pattern of hours worked in Japan. Second, consumption tax and subsidy have a limited role in explaining the labor supply because they cancel each other out. Third, pension benefit may influence the retirement of the people in their sixties but has a minor effect on the hours worked. Fourth, the legal reduction in the workweek length in 1990 can explain the low level of the hours worked since 1990. Fifth, subsistence consumption can account for the slope of hours worked but cannot explain the long-run level. |
| Keywords: | marginal tax rate; subsidy; hours worked; pension benefit |
| JEL: | E62 E32 E24 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30058&r=mac |
| By: | Martin Lettau; Sydney V. Ludvigson |
| Abstract: | Three shocks, distinguished by whether their effects are permanent or transitory, are identified to characterize the post-war dynamics of aggregate consumer spending, labor earnings, and household wealth. The first shock accounts for virtually all of the variation in consumption and has effects akin to a permanent total factor productivity shock in canonical frictionless macroeconomic models. The second shock underlies the bulk of fluctuations in labor income, accounting for 76% of its variation. This shock permanently reallocates rewards between shareholders and workers but leaves consumption unaffected. Over the last 25 years, the cumulative effect of this shock has persistently boosted stock market wealth and persistently lowered labor earnings. The third shock is a persistent but transitory innovation that accounts for the vast majority of quarterly fluctuations in asset values but has a negligible impact on consumption and labor earnings at all horizons. We show that the 2000-02 asset market crash was the result of a negative transitory wealth shock, which predominantly affected stock market wealth. By contrast, the 2007-09 crash was accompanied by a string of large negative realizations in both the transitory shock and the permanent productivity shock, with the latter having especially important implications for housing wealth. |
| JEL: | E10 E21 E27 E44 G12 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16996&r=mac |
| By: | Hanley, Brian P. |
| Abstract: | Use of a promise to pay by a bank to insure an outstanding loan in order to return the value of the insured amount into capital for use in writing a new loan is an invention in banking with calculably greater potential economic impact than the original invention of reserve banking. The consequence of this lending invention is to render the existing money multiplier equations of reserve banking obsolete whenever it is used. The equations describing this multiplier do not converge. Each set of parameters for reserve percentage, nesting depth, etc. creates a unique logarithmic curve rather than approaching a limit. Thus it is necessary to show behavior of this new equation by numerical methods. It is shown that remarkable multipliers occur and early nesting iterations can raise the multiplier into the thousands. This money creation innovation has the demonstrated capacity to impact nations. Understanding this new multiplier is necessary for economic analyses of the GFC. -- |
| Keywords: | GFC,CDS,AIG,money multiplier,banking multiplier |
| JEL: | E20 E51 E17 H56 H63 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20118&r=mac |
| By: | Douglas W. Diamond; Raghuram Rajan |
| Abstract: | Do low interest rates alleviate banking fragility? Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may choose to bail out banks being run. Unconstrained bailouts undermine the disciplinary role of deposits. Moreover, competition forces banks to promise depositors more, increasing intervention and making the system worse off. By contrast, constrained intervention to lower rates maintains private discipline, while offsetting contractual rigidity. It may still lead banks to make excessive liquidity promises. Anticipating this, central banks can reduce financial fragility by raising rates in normal times to offset their propensity to reduce rates in adverse times. |
| JEL: | E4 E5 G2 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16994&r=mac |
| By: | Spolador, Humberto F. S.; Barros, Geraldo S. C.; Bacchi, Mirian R. P. |
| Abstract: | The findings presented in this paper come from our study of the effects of Brazilian macroeconomic policy on the Brazilian Farm [product] Price Index using an adapted version of Frankelâs (1986 & 2006) theoretical model. The study examined the connection between Brazilian farm prices and external variables (worldwide importation of agribusiness products, international commodity prices, and foreign real interest rates) and between Brazilian farm prices and domestic variables (GDP, the real exchange rate, and local interest rates). |
| Keywords: | Brazilian farm prices, interest rate differentials, international commodity prices and exchange rate., Agribusiness, Political Economy, Q, E4, E5, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103221&r=mac |
| By: | Andrew Ang; Francis A. Longstaff |
| Abstract: | We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major European countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is considerable heterogeneity across U.S. and European issuers in their sensitivity to systemic risk. U.S. and Euro systemic shocks are highly correlated, but there is much less systemic risk among U.S. sovereigns than among European sovereigns. We also find that U.S. and European systemic sovereign risk is strongly related to financial market variables. These results provide strong support for the view that systemic sovereign risk has its roots in financial markets rather than in macroeconomic fundamentals. |
| JEL: | E44 F21 F34 F36 G12 G13 G15 G18 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16982&r=mac |
| By: | Carlos Álvarez Nogal; Leandro Prados de la Escosura |
| Abstract: | Two distinctive regimes are distinguished in Spain over half-a-millennium. A first one (1270s-1590s) corresponds to a high land-labour ratio frontier economy, pastoral, trade-oriented, and led by towns. Wages and food consumption were relatively high. Sustained per capita growth occurred from the Reconquest’s end (1264) to the Black Death (1340s) and resumed from the 1390s only broken by late- 15th century turmoil. A second regime (1600s-1810s) corresponds to a more agricultural and densely populated low-wage economy which grew along a lower path. Contrary to preindustrial Western Europe, Spain achieved her highest living standards in the 1340s, not by mid-15th century. Although its population toll was lower, the Plague had a more damaging impact on Spain and, far from releasing non-existent demographic pressure, destroyed the equilibrium between scarce population and abundant resources. Pre-1350 per capita income was reached by the late 16th century but only overcome after 1820. |
| Keywords: | Preindustrial Spain, Frontier economy, Reconquest, Black Death, Rise, Decline, Western Europe |
| JEL: | E01 N13 O47 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:whrepe:wp11-02&r=mac |
| By: | S. Jansen, Eilev (Statistics Norway); S.H. Krogh, Tord (Dept. of Economics, University of Oslo) |
| Abstract: | The interaction between financial markets and the macroeconomy can be strongly affected by changes in credit market regulations. In order to take account of these effects we control explicitly for regime shifts in a system of debt equations for Norway using a common, exible trend. The estimated shape of the trend matches the qualitative development in the regulations, and we argue that it can be viewed as a measure of relative credit availability, or credit conditions, for the period 1975-2008 - a credit conditions index (CCI). This entails years of strict credit market regulations in the 1970s, its gradual deregulation in the 1980s, followed by a full-blown banking crisis in the years around 1990 and the development thereafter up to the advent of the current nancial crisis. Our study is inspired by Fernandez-Corugedo and Muellbauer (2006), which introduced the methodology and provided estimates of a CCI for the UK. The trend conditions on a priori knowledge about changes in the Norwegian regulatory system, as documented in Krogh(2010b), and it shows robustness when estimated recursively. |
| Keywords: | credit conditions; exible trend; financial deregulation; household loans |
| JEL: | E44 G21 G28 |
| Date: | 2011–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2011_010&r=mac |
| By: | Mehlum, Halvor (Dept. of Economics, University of Oslo); Moene, Karl (Dept. of Economics, University of Oslo); Torvik, Ragnar (Department of Economics, Norwegian University of Science and Technology) |
| Abstract: | Norway is often referred to as the prime example of a country that has achieved high growth and low income inequality despite its vast natural resources. This contrasts sharply with many other resource abundant countries, which raises the questions why Norway has succeeded while many other resource abundant countries have not. That is the topic of this paper. To make progress we first need to find out along which dimensions Norway differs from resource abundant countries with a less favorable development. Thereafter we turn to a more detailed description and investigation of the policies adopted in Norway, and discuss if there are lessons to be learned for other resource abundant countries. |
| Keywords: | Sovereign wealth fund; Norway; multi-sector growth; labor supply |
| JEL: | E60 E61 O13 Q32 Q38 |
| Date: | 2011–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2011_014&r=mac |
| By: | David Rosnick; Dean Baker |
| Abstract: | Representative Ryan’s proposal to replace the current Medicare systemwith a system of vouchers or premium supports has been widely described as shifting costs from the government to beneficiaries. However, the size of this shift is actually small relative to the projected increase in costs that would result from having Medicare provided by private insurers instead of the government-run Medicare system. The Congressional Budget Office’s (CBO) projections imply that the Ryan plan would add more than $30 trillion to the cost of providing Medicare equivalent policies over the program’s 75-year planning period. This increase in costs – from waste associated with using a less efficient health care delivery system – has not received the attention that it deserves in the public debate. |
| Keywords: | Medicare, Ryan, budget |
| JEL: | E E6 E62 I I1 I18 H H5 H51 H6 H63 H68 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2011-10&r=mac |
| By: | Abdelaal Mahmoud, Ashraf |
| Abstract: | Despite impressive studies on financial crises consequences and foreign capital flows, by large the research done has examined these economic phenomenons separately without addressing their nexus. This paper aims at bridging this gap by examining the impact of financial crises on bilateral foreign direct investment (BFDI). Financial turmoil reshapes the perception and magnitude of BFDI flows in both host and home countries; host countries governments see in FDI a mean for overcoming the sluggish economic situation and hence become eager to stimulate FDI inflows, while for the same reasons home countries governments, and investors become more cautious about their decisions to invest abroad. This paper addresses in particular the impact of financial crises on FDI in both host and home countries. To that end the paper uses a panel data covering the period 1985-2008 on home countries, as presented by the six largest FDI outflow, and 42 host countries. Empirical analysis applies the system GMM estimator to a gravity model of BFDI flows. The key findings in this paper are that financial crises exerts a negative impact on BFDI, a generalized fact that applies to all financial disturbances that took place during the last 23 years. Second the magnitude of the negative shock of financial crises on FDI differs by type and origins causing the financial crises. |
| Keywords: | Foreign direct investment; financial crisis; Bilateral Foreign direct investment; dynamic panel data; spatial dependence. |
| JEL: | E2 C3 F02 |
| Date: | 2011–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30417&r=mac |
| By: | Antoine Berthou; Charlotte Emlinger |
| Abstract: | Trade unit values are commonly used as proxies for trade prices in empirical research in international economics. Existing datasets providing international trade unit values for a large number of countries typically suffer from a number of statistical biases, due to the aggregation of unit values and the harmonization of quantity information. These biases reduce the reliability of unit values as a proxy for trade prices. This paper presents the Trade Unit Values dataset, a new database developed to circumvent these statistical issues. Bilateral trade unit values are computed at a very high level of disaggregation before aggregation into Harmonized-System 6-digits categories to allow for cross-country comparability. Our processing strategy improves the differentiation of trade prices within product categories, as compared to existing worldwide datasets. A simple econometric analysis shows that unit values in our database are well explained by economic aggregates. |
| Keywords: | Unit value; trade price; international trade |
| JEL: | E3 F1 F4 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2011-10&r=mac |