nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒05‒14
fifty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Trend inflation and Monetary policy rules: Determinacy analyses in New Keynesian model with capital accumulation By Elena, Gerko; Kirill, Sossounov
  2. The Timeless Perspective vs. Discretion: Theory and Monetary Policy Implications for an Open Economy By Alfred Guender
  3. Lessons for Monetary Policy: What Should the Consensus Be? By Otmar Issing
  4. Variety Matters By Oscar Pavlov; Mark Weder
  5. Variety Matters By Oscar Pavlov; Mark Weder
  6. Toward Inflation Targeting in Sri Lanka By Shanaka J. Peiris; Rahul Anand; Ding Ding
  7. How Do Business and Financial Cycles Interact? By M. Ayhan Kose; Stijn Claessens; Marco Terrones
  8. CPI Inflation Targeting and the UIP Puzzle: An Appraisal of Instrument and Target Rules By Alfred Guender
  9. Monetary Policy Transmission Mechanisms in Pacific Island Countries By Yongzheng Yang; Matt Davies; Shengzu Wang; Yiqun Wu; Jonathan C. Dunn
  10. A monetary policy strategy in good and bad times: lessons from the recent past By Stephan Fahr; Roberto Motto; Massimo Rostagno; Frank Smets; Oreste Tristani
  11. Inflation Dynamics and the Great Recession By Laurence Ball and Sandeep Mazumder
  12. Are the Effects of Monetary Policy Shocks Big or Small? By Olivier Coibion
  13. Estimating a Small Open-Economy Model for Egypt: Spillovers, Inflation Dynamics, and Implications for Monetary Policy By Kenji Moriyama; Elif C Arbatli
  14. Monetary and fiscal policy should be merged, which in turn changes the role of central banks By Musgrave, Ralph S.
  15. Credit Risk and Disaster Risk By Francois Gourio
  16. In the quest of macroprudential policy tools By Samano, Daniel
  17. The Contemporaneous Correlation of Structural Shocks and Inflation— Output Variability in Pakistan By Muhammad Nasir; Wasim Shahid Malik
  18. Macro-prudential Policy on Liquidity: What Does a DSGE Model Tell Us? By Jagjit S. Chadha; Luisa Corrado
  19. Should Central Banks Raise their Inflation Targets? Some Relevant Issues By Bennett T. McCallum
  20. The dynamics of Italian public debt: Alternative paths for fiscal consolidation By Casadio, Paolo; Paradiso, Antonio; Rao, B. Bhaskara
  21. Pro-Cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model By Kurt Mitman; Stanislav Rabinovich
  22. Reconsidering the Role of Food Prices in Inflation By James P Walsh
  23. The new Keynesian Phillips curve: Does it fit Norwegian data? By Pål Boug, Ådne Cappelen and Anders R. Swensen
  24. Keeping Up with the Joneses and the Welfare Effects of Monetary Policy By Juha Tervala
  25. Communicational Bias in Monetary Policy: Can Words Forecast Deeds? By Pablo Pincheira; Mauricio Calani
  26. Instrument Versus Target Rules As Specifications of Optimal Monetary Policy: What are the Issues, If Any? By Richard T. Froyen; Alfred Guender
  27. The bank lending channel: lessons from the crisis By Leonardo Gambacorta; David Marques-Ibanez
  28. Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts By Rafael Romeu; Kei Kawakami
  29. Inflation and Bank of Russia's policy: is there a link? By Yulia Vymyatnina; Anna Ignatenko
  30. The price puzzle and monetary policy transmission mechanism in Pakistan: Structural vector autoregressive approach By Javid, Muhammad; Munir, Kashif
  31. Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements By Jan Vlcek; Scott Roger
  32. Monetary Transmission in Dollarized and Non-Dollarized Economies: The Cases of Chile, New Zealand, Peru and Uruguay By David O Coble Fernandez; Santiago Acosta Ormaechea
  33. Real wage cyclicality and the Great Depression: evidence from British engineering and metal working firms By Hart, Robert A.; Roberts, J. Elizabeth
  34. Cycles in Crime and Economy Revised By Claudio Detotto; Edoardo Otranto
  35. International Welfare Effects of Monetary Policy By Juha Tervala
  36. Personal-bankruptcy cycles By Garrett, Thomas A.; Wall, Howard J.
  37. Boom and Bust of the spanish Economy By Tomer Shachmurove; Yochanan Shachmurove
  38. New Evidence on Cyclical and Structural Sources of Unemployment By Prakash Kannan; Jinzhu Chen; Bharat Trehan; Prakash Loungani
  39. The threat of 'currency wars': a European perspective By Zsolt Darvas; Jean Pisani-Ferry
  40. Mongolia: Measuring the Output Gap By Julia Bersch; Tara Sinclair
  41. Determinants of the EONIA spread and the financial crisis By Carla Soares; Paulo M.M. Rodrigues
  42. Financial Cycles: What? How? When? By M. Ayhan Kose; Stijn Claessens; Marco Terrones
  43. New Shocks and Asset Price Volatility in General Equilibrium By Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
  44. Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment By Sandra Gomes; P. Jacquinot; M. Mohr; M. Pisani
  45. Convergence of Euro Area Inflation Rates By Lopez, C.; Papell, David H.
  46. Discordant city employment cycles By Owyang, Michael T.; Piger, Jeremy; Wall, Howard J.
  47. The effect of monetary policy on investors’ risk perception: Evidence from the UK and Germany By Dan Luo; Iris Biefang-Frisancho Mariscal; Peter Howells
  48. Macroeconomic Conditions and Capital Raising By Erel, Isil; Julio, Brandon; Kim, Woojin; Weisbach, Michael S.
  49. Anticipation, learning and welfare: the case of distortionary taxation By Gasteiger, Emanuel; Zhang, Shoujian
  50. A Dynamic Macroeconometric Model of Pakistan’s Economy By Muhammad Arshad Khan; Musleh ud Din
  51. Credit Spreads and Business Cycle Fluctuations By Simon Gilchrist; Egon Zakrajšek
  52. Debt and net financial wealth: a comparative analysis for some European countries By Cinquegrana, Giuseppe

  1. By: Elena, Gerko; Kirill, Sossounov
    Abstract: The eects of positive trend inflation is analyzed in the framework of the standard New-Keynesian model with Calvo price setting and capital accumulation. It is build on the work of Duport (2001) and Ascari and Ropele (2007) who separately considered eects of capital accumulation and trend inflation in the similar context. It is shown that the simultaneous presence of positive inflation and capital accumulation greatly aects determinacy property of equilibrium in this setup. Namely, in order to maintain stability in addition to actively react to inflation monetary authorities should react to output uctuations but not to a great extend. Overreaction to output may lead to indeterminacy. We also show that for a large set of plausible parameters standard Taylor rule leads to indeterminacy. Alternative monetary policy rules are also analyzed.
    Keywords: Indeterminacy Interest rate policy rule
    JEL: E32 E58 E52
    Date: 2011–01–11
  2. By: Alfred Guender (University of Canterbury)
    Abstract: Compared to the standard Phillips curve, an open-economy version that features a real exchange rate channel leads to a markedly different target rule in a New Keynesian optimizing framework. Under optimal policy from a timeless perspective (TP) the target rule involves additional history dependence in the form of lagged inflation. The target rule also depends on more parameters, notably the discount factor as well as two IS and two Phillips curve parameters. Stabilization policy in this open economy model is no longer isomorphic to policy in a closed economy. Because of the additional history dependence in an open economy target rule price level targeting is no longer consistent with optimal policy. The gains from commitment are smaller in economies where the real exchange rate channel exerts a direct effect on inflation in the Phillips curve.
    Keywords: CPI Inflation Targeting; UIP Puzzle; Instrument Rule; Target Rule; Optimal Monetary Policy
    JEL: E52 F41
    Date: 2011–04–13
  3. By: Otmar Issing
    Abstract: This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks’ policy decisions, as is done in the ECB’s encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks’ inflation target.
    Keywords: Asset prices , Central banks , Credit , European Central Bank , Financial stability , Inflation targeting , Monetary aggregates , Monetary policy , Money ,
    Date: 2011–04–29
  4. By: Oscar Pavlov; Mark Weder
    Abstract: Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model addresses this issue. It extends Gall's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges.
    Keywords: Sunspot equilibria, Indeterminacy, Markups, Variety effects, Business cycles.
    JEL: E32
    Date: 2011–03
  5. By: Oscar Pavlov (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    Abstract: Countercyclical markups are a key transmission mechanism in many endogenous business cycle models. Yet, recent findings suggest that aggregate markups in the US are procyclical. The current model adresses this issue. It extends Gali's (1994) composition of aggregate demand model by endogenous entry and exit of firms and by product variety effects. Endogenous business cycles emerge with procyclical markups that are within empirically plausible ranges.
    Keywords: sunspot equilibria, indeterminacy, markups, variety effects, business cycles
    JEL: E32
    Date: 2011–05
  6. By: Shanaka J. Peiris; Rahul Anand; Ding Ding
    Abstract: This paper develops a practical model-based forecasting and policy analysis system (FPAS) to support a transition to an inflation forecast targeting regime in Sri Lanka. The FPAS model provides a relatively good forecast for inflation and a framework to evaluate policy trade-offs. The model simulations suggest that an open-economy inflation targeting rule can reduce macroeconomic volatility and anchor inflationary expectations given the size and type of shocks faced by the economy. Sri Lanka could aim to target a broad inflation range initially due to its susceptibility supply-side shocks while enhancing exchange rate flexibility and strengthening the effectiveness of monetary policy in the transition to an inflation forecast targeting regime.
    Keywords: Central banks , Forecasting models , Inflation targeting , Monetary policy , Sri Lanka ,
    Date: 2011–04–13
  7. By: M. Ayhan Kose; Stijn Claessens; Marco Terrones
    Abstract: This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
    Keywords: Business cycles , Economic models , Economic recession , Economic recovery , Financial sector , Fiscal policy , Monetary policy ,
    Date: 2011–04–20
  8. By: Alfred Guender (University of Canterbury)
    Abstract: Employing an optimizing framework, this paper shows that a target rule dominates a simple instrument rule when the focus of monetary policy is on CPI inflation. The target rule approach produces a systematic relationship between the current CPI inflation rate and the lagged policy instrument that renders the former immune to the stochastic risk premium. No matter how policy parameters are set, the optimal simple instrument rule cannot replicate the superior stabilization results achieved by the target rule approach. The optimal simple instrument rule also fails to account for the UIP puzzle. In contrast, the target rule approach can motivate the widely reported phenomenon whereby high interest rate currencies tend to appreciate. In fact the degree of openness and the central bank’s relative aversion to CPI inflation variability determine the sensitivity of observed changes in the nominal exchange rate to the lagged interest rate differential.
    Keywords: CPI Inflation Targeting; UIP Puzzle; Instrument Rule; Target Rule; Optimal Monetary Policy
    JEL: E4 E5 F3
    Date: 2011–05–01
  9. By: Yongzheng Yang; Matt Davies; Shengzu Wang; Yiqun Wu; Jonathan C. Dunn
    Abstract: During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.
    Keywords: Central banks , Cross country analysis , Demand , Exchange rate regimes , Exchange rates , Fiscal policy , Interest rates , Monetary policy , Pacific Island Countries ,
    Date: 2011–04–28
  10. By: Stephan Fahr (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberto Motto (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We evaluate the ECB’s monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the strategy was successful at ensuring macroeconomic stability and steady growth despite shocks to the supply side and to the transmission mechanism which complicated the policy process. Emphasis on monetary indicators in the ECB’s monetary policy strategy – the monetary pillar – was instrumental in avoiding more volatile and less predictable patterns of inflation and growth. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to preserve the integrity of the monetary policy transmission mechanism by adopting a comprehensive package of non-standard policy measures. According to our quantitative evaluation of the impact of the non-standard policy package, which notably did not include entering commitments regarding the future path of the policy rate, the liquidity interventions decided in October 2008 and in May 2009 were critical to preserving price stability and forestalling a more disruptive collapse of the macro-economy. JEL Classification: E31, E44, E51, E58.
    Keywords: Monetary Policy, Monetary transmission, Credit, Supply factors, Financial crisis, Non-standard policy measures.
    Date: 2011–05
  11. By: Laurence Ball and Sandeep Mazumder
    Abstract: This paper examines inflation dynamics in the Unites States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960- 2007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and variance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.
    Date: 2011–05
  12. By: Olivier Coibion
    Abstract: This paper studies the small estimated effects of monetary policy shocks from standard VAR’s versus the large effects from the Romer and Romer (2004) approach. The differences are driven by three factors: the different contractionary impetus, the period of reserves targeting and lag length selection. Accounting for these factors, the real effects of policy shocks are consistent across approaches and most likely medium. Alternative monetary policy shock measures from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been significant, particularly during the 1970s and early 1980s.
    JEL: E3 E4 E5
    Date: 2011–05
  13. By: Kenji Moriyama; Elif C Arbatli
    Abstract: This paper estimates a small open economy model for Egypt to analyze inflation, output dynamics and monetary policy during 2005-2010. The interest rate channel is found to be relatively weak in Egypt, complicating the use of interest rates as the immediate target of monetary policy. However, the paper also finds a significant level of persistence in the policy rate, making monetary policy pro-cyclical. More active use of interest rate policy, measures to improve domestic debt markets and a gradual move towards inflation targeting can help support a successful disinflation strategy for Egypt.
    Date: 2011–05–06
  14. By: Musgrave, Ralph S.
    Abstract: Keeping monetary and fiscal policy separate causes economic distortions, thus the two should be merged. That is, in a recession for example, the government and central bank should simply spend more (and/or collect less tax), and fund the latter from new or “printed” money. Merging monetary and fiscal policy necessitates a different relationship or split of responsibilities as between governments and central banks, but this is not a big problem. Plus the new relationship dispenses with an illogical element in the current typical relationship, namely that both central bank and government influence aggregate demand.
    Keywords: fiscal policy: monetary policy: distortions: Abba Lerner: central banks: national debt: modern monetary theory: functional finance
    JEL: E62 E58 E52
    Date: 2011–04–25
  15. By: Francois Gourio
    Abstract: Corporate credit spreads are large, volatile, countercyclical, and significantly larger than expected losses, but existing macroeconomic models with financial frictions fail to reproduce these patterns, because they imply small and constant aggregate risk premia. Building on the idea that corporate debt, while safe in normal times, is exposed to the risk of economic depression, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, time-varying risk of large economic disaster. This simple feature generates large, volatile and countercyclical credit spreads as well as novel business cycle implications. In particular, financial frictions substantially amplify the effect of shocks to the disaster probability.
    JEL: E22 E32 E44 G12
    Date: 2011–05
  16. By: Samano, Daniel
    Abstract: The global financial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio (CAR) rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural small open economy neokeynesian model for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second policy instrument the central bank can obtain substantial gains. Moreover, we find that when the CAR rule is adequately designed the central authority can mitigate output gap shocks of twice the variance than the Taylor rule alone scenario. Thus, under this two rule case the central authority can isolate financial shocks and dampen their effects over macroeconomic variables.
    Keywords: macroprudential tools; macroprudential policy; capital adequacy ratio; Taylor rule
    JEL: E58 E52 E44
    Date: 2011–03
  17. By: Muhammad Nasir (Pakistan Institute of Development Economics, Islamabad.); Wasim Shahid Malik (Quaid-i-Azam University, Islamabad.)
    Abstract: Monetary policy has changed in a number of ways during the last two decades . Along with the other characteristics, modern monetary policy is forward-looking, and the central banks respond contemporaneously to structural shocks that are expected to make inflation deviate from the future targets. This study aims at investigating this aspect of the monetary policy for Pakistan. Using a modified version of Structural Vector Autoregression (SVAR) developed by Enders and Hurn (2007), we have found a weak response of policy to supply-side shocks as the correlation coefficient between the demand and supply shocks is only 0.041. Moreover, the results show that the demand shocks have no significant contribution to output variability. On the other hand, both the demand and supply shocks, along with the foreign supply shocks, significantly contribute to inflation variability.
    Keywords: Monetary Policy, Contemporaneous Correlation, Pakistan, Structural Shocks, Vector Autoregression
    JEL: E31 E42 E52 E58
    Date: 2011
  18. By: Jagjit S. Chadha (Keynes College, University of Kent); Luisa Corrado (Faculty of Economics, University of Rome "Tor Vergata")
    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 asset creation, apportioning this to either 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. Overall we find some rationale for Basel III in providing commercial banks with an incentive to hold liquid assets, such as reserves, as this acts to limit the procyclicality of lending to the private sector.
    Keywords: Liquidity, interest on reserves, policy instruments, Basel.
    JEL: E31 E40 E51
    Date: 2011–05–02
  19. By: Bennett T. McCallum
    Abstract: Should central banks, because of the zero-lower-bound problem, raise their inflation-rate targets? Several arguments are relevant. (1) In the absence of the ZLB, the optimal steady-state inflation rate, according to standard New Keynesian reasoning, lies between the Friedman-rule value of deflation at the steady-state real interest rate and the Calvo-model value of zero, with calibration indicating a larger weight on the latter. (2) An attractive modification of the Calvo pricing equation would, however, imply that the weight on the second of these values should be zero. (3) There may be some scope for activist monetary policy to be effective even when the one-period interest rate is at the ZLB; but there is professional disagreement on this matter. (4) Present institutional arrangements are not immutable. In particular, elimination of traditional currency is feasible (even arguably attractive) and would remove the ZLB constraint on policy. (5) Increasing target inflation for the purpose of avoiding occasional ZLB difficulties would tend to undermine the rationale for central bank independence and would constitute an additional movement away from policy recognition of the economic necessity for intertemporal discipline.
    JEL: E31 E52 E58
    Date: 2011–05
  20. By: Casadio, Paolo; Paradiso, Antonio; Rao, B. Bhaskara
    Abstract: This paper analyses possible targets for the Italian debt-to-GDP ratio with a small macroeconomic model. The role of international macroeconomic variables such as the US GDP growth, prices of raw materials, EUR/USD exchange rate, and ECB monetary policy stance and domestic policy instruments is analyzed in the debt dynamics. We find that external conditions play a fundamental role for the Italian fiscal consolidation. To reach a target of 100% of debt-to-GDP ratio by 2020, a further growth sustaining policy has to be implemented.
    Keywords: Debt to GDP Ratio; Italian Economy; International Factors; SUR.
    JEL: E62 H68 C30 H63
    Date: 2011–04–21
  21. By: Kurt Mitman (Department of Economics, University of Pennsylvania); Stanislav Rabinovich (Department of Economics, University of Pennsylvania)
    Abstract: We study the optimal provision of unemployment insurance (UI) over the business cycle. We consider an equilibrium Mortensen-Pissarides search and matching model with risk-averse workers and aggregate shocks to labor productivity. Both the vacancy creation decisions of firms and the search effort decisions of workers respond endogenously to aggregate shocks as well as to changes in UI policy. We characterize the optimal history-dependent UI policy. We find that, all else equal, the optimal benefit is decreasing in current productivity and decreasing in current unemployment. Optimal benefits are therefore lowest when current productivity is high and current unemployment is high. The optimal path of benefits reacts non-monotonically to a productivity shock. Following a drop in productivity, benefits initially rise in order to provide short-run relief to the unemployed and stabilize wages, but then fall significantly below their pre-recession level, in order to speed up the subsequent recovery. Under the optimal policy, the path of benefits is pro-cyclical overall. As compared to the existing US UI system, the optimal history-dependent benefits smooth cyclical fluctuations in unemployment and deliver non-negligible welfare gains.
    Keywords: Unemployment Insurance, Business Cycles, Optimal Policy, Search and Matching
    JEL: E24 E32 H21 J65
    Date: 2011–02–15
  22. By: James P Walsh
    Abstract: Food prices are generally excluded from measures of inflation most closely watched by policymakers due either to their transitory nature or their higher volatility. However, in lower income countries, food price inflation is not only more volatile but also on average higher than nonfood inflation. Food inflation is also in many cases more persistent than nonfood inflation, and shocks in many countries are propagated strongly into nonfood inflation. Under these conditions, and particularly given high global commodity price inflation in recent years, a policy focus on measures of core inflation that exclude food prices can misspecify inflation, leading to higher inflationary expectations, a downward bias to forecasts of future inflation and lags in policy responses. In constructing measures of core inflation, policymakers should therefore not assume that excluding food price inflation will provide a clearer picture of underlying inflation trends than headline inflation.
    Keywords: Agricultural commodities , Commodity price fluctuations , Consumer price indexes , External shocks , Inflation , Low-income developing countries , Prices ,
    Date: 2011–04–06
  23. By: Pål Boug, Ådne Cappelen and Anders R. Swensen (Statistics Norway)
    Abstract: We evaluate the empirical performance of the new Keynesian Phillips curve (NKPC) for a small open economy using cointegrated vector autoregressive models, likelihood based methods and general method of moments. Our results indicate that both baseline and hybrid versions of the NKPC as well as exact and inexact formulations of the rational expectation hypothesis are most likely at odds with Norwegian data. By way of contrast, we establish a well-specified dynamic backward-looking imperfect competition model (ICM), a model which encompasses the NKPC in-sample with a major monetary policy regime shift from exchange rate targeting to inflation targeting. We also demonstrate that the ICM model forecasts well both post-sample and during the recent financial crisis. Our findings suggest that taking account of forward-looking behaviour when modelling consumer price inflation is unnecessary to arrive at a well-specified model by econometric criteria.
    Keywords: The new Keynesian Phillips curve; imperfect competition model; cointegrated vector autoregressive models (CVAR); equilibrium correction models; likelihood based methods and general method of moments (GMM).
    JEL: C51 C52 E31 F31
    Date: 2011–05
  24. By: Juha Tervala (Aboa Centre for Economics and University of Turku)
    Abstract: This paper examines the implications of "keeping up with the Joneses" preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run.
    Keywords: Monetary policy, jealousy, consumption externality
    JEL: E40 E50 E52
    Date: 2011–04
  25. By: Pablo Pincheira; Mauricio Calani
    Abstract: Communication with the public is an ever-growing practice among central banks and complements their decisions of interest rate setting. In this paper we examine one feature of the communicational practice of the Central Bank of Chile which summarizes the assessment of the Board about the most likely future of monetary policy. We show that this assessment, which is called communicational bias or simply c-bias, contains valuable information regarding the future stance of monetary policy. We do this by comparing, against several benchmarks, the c-bias ability to correctly forecast the direction of monetary policy rates. Our results are consistent with the hypothesis that the Central Bank of Chile has (in our sample period) matched words and deeds. In fact, the c-bias is a more accurate predictor than two versions of random walks and than a uniformly-distributed random variable. It also outperforms, at some horizons, the predictive ability of a discrete Taylor-rule-type model that uses persistence, output gap and inflation-deviation-from-target as arguments. Furthermore, the c-bias is more accurate than survey-based forecasts at several forecasting horizons. We also show that the c-bias can provide information to improve monetary policy rate forecasts based on the forward rate curve.
    Date: 2011–02–28
  26. By: Richard T. Froyen; Alfred Guender (University of Canterbury)
    Abstract: One issue in the literature on monetary policy in New Keynesian models has been the relative merits of instrument versus target rules. This paper focuses on optimal instrument and target rules within three workhorse models in the literature: IS-LM, AS-AD and the New Keynesian model. The focus on optimal rules enables us to exploit the equivalence among alternative expressions of optimal policies for a given information set. We find that in the AD-AS model, characterized by the presence of observable information variables and unobservable target variables, an optimal explicit instrument rule, a combination policy, and a target rule produce identical outcomes for the target variables. In the New Keynesian model, the optimal explicit instrument rule achieves the same stabilization results as the globally optimal target rule. However, the latter approach provides a more direct rationale for introducing inertia into policymaking. This seems to be the key advantage of the target rule approach. Along other dimensions such as robustness and transparency, target rules offer no clear advantages over optimal instrument rules.
    JEL: E3 E5
    Date: 2011–02–01
  27. By: Leonardo Gambacorta (Bank for International Settlements (BIS).); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    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 forwardlooking 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. JEL Classification: E51, E52, E44.
    Keywords: bank lending channel, monetary policy, financial innovation.
    Date: 2011–05
  28. By: Rafael Romeu; Kei Kawakami
    Abstract: A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
    Date: 2011–05–05
  29. By: Yulia Vymyatnina; Anna Ignatenko (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences (RAS))
    Abstract: One of the most important aims of monetary policy of the Bank of Russia is to reduce CPI inflation under simultaneous stabilization of ruble exchange rate to the major world currencies. While such task setting is obviously contradictory and requires usage of additional instrument, it is unclear whether Central bank can influence inflation processes at all. The work inquires into how inflation is influenced by credit aggregates, oil prices and exchange rate as the major factors limiting possibilities of Bank of Russia's influence on the price level. Conclusions include recommendations on monetary policy of the Bank of Russia. (in Russian)
    Keywords: monetary policy, inflation, Bank of Russia, oil prices, exchange rate pass through
    JEL: E41
    Date: 2011–02–28
  30. By: Javid, Muhammad; Munir, Kashif
    Abstract: This paper address the issue of monetary policy effectiveness and the price puzzle, a positive response of prices to monetary tightening, in Pakistan. Study examines the effects of monetary policy shock on price level and other macroeconomic variables such as output, exchange rate and money supply within the structural VAR framework over the period 1992: M1 to 2010:M08. We find that a contractionary monetary policy shock has a positive effect on prices and the output increase over some horizon following the monetary tightening but continuously falls after initial rise. The results also indicate that monetary contractions in Pakistan over period reviewed associated with persistent depreciation of domestic currency value relative to the U.S. dollar.
    Keywords: Monetary policy; Price puzzle; Structural VAR; Pakistan
    JEL: E52 E4
    Date: 2011
  31. By: Jan Vlcek; Scott Roger
    Abstract: This paper uses a DSGE model with banks and financial frictions in credit markets to assess the medium-term macroeconomic costs of increasing capital and liquidity requirements. The analysis indicates that the macroeconomic costs of such measures are sensitive to the length of the implementation period as well as to the adjustment strategy used by banks, and the scope for monetary policy to respond to the regulatory changes.
    Date: 2011–05–04
  32. By: David O Coble Fernandez; Santiago Acosta Ormaechea
    Abstract: The paper conducts a comparative study of the monetary policy transmission in two economies that run a well-established IT regime, Chile and New Zealand, vis-à-vis two economies operating under relatively newer IT regimes, and which are exposed to a significant degree of dollarization, Peru and Uruguay. It is shown that the traditional interest rate channel is effective in Chile and New Zealand. For Peru and Uruguay, the exchange rate channel is instead more relevant in the transmission of monetary policy. This latter result follows from the limited impact of the policy rate in curbing inflationary pressures in these two countries, in combination with the fact that they have a relatively large and persistent exchange rate pass through. Finally, it is shown that the on-going de-dollarization process of Peru and Uruguay has somewhat strengthened their monetary transmission through the interest rate channel.
    Keywords: Chile , Cross country analysis , Dollarization , Economic models , Exchange rates , Inflation targeting , Interest rates , Monetary policy , Monetary transmission mechanism , New Zealand , Peru , Uruguay ,
    Date: 2011–04–20
  33. By: Hart, Robert A.; Roberts, J. Elizabeth
    Abstract: Based on firm‐level payroll data from around 2000 member firms of the British Engineering Employers' Federation we examine the behavior of real hourly earnings over the 1927‐1937 cycle that contained the Great Depression. The pay statistics are based on adult male blue‐collar workers within engineering and metal working firms. They allow us to distinguish between pieceworkers and timeworkers and they are delineated by 14 occupations and 51 travel‐to‐work geographical engineering districts. We measure the cycle using national unemployment rates as well as rates that match our district breakdowns. Differences are found in the real hourly earnings cyclicality of pieceworkers and timeworkers. We attempt to relate our findings to those of modern micro panel data studies of real wage cyclicality. We offer some insight into why the estimates of real hourly pay display less procyclicality during the 1920s and 1930s than in studies based on more recent data.
    Keywords: aggregation bias; timework; piecework; the Great Depression; Real wage cyclicality
    Date: 2011–05
  34. By: Claudio Detotto; Edoardo Otranto
    Abstract: In the last decades, the interest in the relationship between crime and business cy- cle has widely increased. It is a diffused opinion that a causal relationship goes from economic variables to criminal activities, but this causal effect is observed only for some typology of crimes, such as property crimes. In this work we examine the pos- sibility of the existence of some common factors (interpreted as cyclical components) driving the dynamics of Gross Domestic Product and a large set of criminal types by using the nonparametric version of the dynamic factor model. A first aim of this exercise is to detect some comovements between the business cycle and the cyclical component of some typologies of crime, which could evidence some relationships between these variables; a second purpose is to select which crime types are related to the business cycle and if they are leading, coincident or lagging. Italy is the case study for the time span 1991 - 1 - 2004 - 12; the crime typologies are constituted by the 22 official categories classified by the Italian National Statistical Institute. The study finds that most of the crime types show a counter-cyclical behavior with respect to the overall economic performance, and only a few of them have an evident relation- ship with the business cycle. Furthermore, some crime offenses, such as bankruptcy, embezzlement and fraudulent insolvency, seem to anticipate the business cycle, in line with recent global events.
    Keywords: business cycle; crime; common factors; dynamic factor models
    JEL: E32 C3 K0
    Date: 2011
  35. By: Juha Tervala (Aboa Centre for Economics and University of Turku)
    Abstract: In this paper, I examine the international welfare effects of monetary policy. I develop a New Keynesian two-country model, where central banks in both countries follow the Taylor rule. I show that a decrease in the domestic interest rate, under producer currency pricing, is a beggar-thyself policy that reduces domestic welfare and increases foreign welfare in the short term, regardless of whether the cross-country substitutability is high or low. In the medium term, it is a beggar-thy-neighbour (beggar-thyself) policy, if the Marshall-Lerner condition is satisfied (violated). Under local currency pricing, a decrease in the domestic interest rate is a beggar-thy-neighbour policy in the short term, but a beggarthyself policy in the medium term. Both under producer and local currency pricing, a monetary expansion increases world welfare in the short term, but reduces it in the medium term.
    Keywords: Open economy macroeconomics, monetary policy, beggar-thyself, beggar-thy-neighbour, Taylor rule, welfare analysis
    JEL: E32 E52 F30 F41
    Date: 2011–04
  36. By: Garrett, Thomas A.; Wall, Howard J.
    Abstract: This paper estimates the dynamics of the personal-bankruptcy rate over the business cycle by exploiting large cross-state variation. We find that bankruptcy rates are significantly higher than normal during a recession and rise as a recession persists. After a recession ends, there is a hangover whereby bankruptcy rates begin to fall but remain above normal for several more quarters. Recovery periods see a strong bounce-back effect with bankruptcy rates significantly below normal for several quarters. Despite the significant increases in bankruptcies during recessions, the largest contributor to rising bankruptcies during these periods has tended to be the longstanding upward trend.
    Keywords: Personal Bankruptcy; Recessions
    JEL: E32 D14
    Date: 2010–08–23
  37. By: Tomer Shachmurove (Pennsylvania State University); Yochanan Shachmurove (Department of Economics, University of Pennsylvania)
    Abstract: Spain has experienced many financial crises through its history. These financial crises have varied origins. However, they do have common threads. The current recession and subsequent debt crisis follow the same pattern. The fiscal and monetary policies of the Spanish government have played a role in creating and prolonging the boom and bust cycles. Government spending, government regulation, credit institutions, budget deficits, the political climate, and international trade are discussed to illuminate the causes and effects of these business cycles. The Spanish government can take action to improve the economy and to lessen the effects of its financial crises.
    Keywords: Spain; Spanish Economy; Financial Crises, Federal Budget Deficit, Banking Crises, Subprime Mortgage; Spanish Industrial Revolution; Economic History; Political Economy; International Trade; Government Regulation
    JEL: E0 E3 E44 E5 E6 F0 G0 G18 G38 N0 N1 N2
    Date: 2011–05–03
  38. By: Prakash Kannan; Jinzhu Chen; Bharat Trehan; Prakash Loungani
    Abstract: We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors-real GDP changes (?Okun‘s Law?), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.
    Date: 2011–05–05
  39. By: Zsolt Darvas; Jean Pisani-Ferry
    Abstract: This Policy Contribution was prepared as a briefing paper for the European Parliament Economic and Monetary Affairs CommitteeÂ?s Monetary Dialogue, entitled Â?The threat of Â?currency warsÂ?: global imbalances and their effect on currencies,Â? held on 30 November 2010. Bruegel Fellows Jean Pisani-Ferry and Zsolt Darvas argue the so-called Â?currency warÂ? 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 Â?beggar-thy-neighbourÂ? policy as long as the FedÂ?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
  40. By: Julia Bersch; Tara Sinclair
    Abstract: This paper compares the output gap estimates for Mongolia based on a number of different methods. Special attention is paid to the substantial role of mining in the Mongolian economy. We find that a Blanchard and Quah-type joint model of output and inflation provides a more robust estimate of the output gap for Mongolia than the traditional statistical decompositions.
    Keywords: Demand , Economic growth , Economic models , External shocks , Inflation rates , Mining sector , Mongolia , Production , Supply ,
    Date: 2011–04–06
  41. By: Carla Soares; Paulo M.M. Rodrigues
    Abstract: The financial markets turmoil of 2007-09 impacted on the overnight segment, which is the first step of monetary policy implementation. We model the volatility of the EONIA spread as an EGARCH. However, the nature of the EGARCH considered will be different in the period before the fixed rate full allotment policy of the ECB (2004 - 2008) where we follow the approach of Hamilton (1996) and in the period afterwards (2008 - 2009) where a conventional EGARCH seems sufficient to capture the behaviour of volatility. The results suggest a greater difficulty during the turmoil for the ECB to steer the level of the EONIA spread relative to the main reference rate. The liquidity effect has been reduced since 2007 and in particular since the full allotment policy at the refinancing operations. On the other hand, the liquidity policy and especially the provision of long-term liquidity followed was effective in reducing market volatility. Liquidity provision conditions were also found to have influenced the EONIA spread only since the financial market turmoil. Fine-tuning operations contributed to stabilize money market conditions, especially during the turmoil. The EGARCH parameter estimates also suggest a structural change in the behaviour of the EONIA spread in reaction to shocks.
    JEL: E43 E52 G21
    Date: 2011
  42. By: M. Ayhan Kose; Stijn Claessens; Marco Terrones
    Abstract: This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. Specifically, we analyze cycles in credit, house prices, and equity prices. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles. We discuss how these findings can guide future research on various aspects of financial market developments.
    Keywords: Business cycles , Capital markets , Credit , Developed countries , Housing prices , Stock prices ,
    Date: 2011–04–05
  43. By: Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci
    Abstract: We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.
    Date: 2011–05–06
  44. By: Sandra Gomes; P. Jacquinot; M. Mohr; M. Pisani
    Abstract: We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating a large scale multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.
    JEL: C53 E52 F47
    Date: 2011
  45. By: Lopez, C.; Papell, David H.
    Abstract: We study the behavior of inflation rates among the 12 initial Euro countries in order to test whether and when the group convergence initially dictated by the Maastricht treaty and now by the ECB, occurs. We also assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. After the 2008 crisis, Euro area inflation rates follow the ECB’s price stability benchmark, although Greece reports relatively higher inflation.
    Keywords: groupwise convergence, inflation, Euro area, 2008 crisis.
    JEL: C32 E31
    Date: 2011
  46. By: Owyang, Michael T.; Piger, Jeremy; Wall, Howard J.
    Abstract: This paper estimates city-level employment cycles for 58 large U.S. cities and documents the substantial cross-city variation in the timing, lengths, and frequencies of their employment contractions. It also shows how the spread of city-level contractions associated with U.S. recessions has tended to follow recession-specific geographic patterns. In addition, cities within the same state or region have tended to have similar employment cycles. We find no evidence, that similarities in employment cycles are related to similarities in industry mix, although cities with more-similar high school attainment and mean establishment size have tended to have more-similar employment cycles.
    Keywords: City Employment Cycles
    JEL: E32 R12
    Date: 2010–08–12
  47. By: Dan Luo (University of Nottingham); Iris Biefang-Frisancho Mariscal (University of the West of England); Peter Howells (University of the West of England)
    Abstract: We use vector autoregressive models to estimate the effect of monetary policy on investors’ risk aversion. The latter is proxied by a variety of option based implied volatility indices for Germany and the UK. There is clear evidence of a procyclical response between monetary policy and risk aversion. Monetary policy shocks affect UK investors risk attitude for longer periods, while they have a stronger impact on German investors for a shorter period of time. There is also evidence that the Bank of England reacts to increases in risk aversion with expansionary monetary policy. In contrast, the ECB appears to tighten monetary policy, although this result may be explained by the ECB making policy decisions for a group of countries. These results are robust w.r.t. to the various risk aversion and monetary policy stance proxies.
    Keywords: Monetary policy, Risk aversion, impulse responses
    JEL: G12 E43 E44
    Date: 2011–05
  48. By: Erel, Isil (OH State University); Julio, Brandon (London Business School); Kim, Woojin (Korea University Business School); Weisbach, Michael S. (OH State University)
    Abstract: Do macroeconomic conditions affect firms' abilities to raise capital? If so, how do they affect the manner in which the capital is raised? We address these questions using a large sample of publicly-traded debt issues, seasoned equity offers, bank loans and private placements of equity and debt. Our results suggest that a borrower's credit quality significantly affects its ability to raise capital during macroeconomic downturns. For noninvestment-grade borrowers, capital raising tends to be procyclical while for investment-grade borrowers, it is countercyclical. Moreover, proceeds raised by investment grade firms are more likely to be held in cash in recessions than in expansions. Poor market conditions also affect the structure of securities offered, shifting them towards shorter maturities and more security. Overall, our results suggest that macroeconomic conditions influence the securities that firms issue to raise capital, the way in which these securities are structured and indeed firms' ability to raise capital at all. This influence likely occurs primarily through the effect of macroeconomic conditions on the supply of capital.
    Date: 2011–04
  49. By: Gasteiger, Emanuel; Zhang, Shoujian
    Abstract: We study the impact of anticipated fiscal policy changes in the Ramsey economy when agents form expectations using adaptive learning. We extend the existing framework by distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour. Moreover, we demonstrate that this behaviour can have important implications for the welfare consequences of fiscal reforms.
    Keywords: Fiscal Policy; Adaptive Learning; Oscillations
    JEL: E62 E32 D84
    Date: 2011–04–18
  50. By: Muhammad Arshad Khan (Pakistan Institute of Development Economics, Islamabad.); Musleh ud Din (Pakistan Institute of Development Economics, Islamabad.)
    Abstract: In this study, an attempt has been made of develop a dynamic macroeconometric model of Pakistan’s economy to examine the behaviour of major macroeconomic variables such as output, consumption, investment, government expenditure, money, interest rates, prices, exports, and imports. The model consists of 21 equations, of which 13 are behavioural and the rest are identities. The Engle-Granger two-step cointegration procedure is used to derive the long-run and short -run elasticities for the period 1972-2009. The test of significance of each estimated equation seems to validate the model. The estimated long-run parameters are used to perform simulation experiments to determine the model’s ability to track historical data and to assess the behaviour of the key macroeconomic variables in response to the changes in selected exogenous variables. The results indicate that the majority of macroeconomic variables follow an increasing trend over the period of simulation, 2009-2013.
    Keywords: Macroeconometric Model; Pakistan Economy, Cointegration, Forecasting
    JEL: C20 C53 E1 E6 O5 R10
    Date: 2011
  51. By: Simon Gilchrist; Egon Zakrajšek
    Abstract: This paper examines the evidence on the relationship between credit spreads and economic activity. Using an extensive data set of prices of outstanding corporate bonds trading in the secondary market, we construct a credit spread index that is—compared with the standard default-risk indicators—a considerably more powerful predictor of economic activity. Using an empirical framework, we decompose our index into a predictable component that captures the available firm-specific information on expected defaults and a residual component—the excess bond premium. Our results indicate that the predictive content of credit spreads is due primarily to movements in the excess bond premium. Innovations in the excess bond premium that are orthogonal to the current state of the economy are shown to lead to significant declines in economic activity and equity prices. We also show that during the 2007–09 financial crisis, a deterioration in the creditworthiness of broker-dealers—key financial intermediaries in the corporate cash market—led to an increase in the excess bond premium. These find- ings support the notion that a rise in the excess bond premium represents a reduction in the effective risk-bearing capacity of the financial sector and, as a result, a contraction in the supply of credit with significant adverse consequences for the macroeconomy.
    JEL: E22 E44 G12
    Date: 2011–05
  52. By: Cinquegrana, Giuseppe
    Abstract: The impact of the different financial frameworks on the long-run growth is one of the most debated arguments in the economic theory. In this paper we present a theoretical and empirical analysis of the financial systems which characterize the financial interrelation in some European countries: the bank oriented model and the market oriented one. The first one was developed during the last part of the nineteenth century in the countries where the court system was based on the civil law principles, the other one became the financial model for the countries historically characterized by a regulatory framework with the common law approach. Considering the financial accounts of some European countries (source: EUROSTAT data, OECD data), we calculate the Goldsmith’s ratios and other indicators for the period 2000-2008. For each considered country as regard to the European Monetary Union, first of all we asses the financial interrelation and intermediation and then we analyze the debt and the net financial wealth of the private non financial sector and of the Households one.
    Keywords: financial framework; civil law; common law; bank and market oriented; financial accounts; Goldsmith’s ratios.
    JEL: E44
    Date: 2010–11–20

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