nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒05‒24
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Hyperbolic Discounting and Positive Optimal Inflation By Graham, Liam; Snower, Dennis J.
  2. Monetary Policy and Stock Market Booms By Christiano, Lawrence; Ilut, Cosmin; Motto, Roberto; Rostagno, Massimo
  3. News Shocks, Price Levels, and Monetary Policy By Ryo Jinnai
  4. Inflation Targeting and Regional Inflation Persistence: Evidence from Korea By Peter Tillmann
  5. The monetary transmission mechanism in the euro area: has it changed and why? By Martina Cecioni; Stefano Neri
  6. Inflation Dynamics and the Great Recession By Laurence M. Ball; Sandeep Mazumder
  7. A Graphical Representation of an Estimated DSGE Model By Kulish, Mariano; Jones, Callum
  8. Financial frictions and optimal monetary policy in an open economy By Marcin Kolasa; Giovanni Lombardo
  9. Can Sterilized FX Purchases under Inflation Targeting be Expansionary? By MArcio Gomes Pinto Garcia
  10. Evaluating the performance of the search and matching model with sticky wages By Christopher Reicher
  11. Central banking in Latin America: changes, achievements, challenges By Klaus Schmidt-Hebbel
  12. Housing, consumption and monetary policy: how different are the U.S. and the euro area? By Alberto Musso; Stefano Neri; Livio Stracca
  13. Price Stickiness Asymmetry, Persistence and Volatility in a New Keynesian Model By Alessandro Flamini
  14. "Was Keynes's Monetary Policy, a outrance in the Treatise, a Forerunnner of ZIRP and QE? Did He Change His Mind in the General Theory?" By Jan Kregel
  15. Capital Flows, Monetary Policy and FOREX Interventions in Peru By Rossini, Renzo; Quispe, Zenon; Rodriguez, Donita
  16. Land-price dynamics and macroeconomic fluctuations By Zheng Liu; Pengfei Wang; Tao Zha
  17. Expectations, employment and prices: a suggested interpretation of the new 'farmerian' economics By Guerrazzi, Marco
  18. Political cycles in income from privatization: The case of Albania By Imami, Drini; Lami, Endrit; Kächelein, Holger
  19. Portrait of the Economist as a Young Man: Raúl Prebisch’s evolving views on the business cycle and money, 1919-1949 By Esteban Pérez Caldentey and Matías Vernengo
  20. Switching Monetary Policy Regimes and the Nominal Term Structure By Ferman, Marcelo
  21. Reinforcing EU Governance in Times of Crisis: The Commission Proposals and Beyond By Ansgar Belke
  22. The anatomy of standard DSGE models with financial frictions By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  23. Uncertainty and capacity constraints: reconsidering the aggregate production function By Gracia, Eduard
  24. Choques não Antecipados de Política Monetária e a Estrutura a Termo das Taxas de Juros no Brasil By Fernando N. de Oliveira; Leonardo Ramos
  25. Products, patents and productivity persistence: A DSGE model of endogenous growth By Holden, Tom
  26. The impact of the global financial crisis on output performance across the European Union: vulnerability and resilience. By Karin Kondor; Karsten Staehr
  27. VAR Estimates of the Housing and Stock Wealth Effects: Cross-country Evidence By Sheng Guo; Umut Unal
  28. A Small Open Economy New Keynesian DSGE model for a foreign exchange constrained economy By Regassa Senbeta S.
  29. How Are Shocks to Trend and Cycle Correlated? A Simple Methodology for Unidentified Unobserved Components Models By Daisuke Nagakura
  30. Who Bears the Cost of the Business Cycle? Labor-Market Institutions and Volatility of the Youth Unemployment Rate By Daiji Kawaguchi; Tetsushi Murao
  31. The Macroeconomic Impacts of Natural Disasters: New Evidence from Floods By Cunado, Juncal; Ferreira, Susana
  32. Why are Trend Cycle Decompositions of Alternative Models So Different? By Shigeru Iwata; Han Li
  33. Measuring Globalization: A hierarchical network approach By David Matesanz Gomez; Guillermo J. Ortega; Benno Torgler
  34. The prospect of migration, sticky wages, and 'educated unemployment' By Fan, C. Simon; Stark, Oded
  35. Competing bimetallic ratios: Amsterdam, London and bullion arbitrage in the 18th century By Pilar Nogues-Marco
  36. The pure logic of value, profit, interest By Kakarot-Handtke, Egmont
  37. Up for count? Central bank words and financial stress By Blix Grimaldi, Marianna
  38. The safe are rationed, the risky not – an extension of the Stiglitz-Weiss model By Helke Waelde
  39. Considering Macroeconomic Indicators in the Food versus Fuel Issues By Qiu, Cheng; Colson, Greg; Wetzstein, Michael
  40. Leverage as a Predictor for Real Activity and Volatility By Robert Kollmann; Stefan Zeugner

  1. By: Graham, Liam (University College London); Snower, Dennis J. (Kiel Institute for the World Economy)
    Abstract: The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.
    Keywords: optimal monetary policy, inflation targeting, unemployment, Phillips curve, nominal inertia, monetary policy
    JEL: E20 E40 E50
    Date: 2011–05
  2. By: Christiano, Lawrence (Northwestern University; National Bureau of Economic Research); Ilut, Cosmin (Duke University); Motto, Roberto (European Central Bank); Rostagno, Massimo (European Central Bank)
    Abstract: Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.
    Keywords: inflation targeting, sticky prices, sticky wages, stock price boom, DSGE model, New Keynesian model, news, interest rate rule
    JEL: E42 E58
    Date: 2011–03
  3. By: Ryo Jinnai
    Abstract: This paper presents a model in which improvement in the future TFP is, on impact, associated with increases in consumption, stock prices, and real wages, and decreases in GDP, investment, hours worked, and inflation. These predictions are consistent with empirical findings of Barsky and Sims. The model features research and development, sticky nominal wages, and the monetary authority responding to inflation and consumption growth. The proposed policy rule fits the actual Federal Funds rate as closely as an alternative policy rule responding to inflation and GDP growth, and is better at reducing distortion due to the nominal wage stickiness.
    Keywords: news shock, R&D, inflation, sticky wages, monetary policy
    JEL: E00 E30 E52
    Date: 2011–03
  4. By: Peter Tillmann (University of Giessen)
    Abstract: The adoption of a credible monetary policy regime such as inflation targeting is known to reduce the persistence of inflation fluctuations. This conclusion, however, is derived from aggregate inflation or sectoral inflation rates, not from regional inflation data. This paper studies the regional dimension of inflation targeting, i.e. the consequences of inflation targeting for regional inflation persistence. Based on data for Korean cities and provinces it is shown that the adoption of inflation targeting leads (i) to a fall in inflation persistence at the regional level and (ii) to a reduction in the cross-regional heterogeneity in inflation persistence. A common factor model lends further support to the role of the common component, and hence monetary policy, for regional inflation persistence.
    Keywords: inflation targeting, inflation persistence, monetary policy regime, regional inflation, factor model
    JEL: E31 E52 R11
    Date: 2011
  5. By: Martina Cecioni (Bank of Italy); Stefano Neri (Bank of Italy)
    Abstract: Based on a structural VAR and a dynamic general equilibrium model, we provide evidence of the changes in the monetary transmission mechanism (MTM) in the European Monetary Union after the adoption of the common currency in 1999. The estimation of a Bayesian VAR over the periods before and after 1999 suggests that the effects of a monetary policy shock on output and prices have not significantly changed over time. We claim that this cannot be the final word on the evolution of the MTM as changes in the conduct of monetary policy and the structure of the economy may have offset each other giving rise to similar responses of output and inflation to monetary policy shocks between the two periods. The estimation of a DSGE model with several real and nominal frictions over the two sub-samples shows that monetary policy has become more effective in stabilizing the economy as the result of a decrease in the degree of nominal rigidities and a shift in monetary policy towards inflation stabilization.
    Keywords: monetary policy, transmission mechanism, Bayesian methods
    JEL: E32 E37 E52 E58
    Date: 2011–04
  6. By: Laurence M. Ball; 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.
    JEL: E31
    Date: 2011–05
  7. By: Kulish, Mariano; Jones, Callum
    Abstract: We write a New Keynesian model as an aggregate demand curve and an aggregate supply curve, relating inflation to output growth. The graphical representation shows how structural shocks move aggregate demand and supply simultaneously. We estimate the curves on US data from 1948 to 2010. The Great Recession in 2008-09 is explained by a collapse of aggregate demand driven by adverse preference and permanent technology shocks, and expectations of low inflation.
    JEL: E27 E37 E58
    Date: 2011–05
  8. By: Marcin Kolasa (National Bank of Poland and Warsaw School of Economics.); Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement. JEL Classification: E52, E61, E44, F36, F41.
    Keywords: financial frictions, open economy, optimal monetary policy.
    Date: 2011–05
  9. By: MArcio Gomes Pinto Garcia (Department of Economics PUC-Rio)
    Abstract: Unlike common wisdom, sterilized FX purchases under inflation targeting, i.e., those that keep the interest rate at the level targeted by the central bank, generally increase aggregate demand. We resort to a simple model with a credit channel to argue that FX purchases, by funding bank credit, end up increasing aggregate and money demand, while expanding loans and reducing the loan interest rate. Therefore, restoring the interest rate to the level previous to the FX purchase may not be sufficient to avoid the expansionary effect; the new money market equilibrium, at the same interest rate, will entail a larger money supply, higher output and larger money demand. Recent Brazilian evidence is reviewed, showing that this effect may be empirically relevant. If this is the case, inflation targeters may have another reason to be concerned when conducting FX sterilized interventions, besides their high cost and controversial effectiveness in preventing nominal appreciation. FX sterilized purchases may not only fail to prevent nominal appreciation, but also boost activity and inflation, thereby appreciating the real exchange rate.
    Date: 2011–04
  10. By: Christopher Reicher
    Abstract: Several authors have proposed staggered wage bargaining as a way to introduce sticky wages into search and matching models while preserving individual rationality. I evaluate the quantitative implications of such an approach. I feed through a series of estimated shocks from US data into a search and matching model with sticky prices and wages. I compare the implications of how the sticky wages enter into the hiring decision, and there seems to be a tradeoff between generating business cycle volatility and matching the lack of a long-run relationship between vacancy creation and inflation. With regard to wages, the sticky wage model unconditionally does a better job at matching wages than the flexible wage model
    Keywords: wages, sticky prices, staggered Nash bargaining, inflation, new hires, search and matching, business cycles
    JEL: E24 E25 E32 J23 J31 J63
    Date: 2010–12
  11. By: Klaus Schmidt-Hebbel (Catholic Universty of Chile)
    Abstract: Latin America's central banks were strengthened in the 1990s by independence laws, adoption of new policy regimes (foremost inflation targeting), and more transparent policy decisions bound by ex-ante rules and ex-post accountability. Central bank modernization - supported by significant fiscal adjustment and financial-sector strengthening - led most Latin American countries to converge to one-digit inflation rates and contributed to higher and more stable growth than in the past. Yet the region's new policy framework was put to severe testing by the global financial crisis and recession. Quick and innovative policy responses by the region's central banks helped domestic financial systems and the real economy to resist well the massive financial and real consequences of the banking crisis and recession in industrial countries. Empirical evidence reported here shows that the central banks' new policy framework and policy response during the crisis dampened significantly the amplitude of the recession. Having weathered well the global financial crisis and recession, now Latin America's central banks face a large array of policy challenges, which are reviewed in this lecture. Some are common to central banks in industrial and emerging economies, derived from the crisis itself and the issues it poses for improving the role of central banks in attaining more effectively both monetary and financial stability. Other challenges are idiosyncratic to emerging economies in the region (and elsewhere) that are facing renewed growth, high commodity prices, large capital inflows, and real exchange-rate appreciation.
    Keywords: Monetary Policy, Central Banks, Latin America
    JEL: E52 E58 O54
    Date: 2011–05
  12. By: Alberto Musso (European Central Bank); Stefano Neri (Banca d’Italia); Livio Stracca (European Central Bank)
    Abstract: This paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the U.S. and the euro area. First, it establishes some stylised facts concerning key variables in the housing market on the two sides of the Atlantic, such as real house prices, residential investment and mortgage debt. It then presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of monetary policy, credit supply and housing demand shocks on the housing market and the broader economy. The analysis shows that similarities outweigh differences as far as the housing market is concerned. The empirical evidence suggests a stronger role for housing in the transmission of monetary policy shocks in the U.S. The evidence is less clear-cut for housing demand shocks. Finally, credit supply shocks seem to matter more in the euro area.
    Keywords: residential investment, house prices, credit, monetary policy
    JEL: E22 E44 E52
    Date: 2011–04
  13. By: Alessandro Flamini (Department of Economics, The University of Sheffield)
    Abstract: In a two-sector New-Keynesian model, this paper shows that the dispersion in the degree of sectoral price stickiness plays a key role in the determination of the dynamics of aggregate inflation and, consequently, of the whole economy. The dispersion in price stickiness reduces the persistence of inflation and, to a smaller extent, of the interest rate. It also reduces the volatility of inflation, the interest rate and the output-gap. Thus two economies with the same average degree of price stickiness but a different variance may behave very differently, highlighting the relevance of sectoral data for economic estimations and forecasts.
    Keywords: Sectoral asymmetries, price stickiness, New Keynesian model, persistence, volatility.
    JEL: E31 E32 E37 E52
    Date: 2011–05
  14. By: Jan Kregel
    Abstract: At the end of 1930, as the 1929 US stock market crash was starting to have an impact on the real economy in the form of falling commodity prices, falling output, and rising unemployment, John Maynard Keynes, in the concluding chapters of his Treatise on Money, launched a challenge to monetary authorities to take "deliberate and vigorous action" to reduce interest rates and reverse the crisis. He argues that until "extraordinary," "unorthodox" monetary policy action "has been taken along such lines as these and has failed, need we, in the light of the argument of this treatise, admit that the banking system can not, on this occasion, control the rate of investment, and, therefore, the level of prices." The "unorthodox" policies that Keynes recommends are a near-perfect description of the Japanese central bank's experiment with a zero interest rate policy (ZIRP) in the 1990s and the Federal Reserve's experiment with ZIRP, accompanied by quantitative easing (QE1 and QE2), during the recent crisis. These experiments may be considered a response to Keynes's challenge, and to provide a clear test of his belief in the power of monetary policy to counter financial crisis. That response would appear to be an unequivocal No.
    Date: 2011–05
  15. By: Rossini, Renzo (Central Reserve Bank of Peru); Quispe, Zenon (Central Reserve Bank of Peru); Rodriguez, Donita (Central Reserve Bank of Peru)
    Abstract: This article explains the main features of the sterilized intervention in the foreign exchange market and the use of non-conventional policy instruments as applied by the Central Reserve Bank of Peru in order to avoid credit booms or busts in a context of a partially dollarized financial system. This monetary policy framework is based on a risk management approach that includes as the main policy tool the short-term interest rate within an inflation targeting regime. This framework helped to reduce the impact of the recent global financial crisis on the Peruvian economy and allowed to rejoin the path of growth with low inflation, avoiding major disruptions from the surge of capital inflows.
    Keywords: Central banks, policy framework
    JEL: E52 E58 F31 F32
    Date: 2011–05
  16. By: Zheng Liu; Pengfei Wang; Tao Zha
    Abstract: We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms' credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment.
    JEL: E21 E27 E32 E44
    Date: 2011–05
  17. By: Guerrazzi, Marco
    Abstract: This paper aims at providing a critical assessment of the new ‘Farmerian’ economics, i.e. the recent Farmer’s attempt to provide a new micro-foundation of the General Theory grounded on modern search and business cycle theories. Specifically, I develop a theoretical model that summarizes the main arguments of the suggested approach by showing that a special importance has to be attached to the search mechanism, the choice of units and ‘animal spirits’ modelling. Thereafter, referring to self-made real-business-cycle experiments, I discuss the main empirical implications of the resulting framework. Finally, I consider its policy implications by stressing the problematic nature of demand management interventions and the advisability of extending the role of the central bank in preventing financial bubbles and crashes.
    Keywords: Old Keynesian Economics; search; demand constrained equilibrium; Shimer puzzle; economic policy.
    JEL: E12 E24
    Date: 2010–05–10
  18. By: Imami, Drini; Lami, Endrit; Kächelein, Holger
    Abstract: The phenomenon of manipulation of the economy by the incumbent for electoral purpose is called Political Business Cycles (PBC). Using policy control economic instruments, such as fiscal and monetary instruments, governments may manipulate the economy to gain electoral advantage by producing growth and decreasing unemployment before elections. Earlier research on PBC in Albania found clear evidence of fiscal expansion before elections. In addition to increased income from taxes and borrowing, another source of financing the increased fiscal expansion in transition countries may be income from privatization, which is also the object of the analysis of this paper. In our analysis we apply standard econometric approach, used widely for research related to PBC. We test if income from privatization increases before elections. We find statistically significant increase of income from privatization before general (parliamentary) elections, which may lead us to conclude that one of the reasons may be to finance increased expenditures before elections. Another motivation, behind this behavior of the incumbent, may be rent - seeking. These results are of particular interest, as it is for the first time that income from privatization is analyzed in conjunction with PBC. --
    Keywords: Albania,Political Business Cycle,Privatization
    JEL: E32 O23 H61
    Date: 2011
  19. By: Esteban Pérez Caldentey and Matías Vernengo
    Abstract: This paper analyzes Raúl Prebisch’s less familiar contributions to economic theory, related to the business cycle, and heavily informed by the Argentinean experience. His views of the cycle emphasize the common nature of the cycle in the center and the periphery as one unified phenomenon. While his rejection of orthodoxy is less than complete, some elements of what would become a more Keynesian position are developed. In particular, a preoccupation with the management of the balance of payments and the need for capital controls as a macroeconomic management tool, considerably before Keynes and White’s plans led to the Bretton Woods agreement. In the process it is clear that Prebisch developed several ideas that are still relevant to understand cyclical fluctuations in the periphery, and became more concerned with the capacity of taking advantage of cyclical booms to maintain sustained economic growth.
    Keywords: Business Cycle, Macroeconomic Policy, History of Economic Thought JEL Codes: B31, E32, E65
    Date: 2011
  20. By: Ferman, Marcelo
    Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that is capable of generating substantial degrees of endogenous persistence in productivity. When products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, resulting in aggregate productivity persistence. Our model also generates sizeable delayed movements in productivity in response to preference shocks, providing a form of endogenous news shock. Finally, if we calibrate our model to match a high aggregate mark-up then we can replicate the negative response of hours to a positive technology shock, even without the inclusion of any frictions.
    Date: 2011–05
  21. By: Ansgar Belke
    Abstract: The recent extensive package introduced by the Commission is the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union. Broader and enhanced surveillance of fiscal policies, but also macroeconomic policies and structural reforms are sought in the light of the shortcomings of the existing legislation. New enforcement mechanisms are foreseen for non-compliant Member States. In this very crucial and important package of 6 legislative dossiers this paper tries to identify critical missing or redundant and/ or unworkable elements within the Commission package. Moreover, it checks what (if anything) is missing outside and beyond the proposals in order to make the whole package of governance reform complete and workable as, for instance, crisis resolution mechanisms and debt restructuring, EMF, project bonds and Eurobonds.
    Keywords: EU governance; European Council; European Financial Stability Facility; European Monetary Fund; policy coordination; scoreboard, Stability and Growth Pact
    JEL: E61 E62 P48
    Date: 2010–12
  22. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: In this paper we compare two standard extensions to the New Keynesian model featuring financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. Our goal is to compare the workings of the two setups. Towards this end, we tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we make a thorough analysis of the two frameworks using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to generate hump-shaped impulse responses and, for some important variables, shows moments that are inconsistent with the data by a large margin.
    Keywords: financial frictions, DSGE models, business cycle accounting
    JEL: E30 E44
    Date: 2011
  23. By: Gracia, Eduard
    Abstract: The Cobb-Douglas function is today one of the most widely-adopted assumptions in economic modeling, yet both its theoretical and empirical basis have long been under question. The purpose of this paper is to build an alternative production function on neoclassical microfoundations to address these issues, and then test it empirically. An analysis of annual U.S. data from 1949 to 2008 suggest the model explains nearly 85 percent of GDP fluctuations, and a nonnested model comparison test concludes that it is empirically more robust than the Cobb-Douglas. Furthermore, both contemporary and lagged aggregate capital are rejected as explanatory variables. This lends support to the old 'Cambridge Critique', which ustained that using valueweighted capital aggregates to explain production simply made no sense, and also strengthens the model in this paper for, unlike the Cobb-Douglas, it does not model installed capacity as aggregate capital, but as a sunk cost generating economic rents. Taken at face value, these results not only pose a question on any macroeconomic model assuming a Cobb-Douglas function but also point towards an alternative interpretation of phenomena such as the way monetary policy impacts productivity. --
    Keywords: production function,Cobb-Douglas,capital controversy
    JEL: E22 E23
    Date: 2011
  24. By: Fernando N. de Oliveira; Leonardo Ramos
    Abstract: This paper has two objectives. One is to identify non anticipated monetary shocks using future contracts of DI. The second objective is to study the relation between these shocks and the term structure of interest rate. Our empirical evidence suggests that, albeit in a partial manner, the market anticipates most interest rate decisions of the Central Bank. We also show that, in general, non anticipated monetary shocks are capable of affecting the term structure of interest rates.
    Date: 2011–04
  25. By: Holden, Tom
    Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that is capable of generating substantial degrees of endogenous persistence in productivity. When products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, resulting in aggregate productivity persistence. Our model also generates sizeable delayed movements in productivity in response to preference shocks, providing a form of endogenous news shock. Finally, if we calibrate our model to match a high aggregate mark-up then we can replicate the negative response of hours to a positive technology shock, even without the inclusion of any frictions.
    Keywords: productivity persistence; patent protection; oligopoly; research and development
    JEL: E32 E37 L16 O31 O33 O34
    Date: 2011–05
  26. By: Karin Kondor; Karsten Staehr
    Abstract: This paper uses regression analyses to explain the different output performance in the 27 countries in the EU based on measures of their pre-existing vulnerability and resilience. Rapid financial deepening and high financial leverage, both domestically and externally, were followed by larger output losses during the crisis. The level of financial depth, on the other hand, did not affect output negatively. A large degree of trade openness was associated with weaker output performance, possibly because of falling export demand during the crisis. Finally, government deficits and debt stocks do not seem have impacted negatively on output. The Baltic States stand out as having much explanatory power in the sample due to their large output losses during the crisis.
    Keywords: global financial crisis, contagion, business cycles, GDP
    JEL: E32 F4
    Date: 2011–05–13
  27. By: Sheng Guo (Department of Economics, Florida International University); Umut Unal (Department of Economics, Florida International University)
    Abstract: We estimate the wealth effects of housing and stock market wealth using time-series data for eight developed countries. In estimation we employ the structural vector-autoregressive regressions (SVAR), which articulate the dynamic interactions of shocks to housing prices, stock values, and disposable incomes. Our results show that for these countries the initial consumption response to housing price shocks is greater than to stock market capitalization shocks, but the long-run consumption response to the latter is more persistent than to the former.
    Keywords: Wealth Effect, Consumption, Housing, Stock Market
    JEL: E21 E44 D12 D14 G12 R31
    Date: 2011–05
  28. By: Regassa Senbeta S.
    Abstract: Firms in many low income countries depend entirely on imported capital and intermediate inputs. As a result, in these countries economic activity is considerably in?uenced by the capacity of the economy to import these inputs which, in turn, depends on the availability and cost of foreign exchange. In this study we introduce foreign exchange availability as an additional constraint faced by ?rms into an otherwise standard small open economy New Keynesian DSGE model. The model is then calibrated for a typical Sub Saharan African economy and the behaviour of the model in response to both domestic and external shocks is compared with the standard model. The impulse response functions of the two models are the same qualitatively for most of the variables though the model with foreign exchange constraint generates more variability in most of the variables than the standard model. This behaviour of the model with foreign exchange constraint is consistent with the stylized facts of low income countries. Furthermore, for variables for which the two models have di¤erent impulse response functions, the model with foreing exchange constraint is both theoretically consistent and matches the stylized facts.
    Date: 2011–05
  29. By: Daisuke Nagakura
    Abstract: In this paper, we propose a simple methodology for investigating how shocks to trend and cycle are correlated in unidentified unobserved components models, in which the correlation is not identified. The proposed methodology is applied to U.S. and U.K. real GDP data. We find that the correlation parameters are negative for both countries. We also investigate how changing the identification restriction results in different trend and cycle estimates.
    Keywords: Unobserved components model, Trend, Cycle, Business Cycle Analysis
    Date: 2011–03
  30. By: Daiji Kawaguchi; Tetsushi Murao
    Abstract: The way age-specific unemployment rates fluctuate over the business cycle differs significantly across countries. This paper examines the effect of labor-market institutions on the fluctuations of age-specific unemployment rates based on panel data of 18 Organisation for Economic Co-operation and Development (OECD) countries between 1971 and 2000. Empirical results suggest that the cost of the business cycle disproportionately falls on youths in countries with stricter employment protection and higher union coverage. These results are consistent with a theoretical prediction that a higher adjustment cost of an existing workforce induces the employment adjustment of new entrants into the labor market.
    JEL: E24 J80
    Date: 2011–03
  31. By: Cunado, Juncal; Ferreira, Susana
    Abstract: We analyze the economic impacts of floods using new data on 3,184 large flood events in 118 countries between 1985 and 2008. We use panel vector auto-regressions to trace the dynamic response of output to three types of flood shocks. Our results robustly indicate that flood shocks tend to have a positive average impact on GDP growth, that this impact is limited to developing countries, that the effect is not confined to the agricultural sector, and that it is stronger when it is accompanied by an increase in gross fixed capital formation.
    Keywords: Natural Disasters, Floods, VAR, Economic growth, Macroeconomic Shocks, Environmental Economics and Policy, International Development, Public Economics,
    Date: 2011–05–03
  32. By: Shigeru Iwata; Han Li
    Abstract: When a certain procedure is applied to extract two component processes from a single observed process, it is necessary to impose a set of restrictions that defines two components. One popular restriction is the assumption that the shocks to the trend and cycle are orthogonal. Another is the assumption that the trend is a pure random walk process. The unobserved components (UC) model (Harvey, 1985) assumes both of the above, whereas the BN decomposition (Beveridge and Nelson, 1981) assumes only the latter. Quah (1992) investigates a broad class of decompositions by making the former assumption only. This paper provides a general framework in which alternative trend-cycle decompositions are regarded as special cases, and examines alternative decomposition schemes from the perspective of the frequency domain. We find that as long as the US GDP is concerned, the conventional UC model is inappropriate for the trend-cycle decomposition. We agree with Morley et al (2003) that the UC model is simply misspecified. However, this does not imply that the UC model that allows for the correlated shocks is a better model specification. The correlated UC model would lose many attractive features of the conventional UC model.
    Keywords: Beveridge-Nelson decomposition, Unobserved Component Models
    JEL: E44 F36 G15
    Date: 2011–03
  33. By: David Matesanz Gomez (University of Oviedo); Guillermo J. Ortega (Universidad Nacional de Quilmes); Benno Torgler (QUT)
    Abstract: This paper investigates the business cycle co-movement across countries and regions since the middle of the last century as a measure for quantifying the ongoing globalization process of the world economy. Our methodological approach is based on analysis of a correlation matrix and the networks it contains. Such an approach summarizes the interaction and interdependence of all elements and it represents a more accurate measure of the global interdependence involved in the economic system. Our results show (1) that the dynamics of globalization has been more driven by synchronization in regional growth patterns than by the synchronization of the world economy as a whole in contrast with other empirical works and (2) that world crisis periods increase dramatically the global co movement in the world economy.
    Keywords: Globalization, regionalism, correlation matrix, clustering, synchronization
    JEL: E32 C45 O47
    Date: 2011–04–18
  34. By: Fan, C. Simon; Stark, Oded
    Abstract: An increase in the probability of work abroad, where the returns to schooling are higher than at home, induces more individuals in a developing country to acquire education, which leads to an increase in the supply of educated workers in the domestic labor market. Where there is a sticky wage-rate, the demand for labor at home will be constant. With a rising supply and constant demand, the rate of unemployment of educated workers in the domestic labor market will increase. Thus, the prospect of employment abroad causes involuntary 'educated unemployment' at home. A government that is concerned about 'educated unemployment' and might therefore be expected to encourage unemployed educated people to migrate will nevertheless, under certain conditions, elect to restrict the extent of the migration of educated individuals. --
    Keywords: The prospect of migration,Sticky wages,'Educated unemployment',Government intervention
    JEL: E24 F22 J24 O15
    Date: 2011
  35. By: Pilar Nogues-Marco
    Abstract: This article analyses the stability of bimetallism in the mid-18th century for the case of two large centres that had different legal ratios and only one international market ratio. A new theoretical framework is articulated for the situation of international independence to set legal bimetallic ratios by monetary authorities in different countries. Then, using new data handcollected from archival sources and relevant to the two main bullion markets in the 18th century, Amsterdam and London, this theoretical framework is utilised to identify the regimes that actually prevailed during that period, in which Amsterdam was effectively on the bimetallic standard while London was on the gold standard de facto.
    Keywords: Bimetallism, Bimetallic stability, Bullion markets, Arbitrage, Specie-point mechanism, Melting-minting points
    JEL: E42 N13 F15 N23
    Date: 2011–04
  36. By: Kakarot-Handtke, Egmont
    Abstract: Standard economic models are based on axioms that epitomize the fundamental behavioral assumptions. This approach is not conductive to convincing results. The suggested change of perspective is guided by the question: what is the minimum set of propositions for the consistent reconstruction of the evolving money economy? We start with three structural axioms and determine their real world implications. The claim of generality entails that it should be possible to demonstrate that well-understood parts of theoretical economics fit consistently into the structural axiomatic framework. We focus here on the classical theory of value as expounded by J. S. Mill.
    Keywords: New framework of concepts; Structure-centric; Axiom set; Labour theory of value; Structural value theorem; Profit; Distributed profit; Rate of interest; Reproducibility
    JEL: E43 B12 D00 B41
    Date: 2011–05–11
  37. By: Blix Grimaldi, Marianna (Monetary Policy Department, Central Bank of Sweden)
    Abstract: While knowing there is a financial distress 'when you see it' might be true, it is not particularly helpful. Indeed, central banks have an interest in understanding more systematically how their communication affects the markets, not least in order to avoid unnecessary volatility; the markets for their part have an interest in better deciphering the message of central banks, especially of course with regard to the conduct of future monetary policy. In this paper we use a novel approach rooted in textual analysis to begin to address these issues. Building on previous work from textual analysis, we are able to use quantitative methods to help identify and measure financial stress. We apply the techniques to the European Central Banks Monthly Bulletin and show that the results give a much more complete and nuanced picture of market distress than those based only on market data and may help improve how the Central Banks communication is designed and understood.
    Keywords: Financial stress; central bank communication; textual analysis; logit distribution
    JEL: E50 E58 G10
    Date: 2011–04–01
  38. By: Helke Waelde (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: Using only two risk types in the Stiglitz-Weiss model it turns out that the return function for banks has to be double hump-shaped. We derive the demand for loans and the supply of loans and find that loans are provided at two interest rates in equilibrium. The safe borrowers are rationed at the lower interest rate, whereas the risky borrowers are not rationed at all. Compared to the existing literature this suggests that the more heterogenous the risk types are, the less credit is rationed. However, credit-rationing persists in equilibrium as long as we consider a discrete number of types.
    JEL: E43 E52 E58 D44
    Date: 2011–05–04
  39. By: Qiu, Cheng; Colson, Greg; Wetzstein, Michael
    Abstract: In this study, a Structural Vector Autoregression model (SVAR) is employed to decompose how supply/demand structural shocks affect food and fuel prices within fuel and corn markets. Results indicate that the relative importance of each structural shock in explaining the variation of corn prices is different. Our findings support the hypothesis that corn prices increase as a response to those positive demand shocks in the short run, while in the long run, global competitive agricultural commodities markets as well as positive supply shocks respond to commodity price shocks, restoring prices to its long-run trends. In conclusion, fundamental market forces of demand and supply as well as real economic aggregated demand shocks were the main contributors of the 2007-2008 food price spike.
    Keywords: Food, fuel, Food Consumption/Nutrition/Food Safety, Resource /Energy Economics and Policy,
    Date: 2011
  40. By: Robert Kollmann; Stefan Zeugner
    Abstract: This paper explores the link between the leverage of the US financial sector, of households and non-financial businesses, and real activity. We document that leverage is negatively correlated with the future growth of real activity, and positively linked to the conditional volatility of future real activity and of equity returns. The joint information in sectoral leverage series is more relevant for predicting future real activity than the information contained in any individual leverage series. Using in-sample regressions and out-of sample forecasts, we show that the predictive power of leverage is roughly comparable to that of macro and financial variables commonly used by forecasters. Leverage information would not have allowed to predict thr "Great Recession" of 2008-2009 any better than macro/financial predictors.
    Keywords: Leverage; Financial crisis; Forecasts; Real activity; Volatility
    JEL: E32 E37 C53 G20
    Date: 2011–04

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