nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒06‒18
38 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Effects of Monetary Policy "News" and "Surprises" By Fabio Milani; John Treadwell
  2. Fiscal Multipliers and Policy Coordination By Gauti B. Eggertsson
  3. Estimating Central Bank preferences in a small open economy: Sweden 1995-2009 By Gaetano D’Adamo
  4. Oil Price Shocks and Cyclical Dynamics in an Asymmetric Monetary Union By Volker Clausen; Hans-Werner Wohltmann
  5. Conduite et efficacité de la politique économique : les leçons de la crise By Landais, Bernard
  6. Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription? By Kenneth Kuttner
  7. Potential output in DSGE models By Igor Vetlov; Tibor Hlédik; Magnus Jonsson; Henrik Kucsera; Massimiliano Pisani
  8. Financial Frictions and Credit Spreads By Ke Pang; Pierre L. Siklos
  9. Analiza empirică a sincronizării ciclului de afaceri şi a similarităţii şocurilor între România şi zona euro By Bojeşteanu, Elena; Manu, Ana Simona
  10. The Global Financial Crisis: Countercyclical Fiscal Policy Issues and Challenges in Malaysia, Indonesia, the Philippines, and Singapore By Doraisami, Anita
  11. Sticky Prices vs. Sticky Information – A Cross-Country Study of Inflation Dynamics By Christian Bredemeier; Henry Goecke
  12. Should central banks lean against changes in asset prices? By Sylvain Leduc; Jean-Marc Natal
  13. Joint Estimates of Automatic and Discretionary Fiscal Policy: the OECD 1981-2003 By Julia Darby; Jacques Melitz
  14. Chile’s Fiscal Rule as Social Insurance By Eduardo Engel; Christopher Neilson; Rodrigo Valdés
  15. The information content of central bank interest rate projections: Evidence from New Zealand By Gunda-Alexandra Detmers; Dieter Nautz
  16. Does Monetary Policy Affect Stock Market Uncertainty? – Empirical Evidence from the United States By Mario Jovanovic
  17. Procyclicality of Fiscal Policy in Emerging Countries: the Cycle is the Trend By Michel Strawczynski; Joseph Zeira
  18. Lumpy investment in sticky information general equilibrium By Fabio Verona
  19. Assessment of Consensus Forecasts Accuracy: The Czech National Bank Perspective By Filip Novotny; Marie Rakova
  20. Introducing Financial Assets into Structural Models By Jorge Fornero
  21. Fiscal Stimulus and Distortionary Taxation By Thorsten Drautzburg; Harald Uhlig
  22. Fiscal Adjustment to Shocks in Commodity-Producing Countries By Karlygash Kuralbayeva
  23. IMPACT OF MACROECONOMIC VARIABLES ON STOCK MARKET: THE CASE OF IRAN By Shahnaz Mashayekh; Hadise Haji Moradkhani; Mahboobeh Jafari
  24. Presentation of the Three-ME model: Multi-sector Macroeconomic Model for the Evaluation of Environmental and Energy policy By Frédéric Reynes; Yasser Yeddir-Tamsamani; Gaël Callonec
  25. Has the Financial Crisis eroded Citizens’ Trust in the European Central Bank? - Evidence from 1999-2010 By Felix Roth; Daniel Gros; Felicitas Nowak-Lehmann
  26. Central Bank Forecasts as a Coordination Device By Jan Filacek; Branislav Saxa
  27. Central bank transparency, the accuracy of professional forecasts, and interest rate volatility By Menno Middeldorp
  28. A Model of Shadow Banking By Nicola Gennaioli; Andrei Shleifer; Robert W. Vishny
  29. The effectiveness of economic policy and position in the cycle The case of tax reductions on overtime in France By Eric Heyer
  30. Public Infrastructure Investment and Fiscal Sustainability in Latin America: Incompatible Goals? By Luis Carranza; Christian Daude; Ángel Melguizo
  31. An empirical estimation of Balassa – Samuelson Effect in case of Eastern European Countries By Paun, Cristian
  32. Do Government Purchases Affect Unemployment? By Holden, Steinar; Sparrman, Victoria
  33. Explicit Evidence on an Implicit Contract By Andrew T. Young; Daniel Levy
  34. Wage Adjustment Practices and the Link between Price and Wages: Survey Evidence from Colombian Firms By Ana María Iregui B.; Ligia Alba Malo B.; María Teresa Ramírez G.
  35. Financial stability, new macro prudential arrangements and shadow banking: regulatory arbitrage and stringent Basel III regulations By Ojo, Marianne
  36. Federal Reserve policies and financial market conditions during the crisis By Scott Brave; Hesna Genay
  37. OLong-run Money Demand in OECD Countries – Cross-Member Cointegration By Frauke Dobnik
  38. Short-Term GDP Forecasting Using Bridge Models: a Case for Chile By Marcus Cobb; Gonzalo Echavarría; Pablo Filippi; Macarena García; Carolina Godoy; Wildo González; Carlos Medel; Marcela Urrutia

  1. By: Fabio Milani (Department of Economics, University of California-Irvine); John Treadwell (Department of Economics, University of California-Irvine)
    Abstract: There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or “surprise” shocks, which is smaller and more short-lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or "news." News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.
    Keywords: Anticipated and unanticipated monetary policy shocks; News shocks; New Keynesian model with news shocks; Effects of monetary policy onoutput
    JEL: E32 E52 E58
    Date: 2011–05
  2. By: Gauti B. Eggertsson
    Abstract: This paper analyzes the effectiveness of fiscal policy at zero nominal interest rates. I solve a stochastic general equilibrium model with sticky prices assuming that the government cannot commit to future policy. Real government spending increases demand by boosting public consumption. Deficit spending increases demand by generating inflation expectations. I compute multipliers of government spending that calculate by how much each dollar of spending increases output. Both the deficit and the real spending multipliers can be large, but the multiplier of deficit spending depends critically on monetary and fiscal cooperation: it can be large with cooperation and zero without it. The theory suggests one interesting interpretation of why recovery measures–such as fiscal spending, exchange interventions, and large increases in the money supply–had a smaller effect on nominal demand in Japan during the Great Recession (1992-2006) than during the US's Great Depression (1929-1941). In both episodes, the short-term nominal interest rate was close to zero. The theory suggests that part of the difference can be explained by the fact that, while monetary and fiscal policy were coordinated in the US during the Great Depression, they were not in Japan during the Great Recession. The overall conclusion of the paper is that the effect of given policy actions depends crucially on the institutional setup in the economy.
    Date: 2011–05
  3. By: Gaetano D’Adamo (Department of Economics, University of Bologna)
    Abstract: Interest Rate rules are often estimated as simple reaction functions linking the policy interest rate to variables such as (forecasted) inflation and the output gap; however, the coefficients estimated with this approach are convolutions of structural and preference parameters. I propose an approach to estimate Central Bank preferences starting from the Central Bank's optimization problem within a small open economy. When we consider open economies in a regime of Inflation Targeting, the issue of the role of the exchange rate in the Monetary Policy rule becomes relevant. The empirical analysis is conducted on Sweden, to verify whether the recent stabilization of the Krona/Euro exchange rate was due to “Fear of Floating”; the results show that the exchange rate might not have played a role in monetary policy, suggesting that the stabilization probably occurred as a result of increased economic integration and business cycle convergence.
    Keywords: Interest Rate Rules, Inflation Targeting, Central Bank Preferences, Fear of Floating.
    JEL: E42 E52 F31
    Date: 2011–05
  4. By: Volker Clausen; Hans-Werner Wohltmann
    Abstract: This paper analyzes the dynamic effects of anticipated and unanticipated oil price increases in a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. Common external oil price disturbances lead in this asymmetric macroeconomic setup to temporary divergences in output developments across the monetary union. In the case of anticipated oil price increases the relative cyclical position is reversed in the course of the adjustment process. Complete stabilization of the output variables throughout the overall adjustment process requires a restrictive monetary policy being time inconsistent from a quantitative but time consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of the nominal money stock but actually implements a reduction, which is less restrictive than the original announcement.
    Keywords: EMU; international policy transmission; oil price shock; time inconsistency; monetary policy
    JEL: E63 F41
    Date: 2011–03
  5. By: Landais, Bernard
    Abstract: This paper intend to keep some lessons from the recent crisis for the monetary and fiscal stabilization policies. We develop six propositions about these policies : The monetary policy may be wrongly orientated before a crisis ; The non-orthodox monetary actions are effective but dangerous; The Central Bank must adopt an enlarged framework for her strategy ; Fiscal Policy has not been completely rehabilited by crisis events and its efficiency is dubious ; In Euro Zone, monetary policy has been a problem that fiscal policies are not able to solve ; In Euro Zone, public debts are a big problem that monetary molicy can solve.
    Keywords: Politique monétaire; Politique budgétaire; Crise économique; Principales leçons
    JEL: E32 H60 B22 E52 E60
    Date: 2011–06–01
  6. By: Kenneth Kuttner (Williams College)
    Abstract: Bernanke and Gertler’s influential 1999 article "Asset Price Bubbles and Monetary Policy" made the case that monetary policy should respond to asset prices only to the extent that they have implications for future inflation. This paper revisits that prescription in light of the 2007– 09 financial crisis. After reviewing the Bernanke-Gertler logic, the paper surveys the recent evolution of views on the appropriate policy response to asset price fluctuations, and discusses the conditions under which a proactive policy would be justified. There is almost no discernible relationship between interest rates and stock and property prices across countries during the years leading up to the crisis, however. While a theoretical case could be made to give some weight to financial stability in setting monetary policy, the evidence presented in the paper suggests that incremental interest rate adjustments are unlikely to be effective in restraining excessive asset price appreciation.
    JEL: E52 E58 E44 G12
    Date: 2011–05
  7. By: Igor Vetlov (Bank of Lithuania, Department of Economics, Economic Research Division, Gedimino pr. 6, LT-01103 Vilnius, Lithuania.); Tibor Hlédik (Czech National Bank.); Magnus Jonsson (Sveriges Riksbank.); Henrik Kucsera (Magyar Nemzeti Bank.); Massimiliano Pisani (Banca d’Italia.)
    Abstract: In view of the increasing use of Dynamic Stochastic General Equilibrium (DSGE) models in the macroeconomic projections and the policy process, this paper examines, both conceptually and empirically, alternative notions of potential output within DSGE models. Furthermore, it provides historical estimates of potential output/output gaps on the basis of selected DSGE models developed by the European System of Central Banks’ staff. These estimates are compared to the corresponding estimates obtained applying more traditional methods. Finally, the paper assesses the usefulness of the DSGE model-based output gaps for gauging inflationary pressures. JEL Classification: E32, E37, E52.
    Keywords: potential output, simulation and forecasting models, monetary policy.
    Date: 2011–06
  8. By: Ke Pang; Pierre L. Siklos
    Abstract: This paper uses the credit-friction model developed by Curdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as crisis times. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads, unlike quantitative easing, which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.
    Keywords: Credit easing, credit spread, financial friction, quantitative easing.
    JEL: E43 E44 E51 E58
    Date: 2010–12
  9. By: Bojeşteanu, Elena; Manu, Ana Simona
    Abstract: The paper aims to evaluate the degree of business cycle synchronization and similarity of economic structures between Romania and the euro zone from the perspective of European Monetary Union (EMU) integration. Despite the fact that the euro adoption can generate benefits for the Romanian economy, this process can entail major economic risks primarily related to the loss of two of the most important macroeconomic adjustment mechanisms, namely the independent monetary policy and flexible exchange rate. The cost – benefit ratio depends on the compatibility of economic structures and business cycles between Romania and the euro zone, on the importance of the idiosyncratic shocks for the Romanian macroeconomic fluctuations, on the degree commercial integration etc. According to the results of this paper, there has been significant progress related to the convergence of the Romanian business cycle with that of the euro zone, however, with regard to structural convergence, the empirical evidence reveals a widening of the gap vis-à-vis the euro area during the transition period.
    Keywords: ciclu de afaceri; şoc structural; convergenţă; zone monetare optime
    JEL: E32 E58 F33
    Date: 2011–06–06
  10. By: Doraisami, Anita (Asian Development Bank Institute)
    Abstract: Several countries have employed countercyclical fiscal policy to ameliorate the impact of the global financial crisis. This study identifies some of the issues and policy implications associated with this policy response in developing countries. Included are case studies of four developing countries in the Asian region—Malaysia, Indonesia, the Philippines, and Singapore. The findings point to a rich diversity in both the size and composition of fiscal stimulus and the challenges which are confronted. This study suggests several steps that countries might take to improve the impact of expansionary fiscal policy in response to future downturns. These include (i) embedding automatic stabilizing impulses through the provision of social safety nets; (ii) increasing tax revenues collected from personal and corporate taxes, by reducing labor market informality through improvements in the business environment; (iii) safeguarding fiscal sustainability; (iv) rebalancing growth by strengthening other sectors of the economy; (v) reducing expenditures on subsidies; and (vi) ensuring smooth and efficient budget execution.
    Keywords: countercyclical fiscal policy; asia fiscal policy; fiscal policy; global financial crisis
    JEL: E60 E61 E62 E63
    Date: 2011–06–08
  11. By: Christian Bredemeier; Henry Goecke
    Abstract: This paper empirically compares sticky-price and sticky-information Phillips curves considering inflation dynamics in six countries (US, UK, Germany, France, Canada, and Japan). We evaluate the models‘ abilities to match empirical second moments of inflation. Under baseline calibrations, the two models perform similarly in almost all countries. Under estimated parametrizations, sticky information performs better in France while sticky prices dominate in the UK and Germany. Sticky prices match unconditional moments of inflation dynamics better while sticky information is more successful in matching co-movement of inflation with demand. Both models‘ performances worsen where inflation dynamics diff er from the US benchmark.
    Keywords: Phillips curve; sticky information; sticky prices
    JEL: E31 E32 E37
    Date: 2011–04
  12. By: Sylvain Leduc; Jean-Marc Natal
    Abstract: How should monetary policy be conducted in the presence of endogenous feedback loops between asset prices, firms’ financial health, and economic activity? We reconsider this question in the context of the financial accelerator model and show that, when the level of natural output is inefficient, the optimal monetary policy under commitment leans considerably against movements in asset prices and risk premia. We demonstrate that an endogenous feedback loop is crucial for this result and that price stability is otherwise quasi-optimal absent this feature. We also show that the optimal policy can be closely approximated and implemented using a speed-limit rule that places a substantial weight on the growth of financial variables.
    Keywords: Monetary policy ; Asset pricing
    Date: 2011
  13. By: Julia Darby; Jacques Melitz
    Abstract: Official calculations of automatic stabilizers are seriously flawed since they rest on the assumption that the only element of social spending that reacts automatically to the cycle is unemployment compensation. This puts into question many estimates of discretionary fiscal policy. In response, we propose a simultaneous estimate of automatic and discretionary fiscal policy. This leads us, quite naturally, to a tripartite decomposition of the budget balance between revenues, social spending and other spending as a bare minimum. Our headline results for a panel of 20 OECD countries in 1981- 2003 are .59 automatic stabilization in percentage-points of primary surplus balances. All of this stabilization remains following discretionary responses during contractions, but arguably only about 3/5 of it remains so in expansions while discretionary behavior cancels the rest. We pay a lot of attention to the impact of the Maastricht Treaty and the SGP on the EU members of our sample and to real time data.
    Keywords: Automatic stabilization; discretionary fiscal policy; government social and health spending; Maastricht Treaty; Stability and Growth Pact; real time reaction functions
    JEL: E62 E63
    Date: 2011–05
  14. By: Eduardo Engel; Christopher Neilson; Rodrigo Valdés
    Abstract: We explore the role of fiscal policy over the business cycle from a normative perspective, for a government with a highly volatile and exogenous revenue source. Instead of resorting to Keynesian mechanisms, in our framework fiscal policy plays a role because the government provides transfers to heterogeneous households facing volatile income, albeit with an imperfect transfer technology (a fraction of transfers leak to richer households). We calibrate the model to Chile’s highly volatile government revenues derived from copper, and characterize the optimal fiscal reaction. We quantify the welfare gains vis-à-vis a balanced budget rule, and the degree of adequate fiscal countercyclicality. We also analyze simpler rules, such as the structural balance rule in place in Chile during the last decade, more general linear rules, and linear rules with an escape clause. We find that the optimal rule leads to the same welfare gain as doubling the government’s copper revenues under a balanced budget rule. Chile’s structural balance rule achieves 18% of these gains, while a linear rule with an escape clause achieves 83% of the gains. The degrees of countercyclicality of the optimal rule and the linear rule with an escape clause are similar, and much larger than those of the structural balance rule.
    Date: 2011–05
  15. By: Gunda-Alexandra Detmers; Dieter Nautz
    Abstract: The Reserve Bank of New Zealand (RBNZ) has been the first central bank that began to publish interest rate projections in order to improve its guidance of monetary policy. This paper provides new evidence on the role of interest rate projections for market expectations about future shortterm rates and the behavior of long-term interest rates in New Zealand. We find that interest rate projections up to four quarters ahead play a significant role for the RBNZs expectations management before the crisis, while their empirical relevance has decreased ever since. For interest rate projections at longer horizons, the information content seems to be only weak and partially destabilizing.
    Keywords: Central bank interest rate projections, central bank communication, expectations management of central banks
    JEL: E52 E58
    Date: 2011–06
  16. By: Mario Jovanovic
    Abstract: This paper investigates the response of US stock market uncertainty to monetary policy of the Federal Reserve Bank. It can be shown that monetary policy significantly Granger-causes stock market confidence. By using monthly closing prices of the VIX as a stock market uncertainty proxy and a copula-based Markov approach the stable nonlinear relation between confidence and uncertainty is demonstrated. The monetary policy effect on stock market uncertainty is therefore separable into a linear and nonlinear part.
    Keywords: Stock market confi dence; temporal dependence; copula
    JEL: C12 C22 E43 E52
    Date: 2011–01
  17. By: Michel Strawczynski; Joseph Zeira
    Abstract: This paper uses the Aguiar and Gopinath (2007) methodology in order to estimate whether “the cycle is the trend” in 23 emerging markets and 22 OECD economies. These estimates are then used to test whether procyclical fiscal policy in emerging countries is due to persistent shocks to per-capita GDP. We find support for this hypothesis. While both developed and emerging countries have a procyclical policy for investment expenditure, procyclicality is evident in emerging countries also for government consumption and transfers. Over the period of increasing globalization after the 1990s, these are signs of a reduction in the extent of procyclical expenditure policy in emerging countries. We also find that, in countries with high levels of foreign direct investment, procyclicality is milder.
    Date: 2011–02
  18. By: Fabio Verona (Universidade do Porto, Faculdade de Economia and CEF.UP)
    Abstract: This paper introduces lumpy micro-level investment into a sticky information general equilibrium model. Lumpy investment arises because of inattentiveness in capital investment decisions instead of the more popular assumption of non-convex adjustment costs. Sticky information is the only source of rigidity in the model and it is pervasive to all markets and decisions. The model yields aggregate dynamics that are substantially different from those of an otherwise identical model with frictionless investment, and much closer to the empirical evidence. These results therefore strengthen the case for the relevance of lumpy micro-level investment for the business cycle.
    Keywords: Sticky information, lumpy investment, general equilibrium, business cycles
    JEL: E10 E22 E30 E32
    Date: 2011–06
  19. By: Filip Novotny; Marie Rakova
    Abstract: Consensus Economics forecasts for euro-area GDP growth, consumer and producer price inflation and the USD/EUR exchange rate are used by the Czech National Bank to make assumptions about future external economic developments. This paper compares the accuracy of the aforementioned Consensus forecasts to those of the European Commission, International Monetary Fund and Organization for Economic Co-operation and Development, and also to the naïve forecast and the forecast implied by the forward exchange rate. In the period from 1994 to 2009 Consensus forecasts for effective euro-area consumer price inflation and GDP growth beat the alternatives by a difference which is typically statistically significant. The results are more diverse for the pre-crisis sample (1994–2007). The Consensus forecast for euro-area producer price inflation significantly outperforms the naïve forecast in the short-term. Finally, the Consensus forecast for the USD/EUR exchange rate during the period from 2002 to 2009 is more precise than the naïve forecast and the forecast implied by the forward rate.
    Keywords: Forecasting accuracy, prediction process, survey forecasts.
    JEL: E37 E58
    Date: 2010–12
  20. By: Jorge Fornero
    Abstract: This paper reviews extensively the literature on asset pricing and builds a structural dynamic general equilibrium model with financial assets. We obtain the policy function of the calibrated model and approximate it up to third order. We derive asset pricing and various premiums conditions up to the third order, meaning that returns depend on the first three conditional moments. We obtain a hypothetic yield curve whose curvature increases with the order of approximation because of premiums. In addition, impulse responses of various fundamental shocks illustrate the effects on the level and slope of bond yields with several maturities and on break-even inflation. Important shocks are technology and inflation target shocks.
    Date: 2011–05
  21. By: Thorsten Drautzburg; Harald Uhlig
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.
    JEL: E62 E63 E65 H20 H62
    Date: 2011–06
  22. By: Karlygash Kuralbayeva
    Abstract: This paper investigates the optimal scal policy adjustment to adverse terms of trade shocks by commodity-producing countries within a general equilibrium model,which allows for explicit distinction between public investment and government consumption. As the private sector has limited room for maneuver in correcting the shock itself, the public sector is used to isolate the economy from external fluctuations. The ability of fiscal policy to shield the economy from external shocks critically depends on instruments available to government. In the presence of international capital market imperfections, the shock is absorbed primarily through a combination of reduced expenditure and higher taxes. Cuts in expenditure are carried out mostly through cuts in public investment, with the change in the levelof public investment being about ten times larger than the change in government consumption. Public investment is thus the main shock absorber in this situation and is highly pro-cyclical. In the absence of distortions on the international capital markets, government shifts from domestic sources to external sources to absorb the shock and resorts to increased external borrowing to finance the shortfall in revenues. In this case, responses of both public investment and government consumption are more smoothed and less pro-cyclical, whereas tax rate falls.
    Keywords: fiscal policy, adjustment, external shocks, commodity-producing countries
    JEL: E32 F41 H54
    Date: 2011
  23. By: Shahnaz Mashayekh; Hadise Haji Moradkhani; Mahboobeh Jafari (Economic& Social Sciences Faculty, Al-Zahra University, Tehran, Iran)
    Abstract: This paper investigates the relationship between a set of economic variables (i.e. inflation rate, interest rate of one-year investing deposits in state banks, interest rate of bonds and the growth rate of gold price) and Tehran Stock Exchange (TSE) indicators during April 1998 to March 2008
    Keywords: Economic variables, Tehran stock Exchange(TSE), Vector auto-regressive model, Johansen co- integration test, Vector-error correction model
    JEL: M0
    Date: 2011–03
  24. By: Frédéric Reynes (VU University Amsterdam, IVM - Institute for Environmental Studies); Yasser Yeddir-Tamsamani (Observatoire Français des Conjonctures Économiques); Gaël Callonec (Agence de l'environnement et de la maîtrise de l'énergie)
    Abstract: This paper presents the structure and the main properties of Three-ME. This new model of the French economy has been especially designed to evaluate the medium and long term impact of environmental and energy policies at the macroeconomic and sector levels. To do so Three-ME combines two important features. Firstly, it has the main characteristics of neo-Keynesian models by assuming a slow adjustment of effective quantities and prices to their notional level. Compared to standard multi-sectors CGEM, this has the advantage to allow for the existence of under-optimum equilibriums such as the presence of involuntary unemployment. Secondly, production and consumption structures are represented with a generalized CES function which allows for the elasticity of substitution to differ between each couple of inputs or goods. This is an improvement compared to the standard approach that uses nested CES functions which has the disadvantage to impose a common elasticity of substitution between the goods located in two different nested structures.
    Keywords: neo-Keynesian model, macroeconomic modeling, energy and environmental policy modeling
    JEL: E12 E17 E27 E37 E47 D57 D58
    Date: 2011–05
  25. By: Felix Roth; Daniel Gros; Felicitas Nowak-Lehmann
    Abstract: Trust in the ECB has fallen to unprecedented lows in the aftermath of the financial crisis. Up to the start of the recession in 2008, trust levels in the ECB were moderately high and trust in the ECB was not affected by business cycle variables such as growth and inflation. This changed radically with the recession, with trust in the ECB becoming correlated quite closely with growth. After a relatively short recovery in 2009 trust in the ECB has fallen again at the start of the Eurozone crisis. Our findings first imply that European citizens seem to have placed a heavy share of the blame on the European Central Bank for the real economic downturn caused by the financial crisis in early 2009 and secondly an increase of debt over GDP and inflation have caused the new fall in May 2010.
    Keywords: Trust, financial crisis, European Central Bank
    JEL: E58 G21 Z13
    Date: 2011–05–20
  26. By: Jan Filacek; Branislav Saxa
    Abstract: Do private analysts coordinate their forecasts via central bank forecasts? In this paper, we examine private and central bank forecasts for the Czech Republic. The evolution of the standard deviation of private forecasts as well as the distance from the central bank’s forecasts are used to study whether a coordination effect exists, how it is influenced by uncertainty, and the effects of changes in central bank communication. The results suggest that private analysts coordinate their forecasts for the interest rate and inflation, while no or limited evidence exists for the exchange rate and GDP growth.
    Keywords: Central bank, coordination, forecast.
    JEL: E27 E37 E47 E58
    Date: 2010–12
  27. By: Menno Middeldorp
    Abstract: Central banks worldwide have become more transparent. An important reason is that democratic societies expect more openness from public institutions. Policymakers also see transparency as a way to improve the predictability of monetary policy, thereby lowering interest rate volatility and contributing to economic stability. Most empirical studies support this view. However, there are three reasons why more research is needed. First, some (mostly theoretical) work suggests that transparency has an adverse effect on predictability. Second, empirical studies have mostly focused on average predictability before and after specific reforms in a small set of advanced economies. Third, less is known about the effect on interest rate volatility. To extend the literature, I use the Dincer and Eichengreen (2007) transparency index for twenty-four economies of varying income and examine the impact of transparency on both predictability and market volatility. I find that higher transparency improves the accuracy of interest rate forecasts for three months ahead and reduces rate volatility.
    Date: 2011
  28. By: Nicola Gennaioli; Andrei Shleifer; Robert W. Vishny
    Abstract: We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.
    JEL: E44 G21
    Date: 2011–06
  29. By: Eric Heyer (Observatoire Français des Conjonctures Économiques)
    Date: 2011–04
  30. By: Luis Carranza; Christian Daude; Ángel Melguizo
    Abstract: Latin American countries exhibit a significant gap in infrastructure stocks, due to low and in many cases inefficient public investment, which is furthermore not compensated by private sector projects. In this paper we analyse trends in public and total infrastructure investment in six large Latin American economies, in the light of fiscal developments since the early eighties. We argue that post-crisis fiscal frameworks, notably fiscal rules which are increasingly popular in the region, should not only consolidate the recent progress towards debt sustainability, but also create the fiscal space to close these infrastructure gaps. These points are illustrated in a detailed account of recent developments in the fiscal framework and public investment in the Peruvian case.<BR>Les pays d'Amérique latine présentent une lacune importante dans les stocks d'infrastructure, à cause des faibles et nombreux cas d'investissements publics inefficaces, ce qui n'est compensée par les projets du secteur privé. Dans ce document, nous analysons les tendances publiques et total d'investissement des infrastructures dans six grandes économies latino-américaines, à la lumière de l'évolution fiscal depuis les années quatre vingt. Nous soutenons que les cadres de post-crise fiscales, notamment les règles fiscales qui sont de plus en plus populaire dans la région, devrait non seulement consolider des progrès récemment accomplis vers la viabilité de la dette, mais aussi de créer l'espace budgétaire pour combler ces lacunes dans l'infrastructure. Ces points sont illustrés dans un compte détaillé de l'évolution récente dans le cadre fiscal et l'investissement public dans le cas du Pérou.
    Keywords: fiscal policy, fiscal rules, Latin America, infrastructure, politique budgétaire, Amérique latine, infrastructure
    JEL: E62 H54 O54
    Date: 2011–06–07
  31. By: Paun, Cristian
    Abstract: Integration into the European Monetary Union (EMU) and adoption of Euro became a specific objective for Eastern European Countries after their accession into the European Union. This objective implies specific nominal and real economic convergence for these countries within a given period of time (Copenhagen criteria). Nominal convergence measurement is based on well-defined system of economic indicators (Maastricht and Amsterdam criteria). Real convergence refers to real economic performance of a country and it is commonly associated with GDP growth rate and productivity level. From a broader perspective, real and nominal convergence could be seen as complementary. Tensions between real and nominal convergence are tested through Balassa – Samuelson Effect. In this paper it is analyzed the evolution of nominal and real convergence based on a proposed set of indicators and it is estimated Balassa-Samuelson Effect on non-Euro countries.
    Keywords: EMU; Euro; Optimal Currency Area; Balassa Samuelson Effect
    JEL: E42 F41 F33
    Date: 2010–03–15
  32. By: Holden, Steinar (Dept. of Economics, University of Oslo); Sparrman, Victoria (Dept. of Economics, University of Oslo)
    Abstract: We investigate empirically the effect of government purchases on unemployment in 20 OECD countries, for the period 1960-2007. Compared to earlier studies we use a data set with more variation in unemployment, and which allows for controlling for a host of factors that influence the effect of government purchases. We find that increased government purchases lead to lower unemployment; an increase equal to one percent of GDP reduces unemployment by 0.2 percentage point in the same year. The effect is greater in downturns than in booms, and also greater under a fixed exchange rate regime than under a floating regime.
    Keywords: Fiscal policy; unemployment
    JEL: E62 H30
    Date: 2011–05–23
  33. By: Andrew T. Young (West Virginia University); Daniel Levy (Bar-Ilan University, Emory University, and RCEA)
    Abstract: We offer the first direct evidence of an implicit contract in a goods market. The evidence we offer comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. The contract represented the promise of a five cent (nominal) price and adherence to the “Secret Formula”. In general, the implicit nature of such contracts makes observation difficult. To overcome this difficulty, we adopt a narrative approach. Based on the analysis of a large number of historical documents obtained from the Coca-Cola Archives and other sources, we offer evidence of the Coca-Cola Company both acknowledging and acting on this implicit contract. We also make another unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. The implicit contract included a promise not only of a constant nominal price but also a constant quality (i.e., 6.5 oz. of the Secret Formula). During a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Coca-Cola Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. We argue that one piece of direct evidence on the magnitude of these costs is the aftermath “New Coke’s” introduction in 1985.
    Keywords: Implicit Contract, Explicit Contract, Invisible Handshake, Customer Market, Long- Term Relationship, Price Rigidity, Nickel Coke, Coca-Cola
    JEL: E12 E31 L14 L16 L66 M30 N80 A14
    Date: 2011–03
  34. By: Ana María Iregui B.; Ligia Alba Malo B.; María Teresa Ramírez G.
    Abstract: The aim of this paper is to explore firms’ wage adjustment practices in the Colombian formal labor market; specifically, the timing and frequency of wage increases, as well as the link between wage and price changes. To this end, we use an ad hoc survey of 1,305 small, medium and large firms belonging to all economic sectors, except the public sector. The results show most of the firms adjust base wages annually, mainly during the first quarter, which suggests wage changes in Colombia are time-dependent. Also, wage increases were concentrated around observed inflation and none of the firms cut wages. Moreover, factors associated with the performance of firms and workers alike are the main determinants of wage adjustments. Regarding the link between wages and price changes, econometric results indicate this relationship is stronger in sectors where labor costs represent a higher share of total costs and in firms operating in sectors with higher labor productivity.
    Date: 2011–06–07
  35. By: Ojo, Marianne
    Abstract: Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules? As well as Basel III reforms which are geared towards greater facilitation of financial stability on a macro prudential basis, further efforts and initiatives aimed at mitigating systemic risks – hence fostering financial stability, have been promulgated through the establishment of the De Larosiere Group, the European Systemic Risk Board, and a working group comprising of “international standard setters and authorities responsible for the translation of G20 commitments into standards.” This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of regulatory arbitrage as well as consider the response of various jurisdictions and standard setting bodies to aims and initiatives aimed at improving their macro prudential frameworks. Furthermore, it will also aim to illustrate why immense work is still required at European level – as regards efforts to address systemic risks on a macro prudential basis. This being the case even though significant efforts and steps have been taken to address the macro prudential framework. In so doing, the paper will also attempt to address how coordination within the macro prudential framework – as well as between micro and macro prudential supervision could be enhanced.
    Keywords: counter party risks; liquidity; European Systemic Risk Board; stability; systemic risk; Shadow Banking; central banks; regulatory arbitrage; OTC derivatives; European Central Bank; supervision; coordination
    JEL: E0 D0 K2 D8
    Date: 2011–06–10
  36. By: Scott Brave; Hesna Genay
    Abstract: During the recent financial crisis, the Federal Reserve implemented a series of extraordinary and unconventional policies to alleviate the impact of the crisis on financial markets and the economy. In this paper, we examine the effects of these policies on broad financial market conditions, explicitly taking into account that policy was endogenously determined in response to prevailing financial market and economic conditions. We find that the Fed was more likely to initiate or expand new programs when financial market conditions were tighter than usual and economic conditions deteriorating. We also find that the Fed’s policies improved broad financial market conditions significantly at announcement and that the improvements were associated primarily with program initiations and expansions.
    Date: 2011
  37. By: Frauke Dobnik
    Abstract: This paper examines the long-run money demand function for 11 OECD countries from 1983 to 2006 using panel data and including wealth. The distinction between common factors and idiosyncratic components using principal component analysis allows to detect cross-member cointegration and to distinguish between international and national developments as drivers of the long-run relation between money and its determinants. Indeed, cointegration between the common factors of the underlying variables, i.e. cross-member cointegration, indicates that the long-run relationship is mainly driven by international stochastic trends. Furthermore, it is found that the impact of income on money demand is positive, while it is negative for the interest rate and stock prices. The estimated (semi-)elasticities of money are larger for the common factors than for the original variables, except the income elasticity. Finally, the results of a panel-based error-correction model suggest that money demand converges to an international cross-member equilibrium relation of the common factors.
    Keywords: Money demand; wealth effects; panel unit roots; vector error-correction models
    JEL: E41 C22 C33
    Date: 2011–01
  38. By: Marcus Cobb; Gonzalo Echavarría; Pablo Filippi; Macarena García; Carolina Godoy; Wildo González; Carlos Medel; Marcela Urrutia
    Abstract: The aim of this document is to provide a forecasting tool that facilitates understanding economic developments in a timely manner. This is pursued through the Bridge Model approach by using it to relate a large set of monthly indicators to Chilean GDP and its main components. The outcome is a set of simple equations that characterize reasonably well total GDP and the feasible supply- and demand-side components based on a small set of relevant indicators. The selected equations generally provide better short-term forecasts than simple autoregressive models. However, if needed, the equation selection methodology is straightforward enough to update the equations easily making it an attractive tool for real-time forecasting.
    Date: 2011–05

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