nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒06‒25
forty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. What is the Importance of Monetary and Fiscal Shocks in Explaining US Macroeconomic Fluctuations? By Barbara Rossi; Sarah Zubairy
  2. Degree of Policy Precommitment in the UK: An Empirical Investigation of Monetary and Fiscal Policy Interactions By Tatiana Kirsanova; Stephanus le Roux
  3. Productivity Shocks, Stabilization Policies and the Dynamics of Net Foreign Assets By Giorgio Di Giorgio; Salvatore Nistico'
  4. Money and inflation in the euro area during the financial crisis By Dreger, Christian; Wolters, Jürgen
  5. Monetary Exit Strategy and Fiscal Spillovers By Jan Libich; Dat Thanh Nguyen; Petr Stehlík
  6. "Effective Demand in the Recent Evolution of the US Economy" By Julio Lopez-Gallardo; Luis Reyes-Ortiz
  7. Money and Inflation in the Euro Area during the Financial Crisis By Christian Dreger; Jürgen Wolters
  8. Metas de Inflação, Crescimento e Estabilidade Macroeconômica Uma análise a partir de um modelo póskeynesianomacrodinâmico não-linear By Breno Santana Lobo; José Luis Oreiro
  9. Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach By Challe, E.; Giannitsarou, C.
  10. A General Equilibrium Model of Sovereign Default and Business Cycles By Enrique G. Mendoza; Vivian Z. Yue
  11. Global Imbalances and Imported Disinflation in the Euro Area By Barthélemy, J.; Cléaud, G.
  12. Monetary Policy, Liquidity Stress and Learning Dynamics By Stefano Marzioni
  13. Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap By David Cook; Michael B. Devereux
  14. What does Monetary Policy do to Long-Term Interest Rates at the Zero Lower Bound? By Jonathan H. Wright
  15. The loss from uncertainty on policy targets By Giorgio Di Giorgio; Guido Traficante
  16. Equilibrium selection in a cashless economy with transaction frictions in the bond market By Marzo , Massimiliano; Zagaglia, Paolo
  17. An Estimated Fiscal Taylor Rule for the Postwar United States By Christopher Reicher
  18. Comparative analysis of monetary and fiscal Policy: a case study of Pakistan By Jawaid, Syed Tehseen; Arif, Imtiaz; Naeemullah, Syed Muhammad
  19. The Increased Importance of Asset Price Misalignments for Business Cycle Dynamics By Bask, Mikael; Madeira, João
  20. Fiscal stimulus and distortionary taxation By Drautzburg, Thorsten; Uhlig, Harald
  21. Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions By Petrosky-Nadeau, Nicolas; Wasmer, Etienne
  22. Structural Breaks in Inflation Dynamics within the European Monetary Union By Thomas Windberger; Achim Zeileis
  23. Domestic Wheat Price Formation and Food Inflation in India By Dasgupta, Dipak; Dubey, R.N.; Sathish, R
  24. Risk, Monetary Policy and the Exchange Rate By Gianluca Benigno; Pierpaolo Benigno; Salvatore Nisticò
  25. From growth to cycles through beliefs By Christopher M. Gunn
  26. Global Versus Local Shocks in Micro Price Dynamics By Philippe Andrade and Marios Zachariadis
  27. Government Policy, Credit Markets and Economic Activity By Lawrence Christiano; Daisuke Ikeda
  28. The possibility of ideological bias in structural macroeconomic models By Saint-Paul, Gilles
  29. Fiscal developments and financial stress: a threshold VAR analysis By António Afonso; Jaromír Baxa; Michal Slavík
  30. The economics of TARGET2 balances By Ulrich Bindseil; Philipp Johann König
  31. The role of oil prices in the euro area economy since the 1970s By Elke Hahn; Ricardo Mestre
  32. Irving Fisher and Price-Level Targeting in Austria: Was Silver the Answer? By Richard C.K. Burdekin; Kris James Mitchener; Marc D. Weidenmier
  34. Child Labor, Idiosyncratic Shocks, and Social Policy By Alice Fabre; Stéphane Pallage
  35. Towards a Political Economy of Macroeconomic Thinking By Saint-Paul, Gilles
  36. Price Setting in a Leading Swiss Online Supermarket By Martin Berka; Michael B. Devereux; Thomas Rudolph
  37. Early Warning Systems in the Republic of Korea: Experiences, Lessons, and Future Steps By Jung, Hyungmin; Yun Jeong, Hoe
  38. Financial repression redux By Reinhart, Carmen; Kirkegaard, Jacob; Sbrancia, Belen
  39. Hiring chains and the dynamic behavior of job and worker flows By Christopher Reicher
  40. Comparing two financial crises: the case of Hong Kong real estate markets By LEUNG, K. Y. Charles; TANG, C. H. Edward
  41. Getting Normalization Right: Dealing with ÔDimensional ConstantsÕ in Macroeconomics By Cristiano Cantore; Raffaele Paul Levine
  42. GDP as a Measure of Economic Welfare By Moshe Syrquin
  43. Mobile Banking: The Impact of M-Pesa in Kenya By Isaac Mbiti; David N. Weil
  44. Evaluating election platforms: a task for fiscal councils? Scope and rules of the game in view of 25 years of Dutch practice By Bos, Frits; Teulings, Coen
  45. An Estimation of Economic Models with Recursive Preferences By Xiaohong Chen; Jack Favilukis; Sydney C. Ludvigson
  46. Contagion effect of financial crisis on OECD stock markets By Kazi, Irfan Akbar; Guesmi, Khaled; Kaabia, Olfa
  47. Illiquidity and All Its Friends. By Tirole, Jean
  48. Fiscal Decentralization, Redistribution and Growth By Bilin Neyapti; Zeynep Burcu Bulut-Cevik
  49. The Role of Worker Flows in the Dynamics and Distribution of UK Unemployment By Elsby, Michael; Smith, Jennifer C.; Wadsworth, Jonathan

  1. By: Barbara Rossi; Sarah Zubairy
    Abstract: This paper analyzes the importance of monetary and fiscal policy shocks in explaining US macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations; and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.
    Keywords: Monetary policy, government spending, fiscal policy, business cycle fluctuations, medium cycle
    JEL: E1 E5 E6 C5
    Date: 2011
  2. By: Tatiana Kirsanova (Department of Economics, University of Exeter); Stephanus le Roux (Department for Work and Pensions)
    Abstract: This paper investigates the conduct of monetary and fiscal policy in the UK in the period of the Bank of England independence and before the start of the quantitative easing. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under the fiscal intra-period leadership we demonstrate that the past policy in the UK is better explained as following optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers, and derive implied policy rules.
    Keywords: Monetary and Fiscal Policy, Commitment, Discretion, Macroeconomic Stabilisation, Bayesian Estimation
    JEL: E52 E61 E63
    Date: 2011
  3. By: Giorgio Di Giorgio (LUISS Guido Carli University); Salvatore Nistico' (La Sapienza University of Rome and LUISS Guido Carli University)
    Keywords: Fiscal Deficit, Net Foreign Assets, DSGE Models, Monetary and Fiscal Policy.
    JEL: E43 E44 E52 E58
    Date: 2011
  4. By: Dreger, Christian; Wolters, Jürgen
    Abstract: This paper explores the stability of the relation between money demand for M3 and inflation in the euro area by including the recent period of the financial crisis. Evidence is based on a cointegration analysis, where inflation and asset prices are allowed to enter the long run relationship. By restricting the cointegrating space, equations for money and inflation are identified. The results indicate that the equilibrium evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Excess liquidity plays an important role for inflation dynamics. While the hypothesis of weak exogeneity is rejected for real money balances and inflation, real income, real asset prices and the term structure do not respond to deviations from the long run equilibria. A single equation analysis derived from this system still provides reliable information for the conduct of monetary policy in real time, since the error correction terms are very similar to those obtained by the system approach. To monitor the monetary development, a single money demand equation is sufficient, at least as a rough indication. --
    Keywords: Money demand,inflation,excess liquidity,cointegration analysis
    JEL: C22 C52 E41
    Date: 2011
  5. By: Jan Libich; Dat Thanh Nguyen; Petr Stehlík
    Abstract: The paper models strategic monetary-fiscal interactions in the aftermath of the global financial crisis - in a single country as well as a monetary union. It depicts both the short- term (stabilization) perspective and the long-term (sustainability) perspective, and the link between them. This is done in a game theoretic framework that allows for revisions of actions, deterministic or stochastic. In addition, we consider incomplete information about economic conditions, and different types of government. We find that, under ambitious fiscal policies, a legislated long-term monetary commitment may: (i) reduce the risk of a double-dip recession and deflation in the short-term, and at the same time (ii) facilitate the 'exit strategy' of monetary policy, ie prevent sub-optimally high future inflation caused by fiscal spillovers. Our analysis thus implies that an explicit numerical target for average inflation may play the role of a monetary 'credibility insurance' over all phases of the business cycle, and is beneficial especially in countries facing fiscal stress.
    JEL: E52 C70
    Date: 2011–02
  6. By: Julio Lopez-Gallardo; Luis Reyes-Ortiz
    Abstract: We present strong empirical evidence favoring the role of effective demand in the US economy, in the spirit of Keynes and Kalecki. Our inference comes from a statistically well-specified VAR model constructed on a quarterly basis from 1980 to 2008. US output is our variable of interest, and it depends (in our specification) on (1) the wage share, (2) OECD GDP, (3) taxes on corporate income, (4) other budget revenues, (5) credit, and the (6) interest rate. The first variable was included in order to know whether the economy under study is wage led or profit led. The second represents demand from abroad. The third and fourth make up total government expenditure and our arguments regarding these are based on Kalecki's analysis of fiscal policy. The last two variables are analyzed in the context of Keynes's monetary economics. Our results indicate that expansionary monetary, fiscal, and income policies favor higher aggregate demand in the United States.
    Keywords: Effective Demand; Wage Shares; Monetary Policy; Fiscal Policy; Model Evaluation
    JEL: C52 E12 E25 E52 E63
    Date: 2011–06
  7. By: Christian Dreger; Jürgen Wolters
    Abstract: This paper explores the stability of the relation between money demand for M3 and inflation in the euro area by including the recent period of the financial crisis. Evidence is based on a cointegration analysis, where inflation and asset prices are allowed to enter the long run relationship. By restricting the cointegrating space, equations for money and inflation are identified. The results indicate that the equilibrium evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Excess liquidity plays an important role for inflation dynamics. While the hypothesis of weak exogeneity is rejected for real money balances and inflation, real income, real asset prices and the term structure do not respond to deviations from the long run equilibria. A single equation analysis derived from this system still provides reliable information for the conduct of monetary policy in real time, since the error correction terms are very similar to those obtained by the system approach. To monitor the monetary development, a single money demand equation is sufficient, at least as a rough indication.
    Keywords: Money demand, inflation, excess liquidity, cointegration analysis
    JEL: C22 C52 E41
    Date: 2011
  8. By: Breno Santana Lobo (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília); José Luis Oreiro (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília)
    Abstract: The aim of this paper is to analyze the effects of adopting an inflation targeting regime, in which central banks set the short-term interest rate as a response to deviations of inflation from its target and of output from its potential, over economic growth. To this end, we build a non-linear post-keynesian growth model which allows the existence of more than one short-term equilibrium point. We conclude that maintaining a balanced short-term growth path after exogenous shocks depends largely on fiscal policy. Besides that, there are three possible long-term equilibrium configurations, two of which are inherently unstable. Long-term equilibrium stability of the third configuration depends on how central banks respond to deviations on inflation and output. More precisely, we show that a more cautious behavior from the Central Bank in a manner that it only increases short term interest rates when it is really required to do so could help the economy to have a balanced growth-path in the longrun.
    Keywords: inflation targeting, economic growth, dynamics, post-keynesian economics
    JEL: E12 E42 E43 E52 O41
    Date: 2011–04
  9. By: Challe, E.; Giannitsarou, C.
    Abstract: Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on stock prices: a 25-basis point increase in the Fed funds rate is associated with an immediate decrease in broad stock indices that may range from 0.5 to 2.3 percent, followed by a gradual decay as stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider allows for staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parameterizations of the model.
    Keywords: Monetary policy; Asset prices; New Keynesian general equilibrium model.
    JEL: E31 E52 G12
    Date: 2011
  10. By: Enrique G. Mendoza; Vivian Z. Yue
    Abstract: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-hoc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around defaults, countercyclical spreads, high debt ratios, and key business cycle moments.
    JEL: E32 E44 F32 F34
    Date: 2011–06
  11. By: Barthélemy, J.; Cléaud, G.
    Abstract: We estimate a medium-scale DSGE model for the euro area in an open economy framework. The model includes structural trends on all variables, which allow us to estimate on gross data. We first provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data, thus our model properly deals with deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro area imports during the last ten years on domestic inflation. From the first quarter of 2000 to the last quarter of 2008, we estimate the contribution of the imbalanced development of international trade on euro area inflation to an average of -0.7%, and on the 3-Month interest rate to an average of -1.4%.
    Keywords: Global Imbalances, Disinflation, Business Fluctuations, Open Economy Macroeconomics.
    JEL: E32 F41
    Date: 2011
  12. By: Stefano Marzioni (LUISS Guido Carli University)
    Abstract: This paper examines the interactions between monetary policy and stability of interbank money markets. After showing some empirical evidence of a central bank's concern for money market stability I derive a forward smoothing interest rate rule moving from an explicit target in terms of a liquidity stress indicator. The implications of this approach on equilibrium determinacy and learnability are analyzed. I show that equilibrium uniqueness is not necessarily compatible with equilibrium learnability, and learnability, in general, has tighter requirements than determinacy.
    Keywords: LIBOR-OIS spread, Taylor Rule, Adaptive Learning, DSGE models, Monetary Policy.
    JEL: E43 E44 E52 E58
    Date: 2011
  13. By: David Cook; Michael B. Devereux
    Abstract: With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause ‘natural real interest rates’ to fall below zero in all countries, giving rise to a global ‘liquidity trap’. This paper explores the policy choices that maximize the joint welfare of all countries following such a shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter this shock. Because of this, it may be optimal for the foreign policy-maker to raise interest rates. Strikingly, the foreign country may choose to have a positive policy interest rate, even though its ‘natural real interest rate’ is below zero. A combination of relatively tight monetary policy in the foreign country combined with substantial fiscal expansion in the home country achieves the level and composition of world expenditure that maximizes the joint welfare of the home and foreign country. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy.
    JEL: E5 F41 F42
    Date: 2011–06
  14. By: Jonathan H. Wright
    Abstract: The federal funds rate has been stuck at the zero bound for over two years and the Fed has turned to unconventional monetary policies, such as large scale asset purchases to provide stimulus to the economy. This paper uses a structural VAR with daily data to identify the effects of monetary policy shocks on various longer-term interest rates during this period. The VAR is identified using the assumption that monetary policy shocks are heteroskedastic: monetary policy shocks have especially high variance on days of FOMC meetings and certain speeches, while there is nothing unusual about these days from the perspective of any other shocks to the economy. A complementary high-frequency event-study approach is also used. I find that stimulative monetary policy shocks lower Treasury and corporate bond yields, but the effects die off fairly fast, with an estimated half-life of about two months.
    JEL: C22 E43 E58
    Date: 2011–06
  15. By: Giorgio Di Giorgio (LUISS Guido Carli University); Guido Traficante (Universita' Europea di Roma and LUISS Guido Carli University)
    Abstract: What is the welfare loss arising from uncertainty about true policy targets? We quantify these effects in a DSGE model where private agents are unable to distinguish between temporary shocks to potential output and to the inßation target. Agents use optimal Þltering techniques to construct estimates of the unknown variables. We Þnd that the welfare costs of not observing the inßation target and potential output are relevant even in the case of a small measurement error. We also show that, in our framework, uncertainty about the inßation target is more costly than uncertainty about potential output.
    Keywords: Monetary Policy, Kalman Filter, Potential Output.
    JEL: E5 E37 E52 E58
    Date: 2011
  16. By: Marzo , Massimiliano; Zagaglia, Paolo
    Abstract: The present paper introduces two bonds in a standard New-Keynesian model to study the role of segmentation in bond markets for the determinacy of rational expectations equilibria. We use a strongly-separable utility function to model 'liquid' bonds that provide transaction services for the purchase of consumption goods. 'Illiquid' bonds, instead, provide the standard services of store of value. We interpret liquid bonds as mimicking short-term instruments, and illiquid bonds to represent long-dated instruments. In this simple setting, the expectation hypothesis holds after log-linearizing the model and after pricing the bonds according to an affine scheme. We assume that monetary policy follows a standard Taylor rule. In this context, the inflation targeting parameter should be higher than one for determinacy of rational expectations equilibria to be achieved. We compute an analytical solution for the bond pricing kernel. We also show that the possibility of obtaining this analytical solution depends on the type of utility function. When utility is weakly separable between consumption and liquid bonds, the Taylor principle holds conditional to the output and inflation coefficients in the Taylor rule. Achieving solution determinacy requires constraining these coefficients within bounds that depend on the structural parameters of the model, like the intertemporal elasticity of consumption substitution.
    Keywords: term structure; determinacy; pricing kernel; fiscal and monetary policy
    JEL: E43 E63
    Date: 2011–06–05
  17. By: Christopher Reicher
    Abstract: This paper documents the systematic response of postwar U.S. fiscal policy to fiscal imbalances and the business cycle using a multivariate Fiscal Taylor Rule. Adjustments to taxes and purchases both account for a large portion of the fiscal response to debt, while authorities seem reluctant to adjust transfers. As expected, taxes are highly procyclical; purchases are acyclical; and transfers are countercyclical. Neither pattern has changed much over time, except that adjustment happens more slowly after 1981 than before 1980. The role of adjustments to purchases in stabilizing the debt indicates that the recent discussion about spending reversals is highly relevant
    Keywords: Spending reversals, Fiscal Taylor Rule, deficits, fiscal policy, taxes, spending, transfer payments
    JEL: E62 E63 H20 H62
    Date: 2011–05
  18. By: Jawaid, Syed Tehseen; Arif, Imtiaz; Naeemullah, Syed Muhammad
    Abstract: This study investigates the comparative effect of fiscal and monetary policy on economic growth in Pakistan using annual time series data from 1981 to 2009. The cointegration result suggests that both monetary and fiscal policy have significant and positive effect on economic growth. The coefficient of monetary policy is much greater than fiscal policy which implies that monetary policy has more concerned with economic growth than fiscal policy in Pakistan. The implication of the study is that the policy makers should focus more on monetary policy than fiscal to enhance economic growth. The role of fiscal policy can be more effective for enhancing economic growth by eliminating corruption, leakages of resources and inappropriate use of resources. However, the combination and harmonization of both monetary and fiscal policy are highly recommended.
    Keywords: Monetary Policy; Fiscal Policy; Economic Growth.
    JEL: H30 E00 O40
    Date: 2010–12
  19. By: Bask, Mikael (Department of Economics); Madeira, João (University of Exeter Business School)
    Abstract: We outline a dynamic stochastic general equilibrium (DSGE) model with trend extrapolation in asset pricing that we fit to quarterly U.S. macroeconomic time series with Bayesian techniques. To be more precise, we modify the DSGE model in Smets and Wouters (2007) by incorporating asset traders who use a mix of fundamental analysis and trend extrapolation in asset pricing. We conclude that trend extrapolation in asset pricing is quantitatively relevant, statistically significant and results in a substantial improvement of the model’s fit to the data. We also find that the strength in trend extrapolation is much stronger during the Great Moderation than it was prior to this period. Moreover, allowing for asset mispricing leads to more pronounced hump-shaped dynamics of the asset price and investment. Thus, asset price misalignments should be an important ingredient in DSGE models that aim to understand business cycles dynamics in general and the interaction between the real and financial sectors in particular.
    Keywords: Asset Price Bubble; Bayesian Technique; Business Cycle; DSGE Model; Fundamental Analysis; Trend Extrapolation
    JEL: E32 E44
    Date: 2011–06–08
  20. By: Drautzburg, Thorsten; Uhlig, Harald
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (Smets and 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. --
    Keywords: Fiscal Stimulus,New Keynesian model,liquidity trap,zero lower bound,fiscal multiplier
    JEL: E62 E63 E65 H20 H62
    Date: 2011
  21. By: Petrosky-Nadeau, Nicolas (Carnegie Mellon University); Wasmer, Etienne (Sciences Po, Paris)
    Abstract: Building a model with three imperfect markets – goods, labor and credit – representing a product's life-cycle, we find that goods market frictions drastically change the qualitative and quantitative dynamics of labor market variables. The calibrated model leads to a significant reduction in the gap with the data, both in terms of persistence and volatility while search models of the labor market fail in one of the two dimensions. Two factors related to goods market frictions generate these results: i) the expected dynamics of consumers' search for goods, itself depending on the income redistributed by firms and the entry of new products; and ii) the expected dynamics of prices, which alter future profit flows.
    Keywords: search, matching, business cycle, goods market imperfection
    JEL: J6 E12 E13 E3
    Date: 2011–06
  22. By: Thomas Windberger; Achim Zeileis
    Abstract: To assess the effects of the EMU on inflation rate dynamics of its member states, the inflation rate series for 21 European countries are investigated for structural changes. To capture changes in mean, variance, and skewness of inflation rates, a generalized logistic model is adopted and complemented with structural break tests and breakpoint estimation techniques. These reveal considerable differences in the patterns of inflation dynamics and the structural changes therein. Overall, there is a convergence towards a lower mean inflation rate with reduced skewness, but it is accompanied by an increase in variance.
    Keywords: inflation rate, structural break, EMU, generalized logistic distribution
    JEL: E31 C22 C52
    Date: 2011–06
  23. By: Dasgupta, Dipak; Dubey, R.N.; Sathish, R
    Abstract: Inflation, especially in food prices, has been persistently high in India during the past twenty four months. This has been a source of concern to policy-makers. Fortunately, food price increases are now starting to ease, after the major spike that occurred in the wake of the severe drought of 2009. However, there still remains concern that we: (a) need to better understand the factors that drive such spikes in key prices; and (b) design more effective policies to prevent such future price spikes. The main approach to understanding inflation and its drivers has typically rested, on the whole, in assessing aggregate macroeconomic (aggregate supply and demand) conditions, which then typically leads to consideration of macroeconomic and monetary) policies as the principal tool to deal with inflation surges. That may indeed be appropriate in most circumstances, but is often a blunt, sometimes costly instrument that can stifle growth, especially if price pressures arise from (temporary) supply constraints. Therefore, it may be important to complement an aggregate macroeconomic analysis of inflation with microeconomic analysis: to ascertain if inflation is being driven by specific price spikes in important food and non-food commodities, which has the potential to drive other commodity prices in a cost-push manner. This paper, on global wheat market developments, price transmission and impacts on Indian domestic markets, as well as an assessment of public policies to manage domestic prices, is part of a larger effort to improve our in-house (Department of Economic Affairs) research---to track, monitor and forecast fast-moving key macro-economic variables with potentially large consequences for public policy. We have begun to intensify our efforts. We are investing further systematically---to understand growth and inflation dynamics in the context of rising food inflationary pressures in India and worldwide. We are capturing more high frequency data, and applying quantitative modeling tools (as evident in our current Economic Survey). We take up wheat in this paper, because of recent rapid price rises globally, as well as domestically, and because it constitutes a major element of the overall wholesale and consumer food price inflation indices. Some aspects of the price formation and policy intervention processes in wheat are also likely to be structurally similar for other similar classes of important food items (such as rice), permitting broader insights. Our paper draws upon existing theoretical insights and modeling attempts in the literature; it is, nevertheless, useful to note three “biases” in our approach: (a) favoring analysis of short-term, high-frequency price formation (daily, monthly, or quarterly), versus alternative longer-term annual, structural models; (b) favoring simplified reduced form forecasting models that track high-frequency turning points well, over more elaborate models and tests of longerduration time-series data (which may tend to be more historical and backward-looking, and less useful for short-term forecasting); and (c) assessing current India-specific public interventions in greater detail, than in more general academic papers and models.
    Keywords: English
    JEL: E31 G15 E37
    Date: 2011–05–15
  24. By: Gianluca Benigno; Pierpaolo Benigno; Salvatore Nisticò
    Abstract: In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coefficient in the UIP regression.
    JEL: E0 E43 E52 F3 F31 F41
    Date: 2011–06
  25. By: Christopher M. Gunn
    Abstract: I present a theoretical model where the economy endogenously adopts the technological ideas of a slowly evolving technological frontier, and show that the presence of a "technological gap" between unadopted ideas and current productivity can lead to multiple equilibria and therefore the possibility that changes in beliefs can be self-fulfilling, often referred to as sunspots. In the model these sunspots take the form of beliefs about the value of adopting the new technological ideas, and unleash both a boom in aggregate quantities as well as eventual productivity growth, increasing the value of adoption and self-confirming the beliefs. Moreover, I demonstrate that the scope for these indeterminacies is a function of the steady-state growth rate of the underlying technological frontier of ideas, and that during times of low growth in ideas, the potential for indeterminacies disappears. Under this view, technology becomes important for cycles not necessarily because of sudden shifts in the technological frontier, but rather, because it defines a technological regime for the economy such that expectations about its value can produce aggregate fluctuations where in a different regime they could not.
    Keywords: expectations-driven business cycle, sunspot, multiple equilibria, indeterminacy, technology, news shock, intangible capital, investment-specific technical change, embodied, technological transition, technological adoption.
    JEL: C62 C68 E00 E2 E3 O3 O4
    Date: 2011–06
  26. By: Philippe Andrade and Marios Zachariadis
    Abstract: A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. The persistence associated with each of these components and its relation with volatility of the different components, provides a number of new facts. Prices respond more slowly to global shocks as compared to local ones .in particular, prices respond faster to local macro shocks than to global micro ones .implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. In addition, more volatility in local conditions leads to more persistent relative price distortions due to slower response of prices to global shocks, with this local -global link more than twice as large as the corresponding micro-macro link. Finally, global shocks account for half of the volatility in prices. Overall, our results imply that global shocks are important when analyzing price dynamics or assessing price-setting models.
    Keywords: global shocks, local shocks, micro shocks, macro shocks, price adjustment, micro-macro gap, price-setting models, micro prices
    Date: 2011–06
  27. By: Lawrence Christiano; Daisuke Ikeda
    Abstract: The US government has recently conducted large scale purchases of assets and implemented policies that reduced the cost of funds to financial institutions. Arguably these policies have helped to correct credit market dysfunctions, allowing interest rate spreads to shrink and output to begin a recovery. We study four models of financial frictions which explore di¤erent channels by which these e¤ects might have occured. Recent events have sparked a renewed interest in leverage restrictions and the consequences of bailouts of the creditors of banks with under-performing assets. We use two of our models to consider the welfare and other effects of these policies.
    JEL: E42 E58 E63
    Date: 2011–06
  28. By: Saint-Paul, Gilles (TSE)
    Date: 2011–06–08
  29. By: António Afonso (European Central Bank, Directorate General Economics, Frankfurt am Main); Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Michal Slavík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, we investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically we employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that (i) the use of a nonlinear framework with regime switches is corroborated by nonlinearity tests; (ii) the responses of economic growth to a fiscal shock are mostly positive in both financial stress regimes; (iii) financial stress has a negative effect on output growth and worsens the fiscal position; (iv) the nonlinearity in the response of output growth to a fiscal shock is mainly associated with different behaviour across regimes; (v) the size of the fiscal multipliers is higher than average in the last crisis.
    Keywords: fiscal policy, financial markets, threshold VAR
    JEL: E62 G15 H60
    Date: 2011–08
  30. By: Ulrich Bindseil; Philipp Johann König
    Abstract: It has recently been argued that intra-eurosystem claims and liabilities in the form of TARGET2 balances would raise fundamental issues within the European monetary union. This article provides a framework for the economic analysis of TARGET2 balances and discusses the key arguments behind this recent debate. The analysis is conducted within a system of financial accounts in which TARGET2 balances can arise either due to current account transactions or cross-border capital flows. It is argued that the recent volatility of TARGET2 balances reflects capital flow movements, while the previously prevailing current account positions did not find a strong reflection in TARGET2 balances. Some recent statements regarding TARGET2 appear to be due to a failure to distinguish between the monetary base (a central bank liability concept) and the liquidity deficit of the banking system vis-à-vis the central bank (a central bank asset concept). Furthermore, the article highlights the importance of TARGET2 for the stability of the euro area and points out that the proposal to limit the size of TARGET2 liabilities essentially contradicts the idea of a monetary union.
    Keywords: TARGET2, central bank balance sheet, liquidity deficit, financial crisis
    JEL: E58 F33
    Date: 2011–06
  31. By: Elke Hahn (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores the role of oil prices in the euro area economy since the 1970s by applying a VAR framework with time varying parameters and stochastic volatility in which oil supply and global demand shocks are identified. Our results show that both types of shock contributed substantially to the oil price surges during historical oil crises and likewise to those over the past decade. Counterfactual histories of the price and activity variables, moreover, reveal much larger adverse contributions of both shocks to HICP inflation and GDP in the first half of the sample than in the second, which suggests that changes related to these shocks have contributed to the Great Moderation. Impulse responses, moreover, show that a decline in the pass through of the two shocks has added to the moderating contribution over time, while variance decompositions indicate no change in the relative importance of the two shocks over time. JEL Classification: E3.
    Keywords: Oil prices, Great Moderation, time varying parameter VAR model, stochastic volatility, euro area.
    Date: 2011–06
  32. By: Richard C.K. Burdekin; Kris James Mitchener; Marc D. Weidenmier
    Abstract: The question of price level versus inflation targeting remains controversial. Disagreement concerns, not so much the desirability of price stability, but rather the means of achieving it. Irving Fisher argued for a commodity dollar standard where the purchasing power of money was fixed by indexing it to a basket of commodities. We show that movements in the price of silver closely track the movements in overall prices during the classical gold standard era. The one-to-one relationship between paper and silver bonds suggests that a simple “silver rule" could have sufficed to fix the purchasing power of money.
    JEL: E31 E4 E58 N1 N33
    Date: 2011–06
  33. By: John Pawley (UWA Business School, The University of Western Australia); Ernst Juerg Weber (UWA Business School, The University of Western Australia)
    Abstract: The vintage model of capital accumulation predicts that technical progress depends on the installation of new capital equipment. In this paper it is found that investment raises labor productivity in the G7 countries and Australia. This finding implies that the decline in investment during the global financial crisis will have a long lasting detrimental effect on labor productivity and hence wages.
    Date: 2011
  34. By: Alice Fabre; Stéphane Pallage
    Abstract: In this paper, we measure the welfare effects of banning child labor in an economy with strong idiosyncratic shocks to employment. We then design two different policies: an unemployment insurance program and a universal basic income system. We show that they can often lead to an endogenous elimination of child labor. We work within a dynamic, general equilibrium model calibrated to South Africa in the 1990s.
    Keywords: Child labor, Idiosyncratic shocks, Unemployment insurance, Universal basic income, Heterogeneous agents, Child labor ban
    JEL: E20 D58 J65
    Date: 2011
  35. By: Saint-Paul, Gilles (TSE)
    Date: 2011–05–23
  36. By: Martin Berka; Michael B. Devereux; Thomas Rudolph
    Abstract: We study a newly released data set of scanner prices for food products in a large Swiss online supermarket. We find that average prices change about every two months, but when we exclude temporary sales, prices are extremely sticky, changing on average once every three years. Non-sale price behavior is broadly consistent with menu cost models of sticky prices. When we focus specifically on the behavior of sale prices, however, we find that the characteristics of price adjustment seems to be substantially at odds with standard theory.
    JEL: E3
    Date: 2011–06
  37. By: Jung, Hyungmin (Early Warning Office); Yun Jeong, Hoe (Asian Development Bank)
    Abstract: This paper examines the cases of the Early Warning System (EWS) in the Republic of Korea, which was introduced in the wake of 1997/98 Asian financial crisis in a policy effort to prevent its recurrence. The EWS in the Republic of Korea was expanded into a national system in 2005 incorporating the finance, real estate, commodities, and labor sectors. This paper provides the descriptions of each EWS sector and documents several episodes of their policy contributions. The past experiences suggest that quantitative models tend to have difficulty predicting a crisis due to the changing nature of crises. Hence, it is desirable that quantitative models are supplemented by qualitative analysis reinforcing EWSs with various methodologies. To improve economic surveillance and message delivery to guide proper policy actions, the independence of surveillance unit should be maintained and the scope of monitoring should be expanded to incorporate regions and markets other than domestic ones given the growing influences of the external sector on the domestic economy through trade and financial linkages.
    Keywords: EWS; crisis; surveillance; monitoring; quantitative model; qualitative analysis
    JEL: E44 E61 F37
    Date: 2011–03–01
  38. By: Reinhart, Carmen; Kirkegaard, Jacob; Sbrancia, Belen
    Abstract: Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Sometimes the debt restructuring is subtle and takes the form of, “financial repression.” In the heavily regulated financial markets of the Bretton Woods system, a variety of restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. In this paper, we summarize our findings for the post-World War II period for a selected group of countries and document the resurgence of financial repression in the wake of the 2007-2009 financial crises and the accompanying surge in public debts in advanced economies.
    Keywords: debt; interest rates; regulation; financial repression
    JEL: E62 F3 E4 H6
    Date: 2011–06
  39. By: Christopher Reicher
    Abstract: In this paper, I discuss three sets of links which I uncover in the data on aggregate US job and worker flows. Job flows are strongly related to aggregate employment growth, while worker flows are strongly related to employment growth and the unemployment rate. I show that a simple frictionless business cycle model with heterogeneity and a simple form of on-the-job search can explain these links. Job flows respond simply to the cross-section of firm growth, which responds to aggregate employment growth. Worker flows are related to both employment growth and the unemployment rate, and quits and hires are particularly tightly related to each other. Quits and hires interact to form a hiring chain—hires beget quits through on-the-job search, and quits beget hires to replace quitters. High unemployment crowds out quits, shortens the hiring chain, reduces the number of hires, and also results in an elevated layoff rate. The simple hiring chain model fits the data surprisingly well
    Keywords: Job flows, worker flows, heterogeneity, on-the-job search, hiring chain
    JEL: E32 J63 J21
    Date: 2011–06
  40. By: LEUNG, K. Y. Charles; TANG, C. H. Edward
    Abstract: Hong Kong is no stranger to bubbles or crisis. During the Asian Financial Crisis(AFC), the Hong Kong housing price index drops more than 50% in less than a year. The same market then experiences the Internet Bubble, the SARS attack, and recently the Global Financial Crisis (GFC). This paper attempts to provide some “stylized facts” of the real estate markets and the macroeconomy, and follow the event-study methodology to examine whether the markets behave differently in the AFC and GFC, and discuss the possible linkage to the change in government policies (“learning effect”) and the flow of Chinese consumers and investors to Hong Kong (“China factor”).
    Keywords: regime switching; structural change; small open economy; bounded rationality; banking policy
    JEL: E50 E44 R20 E60
    Date: 2011–01
  41. By: Cristiano Cantore (University of Surrey); Raffaele Paul Levine (University of Surrey)
    Abstract: We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ÔshareÕ parameters are not in fact shares, but depend on underlying dimensions - they are Ôdimensional constantsÕ in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, Ôre-parametrizationÕ, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our Ôre-parametrizationÕ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.
    JEL: E23 E32 E37
    Date: 2011–06
  42. By: Moshe Syrquin
    Abstract: Ever since the early days of National Income accounting we can observe periodic surges of demands to fix the measurement of GDP to better reflect progress, welfare or even happiness. In recent years even Presidents and Prime Ministers in Europe have joined the chorus of the discontent. In this paper I argue that the critique is mostly misguided. Welfare measurement has not been the objective of the GDP accounts especially since the late 1940s when National Accounts became a vehicle for applying Keynesian economics for, primarily, short run stabilization. I also argue that the search for a unique index of welfare, well-being, or happiness is a chimera.
    Date: 2011–04
  43. By: Isaac Mbiti; David N. Weil
    Abstract: M-Pesa is a mobile phone based money transfer system in Kenya which grew at a blistering pace following its inception in 2007. We examine how M-Pesa is used as well as its economic impacts. Analyzing data from two waves of individual data on financial access in Kenya, we find that increased use of M-Pesa lowers the propensity of people to use informal savings mechanisms such as ROSCAS, but raises the probability of their being banked. Using aggregate data, we calculate the velocity of M-Pesa at between 11.0 and 14.6 person-to-person transfers per month. In addition, we find that M-Pesa causes decreases in the prices of competing money transfer services such as Western Union. While we find little evidence that people use their M-Pesa accounts as a place to store wealth, our results suggest that M-Pesa improves individual outcomes by promoting banking and increasing transfers.
    JEL: E40 O16 O33
    Date: 2011–06
  44. By: Bos, Frits; Teulings, Coen
    Abstract: In some countries - the Netherlands, UK and USA - the expected economic implications of election platforms of political parties are evaluated by independent economic institutions prior to the election. This paper analyzes the merits and limitations of this process, taking 25 years of Dutch experience as a point of reference. In particular in times of financial crisis and unsustainable public finance, evaluation of election platforms can serve as a disciplining device for unrealistic or (time) inconsistent promises by politicians. More in general, it can help political parties to credibly inform voters about the implications of their platforms, to design more efficient policies and to reach consensus on them. It can also create a level playing field for political parties not represented in the government, in particular those with limited resources for economic information and expertise. However, there may be adverse effects, in particular when trade-offs are presented in an unbalanced way or when the rules of the evaluation provide too much room for gaming and free lunches.
    Keywords: Evaluation of election platforms; Fiscal watchdogs
    JEL: E62 D70 H0 E61 A11
    Date: 2011–06
  45. By: Xiaohong Chen; Jack Favilukis; Sydney C. Ludvigson
    Abstract: This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) recursive utility model, evaluates the model's ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.
    JEL: E21 G12
    Date: 2011–06
  46. By: Kazi, Irfan Akbar; Guesmi, Khaled; Kaabia, Olfa
    Abstract: In this paper we investigate the contagion effect between stock markets of U.S and sixteen OECD countries due to Global Financial Crisis (2007-2009). We apply Dynamic Conditional Correlation GARCH model Engle (2002) to daily stock price data (2002-2009). In order to recognize the contagion effect, we test whether the mean of the DCC coefficients in crisis period differs from that in the pre-crisis period. The identification of break point due to the crisis is made by Bai-Perron (1998, 2003) structural break test. We find a significant increase in the mean of dynamic conditional correlation coefficient between U.S and OECD stock markets under study during the crisis period for most of the countries. This proves the existence of contagion between the US and the OECD stock markets. --
    Keywords: Financial crisis,integration,contagion,multivariate GARCH-DCC model
    JEL: E44 F15 F36 F41
    Date: 2011
  47. By: Tirole, Jean
    JEL: E44 E52 G28
    Date: 2011–06
  48. By: Bilin Neyapti (Bilkent University); Zeynep Burcu Bulut-Cevik (METU)
    Abstract: This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and compensates for the deviation of pre-tax or transfer income from a target level; in addition, a portion of transfers is considered to be directed towards investment. Simulations of the model’s optimal solution reveal that increasing punishment always results in increased steady state effort, despite the disincentives that increasing income compensation or directed investment may generate. Increasing punishment also improves capital accumulation the lower the rate of directed investments and the lower the tax rate. Further, efficiency in tax collection is achieved the lower the rate of directed investment and the higher the punishment rate.
    Keywords: Fiscal decentralization, redistribution
    JEL: E62 H71 O23
    Date: 2011–06
  49. By: Elsby, Michael (University of Edinburgh); Smith, Jennifer C. (University of Warwick); Wadsworth, Jonathan (Royal Holloway, University of London)
    Abstract: Unemployment varies substantially over time and across subgroups of the labour market. Worker flows among labour market states act as key determinants of this. We examine how the structure of unemployment across groups and its cyclical movements across time are shaped by changes in labour market flows. Using novel estimates of flow transition rates for the UK over the last 35 years, we decompose unemployment variation into parts accounted for by changes in rates of job loss, job finding and flows via non-participation. Close to two-thirds of the volatility of unemployment in the UK over this period can be traced to rises in rates of job loss that accompany recessions. The share of this inflow contribution has been broadly the same in each of the past three recessions. Decreased job-finding rates account for around one-quarter of unemployment cyclicality and the remaining variation can be attributed to flows via non-participation. Digging deeper into the structure of unemployment by gender, age and education, the flow-approach is shown to provide a richer understanding of the unemployment experiences across population subgroups.
    Keywords: labour market, unemployment, worker flows
    JEL: E24 J6
    Date: 2011–06

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