nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒07‒02
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Monetary aggregates, financial intermediate and the business cycle By Hong, Hao
  2. Policy Commitment and Market Expectations: Lessons Learned from Survey Based Evidence under Japan's Quantitative Easing Policy By Yoshiyuki Nakazono; Kozo Ueda
  3. Business cycle with nominal contracts and search frictions By Moon, Weh-Sol
  4. Identification of Monetary Policy Shocks in Japan Using Sign Restrictions within the TVP-VAR Framework By Michal Franta
  5. Policy Games with Liquidity Constrained Consumers By Alice Albonico; Lorenza Rossi
  6. Monetary policy effects on output and exchange rates: Results from US, UK and Japan By Mustafa Caglayan; Kostas Mouratidis; Elham Saeidinezhad
  7. Assessing the sensitivity of inflation to economic activity By Konstantins Benkovskis; Michele Caivano; Antonello D’Agostino; Alistair Dieppe; Samuel Hurtado; Tohmas Karlsson; Eva Ortega; Tímea Várnai
  8. Real Business Cycles with Capital Maintenance By Alice Albonico; Sarantis Kalyvitis; Evi Pappa
  9. Endogenous Market Structures and Labor Market Dynamics By Andrea Colciago; Lorenza Rossi
  10. Can the Fed Talk the Hind Legs off the Stock Market? By Raes, L.B.D.; Eijffinger, S.C.W.; Mahieu, R.J.
  11. Inflation Dynamics and the Great Recession By Laurence M. Ball; Sandeep Mazumder
  12. Monetary Union, Fiscal Crisis and the Preemption of Democracy By Fritz W. Scharpf
  13. Oil Price Dynamics in a Real Business Cycle Model By Vipin Arora; Pedro Gomis-Porqueras
  14. Revisiting the empirical existence of the Phillips Curve for India By Karan Singh, B; A. Kanakaraj , A; Sridevi, T.O
  15. Search Frictions and the Labor Wedge By Andrea Pescatori; Murat Tasci
  16. A New Action-based Dataset of Fiscal Consolidation By Daniel Leigh; Andrea Pescatori; Jaime Guajardo; Pete Devries
  17. Partisan cycles and the consumption volatility puzzle By Marina Azzimonti; Matthew Talbert
  18. Reconsidering the Welfare Cost of Inflation in the US: A Nonparametric Estimation of the Nonlinear Long-Run Money Demand Equation using Projection Pursuit Regressions By Rangan Gupta; Anandamayee Majumdar
  19. External Monetary Shocks and Monetary Integration: Evidence from the Bulgarian Currency Board By Minea, Alexandru; Rault, Christophe
  20. New evidence on cyclical and structural sources of unemployment By Zinzhu Chen; Prakash Kannan; Prakash Loungani; Bharat Trehan
  21. Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-financial Linkages Framework By Tao Sun
  23. Official Dollarization as a Monetary Regime: Its Effects on El Salvador By Andrew Swiston
  24. Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies By Bianconi, Marcelo; Fisher, Walter H.
  25. El proceso de transmisión de la política monetaria a la estructura temporal de los tipos de interés en España By Paz Rico Belda
  26. Can a pure real business cycle model explain the real exchange rate: the case of Ukraine By Onishchenko, Kateryna
  27. Introduction to the Macroeconomic Structure of Yemen By Mohamed, Issam A.W.
  28. Credit Market Imperfection and Sectoral Asymmetry of Chinese Business Cycle By Yuanyan Sophia Zhang
  29. Exploitation and its unintended outcomes. An axiomatic obituary for Marx’s surplus value. By Kakarot-Handtke, Egmont
  30. The More Business Owners the Merrier? The Role of Tertiary Education By Mirjam van Praag; Andre van Stel
  31. Oil and gold: correlation or causation? By Le, Thai-Ha; Chang, Youngho
  32. What Drives Urban Consumption in Mainland China? The Role of Property Price Dynamics By Yu-Fu Chen; Michael Funke; Aaron Mehrotra
  33. Welfare-improving Government Behaviour and Inequality - Inspection Using a Heterogeneous-agent Model By Miguel Viegas; Ana Paula Ribeiro
  34. Public Expenditures on Education and Health in the Kyrgyz Republic before and during the Global Crisis By Roman Mogilevsky
  35. Government bias in education, schooling attainment and growth By Basu, Parantap; Bhattarai, Keshab
  36. On Brazil’s Term Structure: Stylized Facts and Analysis of Macroeconomic Interactions By Marco Rodriguez Waldo; Richard Munclinger; Luiz Alves; Rodrigo Cabral
  37. The Great Liquidity Freeze: What Does It Mean for International Banking? By Domanski, Dietrich; Turner, Philip
  38. The Dynamics of Energy-Grain Prices with Open Interest By Shawkat Hammoudeh; Soodabeh Sarafrazi; Chia-Lin Chang; Michael McAleer
  39. The Global Financial Crisis: Decoupling of East Asia—Myth or Reality? By Park, Yung Chul
  40. The Greek financial crisis: growing imbalances and sovereign spreads By Heather D. Gibson; Stephan G. Hall; George S. Tavlas
  41. Análisis Neoclásicos de Largo y de Corto Plazo Keynesianos de la Inversión en la Producción y el Crecimiento Económico de México By Salgado-Vega, Jesús; Rogel-García, Hugo Rodolfo; Salgado-Vega, María del Carmen
  42. The Penn-Belassa-Samuelson Effect in Developing Countries: Price and Income Revisited By Fadi Hassan

  1. By: Hong, Hao (Cardiff Business School)
    Abstract: This paper explains and evaluates the transmissions and effectiveness of monetary policy shock in a simple Cash-in-Advance (CIA) economy with financial intermediates. Lucas-Fuerst's (1992) limited participation CIA models are able to explain decreasing nominal interest rates and increasing real economic activity with monetary expansion through limited participation monetary shock and the cost channel of monetary policy. Calvo's (1983) sticky price monetary model examines the real effects of money injections through firms price setting behaviour, but it fails to generate a negative correlation between nominal interest rates and money growth rate, which has been observed in the data. This paper employs McCandless (2008) financial intermediates CIA model to explain the transmissions and impacts of monetary shocks. The model does not request limited participation monetary shock or Keynesian type of sticky price/wage, to examine the lower nominal interest rate and increasing real economic activity with monetary expansion. By extending the model with Stockman's (1981) CIA constraint, it is able to account for both positive response of consumption subject to monetary innovations, which has been found in Leeper et al. (1996) and the positive correlation between output and consumption which has been observed in the data.
    Keywords: Monetary business cycle; financial intermediate; cash-in-advance model
    JEL: E44 E52
    Date: 2011–06
  2. By: Yoshiyuki Nakazono (Waseda University and Research Fellow of the Japan Society for the Promotion of Science (E-mail: ynakazono; Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda
    Abstract: The Bank of Japan conducted its quantitative easing policy ( QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the zero percent threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations.
    Keywords: Commitment policy, policy duration effect, unconventional monetary policy, zero lower bound
    JEL: C23 C24 E43 E44 E52 E58
    Date: 2011–06
  3. By: Moon, Weh-Sol
    Abstract: This paper examines a dynamic stochastic general equilibrium (DSGE) model containing exible prices, search frictions and nominal wage contracts. It is assumed that the nominal hourly wage rate and the hours of work are jointly determined, so-called efficient bargaining, for each period. The frictional labor markets reasonably reflect the volatility of real variables and the fact that productivity is no longer countercyclical. As contract length increases, the volatilities of the unemployment rate and the vacancy rate increase sharply, but those of output and total hours worked do not appreciably change.
    Keywords: Business Cycles; Labor Market Frictions; Nominal Wage Contracts
    JEL: E32 E24 J41 J64
    Date: 2011–06–20
  4. By: Michal Franta (Czech National Bank, Economic Research Department (E-mail:
    Abstract: This paper contributes to the discussion on the functioning of the monetary policy transmission mechanism in Japan during the past three decades. It extends the methodology of time-varying parameter vector autoregressions (TVP-VAR) by employing an identification scheme based on sign restrictions. This approach allows for an explicit account of the zero lower bound on the nominal interest rate. Results suggest differences in the transmission mechanism between the quantitative easing policy period and the periods when the call rate played the role of a monetary policy instrument. Monetary policy operating through call rate movements is found to influence output more than when it targets banksf balances held at the central bank. Monetary policy operating through quantitative easing is found to influence inflation, in sharp contrast to the previous literature.
    Keywords: Structural vector autoregressive model, time-varying parameters, sign restrictions, unconventional monetary policy, zero lower bound
    JEL: C11 C15 E52
    Date: 2011–06
  5. By: Alice Albonico (Department of Economics and Quantitative Methods, University of Pavia); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: In the light of the recent financial crisis, we investigate the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authority are independent and play strategically. We find that limited asset market participation strongly affects the optimal steady state and the optimal dynamics of the different policy regimes considered. In particular: (i) both in the long run and in short run equilibrium, a greater inflation bias is optimal than in the standard representative agent economy; (ii) in response to a markup shock, fiscal policy becomes more active as the fraction of liquidity constrained agents increases; (iii) optimal discretionary policies imply welfare losses for Ricardian, while liquidity constrained consumers experience welfare gains with respect to Ramsey.
    Keywords: liquidity constrained consumers, optimal monetary and fiscal policy, strategic interaction, inflation bias
    JEL: E3 E5
    Date: 2011–02
  6. By: Mustafa Caglayan (Department of Economics, The University of Sheffield); Kostas Mouratidis (Department of Economics, The University of Sheffield); Elham Saeidinezhad (Department of Economics, The University of Sheffield)
    Abstract: We investigate the effects of "contractionary" monetary shocks by imposing sign restrictions on the impulse responses of macroeconomic variables up to six months while allowing industrial production and exchange rate to be completely determined by the data. We show that i) the effect of an adverse monetary policy shock on industrial production is ambiguous; ii) there is price puzzle for Japan and UK which we conjecture as an outcome of excessive bank lending and poor regulation but not of passive monetary policy; ii) there is delayed overshooting puzzle for Japan and the exchange rate puzzle for the UK and the US.
    Keywords: monetary shocks, business cycles, exchange rate puzzle, price puzzle, vector autoregression
    JEL: C3 E1 E3
    Date: 2011–06
  7. By: Konstantins Benkovskis (Bank of Latvia, K. Valdemara street 2A, Riga, LV-1050, Latvia.); Michele Caivano (Banca d’Italia, Italy.); Antonello D’Agostino (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alistair Dieppe (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Samuel Hurtado (Banco de España, Spain.); Tohmas Karlsson (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Eva Ortega (Banco de España, Spain.); Tímea Várnai (National Bank of Hungary, 1054 Szabadság tér 8/9, 1850 Budapest.)
    Abstract: A number of academic studies suggest that from the mid-1990s onwards there were changes in the link between inflation and economic activity. However, it remains unclear the extent to which this phenomenon can be ascribed to a change in the structural relationship between inflation and output, as opposed to a change in the size and nature of the shocks hitting the economy. This paper uses a suite of models, such as time-varying VAR techniques, traditional macro models, as well as DSGE models, to investigate, for various European countries as well as for the euro area, the evolution of the link between inflation and resource utilization and its dependence on the nature and size of the shocks. Our analysis suggests that the relationship between inflation and activity has indeed been changing over time, while remaining positive, with the correlation peaking during recessions. Quantitatively, the link between output and inflation is found to be highly dependent on which type of shocks hit the economy: while, in general, all demand shocks to output imply a reaction of inflation of the same sign, the latter will be less pronounced when output fluctuations are driven by supply shocks. In addition, a sharp deceleration of activity, as opposed to a subdued but protracted slowdown, results in a swifter decline in inflation. Inflation exhibits a rather strong persistence, with a negative impact still visible three years after the initial shock. JEL Classification: E31, E32, E37.
    Keywords: Demand shock, inflation response, macro model, output growth, Phillips curve.
    Date: 2011–06
  8. By: Alice Albonico (Department of Economics and Quantitative Methods, University of Pavia); Sarantis Kalyvitis (Department of International and European Economic Studies, Athens University of Economics and Business); Evi Pappa (Departament de Economia y d’Historia Economica, Universitat Autonoma de Barcelona and CEPR)
    Abstract: We develop a stochastic general equilibrium model in which maintenance endogenously affects the capital depreciation rate. The model performs well in generating maintenance series that match closely existing survey-based measures for Canada. Maintenance is procyclical and comoves almost always with output. Investmentspecific shocks are the only disturbances that induce a negative correlation between output and maintenance. This feature is crucial for the identification of such shocks in the short run. We use Bayesian estimation to obtain the time profile of equipment capital depreciation in Canadian manufacturing. The depreciation rate has been quite volatile and procyclical over the last 50 years.
    Keywords: real business cycle, technology shocks, endogenous capital depreciation, maintenance
    JEL: E22 E32 E37
    Date: 2011–06
  9. By: Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously. The interplay between firms endogenous entry, strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables, and helps addressing the unemployment-volatility puzzle. Consistently with U.S. evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net firms’ entry is procyclical and the price mark up is countercyclical.
    Keywords: Endogenous Market Structures, Firms’ Entry, Search and Matching Frictions
    JEL: E24 E32 L11
    Date: 2011–02
  10. By: Raes, L.B.D.; Eijffinger, S.C.W.; Mahieu, R.J. (Tilburg University, Center for Economic Research)
    Abstract: Deliberately or not, by providing its stance on the prospects of the economy, rationalizing past decisions or announcing future actions, central banks in fluence financial markets' expectations of its future policy. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weak and on average negative. The response of equities to central bank talk depends critically on the business cycle. There are strong industry specific effects of monetary policy actions and communication. These industry effects relate to the variation in cyclicality of different industries. Firm-specific effects of monetary policy relate to the leverage, the size and the price-earnings ratio of firms.
    Keywords: Monetary policy;Monetary policy announcements;Credit Channel;Business cycle;Stock market
    JEL: G14 E44 E52
    Date: 2011
  11. By: Laurence M. Ball; Sandeep Mazumder
    Abstract: This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are ussed to predice inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and vairance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.
    Date: 2011–06–01
  12. By: Fritz W. Scharpf
    Abstract: The European Monetary Union (EMU) has removed crucial instruments of macroeconomic management from the control of democratically accountable governments. Worse yet, it has been the systemic cause of destabilizing macroeconomic imbalances that member states found difficult or impossible to counteract with their remaining policy instruments. And even though the international financial crisis had its origins outside Europe, the Monetary Union has greatly increased the vulnerability of some member states to its repercussions. Its effects have undermined the economic and fiscal viability of some EMU member states, and they have frustrated political demands and expectations to an extent that may yet transform the economic crisis into a crisis of democratic legitimacy. Moreover, present efforts of EMU governments to “rescue the Euro” will do little to correct economic imbalances and vulnerabilities, but are likely to deepen economic problems and political alienation in both, the rescued and the rescuing polities.
    Date: 2011–05
  13. By: Vipin Arora; Pedro Gomis-Porqueras
    Abstract: We show the importance of endogenous oil prices and production in the real business cycle framework. Endogenising these variables improves the model’s predictions of business cycle statistics, oil related and non-oil related, relative to a situation where either is exogenous. This result is robust to the standard extensions (variable capacity utilisation and monopolistic competition) used in the literature. In particular, we first show that with either exogenous oil prices or production the standard real business cycle model and variants cannot match the oil-related and business cycle facts. In contrast, when both of these variables are endogenous, we can substantially improve the corresponding co-movements and slightly improve standard business cycle properties for consumption and investment.
    JEL: E37 F47 Q43
    Date: 2011–06
  14. By: Karan Singh, B; A. Kanakaraj , A; Sridevi, T.O
    Abstract: This paper revisits the empirical existence of the Phillips curve in the Indian context. To estimate the Phillips curve we need two variables – inflation and the output gap. In the case of India, incorrect measurement of both variables causes much difficulty in estimating the Phillipscurve. We use a non-linear Kalman filter approach to estimate the output gap and find that the Kalman filter estimate captures all the dynamics of the economy. Our results show that after taking supply shocks into consideration, there is clear evidence as to the existence of the Phillips curve in India for recent years.
    Keywords: Kalman Filter; Output Gap; Inflation
    JEL: C32 E31 E50 A21
    Date: 2010–02–09
  15. By: Andrea Pescatori; Murat Tasci
    Abstract: This paper shows that labor market search frictions do not explain fluctuations in the labor wedge per se. However, the introduction of extensive and intensive margin clarifies that measuring the MRS in terms of total hours artificially introduces procyclicality in the MRS. When the MRS is correctly measured in terms of hours per worker, the labor wedge obtained is less variable than the one of the competitive model. Finally, we show that it is possible to measure a strongly procyclical labor wedge when the actual data generating process is a search model that allows for movements in both margins.
    Keywords: Accounting , Business cycles , Economic models , Employment , Labor markets , Unemployment ,
    Date: 2011–05–23
  16. By: Daniel Leigh; Andrea Pescatori; Jaime Guajardo; Pete Devries
    Abstract: This paper presents a new dataset of fiscal consolidation for 17 OECD economies during 1978-2009. We focus on discretionary changes in taxes and government spending primarily motivated by a desire to reduce the budget deficit and not by a response to prospective economic conditions. To identify the motivation and budgetary impact of the fiscal policy changes, we examine contemporaneous policy documents, including Budgets, Budget Speeches, central bank reports, Convergence and Stability Programs submitted by the authorities to the European Commission, and IMF and OECD reports. The resulting series can be used to estimate the macroeconomic effects of fiscal consolidation.
    Date: 2011–06–02
  17. By: Marina Azzimonti; Matthew Talbert
    Abstract: Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed countries. In emerging economies, however, consumption is more volatile than income. In this paper the authors provide a novel explanation of this phenomenon, the ‘consumption volatility puzzle,’ based on political frictions. They develop a dynamic stochastic political economy model where parties that disagree on the size of government (right-wing and left-wing) alternate in power and face aggregate uncertainty. While productivity shocks affect only consumption through responses to output, political shocks (switches in political ideology) change the composition between private and public consumption for a given output size via changes in the level of taxes. Since emerging economies are characterized by less stable governments and more polarized societies, the effects of political shocks are more pronounced. For a reasonable set of parameters the authors confirm the empirical relationship between political polarization and the ratio of consumption volatility to output volatility across countries.
    Keywords: Business cycles ; Developing countries
    Date: 2011
  18. By: Rangan Gupta (Department of Economics, University of Pretoria); Anandamayee Majumdar (School of Mathematical & Statistical Sciences, Arizona State University)
    Abstract: This paper, first, estimates the appropriate, log-log or semi-log, linear long-run money demand relationship capturing the behavior US money demand over the period of 1980:Q1 to 2010:Q4, using the standard linear cointegration procedures found in the literature, and the corresponding nonparametric version of the same based on Projection Pursuit Regression (PPR) methods. We then, compare the resulting welfare costs of inflation obtained from the linear and nonlinear money demand cointegrating equations. We make the following observations: (i) The appropriate money demand relationship for the period of 1980:Q1 to 2010:Q4 is captured by a semi-log function, since no cointegrating relationship could be obtained for the log-log model; (ii) The semi-elasticity of interest rate obtained from the PPR method is found to be more than double the corresponding estimate obtained under the linear case; (iii) Based on the estimation of semi-log cointegrating equations, the welfare cost of inflation was found to at the most lie between 0.0131 percent of GDP to 0.2186 percent of GDP for inflation rates between 0 percent and 10 percent, and; (iv) In comparison, the welfare cost of inflation obtained from the semi-log non-linear long-run money demand function, obtained using the PPR method, for 0 to 10 percent of inflation ranges between 0.4929 to 1.9468 percent of GDP. These results suggest that the Federal Reserve’s current policy, which generates low but still positive rates of inflation, might not be an adequate approximation in terms of the welfare cost of inflation. Perhaps, moving all the way to a Friedman-type deflationary rule for a zero nominal interest is a more desired policy given the size of welfare loss.
    Keywords: Cointegration, Money Demand, Projection Pursuit Regression, Welfare Cost of Inflation
    JEL: E31 E41 E52
    Date: 2011–06
  19. By: Minea, Alexandru (CERDI, University of Auvergne); Rault, Christophe (University of Orléans)
    Abstract: Starting July the 1st 1997, Bulgaria adopted a Currency Board (CB) monetary system. This paper aims at investigating if the adoption of the CB monetary system, which involves the cost of loosing monetary autonomy, has provided a relatively better (with respect to other CEEC) monetary integration of Bulgaria with the European Monetary Union (EMU). Since Bulgarian monetary variables are endogenous under a CB, we focus on the ECB and FED interest rates as the main sources on monetary volatility. First, we find that ECB shocks are more rapidly absorbed and have less significant impact of domestic variables, with respect to other external monetary shocks (FED rate changes). Second, the responses of Bulgarian variables following changes in the ECB interest rate present lower persistence and significance, with respect to what the previous literature emphasized for other CEEC with monetary autonomy. This latter result still holds when accounting for different sources of cross-country heterogeneity outlined in the literature, thus supporting that the adoption of the CB may have worked as a rather good device in terms of integration of Bulgaria into the EMU.
    Keywords: currency board, Bulgaria, monetary shocks, ECB interest rate, FED interest rate
    JEL: E42 E52
    Date: 2011–06
  20. By: Zinzhu Chen; Prakash Kannan; Prakash Loungani; Bharat Trehan
    Abstract: We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors—real GDP changes (“Okun’s Law”), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.
    Keywords: Unemployment
    Date: 2011
  21. By: Tao Sun
    Abstract: This paper attempts to identify the indicators that can demonstrate the vulnerabilities in systemically important financial institutions. The paper finds that (i) indicators on leverage, liquidity, and business scope can help identify the differences between the intervened and non-intervened financial institutions during the subprime crisis; (ii) the expected default frequencies react positively to shocks to leverage, inflation, global financial stress, and global excess liquidity, and negatively to return on assets and equity prices; and (iii) leverage has been the most robust factor with a long-run causal effect on the expected default frequencies.
    Keywords: Banking crisis , Banking sector , Credit risk , Economic models , Financial institutions ,
    Date: 2011–05–09
  22. By: Amir Mansour Tehranchian (Department of Economics, Mazandaran University, Babolsar, Iran); Masoud Behravesh (Department of Management, Bonab Branch, Islamic Azad University, Bonab, Iran)
    Abstract: In this paper, Stieglitz’s theory regarding the threshold effects of real interest rate on investment of Iran's private sector during 1973-2008 is experimentally examined. The study showed that although the real interest rate directly affects on private investment in Iran, an increase of more than 2 percent in the real interest rate will reduce the private sector's investment. In other words, Stieglitz’s argument about a one-threshold level (close to zero) of the real interest rate is confirmed in Iran. Paying attention to the rate of inflation and threshold limit of influence of interest rate on monetary policies is considered the most important proposals of the present research
    Keywords: Private sector's investment, Real interest rate, Threshold effects
    JEL: E22 E43 E44
    Date: 2011–06
  23. By: Andrew Swiston
    Abstract: This paper examines El Salvador’s transition to official dollarization by comparing aspects of this regime to the fixed exchange rate regime prevailing in the 1990s. Commercial bank interest rates are analyzed under an uncovered interest parity framework, and it is found that dollarization lowered rates by 4 to 5 percent by reducing currency risk. This has generated net annual savings averaging ½ percent of GDP for the private sector and ¼ percent of GDP for the public sector (net of the losses from foregone seigniorage). Estimated Taylor rules show a strong positive association between Salvadoran output and U.S. Federal Reserve policy since dollarization, implying that this policy has served to stabilize economic activity more than it did under the peg and more than policy rates in Central American countries with independent monetary policy have done. Dollarization does not appear to have affected the transmission mechanism, as pass-through of monetary policy to commercial interest rates has been similar to pass-through under the peg and in the rest of Central America.
    Date: 2011–06–06
  24. By: Bianconi, Marcelo (Department of Economics, Tufts University, Medford, MA, USA); Fisher, Walter H. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: We analyze the role of government intertemporal budget policies in a growing open economy including nominal assets in the presence of an upward sloping supply of debt. This introduces transitional dynamics that influence the effects of government policy instruments on the long term fiscal liability. In particular, shifts in capital income taxes can lead to dynamic scoring effects through the evolution of foreign debt. We show that a combination of tax-cumexpenditure, or government expenditure alone can balance the long term government budget constraint. However, for certain combinations of parameter values, the capital income tax alone cannot balance the intertemporal budget.
    Keywords: Government budget constraint, nominal assets, capital income tax
    JEL: E5 E6 F4
    Date: 2011–06
  25. By: Paz Rico Belda (Universitat de València)
    Abstract: This paper analyses the adjustment grade and speed of interest rates term structure in Spain to changes in official interest rateo For this purpose, we specify and estimate an error-correction model, which considers the anticipation of future policy monetary and this allows obtaining an efficient estimator ofthe long-run relation. Moreover, we consider the possibility of asymmetry in the adjustment process to the equilibrium. The results indicate that interest rates anticipate monetary policy actions. Furthermore, monetary policy is transmitted quickly and completely to the short-term interest rates, while transmission is not complete in long-term interest rates but his speed has increased since 1999. Finally, there is no evidence of asymmetry in the adjustment process to equilibrium. Este trabajo analiza el grado y velocidad de respuesta de la estructura temporal de los tipos de interés en España a variaciones del tipo de interés oficial. Para ello se especifica y estima un modelo de corrección de error que tiene en cuenta la anticipación de las acciones de política monetaria, permitiendo obtener un estimador eficiente de la relación de largo plazo. Además, se considera la posibilidad de asimetría en el proceso de ajuste al equilibrio. Los resultados obtenidos indican que los tipos de interés descuentan con antelación los movimientos de política monetaria. Asimismo, las acciones de política monetaria se transmiten rápida y completamente a los tipos monetarios, mientras que en los tipos a más largo plazo la transmisión no es completa, aunque la velocidad de transmisión ha aumentado desde 1999. Finalmente, no se observa asimetría en el proceso de ajuste de los tipos de interés al equilibrio.
    Keywords: política monetaria, anticipación, asimetría. monetary policy, anticipation, asymmetry.
    Date: 2011–05
  26. By: Onishchenko, Kateryna (Cardiff Business School)
    Abstract: Real exchange rate (RER) is an important instrument for restoring sustainable economic growth in the small open economy with large export share. RER of Ukrainian currency can be explained within the real business cycle (RBC) framework without any forms of nominal rigidities. Fitting Ukrainian quarterly data for the period of 1996:Q1-2009:Q3 into the small open economy real business cycle model and testing it by method of indirect inference shows that RER can be reproduced by RBC framework. The generated pseudo-samples for RER by method of bootstrapping allow to obtain the distribution of the best fit ARIMA(2,1,4) parameters and to show with the Wald statistics that those parameters lie within 95% confidence intervals of those estimated for bootstrapped pseudo Q parameters.
    Keywords: sustainable economic growth; business cycle; real exchange rates; small open economy; indirect inference; ARIMA
    JEL: E31 E32 E37 F31 F37
    Date: 2011–06
  27. By: Mohamed, Issam A.W.
    Abstract: In countries where tools of economic control are immature and disabled due to totalitarian systems, macroeconomic analyses for aggregate quantities and relationships, such as total consumption, investment, and government expenditures represents a difficult task. The practice of aggregation distinguishes this field of microeconomics and has advantages but also creates problems, a brief survey of these problems is required now, although a deeper appreciation of these must await the critical attitudes that can only develop with more exposure to entire subject. One difficulty is the complex area known as the aggregation problem, the classifying of widely varying goods or activities into one general category, which is treated as a homogeneous variable. The political, social and military fate of nations depends greatly upon economic success, and no area of economics is today more vital to nation’s success than its macroeconomic performance. Countries like Japan which has grown rapidly by wining export markets for its products, enjoy enhanced political power and higher living standards. A country’s living standards depend crucially upon its macroeconomic policies.
    Keywords: Yemen; Macroeconomics; Money Supply; Demand
    JEL: R1 A1 C0 C5 C46 R15 A10 C1 C4 A13 C3 A12 A19 C01
    Date: 2011
  28. By: Yuanyan Sophia Zhang
    Abstract: This paper analyzes the role of credit market imperfection and sectoral asymmetry as a means through which shocks to the real economy are propagated and amplified. Drawing on firm-level data to calibrate the model, our simulations capture two key stylized facts of the Chinese economy: that credit constraints are more binding in nontradable sectors than in tradable industries and that output volatility is much greater in China than in industrial economies. We find that the driving force behind our simulation results is strongly related to the non-uniform nature of credit market imperfections in China and their implications for resource allocation and the way in which the economy reacts to shocks. Correctly capturing these macro-financial interactions are essential to understand the dynamic behavior of the Chinese economy.
    Keywords: Business cycles , China , Credit , Economic models ,
    Date: 2011–05–23
  29. By: Kakarot-Handtke, Egmont
    Abstract: The present paper scrutinizes the logical foundation of Marx’s dialectic analysis of the evolving money economy. The minimalistic frame of reference is thereby given with the set of structural axioms. It turns out, first, that the commonplace notion of exploitation has to be replaced by crossover exploitation among capitalists and workers; second, that the concept of surplus value cannot explain the existence and magnitude of overall profits; finally, that the real shares of output are determined in the spheres of income and expenditure and not, as classical, Marxian and neoclassical economists unanimously maintain, in the sphere of production.
    Keywords: New framework of concept;; Structure-centric; Axiom set; Antagonism of profits and wages; Crossover exploitation; Surplus value; Axiom of reals
    JEL: E25 B14 E11 B41
    Date: 2011–06–23
  30. By: Mirjam van Praag (University of Amsterdam); Andre van Stel (EIM Business and Policy Research, Zoetermeer)
    Abstract: Policy in developed countries is often based on the assumption that higher business ownership rates induce economic value. Recent microeconomic empirical evidence casts doubts on the validity of this assumption or, at least, leads to a more nuanced view: Especially the top performing business owners are responsible for the value creation of business owners. Other labor market participants would contribute more to economic value creation as an employee than a business owner. The implied existence of an 'optimal' business ownership rate would thus replace the dictum of 'the more business owners, the merrier'. We attempt to establish whether there is such an optimal level, while investigating the role of tertiary education. Two findings stand out. First, by estimating extended versions of traditional Cobb Douglas production functions on a sample of 19 OECD countries over the period 1981-2006, we find indeed robust evidence of an optimal business ownership rate (at around 12.5%, on average). Second, the relation between business ownership and macroeconomic productivity is steeper for countries with higher participation rates in tertiary education. Thus, the optimal business ownership rate tends to decrease with tertiary education levels. This is consistent with microeconomic theory and evidence showing that entrepreneurs with superior levels of human capital run larger firms.
    Keywords: entrepreneurship; business ownership; human capital; (returns to) education; cross-country comparison; production function
    JEL: E23 J24 L26 O40 O57
    Date: 2011–04–15
  31. By: Le, Thai-Ha; Chang, Youngho
    Abstract: This study using the monthly data spanning 1986:01-2011:04 to investigate the relationship between the prices of two strategic commodities: gold and oil. We examine this relationship through the inflation channel and their interaction with the index of the US dollar. We used different oil price proxies for our investigation and found that the impact of oil price on the gold price is not asymmetric but non-linear. Further, results show that there is a long-run relationship existing between the prices of oil and gold. The findings imply that the oil price can be used to predict the gold price.
    Keywords: oil price fluctuation; gold price; inflation; US dollar index; cointegration.
    JEL: E3
    Date: 2011–06–23
  32. By: Yu-Fu Chen (University of Dundee); Michael Funke (Hamburg University and Hong Kong Institute for Monetary Research); Aaron Mehrotra (Bank of Finland)
    Abstract: This paper adds to the literature on wealth effects on consumption by disentangling house price effects on consumption for mainland China. In a stochastic modelling framework, the riskiness, rate of increase and persistence of house price movements have different implications for the consumption/housing ratio. We exploit the geographical variation in property prices by using a quarterly city-level panel dataset for the period 1998Q1 - 2009Q4 and rely on a panel error correction model. Overall, the results suggest a significant long run impact of property prices on consumption. They also broadly confirm the predictions from the theoretical model.
    Keywords: Consumption, House Prices, China, Panel Data
    JEL: E21 R31 C23 O53
    Date: 2011–05
  33. By: Miguel Viegas (GOVCOPP, DEGEI, Universidade de Aveiro); Ana Paula Ribeiro (Faculdade de Economia da Universidade do Porto and CEF.UP)
    Abstract: Governments behavior is expected to be non-neutral in terms of impacts on both welfare and inequality. In spite of their multivariate form, a tentative assessment of such inequality impacts can be provided by using a general equilibrium model with heterogeneous-agents and where wealth and income distribution is determined endogenously. Using a model capable of exploring the relationship between fiscal policy variables and the endogenous cross-section distribution of income, wealth, consumption and leisure, this paper produces a welfare and inequality analysis of several equilibriums resulting from different combinations of debt levels and of government budget variables. Moreover, such assessment is based on the empirical reality of the EU countries.
    Keywords: government budget composition and debt, heterogeneous agent model, idiosyncratic shock, inequality, welfare.
    JEL: E17 E60 H60 I30
    Date: 2011–06
  34. By: Roman Mogilevsky
    Abstract: This paper analyses the public finance performance and the dynamics of government expenditures on education and health in the Kyrgyz Republic in 2007- 2010, when the country was hit by the global economic crisis and then by an internal political crisis in 2010. Despite these crisis conditions, public health expenditures have increased substantially. In education, recurrent expenditures have been protected, while capital investments have been cut dramatically. Both sectors suffer from chronic under-financing, which results in an insufficient quality of services. The country’s fiscal situation in the medium-term is going to be difficult, so efficiency-oriented reforms need to be implemented in health care and especially in education in order to sustain the development of these critical services in Kyrgyzstan.
    Keywords: Fiscal policy, Kyrgyzstan, Education financing, Health financing, Global economic crisis
    JEL: E62 H50 H51 H52 I18 I22
    Date: 2011
  35. By: Basu, Parantap; Bhattarai, Keshab
    Abstract: A surprising cross country stylized fact is that a higher public spending on education tends to lower the long run per capita growth rate and schooling returns. This is contrary to the conventional wisdom that education is a major driver of growth. In this paper, we revisit this issue and try to understand these puzzling facts in terms of an endogenous growth model. Our cross country calibration of the growth model predicts that countries with a greater government involvement in education experience lower schooling efforts and lower growth.
    Keywords: endogenous growth; public spending on education
    JEL: E62 N10
    Date: 2011–03–02
  36. By: Marco Rodriguez Waldo; Richard Munclinger; Luiz Alves; Rodrigo Cabral
    Abstract: This paper characterizes the term structure of Treasury bond yields for Brazil, and estimates a Nelson-Siegel Model to reproduce its stylized facts for the period 2004-2010. For this purpose, this paper uses a software developed by Fund staff. In addition, the paper estimates two versions of the Nelson-Siegel Model that incorporates macroeconomic variables with the aim of assessing the dynamic interactions between the yield curve and the macroeconomy.
    Keywords: Bonds , Brazil , Economic models , Interest rate structures , Interest rates , Public debt ,
    Date: 2011–05–16
  37. By: Domanski, Dietrich (Asian Development Bank Institute); Turner, Philip (Asian Development Bank Institute)
    Abstract: In mid-September 2008, following the bankruptcy of Lehman Brothers, international interbank markets froze and interbank lending beyond very short maturities virtually evaporated. Despite massive central bank support operations and purchases of key assets, many financial markets remained impaired for a long time. Why was this funding crisis so much worse than other past major bank failures and why has it proved so hard to cure? This paper suggests that much of that answer lies in the balance sheets of international banks and their customers. It outlines the basic building blocks of liquidity management for a bank that operates in many currencies and then discusses how the massive development of foreign exchange (forex) and interest rate derivatives markets transformed banks’ strategies in this area. It explains how the pervasive interconnectedness between major banks and markets magnified contagion effects. Finally, the paper provides some recommendations for how strategic borrowing choices by international banks could make them more stable and how regulators could assist in this process.
    Keywords: banking financial stability; financial markets; international banking; international interbank markets; liquidity management
    JEL: E44 G15 G18 G24 G28
    Date: 2011–06–24
  38. By: Shawkat Hammoudeh (Lebow College of Business, Drexel University, USA); Soodabeh Sarafrazi (Lebow College of Business, Drexel University, USA); Chia-Lin Chang (Department of Applied Economics, Department of Finance, National Chung Hsing University Taichung, Taiwan.); Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).)
    Abstract: This paper examines the short- and long-run daily relationships for a grain-energy nexus that includes the prices of corn, crude oil, ethanol, gasoline, soybeans, and sugar, and their open interest. The empirical results demonstrate the presence of these relationships in this nexus, and underscore the importance of ethanol and soybeans in all these relationships. In particular, ethanol and be considered as a catalyst in this nexus because of its significance as a loading factor, a long-run error corrector and a short-run adjuster. Ethanol leads all commodities in the price discovery process in the long run. The negative cross-price open interest effects suggest that there is a money outflow from all commodities in response to increases in open interest positions in the corn futures markets, indicating that active arbitrage activity takes place in those markets. On the other hand, an increase in the soybean open interest contributes to fund inflows in the corn futures market and the other futures markets, leading to more speculative activities in these markets. In connection with open interest, the ethanol market fails because of its thin market. Finally, it is interesting to note that the long-run equilibrium (cointegrating relationship), speeds of adjustment and open interest across markets have strengthened significantly during the 2009-2011 economic recovery period, compared with the full and 2007-2009 Great Recession periods.
    Keywords: Energy-grain price nexus, open interest, futures prices, ethanol, crude oil, gasoline, corn, soybean, sugar, arbitrage, speculation.
    JEL: E43 Q11 Q13
    Date: 2011
  39. By: Park, Yung Chul (Asian Development Bank Institute)
    Abstract: The “decoupling” of East Asia from its economic interactions—both in trade and finance—with the rest of the world refers to the phenomenon of a weakening of the impact of demand and supply shocks emanating from the advanced countries on the region’s economic performance since the early 1990s. Available empirical evidence, including the faster recovery of East Asia from the 2008 global economic crisis, does not appear to lend credence to the decoupling thesis. However, with increases in income throughout the region and the three free trade agreements of the People’s Republic of China, Japan, and Korea with the Association of Southeast Asian Nations (which have entered into force), East Asia will witness a continuing expansion in intra-regional trade, much of which will consist of horizontal intra-industry trade. At the same time, if East Asia succeeds in instituting an efficient capital control regime and in strengthening the Chiang Mai Initiative Multilateralization, it will be able to cope better with the volatility of capital flows to the region. Together these developments will then help speed up economic integration among ASEAN+3 member states to build a region that is more self-contained than it has been.
    Keywords: global economic crisis; decoupling east asia; free trade agreements; intra-regional trade; chiang mai initiative multilateralization
    JEL: E32 F15 R11
    Date: 2011–06–22
  40. By: Heather D. Gibson (Bank of Greece); Stephan G. Hall (University of Leicester); George S. Tavlas (Bank of Greece)
    Abstract: We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants (including a measure of the fiscal situation, competitiveness of the Greek economy, economic activity and oil prices, reflecting the high dependence of the Greek economy on imported energy) and compare the spreads predicted by this estimated relationship with actual spreads. We find that spreads were significantly below what would be predicted by fundamentals from end-2004 up to the middle of 2005; by contrast, since May 2010, actual spreads have exceeded predicted spreads by some 400 basis points.
    Keywords: Greek financial crisis; sovereign spreads
    JEL: E63 G12
    Date: 2011–03
  41. By: Salgado-Vega, Jesús (IISEC, Universidad Católica Boliviana); Rogel-García, Hugo Rodolfo (IISEC, Universidad Católica Boliviana); Salgado-Vega, María del Carmen (IISEC, Universidad Católica Boliviana)
    Abstract: Examinamos los efectos de la inversión en la producción en el largo plazo neoclásico y en el corto keynesiano; se prueba la hipótesis nula de no causalidad de inversión y crecimiento en México, mediante una sola ecuación. Todos los estimadores sugieren una relación de cointegración entre la inversión y la producción. El largo plazo mostró inestabilidad a pesar de existir la relación de cointegración a través de pruebas de Chow y CUSUM, para corregirla, se empleó el método de Gregory-Hansen con un cambio estructural en 1984, sin embargo para obtener el modelo completo se incluyeron variables binarias en cuatro períodos, mostrando inestabilidad en el largo plazo de la economía mexicana. El modelo de corrección de error, muestra que la inversión constituye alrededor de un diez por ciento del peso bruto en la demanda agregada. Este peso es una fuente potencial de las fluctuaciones económicas de corto plazo.
    Keywords: Inversión; Producción; Crecimiento Económico; México; Keynesiano; Neoclásico
    JEL: E12 E13 E22 E23
    Date: 2011–03
  42. By: Fadi Hassan
    Abstract: It is conventional wisdom that richer countries have a higher price level than poorer countries. This paper provides evidence that the price-income relationship is non-linear and that it turns negative, or at best flat, in low income countries. The result is robust along both cross-section and time-series dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result.
    Keywords: Balassa-Samuelson, Penn effect, developing countries, non-parametricestimation, purchasing power parity, real exchange rate
    JEL: E31 F4 O1
    Date: 2011–06

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