nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒07‒13
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Inflation persistence, Price Indexation and Optimal Simple Interest Rate Rules By Guido Ascari; Nicola Branzoli
  2. Public Sector Debt Dynamics: The Persistence and Sources of Shocks to Debt in Ten EU Countries By Massimo Antonini; Kevin Lee; Jacinta Pires
  3. How Well Does Sticky Information Explain the Dynamics of Inflation, Output, and Real Wages? By J. A. CARRILLO
  4. Labor Market Participation, Unemployment and Monetary Policy By Alessia Campolmi; Stefano Gnocchi
  5. Asset Prices, Monetary Policy, and Aggregate Fluctuations: An Empirical Investigation By Lichao Cheng; Yi Jin; Zhixiong Zeng
  6. Individual Expectations and Aggregate Macro Behavior By Tiziana Assenza; Peter Heemeijer; Cars Hommes; Domenica Massaro
  7. The Effectiveness of Government Debt for Demand Management: Sensitivity to Monetary Policy Rules By Guido Ascari; Neil Rankin
  8. Understanding the macroeconomic effects of working capital in the United Kingdom By Fernandez-Corugedo, Emilio; McMahon, Michael; Millard, Stephen; Rachel, Lukasz
  9. Unveiling the monetary policy rule in euro area By Thanassis Kazanas; Elias Tzavalis
  10. Policy Risk and the Business Cycle By Benjamin Born; Johannes Peifer
  11. Optimal monetary policy and default By Lizarazo, Sandra; Da-Rocha, Jose-Maria
  12. Monetary Policy and Automatic Stabilizers: the Role of Progressive Taxation By Fabrizio Mattesini; Lorenza Rossi
  13. House Price, Mortgage Premium, and Business Fluctuations By Nan-Kuang Chen; Han-Liang Cheng; Ching-Sheng Mao
  14. Global Liquidity Trap By Ippei Fujiwara; Tomoyuki Nakajima; Nao Sudo; Yuki Teranishi
  15. News-driven Business Cycles in SVARs By Patrick Bunk
  16. The Persistence Characteristics of Output Growth in China: How Important is the Business Cycle? By James Laurenceson
  17. Liquidity, Assets and Business Cycles By Shouyong Shi
  18. Canadian Monetary Policy and Real and Nominal Exchange Rates [Revised] By John E. Floyd
  19. No news in business cycles By Mario Forni; Luca Gambetti; Luca Sala
  20. Performance pay and shifts in macroeconomic correlations By Francesco Nucci; Marianna Riggi
  21. Business cycle synchronisation between the V4 countries and the euro area By Michal Bencik
  22. A Repayment Model of House Prices Oil Price Dynamics in a Real Business Cycle Model By Vipin Arora; Pedro Gomis-Porqueras
  23. Fiscal Calculus in a New Keynesian Model with Labor Market Frictions By Alessia Campolmi; Ester Faia; Roland Winkler
  24. What Caused the Recent Boom-And-Bust Cycle in Lithuania? Evidence from a Macromodel with the Financial Sector By Tomas Ramanauskas
  25. Towards a Political Economy of Macroeconomic Thinking By Saint-Paul, Gilles
  26. Equilibrium Selection in a Cashless Economy with Transaction Frictions in the Bond Market By M. Marzo; P. Zagaglia
  27. Efficient Search on the Job and the Business Cycle By Guido Menzio; Shouyong Shi
  28. The Euro-project at risk By Hankel, Wilhelm; Hauskrecht, Andreas; Stuart, Bryan
  29. Financial intermediation and the international business cycle: The case of small countries with big banks By Gunes Kamber; Christoph Thoenissen
  30. What Might Central Banks Lose or Gain in Case of Euro Adoption – A GARCH-Analysis of Money Market Rates for Sweden, Denmark and the UK By Herbert Buscher; Hubert Gabrisch
  31. Clashing Theories of Unemployment By Robert E. Hall
  32. Macroeconomic Implications of the Underground Sector: Challenging the Double Business Cycle Approach By Catalina Granda-Carvajal
  33. Learning, Capital-Embodied Technology and Aggregate Fluctuations By Christoph Görtz; John Tsoukalas
  34. Monetary policy trade-offs in a portfolio model with endogenous asset supply By Schüder, Stefan
  35. Monetary Policy Trade-Offs in a Portfolio Model with Endogenous Asset Supply By Stefan Schüder
  36. Testing for Parameter Stability in DSGE Models. The Cases of France, Germany and Spain By Jerger, Jürgen; Röhe, Oke
  37. U.S. Core Inflation: A Wavelet Analysis By Kevin Dowd; John Cotter
  38. On wage formation, wage flexibility and wage coordination : A focus on the wage impact of productivity in Germany, Greece, Ireland, Portugal, Spain and the United States By Peeters, Marga; Den Reijer, Ard
  39. What Explains the German Labor Market Miracle in the Great Recession? By Michael C. Burda; Jennifer Hunt
  40. Idiosyncratic uncertainty, capacity utilization and the business cycle. By Fagnart, Jean-Francois; Licandro, Omar; Portier, Franck
  41. What Explains the German Labor Market Miracle in the Great Recession? By Burda, Michael C.; Hunt, Jennifer
  42. Business fixed investment and credit market frictions. A VECM approach for Hungary By Marianna Endrész
  43. The Financial and Macroeconomic Implications of Banking Frictions and Banking Riskiness By Yi Jin; Zhixiong Zeng
  44. Asset Arbitrage and the Price of Oil By Vipin Arora; Rod Tyers
  45. Growth and cyclical fluctuations in Spanish macroeconomic series. By Lores, Francisco Xavier
  46. Evaluation of firms dissimulated activity based on fiscal audits and integration in national accounts By C. LOUVOT-RUNAVOT
  47. Taxes, Transfers and the Distribution of Employment in Mexico By Alonso Ortiz, Jorge; Leal Ordóñez, Julio C.
  48. The Cyclicality of Search Intensity in a Competitive Search Model By Paul Gomme; Damba Lkhagvasuren
  49. Performance of Microfinance Institutions-A Macroeconomic and Institutional Perspective By Katsushi S. Imai; Raghav Gaiha; Ganesh Thapa; Samuel Kobina Annim; Aditi Gupta
  50. Interview with Nobel Prize Laureates Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides By Diamond, Peter A.; Mortensen, Dale T.; Pissarides, Christopher A.
  51. We are living on the cost of our children By Waqas, Muhamad; Awan, Masood Sarwar; Aslam, Muhammad Amir
  52. Foreign exchange reserve management in the 19th century: The National Bank of Belgium in the 1850s By Stefano Ugolini
  53. Retirement Flexibility and Portfolio Choice By Jan Bonenkamp
  54. Taking Multi-Sector Dynamic General Equilibrium Models to the Data By Huw Dixon; Engin Kara
  55. A Repayment Model of House Prices By Jakob B Madsen
  56. On the Dynamic Effects of Government Stimulus Measures in a Changing Economy. By [no author]
  57. Tertiarisation of the French Economy and the slowdown in labor productivity between 1978 and 2008 By A. SCHREIBER; A. VICARD
  58. Un Indicatore di Attività Economica per la Lombardia e per la Provincia di Milano By Donatella Baiardi; Carluccio Bianchi
  59. The Role of Worker Flows in the Dynamics and Distribution of UK Unemployment By Michael W. L. Elsby; Jennifer C. Smith; Jonathan Wadsworth

  1. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Nicola Branzoli (University of Wisconsin Madison)
    Abstract: We study the properties of the optimal nominal interest rate policy under different levels of price indexation. In our model indexation regulates the sources of inflation persistence. When indexation is zero, the inflation gap is purely forward- looking and inflation persistence depends only on the level of trend inflation, while full indexation makes the inflation gap persistent and it eliminates the effects of trend inflation. We show that in the former case the optimal policy is inertial and targets inflation stability while in the latter the optimal policy has no inertia and targets the real interest rate. We compare our results with empirical estimates of the FED's policy in the post-WWII era.
    Keywords: Inflation Persistence, Taylor Rule, New Keynesian model, Indexation
    JEL: E31 E52
    Date: 2010–11
  2. By: Massimo Antonini; Kevin Lee; Jacinta Pires
    Abstract: We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are largely determined by domestic monetary policy, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.
    Keywords: International business cycles, prices, interest rates.
  3. By: J. A. CARRILLO
    Abstract: This paper finds that a model with pervasive information frictions is less successful than a standard model featuring nominal rigidities, inflation indexation, and habit persistence in generating the dynamics triggered by technology shocks, as estimated by a vector autoregression using key U.S. macroeconomic time series. The real wage responses after a permanent increase in productivity tilt the balance clearly in favor of the standard model. The sticky information model overestimates the speed of adjustment in the real wage and is hence particularly unsuccessful in replicating its inertial response, whereas the standard model relies on inflation indexation in wage-setting to achieve a better fit. The two models are, however, statistically equivalent in mimicking the responses of output, inflation, the real wage and the federal funds rate after a shock in monetary policy.
    Keywords: Sticky prices, sticky information, inflation indexation, monetary and technology shocks
    JEL: E31 E52 C15
    Date: 2011–06
  4. By: Alessia Campolmi (Central European University; Magyar Nemzeti Bank (central bank of Hungary)); Stefano Gnocchi (Universitat Autonoma de Barcelona)
    Abstract: In the present paper we examine how the introduction of endogenous participation in an otherwise standard DSGE model with matching frictions and nominal rigidities affects business cycle dynamics and monetary policy. The contribution of the paper is threefold: first, we show that the model provides a good fit for employment and unemployment volatility, as well as participation volatility and its correlation with output for US data. Second, we show that in such a model, and contrary to a model with exogenous participation, a monetary authority that becomes more aggressive in fighting inflation decreases the volatility of employment and unemployment. Finally, we show the role of search costs in shaping those results.
    Keywords: matching frictions, endogenous participation, monetary policy
    JEL: E24 E32 E52
    Date: 2011
  5. By: Lichao Cheng; Yi Jin; Zhixiong Zeng
    Abstract: This paper studies empirically the dynamic interactions between asset prices, monetary policy, and aggregate fluctuations during the Volcker-Greenspan period. Using a simple structural vector autoregression framework, we investigate the effects of monetary policy on output, inflation and asset prices, the interactions of asset prices with the aggregate economy, as well as the relationship between stock price and house price. Several robust findings emerge. The systematic response of monetary policy to output and inflation is also found to play an important role in stabilizing the aggregate economy. In addition, the results call for special attention to be paid to house price when studying the dynamic relationships between asset prices and macroeconomic fluctuations.
    Keywords: House prices; stock prices; systematic monetary policy; structural vector autoregressions.
    JEL: E31 E32 E44 E52
    Date: 2011–06
  6. By: Tiziana Assenza; Peter Heemeijer; Cars Hommes; Domenica Massaro
    Abstract: The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. We find that a more aggressive monetary policy that sets the interest rate more than point for point in response to inflation stabilizes inflation in our experimental economies. We use a simple model of individual learning, with a performance-based evolutionary selection among heterogeneous forecasting heuristics, to explain coordination of individual expectations and aggregate macro behavior observed in the laboratory experiments. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behaviour and oscillatory convergence. A simple heterogeneous expectations switching model fits individual learning as well as aggregate outcomes and outperforms homogeneous expectations benchmarks.
    Keywords: Experiments; Monetary Policy; Expectations; Heterogeneity
    JEL: C91 C92 E52
    Date: 2011–05
  7. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Neil Rankin (Department of Economics and Related Studies, University of York)
    Abstract: We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lumpsum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary.
    Keywords: staggered prices, overlapping generations, government debt, fiscal policy effectiveness, monetary policy rules
    JEL: E62 E63
    Date: 2010–11
  8. By: Fernandez-Corugedo, Emilio (Bank of England); McMahon, Michael (University of warwick and Centre for Economic Performance, LSE); Millard, Stephen (Bank of England); Rachel, Lukasz (Bank of England)
    Abstract: In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity ; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks. Key words: Working capital ; business cycle model ; spreads ; financial crisis. JEL classification: E20 ; E51 ; E52
    Date: 2011
  9. By: Thanassis Kazanas (Athens University of Economics and Business); Elias Tzavalis (Athens University of Economics and Business)
    Abstract: This paper provides evidence that, since the sign of Maastricht Treaty, euro-area monetary authorities mainly follow a strong anti-inflationary policy. This policy can be described by a threshold monetary policy rule model which allows for distinct inflation policy regimes: a low and high. The paper finds that these authorities react more strongly to positive deviations of inflation and/or output from their target levels rather than to the negative. They do not seem to react at all to negative deviations of output from its target level in the low-inflation regime. We argue that this behaviour can be attributed to the attitude of the monetary authorities to build up credibility on stabilizing inflationary expectations. To evaluate the policy implications of the above euro-area monetary policy rule behaviour, the paper simulates a small New Keynesian model. This exercise clearly indicates that the absence of reaction of the euro-area monetary authorities to negative output gap when inflation is very low reduces their efficiency on dampening the effects of negative demand shocks on the economy.
    Keywords: Monetary policy, threshold models; regime-switching; generalized method of moments; New Keynesian model
    JEL: E52 C13 C30
    Date: 2011–05
  10. By: Benjamin Born; Johannes Peifer
    Abstract: The argument that policy risk, i.e. uncertainty about monetary and fiscal policy, has been holding back the economic recovery in the U.S. during the Great Recession has a large popular appeal. We analyze the role of policy risk in explaining business cycle fluctuations by using an estimated New Keynesian model featuring policy risk as well as uncertainty about technology. We directly measure uncertainty from aggregate time series using Sequential Monte Carlo Methods. While we find considerable evidence of policy risk in the data, we show that the "pure uncertainty"-effect of policy risk is unlikely to play a major role in business cycle fluctuations. With the estimated model, output effects are relatively small due to i) dampening general equilibrium effects that imply a low amplification and ii) counteracting partial effects of uncertainty. Finally, we show that policy risk has effects that are an order of magnitude larger than the ones of uncertainty about aggregate TFP.
    Keywords: Policy Risk; Uncertainty; Aggregate Fluctuations; Particle Filter; General Equilibrium.
    JEL: E32 E63 C11
    Date: 2011–06
  11. By: Lizarazo, Sandra; Da-Rocha, Jose-Maria
    Abstract: In a context in which individuals might default on their debts and subsequently be excluded from credit markets, holding money helps agents smooth their consumption during periods in which they cannot borrow. Therefore holding money makes the punishment to default less severe. In this context, by affecting money demand, monetary policy can affect incentives to default; determining optimal monetary policy can then be thought of as equivalent to choosing the optimal default rate. Since each economy might have a different optimal default rate, each economy might have a different optimal monetary policy different from the Friedman rule. Specifically, we compare the US to Colombia, using a model with idiosyncratic labor income risk and fiat money. Given differences in enforcement of debt contracts, and differences in income variability and persistence, we find that high inflation is costlier for developing countries compared to developed countries.
    Keywords: Default; Inflation; Fiat Money; Friedman rule; Endogenous Borrowing Constraints; Precautionary Savings.
    JEL: E52 E44 E21 E41
    Date: 2011–06–29
  12. By: Fabrizio Mattesini (University of Rome "Tor Vergata"); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We study the e¤ects of progressive labor income taxation in an otherwise standard NK model. We show that progressive taxation (i) introduces a trade-o¤ between output and in?ation stabilization and a¤ects the slope of the Phillips Curve; (ii) acts as automatic stabilizer changing the responses of the economy to technology shocks and demand shocks (iii) alters the prescription for the optimal discretionary interest rate rule. We also show that the welfare gains from commitment decrease as labor income taxes become more progressive. Quantitatively, the model is able to reproduce the observed negative correlation between the volatility of output, hours and in?ation and the degree of progressivity of labor income taxation.
    JEL: E50 E52 E58
    Date: 2010–11
  13. By: Nan-Kuang Chen (National Taiwan University and Hong Kong Institute for Monetary Research); Han-Liang Cheng (Chung-Hua Institution for Economic Research); Ching-Sheng Mao (National Taiwan University)
    Abstract: This paper investigates the transmission mechanism of mortgage premium to characterize the relationship between the housing market and the business cycle for the U.S. economy. The model matches the main features of the U.S. housing market and business cycles well. The mortgage premium is crucial for the amplification and propagation of the model to match the data. If the Federal Reserve had exercised pre-emptive monetary policy in 2002Q1, the counterfactual analysis suggests that a higher interest rate would have stabilized house price and housing investment volatilities, but would have taken a big toll on real GDP: its volatility remains approximately the same, but the level of GDP contracts dramatically.
    Keywords: Mortgage Premium, House Price, DSGE
    JEL: E3 E4 E5 G1
    Date: 2011–06
  14. By: Ippei Fujiwara (Bank of Japan); Tomoyuki Nakajima (Kyoto University); Nao Sudo (Bank of Japan); Yuki Teranishi (Bank of Japan)
    Abstract: Using a two-country New Open Economy Macroeconomics model, we analyze how monetary policy should respond to a "global liquidity trap," where the two countries may fall into a liquidity trap simultaneously. We first characterize optimal monetary policy, and show that the optimal rate of infl ation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. We find that the interest-rate rule targeting the producer price index performs very well in this respect.
    Keywords: Zero interest rate policy; two-country model; international spillover; monetary policy coordination
    JEL: E52 E58 F41
    Date: 2011–06
  15. By: Patrick Bunk
    Abstract: Recent studies proposed news about future technology growth as the main driver of macroeconomic fluctuations. The identification of these news through stock prices in SVARs has been criticized in the past. Therefore, I propose a series of experiments to test that hypothesis by examining its implications. If business cycles are mainly driven by news then these shocks should be captured by other time series as well. I find that news shocks identified through S&P 500 prices exhibit the same dynamics as news identified through a broader stock price index, patent applications, the relative price of investment or shocks to the real interest rate. The common theme among these identifications is a technological change in productivity that demands time to build, economic activity and natural resources to come into effect.
    Keywords: Business Cycles, News Shocks, Technological Progress
    JEL: E30 E32
    Date: 2011–07
  16. By: James Laurenceson (School of Economics, The University of Queensland)
    Abstract: Output growth volatility at the macroeconomic level reflects the impact of demand and supply-side shocks. These shocks differ in terms of the persistence of their impact on output growth with the former typically being responsible for cyclical fluctuations of the business cycle variety. This paper uses Spectral Density Analysis to decompose the persistence characteristics of output growth in China since 1953, including in its provinces and regions. An important finding is that the persistence characteristics of output growth changed dramatically in most provinces during the reform period to the extent that only a minority of output growth variance can be attributed to business cycle fluctuations. This finding points to a number of challenges for policy-makers, including questions over the expected effectiveness of using macroeconomic policies that are intended to smooth business cycle fluctuations when the nature of output growth volatility is considerably more complex.
    Date: 2011
  17. By: Shouyong Shi
    Abstract: Equity price is cyclical and often leads the business cycle by one or two quarters. These observations lead to the hypothesis that shocks to equity market liquidity are an independent source of the business cycle. In this paper I construct a model to evaluate this hypothesis. The model is easy for aggregation and for the construction of the recursive competitive equilibrium. After calibrating the model to the US data, I find that a negative liquidity shock in the equity market can generate large drops in investment and output but, contrary to what one may conjecture, the shock generates an equity price boom. This response of equity price occurs as long as a negative liquidity shock tightens firms' financing constraints on investment. Thus, liquidity shocks to the equity market cannot be the primary driving force of the business cycle. For equity price to fall as it typically does in a recession, a negative liquidity shock must be accompanied or caused by other shocks that reduce the need for investment sufficiently and relax firms' financing constraints on investment. I illustrate that a strong negative productivity shock is a good candidate of such concurrent shocks.
    Keywords: Liquidity; Asset prices; Business cycle
    JEL: E32 E5 G1
    Date: 2011–06–14
  18. By: John E. Floyd
    Abstract: Abstract: This paper analyzes the relationship between Canadian Monetary Policy and the movements of Canada's real and nominal exchange rates with respect to the U.S. A broad-based theory is developed to form the basis for subsequent empirical analysis. The main empirical result is that the Canadian real exchange rate has been determined in large part by capital movements into and out of Canada as compared to the U.S. and world energy prices. Additional important determinants were world commodity prices and Canadian and U.S. real GDPs and employment rates. No evidence of effects of unanticipated money supply shocks on the nominal and real exchange rates is found. Under conditions where exchange rate overshooting is likely to occur in response to monetary demand or supply shocks, this suggests that the Bank of Canada follows an orderly-markets style of monetary policy and the conclusion is that this is the best approach under normal conditions. Finally, it is shown that in response to a domestic inflation rate that has become permanently too high or a catastrophic situation in the U.S., the Bank of Canada can induce a one-percent short-run change in the unemployment rate by pushing the nominal and real exchange rates in the appropriate direction by between five and six percent.
    Keywords: Canadian Monetary Policy Real Exchange Rates
    JEL: E F
    Date: 2011–06–15
  19. By: Mario Forni; Luca Gambetti; Luca Sala
    Abstract: This paper uses a structural, large dimensional factor model to evaluate the role of `news' shocks (shocks with a delayed effect on productivity) in generating the business cycle. We find that (i) existing small-scale VECM models are affected by `non-fundamentalness' and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a limited role in explaining the business cycle; (iii) their effects are in line with what predicted by standard neoclassical theory; (iv) the bulk of business cycle flucuations is explained by shocks unrelated to technology.
    Keywords: structural factor model; news shocks; invertibility; fundamentalness
    JEL: C32 E32 E62
    Date: 2011–06
  20. By: Francesco Nucci (La Sapienza University of Rome); Marianna Riggi (Bank of Italy)
    Abstract: A coincidence in time between the volatility break associated with the "Great Moderation" and large changes in the pattern of conditional and unconditional correlations between output, hours and labor productivity was detected by Galí and Gambetti (2009). We provide a novel explanation for these findings, based on the major changes that occurred in the U.S. design of labor compensation around the mid-1980s. These include a substantial increase in the incidence of performance pay coupled with a higher responsiveness of real wages to the business cycle. We capture this shift in the structure of labor compensation in a Dynamic New Keynesian (DNK) model and show that, by itself, it generates the disappearance of the procyclical response of labor productivity to non-technology shocks and a reduction of the contractionary effects of technology shocks on hours worked. Moreover, it accounts for a large share of the observed drop in output volatility after 1984 and for most of the observed changes in unconditional correlations.
    Keywords: procyclical productivity, wage rigidities, performance pay.
    JEL: E24 E32 J3 J22
    Date: 2011–03
  21. By: Michal Bencik (National Bank of Slovakia, Research Departmen)
    Abstract: Business cycle synchronisation between the V4 countries and the euro area is important in regard to the costs of the common monetary policy. This paper addresses the issue of business cycle synchronisation by directly calculating cross correlations, by calculating cross correlations from primary impulses, and finally by calculating output gap component correlations from common and country-specific shocks. In regard to the output gap, the results of all three methods are approximately the same: before 2001, the business cycles of the V4 countries were not synchronised with the euro area (low or negative correlations); between 2001 and 2007, the correlations entered positive territory as the V4 countries joined the EU and trade between the V4 countries and the euro area increased; and during the economic crisis of 2008–2009, synchronisation increased still further.
    Keywords: optimum currency area, business cycle, autoregressive model, SVAR
    JEL: E32 F02
  22. 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.
    Keywords: Oil price, two regions, variable capacity utilization
    JEL: E37 F47 Q43
    Date: 2011–06
  23. By: Alessia Campolmi (Central European University; Magyar Nemzeti Bank (central bank of Hungary)); Ester Faia (Goethe University Frankfurt; Kiel Institute for the World Economy (IfW); CEPREMAP); Roland Winkler (Goethe University Frankfurt; Kiel Institute for the World Economy (IfW))
    Abstract: During the Great Recession following the recent financial crisis large fiscal stimuli were implemented to counteract labor market sclerosis. We explore the effectiveness of various fiscal packages in a matching model featuring inefficient unemployment and a rich fiscal sector employing distortionary taxation and government debt. Results show that only stimuli directed toward the labor market, such as hiring subsidies, deliver large multipliers. Those policies can, indeed, abate the congestion externality, pervasive in the labor market. Various robustness checks confirm the results. The results obtained in the calibrated model are also confirmed through Bayesian estimation.
    Keywords: fiscal calculus, taxation, matching frictions, bayesian estimation
    JEL: E62 E63 E24
    Date: 2011
  24. By: Tomas Ramanauskas (Bank of Lithuania)
    Abstract: In this paper we analyse determinants of the recent boom-and-bust cycle of the Lithuanian economy with the help of a medium-sized macroeconometric model that incorporates a functional financial block. Special emphasis is put on the role of credit market conditions during the overheating episode. We quantitatively estimate the impact of credit conditions and externally funded bank lending on macroeconomic developments. There is evidence that easy credit conditions and active credit expansion contributed moderately to real economic growth but significantly added to overheating pressures by pushing up real estate prices, encouraging concentration of labour and capital into procyclical sectors and increasing private sector’s debt burden. During the boom episode buoyant external environment provided strong background for export-led growth, which was later strongly affected by temporary foreign trade collapse at the outset of the economic crisis. Model results also suggest that government’s discretionary fiscal policies may have contributed to economic overheating and severity of the ensuing crisis by not adopting sufficiently prudent fiscal stance during the boom episode. The model confirms that more favourable interest rate environment and accommodating fiscal policies are important for providing a temporary relief for the crisis-stricken economy but deep structural transformation of the economy is needed for the sustainable recovery to take hold.
    Keywords: structural macroeconometric modelling, macrofinancial linkages, economic cycles, credit, banking sector, housing price bubble
    JEL: E10 E17 E37 E51
    Date: 2011–07–04
  25. By: Saint-Paul, Gilles
    Abstract: This paper investigates, in a simplified macro context, the joint determination of the (incorrect) perceived model and the equilibrium. I assume that the model is designed by a self-interested economist who knows the true structural model, but reports a distorted one so as to influence outcomes. This model influences both the people and the government; the latter tries to stabilize an unobserved demand shock and will make different inferences about that shock depending on the model it uses. The model’s choice is constrained by a set of autocoherence conditions that state that, in equilibrium, if everybody uses the model then it must correctly predict the moments of the observables. I then study, in particular, how the models devised by the economists vary depending on whether they are "progressive" vs. "conservative". The predictions depend greatly on the specifics of the economy being considered. But in many cases, they are plausible. For example, conservative economists will tend to report a lower keynesian multiplier, and a greater long-term inflationary impact of output expansions. On the other hand, the economists’ margin of manoeuver is constrained by the autocoherence conditions. Here, a "progressive" economist who promotes a Keynesian multiplier larger than it really is, must, to remain consistent, also claim that demand shocks are more volatile than they really are. Otherwise, people will be disappointed by the stabilization performance of fiscal policy and reject the hypothesized value of the multiplier. In some cases, autocoherence induces the experts to make, loosely speaking, ideological concessions on some parameter values. The analysis is illustrated by empirical evidence from the Survey of Professional Forecasters
    Keywords: Autocoherence; Bias; Experts; Ideology; Macroeconomic modelling; Political Economy
    JEL: A11 E6
    Date: 2011–06
  26. By: M. Marzo; P. Zagaglia
    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.
    JEL: E43 E63
    Date: 2011–07
  27. By: Guido Menzio; Shouyong Shi
    Abstract: The paper develops a model of directed search on the job where transitions of workers between unemployment, employment and across employers are driven by heterogeneity in the quality of firm-worker matches. The equilibrium is such that the agents' value and policy functions are independent of the distribution of workers across employment states. Hence, the model can be solved outside of steady-state and used to measure the effect of cyclical productivity shocks on the labor market. Productivity shocks are found to generate large fluctuations in workers' transitions, unemployment and vacancies when matches are experience good, but not when matches are inspection goods.
    Keywords: Directed search; On the Job Search; Business Cycles; Unemployment
    JEL: E24 E32 J64
    Date: 2011–06–19
  28. By: Hankel, Wilhelm; Hauskrecht, Andreas; Stuart, Bryan
    Abstract: In contrast to Robert Mundell's Optimum Currency Area theory and his recommendation of forming a monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries - most of all Germany, but also the Netherlands and Finland - increased productivity growth while limiting nominal wage growth. However, Mediterranean countries - particularly Greece, but also Spain, Portugal, and Italy - have dramatically lost international competitiveness. Although the overall balance of payments for the Euro area at large is almost balanced, internal disequilibria are skyrocketing and default risk premiums and tensions within the Euro area are rising, thus jeopardizing the stability of the monetary union. The findings confirm that a common currency without fiscal union is inherently unstable. The international financial and economic crisis has merely triggered events which highlight this instability. The paper discusses three possible scenarios for the future of the Euro: a laissez faire approach, a bailout, and finally an exit strategy for the Mediterranean countries, or an organized exit by a group of core countries led by Germany, forming their own smaller monetary union. --
    Keywords: Optimum currency areas,monetary union,risk spreads,central banking,exchange rates,fiscal policy
    JEL: E42 E63 F15 F33 F34
    Date: 2010
  29. By: Gunes Kamber; Christoph Thoenissen
    Abstract: We examine the transmission mechanism of banking sector shocks in a two-country DSGE model. Assuming that the home country is small relative to the rest of world, we find that spillovers from foreign banking sector shocks are modest unless banks in the small country hold foreign banking assets. The correlation between home and foreign GDP rises with the exposure of the of the domestic banking sector to foreign bank assets.
    Date: 2011–06–21
  30. By: Herbert Buscher; Hubert Gabrisch
    Abstract: This study deals with the question whether the central banks of Sweden, Denmark and the UK can really influence short-term money markets and thus, would lose this influence in case of Euro adoption. We use a GARCH-M-GED model with daily money market rates. The model reveals the co-movement between the Euribor and the shortterm interest rates in these three countries. A high degree of co-movement might be seen as an argument for a weak impact of the central bank on its money markets. But this argument might only hold for tranquil times. Our approach reveals, in addition, whether there is a specific reaction of the money markets in turbulent times. Our finding is that the policy of the European Central Bank (ECB) has indeed a significant impact on the three money market rates, and there is no specific benefit for these countries to stay outside the Euro area. However, the GARCH-M-GED model further reveals risk divergence and unstable volatilities of risk in the case of adverse monetary shocks to the economy for Sweden and Denmark, compared to the Euro area. We conclude that the danger of adverse monetary developments cannot be addressed by a common monetary policy for these both countries, and this can be seen as an argument to stay outside the Euro area
    Keywords: Euro adoption, EMS, money markets, interest rates, GARCH-M-GED models, international financial markets
    JEL: E42 E43 F36 G15
    Date: 2011–07
  31. By: Robert E. Hall
    Abstract: General-equilibrium models for studying monetary influences in general and the zero lower bound on the nominal interest rate in particular contain implicit theories of unemployment. In some cases, the theory is explicit. When the nominal rate is above the level that clears the current market for output, the excess supply shows up as diminished output, lower employment, and higher unemployment. Quite separately, the Diamond-Mortensen-Pissarides model is a widely accepted and well-developed account of turnover, wage determination, and unemployment. The DMP model is a clashing theory of unemployment, in the sense that its determinants of unemployment do not include any variables that signal an excess supply of current output. In consequence, a general-equilibrium monetary model with a DMP labor market generally has no equilibrium. After demonstrating the clash in a minimal but adequate setting, I consider modifications of the DMP model that permit the complete model to have an equilibrium. No fully satisfactory modification has yet appeared.
    JEL: E12 E22 E32
    Date: 2011–06
  32. By: Catalina Granda-Carvajal (University of Connecticut and Universidad de Antioquia)
    Abstract: Within the literature on business cycles featuring shadow economic activities, there is an approach based on the arguable premise that fluctuations in the official and unofficial sectors are negatively correlated. The present paper develops a real business cycle model that does not impose such an assumption. To do so, preferences are characterized so that regular and irregular labor are additively separable. Furthermore, leisure time is spent on both irregular work effort and non-market activities. Simulations are conducted to examine the performance of the model economy and to compare the resulting cyclical features with related empirical findings. In addition, computational experiments allow to analyze the effects of different tax structures, enforcement rates and tastes for irregular labor on the volatility and comovements of aggregate variables. These simulations and experiments overall offer a more comprehensive view of the cyclical implications of the shadow economy.
    Keywords: Underground economy, shadow economy, business cycles, dynamic stochastic general equilibrium models
    JEL: E26 E32 H26 O17
    Date: 2011–07
  33. By: Christoph Görtz; John Tsoukalas
    Abstract: Recent evidence suggests that agents’ expectations may have played a role in several cycli¬cal episodes such as the U.S. "new economy" boom in the late 1990s, the real estate boom in Japan in the 1980s and the real estate boom in the U.S. which ended in 2008. One chal¬lenge in the expectations driven view of fluctuations has been to develop simple one sector models that can give rise to such fluctuations without a compromise on other dimensions. In this paper we propose a simple generalization of the Greenwood et al. (1988) one sec¬tor model and show it can generate fluctuations that arise as a result of agents difficulty to forecast productivity embodied in new capital. The two key assumptions in the model are: (1) the vintage view of capital productivity, whereby each successive vintage has (po¬tentially) different productivity and (2) agents’ imperfect information and learning about this productivity. The model is consistent with second and third moments from U.S. data. Simulations of the model suggest that, (a) noise amplifies fluctuations and (b) pure noise can trigger recessions that mimic in magnitude, duration and depth the typical post WW II U.S. recession.
    Keywords: News shocks, expectations, growth asymmetry, Bayesian learning, business cy¬cles.
  34. By: Schüder, Stefan
    Abstract: This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers finance capital goods through credit and bonds in accordance with debt capital costs as well as through equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the real exchange rate. Within this general equilibrium model, it can be shown that expansive monetary interventions, being applied throughout the course of economic crises, stabilise the real amount of domestic investments at the cost of inflation, currency devaluation, distortions of interest rates, and risk clusters on the central bank’s balance sheet. Furthermore, through exchange rate stabilising interventions, the central bank is able to stabilise the real amount of domestic investments and in turn the main goal of exchange rate stabilisation is also achieved. However, either risk clusters on central bank’s balance sheet or changes in the domestic price level emerge. This consequently results in both types of central bank interventions promoting an inefficient international allocation of real capital investments.
    Keywords: portfolio balance; monetary policy; macroeconomic risk; exchange rate; real capital investments
    JEL: E52 E44 E10
    Date: 2011–06–25
  35. By: Stefan Schüder
    Abstract: This paper develops an open economy portfolio balance model with en¬dogenous asset supply. Domestic producers finance capital goods through credit and bonds in accordance with debt capital costs as well as through equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the real exchange rate. Within this general equilibrium model, it can be shown that expansive monetary interventions, being applied throughout the course of economic crises, stabilise the real amount of domestic investments at the cost of inflation, currency devaluation, distortions of interest rates, and risk clusters on the central bank’s balance sheet. Furthermore, through exchange rate stabilising interventions, the central bank is able to stabilise the real amount of domestic investments and in turn the main goal of exchange rate stabilisation is also achieved. However, either risk clusters on central bank’s balance sheet or changes in the domestic price level emerge. This consequently results in both types of central bank interventions promoting an inefficient international allocation of real capital investments.
    Keywords: portfolio balance, monetary policy, macroeconomic risk, exchange rate, real capital investments
    JEL: E10 E44 E52
    Date: 2011–06–27
  36. By: Jerger, Jürgen; Röhe, Oke
    Abstract: We estimate a New Keynesian DSGE model on French, German and Spanish data. The main aim of this paper is to check for the respective sets of parameters that are stable over time, making use of the ESS procedure ( ”Estimate of Set of Stable parameters“) developed by Inoue and Rossi (2011). This new econometric technique allows to address the stability properties of each single parameter in a DSGE model separately. In the case of France and Germany our results point to structural breaks after the beginning of the second stage of EMU in the mid-nineties, while the estimates for Spain show a significant break just before the start of the third stage in 1998. Specifically, there are significant changes in monetary policy behavior for France and Spain, while monetary policy in Germany seems to be stable over time.
    Keywords: DSGE; EMU; Monetary Policy; Structural Breaks
    JEL: E31 E32 E52
    Date: 2009–10–01
  37. By: Kevin Dowd (The University of Nottingham, UK); John Cotter (University College Dublin, Ireland)
    Abstract: This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.
    Keywords: core inflation, wavelets, trend inflation, inflation prediction
    Date: 2011–06–24
  38. By: Peeters, Marga; Den Reijer, Ard
    Abstract: This paper discusses the endeavours of policy makers to come to some degree of wage coordination among EU countries, aiming at aligning wage growth with labour productivity growth at the national levels. In this context, we analyse the wage and productivity developments in Germany, the European Union’s periphery countries Greece, Ireland, Portugal, and Spain along with the US for the period 1980-2010. Apart from the contribution of productivity to wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated non-linear wage equation resulting from a wage bargaining model. We further study the downward rigidities of wages in depth. The findings show that in past times of low productivity, price inflation and reductions in unemployment put significant upward pressure on wage growth, also in the low inflationary period of the 2000s. Greece, Ireland, Portugal and Spain are far from aligning wage growth with productivity growth. German productivity is a major German wage determinant, but surely not the only one. To steer wages, policy makers can effectively use the replacement rate.
    Keywords: wages; compensation per employee; unit labour costs; productivity; wage formation; wage coordination; labour market; wage flexibility; unemployment; prices; replacement rate; monetary union;
    JEL: E24 J3 E5 C22 E6
    Date: 2011–06–29
  39. By: Michael C. Burda; Jennifer Hunt
    Abstract: Germany experienced an even deeper fall in GDP in the Great Recession than the United States, with little employment loss. Employers’ reticence to hire in the preceding expansion, associated in part with a lack of confidence it would last, contributed to an employment shortfall equivalent to 40 percent of the missing employment decline in the recession. Another 20 percent may be explained by wage moderation. A third important element was the widespread adoption of working time accounts, which permit employers to avoid overtime pay if hours per worker average to standard hours over a window of time. We find that this provided disincentives for employers to lay off workers in the downturn. Although the overall cuts in hours per worker were consistent with the severity of the Great Recession, reduction of working time account balances substituted for traditional government-sponsored short-time work.
    JEL: E24 E32 J6
    Date: 2011–06
  40. By: Fagnart, Jean-Francois; Licandro, Omar; Portier, Franck
    Abstract: In a stochastic dynamic general equilibrium framework, we introduce the concept of variable capacity utilization (as opposed to the concept of capital utilization). We consider an economy where imperfectly competitive firms use a putty-clay technology and decide on their productive capacity level under uncertainty. An idiosyncratic uncertainty about the exact position of the demand curve facedby each firm explains why sorne productive capacities may remain idle in the sequel and why individual capacity utilization rates differ across firms. The capacity underutilization at the aggregate level thus hides a diversity of microeconomic situations. The variability of the capacity utilization allows for a good description of sorne of the main stylized facts of the business cycle, propagates and magnifies aggregate technological shocks and generates endogenous persistence (Le., the output growth rate displays positive serial correlation).
    Keywords: Business Cycle; Capacity Utilization; Idiosyncratic shocks; Mark-ups; Propagation Mecanism;
  41. By: Burda, Michael C. (Humboldt University, Berlin); Hunt, Jennifer (McGill University)
    Abstract: Germany experienced an even deeper fall in GDP in the Great Recession than the United States, with little employment loss. Employers' reticence to hire in the preceding expansion, associated in part with a lack of confidence it would last, contributed to an employment shortfall equivalent to 40 percent of the missing employment decline in the recession. Another 20 percent may be explained by wage moderation. A third important element was the widespread adoption of working time accounts, which permit employers to avoid overtime pay if hours per worker average to standard hours over a window of time. We find that this provided disincentives for employers to lay off workers in the downturn. Although the overall cuts in hours per worker were consistent with the severity of the Great Recession, reduction of working time account balances substituted for traditional government-sponsored short-time work.
    Keywords: unemployment, Germany, Great Recession, short time work, working time accounts, Hartz reforms, extensive vs. intensive employment margin
    JEL: E24 E32 J6
    Date: 2011–06
  42. By: Marianna Endrész (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: The aim of this paper is to model the interaction between the loan market and real activity, while financial frictions are explicitly taken into account. The econometric methodology used is VECM. Johansen’s approach is employed to allow for multiple cointegration. Financial frictions are captured by including balance sheet indicators of firms and banks (cash flow and the VIX index) which move the loan supply curve. For the non-financial corporate sector 3 long-run equilibrium relationships were found, each corresponding to a reduced form investment, a loan demand and a loan supply equation, where loan supply is determined by the cost of borrowing, and the cash flow of firms or the VIX index. In contrast, for manufacturing no evidence was found concerning the significance of financial frictions. Impulse response analysis is used to calculate the real effects of a loan supply shock. Various tax measures and the introduction of inflation targeting were found to have significant impact on investment.
    Keywords: aggregate investment, financial frictions, cointegration, error correction models
    JEL: E22 E44 E51 C32
    Date: 2011
  43. By: Yi Jin; Zhixiong Zeng
    Abstract: This paper develops a model of banking frictions and banking riskiness, the importance of which is highlighted by the recent Global Financial Crisis (GFC). We propose a model-based approach to decompose the effect of a banking riskiness shock into a pure default effect and a risk effect when risk sharing among the depositors is imperfect. Although the default effect is quantitatively more important, the risk effect is not to be neglected. When the shock generates a bank spread similar in value to the peak during the GFC, the overall effect is a decline in employment by 6:57 percent. The pure default effect leads to a 4:76 percent employment decline by a “within-model” measure, and a 5:05 decline by a “between-model” measure. The remaining is attributed to the risk effect.
    Keywords: Banking riskiness shocks; two-sided debt contract; default effects; risk effects; financial crisis.
    JEL: E44 E32 D82 D86
    Date: 2011–06
  44. By: Vipin Arora; Rod Tyers
    Abstract: It is commonly understood that macroeconomic shocks influence commodity prices and that one channel for this is the link between interest rates, expected future asset returns and stockholding. In this paper the link is extended to the petroleum market with the recognition that recorded stocks of oil comprise a small share of annual demand and that the parallel with storable commodities is the decision to produce the oil in the first place, as opposed to holding it in the ground as reserve. Oil reserves are then a key asset in producing countries, which is arbitraged against financial assets. Thus, when the yield on financial assets falls, retaining oil reserves becomes more attractive to producing countries, which then have less incentive to accommodate demand rises, and so the oil price rises. This perspective on oil pricing is modeled in a dynamic multi-region general equilibrium framework in which regional households manage portfolios of assets that include oil reserves. When the model is calibrated to match observed data over two decades, simulation results indicate that asset arbitrage made a large contribution to the high pre-GFC oil price.
    JEL: E37 F47 Q43
    Date: 2011–07
  45. By: Lores, Francisco Xavier
    Abstract: This paper provides an empirical description of some stylized facts of growth for the Spanish economy with the purpose of evaluating the adequacy of the neoclassical model of growth as a structure on which we can build a theory of the economic cycle for the Spanish economy. On the other hand, the description of the fluctuations in the Spanish economy is expanded and analyzed by taking into account different theories developed in literature. In this work, we use three filters to remove trends from the data: first differences, Hodrick-Prescott filter and Baxter-King filter. The task here is to check whether the stylized facts keep, at least, qualitatively equal with different filters, so that invariant stylized facts with different filters obtain an additional confirmation.
  46. By: C. LOUVOT-RUNAVOT (Insee)
    Abstract: The measurement of the hidden economy is necessary to ensure exhaustiveness of Gross Domestic Product and thus be able to conduct comparisons between countries. The part of firms activity that is not declared to tax authorities inevitably evades statistical observation. In France, it is possible to evaluate this hidden activity by means of fiscal audits, during which concealed profits may be unveiled. By incorporating a fiscal audit sample into a survey, this type of fraud can then be extrapolated to the whole field. For every category of taxpayer, inclusion probabilities have been estimated with logistic models, making use of categorical predictor variables, like size or activity sector. The more significant of those variables have been used next to define a post-stratification upon which is based the macroeconomic evaluation of the dissimulated aggregates. This extrapolation method takes into account the overrepresentation of the firms that are supposed to conceal the biggest amounts of taxes. In particular, financial indicators have been introduced in the stratification to improve the modeling of this overrepresentation and they lead to a marked decrease in the estimation of the hidden production. The aim was to rectify National Accounts output and value-added. Among the fiscal rectifications, only those that dealt with the real flows of the firms book-keeping were taken into account. Moreover, when the available rectifications were concerned with taxes, it was necessary to go back to the corresponding taxable amount. This procedure is the main weakness of the fiscal information processing. Applied to 2006 turnover, the fraud rates finally obtained led to a 40 billion euro rise in the level of national value-added, that is to say a 2.2 % adjustment of GDP.
    Keywords: Dissimulated activity, fiscal audit, logistic regression, post-stratification, correction (rectification), National Accounts
    JEL: E26 C25 C81 E01
    Date: 2011
  47. By: Alonso Ortiz, Jorge; Leal Ordóñez, Julio C.
    Abstract: The informal sector accounts for a substantial fraction of employed population in Mexico and other Latin American countries. In this paper we study the interaction between the tax and transfers system and the size and composition of informal sector. To do that we build a search model that can be calibrated to the Mexican data. Our model features two employment statuses: employed and unemployed; and two sectors: formal and informal. We estimate our model to data from Encuesta Nacional de Ocupaci ́on y empleo (ENOE) by simulated GMM. Then we perform three different policy analyses: changes in the distribution of the transfers between formal and informal sector workers, changes in the size of the transfer system, and changes in the progressivity of taxes and transfers (pending). Our model is able to capture key features of Mexican labor markets, such as the distribution of the labor force across sectors and the distribution of accepted wage offers. Dividing transfers equally between formal and informal sector workers increases the size of the informal sector by 5 percentage points, it also increases average wages in the formal sector by 6% whereas wages in the informal sector fall by 4%. When we double the size of transfers, the size of informal sector falls by 5 percentage points. However, it has a big effect on the distribution of accepted wage offers: average wages increase by 10% in the formal sector and they raise by 16% in the informal sector.
    Keywords: Informal Sector; Mexico; Taxes; Transfers; General Equilibrium; Frictions
    JEL: E62 E24 J31 J21 H30 H53
    Date: 2011–07–04
  48. By: Paul Gomme (Concordia University and CIREQ); Damba Lkhagvasuren (Concordia University and CIREQ)
    Abstract: Reasonably calibrated versions of the Diamond-Mortensen-Pissarides search and matching model of unemployment underpredict, by a wide margin, the volatility of vacancies, unemployment, and the vacancies-unemployment ratio - variables at the heart of this model. These shortcomings motivate two modifications to the Diamond-Mortensen-Pissarides model. First, wages are determined via competitive search (wage posting by firms along with directed search on the part of workers) rather than the usual Nash bargaining. This change is motivated by the fact that most unemployment variation in the U.S. is due to non-college educated individuals, and that wages of newly-hired non-college educated workers are predominantly set by wage posting. Second, workers are permitted to take direct action to affect the outcome of their labor market search through search effort. With these modifications in place, the benchmark model captures 70% of the standard deviation of unemployment and the vacancies-unemployment ratio, and almost 80% of the volatility of vacancies. A recalibration of the model that targets the variability of the vacancies-unemployment ratio results in reasonable parameters, and can account for almost all of the cyclical variability in unemployment and vacancies.
    Keywords: Variable Search Effort, Educational Differences in Unemployment Volatility, Endogenous Matching Technology, Time Use, Wage Posting, Competitive Search
    JEL: E24 E32 J63 J64
    Date: 2011–06
  49. By: Katsushi S. Imai (Economics, School of Social Sciences, University of Manchester, UK & Research Institute for Economics and Business Administration, Kobe University, Japan); Raghav Gaiha (Faculty of Management Studies, University of Delhi, India); Ganesh Thapa (International Fund for Agricultural Development, Italy); Samuel Kobina Annim (Economics, School of Social Sciences, University of Manchester, UK); Aditi Gupta (Yes Bank, mumbai)
    Abstract: Under the continued effects of global financial crisis where the donor’s investment in microfinance sectors has become shrunk, how the macroeconomic factors or the crisis or the macro-institutional factors would affect the performance of microfinance institutions (MFIs) have become one of the key debates among the policy makers and practitioners. The present paper has investigated the effect of both institutional factors and the macro economy on the financial performance of MFIs drawing upon the Microfinance Information Exchange (MIX) data as well as cross-country data of macro economy, finance and institutions drawing upon three stage least squares (3SLS) and fixed effects vector decomposition (FEVD) to take account of the endogeneity of key explanatory variables. In contrast to Ahlin et al.’s (2010), we generally find that institutional factors affect MFIs' financial performance, in particular, profitability, operating expense, and portfolio quality. It is also found that the macro-economic and financial factors, such as GDP and share of domestic credit to GDP, have positive impacts on MFIs’ financial performance, such as profitability, operating expense ratio and portfolio quality. It is thus concluded that while macroeconomic factors are important, improving macro-institutional factors, policies to raise country-level institutional qualities are required for making the activities of MFIs more sustainable under the global recession.
    Date: 2011–07
  50. By: Diamond, Peter A. (Massachusetts Institute of Technology); Mortensen, Dale T. (Northwestern University); Pissarides, Christopher A. (London School of Economics)
    Abstract: Interview with the 2010 Laureates in Economic Sciences Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides, 6 December 2010. The interviewer is Adam Smith, Editorial Director of Nobel Media.
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–12–06
  51. By: Waqas, Muhamad; Awan, Masood Sarwar; Aslam, Muhammad Amir
    Abstract: The strict assumptions of Ricardian Equivalence Hypothesis hoist the debates on this issue among different school of thoughts. Its validity entails certain assumptions which raise the doubts on its validity especially in the context of developing countries like Pakistan. The aim of this study is to check the validity of Ricardian Equivalence Hypothesis and its sources of deviation in case of Pakistan. The study use annual data for the period of 1973-2009. Engle and Granger and Johansen cointegration approaches depicts the long run relationship among variables. Generalized Method of Moment results shows that the presence of liquidity constraints and infinite horizons are the sources of failure of Ricardian Equivalence Hypothesis. These findings illustrate concentration towards the importance of fiscal policies in raising private consumption and controlling budget deficits, which are the prime goals of stabilization policies.
    Keywords: Fiscal policy; Ricardian Equivalence; Pakistan
    JEL: E62 E6 H53 H6
    Date: 2011
  52. By: Stefano Ugolini (Scuola Normale Superiore, Pisa)
    Abstract: As well as the current one, the wave of globalization culminated in 1913 was marked by increasing accumulation of foreign exchange reserves. But what did ‘reserves’ mean in the past, how were they managed, and how much relevant are the differences between then and now? This paper is the first attempt to investigate 19th-century reserve management from central banks’ perspective. Building on a significant case study (the National Bank of Belgium, i.e. the ‘inventor’ of foreign exchange policy, in the 1850s), it shows that risk management practices in the past differed considerably from nowadays. The structure of the international monetary system allowed central banks to minimize financial risk, while poor institutional design enhanced operational risk: this is in stark contrast with the present situation, in which operational risk has been minimized and financial risk has considerably increased. Yet 19th-century reserve management was apparently not conducive to major losses for central banks, while the opposite seems to have been the case in the 21st century.
    Keywords: Foreign exchange reserves, international monetary systems, central banking, risk management
    JEL: E42 E58 G11 N23
    Date: 2011–07–05
  53. By: Jan Bonenkamp
    Abstract: <p>This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model. We analyse this interaction both in a partial-equilibrium and general-equilibrium setting. </p><p>Retirement flexibility is often seen as a hedge against capital-market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened  and under some conditions even turned around, if not only capital-market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general-equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.</p><p>Key words: retirement (in) flexibility, portfolio allocation, risk, intratemporal substitution elasticity<br />JEL codes: E21, G11, J26<br /> </p>
    JEL: E21 G11 J26
    Date: 2011–06
  54. By: Huw Dixon; Engin Kara
    Abstract: We estimate and compare two models, the Generalized Taylor Economy (GTE) and the Multiple Calvo model (MC) that have been built to model the distributions of contract lengths observed in the data. We compare the performances of these models to those of the standard models such as the Calvo and its popular variant, using the ad hoc device of indexation. The estimations are made with Bayesian techniques for the US data. The results indicate that the data strongly favour the GTE.
    Keywords: DSGE models, Calvo, Taylor, price-setting
    JEL: E32 E52 E58
    Date: 2011–07
  55. By: Jakob B Madsen
    Abstract: This paper proposes a model in which house prices are determined by housing affordability in the short run, while being determined by acquisition costs in the long run. Housing affordability is, in turn, determined by nominal income and nominal mortgage payments. The model explains the recent housing market run-up in the OECD countries by lower housing repayments, decreasing nominal interest rates, and a large inflow of migrants. Empirical estimates give strong support for the model and suggest that it explains house prices in the OECD better than the mainstream models.
    Keywords: house prices, institutions, affordability, financial innovations, Tobin’s q.
    JEL: E13 E22 G12
    Date: 2011–06
  56. By: [no author]
    Abstract: No abstract available
    Date: 2011
  57. By: A. SCHREIBER (Direction générale de ladministration et de la fonction publique); A. VICARD (Insee)
    Abstract: In France, as in many industrialized countries, labor productivity experienced a slowdown over the past three decades: labor productivity per capita increased by 2.6% per year from 1979 to 1989, by 1.9% from 1990 to 1999 and by 1.0% per year from 2000 to 2008. Meanwhile, tertiarisation went on. Since 1978, 150,000 jobs were created on average each year in the services sector, while 60,000 were destroyed in manufacturing. The service sector is often presented as one major factor behind the slowdown in productivity. We show however that this is not the main driving factor. According to our decomposition, if the share of each sector in the total employment had remained the same from 1978 to 2008, annual average labor productivity gains would have been at a level of 2.0%. Instead, they were actually at 1.9%, a level only slightly lower. The slowdown is in fact driven by the evolution within the major sectors (agriculture, market services, construction, and to a lesser extent, manufacturing) and their sub-branches, especially between the 1990s and 2000s. Annual average productivity gains were reduced by 3.7 percentage points in agriculture between the two decades, by 0.8 percentage points in manufacturing, by 0.3 percentage points in services and by 2.0 points in construction.
    Keywords: Labor productivity, tertiarisation, deindustrialisation, structural change
    JEL: E23 E24
    Date: 2011
  58. By: Donatella Baiardi (Department of Economics and Quantitative Methods, University of Pavia); Carluccio Bianchi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: Questo lavoro si propone di costruire un indicatore coincidente di attività economica ad alta frequenza per la regione Lombardia e la provincia di Milano, mediante l’utilizzo di un dynamic factor model costruito secondo l’approccio di Stock e Watson (1998a e 1998b). La tecnica di analisi delle componenti principali sintetizza le informazioni contenute in un ampio dataset di base in un numero limitato di fattori comuni capaci di descrivere le alterne fasi cicliche. L’algoritmo EM (Expectation Maximization), infine, consente di ricavare gli indicatori territoriali desiderati tenendo conto dei dati ufficiali annuali sulla dinamica del PIL regionale o del valore aggiunto provinciale.
    Keywords: Indicatori coincidenti di attività economica, Regioni italiane, Indici di diffusione.
    JEL: E32 C32 C82
    Date: 2010–11
  59. By: Michael W. L. Elsby; Jennifer C. Smith; Jonathan Wadsworth
    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 variation. 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 jobfinding 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: 2011–07

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