nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒07‒21
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Budgetary Policies in a DSGE Model with Finite Horizons By Barbara Annicchiarico; Nicola Giammaroli; Alessandro Piergallini
  2. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Barbara Annicchiarico; Alessandra Pelloni; Lorenza Rossi
  3. Unions Power, Collective Bargaining and Optimal Monetary Policy By Ester Faia; Lorenza Rossi
  4. A New Approach to Inflation Aversion By Gaowang Wang
  5. Equilibrium Selection in a Cashless Economy with Transaction Frictions in the Bond Market By Massimiliano Marzo; Paolo Zagaglia
  6. Limited Asset Market Participation: Does it Really Matter for Monetary Policy? By Guido Ascari; Andrea Colciago; Lorenza Rossi
  7. Monetary Policy Rules in the BRICS: How Important is Nonlinearity? By Fredj Jawadi; Sushanta K. Mallick; Ricardo M. Sousa
  8. Policy Coordination in Fiscal Federalism: Drawing Lessons from the Dubai Debt Crisis By Serhan Cevik
  9. Fiscal Policy in the BRICs By Fredj Jawadi; Sushanta K. Mallick; Ricardo M. Sousa
  10. Has India emerged? Business cycle facts from a transitioning economy. By Ghate, Chetan; Pandey, Radhika; Patnaik, Ila
  11. The Reserve Equation and The Analytics of Pakistan's Monetary Policy By Hassan, Rubina; Mirza, M. Shahzad
  12. Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions By Fernando Alvarez-Parra; Manuel Toledo; Luis Brandao Marques
  13. Exchange Rate Pass-Through over the Business Cycle in Singapore By Joey Chew; Siang Meng Tan; Sam Ouliaris
  14. Should Unconventional Balance Sheet Policies be Added to the Central Bank Toolkit? A Review of the Experience So Far By Kotaro Ishi; Kenji Fujita; Mark R. Stone
  15. Resolving economic deadlock By Pfeffer, Claus-Peter
  16. The Role of Monetary Policy in Turkey during the Global Financial Crisis By Selim Elekdag; Harun Alp
  17. Fiscal rules and fiscal sustainability at sub-national government level: experiences of Slovakia, Slovenia and Croatia By DREZGIC, Sasa; KLIMOVSKY, Daniel; PINTERIC, Uros
  18. How Does Fiscal Policy React to Wealth Composition and Asset Prices? By Luca Agnello; Vítor Castro; Ricardo M. Sousa
  19. Who Supports the ECB? Evidence from Eurobarometer Survey Data By Etienne Farvaque; Muhammad Azmat Hayat; Alexander Mihailov
  20. The Basel III framework for liquidity standards and monetary policy implementation By Ulrich Bindseil; Jeroen Lamoot
  21. The Recent Evolution of the Natural Rate of Unemployment By Daly, Mary C.; Hobijn, Bart; Valletta, Rob
  22. What It Takes to Solve the U.S. Government Deficit Problem By Ray C. Fair
  23. Foreign Asset Accumulation and Macroeconomic Policies in a Model of Mercantilism By Heng-fu Zou
  24. How to Solve the Price Puzzle? A Meta-Analysis By Marek Rusnak; Tomas Havranek; Roman Horvath
  25. Recent Developments in European Bank Competition By Yu Sun
  26. Do Fiscal Rules Matter? A Difference-in-Discontinuities Design By Veronica Grembi; Tommaso Nannicini; Ugo Troiano
  27. Default risk and fiscal sustainability in PIIGS countries By Canale, Rosaria Rita
  28. Resource Windfalls, Macroeconomic Stability and Growth: The Role of Political Institutions By Rabah Arezki; Kazim Kazimov; Kirk Hamilton
  29. The Behavior of Savings and Asset Prices When Preferences and Beliefs Are Heterogeneous By Tran, Ngoc-Khanh; Zeckhauser, Richard J.
  30. Economic Reforms and Growth in Franco’s Spain By Leandro Prados de la Escosura; Joan R. Rosés; Isabel Sanz Villarroya
  31. Wealth, Labour Income, Stock Returns and Government Bond Yields, and Financial Stress in the Euro Area By Ricardo M. Sousa
  32. Getting Normalization Right: Dealing with ‘Dimensional Constants’ in Macroeconomics By Cantore, Cristiano; Levine, Paul
  33. Effective Demand: Securing the Foundations By Olivier Allain
  34. Economic Planning in China By Gregory C. Chow
  35. Asset Returns Under Model Uncertainty: Eveidence from the euro area, the U.K and the U.S By João Sousa; Ricardo M. Sousa
  36. The Global Impact of Chinese Growth By Ippei Fujiwara; Keisuke Otsu; Masashi Saito
  37. La perspectiva de la macroeconomía postwalrasiana1 By David Colander
  38. Evidence-Based Management in "Macro" Areas: The Case of Strategic Management By Madhavan, Ravi; Mahoney, Joseph T.
  39. Real Exchange Rate Uncertainty and Output: A Sectoral Analysis By Gonzalo Varela
  40. Till Labor Cost Do Us Part A Vecm Model of Unit Labor Cost Convergence in the Euro Area By Francesca Pancotto; Filippo Pericoli

  1. By: Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Nicola Giammaroli (International Monetary Fund); Alessandro Piergallini (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. The model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.
    Keywords: Fiscal Policy; Monetary Policy; Nominal Rigidities; Capital Accumulation;Finite Horizons; Simulations.
    JEL: E52 E58 E63
    Date: 2011–07–12
  2. By: Barbara Annicchiarico (Department of Economics, University of Rome ‘Tor Vergata’); Alessandra Pelloni (Department of Economics, University of Rome ‘Tor Vergata’); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth, volatility, business cycle, monetary policy
    JEL: E32 E52 O42
    Date: 2010–08
  3. By: Ester Faia (Department of Money and Macro, Goethe University Frankfurt); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We study Ramsey policies and optimal monetary policy rules in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power dampen wage fluctuations and amplify employment fluctuations relatively to a DNK model. The optimal monetary policy must trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions' monopoly power. In this context the monetary authority uses inflation as a tax on unions' rents. The optimal monetary policy rule targets unemployment alongside inflation.
    Date: 2010–10
  4. By: Gaowang Wang (Wuhan University)
    Abstract: This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing in?ation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.
    Keywords: Inflation Aversion, Endogenous Time Preference, Monetary Superneutrality, Optimum Quantity of Money
    JEL: E31 E5 O41
    Date: 2011–11
  5. By: Massimiliano Marzo (Department of Economics, Università di Bologna); Paolo Zagaglia (Department of Economics, Università di Bologna)
    Abstract: The present paper introduces two bonds in a standard New-Keynesian model to study the role of segmentation in bond markets for the determinacy of rational expectations equilibria. We use a strongly-separable utility function to model ‘liquid’ bonds that provide transaction services for the purchase of consumption goods. ‘Illiquid’ bonds, instead, provide the standard services of store of value. We interpret liquid bonds as mimicking short-term instruments, and illiquid bonds to represent long-dated instruments. In this simple setting, the expectation hypothesis holds after log-linearizing the model and after pricing the bonds according to an affine scheme. We assume that monetary policy follows a standard Taylor rule. In this context, the inflation targeting parameter should be higher than one for determinacy of rational expectations equilibria to be achieved. We compute an analytical solution for the bond pricing kernel. We also show that the possibility of obtaining this analytical solution depends on the type of utility function. When utility is weakly separable between consumption and liquid bonds, the Taylor principle holds conditional to the output and inflation coefficients in the Taylor rule. Achieving solution determinacy requires constraining these coefficients within bounds that depend on the structural parameters of the model, like the intertemporal elasticity of consumption substitution.
    Keywords: term structure, determinacy, pricing kernel, fiscal and monetary policy
    JEL: E43 E63
    Date: 2011–07
  6. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We study the design of monetary policy in an economy characterized by staggered wage and price contracts together with limited asset market participation (LAMP). Contrary to previous results, we find that once nominal wage stickiness, an incontrovertible empirical fact, is considered: i) the Taylor Principle is restored as a necessary condition for equilibrium determinacy for any empirically plausible degree of LAMP; ii) the effect of LAMP for the design of optimal monetary policy are minor; iii) optimal interest rate rules become active no matter the degree of asset market participation. For this reasons we argue that LAMP does not matter much for monetary policy.
    Keywords: optimal monetary policy, sticky wages, non-Ricardian household, determinacy, optimal simple rules.
    JEL: E50 E52
    Date: 2010–10
  7. By: Fredj Jawadi (University of Evry Val d?Essone & Amiens School of Management); Sushanta K. Mallick (Queen Mary University of London); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: Given limited research on monetary policy rules in emerging markets, this paper estimates monetary policy rules for five key emerging market economies: Brazil, Russia, India, China and South Africa (BRICS) analysing whether the monetary authority reacts to changes in financial markets, in monetary conditions, in the foreign exchange sector and in the commodity price. To get a deeper understanding of the central bank’s behaviour, we assess the importance of nonlinearity using a smooth transition (STAR) model. Using quarterly data, we find strong evidence that the monetary policy followed by the Central Banks in the BRICS varies from one country to another and that it exhibits nonlinearity. In particular, considerations about economic growth (in the cases of Brazil and Russia), inflation (for India and China) and stability of financial markets (in South Africa) seem to be the major drivers of such nonlinear monetary policy behaviour. Moreover, the findings suggest that the monetary authorities pursue, with the exception of India, a target range for the threshold variable rather than a specific point target. In fact, the exponential smooth transition regression (ESTR) model seems to be the best description of the monetary policy rule in these countries.
    Keywords: monetary policy, emerging markets, smooth transition.
    JEL: E37 E52
    Date: 2011
  8. By: Serhan Cevik
    Abstract: Using the cyclically adjusted non-hydrocarbon primary balance, this paper investigates the evolution of the fiscal policy stance in the United Arab Emirates at consolidated and sub-national levels in the run-up and after the crisis. The empirical findings show that procyclical fiscal policies prior to the crisis reinforced the financial sector cycle, exacerbated the economic upswing, and thereby contributed to the build-up of macro-financial vulnerabilities. The paper also sets out policy lessons to develop a rule-based fiscal framework that would help strengthen fiscal policy coordination between the various layers of government and ensure long-term fiscal sustainability and a more equitable intergenerational distribution of wealth.
    Keywords: Business cycles , Debt sustainability , Fiscal policy , Fiscal sustainability , Hydrocarbons , Public debt , United Arab Emirates ,
    Date: 2011–06–27
  9. By: Fredj Jawadi (University of Evry Val d?Essone & Amiens School of Management); Sushanta K. Mallick (Queen Mary University of London); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: This paper assesses the macroeconomic impact of fiscal policy shocks for four key emerging market economies - Brazil, Russia, India and China (BRICs) – using a Bayesian Structural Vector Auto-Regressive (BSVAR) approach, a Sign-Restrictions Vector Auto-Regressive framework and a Panel Vector Auto-Regressive (PVAR) model. To get a deeper understanding of the government’s behaviour, we also estimate fiscal policy rules using a Fully Simultaneous System of Equations and analyze the importance of nonlinearity using a smooth transition (STAR) model. Drawing on quarterly frequency data, we find that government spending shocks have strong Keynesian effects for this group of countries while, in the case of government revenue shocks, a tax hike is harmful for output. This suggests that there is no evidence in favour of ‘expansionary fiscal contraction’ in the context of emerging economies where spending policies are largely pro-cyclical. Our findings also show that considerations about growth (in the case of China), exchange rate and inflation (for Brazil and Russia) and commodity prices (in India) drive the nonlinear response of fiscal policy to the dynamics of the economy. All in all, our results are consistent with the idea that fiscal policy can be a powerful stabilization tool and can provide an important short-term economic boost for emerging markets, in particular, in the context of severe downturns as in most recent financial turmoil.
    Keywords: fiscal policy, emerging markets, fully simultaneous system of equations, sign-restrictions VAR, smooth transition regression model
    JEL: E37 E62
    Date: 2011
  10. By: Ghate, Chetan; Pandey, Radhika; Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: This paper presents a comprehensive set of stylised facts for business cycles in India from 1950 - 2009. We find that the nature of the business cycle has changed dramatically after India's liberalisation reforms in 1991. In particular, after the the mid 1990s, the properties of India's business cycle has moved closer in key respects to select advanced countries. This is consistent with India's structural transformation from a pre-dominantly agricultural and planned developing economy to a more mar- ket based industrial-income economy. We also identify in what respects the behaviour of the Indian business cycle is different from that of other advanced economies, and closer to that of other less developed economies. This is the first exercise of this kind to generate an exhaustive set of stylised facts for India using both annual and quarterly data.
    Keywords: Macroeconomics ; Real business cycles ; Emerging market DSGE models ; Volatility and growth
    JEL: E10 E32
    Date: 2011–04
  11. By: Hassan, Rubina; Mirza, M. Shahzad
    Abstract: This paper deals with the computation and analysis of some fundamental reserve aggregates and associated monetary statistics which impart important information regarding the design and conduct of monetary policy at the State Bank of Pakistan. Specifically, we compute the data series for borrowed, unborrowed, free and drainable reserves using balance sheet data published by the State Bank of Pakistan for the period 1985-2009. Results show that Pakistan’s monetary policy revolves around managing the exchange rate while using the t-bill rate as the key policy instrument. However, the value of the t-bill rate is both incorrectly and sub-optimally related to macroeconomic fundamentals rendering monetary policy time inconsistent. This hinges on the finding that since 2000-01, State Bank of Pakistan is targeting net free reserves of the banking system at 4% of total private deposits. Among other observations, we find that the scope of open market operations as a tool of monetary policy remains but limited and that this limited role of open market defenses derives from an indiscreet concern of the central bank to sterilize its own foreign exchange reserves. Furthermore, the growth rate of unborrowed plus drainable reserves bears a strong negative correlation with the annual average rate of inflation, which, on account of the former being consistently negative since 2005, implies that the government and the State Bank of Pakistan both have absolutely no concern for controlling inflation.
    Keywords: Measurement of Money Supply; Analysis of Monetary Policy; Central Banks and Their Policies; Taylor Rule; Operational Targets of Monetary Policy.
    JEL: E51 E58 E52
    Date: 2010–11
  12. By: Fernando Alvarez-Parra; Manuel Toledo; Luis Brandao Marques
    Abstract: This paper examines how durable goods and financial frictions shape the business cycle of a small open economy subject to shocks to trend and transitory shocks. In the data, nondurable consumption is not as volatile as income for both developed and emerging market economies. The simulation of the model implies that shocks to trend play a less important role than previously documented. Financial frictions improve the ability of the model to match some key business cycle properties of emerging economies. A countercyclical borrowing premium interacts with the nature of durable goods delivering highly volatile consumption and very countercyclical net exports.
    Keywords: Business cycles , Consumer goods , Economic models , Emerging markets , External shocks ,
    Date: 2011–06–07
  13. By: Joey Chew; Siang Meng Tan; Sam Ouliaris
    Abstract: This paper investigates exchange rate pass-through in Singapore using band-pass spectral regression techniques, allowing for asymmetric effects over the business cycle. First stage pass-through is estimated to be complete and relatively quick, confirming existing views that the exchange rate provides an effective tool to moderate imported inflation in Singapore. Asymmetric pass-through effects over the business cycle are also detected, with importers passing on a smaller share of exchange rate movements during boom periods as compared to recessions. This result suggest that Singapore’s exchange rate policy could afford to "lean against the wind," especially during cyclical expansions.
    Keywords: Business cycles , Economic models , Exchange rate policy , Monetary policy , Singapore ,
    Date: 2011–06–17
  14. By: Kotaro Ishi; Kenji Fujita; Mark R. Stone
    Abstract: What is the case for adding the unconventional balance sheet policies used by major central banks since 2007 to the standard policy toolkit? The record so far suggests that the new liquidity providing policies in support of financial stability generally warrant inclusion. As the balance sheet policies aimed at macroeconomic stability were used only by a small number of highly credible central banks facing a lower bound constraint on conventional interest rate policy, they are not relevant for most central banks or states of the world. Best practices of these policies are documented in this paper.
    Keywords: Central bank role , Central banks , Financial risk , Financial stability , Liquidity management , Monetary policy , Risk management ,
    Date: 2011–06–22
  15. By: Pfeffer, Claus-Peter
    Abstract: In the introductory chapter a novel economic policy is proposed which consists of a) 'virtualizing' debt (putting it on the Central Bank balance sheet) and b) reduce the money-multiplier by an implementation of a strong minimum reserving policy. The main part shows exposes a flaw in the concept of capital in neoclassical thinking, with special reference to Tobin's q-theory. This has the implication that neoclassical thinking - Keynesian and 'classical' - overstates investment activity and the tendency to full employment. The last two chapters - on China and the Nazi-Recovery - are empirical illustrations.
    Keywords: Keynesianism; deficit spending; public debt; capital theory; monetary theory and policy;
    JEL: E12 B22 E44 D53 E00 E40 D43 E11 E41
    Date: 2011–04–30
  16. By: Selim Elekdag; Harun Alp
    Abstract: Turkey is an interesting case study because it was one of the hardest hit emerging economies by the global financial crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating the fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) decreased policy rates by an astounding 1025 basis points over the November 2008 to November 2009 period. In this context, this paper addresses the following broad question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recent recession have been? Counterfactual experiments based on an estimated structural model provide quantitative evidence which suggests that the recession would have been substantially more severe. In other words, the interest rate cuts implemented by the CBRT and exchange rate flexibility both helped substantially soften the impact of the global financial crisis.
    Date: 2011–06–28
  17. By: DREZGIC, Sasa; KLIMOVSKY, Daniel; PINTERIC, Uros
    Abstract: Relationship of fiscal rules and fiscal sustainability is subject to ongoing debate which was intensified by adoption of EU fiscal rules. Task of the fiscal rules is simple - to prevent the unsustainable growth of debt and spending. However, the problem of fiscal rules that have been applied in past is in ignoring the economic fundamentals that determine fiscal sustainability. So far, fiscal rules were focused on the control of spending without taking care about possible output fluctuations or effects of debt financing on growth. That led to paradox that even with the sound fiscal policy guided by the fiscal rules there is no guarantee of fiscal sustainability. This flaw became obvious when countries hit by economic crises start abandoning the criteria set up by fiscal rules in order to confront impact of worsening economic conditions to fiscal variables. Therefore, there is a need for development of new fiscal rules, particularly on the sub-national government levels. These new fiscal rules should encompass both short-term and long-term sustainability and particularly stimulus to economic efficiency. In order to determine necessary content of fiscal rules to achieve such goals it is important to conduct comparative research on the issue. This paper presents experiences of Slovakia, Slovenia and Croatia and tries to draw useful lessons.
    Keywords: economic crises; fiscal policy; sub-national governments; fiscal sustainability; fiscal rules
    Date: 2011
  18. By: Luca Agnello (Banque de France); Vítor Castro (Universidade de Coimbra and NIPE); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: We assess the response of fical policy to developments in asset markets in the US and the UK. We estimate fical polyce rules augmented with aggregate wealth, wealth composition (i.e. financial and housing wealth) and asset prices (i.e. stock and housing prices) using: (i) a linear framework based on a fully simultaneous system approach; and (ii) two nonlinear specifications that rely on a smooth transition regression (STR) and a Markov-switching (MS) model. The linear framework suggests that, while primary spending does not seem to react to wealth composition or asset prices, taxes and primary surplus are significantly: (i) cut when financial wealth or stock prices rise, and (ii) raised when housing wealth or housing prices increase. The smooth transition regression model shows that primary spending and fiscal balance are adjusted in a nonlinear fashion to both wealth and price effects, while the Markov-switching framework highlights the importance of tax cuts (in the US) and spending hikes (in the UK) to offset the decline in wealth suring major recessions and financial crises. Overall, our results provide evidence of a non-stabilizing effect of government debt, a countercyclical policy and a vigilant track of wealth developments by fiscal authorities.
    Keywords: fiscal policy, wealth composition, asset prices
    JEL: E37 E52
    Date: 2011
  19. By: Etienne Farvaque (Department of Economics, University of Lille 1); Muhammad Azmat Hayat (Department of Economics, University of Lille 1); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: This paper addresses empirically the still debated issue of the legitimacy of the European Central Bank (ECB) with regard to European polities, presenting evidence on public opinion support for the ECB as elicited from responses in the recent waves of the Eurobarometer survey. We employ a rich set of potential determinants, combining macroeconomic and socio-demographic data in logistic regressions, to explain trust in the ECB. We find that people with higher level of income and education and centre to right-wing political orientation tend to support the ECB, as well as people with optimistic expectations on the economic situation. Moreover, our results indicate that socio-demographic determinants of trust in the ECB dominate macroeconomic ones, in particular inflation performance, by a considerable margin of magnitude and in a quite robust way. The policy relevance of such results is important for ECB’s communication strategy with the EU public, especially in the years ahead of likely reforms of the European Monetary Union (EMU).
    Keywords: European Central Bank, communication, legitimacy, determinants of trust, Eurobarometer survey, logistic regression
    JEL: C23 E58 F33 H11 Z13
    Date: 2011–07–08
  20. By: Ulrich Bindseil; Jeroen Lamoot
    Abstract: Basel III introduces for the first time an international framework for liquidity risk regulation, reflecting the experience of excessive liquidity risk taking of banks in the run up to the financial crisis that erupted in August 2007, and associated negative externalities. As central banks play a crucial role in the liquidity provision to banks during normal times and in a financial crisis, the treatment of central bank operations in the regulation is obviously important. To ensure internalisation of liquidity risks (i.e. pricing of liquidity risk) and to address excessive reliance ex ante on central bank liquidity support by the banks, the regulation deliberately does not establish a direct close link with the monetary policy operational framework. While this reflects the purpose of the regulation and is also natural outcome of an international rule being applied under a multitude of very different monetary policy operational frameworks, this paper shows that the interaction between the two areas can be substantial, depending on the operational and collateral framework of the central bank. This implies the need for further study and the development of policies at the central bank and regulatory/supervisory side on how to handle these potential interactions in practice.
    Keywords: Basle III, Liquidity Risk, Banking Regulation, monetary policy implementation
    JEL: E58 G21 G28
    Date: 2011–07
  21. By: Daly, Mary C. (Federal Reserve Bank of San Francisco); Hobijn, Bart (Federal Reserve Bank of San Francisco); Valletta, Rob (Federal Reserve Bank of San Francisco)
    Abstract: The U.S. economy is recovering from the financial crisis and ensuing deep recession, but the unemployment rate has remained stubbornly high. Some have argued that the persistent elevation of unemployment relative to historical norms reflects the fact that the shocks that hit the economy were especially disruptive to labor markets and likely to have long lasting effects. If such structural factors are at work they would result in a higher underlying natural or nonaccelerating inflation rate of unemployment, implying that conventional monetary and fiscal policy should not be used in an attempt to return unemployment to its pre-recession levels. We investigate the hypothesis that the natural rate of unemployment has increased since the recession began, and if so, whether the underlying causes are transitory or persistent. We begin by reviewing a standard search and matching model of unemployment, which shows that two curves – the Beveridge curve (BC) and the Job Creation curve (JCC) – determine equilibrium unemployment. Using this framework, our joint theoretical and empirical exercise suggests that the natural rate of unemployment has in fact risen over the past several years, by an amount ranging from 0.6 to 1.9 percentage points. This increase implies a current natural rate in the range of 5.6 to 6.9 percent, with our preferred estimate at 6.25 percent. After examining evidence regarding the effects of labor market mismatch, extended unemployment benefits, and productivity growth, we conclude that only a small fraction of the recent increase in the natural rate is likely to persist beyond a five-year forecast horizon.
    Keywords: equilibrium unemployment, Beveridge curve, structural unemployment, mismatch
    JEL: E24 J3 J6
    Date: 2011–07
  22. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper estimates how large fiscal-policy changes have to be to solve the U.S. government deficit problem. This question is complicated in part because of endogeneity issues. A fiscal-policy change designed to decrease the deficit has effects on the macro economy, which in turn affects the deficit. Any analysis of fiscal-policy proposals must take these effects into account: one needs a model of the economy. This paper uses a macroeconometric model of the world economy to examine the deficit problem. A base run is first obtained in which there are no major changes in U.S. fiscal policy.  This results in an ever increasing debt/GDP ratio. Then net taxes (taxes minus transfers) are increased by an amount sufficient to stabilize the long-run debt/GDP ratio. The increases are linearly phased in over a three-year period beginning in the first quarter of 2012. The estimates of the needed net tax increases are large. Compared to values in the base run, net taxes after the phase in need to be about $650 billion higher each year in 2011 dollars. In percentage terms this translates into about 45 percent of personal income taxes, 51 percent of social security taxes, 24 percent of transfer payments to state and local governments and to persons, 44 percent of purchases of goods and services, and 176 percent of corporate profit taxes. The output loss is 1.38 percent of real GDP over the 9 years analyzed.
    Keywords: Federal deficit, Debt/GDP ratio
    JEL: E17
    Date: 2011–07
  23. By: Heng-fu Zou
    Date: 2011
  24. By: Marek Rusnak; Tomas Havranek; Roman Horvath
    Abstract: The short-run increase in prices following an unexpected tightening of monetary policy represents a frequently reported puzzle. Yet the puzzle is surprisingly easy to explain away when all published models are quantitatively reviewed. We collect about 1,000 point estimates of impulse responses from 70 articles using vector autoregressive models and present a simple method of research synthesis for graphical results. We find some evidence of publication selection against the price puzzle. Our results suggest that the reported impulse responses depend systematically on the study design: when misspecifications are filtered out, the average impulse response shows that prices decrease soon after a tightening. The long-run response of prices to monetary policy shocks depends on the characteristics of the economy.
    Keywords: Meta-analysis, monetary policy transmission, price puzzle, publication selection bias.
    JEL: E52
    Date: 2011–07
  25. By: Yu Sun
    Abstract: This paper investigates the degree of bank competition in the euro area, the U.S. and U.K. before and after the recent financial crisis, and revisits the issue whether the introduction of EMU and the euro have had any impact on bank competition. The results suggest that the level of bank competition converged across euro area countries in the wake of the EMU. The recent global financial crisis led to a fall in competition in several countries and especially where large credit and housing booms had preceded the crisis..
    Keywords: Banks , Competition , Cross country analysis , Economic models , Euro Area , European Economic and Monetary Union , United Kingdom ,
    Date: 2011–06–24
  26. By: Veronica Grembi; Tommaso Nannicini; Ugo Troiano
    Abstract: We evaluate the effect of relaxing fiscal rules on budget outcomes in a quasi-experimental setup. In 1999, the Italian central government introduced fiscal rules—also known as the Domestic Stability Pact—aimed at imposing fiscal discipline on municipal governments, and in 2001 the Pact was relaxed for municipalities below 5,000 inhabitants. This institutional change allows us to implement a “difference-in-discontinuities” design by combining the before/after with the discontinuous policy variation. Our estimates show that relaxing fiscal rules triggers a substantial deficit bias, captured by a shift from zero deficit to a deficit that amounts to 2% of total budget. The adjustment mostly involves revenues as unconstrained municipalities cut their real estate and income taxation. The impact is larger when mayors can run for reelection and the number of political parties is high. A falsification test in 1999 shows that our findings are not driven by the fact that cities just below and above 5,000 are differentially affected by fiscal rules.
    Date: 2011
  27. By: Canale, Rosaria Rita
    Abstract: European Monetary Union experiences the division into two major blocks according to their ability to respect fiscal criteria and replace their bonds on the market. The so-called PIIGS countries are asked to hardly reduce their deficit and debt in order to prevent speculative attacks and preserve the Currency Union. The aim of the paper is to show that speculative attacks on government debt are not directly linked to default probability, but to liquidity requirements and to the EU fiscal constraints. In times of crisis the path of deficit/GDP ratio goes up and send the signal that governments are loosening their fiscal stance. As far as there are liquidity constraints, markets increase the spreads and force governments to fiscal retrenchments, hardly increasing the cost of adjustment. The result is that in the absence of a bailout shared mechanism financial markets give policy prescriptions and exert a political pressure without having fiscal sovereignty.
    Keywords: Fiscal policy; sovereign debt crisis; EMU
    JEL: E65 E61 F33
    Date: 2011–06
  28. By: Rabah Arezki; Kazim Kazimov; Kirk Hamilton
    Abstract: We use a new dataset on non-resource GDP to examine the performance of commodity-exporting countries in terms of macroeconomic stability and economic growth in a panel of up to 129 countries during the period 1970-2007. Our main findings are threefold. First, we find that overall government spending in commodity-exporting countries has been procyclical. Second, we find that resource windfalls initially crowd out non-resource GDP which then increases as a result of the fiscal expansion. Third, we find that in the long run resource windfalls have negative effects on non-resource sector GDP growth. Yet, the effects turn out to be statistically insignificant when controlling for government spending. Both the effects of resource windfalls on macroeconomic stability and economic growth are moderated by the quality of political institutions.
    Keywords: Agricultural exports , Commodities , Developing countries , Economic growth , Energy , Exports , Fiscal policy , Fiscal stability , Governance , Government expenditures , Natural resources ,
    Date: 2011–06–17
  29. By: Tran, Ngoc-Khanh (MIT); Zeckhauser, Richard J. (Harvard University)
    Abstract: Movements in asset prices are a major risk confronting individuals. This paper establishes new asset pricing results when agents differ in risk preference, time preference and/or expectations. It shows that risk tolerance is a critical concept driving savings decisions, consumption allocations, prices and return volatilities. Surprisingly, due to the equilibrium risk sharing, the precautionary savings motive in the aggregate can vastly exceed that of even the most prudent actual agent in the economy. Consequently, a low real interest rate, resulting from large aggregate savings, can prevail with reasonable risk aversions for all agents. One downside of a large aggregate savings motive is that savings rates become extremely sensitive to output fluctuation. Thus, the same mechanism that produces realistically low interest rates tends to make them unrealistically volatile. A powerful isomorphism allows differences in time preference and expectations to be swept away in the analysis, yielding an equivalent economy whose agents differ merely in risk aversion. These results hold great potential to simplify the analysis of heterogeneous-agent economies, as we demonstrate in quantifying how asset prices move and bounding their volatilities. All results are obtained in closed form for any number of agents possessing additively separable preferences in an endowment economy.
    Date: 2011–07
  30. By: Leandro Prados de la Escosura; Joan R. Rosés; Isabel Sanz Villarroya
    Abstract: This paper is an attempt at assessing the economic impact of market-oriented reforms undertaken during General Franco’s dictatorship, in particular, the 1959 Stabilization and Liberalization Plan. Using an index of macroeconomic distortions (IMD) the relationship between economic policies and the growth record is examined. Although a gradual reduction in macroeconomic distortions was already in motion during the 1950s, the 1959 Plan opened the way to a new institutional design that favoured a free-market allocation of resources and allowed Spain to accelerate growth and catch up with Western Europe. Without the 1950s reforms and, especially, the 1959 Plan, per capita GDP would have been significantly lower in 1975
    Keywords: Spain, Franco’s dictatorship, Economic reforms, Stabilization, Liberalization, Growth
    JEL: E65 F43 N14 N44 O43
    Date: 2011–07
  31. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: I show that when the ratio of asset wealth to human wealth falls, investors become more exposed to idiosyncratic shocks and demand higher stock and government bond risk premia. I find that the residuals from the cointegrating vector among asset wealth and labour income, wy, predict both future stock and bond returns in the Euro Area. Consequently, it can be used to track time-variation in risk premium. The results are robust to the inclusion of control variables and vis-a-vis other benchmark models. Finally, I show that, conditioning the predictive ability of wy on the financial stress conditions allows one to track better future time-variation in risk premium. Moreover, when financial stress increases, investors perceive a larger risk for both stocks and government bonds.
    Keywords: wealth, income, stock returns, government bond yields
    JEL: E21 E44 D12
    Date: 2011
  32. By: Cantore, Cristiano; Levine, Paul
    Abstract: We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ‘share’ parameters are not in fact shares, but depend on underlying dimensions - they are ‘dimensional constants’ in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, ‘re-parametrization’, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our ‘re-parametrization’ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.
    Keywords: CES production function; normalization; CES utility function
    JEL: E23 E32 E37
    Date: 2011–07
  33. By: Olivier Allain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: A panel session was organised at the 5th "Dijon" Post-Keynesian Conference (Roskilde University - 13th-14th May 2011) in order to confront three recent interpretations of Keynes's principle of effective demand: that of Hartwig (2007), Hayes (2007) and Allain (2009). Allain's comments on Hartwig and Hayes articles are developed in the present contribution.
    Keywords: Keynesian economics; General Theory; macroeconomics; effective demand; short-term expectations
    Date: 2011–05–13
  34. By: Gregory C. Chow (Princeton University)
    Abstract: This paper provides an up-to-date study of economic planning in China as it affects the economic development, growth and fluctuations of the Chinese economy. Although economic planning has been practiced in China since 1953 when the first Five-Year Plan began, its nature has changed after economic reform started in 1978. Market reform reduced the importance of central planning, but more recently the global economic recession and China’s active macro-economic policy interventions have increased the importance of economic planning. Our discussion is divided into the following sections: 1. Role of planning in the Chinese economy. 2. Scope of planning. 3. Numerical targets of the Plan and the degree to which the targets are met. 4. Organization of the NCDR. 5. How a plan is implemented. 6. Effects of planning on China’s economic development.
    Keywords: China, Chinese economy, growth, planning, five year plans, market reforms
    JEL: E21 E20 F14 N15 P20
    Date: 2011–06
  35. By: João Sousa (Banco de Portugal); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: The goal of thes paper is to analyze predictability of future asset returns in the context of model uncertainty. Using data for the euro area, the US and the U.K., we show that one can improve the forecasts of stock returns using a Bayesian Model Averaging (BMA) approach, and there is a large amount of model uncertainty. The empirical evidence for the euro area suggests that several macroeconomic, financial and macro-financial variables are consistently among the most prominent determinants of risk premium. As for the U.S, only a few number of predictors play an important role. In the case of the UK, future stock returns are better forecasted by financial variables. These results are corroborated for both the M-open and the M-closed perspectives and in the context of "in-sample" and "out-of-sample" forescating. Finally, we highlight that the predictive ability of the BMA framework is stronger at longer periods, and clearly outperforms the constant expected returns and the autoregressive benchmark models.
    Keywords: stock returns, model uncertainty, Bayesian Model Averaging
    JEL: E21 G11 E44
    Date: 2011
  36. By: Ippei Fujiwara; Keisuke Otsu; Masashi Saito
    Abstract: Three decades have passed since China dramatically opened up to the global market and began to catch up rapidly with leading economies. In this paper we discuss the effects of China's opening-up and rapid growth on the welfare of both China and the rest of the world (ROW). We find that the opening-up per se is welfare improving for China but has had little impact on the ROW. The opening-up of China is beneficial to the ROW if it led to significant productivity growth in China. Furthermore, China's balanced trade policy after the opening-up has helped the ROW rather than China. Hence, according to a simple neoclassical model with complete markets, a gradual trade liberalization in China is prefereble to a drastic one from the ROW perspective.
    Keywords: Chinese Growth; Reform and Opening-up; Productivity; Terms of Trade
    JEL: E13 F41 O47
    Date: 2011–07
  37. By: David Colander
    Abstract: El trabajo postwalrasiano es una continuación del trabajo walrasiano con nuevas herramientas. Estas nueva herramientas significan que el enfoque tiene las siguientes características: 1) toma más seriamente el problema de los equilibrios múltiples y los mecanismos de selección del equilibrio. 2) Toma mucho más en cuenta la incertidumbre en el modelo. 3) Toma en serio el problema de la heterogeneidad e interdependencia de los agentes. 4) Toma mucho más seriamente el problema del aprendizaje del agente. 5) Está más dirigido por las regularidades empíricas que por la teoría sobre todo para guiar las políticas. 6) Está más dispuesto a usar análisis estadístico VAR cointegrado, de lo general a lo específico, vagamente limitado por un amplio sentido de la teoría, más que usar una teoría limitada por las observaciones empíricas. 7) Tiene mucho menos certidumbre acerca de la política, considerando la política como una manera de ayudar a los agentes coordinados al proporcionarles un punto de enfoque.
    JEL: A1 B4
    Date: 2011
  38. By: Madhavan, Ravi (University of Pittsburgh); Mahoney, Joseph T. (University of IL)
    Abstract: Despite its intuitive appeal, evidence-based management (EBMgt) faces unique challenges in "macro" areas such as Organization Theory and Strategy Management, which emphasize actions by organizations, and business and corporate leaders. The inherent focus on complex, multi-level and unique problems present serious challenges. EBMgt will nurture the establishment of a new model of research that is not only cumulative in its knowledge-building but also promotes engaged scholarship. Further, the uncertainty and conflict that characterize "macro" decision contexts heighten the need for EBMgt. We put forward four recommendations to advance EBMgt: (1) using more sophisticated meta-analyses; (2) providing syntheses that go beyond quantitative summaries; (3) engaging in a disciplined conversation about our implicit "levels of evidence" frameworks; and (4) developing decision supports.
    Date: 2011–06
  39. By: Gonzalo Varela (Department of Economics, University of Sussex)
    Abstract: Developing countries exhibit a more uncertain economic environment than developed countries. Argentina, Brazil and Uruguay in particular, display high levels of real exchange rate uncertainty. Moreover, a succession of trade agreements among them, culminating in the creation of Mercosur in 1991 have increased intra-regional trade. This paper examines empirically the impact of real-eective-exchange-rate (REER) uncertainty on the output of 28 manufacturing sectors in Argentina, Brazil and Uruguay over 1970-2002. It provides alternative uncertainty measures that take into account the non-normality of the REER distribution by considering its higher moments (skewness and kurtosis) and dierent degrees of sophistication in agents' expectation formation, and estimates an augmented supply function using sectoral data on output, prices, and including these measures of REER uncertainty. Two dierent sets of instruments are used for domestic prices, in order to deal with the simultaneity problem that arises in the estimation of the supply function. Res- ults suggest a negative non-negligible eect of uncertainty on output, homogeneous across countries. Interestingly, there is evidence of threshold eects, so that uncer- tainty aects output negatively when it exceeds some critical level. In addition, the eect is heterogeneous across sectors. This is explained by trade orientation, the intensity with which the sector trades within Mercosur and by sectoral productivity. Sectors that trade more intensively within Mercosur are more aected by REER uncertainty than those predominantly oriented to the rest of the world. Second, more productive sectors are less aected by REER uncertainty than those that are less productive.'
    Keywords: Uncertainty, Exchange rates, Output growth, Regional Integration, In- strumental Variables
    JEL: E23 F15 F31
    Date: 2011–02
  40. By: Francesca Pancotto; Filippo Pericoli (Department of Economics, University of Bologna)
    Abstract: A sustainable path of relative competitiveness among the EMU countries is a key factor for the survivorship of the currency union in the long run. We analyze unit labor costs in the European Union with VECM methodology to evaluate relative competitiveness of euro area countries, controlling for exchange rate on the adjustment dynamics, for the economy as a whole and for the manufacturing sector, considered as a proxy of the tradable sector. Results show a lack of convergence of member countries, which is more pronounced for the tradable sector. Persisting idiosyncratic dynamics may be driven by different bargaining policies and institutional structures of national labor markets, and by differential path of technological advance deterring convergence of long run productivity.
    Keywords: Unit labor costs, Exchange Rates, Convergence, Competitiveness, Manufacturing Sector
    JEL: E31 O47 C32
    Date: 2011

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