nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒08‒09
35 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Will the SARB always succeed in fighting inflation with contractionary policy? By Guangling (Dave) Liu
  2. Have market views on the sustainability of fiscal burdens influenced monetary authorities' credibility? By Gabriele Galati; John Lewis; Steven Poelhekke; Chen Zhou
  3. Countercyclical Markups and News-Driven Business Cycles By Oscar Pavlov; Mark Weder
  4. Financial frictions and optimal monetary policy in an open economy By Marcin Kolasa; Giovanni Lombardo
  5. Approximations to viability kernels for sustainable macroeconomic policies By Krawczyk, Jacek; Pharo, Alastair; Simpson, Mark
  6. L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise. By Eleni Iliopulos; Thepthida Sopraseuth
  7. On Measuring the Efficiency of Monetary Policy By Walter Briec; Emmanuelle Gabillon; Laurence Lasselle; Hermann Ratsimbanierana
  8. Dual-Track Interest Rates and the Conduct of Monetary Policy in China By Dong He; Honglin Wang
  9. On the Growth and Stability E¡èects of Habit Formation and Durability in Consumption By Shu-Hua Chen
  10. Inflation Forecast Contracts By Hans Gersbach; Volker Hahn
  11. An estimated DSGE model of energy, costs and inflation in the United Kingdom By Millard, Stephen
  12. The International Transmission of Euro Area Monetary Policy Shocks By Nils Jannsen; Melanie Klein
  13. Monetary-fiscal-trade policy and economic growth in Pakistan: Time series empirical investigation By Jawaid, Syed Tehseen; Faisal Sultan Qadri, Faisal; Ali, Nasir
  14. Sticky wages in search and matching models in the short and long run By Christopher Reicher
  15. The fiscal theory of the price level and the backing theory of money By Sproul, Michael
  16. A Response to Cogley and Sbordone's Comment on "Closed-Form Estimates of the New Keynesian Phillips Curve with Time-Varying Trend Inflation" By Gumbau-Brisa, Fabià; Lie, Denny; Olivei, Giovanni P.
  17. Monetary union, fiscal crisis and the preemption of democracy By Scharpf, Fritz W.
  18. A SVECM Model of the UK Economy and The Term Premium By MARDI DUNGEY; M.TUGRUL VEHBI
  19. Optimal monetary policy in an operational medium-sized DSGE model By Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
  20. Estimation of Forward-Looking Relationships in Closed Form: An Application to the New Keynesian Phillips Curve By Barnes, Michelle L.; Gumbau-Brisa, Fabià; Lie, Denny; Olivei, Giovanni P.
  21. An unobserved components common cycle for Australasia? Implications for a common currency By Hall, Viv B; McDermott, C John
  22. The federal funds rate in the post-Volcker era: evidence from Basic VAR By Jamilov, Rustam
  23. Identifying the Effects of Government Spending Shocks with and without Expected Reversal: an Approach Based on U.S. Real-Time Data By Jacopo Cimadomo, Sebastian Hauptmeier, Sergio Sola
  24. Budgeting versus implementing fiscal policy:the Italian case By Cepparulo, Alessandra; Gastaldi, Francesca; Giuriato, Luisa; Sacchi, Agnese
  25. Determinants of credit to households in a life-cycle model By Michal Rubaszek; Dobromil Serwa
  26. A tale of two countries: A comparison of the aggregate effects of sectoral reallocation in the United States and Germany By Christopher Reicher
  27. Public Expenditures on Education and Health in Belarus before and during the Global Crisis By Dmitrij Kruk; Gleb Shymanovich
  28. The impact of permanent energy price shocks on the UK economy By Harrison, Richard; Thomas, Ryland; de Weymarn, Iain
  29. Properties of Foreign Exchange Risk Premiums By Sarno, Lucio; Schneider, Paul; Wagner, Christian
  30. The aggregate effects of long run sectoral reallocation By Christopher Reicher
  31. Finance and growth: Schumpeter might be wrong in our era. New evidence from Meta-analysis By Simplice A , Asongu
  32. Institutions, macroeconomic policy and foreign direct investment: South Asian countries case By Azam, Muhammad; Khan, Hashim; Hunjra, Ahmed Imran; Ahmad, H. Mushtaq; Chani, Muhammad Irfan
  33. O conceito de produção na contabilidade social: uma contribuição crítica By Cláudio Gontijo
  34. The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework By Carlos Miguel Silva; Ana Paula Ribeiro
  35. Stories of the Twentieth Century for the Twenty-First By Pierre-Olivier Gourinchas; Maurice Obstfeld

  1. By: Guangling (Dave) Liu (Department of Economics)
    Abstract: The conventional view is that a monetary policy shock has both supply-side and demand-side effects, at least in the short run. Barth and Ramey (2001) show that the supply-side effect of a monetary policy shock may be greater than the demand-side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. Using a standard New Keynesian dynamic stochastic general equilibrium model with the cost-channel of monetary transmission, we show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output.
    Keywords: Monetary policy, price puzzle, inflation targeting, New Keynesian model
    JEL: E52 E31 E58 E12
    Date: 2011
  2. By: Gabriele Galati; John Lewis; Steven Poelhekke; Chen Zhou
    Abstract: During the Great Crisis, most governments in industrial countries supported their domestic financial sector under stress and responded to strong declines in output growth with fiscal stimulus packages. Starting in 2010, attention focused on the sustainability of the resulting debt burdens. We conduct an empirical study to test whether in the United States, the euro area and the United Kingdom, views on the sustainability of fiscal burdens have influenced markets’ assessment of central banks’ commitment to price stability. Using a daily measure of inflation expectations extracted from nominal and indexed-linked government bonds, or inflation swaps, we test whether these react to alternative measures of fiscal burdens. These include rescue package announcements, credit default swap (CDS) spreads and changes in either the outlook or the credit rating of governments. We find no evidence of a significant effect of market participants’ perceptions of fiscal burdens on long-term inflation expectations in the United States, the euro area and the United Kingdom. These results are broadly consistent with the view that long term inflation expectations have remained well anchored.
    Keywords: fiscal policy; monetary policy; inflation and inflation compensation; anchors for expectations; crisis
    JEL: E31 E44 E52 H63 H68
    Date: 2011–07
  3. By: Oscar Pavlov (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    Abstract: The standard one-sector real business cycle model is unable to generate expectations-driven business cycles. The current paper shows that this conundrum can be solved by adding countercyclical markups and modest capital adjustment costs.
    Keywords: expectations-driven business cycles, markups
    JEL: E32
    Date: 2011–07
  4. By: Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Giovanni Lombardo (European Central Bank)
    Abstract: A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement.
    Keywords: financial frictions, open economy, optimal monetary policy
    JEL: E52 E61 E44 F36 F41
    Date: 2011
  5. By: Krawczyk, Jacek; Pharo, Alastair; Simpson, Mark
    Abstract: Maintaining an open economy within certain bounds on inflation, output gap and exchange rate can help sustainable economic development. Macroeconomics proposes monetary-policy models that describe evolution of the above quantities. We use one such model, constituted by a four-metastate one-control system, to compute viability kernel approximations that one can use to assist the central bank to establish "sustainable" policies. We propose a simple heuristic algorithm that leads to kernel approximations for this and similar models.
    Keywords: monetary policy, viability kernel, algorithm, MATLAB,
    Date: 2011–02–18
  6. By: Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economics et CEPREMAP); Thepthida Sopraseuth (GAINS-TEPP - Université du Maine et CEPREMAP)
    Abstract: In this paper, we review the macroeconomic literature on financial frictions and banking in a dynamic general equilibrium framework. Our work focuses first on the pioneer articles that have analyzed the amplification effects associated to the financial accelerator. We then shift our attention towards the recent literature that flourished in the aftermath of the financial crisis. Indeed, the crisis has challenged several assumptions and modeling tools that were commonly used in the DSGE literature. We thus review the main recent contributions that have tried to overcome the limits of old models.
    Keywords: Financial frictions, banking, monetary policy, business cycle.
    JEL: E3 E4 E5 G21
    Date: 2011–07
  7. By: Walter Briec; Emmanuelle Gabillon; Laurence Lasselle; Hermann Ratsimbanierana
    Abstract: Cecchetti et al. (2006) develop a method for allocating macroeconomic performance changes among the structure of the economy, variability of supply shocks and monetary policy. We propose a dual approach of their method by borrowing well-known tools from production theory, namely the Farrell measure and the Malmquist index. Following Färe et al (1994) we propose a decomposition of the efficiency of monetary policy. It is shown that the global efficiency changes can be rewritten as the product of the changes in macroeconomic performance, minimum quadratic loss, and efficiency frontier.
    Keywords: efficiency frontier, inflation variability, Farrell measure, Malmquist index.
    JEL: E52 E58
    Date: 2011–01
  8. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research)
    Abstract: China has a dual-track interest-rate system: bank deposit and lending rates are regulated, but money and bond market rates are market-determined. At the same time, the central bank also imposes an indicative target, which may not be binding at all times, on total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of both price- and quantity-based policy instruments. We model the transmission of monetary policy instruments to market interest rates, which, together with the quantitative credit target in the banking system, ultimately serve as the lever by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical predictions are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the results of this study help us understand why the central bank conducts monetary policy in China the way it does: a combination of price and quantitative instruments, with various degrees of potency in terms of their influence on the cost of credit.
    Keywords: Monetary Policy, People's Bank of China, Dual-Track Interest Rates, Interest Rate Liberalization
    JEL: E52 E58 C25 C32
    Date: 2011–07
  9. By: Shu-Hua Chen (National Taipei Universityy)
    Abstract: This paper shows that a unique balanced growth monetary equilibrium exists in a transactions-based monetary endogenous growth model with habit formation or durability in consumption. An increase in the nominal money growth rate reduces the long-run output growth rate, wherein habit formation enforces the effectiveness of monetary policy while durability in consumption reduces it. We also show that while habit formation destabilizes the macroeconomy by making the balanced growth equilibrium to exhibit local indeterminacy, durability in consumption maintains saddle-path stability of the balanced growth equilibrium. We find that the mechanism through which habit formation and durability impose different effects on both the growth-e¡èect of money and the macroeconomic stabilizing properties is that they influence the elasticity of intertemporal substitution in consumption in opposite directions.
    Keywords: Habit formation, Durability, Superneutrality, Indeterminacy
    JEL: E21 E52 O42
    Date: 2011–07–30
  10. By: Hans Gersbach (ETH Zurich, Switzerland); Volker Hahn (ETH Zurich, Switzerland)
    Abstract: We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare.
    Keywords: central banks, incentive contracts, transparency, inflation targeting, inflation forecast targeting, intermediate targets
    JEL: E58
    Date: 2011–07
  11. By: Millard, Stephen (Bank of England)
    Abstract: In this paper, I estimate a dynamic stochastic general equilibrium (DSGE) model of the United Kingdom. The basic building blocks of the model are standard in the literature. The main complication is that there are three consumption goods: non-energy output, petrol and utilities; given relative prices and their overall wealth, consumers choose how much of each of these goods to consume in order to maximise their utility. Each of the consumption goods is produced according to a sector-specific production function and sticky prices in each sector imply sector-specific New Keynesian Phillips Curves. I show how this model, once estimated, could form a useful additional input within a policymaker’s ‘suite of models’ by considering its implications for the responses of various macroeconomic variables to different economic shocks and by decomposing recent movements of energy and non-energy output and inflation into the proportions caused by each of the shocks.
    Keywords: Dynamic stochastic general equilibrium model; Energy prices and inflation
    JEL: E13 E31
    Date: 2011–07–26
  12. By: Nils Jannsen; Melanie Klein
    Abstract: This paper analyzes the international transmission effects of euro area monetary policy shocks in to other western European countries, namely the United Kingdom, Sweden, Switzerland, Denmark, and Norway. For this purpose, we use a structural VAR model of the euro area and augment it consecutively by the foreign variables of interest. We find that a monetary policy shock in the euro area leads to a largely similar change in the interest rate and in GDP in these other western European countries. The effects on their exchange rates are limited and their trade balances usually are unaffected. Our results suggest that the income absorption effect to be more important than the expenditure switching effect in the international transmission of monetary policy and that exchange rate stabilization seems to be of some concern to monetary policy makers in small open economies
    Keywords: Monetary policy, international transmission, euro area, vector autoregression
    JEL: C32 E52 F41
    Date: 2011–07
  13. By: Jawaid, Syed Tehseen; Faisal Sultan Qadri, Faisal; Ali, Nasir
    Abstract: This study empirically examines the effect of monetary, fiscal and trade policy on economic growth in Pakistan using annual time series data from 1981 to 2009. Money supply, government expenditure and trade openness are used as proxies of monetary, fiscal and trade policy respectively. Cointegration and error correction model indicate the existence of positive significant long run and short run relationship of monetary and fiscal policy with economic growth. Result also indicates that monetary policy is more effective than fiscal policy in Pakistan. In contrast, trade policy has insignificant effect on economic growth both in the short run and in the long run. In light of the findings, it is suggested that the policy makers should focus more on monetary policy in order to ensure economic growth in the country. It is also recommended that further research should be conducted to find out such components of exports and imports which lead to the ineffectiveness of trade policy to enhance economic growth in Pakistan.
    Keywords: Monetary; Fiscal; Trade; Economic Growth
    JEL: E62 F13 E42 F43
    Date: 2011–06–09
  14. By: Christopher Reicher
    Abstract: This paper documents the short run and long run behavior of the search and matching model with staggered Nash wage bargaining. It turns out that there is a strong tradeoff inherent in assuming that previously bargained sticky wages apply to new hires. If sticky wages apply to new hires, then the staggered Nash bargaining model can generate realistic volatility in labor input, but it predicts a strong counterfactually negative long run relationship between inflation and unemployment. This finding is robust to including a microeconomically realistic degree of indexation of wages to inflation. The lack of a negative long run relationship between trend inflation and unemployment provides indirect evidence against the proposed mechanism that high inflation systematically makes new hiring more profitable by depressing the real wages of new hires
    Keywords: Sticky wages, staggered Nash bargaining, trend inflation, unemployment, search and matching
    JEL: E24 E25 J23 J31
    Date: 2011–07
  15. By: Sproul, Michael
    Abstract: A numerical example of privately issued money is used to illustrate the fiscal theory of the price level, and to show that the fiscal theory is best understood as a subset of the backing theory of money. Government issuance of money or debt is shown to be potentially inflationary only when the government’s net worth is negative, and when the government’s assets do not rise in step with its liabilities. The backing theory is used to examine whether inflation can be avoided by a sufficiently tough central bank, and to criticize the view that fiscal policies affect inflation through their wealth effects.
    Keywords: Money; price level; fiscal; real bills; backing theory
    JEL: E50
    Date: 2011–07
  16. By: Gumbau-Brisa, Fabià; Lie, Denny; Olivei, Giovanni P.
    Abstract: In their 2010 comment (which we refer to as CS10), Cogley and Sbordone argue that: (i) our estimates are not entirely closed form, and hence are arbitrary; (ii) we cannot guarantee that our estimates are valid, while their estimates (Cogley and Sbordone 2008, henceforth CS08) always are; and (iii) the estimates in CS08, in terms of goodness of fit, are just as good as other, much different estimates in our paper. We show in this reply that the exact closed-form estimates are virtually the same as the "quasi" closed-form estimates. Our estimates are consistent with the implicit assumptions underlying the first-stage VAR used to form expectations, while the estimates in CS08 are not. As a result, the estimates in CS08 point towards model misspecification. We also rebut the goodness of fit comparisons in CS10, and provide a more credible exercise that illustrates that our estimates outperform CS08's estimates.
    Keywords: time-varying trend inflation; forward-looking Euler equation; New Keynesian Phillips curve; model-consistent expectations; closed form
    Date: 2011–06
  17. By: Scharpf, Fritz W.
    Abstract: The European Monetary Union (EMU) has removed crucial instruments of macroeconomic management from the control of democratically accountable governments. Worse still, the EMU has systemically caused destabilizing macroeconomic imbalances that member states found difficult or impossible to counteract with their remaining policy instruments. And even though the international financial crisis had its origins beyond Europe, the EMU has greatly increased the vulnerability of some member states to its repercussions. Its effects have undermined the economic and fiscal viability of some EMU member states and have frustrated political demands and expectations to an extent that may yet transform the economic crisis into a crisis of democratic legitimacy. Moreover, present efforts by EMU governments to 'rescue the euro' will do little to correct the economic imbalances and vulnerabilities, but are likely to deepen economic problems and political alienation in both the rescued and the rescuing polities. -- Die Europäische Währungsunion hat ihren Mitgliedstaaten die wesentlichen Instrumente der makroökonomischen Politik entzogen. Zugleich ist die einheitliche europäische Geldpolitik die strukturelle Ursache makroökonomischer Ungleichgewichte, die die Mitgliedstaaten mit den verbliebenen Mitteln nicht ausgleichen können. Und obwohl die internationale Finanzkrise nicht von Europa ausging, hat die Währungsunion die Verwundbarkeit einiger Mitgliedstaaten für deren Auswirkungen beträchtlich gesteigert. Die Folgen für die Wirtschaft der betroffenen Länder sind verheerend, und je mehr deren Politik gezwungen wird, die Forderungen und Erwartungen ihrer Bürger zu enttäuschen, desto eher kann die ökonomische Krise auch die demokratische Legitimität zerstören. Überdies ignorieren die gegenwärtigen Maßnahmen zur 'Rettung des Euro' die strukturellen Ursachen der ökonomischen Ungleichgewichte, und sie werden deshalb eher zur Verschärfung der ökonomischen Probleme und der politischen Frustration in den Geber- wie in den Nehmerländern beitragen.
    Date: 2011
    Abstract: The term premium is estimated from an empirically coherent open economy VAR model of the UK economy where the model specifically accounts for the mixed nature of the data and cointegration between some variables. Using this framework the estimated negative term premia for 1980-2007 is decomposed into its contributing shocks, where the role of inflation and monetary policy shocks are shown to be dominant in the evolution of the term premium. Projecting into the 2008 crisis period reveals the extent of the shocks to the UK economy, and also shows the similarities in term premia behaviour with those experienced during the 1998 Russian crisis.
    JEL: E43 E52 C51 C32
    Date: 2011–08
  19. By: Malin Adolfson; Stefan Laséen; Jesper Lindé; Lars E.O. Svensson
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
    Date: 2011
  20. By: Barnes, Michelle L.; Gumbau-Brisa, Fabià; Lie, Denny; Olivei, Giovanni P.
    Abstract: We illustrate the importance of placing model-consistent restrictions on expectations in the estimation of forward-looking Euler equations. In two-stage limited-information settings where first-stage estimates are used to proxy for expectations, parameter estimates can differ substantially, depending on whether these restrictions are imposed or not. This is shown in an application to the New Keynesian Phillips Curve (NKPC), first in a Monte Carlo exercise, and then on actual data. The closed-form (CF) estimates require by construction that expectations of inflation be model-consistent at all points in time, while the difference-equation (DE) estimates impose no model discipline on expectations. Between those two polar extremes there is a wide range of alternative DE specifications, based on the same dynamic relationship, that explicitly impose model restrictions on expectations for a finite number of periods. In our application, these last estimates quickly converge to the CF estimates, and illustrate that the DE estimates in Cogley and Sbordone (2008) are not robust to imposing modest model requirements on expectations. In particular, our estimates show that the NKPC is not purely forward-looking, and thus that time-varying trend inflation is insufficient to explain inflation persistence.
    Keywords: time-varying trend inflation; forward- looking Euler equation; New Keynesian Phillips curve; model-consistent expectations; closed form
    Date: 2011–06
  21. By: Hall, Viv B; McDermott, C John
    Abstract: We use unobserved components methodology to establish an Australasian common cycle, and assess the extent to which region-specific cycles of Australian States and New Zealand are additionally important. West Australian and New Zealand region-specific growth cycles have exhibited distinctively different features, relative to the common cycle. For every Australasian region, the region-specific cycle variance dominates that of the common cycle, in contrast to findings for U.S. BEA regions and prior work for Australian States. The distinctiveness of New Zealand’s output and employment cycles is consistent with New Zealand retaining the flexibility of a separate currency and monetary policy, for periods when significant region-specific shocks occur.
    Keywords: Australasian common cycle, regional cycles, Unobserved components, common currency, New Zealand, Australia,
    Date: 2011–03–11
  22. By: Jamilov, Rustam
    Abstract: This paper proposes a comparative analysis of the federal funds rate. The analysis is based on the results of an empirical study, conducted using the econometrics of Vector Auto Regressions. The results are compared across two time periods: 1960-1979 and 1983-2002, the intervals representing the pre and post-Volcker monetary eras. The study examines the degree of exogeneity of the federal funds rate and its power to explain and predict variations in macroeconomic aggregates. The paper concludes that for the post-Volcker era the federal funds rate has become more exogenous; that the federal funds rate has remained a strong economic indicator; that the notion of “lean against the wind” monetary policy continues to be relevant and appropriate; that the “price effect” of the response of inflation to innovations in the federal funds rate has become smaller. The paper also suggests that the Federal Reserve has since the 1980s initiated the practice of countercyclical monetary policy, and that economic cycles have tightened during the post-Volcker era.
    Keywords: Federal Funds Rate; Bernanke and Blinder; Basic VAR; Funds Rate Exogeneity; Monetary Transmissions; Post-Volcker; Pre-Volcker
    JEL: E5
    Date: 2011–06–20
  23. By: Jacopo Cimadomo, Sebastian Hauptmeier, Sergio Sola (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper investigates how expectations about future government spending affect the transmission of fiscal policy shocks. We study the effects of two different types of government spending shocks in the United States: (i) spending shocks that are accompanied by an expected reversal of public spending growth below trend; (ii) spending shocks that are accompanied by expectations of future spending growth above trend. We use the Ramey (2011)’s time series of military build-ups to measure exogenous spending shocks, and deviations of forecasts of public spending with respect to past trends, evaluated in real-time, to distinguish shocks into these two categories. Based on a structural VAR analysis, our results suggest that shocks associated with an expected spending reversal exert expansionary effects on the economy and accelerate the correction of the initial increase in public debt. Shocks associated with expected spending growth above trend, instead, are characterized by a contraction in aggregate demand and a more persistent increase in public debt. The main channel of transmission seems to run through agents’ perception of the future macroeconomic environment.
    Keywords: Government spending shocks, Survey of Professional Forecasters, Real-time data, Spending reversal, Fiscal multipliers.
    JEL: E62 E65 H20
    Date: 2011–07
  24. By: Cepparulo, Alessandra; Gastaldi, Francesca; Giuriato, Luisa; Sacchi, Agnese
    Abstract: The budgeting process has been recently reformed in Italy (L. 196/2009) in order to improve control of budget and transparency in the provision of clear information on government fiscal policy. Indeed, the general government final expenditures often deviate significantly from the initial forecasted amounts. Therefore, although the initial budget is often formulated in contractionary stance compared with the previous year’s final account, the final outcome turns out to be expansionary. As a consequence, confidence in the reliability of expenditure estimates in the initial budget and in the value of the initial budget as an indicator of the stance of fiscal policy have been undermined. Using real-time data for Italy, reported in the Relazione Previsionale e Programmatica (RPP) and in the Relazione Unificata sull’Economia e la Finanza Pubblica (RUEF), we explore fiscal plans and their implementation for GDP and general government aggregated and disaggregated items of revenue, expenditure and budget balance over the period 1998-2009. Both reports are employed with the aim of measuring the budgetary policy implementation error, following the methodology of Beetsma et al. (2009). We focus on the first year of the fiscal plans because budgetary slippages mainly occur in this year (Balassone et al. 2010). The main findings suggest that implemented budgetary adjustment falls systematically short of planned adjustment for GDP, for primary balance and overall balance. Actually, the main determinants of the implementation error of both primary and overall balance are the expenditures, in particular, the capital expenditures. Moreover, it seems that errors in macroeconomic forecasts cannot be considered the driving force of the budgetary slippages. Our results are in line with the strand of literature (von Hagen 1992; von Hagen and Harden 1994; Alesina and Perotti 1999; Tanaka 2003) according to which credible plans are the conditio sine qua non for healthy budget outcomes and resorting fiscal transparency and accountability. To improve public budgeting in Italy, we deem necessary a renewed commitment by policy makers in term of planning and control of public expenditures.
    Keywords: fiscal plans; real-time data; implementation; budget process; expenditure and revenue; Italy
    JEL: E62 H60 H5 H68
    Date: 2011–07
  25. By: Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics); Dobromil Serwa (Narodowy Bank Polski; Warsaw School of Economics)
    Abstract: This paper applies a life-cycle model with individual income uncertainty to investigate the determinants of credit to households. We show that the value of household credit to GDP ratio depends on (i) the lending-deposit interest rate spread, (ii) individual income uncertainty, (iii) individual productivity persistence, and (iv) the generosity of the pension system. Subsequently, we provide empirical evidence for the predictions of the theoretical model on the basis of data for OECD and EU countries.
    Keywords: Household credit; life cycle economies; banking sector
    JEL: E21 E43 E51
    Date: 2011
  26. By: Christopher Reicher
    Abstract: This paper compares the aggregate effects of sectoral reallocation in the United States and Western Germany using a stochastic volatility model of sectoral employment growth. Reallocative shocks have no effect on the natural rate of unemployment in either country, and there is mild evidence that reallocative shocks are contractionary over the cycle. The overall statistical contribution of such shocks to the cycle, however, is limited. Reallocative shocks do not appear to be to blame for the rise in trend unemployment in Germany in the 1980s or for a possible rise in trend unemployment in the United States following the Great Recession
    Keywords: Sectoral shifts, reallocation, natural rate, unemployment, turbulence, stochastic volatility
    JEL: E24 E32 J24 J62
    Date: 2011–07
  27. By: Dmitrij Kruk; Gleb Shymanovich
    Abstract: The paper deals with the impact of the global financial crisis on public service delivery - mainly education and healthcare - in Belarus. The pre-crisis period of 2003-2008 was the most prosperous in recent history. These trends resulted in a pretty good fiscal performance. Nevertheless, the share of expenditures on education and healthcare in GDP was decreasing during the 2000s, which was a consequence of demographic trends and a number of reforms in these sectors. The global crisis hurt the Belarusian economy considerably. However, macro-indicators of the Belarusian economy looked pretty good in comparison to other countries, and the deterioration of public finance was limited. Thus, expenditures on both education and healthcare were mainly part of long-term trends and were able to avoid shock adjustments during the crisis. However, there are a number of medium and long-term threats to these public service sectors associated with the crisis agenda. This paper provides a number of policy recommendations to stave off these threats.
    Keywords: Fiscal policy, Belarus, Education financing, Health financing, Global economic crisis
    JEL: E62 H50 H51 H52 I18 I22
    Date: 2011
  28. By: Harrison, Richard (Bank of England); Thomas, Ryland (Bank of England); de Weymarn, Iain (Bank of England)
    Abstract: This paper outlines the properties of one of the models used at the Bank of England for analysing the impact of energy prices on the UK economy. We build a dynamic general equilibrium model that includes a variety of channels through which energy prices affect demand and supply. On the demand side we model household consumption of final energy goods (petrol and utilities) separately from other goods and services. On the supply side, we model the production of final energy goods and the way that they enter the production process of other goods and services. We calibrate the model using UK data and examine how the various channels in the model contribute to the responses to permanent energy price shocks of a similar magnitude to those observed in the recent data. We show the effects of such shocks have important implications for monetary policy.
    Keywords: Energy; prices.
    JEL: E27 E37
    Date: 2011–07–26
  29. By: Sarno, Lucio; Schneider, Paul; Wagner, Christian
    Abstract: We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals.
    Keywords: exchange rates; forward bias; predictability; term structure
    JEL: E43 F31 G10
    Date: 2011–08
  30. By: Christopher Reicher
    Abstract: In this paper, I estimate a series of long run reallocative shocks to sectoral employment using a stochastic volatility model of sectoral employment growth for the United States from 1960 through 2011. Reallocative shocks (which primarily measure construction and technology busts) have little effect on the natural rate of unemployment or on long run productivity, but there is mild evidence that they are recessionary. A broad class of theoretical models suggests that the contractionary effect of a reallocative shock should come from the direct aggregate effect of the underlying shock and not from human capital mismatch. Looking at the period of the Great Recession, reallocation has had no detectable effect on the natural rate of unemployment and can count for a 0.5% rise in cyclical unemployment from 2007 through the end of 2009 and 0.3% through the beginning of 2011
    Keywords: Mismatch, sectoral shifts, reallocation, natural rate, unemployment, Great Recession, stochastic volatility
    JEL: E24 E32 E66 J24 J62
    Date: 2011–07
  31. By: Simplice A , Asongu
    Abstract: This paper seeks to bridge the gap between Schumpeterian authors and sympathizers of Andersen and Tarp (2003). As far as we have perused, the absence of a meta-study in the finance-growth nexus literature is an important missing link. Methodically narrowing down from 186 papers to a summary of 20 studies with 197 outcomes, we use 20 comparison criteria to evaluate which factors have influenced the phenomenon over the past decades. Using dynamics of financial depth and financial activity, our meta-findings provide support for Andersen and Tarp (2003) in concluding that contrary to Schumpeterian authors, the positive link between finance and growth has not been sufficiently sustained by recent empirical works. The frequency of financial crisis that inhibit the finance-led-growth nexus is more preponderant in our era than it was in the days of Schumpeter. The study also accounts for the presence of publication bias in the literature which further vindicates an anti-Schumpeterian thesis.
    Keywords: Meta analysis; Finance; Economic growth; Publication bias
    JEL: E0 O1 C1 C4
    Date: 2011–08–03
  32. By: Azam, Muhammad; Khan, Hashim; Hunjra, Ahmed Imran; Ahmad, H. Mushtaq; Chani, Muhammad Irfan
    Abstract: Recent economic literature suggests that institutional quality factors exerted positive effect on foreign direct investment (FDI) inflows. The main focus of this study is to examine the role of institutional factors and macro economic policy factors on FDI inflows in a panel data of seven South Asian countries over the period of 12 years since 1996-2007. This study implies that a good institutional quality plays a key role in attractiveness of FDI inflows. A poor macroeconomic policy situation produces negative impact on FDI. Good Institutional quality and macroeconomic policy generate negative in a combined form on FDI. This study further implies that poor economic policy deteriorates institutional quality and creates negative effect on FDI inflows. Incredibility in trade liberalization policy may be a part of poor macro economic policy.
    Keywords: Institutional quality; Macro economic policy; Attractiveness; Incredibility; South Asia
    JEL: E60
    Date: 2011–01–01
  33. By: Cláudio Gontijo (FACE/UFMG)
    Abstract: This article discusses the theoretical foundations of the concept of production of ONU’s National Accounting System, demonstrating that it is constructed upon ad hoc formulations. To start with, the distinction between intermediate consumption and workers’ consumption at the working site seems arbitrary. Second, because public goods are not marketable, their inclusion in the productive sphere seems inconsistent. Third, considering commerce as a productive activity implies difficulties, such as identifying its product and its utility to consumers. In addition, it seems problematic to explain the origins of the gains of exchange, which requires the pre classical theory of profits of alienation, considered unacceptable even by neoclassical authors. Finally, neither the definition of financial intermediaries and real estate “services”, nor their revenues seem to be acceptable, since from a neoclassical perspective interests and ground rent are derived from joint production of labor, capital and land.
    Keywords: National Accounting; productive and unproductive labor; production boundaries
    JEL: E01 B4
    Date: 2011–08
  34. By: Carlos Miguel Silva (Faculdade de Economia da Universidade do Porto and CEF.UP); Ana Paula Ribeiro (Faculdade de Economia da Universidade do Porto and CEF.UP)
    Abstract: In this paper we aim at analyzing the impacts on welfare and wealth and consumption distribution across different labor market structural features. In particular, we pursue a steady-state analysis to assess the impacts of unit vacancy costs, unemployment replacement ratio or the job destruction rate, when they are changed in order to promote a given reduction in the unemployment rate. We combine a labor market search and matching framework with unions, based on Mortensen and Pissarides (1994) with a heterogeneous-agent framework close to Imrohoroglu (1989) in a closed economy model. Such approach enables the joint assessment of macroeconomic welfare and inequality together with implications derived from institutional changes in labor market. Moreover, the transition matrix between worker's states is endogenous, fully derived from labor market conditions. Using feasible calibration to the Euro Area, we conclude that different institutional changes to promote unemployment reduction have non-neutral and differentiated effects on welfare and inequality. While changing unit vacancy costs and job destruction can be ranked, changes in the unemployment benefit replacement ration involve a trade-off between gains in welfare and in consumption/income distribution.
    Keywords: Labor market institutions, search and matching models, heterogeneous-agent models, welfare and inequality.
    JEL: E21 E24 E27 I30 J64
    Date: 2011–07
  35. By: Pierre-Olivier Gourinchas; Maurice Obstfeld
    Abstract: A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis.
    JEL: E32 E51 F32 F34 G15 G21
    Date: 2011–07

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