nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒08‒22
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Fiscal Volatility Shocks and Economic Activity By Jesus Fernandez-Villaverde; Pablo Guerron-Quintana; Keith Kuester; Juan Rubio-Ramirez
  2. Fiscal volatility shocks economic activity By Jesus Fernandez-Villaverde; Pablo Guerron-Quintana; Keith Kuester; Juan Rubio-Ramirez
  3. Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study By David Kiefer
  4. Inflation Inertia in Egypt and its Policy Implications By Kenji Moriyama
  5. Business Cycle and Bank Capital Regulation: Basel II Procyclicality By Guangling (Dave) Liu; Nkhahle E. Seeiso
  6. A Gains from Trade Perspective on Macroeconomic Fluctuations By Paul Beaudry; Franck Portier
  7. Money, interest rates and the real activity By Hong, Hao
  8. El traspaso de las tasas de interés en el sistema bancario uruguayo. By Diego Gianelli
  9. Pro-cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model By Kurt Mitman; Stanislav Rabinovich
  10. Inflation Aversion and the Optimal Inflation Tax By Gaowang Wang; Heng-fu Zou
  11. Central banks and macroprudential policy. Some reflections from the Spanish experience By Enrique Alberola; Carlos Trucharte; Juan Luis Vega
  12. Working Paper 134 - Inflation Targeting, Exchange Rate Shocks and Output: Evidence from South Africa By AfDB
  13. A General Equilibrium Model of Sovereign Default and Business Cycles By Vivian Z. Yue; Enrique G. Mendoza
  14. Keynes’s missing axioms By Kakarot-Handtke, Egmont
  15. What Explains the German Labor Market Miracle in the Great Recession? By Burda, Michael C; Hunt, Jennifer
  16. On the implementation of Markov-perfect monetary policy By Michael Dotsey; Andreas Hornstein
  17. Nonperforming Loans and Macrofinancial Vulnerabilities in Advanced Economies By Mwanza Nkusu
  18. Policy Change and Learning in the RBC Model By Kaushik Mitra; George W. Evans; Seppo Honkapohja
  19. Is Fiscal Policy Procyclical in Developing Oil-Producing Countries? By Nese Erbil
  20. Inflation persistence: Implication for a monetary union in the Caribbean By Juan Carlos Cuestas; Carlyn Dobson
  21. Optimal monetary policy in a model of money and credit By Pedro Gomis-Porqueras; Daniel R. Sanches
  22. Individual and Aggregate Money Demands By André C. Silva
  23. Debt deleveraging and business cycles: An agent-based perspective By Raberto, Marco; Teglio, Andrea; Cincotti, Silvano
  24. Policy Instruments To Lean Against The Wind In Latin America By Mercedes Garcia-Escribano; Man-Keung Tang; Carlos I. Medeiros; W. Christopher Walker; Carlos Fernandez Valdovinos; Camilo E Tovar Mora; Mercedes Vera-Martin; Jorge A. Chan Lau; G. Terrier; Rodrigo O. Valdés
  25. Macroeconomic Imbalances as Indicators for Debt Crises in Europe By Tobias Knedlik; Gregor von Schweinitz
  26. Bank concentration and the interest rate pass-through in Sub-Saharan African countries By T. Mangwengwende; Z. Chinzara; H. Nel
  27. Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter? By Nikoloz Gigineishvili
  28. Politiques monétaires : à hue et à dia. By Blot, Christophe; Rifflart, Christine
  29. Fiscal Federalism, Public Capital Formation, and Endogenous Growth By Liutang Gong; Heng-fu Zou
  30. Optimal taxes on fossil fuel in general equilibrium By Golosov, Mikhail; Hassler, John; Krusell, Per; Tsyvinski, Aleh
  31. Exchange Rate Pass-Through and Monetary Integration in the Euro Area By Ayako Saiki
  32. Inefficient Provision of Liquidity By Hart, Oliver; Zingales, Luigi
  33. Financing Infrastructure in India: Macroeconomic Lessons and Emerging Market Case Studies By James P Walsh; Jiangyan Yu; Chanho Park
  34. Labor Market Flows in the Cross Section and Over Time By Steven J. Davis; Jason Faberman; John C. Haltiwanger
  35. The Impact of the Global Financial Crisis on Public Expenditures on Education and Health in the Economies of the Former Soviet Union By Alexander Chubrik; Roman Mogilevsky; Irina Sinitsina; Marek Dabrowski
  36. "The Continental Dollar: Initial Design, Ideal Performance, and the Credibility of Congressional Commitment" By Farley Grubb
  37. Family reunification or point-based immigration system? The case of the United States and Mexico By López Real, Joel
  39. "Lessons We Should Have Learned from the Global Financial Crisis but Didn't" By L. Randall Wray
  40. Flood Risks, Climate Change Impacts and Adaptation Benefits in Mumbai: An Initial Assessment of Socio-Economic Consequences of Present and Climate Change Induced Flood Risks and of Possible Adaptation Options By Stéphane Hallegatte; Fanny Henriet; Anand Patwardhan; K. Narayanan; Subimal Ghosh; Subhankar Karmakar; Unmesh Patnaik; Abhijat Abhayankar; Sanjib Pohit; Jan Corfee-Morlot; Celine Herweijer; Nicola Ranger; Sumana Bhattacharya; Murthy Bachu; Satya Priya; K. Dhore; Farhat Rafique; P. Mathur; Nicolas Naville

  1. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Pablo Guerron-Quintana (Federal Reserve Bank of Philadelphia); Keith Kuester (Federal Reserve Bank of Philadelphia); Juan Rubio-Ramirez (Department of Economics, Duke University)
    Abstract: We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fisscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.
    Keywords: DSGE models, Uncertainty, Fiscal Policy, Monetary Policy
    JEL: E10 E30 C11
    Date: 2011–08–09
  2. By: Jesus Fernandez-Villaverde; Pablo Guerron-Quintana; Keith Kuester; Juan Rubio-Ramirez
    Abstract: The authors study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, the authors first estimate tax and spending processes for the U.S. that allow for time-varying volatility. They then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. The authors find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.
    Keywords: Monetary policy ; Fiscal policy ; Uncertainty
    Date: 2011
  3. By: David Kiefer
    Abstract: Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy, the IS-PC-MR model. Their third equation is the monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. Central banks achieve their preferred outcome by setting interest rates along an IS curve. We simplify their model to 2 equations (PC and MR), developing a state space econometric specification of this solution, and adding a random walk model of unobserved potential growth. Applying this model to a panel of North Atlantic countries, we find it historically consistent with an inflation target of about 4%. Significant interdependence is found in the between-country covariance of inflation and growth shocks, but not of potential output. Beginning with the approximation that expected inflation is the most recent observation, we extend the model to introduce alternative assumptions about expectations with mixed results, support for the sticky-price model, but doubts about activist policy.
    Keywords: new Keynesian policy, inflation targets, expectations JEL Codes: E61, E63
    Date: 2011
  4. By: Kenji Moriyama
    Abstract: This paper investigates the degree of inflation inertia in Egypt and its determinants using the cross country data consisting of over 100 countries. Medium-unbiased estimator of inflation inertia in Egypt is high compared to other countries, as indicated by its location around the upper quartile among the sample. The cross country analysis indicates that counter-cyclical macroeconomic policy and fiscal consolidation are a key to reduce inflation inertia and the costs of disinflation.
    Keywords: Business cycles , Cross country analysis , Egypt , Fiscal consolidation , Inflation , Monetary policy ,
    Date: 2011–07–11
  5. By: Guangling (Dave) Liu; Nkhahle E. Seeiso
    Abstract: This paper studies the impacts of bank capital regulation on business cycle fluctuations. To do so, we adopt the Bernanke et al. (1999) "financial accelerator" model (BGG), to which we augment a banking sector to study the procyclical nature of Basel II claimed in the literature. We first study the impacts of a negative shock to entrepreneur's net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impacts of a negative shock to the entrepreneurs' net worth when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further ampliflies the financial accelerator effect through the external finance premium channel, which in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable.
    Keywords: Business cycle fluctuations, Financial accelerator, Bank capital requirement, Monetary policy
    JEL: E32 E44 G28 E50
    Date: 2011
  6. By: Paul Beaudry; Franck Portier
    Abstract: Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a "gains from trade" approach can easily explain why changes in perceptions about the future (including "news" about the future) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption.
    JEL: E32
    Date: 2011–08
  7. By: Hong, Hao (Cardiff Business School)
    Abstract: This paper examines the effectiveness of monetary aggregates through various nominal interest rates by integrating the financial sector into the Cash-in-Advance (CIA) economy. The model assumes that there are two types of representative agents in the financial sector, which are: productive banks and financial intermediates. The productive banks supply a financial service, which is an exchange technology service to households and financial intermediates receive savings fund from savers and offer loans to borrowers. The monetary expansions are increased banking costs through the rate of inflation. It leads households to use more exchange credit relative to cash at the goods market. Since the number of savings funds is equal to the number of exchange credits used at the goods market, money injections are lower the nominal interest rate on saving as the saving fund increases with exchange credit. By assuming that firms are the only borrowers at the capital market from Fuerst (1992), a lower nominal interest rate on the saving fund reduces the marginal cost of labour and increases labour demand. Meanwhile, the increasing marginal cost of money through the expected inflation effect has a negative effect on labour supply. With labour demand dominating labour supply effects, both output and employment increase with monetary expansion. The paper is able to generate a decreasing nominal interest rate with an increasing money supply with an absence of limited participation monetary shocks from Lucas (1990); and by allowing firms to borrow wage bills payment from financial intermediates, it examines the positive response of aggregate output subject to monetary expansion under flexible price framework.
    Keywords: monetary transmission; business cycles; banking sector; interest rates
    JEL: E10 E44 E51
    Date: 2011–07
  8. By: Diego Gianelli (Banco Central del Uruguay)
    Abstract: Banking interest rates are closely related to monetary policy transmission than overnight interest rates. Since overnight interest rates are used as policy instrument since September 2007 by Uruguayan Central Bank, it is important to quantify the extent to which overnight interest rates are transmitted to banking interest rates. This paper quantifies the interest rate pass-through, both in the long and the short run, considering the structural changes observed in the underlying economic structure, and controlling for the fundamentals of financial intermediation margins. I find a significant pass-through from overnight interest rates to banking interest rates denominated in domestic currency but no significant passthrough to those denominated in foreign currency. I also find a notorious reduction in the level and the speed of the pass-through since the adoption of quantitative monetary target, and a positive correlation between financial margins and aggregate macroeconomic risk perception. The apparent reduction in the interest rate pass-through since 2004 represent a challenge for conducting monetary policy under a flexible inflation targeting regime.
    Keywords: Monetary Policy, interest rate pass through
    JEL: E44 G12 C01
    Date: 2011–01
  9. By: Kurt Mitman (Department of Economics, University of Pennsylvania); Stanislav Rabinovich (Department of Economics, University of Pennsylvania)
    Abstract: We study the optimal provision of unemployment insurance (UI) over the business cycle. We use an equilibrium search and matching model with aggregate shocks to labor productivity, incorporating risk-averse workers, endogenous worker search effort decisions, and unemployment benefit expiration. We characterize the optimal UI policy, allowing both the benefit level and benefit duration to depend on the history of past aggregate shocks. We find that the optimal benefit is decreasing in current productivity and decreasing in current unemployment. Following a drop in productivity, benefits initially rise in order to provide short-run relief to the unemployed and stabilize wages, but then fall significantly below their pre-recession level, in order to speed up the subsequent recovery. Under the optimal policy, the path of benefits is pro-cyclical overall. As compared to the existing US UI system, the optimal history-dependent benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains.
    Keywords: Unemployment Insurance, Business Cycles, Optimal Policy, Search and Matching
    JEL: E24 E32 H21 J65
    Date: 2011–08–07
  10. By: Gaowang Wang (School of Economics and Management, Wuhan University); Heng-fu Zou (CEMA, Central University of Finance and Economics; China School of Advanced Study (SAS), Shenzhen University; IAS, Wuhan University; GSM, Peking University)
    Abstract: The optimal inflation tax is reexamined in the framework of dynamic second best economy populated by individuals with inflation aversion. A simple formula for the optimal inflation rate is derived. Different from the literature, it is shown that if the marginal excess burden of other distorting taxes approaches zero, Friedman's rule for optimum quantity of money is not optimal, and the optimal inflation tax is negative; if the marginal excess burden of other taxes is nonzero, the optimal inflation rate is indeterminate and relies on the tradeoffs between the impatience effect of inflation and the effects of other economic forces in the monetary economy.
    Keywords: Inflation aversion, Optimal inflation tax, Second best taxation, The friedman rule
    JEL: E31 E41 E52 H21
    Date: 2011
  11. By: Enrique Alberola (Banco de España); Carlos Trucharte (Banco de España); Juan Luis Vega (Banco de España)
    Abstract: The view that central banks must play a greater role in preserving financial stability has gained considerable ground in the aftermath of the crisis and macroprudential policy has become a central pillar to deal with financial stability. The policy frame of macroprudential policy, its toolbox and interactions with other policies is not completely established yet, though. In this context, Spain’s ten-year experience with its dynamic provision is a key reference. The analysis shows that, during the current financial crisis, dynamic provisions have proved useful to mitigate —to a limited extent— the build-up of risks and, above all, to provide substantial loss absorbency capacity to the financial institutions, suggesting that it could be an important tool for other banking systems. However, it is not the macro-prudential panacea: it needs to be complemented and be consistent with the rest of policies, either within the macro-prudential or in the broader context of macroeconomic management, including monetary policy. While there is a higher awareness of the contribution of monetary policy to financial stability, its role is in practice limited. The case of the euro area is particularly telling in this respect: macro-financial imbalances developed in sectors where financial integration was low and the effects hence were confined to the domestic economies. The asymmetry between a supranational monetary policy plus macroprudential surveillance and domestic implementation of macroprudential policies raises a set of issues which are worth exploring.
    Keywords: Macroprudential policy, Dynamic provision, Central banks
    JEL: E52 E58 G28
    Date: 2011–08
  12. By: AfDB
    Date: 2011–08–11
  13. By: Vivian Z. Yue; Enrique G. Mendoza
    Abstract: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments.
    Keywords: Sovereign debt , Business cycles , Economic models , External debt , Emerging markets , Credit risk ,
    Date: 2011–07–14
  14. By: Kakarot-Handtke, Egmont
    Abstract: Between Keynes’s verbalized theory and its formal basis persists a lacuna. The conceptual groundwork is too small and not general. The quest for a comprehensive formal basis is guided by the question: what is the minimum set of foundational propositions for a consistent reconstruction of the money economy? We start with three structural axioms. The claim of generality entails that it should be possible to prove that Keynes’s formalism is a subset of the structural axiom set. The axioms are applied to a central part of the General Theory in order to achieve consistency and generality.
    Keywords: New framework of concept; Structure-centric; Axiom set; Full employment; Intermediate situation; Emergent money; Singularity; System immanent risk; Distributed profit; Saving; Investment; Allais-Identity
    JEL: E12 E25 E31 E24 E40 B41
    Date: 2011–05–14
  15. By: Burda, Michael C; Hunt, Jennifer
    Abstract: Germany experienced an even deeper fall in GDP in the Great Recession than the United States, with little employment loss. Employers’ reticence to hire in the preceding expansion, associated in part with a lack of confidence it would last, contributed to an employment shortfall equivalent to 40 percent of the missing employment decline in the recession. Another 20 percent may be explained by wage moderation. A third important element was the widespread adoption of working time accounts, which permit employers to avoid overtime pay if hours per worker average to standard hours over a window of time. We find that this provided disincentives for employers to lay off workers in the downturn. Although the overall cuts in hours per worker were consistent with the severity of the Great Recession, reduction of working time account balances substituted for traditional government-sponsored short-time work.
    Keywords: extensive vs intensive employment margin; Germany; Great Recession; Hartz reforms; short time work; unemployment; working time accounts
    JEL: E24 E32 J6
    Date: 2011–08
  16. By: Michael Dotsey; Andreas Hornstein
    Abstract: The literature on optimal monetary policy in New Keynesian models under both commitment and discretion usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study whether the policy can be implemented given the available policy instruments. Recently, King and Wolman (2004) have provided an example for which a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money stock regime and they attribute the non-uniqueness to strategic complementarities in the price-setting process. The authors clarify how the choice of monetary policy instrument contributes to the emergence of strategic complementarities in the King and Wolman (2004) example. In particular, they show that for an alternative monetary policy instrument, namely, the nominal interest rate, there exists a unique Markov-perfect equilibrium. The authors also discuss how a time-consistent planner can implement the optimal allocation by simply announcing his policy rule in a decentralized setting.
    Keywords: Monetary policy ; Interest rates ; Money supply
    Date: 2011
  17. By: Mwanza Nkusu
    Abstract: We analyze the link between nonperforming loans (NPL) and macroeconomic performance using two complementary approaches. First, we investigate the macroeconomic determinants of NPL in panel regressions and confirm that adverse macroeconomic developments are associated with rising NPL. Second, we investigate the feedback between NPL and its macroeconomic determinants in a panel vector autoregressive (PVAR) model. The impulse response functions (IRFs) attribute to NPL a central role in the linkages between credit market frictions and macrofinancial vulnerability. They suggest that a sharp increase in NPL triggers long-lived tailwinds that cripple macroeconomic performance from several fronts.
    Keywords: Banks , Business cycles , Credit risk , Developed countries , Economic models , Loans ,
    Date: 2011–07–11
  18. By: Kaushik Mitra; George W. Evans; Seppo Honkapohja
    Abstract: What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.
    Keywords: Taxation, Government Spending, Expectations, Permanent and temporary policy changes.
    JEL: E62 D84 E21 E43
    Date: 2011–08–11
  19. By: Nese Erbil
    Abstract: This paper examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures - government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance - and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group.
    Keywords: Business cycles , Cross country analysis , Developing countries , Economic models , Fiscal policy , Government expenditures , Nonoil sector , Oil producing countries , Oil revenues ,
    Date: 2011–07–19
  20. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Carlyn Dobson (Division of Economics, Nottingham trent University)
    Abstract: In this paper we aim to shed some light on the potential for creating a monetary union in the Caribbean. We analyse the inflation rates for twelve countries using various time series methods. The results show that the inflation rates are mean reverting processes and that there is evidence of a convergence club in inflation rates within the area, which contradicts previous studies. Our contribution implies good news for the creation of a common central bank in the Caribbean.
    Keywords: Caribbean, inflation persistence, monetary union and unit roots
    JEL: C32 F15
    Date: 2011–08
  21. By: Pedro Gomis-Porqueras; Daniel R. Sanches
    Abstract: The authors investigate the extent to which monetary policy can enhance the functioning of the private credit system. Specifically, they characterize the optimal return on money in the presence of credit arrangements. There is a dual role for credit: It allows buyers to trade without fiat money and also permits them to borrow against future income. However, not all traders have access to credit. As a result, there is a social role for fiat money because it allows agents to self-insure against the risk of not being able to use credit in some transactions. The authors consider a (nonlinear) monetary mechanism that is designed to enhance the credit system. An active monetary policy is sufficient for relaxing credit constraints. Finally, they characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate, which is required to induce cooperation in the credit system.
    Keywords: Monetary policy ; Money ; Credit
    Date: 2011
  22. By: André C. Silva
    Abstract: I construct a model in which money and bond holdings are consistent with individual decisions and aggregate variables such as production and interest rates. The agents are infinitely-lived, have constant-elasticity preferences, and receive a fraction of their income in money. Each agent solves a Baumol-Tobin money management problem. Markets are segmented because financial frictions make agents trade bonds for money at different times. Trading frequency, consumption, government decisions and prices are mutually consistent. An increase in inflation, for example, implies higher trading frequency, more bonds sold to account for seigniorage, and lower real balances. JEL codes:E3, E4, E5
    Keywords: money demand, cash management, inventory problem, market segmentation
    Date: 2011
  23. By: Raberto, Marco; Teglio, Andrea; Cincotti, Silvano
    Abstract: The recent financial crises pointed out the central role of public and private debt in modern economies. However, even if debt is a recurring topic in discussions about the current economic situation, economic modelling does not take into account debt as one of the crucial determinants of economic dynamics. Our contribution, in this paper, is to investigate the issues of borrowing and debt load by means of computational experiments, performed in the environment of the agent-based Eurace simulator. We aim to shed some light on the relation between debt and the main economic indicators. Our results clearly confirm that the amount of credit money in the economy is a very important variable, that can affect economic performance in a twofold way: fostering growth or pushing the economy into recession or crisis. The outcomes of our experiments show a rich scenario of interactions between real and financial variables in the economy, and therefore represents a truly innovative tool for the study of economics. --
    Keywords: Agent-based computational economics,debt,leverage,credit money,economic crisis
    JEL: E2 E3 E44 E51
    Date: 2011
  24. By: Mercedes Garcia-Escribano; Man-Keung Tang; Carlos I. Medeiros; W. Christopher Walker; Carlos Fernandez Valdovinos; Camilo E Tovar Mora; Mercedes Vera-Martin; Jorge A. Chan Lau; G. Terrier; Rodrigo O. Valdés
    Abstract: This paper reviews policy tools that have been used and/or are available for policy makers in the region to lean against the wind and review relevant country experiences using them. The instruments examined include: (i) capital requirements, dynamic provisioning, and leverage ratios; (ii) liquidity requirements; (iii) debt-to-income ratios; (iv) loan-to-value ratios; (v) reserve requirements on bank liabilities (deposits and nondeposits); (vi) instruments to manage and limit systemic foreign exchange risk; and, finally, (vii) reserve requirements or taxes on capital inflows. Although the instruments analyzed are mainly microprudential in nature, appropriately calibrated over the financial cycle they may serve for macroprudential purposes.
    Keywords: Banking sector , Capital controls , Capital flows , Credit risk , Cross country analysis , Fiscal policy , Foreign exchange , Latin America , Liquidity , Monetary policy , Risk management ,
    Date: 2011–07–11
  25. By: Tobias Knedlik; Gregor von Schweinitz
    Abstract: European authorities and scholars published proposals on which indicators of macroeconomic imbalances might be used to uncover risks for the sustainability of public debt in the European Union. We test the ability of four proposed sets of indicators to send early-warnings of debt crises using a signals approach for the study of indicators and the construction of composite indicators. We find that a broad composite indicator has the highest predictive power. This fact still holds true if equal weights are used for the construction of the composite indicator in order to reflect the uncertainty about the origin of future crises.
    Keywords: macroeconomic surveillance, macroeconomic imbalances, economic governance, signals approach, European Union (EU), European Monetary Union (EMU)
    JEL: C14 E61 E62 F40
    Date: 2011–08
  26. By: T. Mangwengwende; Z. Chinzara; H. Nel
    Abstract: This study investigates the link between bank concentration and interest rate pass-through (IRPT) in four sub-Saharan countries. It also analyses whether there is asymmetry in IRPT and whether such asymmetry is related to changes in bank concentration. By applying a number of econometric methods including Asymmetric Error Correction Models, Mean Adjustment Lag (MAL) models and Autoregressive Distributed Lag models on monthly data for the period 1994-2007, the study found some evidence of a relationship between bank concentration and IRPT in all four countries. However, the results reveal that bank concentration has a stronger influence on the magnitude of its adjustment rather than its speed. Of particular note in this investigation is the fact that the findings support both the Structure-Conduct-Performance hypothesis and the competing Efficient-Structure hypothesis in the banking industries of the four countries. While there is some evidence supporting the view that bank lending and deposit rates adjust asymmetrically to changes in policy rates, there is very limited evidence that these asymmetries are a result of bank concentration. The key implication of the result for African countries is that increased bank concentration through bank consolidation programmes designed to strengthen banking industries should not be viewed with cynicism in so far as monetary policy transmission is concerned because concentration does not necessarily undermine the effectiveness of monetary policy.
    Keywords: Bank Concentration Monetary Policy Interest Rate Pass-Through Asymmetric Adjustment Sub-Saharan Africa
    JEL: E52 E58 G28
    Date: 2011
  27. By: Nikoloz Gigineishvili
    Abstract: Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it.
    Date: 2011–07–27
  28. By: Blot, Christophe (Centre de recherche en économie de Sciences Po); Rifflart, Christine (Centre de recherche en économie de Sciences Po)
    Abstract: Cet article analyse les politiques conduites par les différentes banques centrales pour sortir de la crise. La Réserve fédérale des États-Unis et la Banque du Japon ont lancé de nouveaux programmes de mesures non conventionnelles. La Banque d’Angleterre a maintenu le statu quo. Quant à la Banque centrale européenne (BCE), elle est intervenue pour enrayer le mouvement de spéculation sur les dettes souveraines en achetant des titres publics mais, en même temps, elle a réduit le nombre de ces opérations de refinancement à long terme. Ces divergences se sont accentuées en début d’année 2011 après qu’une nouvelle flambée du prix du pétrole ait provoqué une accélération de l’inflation. Pourtant, si l’inflation est bien repartie à la hausse, il est erroné de considérer qu’il y a des tensions inflationnistes. L’inflation sous-jacente est en effet toujours au point mort et le niveau de chômage ne fait pas craindre d’effets de second tour. La BCE, en décidant une hausse des taux d’intérêt par crainte des tensions inflationnistes, pourrait donner le signal d’un mouvement plus général de hausse des taux. Cette décision pourrait fragiliser la reprise et aboutirait à un policy-mix franchement restrictif. Aux États-Unis, la hausse des taux serait plus tardive et motivée par un objectif de normalisation de la politique monétaire plutôt que par le souci de lutter contre un regain éphémère de l’inflation. Quant au Japon, le tsunami puis l’accident nucléaire écartent la perspective d’une orientation moins expansionniste de la politique monétaire. Ces divergences se répercuteraient sur le marché des changes. Si le terme de « guerre des monnaies » semble exagéré, il n’en demeure pas moins que l’intransigeance de la BCE infligera une double peine aux États membres de la zone euro qui subiront une nouvelle phase d’appréciation de l’euro. Enfin, dans de nombreux pays émergents, la reprise plus franche de la croissance et de l’inflation ont conduit plusieurs banques centrales à resserrer dès l’année 2010 leur politique monétaire provoquant des mouvements de capitaux et donc une appréciation de certaines monnaies (Singapour, Brésil, Mexique, Corée du Sud, Chine...).
    Date: 2011–04
  29. By: Liutang Gong (Guanghua School of Management, Peking University; Institute for Advanced Study, Wuhan University); Heng-fu Zou (Guanghua School of Management, Peking University; Institute for Advanced Study, Wuhan University; Development Research Group, The World Bank)
    Abstract: This paper extends the Barro (1990) growth model with one aggregate government spending and one flat income tax to include federal and local public consumption, federal and local public capital formation, federal and local taxes, and federal transfers to locality. It derives the rate of endogenous growth and examines how the growth rate and welfare respond to changes in federal taxes, local taxes, and federal transfers.
    Keywords: Fiscal federalism, Public expenditures, Public capital, Taxes, Federal transfers, Endogenous growth
    JEL: E0 G1 H0 O0
    Date: 2011
  30. By: Golosov, Mikhail; Hassler, John; Krusell, Per; Tsyvinski, Aleh
    Abstract: We analyze a dynamic stochastic general-equilibrium (DSGE) model with an externality---through climate change---from using fossil energy. A central result of our paper is an analytical derivation of a simple formula for the marginal externality damage of emissions. This formula, which holds under quite plausible assumptions, reveals that the damage is proportional to current GDP, with the proportion depending only on three factors: (i) discounting, (ii) the expected damage elasticity (how many percent of the output flow is lost from an extra unit of carbon in the atmosphere), and (iii) the structure of carbon depreciation in the atmosphere. Very importantly, future values of output, consumption, and the atmospheric CO2 concentration, as well as the paths of technology and population, and so on, all disappear from the formula. The optimal tax, using a standard Pigou argument, is then equal to this marginal externality. The simplicity of the formula allows the optimal tax to be easily parameterized and computed. Based on parameter estimates that rely on updated natural-science studies, we find that the optimal tax should be a bit higher than the median, or most well-known, estimates in the literature. We also show how the optimal taxes depend on the expectations and the possible resolution of the uncertainty regarding future damages. Finally, we compute the optimal and market paths for the use of energy and the corresponding climate change.
    Keywords: climate externality; integrated assessment model; optimal carbon taxes
    JEL: E0 Q5
    Date: 2011–08
  31. By: Ayako Saiki
    Abstract: The purpose of this study is to examine how monetary integration affects the exchange rate pass-through, by testing whether monetary policy convergence in the euro area led to a convergence in terms of exchange rate pass-through. We conduct a comparative study between the “experiment group” (the euro area) and the “control group” (non-euro industrial countries). We find evidence for stronger convergence of exchange rate pass-through for the euro area economies as a group, especially around the 1980s. The group of non-euro industrial countries also had conditional convergence (convergence with permanent cross-sectional heterogeneity) in exchange rate pass-through, but its cross-sectional dispersion remains substantially larger compared to the euro area. This indicates that monetary integration affects the exchange rate pass-through. This has an important policy implication for the euro area, especially for the new member countries, as their exchange rate pass-through would not remain constant or purely exogenous; it should also converge to the euro area average as they work to achieve the Maastricht Criteria.
    Keywords: Monetary Policy; Central Banks and Their Policies; International Monetary Arrangements and Institutions
    JEL: E52 E58 F33
    Date: 2011–08
  32. By: Hart, Oliver; Zingales, Luigi
    Abstract: We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector.
    Keywords: banking; liquidity; money
    JEL: E41 E51 G21
    Date: 2011–08
  33. By: James P Walsh; Jiangyan Yu; Chanho Park
    Abstract: Driving infrastructure development, notably mobilizing financial resources for infrastructure projects, has been challenging in many countries. This study includes two parts: an empirical analysis of macroeconomic risks associated with infrastructure booms, and a case study of four emerging economies about their practice of funding infrastructure development. The study shows that (i) there is no empirical evidence that rapid infrastructure growth would undermine contemporary macroeconomic performance, implying that room is created to accommodate infrastructure booms without compromising fiscal and external sustainability; (ii) banks may play an important role in financing infrastructure, but caution is needed to avoid directed lending and regulatory forbearance that the authorities may use to promote financing; (iii) capital market development is important to accommodate the usually high financing needs, and encouraging private investors to move into infrastructure would require regulatory and institutional improvements; and (iv) public support, including credit guarantees, may help bolster investors’ confidence, but the authorities should carefully monitor and manage fiscal risks.
    Date: 2011–08–01
  34. By: Steven J. Davis; Jason Faberman; John C. Haltiwanger
    Abstract: Many theoretical models of labor market search imply a tight link between worker flows (hires and separations) and job gains and losses at the employer level. Partly motivated by these theories, we exploit establishment-level data from U.S. sources to study the relationship between worker flows and job flows in the cross section and over time. We document strong, highly nonlinear relationships of hiring, quit and layoff rates to employer growth in the cross section. Simple statistical models that capture these cross-sectional relationships greatly improve our ability to account for fluctuations in aggregate worker flows. We also evaluate how well various theoretical models and views fit the patterns in the data. Aggregate fluctuations in layoffs are well captured by micro specifications that impose a tight cross-sectional link between worker flows and job flows. Aggregate fluctuations in quits are not. Instead, quit rates rise and fall with booms and recessions across the distribution of establishment growth rates, but more so at shrinking employers. Finally, we use our preferred statistical models – in combination with data on the cross-sectional distribution of establishment growth rates – to construct synthetic JOLTS-type measures of hires, separations, quits and layoffs back to 1990.
    JEL: E24 J63 J64
    Date: 2011–08
  35. By: Alexander Chubrik; Roman Mogilevsky; Irina Sinitsina; Marek Dabrowski
    Abstract: This paper provides an overview of public expenditures on education and healthcare in Belarus, Georgia, Kyrgyzstan, Moldova, Russia, Ukraine and some other countries of the former Soviet Union before and during the global financial crisis. Before the crisis, the governments of these countries were substantially increasing spending on education and health. The crisis adversely affected the FSU countries and worsened their fiscal situation. The analysis indicates that during the crisis, despite the fiscal constraints, public education and health expenditures have mostly been maintained or increased in almost all of these countries. However, the crisis situation was not taken as an opportunity to address these countries’ key education and healthcare problems related to demographic changes, insufficient per capita expenditure levels, the low efficiency of public spending and the insufficient quality of services. These issues form an ambitious reform agenda for these countries in the medium- and long-term.
    Keywords: Fiscal policy, Former Soviet Union, Education financing, Health financing, Global economic crisis
    JEL: E62 H50 H51 H52 I18 I22
    Date: 2011
  36. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: An alternative history of the Continental Dollar is constructed from the original resolutions passed by Congress. The Continental Dollar was a zero-interest bearer bond, not a fiat currency. The public could redeem it at face value in specie at fixed future dates. Being a zero-interest bearer bond, discounting must be separated from depreciation. Before 1779 there was no depreciation, only discounting. In 1779 and again in 1780 Congress passed ex post facto laws which altered the redemption dates of past Continental Dollars in ways that were not fiscally credible. These laws were the turning point. Depreciation and collapse followed.
    Keywords: American Revolution; war financing; debt retirement; fiat money; bearer bonds; monetary denominations; congressional spending; currency depreciation; U.S. Constitution; founding fathers; Benjamin Franklin; state tax rates.
    JEL: E42 E52 G12 G18 H11 H56 H60 H71 H83 N11 N21 N41
    Date: 2011
  37. By: López Real, Joel
    Abstract: While the immigration policy in the United States is mainly oriented to family reunification, in Australia, Canada and the United Kingdom. it is a points-based immigration system which main objective is to attract high skilled immigrants. This paper compares both immigration policies through the transition for the United States and Mexico. I find that: (i) the point system increases the average years of the immigrants by 3.5 years; (ii) the Mexican immigrants suffer a 10% reduction in their effective hours of labor when they move to the United States; (iii) migration reduces inequality, more significantly if the immigration policy is the point system and increases output per capita differences between both countries; (iv) the offspring of the immigrants invest more in human capital than the United States natives; (v) the earnings ratio immigrants to the United States natives is lower under the quota system than under the point system but along the transition it reverses converging at the steady state. --
    Keywords: Migration,self-selection,human capital,immigration policies
    JEL: E20 F22 J61 O11
    Date: 2011
  38. By: HARISH MANI (Sri Sathya Sai Institute of Higher Learning Prasanthinilayam Campus Anantapur District, (A.P.)); G. BHALACHANDRAN (Sri Sathya Sai Institute of Higher Learning Prasanthinilayam Campus Anantapur District, (A.P.)); V. N. PANDIT (Sri Sathya Sai Institute of Higher Learning Prasanthinilayam Campus Anantapur District, (A.P.))
    Abstract: Despite its reduced share in India’s GDP, agriculture continues to have a strategic importance in ensuring its overall growth and prosperity. As part of the new economic policy package introduced in the early nineties, there has been a reduction in the rate of public investment. While this may not be bad for the industrial sector, the impact of this policy on agriculture is a matter of concern, in sofar as it not only affects steady growth of agriculture but also influences the overall performance of the economy. This is more so because the agricultural sector public investment has also promoted private investment by way of what is termed as the crowding-in phenomenon. This phenomenon together with inter-sectoral linkages is used in this paper to examine the effect of higher public investment for agriculture on the stable growth of this sector as well as of the entire economy. Policy implications of this exercise are important for obvious reasons.
    Keywords: Sectoral linkages, Public Investment, crowding-in
    JEL: E22 E23 E27 H54
    Date: 2011–08
  39. By: L. Randall Wray
    Abstract: In this paper, I first quickly recount the causes and consequences of the global financial crisis (GFC). Of course, the triggering event was the unfolding of the subprime crisis; however, I argue that the financial system was already so fragile that just about anything could have caused the collapse. I then move on to an assessment of the lessons we should have learned. Briefly, these include: (a) the GFC was not a liquidity crisis, (b) underwriting matters, (c) unregulated and unsupervised financial institutions naturally evolve into control frauds, and (d) the worst part is the cover-up of the crimes. I argue that we cannot resolve the crisis until we begin going after the fraud. Finally, I outline an agenda for reform, along the lines suggested by the work of Hyman P. Minsky.
    Keywords: Global Financial Crisis; Subprime Crisis; Hyman P. Minsky; Galbraith and the Great Crash; Control Fraud; Underwriting; Deregulation; Financial Reform
    JEL: E3 E11 E12 E32 E44 G21 G38
    Date: 2011–08
  40. By: Stéphane Hallegatte; Fanny Henriet; Anand Patwardhan; K. Narayanan; Subimal Ghosh; Subhankar Karmakar; Unmesh Patnaik; Abhijat Abhayankar; Sanjib Pohit; Jan Corfee-Morlot; Celine Herweijer; Nicola Ranger; Sumana Bhattacharya; Murthy Bachu; Satya Priya; K. Dhore; Farhat Rafique; P. Mathur; Nicolas Naville
    Abstract: Managing risks from extreme events will be a crucial component of climate change adaptation. In this study, we demonstrate an approach to assess future risks and quantify the benefits of adaptation options at a city-scale, with application to flood risk in Mumbai. In 2005, Mumbai experienced unprecedented flooding, causing direct economic damages estimated at almost two billion USD and 500 fatalities. Our findings suggest that by the 2080s, in a SRES A2 scenario, an ‘upper bound’ climate scenario could see the likelihood of a 2005-like event more than double. We estimate that total losses (direct plus indirect) associated with a 1-in-100 year event could triple compared with current situation (to $690 – $1890 million USD), due to climate change alone. Continued rapid urbanisation could further increase the risk level. Moreover, a survey on the consequences of the 2005 floods on the marginalized population reveals the special vulnerability of the poorest, which is not apparent when looking only through a window of quantitative analysis and aggregate figures. For instance, the survey suggests that total losses to the marginalized population from the 2005 floods could lie around $250 million, which represents a limited share of total losses but a large shock for poor households. The analysis also demonstrates that adaptation could significantly reduce future losses; for example, estimates suggest that by improving the drainage system in Mumbai, losses associated with a 1-in-100 year flood event today could be reduced by as much as 70%. We show that assessing the indirect costs of extreme events is an important component of an adaptation assessment, both in ensuring the analysis captures the full economic benefits of adaptation and also identifying options that can help to manage indirect risks of disasters. For example, we show that by extending insurance to 100% penetration, the indirect effects of flooding could be almost halved. As shown by the survey, the marginalized population has little access to financial support in disaster aftermaths, and targeting this population could make the benefits of such measures even larger. While this study explores only the upper-bound climate scenario and is insufficient to design an adaptation strategy, it does demonstrate the value of risk-assessment as an important quantitative tool in developing city-scale adaptation strategies. We conclude with a discussion of sources of uncertainty, and of risk-based tools that could be linked with decision-making approaches to inform adaptation plans that are robust to climate change.<BR>hangement climatique. Dans cette étude, nous décrivons une méthode permettant d’évaluer les risques futurs et de quantifier les avantages de solutions d’adaptation à l’échelle urbaine, puis nous l’appliquons à l’estimation des risques d’inondation à Mumbai (Bombay). En 2005, une inondation sans précédent frappait la ville de Mumbai, faisant 500 victimes et occasionnant des dommages économiques directs estimés à près de deux milliards de dollars. Nos résultats suggèrent que, d’ici les années 2080, en appliquant le scénario SRES A2 et en sélectionnant un scénario climatique dans le haut de la fourchette, la probabilité d’un événement tel que celui de 2005 pourrait plus que doubler. Selon nos estimations, les pertes totales (directes et indirectes) causées par une catastrophe centennale pourraient tripler par rapport à leur niveau actuel (pour atteindre 690 à 1890 millions de dollars), du seul fait du changement climatique. L’urbanisation rapide et continue pourrait accroître d’autant plus le niveau de risque. D’autre part, l’étude que nous avons faite des conséquences des inondations de 2005 sur les populations marginalisées met en lumière la vulnérabilité particulière des plus démunis, qui n’est pas apparente lorsqu’on se limite aux analyses quantitatives et aux chiffres globaux. Par exemple, selon notre étude, le total des pertes subies lors des inondations de 2005 par les personnes marginalisées avoisinerait 250 millions de dollars, une faible part du total des dommages, mais un désastre considérable pour les foyers pauvres. Notre analyse montre également que l’adaptation pourrait substantiellement réduire les dommages futurs : nous estimons ainsi que les dommages causés par une inondation centennale pourraient être réduits de 70 % si l’on améliore le réseau d’assainissement de Mumbai. Quand on procède à une évaluation de l’adaptation, il importe d’estimer les coûts indirects des événements extrêmes car on peut ainsi à la fois intégrer à l’analyse l’ensemble des avantages économiques de l’adaptation et identifier des options de gestion des risques indirects liés aux catastrophes. Par exemple, nous montrons que si 100 % des habitants étaient en mesure de souscrire une assurance, les effets indirects des inondations pourraient être réduits de près de la moitié. Comme l’indique notre étude, la population marginalisée a peu accès aux aides financières après les catastrophes : les avantages de telles mesures pourraient donc être encore plus élevés si cette population était ciblée en priorité. Notre étude se limite à un scénario climatique dans le haut de la fourchette et ne suffit pas à élaborer une stratégie d’adaptation à part entière. Néanmoins, elle démontre la valeur des évaluations des risques, outils de mesure importants quand il s’agit de concevoir des stratégies d’adaptation à l’échelle urbaine. Nous concluons par un examen des sources d’incertitude ainsi que des outils fondés sur les risques qui, associés à des processus décisionnels, permettraient de formuler des plans d’adaptation durable au changement climatique.
    Keywords: sustainable development, insurance, government policy, climate change, global warming, natural disasters, flood management, adaptation, urban planning, développement durable, assurance, changement climatique, réchauffement climatique, adaptation, catastrophes naturelles, gestion des inondations, aménagement urbain, action publique
    JEL: E20 O18 Q01 Q54 R11 R52
    Date: 2010–11–22

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