nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒09‒16
58 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Asset Market Participation, Monetary Policy Rules and the Great Inflation By Bilbiie, Florin Ovidiu; Straub, Roland
  2. Inflation Targeting and Inflation Persistence in Asia-Pacific By Stefan Gerlach; Peter Tillmann
  3. Optimal monetary policy under financial sector risk By Scott Davis; Kevin X.D. Huang
  4. Lessons for monetary policy: what should the consensus be? By Otmar Issing
  5. Monetary Policy and TIPS Yields before the Crisis By Gerlach, Stefan; Moretti, Laura
  6. Money growth and inflation in the euro area: a time-frequency view By António Rua
  7. Monetary policy, capital inflows, and the housing boom By Filipa Sá; Tomasz Wieladek
  8. Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions By Emi Nakamura; Jón Steinsson
  9. Money, Financial Stability and Efficiency By Allen, Franklin; Carletti, Elena; Gale, Douglas M
  10. Is Monetary Policy in the New EU Member States Asymmetric? By Borek Vasicek
  11. Money dynamics with multiple banks of issue: evidence from Spain 1856-1874 By Galo Nuño; Pedro Tedde; Alessio Moro
  12. The Implementation of Monetary Policy in China: The Interbank Market and Bank Lending By Hongyi Chen; Qianying Chen; Stefan Gerlach
  13. Sharing the burden: monetary and fiscal responses to a world liquidity trap By David Cook; Michael B. Devereux
  14. Oil shocks through international transport costs: evidence from U.S. business cycles By Hakan Yilmazkuday
  15. Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter By David de la Croix; Olivier Pierrard; Henri R. Sneessens
  16. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate" By Alfonso Palacio-Vera
  17. Stylized (Arte) Facts on Sectoral Inflation By De Graeve, Ferre; Walentin, Karl
  18. Financial Markets and Unemployment By Tommaso Monacelli; Vincenzo Quadrini; Antonella Trigari
  19. The Chinese Impact on GDP Growth and Inflation in the Industrial Countries By Christian Dreger; Yanqun Zhang
  20. The effects of fiscal shocks on the exchange rate in Spain By Laura Fernández-Caballero
  21. Do banking shocks matter for the U.S. economy? By Naohisa Hirakata; Nao Sudo; Kozo Ueda
  22. Monetary and Fiscal Stimuli, Ownership Structure, and China's Housing Market By Deng, Yongheng; Morck, Randall; Wu, Jing; Yeung, Bernard
  23. Cyclicality of Credit Supply: Firm Level Evidence By Bo Becker; Victoria Ivashina
  24. A simulation study of an ASEAN Monetary Union (Replaces CentER DP 2010-100) By Boldea, O.; Engwerda, J.C.; Michalak, T.; Plasmans, J.E.J.; Salmah, S.
  25. Labor matching: putting the pieces together By Anton A. Cheremukhin
  26. Increasing returns and stability By Kakarot-Handtke, Egmont
  27. Improving GDP Measurement: A Forecast Combination Perspective By Boragan Aruoba; Francis X. Diebold; Jeremy Nalewaik; Frank Schorfheide; Dongho Song
  28. A DSGE model of banks and financial intermediation with default risk By Wickens, Michael R.
  29. Globalisation effect on inflation in the great moderation era: new evidence from G10 countries By Qin, Duo; He, Xinhua
  30. The coexistence of commodity money and fiat money By Olivier Ledoit; Sébastien Lotz
  31. Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation By Filipa Sá; Pascal Towbin; Tomasz Wieladek
  32. Offshoring and volatility: more evidence from Mexico's maquiladora industry By Roberto A. Coronado
  33. Welfare costs of inflation and the circulation of U. S. currency abroad By Alessandro Calza; Andrea Zaghini
  34. Impact of monetary policy on lending and deposit rates in Pakistan: Panel data analysis By Mohsin, Hasan Muhammad
  35. The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel: A Luxembourg case study By Gaston Giordana; Ingmar Schumacher
  36. The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States By Mertens, Karel; Ravn, Morten O
  37. Inflation variability and the relationship between inflation and growth By Raghbendra Jha; Tu Dang
  38. Are domestic banks' pass through higher than foreign banks? Empirical evidence from Pakistan By Mohsin, Hasan Muhammad; Rivers, P
  39. "Central Banking in an Era of Quantitative Easing" By Andrew Sheng
  40. A Short Empirical Note on Household Debt, Financialization, and Macroeconomic Performance By Yun Kim
  42. Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata By Jósef Sigurdsson; Rannveig Sigurdardottir
  43. What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk By Joshua Aizenman; Michael M. Hutchison; Yothin Jinjarak
  44. Consumer and Corporate Debt: A Neo-Kaleckian Synthesis By Yun Kim; Alan Isaac
  45. Cycles of Wage Discrimination By Biddle, Jeff E.; Hamermesh, Daniel S.
  46. Economic Forecasting in the Great Recession By Herman O. Stekler; Raj M. Talwar
  47. Die Währungskrisenunion: Die Euro-Verschuldung der Nationalstaaten als Schwachstelle der EWU By Spahn, Peter
  48. Beyond GDP: Measuring Economic Well-Being in Canada and the Provinces, 1981-2010 By Lars Osberg; Andrew Sharpe
  49. Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis By Rose, Andrew K; Spiegel, Mark
  50. Does Financial Development Increase Energy Consumption? Role of Industrialization and Urbanization in Tunisia By Muhammad, Shahbaz; Lean, Hooi Hooi
  51. Konsumausgaben und Aktienmarktentwicklung in Deutschland: Ein kointegriertes vektorautoregressives Modell By Andreas Nastansky; Hans Gerhard Strohe
  52. Stochastic trends and seasonality in economic time series: new evidence from Bayesian stochastic model specification search By Stefano Grassi; Tommaso Proietti
  53. Sobre el impacto macroeconómico de los beneficios tributarios al capital By Franz Alonso Hamann Salcedo; Luis Ignacio Lozano Espitia; Luis -Fernando Mejía
  54. Moving from a GDP-Based to a Well-Being Based Metric of Economic Performance and Social Progress: Results from the Index of Economic Well-Being for OECD Countries, 1980-2009 By Lars Osberg; Andrew Sharpe
  55. Government and Growth By Milad Zarin-Nejadan
  56. Public Capital in Resource Rich Economies: Is there a Curse? By Sambit Bhattacharyya; Paul Collier
  57. The political economy of the clean development mechanism (CDM) governance system. By Nedergaard, Peter
  58. Productivity growth and ownership change in China: 1998-2007 By Liu, Jing; Cao, Shutao

  1. By: Bilbiie, Florin Ovidiu; Straub, Roland
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price DSGE model, whereby at low enough asset market participation, standard aggregate demand logic is inverted: interest rate increases become expansionary. Thereby, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare, suggesting that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom suggests. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation.
    Keywords: aggregate demand; Bayesian estimation; Great Inflation; Great Moderation; limited asset markets participation; passive monetary policy rules; real (in)determinacy
    JEL: E31 E32 E44 E52 E58 E65 N12 N22
    Date: 2011–09
  2. By: Stefan Gerlach (Institute for Monetary and Financial Stability and Goethe-University Frankfurt and Hong Kong Institute for Monetary Research); Peter Tillmann (Justus-Liebig-University Giessen and Institute for Monetary and Financial Stability and Hong Kong Institute for Monetary Research)
    Abstract: Following the Asian financial crisis in 1997-98, a number of Asian central banks adopted inflation targeting. While it is possible for the average inflation rate to be close to target, deviations of inflation could nevertheless be large and protracted. We therefore explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find a significant reduction in inflation persistence following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting do not show a decline in persistence. Measuring the performance of monetary policy strategies in terms of inflation persistence rather than the level of inflation shows that inflation targeting performs better than alternative strategies.
    Keywords: Inflation Targeting, Asia, Inflation Persistence, Monetary Policy Strategy
    JEL: C22 E31 E5
    Date: 2011–08
  3. By: Scott Davis; Kevin X.D. Huang
    Abstract: We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in the Taylor rule (the coefficients on the lagged interest rate, inflation, and the output gap) are optimally chosen, the central bank should not put any weight on endogenous fluctuations in the interbank lending spread. ; However, the central bank should adjust the risk free rate in response to fluctuations in the spread that occur because of exogenous financial shocks, but we find that the central bank should not be too aggressive in its easing policy. Optimal policy calls for a two-thirds of a percentage point cut in the risk free rate in response to a financial shock that causes a one percentage point increase in interbank lending spreads.
    Keywords: Business cycles ; Financial markets ; Monetary policy
    Date: 2011
  4. By: Otmar Issing
    Abstract: This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks' policy decisions, as is done in the ECB's encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks' inflation target.
    Keywords: Financial markets ; Monetary policy ; Banks and banking, Central
    Date: 2011
  5. By: Gerlach, Stefan; Moretti, Laura
    Abstract: We make three points. First, the decade before the financial crisis in 2007 was characterized by a collapse in the yield on TIPS. Second, estimated VARs for the federal funds rate and the TIPS yield show that while monetary policy shocks had negligible effects on the TIPS yield, shocks to the latter had one-to-one effects on the federal funds rate. Third, these findings can be rationalized in a New Keynesian model.
    Keywords: long real interest rates; monetary policy; TIPS
    JEL: E42 E53 E58
    Date: 2011–09
  6. By: António Rua
    Abstract: This paper provides new insights on the relationship between money growth and inflation in the euro area over the last forty years. This highly relevant link for the European Central Bank monetary policy strategy is assessed using wavelet analysis. In particular, wavelet analysis allows to study simultaneously the relationship between money growth and inflation in the euro area at the frequency level and assess how it has changed over time. The findings indicate a stronger link between inflation and money growth at low frequencies over the whole sample period. At the typical business cycle frequency range the link is only present until the beginning of the 1980’s. Moreover, there seems to be a recent deterioration of the leading properties of money growth with respect to inflation in the euro area. These results highlight the importance of a regular assessment of the role of money growth in tracking inflation developments in the euro area since such relationship varies across frequencies and over time.
    JEL: C40 E30 E40 E50
    Date: 2011
  7. By: Filipa Sá; Tomasz Wieladek
    Abstract: We estimate an open economy VAR model to quantify the effect of monetary policy and capital inflows shocks on the US housing market. The shocks are identified with sign restrictions derived from a standard DSGE model. We find that monetary policy shocks have a limited effect on house prices and residential investment. In contrast, capital inflows shocks driven by an increase in foreign savings have a positive and persistent effect on both housing variables. Other sources of capital inflows shocks, such as foreign monetary expansion or an increase in aggregate demand in the US, have a more limited role.
    Keywords: Monetary policy ; Money supply ; International finance
    Date: 2011
  8. By: Emi Nakamura; Jón Steinsson
    Abstract: We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier'' of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind.'' In contrast, our estimate "differences out'' these effects because different regions in the union share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks can have large effects on output.
    JEL: E32 E62
    Date: 2011–09
  9. By: Allen, Franklin; Carletti, Elena; Gale, Douglas M
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Keywords: monetary policy; nominal contracts
    JEL: E42 E44 E52 E58
    Date: 2011–09
  10. By: Borek Vasicek
    Abstract: Estimated Taylor rules have become popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rules nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary, and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) Generalized Method of Moments (GMM) estimation of models that allow discrimination between sources of potential policy asymmetry but are conditioned by specific underlying relations, and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes. We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences, and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: Inflation targeting, monetary policy, nonlinear Taylor rules, threshold estimation.
    JEL: C32 E52 E58
    Date: 2011–07
  11. By: Galo Nuño (Banco de España); Pedro Tedde (Banco de España); Alessio Moro (Università di Cagliari)
    Abstract: This paper analyzes the Spanish monetary system from 1856, when the Bank of Spain was created, to 1874, when it was awarded the monopoly of emission. This period was characterized by the emergence of an unregulated banking system, with multiple banks of issue entitled to emit bank notes. We focus on two main issues: i) the large fluctuations in the money supply during this period; and ii) the lack of a lender of last resort in the banking panic of 1866. To analyze this, we construct a new dataset on money supply aggregates. The paper also estimates the economic impact of monetary fluctuations with the help of a calibrated new Keynesian model. Our results suggest that money supply shocks had a milder effect on inflation and output than the one predicted by the theory.
    Keywords: unregulated banking, Gresham’s`law, lender of last resort, Overend and Gurney crisis
    JEL: N13 N23 E31 E5
    Date: 2011–09
  12. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Qianying Chen (Hong Kong Institute for Monetary Research); Stefan Gerlach (Institute for Monetary and Financial Stability and University of Frankfurt and Hong Kong Institute for Monetary Research)
    Abstract: We analyze the impact of monetary policy instruments on interbank lending rates and retail bank lending in China using an extended version of the model of Porter and Xu (2009). Unlike the central banks of advanced economies, the People's Bank of China uses changes in the required reserve ratios and open market operations to influence liquidity in money markets and adjusts the regulated deposit and lending rates and loan targets to intervene in the retail deposit and lending market. These interventions prevent the interbank lending rate from signalling monetary policy stance and transmitting the effect of policy to the growth of bank loans.
    Keywords: Monetary Policy Implementation, Regulated Retail Interest Rates, Transmission Mechanism, Window Guidance, Bank Loans, China
    JEL: E42 E52 E58
    Date: 2011–08
  13. By: David Cook; Michael B. Devereux
    Abstract: With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause "natural real interest rates" to fall below zero in all countries, giving rise to a global "liquidity trap." This paper explores the optimal policy response to this type of shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. ; The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter this shock. Because of this, it may be optimal for the foreign policymaker to raise interest rates. ; Strikingly, the foreign country may choose to have a positive policy interest rate, even though its natural real interest rate is below zero. A combination of relatively tight monetary policy in the foreign country combined with substantial fiscal expansion in the home country achieves the desired mix in terms of the level and composition of world expenditure. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy.
    Keywords: Monetary policy ; Fiscal policy ; Interest rates
    Date: 2011
  14. By: Hakan Yilmazkuday
    Abstract: The effects of oil shocks on output volatility through international transport costs are investigated in an open-economy DSGE model. Two versions of the model, with and without international transport costs, are structurally estimated for the U.S. economy by a Bayesian approach for moving windows of ten years. For model selection, the posterior odds ratios of the two versions are compared for each ten-year window. The version with international transport costs is selected during periods of high volatility in crude oil prices. The contribution of international transport costs to the volatility of U.S. GDP has been estimated as high as 36 percent during periods of oil crises.
    Keywords: Monetary policy ; International trade
    Date: 2011
  15. By: David de la Croix; Olivier Pierrard; Henri R. Sneessens
    Abstract: This paper re-examines the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertize more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate changes may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate.
    Keywords: Overlapping Generations, Search Unemployment, Labor Force Participation, Aging, Pensions, Labor Market
    JEL: E24 H55 J26 J64
    Date: 2011–07
  16. By: Alfonso Palacio-Vera
    Abstract: The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap," provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion.
    Keywords: Floor System; Debt Monetization; Functional Finance; Policy Coordination; Neutral Interest Rate
    JEL: E10 E12 E44 E52 E58
    Date: 2011–09
  17. By: De Graeve, Ferre (Monetary Policy Department, Central Bank of Sweden); Walentin, Karl (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Research on disaggregate price indices has found that sectoral shocks generate the bulk of sectoral inflation variance, but no persistence. Aggregate shocks, by contrast, are the root of sectoral inflation persistence, but have negligible relative variance. We argue that these findings are largely an artefact of using overly simple factor models to characterize inflation. Sectoral inflation series are subject to particular features such as sales and item substitutions. In factor models, these blow up the variance of sectoral shocks, while reducing their persistence. Controlling for such effects, we find that inflation variance is driven by both aggregate and sectoral shocks. Sectoral shocks, too, generate substantial inflation persistence. Both findings contrast sharply with earlier evidence from factor models. However, these results align well with recent micro evidence. This has implications for the foundations of price stickiness, and provide quantitative inputs for calibrating models with sectoral heterogeneity.
    Keywords: Inflation persistence; sticky prices; factor model; sectoral inflation
    JEL: E50 G21
    Date: 2011–08–01
  18. By: Tommaso Monacelli; Vincenzo Quadrini; Antonella Trigari
    Abstract: We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.
    JEL: E24 E32 E44
    Date: 2011–09
  19. By: Christian Dreger; Yanqun Zhang
    Abstract: The integration of China into the global economy is one of the most spectacular events in economic history. This paper investigates to what extent this process affects output growth and inflation in the advanced countries. A GVAR model is specified to explore interdependencies between business cycles in China and industrial countries, including the US, the euro area and Japan. For robustness, the results are compared to those obtained from leading structural models, such as NiGEM and OEF. Evidence is based on the responses to a Chinese demand shock arising from the recent fiscal stimulus program. The results show that the impact on output growth in the advanced economies can be quite substantial, especially for the Asian region. The expansionary effects in the US and the euro area responses are lower, as trade linkages are less intensive. The multipliers are also reduced by a sizeable effect on inflation, as Chinese firms participate in international production chains.
    Keywords: GVAR, Chinese economy, shock transmission
    JEL: E32 F15 C51
    Date: 2011
  20. By: Laura Fernández-Caballero (Banco de España)
    Abstract: We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the “twin deficits” hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.
    Keywords: SVAR, Fiscal shocks, Effective exchange rates, Twin deficits, Fiscal multipliers
    JEL: E62 H30
    Date: 2011–09
  21. By: Naohisa Hirakata; Nao Sudo; Kozo Ueda
    Abstract: The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.
    Keywords: Price levels ; Financial markets ; Monetary policy
    Date: 2011
  22. By: Deng, Yongheng (National University of Singapore); Morck, Randall (University of Alberta and NBER); Wu, Jing (National University of Singapore and Tsinghua University); Yeung, Bernard (National University of Singapore)
    Abstract: In the recent financial crisis, macroeconomic stimuli produced mixed results across developed economies. In contrast, China's stimulus boosted real GDP growth from an annualized 6.2% in the first quarter of 2009 trough to 11.9% in the first quarter of 2010. Amidst this phenomenal response, land auction and house prices in major cities soared. We argue that the speed and efficacy of China's stimulus derives from state control over its banking system and corporate sector. Beijing ordered state-owned banks to lend, and they lent. Beijing ordered centrally-controlled state-owned enterprises (SOEs) to invest, and they invested. However, our data show that much of this investment was highly leveraged purchases of real estate. Residential land auction prices in eight major cities rose about 100% in 2009, controlling for quality variation. Moreover, higher price rises occur these SOEs are more active buyers. We argue that these centrally-controlled SOEs overbid substantially, fueling a real estate bubble; and that China's seemingly highly effective macroeconomic stimulus package may well have induced costly resource misallocation.
    Keywords: Monetary stimuli; Fiscal Stimuli; Ownership Structure; Housing Market; China
    JEL: E52 G21 G38 P27 P34
    Date: 2011–09–05
  23. By: Bo Becker; Victoria Ivashina
    Abstract: Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time-series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms’ substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm’s switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.
    JEL: E32 E44 G21
    Date: 2011–09
  24. By: Boldea, O.; Engwerda, J.C.; Michalak, T.; Plasmans, J.E.J.; Salmah, S. (Tilburg University, Center for Economic Research)
    Abstract: This paper analyzes some pros and cons of a monetary union for the ASEAN1 countries, excluding Myanmar. We estimate a stylized open-economy dynamic general equilibrium model for the ASEAN countries. Using the framework of linear quadratic differential games, we contrast the potential gains or losses for these countries due to economic shocks, in case they maintain their status-quo, they coordinate their monetary and/or fiscal policies, or form a monetary union. Assuming for all players open-loop information, we conclude that there are substantial gains from cooperation of monetary authorities. We also find that whether a monetary union improves upon monetary cooperation depends on the type of shocks and the extent of fiscal policy cooperation. Results are based both on a theoretical study of the structure of the estimated model and a simulation study.
    Keywords: ASEAN economic integration;monetary union;linear quadratic differential games;open-loop information structure.
    JEL: C61 C71 C72 C73 E17 E52 E61 F15 F42 F47
    Date: 2011
  25. By: Anton A. Cheremukhin
    Abstract: The original Mortensen-Pissarides model possesses two elements that are absent from the commonly used simplified version: the job destruction margin and training costs. I find that these two elements enable a model driven by a single aggregate shock to simultaneously explain most movements involving unemployment, vacancies, job destruction, job creation, the job finding rate and wages. The job destruction margin's role in propagating aggregate shocks is to create an additional pool of unemployed at the onset of a recession. The role of training costs is to explain the simultaneous decline in vacancies and slow response of job creation.
    Keywords: Unemployment ; Job creation ; Employment ; Business cycles
    Date: 2011
  26. By: Kakarot-Handtke, Egmont
    Abstract: Increasing returns are an incontrovertible fact since Adam Smith hailed them as the very originators of wealth, yet they play havoc with general equilibrium. They fit, in marked contrast, nicely into the structural axiomatic framework. This indicates that it is worthwhile to replace the behavioral axioms of standard economics by objective structural axioms. These are in the present paper applied to the question of how increasing returns affect the systemic interrelations in the pure consumption economy. To invite a reality check the logical implications of the structural employment equation are set in relation to three well-known statistical relationships.
    Keywords: New framework of concepts; Structure-centric; Axiom set; Verdoorn’s law; Phillips curve; Okun’s law
    JEL: E24 E23 D24
    Date: 2011–09–02
  27. By: Boragan Aruoba (Department of Economics, University of Maryland); Francis X. Diebold (Department of Economics, University of Maryland); Jeremy Nalewaik (Federal Reserve Board, Washington D.C.); Frank Schorfheide (Department of Economics, University of Pennsylvania); Dongho Song (Department of Economics, University of Pennsylvania)
    Abstract: Two often-divergent U.S. GDP estimates are available, a widely-used expenditure side version, GDPE, and a much less widely-used income-side version, GDPI . We propose and explore a "forecast combination" approach to combining them. We then put the theory to work, producing a superior combined estimate of GDP growth for the U.S., GDPC. We compare GDPC to GDPE and GDPI, with particular attention to behavior over the business cycle. We discuss several variations and extensions.
    Keywords: National Income and Product Accounts, Output, Expenditure, Economic Activity, Business Cycle, Recession
    JEL: E01 E32
    Date: 2011–09–06
  28. By: Wickens, Michael R.
    Abstract: This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.
    Keywords: Default; Financial crisis; Financial intermediation; Liquidity shortages; Risk
    JEL: E44 E51 G12 G21 G33
    Date: 2011–09
  29. By: Qin, Duo; He, Xinhua
    Abstract: The effect of globalisation on inflation is modelled and simulated for ten countries from G10 during the Great Moderation period. The results are supportive of the globalisation hypothesis. In particular, the results show that dynamic channels and magnitudes of globalisation to domestic inflation are highly heterogeneous from country to country, that increases in trade openness could be either inflationary or deflationary, while increased imports from low-cost emerging-market economies have been mostly deflationary, and that there has been almost no direct globalisation impact as far as inflation persistence is concerned while the impact on inflation variability can be positive as well as negative. Overall, globalisation is shown to have contributed positively to the aspect of low inflation rather than that of stable inflation during the Great Moderation era.
    Keywords: Inflation dynamics; globalisation
    JEL: E31 C52 F41 E37
    Date: 2011–08–26
  30. By: Olivier Ledoit; Sébastien Lotz
    Abstract: In reaction to the monetary turmoil created by the financial crisis of September 2008, both legislative and constitutional reforms have been proposed in different Countries to introduce Commodity Money longside existing National Fiat Currency. A thorough evaluation of the Economic consequences of these new proposals is warranted. This paper surveys some of the existing knowledge in Monetary and Financial Economics for the purpose of answering the significant Economic questions raised by these new political initiatives.
    Keywords: Currency competition, commodity money, fiat money, gold, safe haven, search models
    JEL: E42 E52
    Date: 2011–08
  31. By: Filipa Sá; Pascal Towbin; Tomasz Wieladek
    Abstract: A number of OECD countries experienced an environment of low interest rates and a rapid Increase in real house prices and residential investment during the past decade. Different explanations have been suggested for the housing boom: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how the effects of these shocks change with the structure of the mortgage market and the degree of securitization, we allow the VAR coefficients to vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and residential investment. The response of housing variables to both types of shocks is stronger in countries with more developed mortgage markets. The amplification effect of mortgage-backed securitization is particularly strong for capital inflows shocks.
    Keywords: Money supply ; Capital movements
    Date: 2011
  32. By: Roberto A. Coronado
    Abstract: In recent papers, Bergin, Feenstra, and Hanson (2007 and 2009, hereafter BFH) analyze the impact that offshoring has in employment and output volatility, particularly on the Mexican maquiladora industry. Their empirical results indicate that employment and output in the offshoring manufacturing plants in Mexico are more volatile than their counterparts in the U.S. Such empirical results suggest that the maquiladora industry (offshoring) can help the U.S. industrial sector to better absorb shocks. In this paper, I expand BFH's empirical analysis in different directions. The empirical results I provide here suggest that the volatility in employment and output in Mexico's maquiladoras is greater than the one estimated by BFH. Therefore, offshoring via the maquiladora industry in Mexico can act as a greater cushion for business cycle fluctuations in the U.S.
    Keywords: Business cycles ; International trade
    Date: 2011
  33. By: Alessandro Calza; Andrea Zaghini
    Abstract: Empirical studies of the "shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for U.S. dollars abroad, we show that the failure to control for currency held by nonresidents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favor of the Fed's current policy.
    Keywords: Price levels ; Demand for money ; Monetary policy
    Date: 2011
  34. By: Mohsin, Hasan Muhammad
    Abstract: The study estimates impact of monetary policy (discount rate) on lending and deposit rates in Pakistan using bank type data from November 2001 to March 2011. The study finds evidence of long run relationship between lending and discount rate but deposit rate is not cointegrated with discount rate, monetary policy instrument. The study also finds an increase in the lending rate pass through rate during restricted monetary policy times (2005-2010), whereas deposit rate pass through remains same. The study finds that overall banks pass on only 20% impact of a change in discount rate to the lenders in first month implying it is not complete. There is also significant difference in various bank types pass through rates. The pass through of deposit rate is further low at 0.16 as revealed by short run analysis. It implies that the effectiveness of monetary policy is limited in Pakistan.
    Keywords: Discount rate, pass-through, monetary policy
    JEL: E58 E00
    Date: 2011–01
  35. By: Gaston Giordana; Ingmar Schumacher
    Abstract: In this paper we study the impact of the Basel III liquidity regulations, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the bank lending channel in Luxembourg. For this aim we built, based on individual bank data, time series of the LCR and NSFR for a sample of banks covering between 82% and 100% of total assets of the banking sector. Additionally, we simulated the optimal balance sheet adjustments needed to adhere to the regulations. We extend the existing literature on the identification of the bank lending channel by adding as banks characteristics the estimated shortfalls in both the LCR and NSFR. We find a significant role for the bank lending channel in Luxembourg which mainly works through small banks with a large shortfall in the NSFR. We also show that big banks are able to increase their lending following a contractionary monetary policy shock, in line with the fact that big banks in Luxembourg are liquidity providers. Our extrapolation and simulation results suggest that the bank lending channel will no longer be effective in Luxembourg once banks adhere to the Basel III liquidity regulations. We find that adhering to the NSFR may reduce the bank lending channel more strongly than complying with the LCR.
    Keywords: bank, bank lending channel, monetary policy, Basel III, LCR, NSFR
    JEL: E51 E52 E58 G21 G28
    Date: 2011–06
  36. By: Mertens, Karel; Ravn, Morten O
    Abstract: This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between the effects of changes in personal and corporate income taxes using a new narrative account of federal tax liability changes in these two tax components. We develop an estimator in which narratively identified tax changes are used as proxies for structural tax shocks and apply it to quarterly post WWII US data. We find that short run output effects of tax shocks are large and that it is important to distinguish between different types of taxes when considering their impact on the labor market and the major expenditure components.
    Keywords: fiscal policy; measurement error; narrative identification; tax changes
    JEL: E20 E32 E62 H30
    Date: 2011–09
  37. By: Raghbendra Jha; Tu Dang
    Abstract: We examine the effect of inflation variability and economic growth using annual historical data on both developing and developed countries. The data cover 182 developing countries and 31 developed countries for the period 1961-2009. Proxying inflation variability by the five-year coefficient of variation of inflation, we obtain the following results: (1) For developing countries, there is significant evidence to suggest that when the rate of inflation exceeds 10 percent inflation variability has a negative effect on economic growth. (2) For developed countries, there is no significant evidence that inflation variability is detrimental to growth.
    Keywords: Inflation, Growth, Threshold, Variablity
    JEL: C51 E31 E58
    Date: 2011
  38. By: Mohsin, Hasan Muhammad; Rivers, P
    Abstract: This study contributes to the literature by estimating Interest Rate Pass Through (IRPT) using Pakistani aggregate banks’ lending and deposit rate data. Lending and deposit rates are estimated to be sluggish in terms of their response to a change in monetary policy rate. There is also evidence of asymmetry in the pass through of four types of banks (i.e., privatized, nationalized, foreign and specialized). Overall, the domestic banks’ pass through is estimated to be higher than that of foreign bank. Although the IRPT is estimated to be incomplete, the degree of lending rate pass- through is not very low. This study provides evidence of an increase in the adjustment speed when the lending rate is below equilibrium after January 2005. However, there was no significant change in the pass through after January 2005 which coincided with the constant increase in the Treasury bill rate by the State Bank of Pakistan.
    Keywords: Monetary policy; Treasury Bill rate; pass thropugh
    JEL: E43 C23
    Date: 2011–01
  39. By: Andrew Sheng
    Abstract: This paper reviews the key insights of Hyman P. Minsky in arguing why finance cannot be left to free markets, drawing on the East Asian development experience. The paper suggests that Minsky's more complete stock-flow consistent analytical framework, by putting finance at the center of analysis of economic and financial system stability, is much more pragmatic and realistic compared to the prevailing neoclassical analysis. Drawing upon the East Asian experience, the paper finds that Minsky's analysis has a system-wide slant and correctly identifies Big Government and investment as driving employment and profits, respectively. Specifically, his two-price system can aid policymakers in correcting the systemic vulnerability posed by asset bubbles. By concentrating on cash-flow analysis and funding behaviors, Minsky's analysis provides the link between cash flows and changes in balance sheets, and therefore can help identify unsustainable Ponzi processes. Overall, his multidimensional analytical framework is found to be more relevant than ever in understanding the Asian crisis, the 2008 global financial crisis, and policymaking in the postcrisis world.
    Keywords: Financial Economics; Keynes; Keynesian; Post-Keynesian; Government Policy and Regulation
    JEL: E12 G28
    Date: 2011–09
  40. By: Yun Kim (Department of Economics, Trinity College)
    Abstract: We empirically examine the relationship between U.S. output and household debt. To account for structural change due to financial liberalization, we divide the sample at the fourth quarter of 1982. We find structural differences between earlier and later business cycles for the U.S. household sector and its relation to the macroeconomy. In the regression analysis for pre-1982, we find no evidence that the household debt variables had any negative effect on output. However, we find some evidence that the household debt variables have negative effects on output for the post-1982 period. A formal structural break test provides evidence of a structural change in the relationship of U.S. output to household debt. Unit root tests for the separate samples show that none of the household variables possesses a unit root in the earlier period, yet all of them do in the later period, indicating fundamental differences between earlier and later periods in terms of the data generating process.
    Keywords: household debt, output, financial liberalization, structural break
    JEL: E29 B59
    Date: 2011–08
  41. By: Thai-Ha Le (Division of Economics, Nanyang Technological University, Singapore); Youngho Chang (Division of Economics, Nanyang Technological University, Singapore)
    Abstract: This study using the monthly data spanning 1986:01-2011:04 to investigate the relationship between the prices of two strategic commodities: gold and oil. We examine this relationship through the inflation channel and their interaction with the index of the US dollar. We used different oil price proxies for our investigation and found that the impact of oil price on the gold price is not asymmetric but non-linear. Further, results show that there is a long-run relationship existing between the prices of oil and gold. The findings imply that the oil price can be used to predict the gold price.
    Keywords: oil price fluctuation, gold price, inflation, US dollar index, cointegration.
    JEL: E3
    Date: 2011
  42. By: Jósef Sigurdsson; Rannveig Sigurdardottir
    Abstract: This paper presents new evidence about wage stickiness and the nature of wage setting. We use a unique micro dataset on monthly frequency, covering wages in the Icelandic private sector for the period from 1998-2010, and draw the following conclusions. First, the mean frequency of wage change is 10.8% per month. When weighted for heterogeneity across industries and occupations the result is almost identical; the frequency of change is 10.5% per month. Second, only 0.5% of monthly wage changes are decreases. Third, the mean duration of wage spells is 8.9 months. Onefifth of wage spells last longer than a year while other spells last for one year or shorter. Fourth, wage setting displays strong features of time-dependence: half of all wage changes are synchronised in January, but other adjustments are staggered through the year. Fifth, there is limited evidence of state-dependence: frequency of wage increases, size of increases, frequency of wage decreases and size of decreases do not correlate with inflation. However, both frequency and size of wage decreases have significant correlation with unemployment. Sixth, the hazard function for wages is mostly flat during the first months but has a large twelve-month spike. These facts align with a model of time-dependent wage contracts of fixed duration.
    Date: 2011–08
  43. By: Joshua Aizenman; Michael M. Hutchison; Yothin Jinjarak
    Abstract: We estimate the pricing of sovereign risk for sixty countries based on fiscal space (debt/tax; deficits/tax) and other economic fundamentals over 2005-10. We measure how accurately the model predicts sovereign credit default swap (CDS) spreads, focusing in particular on the five countries in the South-West Eurozone Periphery (Greece, Ireland, Italy, Portugal, and Spain). Dynamic panel estimates of the model suggest that fiscal space and other macroeconomic factors are statistically significant and economically important determinants of market-based sovereign risk. Although the explanatory power of fiscal space measures drop during the crisis, the TED spread, trade openness, external debt and inflation play a larger role. As expectations of market volatility jumped during the crisis, the weakly concavity of creditors’ payoff probably accounts for the emergence of TED spread as a key pricing factor. However, risk-pricing of the South-West Eurozone Periphery countries is not predicted accurately by the model either in-sample or out-of-sample: unpredicted high spreads are evident during global crisis period, especially in 2010 when the sovereign debt crisis swept over the periphery area. We “match” the periphery group with five middle income countries outside Europe that were closest in terms of fiscal space during the European fiscal crisis. We find that Eurozone periphery default risk is priced much higher than the “matched” countries in 2010, even allowing for differences in fundamentals. One interpretation is that the market has mispriced risk in the Eurozone periphery. An alternative interpretation is that the market is pricing not on current fundamentals but future fundamentals, expecting the periphery fiscal space to deteriorate markedly and posing a high risk of debt restructuring. Adjustment challenges of the Eurozone periphery may be perceived as economically and politically more difficult than the matched group of middle income countries because of exchange rate and monetary constraints.
    JEL: E43 F34 F36 H63
    Date: 2011–09
  44. By: Yun Kim (Department of Economics, Trinity College); Alan Isaac (Department of Economics, American University)
    Abstract: Models of the macrodynamic impact of private debt tend to emphasize the role of corporate debt. Corporate leverage affects macroeconomic outcomes and can contribute to financial fragility. We show that consumer debt is also important. We include consumer as well as corporate debt in a stock-flow consistent neo-Kaleckian growth model and explore the macrodynamic ramifications. We find that consumer credit conditions influence effective demand, the profit rate, and economic growth. The inclusion of consumer debt as well as corporate debt in our model substantially alters the model's dynamics. We compare our short-run, transition, and long-run results to models containing a single type of debt. Some of our results confirm the results of simpler models. For example, we find that a surge in animal spirits is good for steady-state growth. We show that consumer borrowing can also help to sustain aggregate demand, that looser consumer credit conditions have a steady-state growth effect, and that demand augmenting changes can enhance system stability. In this sense, looser consumer credit conditions are good for macroeconomic stability.
    Keywords: consumer debt, corporate debt, leverage, growth, stability
    JEL: E12 E44 O41
    Date: 2011–08
  45. By: Biddle, Jeff E. (Michigan State University); Hamermesh, Daniel S. (University of Texas at Austin)
    Abstract: Using CPS data from 1979-2009 we examine how cyclical downturns and industry-specific demand shocks affect wage differentials between white non-Hispanic males and women, Hispanics and African-Americans. Women's and Hispanics' relative earnings are harmed by negative shocks, while the earnings disadvantage of African-Americans may drop with negative shocks. Negative shocks also appear to increase the earnings disadvantage of bad-looking workers. A theory of job search suggests two opposite-signed mechanisms that affect these wage differentials. It suggests greater absolute effects among job-movers, which is verified using the longitudinal component of the CPS.
    Keywords: women, minorities, beauty, search models
    JEL: E29 J71
    Date: 2011–08
  46. By: Herman O. Stekler (George Washington University); Raj M. Talwar (George Washington University)
    Date: 2011–08
  47. By: Spahn, Peter
    Abstract: Die Staatsschuldenkrise einiger Länder in der EWU ist letztlich doch eine Währungskrise. Nur im gemeinsamen Währungsraum war es überhaupt möglich, die Schuldaufnahme stark auszuweiten. Andererseits treten bei Zweifeln an der finanziellen Solidität von Schuldnerstaaten kumulative Instabilitätsprobleme auf, die in der internationalen Geldwirtschaft aus der Konstellation Verschuldung in fremder Währung bekannt sind. Die regulär nicht vorgesehene Kurspflege nationaler Schuldtitel seitens der EZB und endogene Liquiditätsengpässe im nationalen Banksystem bei einem massiven Umstieg der Anleger in Papiere mit besserer Reputation erzeugen eine durchaus rationale Insolvenzerwartung. Ironischerweise galt die Konstellation einer alleinigen Abhängigkeit der nationalen Finanzpolitik von Kreditanbietern auf dem Euro-Finanzmarkt als erwünschtes ordnungspolitisches Disziplinierungsprinzip; sie erweist sich nun als nicht tragfähig. Die Alternative sind permanente Rettungsschirme oder Euro-Bonds. In beiden Fällen wird die währungspolitisch schwache Stellung nationaler Schuldner durch implizite Zinszahlungen und Vermögensgarantien wirtschaftlich stärkerer Länder kompensiert. Die damit verbundenen Einkommens- und Vermögensverluste sind der Preis, den exportorientierte Länder wie die Bundesrepublik für die Bewahrung des Euro zahlen müssen. --
    Keywords: Staatsverschuldung,Europäische Währungsunion,Goldstandard,TARGET2
    JEL: E5 H6
    Date: 2011
  48. By: Lars Osberg; Andrew Sharpe
    Abstract: This report presents new estimates of the Index of Economic Well-being (IEWB) and its four domains (consumption flows, stocks of wealth, economic equality and economic security) for Canada and the provinces for the 1981-2010 period. It finds that the IEWB advanced at a 0.78 per cent average annual growth rate over the period, below the 1.32 per cent growth for GDP per capita. Both the consumption and wealth domains experienced solid advances over the period, but these developments were offset by declines in the equality and economic security domains. The recent recession caused a decline in the IEWB for Canada, driven by declines in wealth and economic security.
    Keywords: well-being, economic measurement, IEWB, consumption, wealth, equality, economic security
    JEL: E01 I31 E21 E24
    Date: 2011–09
  49. By: Rose, Andrew K; Spiegel, Mark
    Abstract: While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.
    Keywords: dollar; exchange rate; Federal Reserve; financial crisis; illiquidity; swap; TAF
    JEL: E44 E58 F31 F33 F41 F42 G15 O24
    Date: 2011–09
  50. By: Muhammad, Shahbaz; Lean, Hooi Hooi
    Abstract: This paper assesses the relationship among energy consumption, financial development, economic growth, industrialization and urbanization in Tunisia from 1971-2008. The autoregressive distributed lag bounds testing approach to cointegration and Granger causality tests are employed for the analysis. The result confirms the existence of long-run relationship between energy consumption, economic growth, financial development, industrialization and urbanization in Tunisia. Moreover, financial development, industrialization and urbanization are positively related to energy consumption especially in the long-run. Long-run bidirectional causal relationships are found between financial development and energy consumption, financial development and industrialization, and industrialization and energy consumption. Hence, sound and developed financial system which can attract investors, boost the stock market and improve the efficiency of economic activities should be encouraged in the country. Nevertheless, promoting industrialization and urbanization can never be left out from the process of development. On the other hand, the unidirectional causality from energy consumption to financial development implies that government should implement loose monetary policy which will stimulates investment activities and enhances economic growth and hence the energy consumption.
    Keywords: Energy Consumption; Financial Development; Economic Growth
    JEL: E44 Q4
    Date: 2011–09–01
  51. By: Andreas Nastansky; Hans Gerhard Strohe
    Abstract: Vektorfehlerkorrekturmodelle (VECM) erlauben es, Abhängigkeiten zwischen den Veränderungen mehrerer potenziell endogener Variablen simultan zu modellieren. Die Idee, ein langfristiges Gleichgewicht gleichzeitig mit kurzfristigen Veränderungen zu modellieren, lässt sich vom Eingleichungsansatz des Fehlerkorrekturmodells (ECM) zu einem Mehrgleichungsansatz für Variablenvektoren (VECM) verallgemeinern. Die Anzahl der kointegrierenden Beziehungen und die Koeffizientenmatrizen werden mit dem Johansen-Verfahren geschätzt. An einer einfachen Verallgemeinerung einer Konsumfunktion wird die Schätzung und Wirkungsweise eines VECM für Verbrauch, Einkommen und Aktienkurse in Deutschland gezeigt. Die Anwendung der Beveridge- Nelson-(BN)-Dekomposition auf vektorautoregressive Prozesse ermöglicht zudem, Abhängigkeiten zwischen den aus den kointegrierten Zeitreihen extrahierten zyklischen Komponenten zu schätzen.
    Keywords: Beveridge-Nelson-Decomposition, Johansen Procedure, Cointegration, Vector Error Correction Model, Wealth Effect
    JEL: E21 C51 C32
    Date: 2011–08
  52. By: Stefano Grassi (Aarhus University and CREATES); Tommaso Proietti (University of Sydney)
    Abstract: An important issue in modelling economic time series is whether key unobserved components representing trends, seasonality and calendar components, are deterministic or evolutive. We address it by applying a recently proposed Bayesian variable selection methodology to an encompassing linear mixed model that features, along with deterministic effects, additional random explanatory variables that account for the evolution of the underlying level, slope, seasonality and trading days. Variable selection is performed by estimating the posterior model probabilities using a suitable Gibbs sampling scheme. The paper conducts an extensive empirical application on a large and representative set of monthly time series concerning industrial production and retail turnover. We find strong support for the presence of stochastic trends in the series, either in the form of a time-varying level, or, less frequently, of a stochastic slope, or both. Seasonality is a more stable component: only in 70% of the cases we were able to select at least one stochastic trigonometric cycle out of the six possible cycles. Most frequently the time variation is found in correspondence with the fundamental and the first harmonic cycles. An interesting and intuitively plausible finding is that the probability of estimating time-varying components increases with the sample size available. However, even for very large sample sizes we were unable to find stochastically varying calendar effects.
    Keywords: Bayesian model selection, stationarity, unit roots, stochastic trends, variable selection.
    JEL: E32 E37 C53
    Date: 2011–09–02
  53. By: Franz Alonso Hamann Salcedo; Luis Ignacio Lozano Espitia; Luis -Fernando Mejía
    Abstract: En este trabajo se cuantifica el impacto macroeconómico del beneficio tributario al capital establecido en Colombia en el 2003, en el contexto de un modelo de equilibrio general dinámico de previsión perfecta con oferta de trabajo endógena. Los ejercicios de calibración indican que hay ganancias importantes en términos de bienestar, acumulación de capital y empleo de fijar el beneficio tributario al capital de forma permanente, independientemente de cómo el gobierno reajuste su presupuesto. En el corto plazo, sin embargo, el impacto sobre el empleo y el producto depende de la forma en la que el gobierno financia el déficit generado por el beneficio tributario. Si las rigideces presupuestales obligan al gobierno a recurrir a impuestos distorsionantes sobre el consumo y/o el trabajo, el empleo y el producto caen en el corto plazo. Por el contrario, si el gobierno puede acudir a impuestos de suma fija para el cierre presupuestal, el empleo y el producto aumentan en el corto plazo. Se concluye que si bien el beneficio tributario al capital puede generar un efecto negativo sobre el empleo en el corto plazo, este efecto proviene del impacto negativo sobre la oferta de trabajo como consecuencia de la necesidad de financiar el beneficio con impuestos distorsionantes y no de un efecto sustitución en la demanda por trabajo, que es el efecto de corto plazo sobre el que se ha hecho énfasis en el debate de política.
    Date: 2011–08–30
  54. By: Lars Osberg; Andrew Sharpe
    Abstract: This report presents new estimates of the Index of Economic Well-being (IEWB) and its four domains (consumption flows, stocks of wealth, economic equality, and economic security) for 14 OECD countries for the 1980-2009 period. It finds that in 2009 Norway had the highest level of economic well-being and Spain the lowest. Canada ranked ninth among the fourteen countries. Over the 1980-2009 period Denmark enjoyed the most rapid increase in economic well-being, and the Netherlands the slowest. In all 14 countries rate of advance of the IEWB was less than that of GDP per capita. Economic well-being, therefore, has not advanced as rapidly as GDP per capita.
    Keywords: well-being, economic measurement, IEWB, consumption, wealth, equality, economic security
    JEL: E01 I31 E21 E24
    Date: 2011–09
  55. By: Milad Zarin-Nejadan (Institute of economic research IRENE, Faculty of Economics, University of Neuchâtel, Switzerland)
    Abstract: The relative size of the State in industrialized economies has increased dramatically during the past century giving rise to legitimate fears that such a trend might end up having an adverse impact on growth. This paper explores the relationship between the development of government activities and economic growth. It starts by evoking problems related to the measurement of the public sector before reviewing statistical evidence on the long-term growth of the share of the State in the economy. It then provides a number of explanations for this phenomenon including those pertaining to the functioning of the political system itself thereby pointing towards inefficiencies. The next step is to explore the principal avenues along which government interventions can positively or negatively interfere with the growth potential of the economy. It turns out that while public expenditures – especially those responding to market failures – tend to be favorable to growth, most taxes are growth-hindering. The final part of the paper singles out some pitfalls in the empirical investigation of this relationship. The conjecture is that the nonlinear and possibly endogenous nature of the hypothesized nexus can explain the lack of consensus in empirical studies conducted so far.
    Keywords: Government growth, Public expenditure, Taxes, Economic growth, Endogenous growth
    JEL: E62 H11 H21 H50 O40
    Date: 2011–08
  56. By: Sambit Bhattacharyya; Paul Collier
    Abstract: As poor countries deplete their natural resources, for increased consumption to be sustainable some of the revenues should be invested in other public assets. Further, since such countries typically have acute shortages of public capital, the finance from resource depletion is an opportunity for needed public investment. Using a new global panel dataset on public capital and resource rents covering the period 1970 to 2005 we find that, contrary to these expectations, resource rents significantly and substantially reduce the public capital stock. This is more direct evidence for a policy-based ‘resource curse’ than the conventional, indirect evidence from the relationships between resource endowments, growth and income. The adverse effect on public capital is mitigated by good economic and political institutions and worsened by GDP volatility and ethnic fractionalization. Rents from depleting resources have more adverse effects than those that are sustainable. Our main results are robust to a variety of controls, and to instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, as well as across different samples and data frequencies.
    Keywords: Natural resources; public capital
    JEL: E0 O1
    Date: 2011
  57. By: Nedergaard, Peter
    Abstract: In spite of the exponentially increasing volume of the CDM system of the Kyoto Protocol, very few have so far come up with scholarly political economy analysis of its governance system. Based on interviews with the CDM system’s main stakeholders as well as through scrutiny of CDM related documents, this paper will contribute to filling this hole. In this respect, it is assumed that the political economy analysis can be based on two analytical concepts: First, the CDM governance system has to be legitimate (the political side of the system), i.e. seen as broadly acceptable and accountable by its stakeholders as well as the broader public. Second, the CDM governance system has to be efficient (the economic side of the system), i.e. involve as few transaction costs as possible. Based on these concepts, the paper analyses the present balances of the CDM governance system.
    Keywords: CDM; climate policy; legitimacy; efficiency
    JEL: E0
    Date: 2011
  58. By: Liu, Jing; Cao, Shutao
    Abstract: This paper studies the industry productivity dynamics in China’s manufacturing sector from 1998 to 2007, and in particular, explores to what extent the privatization of state-owned enterprises (SOEs) contributes to the aggregate productivity growth. Our results show that, though non-SOEs on average are more productive than SOEs, the average productivity growth among SOEs is greater than the privately-owned firms. Industry concentration, taxation, and credit market all account for this difference in growth between SOEs and non-SOEs. In addition, industry productivity growth is mainly attributed to the growth of non-SOEs, entry of non-SOE firms, and the exit of SOEs. However, non-SOE firms that are transformed directly from SOEs make a small but negative contribution to industry productivity growth.
    Keywords: Productivity Growth, Industry Dynamics, Ownership Change, Reallocation
    JEL: E6 D24 O4
    Date: 2011–04–15

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