nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒10‒01
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium. By Meixing Dai; Moïse Sidiropoulos
  2. How Flexible Can Inflation Targeting Be and Still Work? By Kenneth N. Kuttner; Adam S. Posen
  3. Medium Term Business Cycles in Developing Countries By Comin, Diego; Loayza, Norman; Pasha, Farooq; Servén, Luis
  4. How Flexible Can Inflation Targeting Be and Still Work? By Kenneth Kuttner; Adam Posen
  5. Discretion versus Rule-Based Fiscal Policy in New EU Economies By Stanova N.
  6. Monetary policy and sunspot fluctuation in the U.S. and the Euro area By Hirose, Yasuo
  7. Endogenous Credit Cycles By Chao Gu; Joseph Haslag
  8. Macroeconomic Shocks and the Fiscal Stance within the EU: A Panel Regression Analysis By Dybczak, Kamil; Melecky, Martin
  9. Optimal Monetary Policy with Endogenous Entry and Product Variety By Florin O. Bilbiie; Ippei Fujiwara; Fabio Ghironi
  10. Monetary policy in a non-representative agent economy: A survey By Michał Brzoza-Brzezina; Marcin Kolasa; Grzegorz Koloch; Krzysztof Makarski; Michal Rubaszek
  11. Overview of the Evolution of China's Central Bank and Monetary Policy: Correlation to the European Union By Skold, Alida S.
  12. How to Restore Sustainability of the Euro? By Kari E.O. Alho
  13. Eurozone inflation differentials and the ECB By Pirovano M.; Van Poeck A.
  14. Optimal Unemployment Insurance Over the Business Cycle By Camille Landais; Pascal Michaillat; Emmanuel Saez
  15. Fiscal Policy in Debt Constrained Economies By Mark A. Aguiar; Manuel Amador
  16. Estimating US persistent and transitory monetary shocks: implications for monetary policy By Juan Angel Lafuente; Rafaela Pérez; Jesús Ruiz
  17. International Recessions By Fabrizio Perri; Vincenzo Quadrini
  18. Expectations, Employment and Prices: A Suggested Interpretation of the New ‘Farmerian’ Economics By Marco Guerrazzi
  19. Fiscal Multipliers in Recession and Expansion By Alan J. Auerbach; Yuriy Gorodnichenko
  20. The Stability and Growth Pact: crisis and reform By Ludger Schuknecht; Philippe Moutot; Philipp Rother; Jürgen Stark
  21. Floating against the tide : Spanish monetary policy, 1870-1931 By Pablo Martín-Aceña; Elena Martínez Ruiz; Pilar Noguer Marco
  22. Okun's law revisited. Is there structural unemployment in developed countries? By Ivan O. Kitov
  23. Labor Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing By Serdar Kabaca
  24. Financial-Friction Macroeconomics with Highly Leveraged Financial Institutions By Luk, Sheung Kan; Vines, David
  25. Analysing Risk Management in Banks: Evidence of Bank Efficiency and Macroeconomic Impact By Awojobi, Omotola; Amel, Roya; Norouzi, Safoura
  26. Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation By Juha Tervala
  27. Sistemas Publicos de Pensiones y la crisis fiscal en la zona euro. Enseñanzas para America Latina By Javier Alonso; Rafael Domenech; David Tuesta
  28. Informal Sector and Economic Growth: The Supply of Credit Channel By Massenot, Baptiste; Straub, Stéphane
  29. Means-Tested Subsidies and Economic Performance Since 2007 By Casey B. Mulligan
  30. Is Ireland really the role model for austerity? By Stephen Kinsella
  31. Costly Contracts and Consumer Credit By Igor Livshits; James MacGee; Michèle Tertilt
  32. Political Pressure on the National Bank of Slovakia By Peter Kukuk; Adam Gersl
  33. Foreclosures, House Prices, and the Real Economy By Atif Mian; Amir Sufi; Francesco Trebbi
  34. Decisions on investment allocation in the post-Keynesian growth models By Araujo, Ricardo Azevedo; Teixeira, Joanílio Rodolpho
  35. The Social Stratification of Social Risks: Class and Responsibility in the 'New' Welfare State By Olivier Pintelon; Bea Cantillon; Karel Van den Bosch; Christopher T. Whelan
  36. Precautionary price stickiness By James Costain; Anton Nakov
  37. Factor Shares, the Price Markup, and the Elasticity of Substitution between Capital and Labor By Raurich, Xavier; Sala, Hector; Sorolla, Valeri
  38. Bubbles, Banks, and Financial Stability By Kosuke Aoki; Kalin Nikolov
  39. Remittances and Financial Openness By Michel Beine; Elisabetta Lodigiani; Robert Vermeulen
  40. Performance of manufacturing industry in Indian states: who loose and why? By Sarker, Debnarayan; Das, Debraj
  41. The Financial Crisis and the Well-Being of Americans By Angus S. Deaton

  1. By: Meixing Dai; Moïse Sidiropoulos
    Abstract: Several recent studies have shown that, when fiscal and monetary authorities play a Stackelberg game, central bank opacity has a fiscal disciplining effect in the sense that it induces the government to reduce taxes and public expenditures, leading hence to lower inflation and output distortions, and lower macroeconomic variability. We show in this paper that, in a Nash equilibrium, the government is still disciplined by central bank opacity. However, the disciplining effect on the level and variability of inflation and the output gap is dominated by the direct effect of opacity.
    Keywords: Distortionary taxes, output distortions, central bank transparency (opacity), fiscal disciplining effect.
    JEL: E52 E58 E62 E63 H30
    Date: 2011
  2. By: Kenneth N. Kuttner (Oberlin College, Department of Economics); Adam S. Posen (Peterson Institute for International Economics)
    Abstract: This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecasters' predictions at successive forecast horizons, to gauge the perceived flexibility of the central bank's response to macroeconomic shocks. Based on this criterion, there is no evidence to suggest that the Bank of England's inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve.
    Keywords: Inflation targeting, inflation expectations, monetary policy
    JEL: E42 E58 E65
    Date: 2011–09
  3. By: Comin, Diego; Loayza, Norman; Pasha, Farooq; Servén, Luis
    Abstract: Business cycle fluctuations in developed economies (N) tend to have large and persistent effects on developing countries (S). We study the transmission of business cycle fluctuations for developed to developing economies with a two-country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. Consistent with the model we observe that the flow of technologies from N to S co-moves positively with output in both N and S. After calibrating the model to Mexico and the U.S., it can explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output.
    Keywords: business cycles in developing countries; co-movement between developed and developing economies; extensive margin of trade; FDI; product life cycle; volatility
    JEL: E3 O3
    Date: 2011–09
  4. By: Kenneth Kuttner (Williams College); Adam Posen
    Abstract: This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecasters’ predictions at successive forecast horizons, to gauge the perceived flexibility of the central bank’s response to macroeconomic shocks. Based on this criterion, there is no evidence to suggest that the Bank of England’s inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve.
    JEL: E42 E58 E65
    Date: 2011–09
  5. By: Stanova N.
    Abstract: This paper aims to evaluate fiscal policy as a macroeconomic stabilization tool in the new EU member countries using a vector autoregression (VAR) framework. The combined results of the analysis of impulse response functions and of the aggressiveness of fiscal discretion suggest that: 1. Shocks to government expenditures and revenues yield rather minor stimulating effects on output. 2. Periods with higher output growth tend to be linked with more loosened systematic policy levels. 3. There is evidence that higher output volatility is associated with the aggressive use of fiscal policy, whilst fiscal discretion does not seem to stimulate lasting output growth. Overall, this evidence together with the increased debt financing risks of these emerging economies favours the use of rules-based fiscal policy rather than (aggressive) fiscal discretion.
    Date: 2011–09
  6. By: Hirose, Yasuo
    Abstract: We estimate a two-country open economy version of the New Keynesian DSGE model for the U.S. and the Euro area, using Bayesian techniques that allow for both determinacy and indeterminacy of the equilibrium. Our empirical analysis shows that the worldwide equilibrium is indeterminate due to a passive monetary policy in the Euro area, even if U.S. policy is aggressive enough. We demonstrate that the impulse responses under indeterminacy exhibit different dynamics than those under determinacy and that sunspot shocks affect the Euro economy to a substantial degree, while the transmission of sunspots to the U.S. is limited.
    Keywords: Monetary Policy; Indeterminacy; Sunspot Shock; Open Economy Model; Bayesian Analysis
    JEL: E52 F41 C11 C62
    Date: 2010–11
  7. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: We build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the timing mismatch is driven by a real shock (i.e., preference shock).
    Keywords: liquidity problem, timing mismatch, leveraging, liquidity shock, settlement risk, repurchase agreement, consumption shock
    JEL: E44 E52
    Date: 2011–09–22
  8. By: Dybczak, Kamil; Melecky, Martin
    Abstract: The recent global financial crisis has had a diverse effect on countries’ fiscal stance, especially throughout the EU. This paper examines the impact of macroeconomic shocks, including those to government revenues and expenditures, on EU countries’ fiscal stance, on aggregate, and within the EU’s sub-regions as defined by the length of countries’ membership in the EU and their level of indebtedness. The fiscal stance is measured by means of the government deficit, and the impact of macroeconomic shocks is examined using impulse responses from a structural vector autoregression (SVAR) model estimated on annual panel data. The analyzed system of macroeconomic variables includes, government revenues and expenditures, GDP growth, CPI inflation, the interest rate, the terms of trade, and the real effective exchange rate. The paper discusses the policy implications and the challenges for the EU and its sub-regions concerning the fiscal policy setting and balanced fiscal stance.
    Keywords: Macroeconomic shocks; Fiscal Stance; European Union; Panel Data Analysis; Structural Vector Autoregression Models
    JEL: E62 H68 E37
    Date: 2011–09
  9. By: Florin O. Bilbiie (Assistant Professor, Centre d'Economie de la Sorbonne, Maison des Sciences Economiques and CEPR (E-mail:; Ippei Fujiwara (Director and Senior Economist, Financial Markets Department, Bank of Japan (E-mail:; Fabio Ghironi (Associate Professor, Boston College and NBER (E-mail:
    Abstract: We show that deviations from long-run stability of product prices are optimal in the presence of endogenous producer entry and product variety in a sticky-price model with monopolistic competition in which price stability would be optimal in the absence of entry. Specifically, a long-run positive (negative) rate of inflation is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentives for creating that variety under flexible prices, governed by the desired markup. Plausible preference specifications and parameter values justify a long-run inflation rate of two percent or higher. Price indexation implies even larger deviations from long-run price stability. However, price stability (around this non-zero trend) is close to optimal in the short run, even in the presence of time-varying flexible-price markups that distort the allocation of resources across time and states. The central bank uses its leverage over real activity in the long run, but not in the short run. Our results point to the need for continued empirical research on the determinants of markups and investigation of the benefit of product variety to consumers.
    Keywords: Entry, Optimal Inflation Rate, Price Stability, Product Variety, Ramsey-Optimal Monetary Policy
    JEL: E31 F32 E52
    Date: 2011–09
  10. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute; Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Grzegorz Koloch (National Bank of Poland, Economic Institute); Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics); Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: It is well-known that central bank policies affect not only macroeconomic aggregates, but also their distribution across economic agents. Similarly, a number of papers demonstrated that heterogeneity of agents may matter for the transmission of monetary policy on macro variables. Despite this, the mainstream monetary economics literature has so far been dominated by dynamic stochastic general equilibrium (DSGE) models with representative agents. This article aims to tilt this imbalance towards heterogeneous agents setups by surveying the main positive and normative findings of this line of the literature, and suggesting areas in which these models could be implemented. In particular, we review studies that analyze the heterogeneity of (i) households’ income, (ii) households’ preferences, (iii) consumers’ age, (iv) expectations, and (v) firms’ productivity and financial position. We highlight the results on issues that, by construction, cannot be investigated in a representative agent framework and discuss important papers modifying the findings from the representative agent literature.
    Keywords: Heterogeneous Agents; Monetary Policy
    JEL: E31 E32 E43 E44 E52
    Date: 2011
  11. By: Skold, Alida S.
    Abstract: As an innovator in the financial system, China was the first to use paper currency. Eventually the form of currency was held responsible for devastating inflation and was abandoned during the Ming Dynasty. Going forward in time, uprisings and discontent have emphasized the importance of controlling inflation. The central bank is pivotal in issuing monetary policy to control inflation and to maintain financial stability as the government transforms itself from a planned economy to a mixed market economy. The transforming economy is moving toward a free market system through series of economic reforms. The correlation between China’s structure and the European Union’s structure provides opportunities for further study to determine next steps for both.
    Keywords: China; central bank; monetary policy; inflation; economy
    JEL: E0 H60 E5
    Date: 2011–07–17
  12. By: Kari E.O. Alho
    Abstract: We reassess the result of unsustainability of the euro with respect to inflation differentials claimed by Wickens (2007) by specifying an open-economy version of a two-region New Keynesian model for EMU and demonstrate that the result by Wickens does not hold in general. We are able to derive a result that the model is determinate for a wide range of policy rules so that the sustainability of the euro area and the member countries is reached over time with respect to supply and demand shocks and emerged imbalances in price levels and competitiveness. We then enlarge the numerical analysis to consider EMU and sustainability in the case, prevailing currently, where a high debt country should both restore its competitiveness and its fiscal balance, and the policies re-quired from the single monetary policy and the national fiscal policies. Strong fiscal consolidation and far-reaching successful structural reforms are needed to reach sustainability in the sense that emerged imbalances in competitiveness and price levels and the threat of ever mounting debt levels could be eliminated over the medium run. We also illustrate how the current deflationary adjustment involves a major polarisation in economic developments within the euro area.
    JEL: E43 E52 E62
    Date: 2011–09–21
  13. By: Pirovano M.; Van Poeck A.
    Abstract: This paper presents new evidence on inflation differentials in the Euro Area from different perspectives, and extending the sample including the recent financial crisis. First, we give an informal analysis of the evolution of inflation dispersion and inflation differentials since the start of EMU. Second, we perform formal statistical analyses of the stability properties of inflation differentials in the period 1999-2010. Univariate and multivariate tests reject the null of stability of inflation differentials when conducted over the entire sample period. However, when the financial crisis is excluded, the null of stability is not rejected for the large majority of countries. This finding implies the beginning of a new tendency since the global financial turmoil, and new challenges for the common monetary policy. Finally, we analyze the determinants of inflation differentials, empirically testing a number of theories including price level equalization, productivity differentials, differences in cyclical positions, labor and product market rigidities. We conclude that inflation differentials are not the result of equilibrating, transitory forces, but rather of persistent structural and country-specific factors. This calls for structural reforms in labor and product markets, and countercyclical fiscal policy measures at the individual country level. As inflation differentials pose a serious challenge for the monetary policy of the ECB, we further believe that the ECB should be equipped with additional policy instruments to cope with them in a more direct way.
    Date: 2011–09
  14. By: Camille Landais; Pascal Michaillat; Emmanuel Saez
    Abstract: This paper characterizes optimal unemployment insurance (UI) over the business cycle using a model of equilibrium unemployment in which jobs are rationed in recession. It offers a simple optimal UI formula that can be applied to a broad class of equilibrium unemployment models. In addition to the usual statistics (risk aversion and micro-elasticity of unemployment with respect to UI), a macro-elasticity appears in the formula to capture the macroeconomic impact of UI on unemployment. In a model with job rationing, the formula implies that optimal UI is countercyclical. This result arises because in recession, jobs are lacking irrespective of job search. Therefore (1) a higher aggregate search effort cannot reduce aggregate unemployment much; and (2) individual search effort creates a negative externality by reducing other jobseekers' probability of finding a job as in a rat race. Hence the social benefits of job search are low. In a calibrated model, optimal UI increases significantly in recession. This quantitative result holds whether the government adjusts the level or duration of benefits; whether it balances its budget each period or uses deficit spending.
    Keywords: Unemployment insurance, business cycle, job rationing, matching frictions
    JEL: E24 E32 H21 H23
    Date: 2011–09
  15. By: Mark A. Aguiar; Manuel Amador
    Abstract: We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the private agents are impatient relative to the international interest rate and the economy is subject to sovereign debt constraints. The front loading of labor taxes allows the economy to build a large (aggregate) debt position in the presence of limited commitment. We show that a similar result holds in a closed economy with imperfect inter-generational altruism.
    JEL: E62 F41 H63
    Date: 2011–09
  16. By: Juan Angel Lafuente; Rafaela Pérez; Jesús Ruiz
    Abstract: This paper proposes an estimation method for persistent and transitory monetary shocks using the monetary policy modeling proposed in Andolfatto et al, [Journal of Monetary Economics, 55 (2008), pp.: 406-422]. The contribution of the paper is threefold: a) to deal with non-Gaussian innovations, we consider a convenient reformulation of the state-space representation that enables us to use the Kalman filter as an optimal estimation algorithm. Now the state equation allows expectations play a significant role in explaining the future time evolution of monetary shocks; b) it offers the possibility to perform maximum likelihood estimation for all the parameters involved in the monetary policy, and c) as a consequence, we can estimate the conditional probability that a regime change has occurred in the current period given an observed monetary shock. Empirical evidence on US monetary policy making is provided through the lens of a Taylor rule, suggesting that the Fed’s policy was implemented accordingly with the macroeconomic conditions after the Great Moderation. The use of the particle filter produces similar quantitative and qualitative findings. However, our procedure has much less computational cost.
    Keywords: Kalman filter, Non-normality, Particle filter, Monetary policy
    JEL: C4 F3
    Date: 2011–09
  17. By: Fabrizio Perri (University of Minnesota and Federal Reserve Bank of Minneapolis (email:; Vincenzo Quadrini (University of Southern California)
    Abstract: The 2008-2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions. Countries also experienced large and synchronized contractions in the growth of financial flows. In this paper we present a two-country model with financial markets frictions where credit-driven recessions can explain these features of the recent crisis. A credit contraction can emerge as a self-fulling equilibrium caused by pessi- mistic but fully rational expectations. As a result of the credit contraction, in a financially integrated world, countries experience large and, endogenously synchronized, declines in asset prices and economic activity ( international recessions).
    Date: 2011–09
  18. By: Marco Guerrazzi
    Abstract: This paper aims at providing a critical assessment of the new ‘Farmerian’ economics, i.e. the recent Farmer’s attempt to provide a new micro-foundation of the General Theory grounded on modern search and business cycle theories. Specifically, I develop a theoretical model that summarizes the main arguments of the suggested approach by showing that a special importance has to be attached to the search mechanism, the choice of units and ‘animal spirits’ modelling. Thereafter, referring to self-made real-business-cycle experiments, I discuss the main empirical implications of the resulting framework. Finally, I consider its policy implications by stressing the problematic nature of demand management interventions and the advisability of extending the role of the central bank in preventing financial bubbles and crashes.
    Keywords: New ‘Farmerian’ Economics, Search Theory, Demand Constrained Equilibrium, Bubbles and Crashes.
    JEL: E12 E24
    Date: 2011–01–05
  19. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: In this paper, we estimate government purchase multipliers for a large number of OECD countries, allowing these multipliers to vary smoothly according to the state of the economy and using real-time forecast data to purge policy innovations of their predictable components. We adapt our previous methodology (Auerbach and Gorodnichenko, 2011) to use direct projections rather than the SVAR approach to estimate multipliers, to economize on degrees of freedom and to relax the assumptions on impulse response functions imposed by the SVAR method. Our findings confirm those of our earlier paper. In particular, GDP multipliers of government purchases are larger in recession, and controlling for real-time predictions of government purchases tends to increase the estimated multipliers of government purchases in recession. We also consider the responses of other key macroeconomic variables and find that these responses generally vary over the cycle as well, in a pattern consistent with the varying impact on GDP.
    JEL: E32 E62
    Date: 2011–09
  20. By: Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Philippe Moutot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Philipp Rother (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jürgen Stark (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The sovereign debt crisis in the euro area is a symptom of policy failures and deficiencies in – among other things – fiscal policy coordination. The first nine years of the euro were not used effectively in order to improve public finances, while the Stability and Growth Pact was watered down. Spillovers from the financial and economic crisis compounded fiscal difficulties in the euro area, especially in certain member countries. This paper looks back at the history of fiscal policies and rules in Economic and Monetary Union (EMU). It makes proposals to strengthen fiscal policy governance that go well beyond the legislation set to be adopted in autumn 2011. The authors consider these additional governance measures to be essential for effective policy coordination and sound public finances in the future. JEL Classification: H6, E6
    Keywords: fiscal rules, Stability and Growth Pact, fiscal deficits, public debt, EU institutional reform
    Date: 2011–09
  21. By: Pablo Martín-Aceña; Elena Martínez Ruiz; Pilar Noguer Marco
    Abstract: The gold standard began to emerge as a universal monetary system in the late 1870s, and it had spread throughout the world economy by 1900. It was unusual for nations to be off the gold standard, and it meant that they were detached from the international financial community. Spain never joined the gold standard club in any of its varieties, either before or after 1914. Unlike the vast majority of the European currencies, the peseta’s exchange rate fluctuated, sometimes widely, against gold and gold currencies. Gold convertibility was suspended in 1883 and never resumed. Nevertheless, the monetary authorities were aware that the Spanish economy, off the gold standard, was an outlier in the international economy and made plans to put the peseta on gold both before and after 1914.Why Spain never adopted the gold standard is a complex issue, and our paper offers a possible answer by examining the behaviour of an issuing bank that refused to accept, or resisted, its role as a central bank. Our study also provides a basis for a comparison between the Bank of Spain, some of its features and policies, with other peripheral issuing institutions. Moreover, our paper encompasses both the pre-war and the post-war periods, which allows us to present both the similarities and the differences in the exchange and monetary policies of the Spanish authorities during the era of the classical gold standard and the years of the gold exchange standard
    Keywords: Gold standard, Monetary policy, Bank of Spain
    JEL: E42 E58 N10
    Date: 2011–09
  22. By: Ivan O. Kitov
    Abstract: Okun's law for the biggest developed countries is re-estimated using the most recent data on real GDP per capita and the rate of unemployment. Our results show that the change in unemployment rate can be predicted with a high accuracy. The link needs the introduction of a structural break which might be caused by the change in monetary policy or/and in measurement units. Statistically, the link between the studied variables is characterized by the coefficient of determination between 0.40 (Australia) and 0.84 (the USA). The residual errors can be associated with measurement errors. The obtained results suggest the absence of structural unemployment in the studied developed countries.
    Date: 2011–07
  23. By: Serdar Kabaca (University of British Columbia (UBC), Department of Economics)
    Abstract: This paper contributes to the literature by documenting labor income share fluctuations in emerging economies and proposing an explanation for them. We show that emerging markets differ from developed markets in terms of changes in the labor share over the business cycle. Labor share is more volatile in emerging markets and is pro-cyclical with output, especially in countries facing counter-cyclical interest rates. On the contrary, labor share in developed markets is more stable and slightly counter-cyclical with output. A frictionless RBC model cannot account for these facts. We introduce working capital into an RBC model, which generates liquidity need for labor payments. The main result is that the behavior of the cost of borrowing along with working capital mechanisms can predict the right sign of the comovement between labor share and output, and can partly be responsible for the volatility of labor share. We also show that imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labor share but also help better explain some of the striking business cycle regularities in emerging markets such as strongly pro-cyclical investment and counter-cyclical net exports.
    Keywords: labor income share, emerging markets, working capital, credit constraints
    JEL: E25 F41 E44
    Date: 2011–09
  24. By: Luk, Sheung Kan; Vines, David
    Abstract: This paper adds a highly-leveraged financial sector to the Ramsey model of economic growth and shows that this causes the economy to behave in a highly volatile manner: doing this strongly augments the macroeconomic effects of aggregate productivity shocks. Our model is built on the financial accelerator approach of Bernanke, Gertler and Gilchrist (BGG), in which leveraged goods-producers, subject to idiosyncratic productivity shocks, borrow from a competitive financial sector. In the present paper, by contrast, it is the financial institutions which are leveraged and subject to idiosyncratic productivity shocks. Financial institutions can only obtain their funds by paying an interest rate above the risk-free rate, and this risk premium is anti-cyclical, and so augments the effects of shocks. Our parameterisation, based on US data, is one in which the leverage of the financial sector is two and a half times that of the goods-producers in the BGG model. This causes a much more significant augmentation of aggregate productivity shocks than that which is found in the BGG model.
    Keywords: financial accelerator; highly leveraged financial institutions; leverage; volatility
    JEL: E22 E32 E44
    Date: 2011–09
  25. By: Awojobi, Omotola; Amel, Roya; Norouzi, Safoura
    Abstract: The recent Global Economic meltdown triggered by the subprime mortgage crisis of United States in 2007 and its adverse effect on financial markets and participants in the financial industry worldwide have resulted in a capital management crisis in most financial institutions especially banks. This study is a case for the Nigerian banking industry, focusing on factors affecting risk management efficiency in banks. For empirical investigation, we employed Panel regression analysis taking a stratum of time series data and cross-sectional variants of macro and bank-specific factors for period covering 2003 to 2009. Result for panel regression indicates that risk management efficiency in Nigerian banks is not just affected by bank-specific factors but also by macroeconomic variables. This describes the pro-cyclicality of bank performance in the Nigerian banking sector. As it stands, the sufficiency of Basel principles for risk management is doubtful because asset quality varies with business cycles.
    Keywords: Risk management; Nigerian banks; capital adequacy; Basel; cyclicality
    JEL: E31 G31 G21
    Date: 2011–04–06
  26. By: Juha Tervala
    Abstract: This study shows that the learning by doing (LBD) effect has substantial, both quantitative and qualitative, consequences for the international transmission of monetary policy. LDB implies that a country can increase its productivity-increasing skill level, at the expense of the neighbour, by competitive devaluation engineered through low interest rates. If measured by the cumulative change in output after 12 quarters, LBD increases the harmful effect of competitive devaluation on foreign output by 85Ð125%, when compared to the case without it. If LBD is sufficiently strong and the cross-country substitutability is high (low), it reverses the effect of monetary policy on foreign (domestic) welfare into negative (positive). Moreover, a combination of a high crosscountry substitutability and a sufficiently strong LDB effect implies that competitive devaluation increases both domestic output and welfare, at the expense of foreign output and welfare.
    Keywords: Beggar-thyself, beggar-thy-neighbour, competitive devaluation, learning by doing, open economy macroeconomics
    JEL: E52 F30 F41
    Date: 2011–09
  27. By: Javier Alonso; Rafael Domenech; David Tuesta
    Abstract: Este trabajo analiza las circunstancias que han dado lugar a las reformas de los sistemas de pensiones en Europa y las medidas adoptadas, con la finalidad de extraer algunas lecciones que pueden ser de utilidad para los paises de America Latina.
    Keywords: Pensiones, deficit fiscal, deuda actuarial, Europa, Latinoamerica
    JEL: E32 C22 E27
    Date: 2011–05
  28. By: Massenot, Baptiste; Straub, Stéphane
    Abstract: A standard view holds that removing barriers to entry and improving judicial enforcement would reduce informality and boost investment and growth. We show, however, that this conclusion may not hold in countries with a concentrated bank- ing sector or with low financial openness. When the formal sector becomes larger in those countries, more entrepreneurs become creditworthy and the higher pres- sure in the credit market increases the interest rate. This reduces future capital accumulation. We show some empirical evidence consistent with these predictions.
    Date: 2011–09
  29. By: Casey B. Mulligan
    Abstract: The aggregate neoclassical growth model – with means-tested subsidies whose replacement rates began rising at the end of 2007 as its only impulse – produces time series for aggregate labor usage, consumption, investment, and real GDP that closely resemble actual U.S. time series. Despite having no explicit financial market, the model has investment fall steeply during the recession not because of any distortions with the supply of capital, but merely because labor is falling and labor is complementary with capital in the production function. Through the lens of the model, the fact that real consumption fell significantly below trend during 2008 suggests that labor usage per capita is expected to remain well below pre-recession levels for several years.
    JEL: E24 E32 H31 O41
    Date: 2011–09
  30. By: Stephen Kinsella (Department of Economics, University of Limerick; Geary Institute, Universty College Dublin)
    Abstract: This paper describes the causes and consequences of Ireland's economic crisis in the context of the policy solution implemented to contain that crisis: protracted fiscal austerity. I describe the causes of the recent crisis in Ireland, and look at the logic of austerity with a simple model. I compare the current crisis to the crisis of the 1980's, when fiscal austerity was touted as the trigger for the Celtic Tiger. I discuss the measures implemented to date in the current crisis, tracing their effects on sectors of Ireland's macroeconomy, and, finally, ask whether Ireland is, indeed, the role model for fiscal austerity in the Eurozone and beyond.
    Keywords: Ireland, Austerity, Fiscal Policy, Monetary Policy
    JEL: E00 E30 E62 E63
    Date: 2011–09–19
  31. By: Igor Livshits; James MacGee; Michèle Tertilt
    Abstract: Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, as well as increased dispersion of interest rates. Using the Survey of Consumer Finance and interest rate data collected by the Board of Governors, we find evidence supporting these predictions, as the dispersion of credit card interest rates nearly tripled, and the share of credit card debt of lower income households nearly doubled.
    JEL: E21 E49 G18 K35
    Date: 2011–09
  32. By: Peter Kukuk (UniCredit Bank, Prague); Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyzes political pressure on the National Bank of Slovakia, using the Havrilesky (1993) methodology based on media signalling. This methodology allows the pressure on the Central Bank of Slovakia to be compared with the pressure on the central banks to which the methodology was already applied, namely – the U.S. Federal Reserve, the Deutsche Bundesbank and the Czech National Bank. The analysis and the comparison reveals a relatively weak signalling of pressure in media in Slovakia and prevailance of financial sector representatives as the main commentaries on monetary policy of the National Bank of Slovakia in the period before euro adoption.
    Keywords: political economy, central banks, monetary policy
    JEL: E52 D78
    Date: 2011–09
  33. By: Atif Mian (University of California, Berkeley and NBER (email:; Amir Sufi (University of Chicago Booth School of Business and NBER (email:; Francesco Trebbi (University of British Columbia, CIFAR, and NBER (email:
    Abstract: A central idea in macroeconomic theory is that negative price effects from the leverage-induced forced sale of durable goods can amplify negative shocks and reduce economic activity. We examine this idea by estimating the effect of U.S. foreclosures in 2008 and 2009 on house prices, residential investment, and durable consumption. We show that states that require judicial process for a foreclosure sale have significantly lower rates of foreclosures relative to states that have no such requirement. Using state laws requiring a judicial foreclosure as an instrument for actual foreclosures, as well as a regression discontinuity design around state borders with differing foreclosure laws, we show that foreclosures have a large negative impact on house prices. Foreclosures also lead to a significant decline in residential investment and durable consumption. The magnitudes of the effects are large, suggesting that foreclosures have been an important factor in weak house price, residential investment, and durable consumption patterns during and after the Great Recession of 2007 to 2009.
    Date: 2011–09
  34. By: Araujo, Ricardo Azevedo; Teixeira, Joanílio Rodolpho
    Abstract: In this article the analysis developed by Feldman (1928) and Mahalanobis (1953) are incorporated to the Post-Keynesian Growth Model to consider the decisions of investment allocation on economic growth. By adopting this approach it is possible to study the interaction between distributive features and investment allocation which allows us to determine the rate of investment allocation according to the equilibrium decisions of investment and savings. Finally, an additional condition is added to the Post Keynesian Growth Model in order to fully characterise the equilibrium path in an extended version of this framework, where capital goods are also needed to produce capital goods.
    Keywords: Post-Keynesian growth model; structural change; multi-sector models
    JEL: E12 O41 E21
    Date: 2011–09
  35. By: Olivier Pintelon (Herman Deleeck Centre for Social Policy, University of Antwerp); Bea Cantillon (Herman Deleeck Centre for Social Policy, University of Antwerp); Karel Van den Bosch (Herman Deleeck Centre for Social Policy, University of Antwerp); Christopher T. Whelan (School of Sociology & Geary Institute, University College Dublin)
    Abstract: Welfare states are said to have evolved over the course of the past twenty years towards a ‘social investment’ model of welfare, characterised by a focus on equality of opportunity and upward social mobility combined with greater emphasis on individual responsibility. More or less concurrently, under the mantra of ‘individualisation’, scepticism has grown with regard to the relevance of traditional stratification schemes. This paper sets out to ascertain whether social class, i.e. intergenerational background, (still) affects the occurrence of ‘social risks’. Using SILC 2005 data, it considers the impact of social class (of origin) on a relevant selection of social risks: unemployment, ill-health, living in a jobless household, single parenthood, temporary employment, and low-paid employment. The results provide clear evidence of a continuing influence of social class. On this basis, we argue that a one-sided focus on individual responsibility could open the door to new forms of marginalisation.
    Keywords: Ireland, Austerity, Fiscal Policy, Monetary Policy
    JEL: E00 E30 E62 E63
    Date: 2011–09–19
  36. By: James Costain (Banco de España); Anton Nakov (Banco de España)
    Abstract: This paper proposes two models in which price stickiness arises endogenously even though fi rms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our fi rst specifi cation, fi rms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specifi cation derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since fi rms making suffi ciently large errors choose to adjust, both versions generate a strong “selection effect” in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fi ts microdata better than their specifi cation.
    Keywords: Nominal rigidity, logit equilibrium, state-dependent pricing, (S,s) adjustment, near-rational behavior
    JEL: E31 D81 C72
    Date: 2011–09
  37. By: Raurich, Xavier (CREB, Barcelona); Sala, Hector (Universitat Autònoma de Barcelona); Sorolla, Valeri (Universitat Autònoma de Barcelona)
    Abstract: In a Walrasian labor market, the labor income share is constant under the assumptions of a Cobb-Douglas production function and perfect competition. Given the observed decline of the labor share in recent decades, this paper relaxes these assumptions, proposes a time-series calculation of the aggregate price mark-up reflecting the degree of imperfect competition in the product market, and provides estimates of the elasticity of substitution under such product market imperfections. We focus on Spain and the U.S. and show that the elasticity of substitution is above one in Spain and below one in the U.S. We also show that the price markup drives the elasticity of substitution away from one, upwards in Spain, downwards in the U.S. These results are used to explain the declining path of the labor income share, common to both economies, and their contrasted patterns in terms of capital deepening.
    Keywords: elasticity of substitution, price markup, factor shares, capital deepening
    JEL: E22 E24 E25
    Date: 2011–09
  38. By: Kosuke Aoki (University of Tokyo (email:; Kalin Nikolov (European Central Bank(email:
    Abstract: This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2)When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.
    Keywords: Rational bubbles, Financial Frictions, Financial Stability
    JEL: E32 E44
    Date: 2011–09
  39. By: Michel Beine; Elisabetta Lodigiani; Robert Vermeulen
    Abstract: Migrant remittances increased strongly since the 1980s, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels that turn to be either less expensive and/or less risky than informal ones. One way of doing so is to increase their country’s financial openness, but this policy option might also generate additional costs in terms of macroeconomic volatility. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We apply a two-step method akin to two stage least squares to deal with the endogeneity of remittances and potential measurement errors. We find a strong positive statistical and economic effect of remittances on financial openness.
    Keywords: remittances; financial openness; government policy
    JEL: E60 F24 F41 O10
    Date: 2011–08
  40. By: Sarker, Debnarayan; Das, Debraj
    Abstract: This paper is an attempt to present the disparities of state-level performance of manufacturing industry on some key variables and tries to examine as to why the poorer states loose in relation to the richer ones. The study suggests that Indian states which could contribute to higher economic and administrative reforms during reform period by various fiscal measures did gain the boon of industrial achievements. So, in order to gain industrial uplift, the fiscal reforms of a state must help raising the income level of the particular state reflecting thereby to develop her economy by receiving the fruits of industrial development
    Keywords: Profit efficiency; Major Indian States; Fiscal Reforms; Strikes and Lockouts; Foreign Direct Investment; Electricity; Telephone
    JEL: E22 H76
    Date: 2011
  41. By: Angus S. Deaton
    Abstract: The Great Recession was associated with large changes in income, wealth, and unemployment, changes that affected many lives. Since January 2008, the Gallup Organization has been collecting daily data on 1,000 Americans each day, with a range of self-reported well-being (SWB) questions. I use these data to examine how the recession affected the emotional and evaluative lives of the population, as well as of subgroups within it. In the fall of 2008, around the time of the collapse of Lehman Brothers, and lasting into the spring of 2009, at the bottom of the stock market, Americans reported sharp declines in their life evaluation, sharp increases in worry and stress, and declines in positive affect. By the end of 2010, in spite of continuing high unemployment, these measures had largely recovered, though worry remained higher and life evaluation lower than in January 2008. The SWB measures do a much better job of monitoring short-run levels of anxiety as the crisis unfolded than they do of reflecting the evolution of the economy over a year or two. Even large macroeconomic shocks to income and unemployment can be expected to produce only small and hard to detect effects on SWB measures. SWB, particularly evaluation of life as a whole, is sensitive to question order effects. Asking political questions before the life evaluation question reduces reported life evaluation by an amount that dwarfs the effects of even the worst of the crisis; these order effects persist deep into the interview, and condition the reporting of hedonic experience and of satisfaction with standard of living. Methods for controlling these effects need to be developed and tested if national measures are to be comparable over space and time.
    JEL: E01 E32 H0 I31
    Date: 2011–09

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