|
on Macroeconomics |
|
Issue of 2011‒11‒07
forty-five papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Dewachter, Hans; Iania, Leonardo; Lyrio, Marco |
| Abstract: | We estimate a New-Keynesian macro-finance model of the yield curve incorporating learning by private agents with respect to the long-run expectation of inflation and the equilibrium real interest rate. A preliminary analysis shows that some liquidity premia, expressed as some degree of mispricing relative to no-arbitrage restrictions, and time variation in the prices of risk are important features of the data. These features are, therefore, included in our learning model. The model is estimated on U.S. data using Bayesian techniques. The learning model succeeds in explaining the yield curve movements in terms of macroeconomic shocks. The results also show that the introduction of a learning dynamics is not sufficient to explain the rejection of the extended expectations hypothesis. The learning mechanism, however, reveals some interesting points. We observe an important difference between the estimated inflation target of the central bank and the perceived long-run inflation expectation of private agents, implying the latter were weakly anchored. This is especially the case for the period from mid-1970s to mid-1990s. The learning model also allows a new interpretation of the standard level, slope, and curvature factors based on macroeconomic variables. In line with standard macro-finance models, the slope and curvature factors are mainly driven by exogenous monetary policy shocks. Most of the variation in the level factor, however, is due to shocks to the output-neutral real rate, in contrast to the mentioned literature which attributes most of its variation to long-run inflation expectations. |
| Keywords: | New-Keynesian model; Affine yield curve model; Learning; Bayesian estimation |
| JEL: | E43 E52 E44 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34461&r=mac |
| By: | Flávio Augusto Corrêa Basilio; JoséLuis da Costa Oreiro |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2009:44&r=mac |
| By: | Elmar Mertens |
| Abstract: | Firmly-anchored inflation expectations are widely viewed as playing a central role in the successful conduct of monetary policy. This paper presents estimates of trend inflation, based on information contained in survey expectations, the term structure of interest rates, and realized inflation rates. My application combines a variety of data sources at the monthly frequency and it can flexibly handle missing data arising from infrequent observations and limited data availability. In order to assess whether inflation expectations are anchored, uncertainty surrounding future changes in trend inflation--measured by a time-varying volatility of trend shocks--is estimated as well. ; Not surprisingly, the estimates suggest that trend inflation in the U.S. rose and fell again over the 1970s and 1980s, accompanied by increases in uncertainty. Considering the recent crisis, full-sample estimates of trend inflation fell quite a bit, but not too dramatically. In contrast, real-time estimates recorded sizeable increases of trend uncertainty during the crisis of 2007/2008, which have abated since then. |
| Keywords: | Inflation (Finance) - United States |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-42&r=mac |
| By: | Hatcher, Michael (Cardiff University) |
| Abstract: | This paper analyses the conduct of monetary policy in an environment where households’ desire to amass precautionary savings is influenced by fluctuations in the volatilities of disturbances that hit the economy. It uses a simple New Keynesian model with external habit formation that is augmented with demand and supply disturbances whose volatilities vary over time. If volatility fluctuations are ignored by policy, interest rates are set at a suboptimal level. The extent of ‘policy bias’ is relatively small but of greater importance the higher the degree of habit formation. The reason is that habit-forming preferences raise risk aversion, increasing the importance of the precautionary savings channel through which volatility fluctuations impact upon inflation and output. |
| Keywords: | Time-varying volatility; precautionary saving; monetary policy; DSGE models. |
| JEL: | E21 E32 E58 G12 |
| Date: | 2011–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0440&r=mac |
| By: | Polito, Vito (Cardiff Business School); Spencer, Peter |
| Abstract: | This paper explores the implications of time varying volatility for optimal monetary policy and the measurement of welfare costs. We show how macroeconomic models with linear and quadratic state dependence in their variance structure can be used for the analysis of optimal policy within the framework of an optimal linear regulator problem. We use this framework to study optimal monetary policy under inflation conditional volatility and Find that the quadratic component of the variance makes policy more responsive to inflation shocks in the same way that an increase in the welfare weight attached to inflation does, while the linear component reduces the steady state rate of inflation. Empirical results for the period 1979-2010 underline the statistical significance of inflation-dependent UK macroeconomic volatility. Analysis of the welfare losses associated with inflation and macroeconomic volatility shows that the conventional homoskedastic model seriously underestimates both the welfare costs of inflation and the potential gains from policy optimization. |
| Keywords: | Monetary policy; Macroeconomic volatility; Optimal control; Welfare costs of inflation |
| JEL: | C32 C61 E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/23&r=mac |
| By: | Kenneth Beauchemin; Saeed Zaman |
| Abstract: | This paper presents a 16-variable Bayesian VAR forecasting model of the U.S. economy for use in a monetary policy setting. The variables that comprise the model are selected not only for their effectiveness in forecasting the primary variables of interest, but also for their relevance to the monetary policy process. In particular, the variables largely coincide with those of an augmented New-Keynesian DSGE model. We provide out-of sample forecast evaluations and illustrate the computation and use of predictive densities and fan charts. Although the reduced form model is the focus of the paper, we also provide an example of structural analysis to illustrate the macroeconomic response of a monetary policy shock. |
| Keywords: | Forecasting ; Monetary policy |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1128&r=mac |
| By: | Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana; Juan Rubio-Ramírez |
| Abstract: | This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies. |
| JEL: | E3 E4 E52 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17543&r=mac |
| By: | Philippe Bergevin (C.D. Howe Institute); Colin Busby (C.D. Howe Institute) |
| Abstract: | With inflation as measured by the Consumer Price Index (CPI) growing faster than the Bank of Canada’s 2 percent target, the Bank has pointed out that core CPI, which excludes items whose prices are especially volatile, is at or below target and, further, that the Bank anticipates total CPI eventually will converge with the core measure. While the Bank is certainly justified in using core CPI as one of many imperfect measures of underlying inflation, our results suggest that the Bank should, at a minimum, revisit the role of core within its inflation-targeting framework and consider de-emphasizing core CPI in its communications or as an operational guide. |
| Keywords: | Monetary Policy, Bank of Canada, inflation, Consumer Price Index (CPI), core CPI |
| JEL: | E52 E58 E31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:ebrief:124&r=mac |
| By: | Carlos J. García; Andrés Sagner |
| Abstract: | This paper studies the interaction between the business cycle and the credit market. A first result is that the business cycle has procyclical effects on different types of credit (i.e., consumer, commercial and mortgage loans). The results area obtained through the identification of structural shocks of VAR models that empirically replicate the standard transmission mechanism of monetary policy that has been found in previous work on the Chilean economy. However, our evidence points to new results. Periods of economic expansion trigger in the medium term, first, an increase in non– performing loans, and then, a decline in credit. We interpret this phenomenon as excessive risktaking. Similarly, periods of economic contraction and high interest rates are followed by a drop in non–performing loans in the medium term and then by a credit expansion. Finally, unexpected increases in non–performing loans can also produce contractionary effects, a rise in inflation by increasing credit risk and financial costs for firms. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:645&r=mac |
| By: | Mei Dong; Janet Hua Jiang |
| Abstract: | We study price posting with undirected search in a search-theoretic monetary model with divisible money and divisible goods. Ex ante homogeneous buyers experience match specific preference shocks in bilateral trades. The shocks follow a continuous distribution and the realization of the shocks is private information. We show that generically there exists a unique price posting monetary equilibrium. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers spend only when they have high enough preferences. As their preferences are higher, they spend more till they become cash constrained. Since inflation reduces the future purchasing power of money and the value of retaining money, buyers tend to spend their money faster in response to higher inflation. In particular, more buyers choose to spend money and buyers spend on average a higher fraction of their money. The model naturally captures the hot potato effect of inflation along both the intensive margin and the extensive margin. |
| Keywords: | Economic models; Inflation and prices |
| JEL: | D82 D83 E31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-22&r=mac |
| By: | Marek Rusnak; Tomas Havranek; Roman Horvath |
| Abstract: | The short-run increase in prices following an unexpected tightening of monetary policy represents a frequently reported puzzle. Yet the puzzle is easy to explain away when all published models are quantitatively reviewed. We collect and examine about 1,000 point estimates of impulse responses from 70 articles using vector autoregressive models to study monetary transmission in various countries. We find some evidence of publication selection against the price puzzle in the literature, but our results also suggest that the reported puzzle is mostly caused by model misspecifications. Finally, the long-run response of prices to monetary policy shocks depends on the characteristics of the economy. |
| Keywords: | monetary policy transmission; price puzzle; meta-analysis; publication selection bias; |
| JEL: | E52 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp446&r=mac |
| By: | Mumtaz, Haroon (Bank of England) |
| Abstract: | A large empirical literature has examined the transmission mechanism of structural shocks in great detail. The possible role played by changes in the volatility of shocks has largely been overlooked in vector autoregression based applications. This paper proposes an extended vector autoregression where the volatility of structural shocks is allowed to be time-varying and to have a direct impact on the endogenous variables included in the model. The proposed model is applied to US data to consider the potential impact of changes in the volatility of monetary policy shocks. The results suggest that while an increase in this volatility has a statistically significant impact on GDP growth and inflation, the relative contribution of these shocks to the forecast error variance of these variables is estimated to be small. |
| Keywords: | Vector autoregression; stochastic volatility; particle filter. |
| JEL: | E30 E32 |
| Date: | 2011–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0437&r=mac |
| By: | Jesús Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez |
| Abstract: | This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. The authors illustrate this mechanism with a simple two-period New Keynesian model. They discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies. |
| Keywords: | Supply-side economics ; Keynesian economics |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:11-47&r=mac |
| By: | Barthélemy, J.; Marx, M. |
| Abstract: | In this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous", i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are difficult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix. |
| Keywords: | Perturbation methods, monetary policy, indeterminacy, regime switching, DSGE. |
| JEL: | E32 E43 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:347&r=mac |
| By: | Marco Del Negro; Gauti Eggertsson; Andrea Ferrero; Nobuhiro Kiyotaki |
| Abstract: | We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government exchanges liquid government assets for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-09. |
| Keywords: | Federal Reserve System ; Interest rates ; Liquidity (Economics) ; Private equity |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:520&r=mac |
| By: | Alex Luiz Ferreira |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2009:55&r=mac |
| By: | Karsten Jeske; Dirk Krueger; Kurt Mitman |
| Abstract: | This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households. |
| JEL: | E21 G11 R21 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17537&r=mac |
| By: | Jacopo Cimadomo |
| Keywords: | Fiscal policy, real-time data, data revisions, cyclical sensitivity |
| JEL: | E62 H68 A |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2011-20&r=mac |
| By: | Michel-Pierre Chelini; Georges Prat |
| Abstract: | From a macroeconomic perspective, this paper aims to represent the dynamics of the unemployment rate and of the variations of wages in France over the period of 1950-2008. On a theoretical level, the unemployment equation distinguishes a chronic factor characterized by an excess of real wages compared to the labor productivity gains, a conjunctural factor characterized by the difference between the growth rate of the production and its long term value, and a structural factor including frictional, technological and voluntary components of the unemployment. The wages' variations are classically supposed to depend on productivity gains and inflation. On the empirical level, estimations are made simultaneously for the unemployment and wages with a Space-State model based on the Kalman filter methodology. This econometric approach allows for the introduction of time varying parameters. In accordance with these hypotheses, the unemployment rate is shown to depend on the excess of the real hourly labor cost over the marginal productivity of labor (with a time varying sensibility), on the growth rate of the real GDP and on a structural component, which is about 4%. The chronic unemployment rate appeared in the beginning of the 1970s; at this time, it progressively increases to reach a maximum of 7.8% in 1994, then decreases to fall below 2% in 2008. The conjunctural component is in conformity with the Okun's law since it links negatively the unemployment rate with the production growth rate, this factor seeming to develop particularly after the 1973 oil shock. In addition, the results indicate a delayed influence of the above-mentioned factors on the unemployment, with an average period of influence of 3.3 years. Concerning wages, as expected, the rate of change in nominal wages is shown to be determined by the growth rate in productivity and by the inflation rate as well. The wages' elasticity with respect to price level appears to be time -varying, with a value close to the unit at the beginning of the period and ending up with a value close to zero by the end. This result must be connected with deflation, price/wage de-indexation, and labor unions' decreasing influence that are observed during the period. |
| Keywords: | rate of unemployment, wages, French Economy |
| JEL: | E24 J2 J30 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2011-29&r=mac |
| By: | Sofia Bauducco; Francesco Caprioli |
| Abstract: | We introduce limited commitment into a standard optimal fiscal policy model in small open economies. We consider the problem of a benevolent government that signs a risk-sharing contract with the rest of the world, and that has to choose optimally distortionary taxes on labor income, domestic debt and international debt. Both the home country and the rest of the world may have limited commitment, which means that they can leave the contract if they find it convenient. The contract is designed so that, at any point in time, neither party has incentives to exit. We define a small open emerging economy as one where the limited commitment problem is active in equilibrium. Conversely, a small open developed economy is an economy with full commitment. Our model is able to rationalize two stylized facts about fiscal policy in emerging economies: i) the volatility of tax revenues over GDP is higher in emerging economies than in developed ones; ii) the volatility of tax revenues over GDP is positively correlated with sovereign default risk. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:644&r=mac |
| By: | Thai-Ha LE (Division of Economics, Nanyang Technological University, Singapore 639798, Singapore); Youngho CHANG (Division of Economics, Nanyang Technological University, Singapore 639798, Singapore) |
| Abstract: | This paper uses the monthly data spanning from Jan-1986 to April-2011 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 use different oil price proxies in our investigation and find that the impact of oil price on gold price is not asymmetric but non-linear. Our results show that there is a long-run relationship existing between the prices of oil and gold. Our findings imply that the oil price can be used to predict the gold price. |
| Keywords: | oil price, gold price, inflation, US dollar index, cointegration |
| JEL: | E3 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:nan:wpaper:1102&r=mac |
| By: | Leo Krippner |
| Abstract: | With nominal interest rates currently at or near their zero lower bound (ZLB) in many major economies, it has become untenable to apply Gaussian affine term structure models (GATSMs) while ignoring their inherent non-zero probabilities of negative interest rates. In this article I modify GATSMs by representing physical currency as call options on bonds to establish the ZLB. The result- ing ZLB-GATSM framework remains tractable, producing a simple closed-form analytic expression for forward rates and requiring only elementary univariate numerical integration (over time to maturity) to obtain interest rates and bond prices. I demonstrate the salient features of the ZLB-GATSM framework using a two-factor model. An illustrative application to U.S. term structure data in- dicates that movements in the model state variables have been consistent with unconventional monetary policy easings undertaken after the U.S. policy rate reached the ZLB in late 2008. |
| JEL: | E43 G12 G13 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2011-36&r=mac |
| By: | BRUNO BREYER CALDAS (PPGA/UFRGS); PAULO RENATO SOARES TERRA (PPGA/UFRGS) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2010:219&r=mac |
| By: | Antonio Alberto Mazali; José Angelo Divino |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2009:38&r=mac |
| By: | Daniel Martin; Olivier Pierrard |
| Abstract: | We incorporate on-the-job search (OTJS) into a real business cycle model in order to study whether OTJS increases the cyclical volatility of unemployment and vacancies. The increased search of employed workers during expansions has two effects on the unemployed: it induces firms to openmore vacancies, but employedworkers also crowd out unemployed workers in the job search. The overall effect of OTJS on unemployment volatility is thus ambiguous. We showanalytically and numerically that the difference between the (employer?s share of the) surplus ofmatchwith a previously employed versus a previously unemployed job seeker determines the degree to which OTJS increases unemployment volatility. We use this result to re-consider some related papers of OTJS and explain the amplification of volatility they obtain. |
| Keywords: | on-the-job search, cyclical properties |
| JEL: | E24 E32 J64 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp064&r=mac |
| By: | Marta Arespa (CREB, Universitat de Barcelona.) |
| Abstract: | This paper provides a new benchmark for the analysis of the international diversi cation puzzle in a tractable new open economy macroeconomic model. Building on Cole and Obstfeld (1991) and Heathcote and Perri (2009), this model speci es an equilibrium model of perfect risk sharing in incomplete markets, with endogenous portfolios and number of varieties. Equity home bias may not be a puzzle but a perfectly optimal allocation for hedging risk. In contrast to previous work, the model shows that: (i) optimal international portfolio diversi cation is driven by home bias in capital goods, independently of home bias in consumption, and by the share of income accruing to labour. The model explains reasonably well the recent patterns of portfolio allocations in developed economies; and (ii) optimal portfolio shares are independent of market dynamics. |
| Keywords: | Subsidies; Home bias, equity puzzle, New open economy macroeconomics, NOEM, extensive margin. |
| JEL: | F41 G11 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2011-15&r=mac |
| By: | João Rebelo Barbosa (Faculdade de Economia, Universidade do Porto); Rui Henrique Alves (CEF.UP, Faculdade de Economia, Universidade do Porto) |
| Abstract: | As the euro is on its second decade, the European sovereign debt crisis and the ever more evident disparities in competitiveness among member states are prompting many to question whether monetary union is bringing more benefits than costs. The optimum currency area (OCA) theory provides a framework with several criteria for such analysis. Most literature focuses either or on OCA individual criteria or on an aggregate analysis of these criteria, using meta-properties. Differently, we start by a descriptive analysis of the first twelve euro countries under six criteria between 1999 and 2009. We detect signs of labour geographic mobility. However, nominal wages growth largely outpaced productivity growth in some periphery countries, resulting in losses of competitiveness. Financial markets seem to be deeply integrated. Total intra-EMU trade increased, though core countries seem to have benefited more, as their relative competitiveness improved. We detect no increased homogeneity of exports structures of EMU countries. Inflation rates alternated between periods of convergence and of divergence, though prices levels consistently converged between EMU countries. Finally, budgetary indiscipline was frequent preventing several countries from having fiscal room to face asymmetrical shocks.We conclude by estimating the impact of five OCA criteria on countries’ relative competitiveness, using real effective exchange rates as a proxy. Differences in the growth of unit labour costs, the dissimilarity of trade and the differences in output growth were found to be significant. With a higher confidence level, bilateral trade is significant and points towards the specialization paradigm. Thus, we identify some causes of the divergent competitiveness between some EMU countries that contributed to weaker economic growth in parts of the euro area. |
| Keywords: | Optimum currency area, Euro Area; Economic and Monetary Union (EMU), Competitiveness |
| JEL: | E42 E63 F15 F33 F41 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:436&r=mac |
| By: | Regassa Senbeta S. |
| Abstract: | This paper assesses the applicability of new Keynesian DSGE models to low income economies similar to those in Sub Saharan Africa. To this e¤ect, we ?rst review the development, criticisms and recent advances in DSGE modeling. Then we assess the implications that emanate from the assumptions of the standard small open economy New Keynesian DSGE model within the context of the economic environment of a typical low income economy. Our assessment shows the following two points. First, though there are many criticisms to these models, most recent advances seem to have addressed most of them. However, there are still some outstanding criticisms that seriously challenge not only the DSGE models but also all conventional economic models. Second, the current tendency of applying these models to explain or predict economic phenomena in low income countries without incorporating the structural speci?cities of these countries cannot be justi?ed. Instead, for these models to be helpful to understand the economic events in low income countries, most of their components must be changed or modi?ed. In this study we identify some of these components and suggest the possible changes or modi?cations. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2011016&r=mac |
| By: | Chani, Muhammad Irfan; Pervaiz, Zahid; Jan, Sajjad Ahmad; Ali, Amjad; Chaudhary, Amatul R. |
| Abstract: | This study aims to investigate the role of economic growth and inflation in explaining the prevalence of poverty in Pakistan. ARDL bound testing approach to co-integration confirms the existence of long run relationship among the variables of poverty, economic growth, inflation, investment and trade openness over the period of 1972-2008. Empirical results show that economic growth and investment have negative and inflation has positive impact on poverty. The effect of trade openness on poverty is insignificant in this study. The short run analysis reveals that economic growth has negative and inflation has positive impact on poverty whereas the role of investment and trade openness in poverty reduction in short run is not significant. |
| Keywords: | Poverty; Inflation; Economic Grovvth; Pakistan; Macroeconomic Policy; Welfare; Trade Openness |
| JEL: | E31 F43 C01 I32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34290&r=mac |
| By: | Elisa Faraglia; Albert Marcet; Andrew Scott |
| Abstract: | A growing literature integrates debt management into models of optimal fiscal policy. One promising theory argues the composition of government debt should be chosen so that fluctuations in its market value offsets changes in expected future deficits. This complete market approach to debt management is valid even when governments only issue non-contingent bonds. Because bond returns are highly correlated it is known this approach implies asset positions which are large multiples of GDP. We show, analytically and numerically, across a wide range of model specifications (habits, productivity shocks, capital accumulation, persistent shocks, etc) that this is only one of the weaknesses of this approach. We find evidence of large fluctuations in positions, enormous changes in portfolios for minor changes in maturities issued and no presumption it is always optimal to issue long term debt and invest in short term assets. We show these extreme, volatile and unstable features are undesirable from a practical perspective for two reasons. Firstly the fragility of the optimal portfolio to small changes in model specification means it is frequently better for fear of model misspecification to follow a balanced budget rather than issue the optimal debt structure. Secondly we show for even miniscule levels of transaction costs governments would prefer a balanced budget rather than the large and volatile positions the complete market approach recommends. We conclude it is difficult to insulate fiscal policy from shocks using the complete markets approach. Due to the yield curve's limited variability maturities are a poor way to substitute for state contingent debt. As a result the recommendations of this approach conflict with a number of features we believe are integral to bond market incompleteness e.g. allowing for transaction costs, liquidity effects, robustness etc. Our belief is that market imperfections need to be explicitly introduced into the model and incorporated into the portfolio problem. Failure to do so means that the complete market approach applied in an incomplete market setting can be seriously misleading. |
| Keywords: | Complete markets, debt management, government debt, maturity structure, yield curve |
| JEL: | E43 E62 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1083&r=mac |
| By: | Gregor Semieniuk; Till van Treeck; Achim Truger |
| Abstract: | This paper evaluates whether the 2011 national stability programs (SPs) of the euro area countries are instrumental in achieving economic stability in the European Monetary Union (EMU). In particular, we analyze how the SPs address the double challenge of public deficits and external imbalances. Our analysis rests, first, on the accounting identities of the public, private, and foreign financial balances; and second, on the consideration of all SPs at once rather than separately. We find that conclusions are optimistic regarding GDP growth and fiscal consolidation, while current account rebalancing is neglected. The current SPs reach these conclusions by assuming strong global export markets, entrenched current account imbalances within the EMU as well as the deterioration of private financial balances in the current account deficit countries. By means of our simulations we conclude, on the one hand, that the failure of favorable global macroeconomic developments to materialize may lead to the opposite of the desired stability by exacerbating imbalances in the euro area. On the other hand, given symmetric efforts at rebalancing, the simulation suggests that for surplus countries that reduce their current account, a more expansionary fiscal policy will likely be required to maintain growth rates. |
| Keywords: | Euro Area; Stability Programs; Current Account Imbalances; Fiscal Policy; Stability and Growth Pact |
| JEL: | E10 E17 E62 F42 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_694&r=mac |
| By: | Luiz Fernando Rodrigues de Paula; Tiago Rinaldi Meyer; JoãoAdelino de Faria Júnior; Manoel Carlos de Castro Pires |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2009:100&r=mac |
| By: | Alexandre Manir Figueiredo Sarquis; José Luis Oreiro |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2009:53&r=mac |
| By: | Felissa Silva de Sousa Marques; José Luis Oreiro; MarcosRocha |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2009:108&r=mac |
| By: | Guido Sandleris; Mark L.J. Wright |
| Abstract: | Financial crises in emerging market countries appear to be very costly: both output and a host of partial welfare indicators decline dramatically. The magnitude of these costs is puzzling both from an accounting perspective -- factor usage does not decline as much as output, resulting in large falls in measured productivity -- and from a theoretical perspective. Towards a resolution of this puzzle, we present a framework that allows us to (i) account for changes in a country's measured productivity during a financial crises as the result of changes in the underlying technology of the economy, the efficiency with which resources are allocated across sectors, and the efficiency of the resource allocation within sectors driven both by reallocation amongst existing plants and by entry and exit; and (ii) measure the change in the country's welfare resulting from changes in productivity, government spending, the terms of trade, and a country's international investment position. We apply this framework to the Argentine crisis of 2001 using a unique establishment level data-set and find that more than half of the roughly 10% decline in measured total factor productivity can be accounted for by deterioration in the allocation of resources both across and within sectors. We measure the decline in welfare to be on the order of one-quarter of one years GDP. |
| JEL: | E01 F32 F34 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17552&r=mac |
| By: | Liutang Gong (Guanghua School of Management, Peking University); Heng-fu Zou (CEMA, Central University of Finance and Economics; Shenzhen University; Wuhan University; The World Bank) |
| Abstract: | This paper extends the Barro (1990) model with single aggregate government spending and one flat income tax to include public expenditures and taxes by multiple levels of government. It derives the rate of endogenous growth and, with both simulations and special examples, examines how that rate changes with respect to federal income tax, local taxes, and federal transfers. It also discusses the growth and welfare-maximizing choices of taxes and federal transfers. |
| Keywords: | Public expenditures, Taxes, Federal transfers, Endogenous growth |
| JEL: | E0 H2 H4 H5 H7 O4 R5 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:524&r=mac |
| By: | Dobromil Serwa (Narodowy Bank Polski; Warsaw School of Economics) |
| Abstract: | This research proposes a new method to identify the differing states of the market with respect to lending to households. We use an econometric multi-regime regression model where each regime is associated with a different economic state of the credit market (i.e. a normal regime or a boom regime). The credit market alternates between regimes when some specific variable increases above or falls below the estimated threshold level. A new method for estimating multi-regime threshold regression models for dynamic panel data is also demonstrated. |
| Keywords: | credit boom, threshold regression, dynamic panel |
| JEL: | E51 C23 C51 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:99&r=mac |
| By: | Daniel A. Dias; Christine J. Richmond; Mark L.J. Wright |
| Abstract: | The stock of sovereign debt is typically measured at face value. This is a misleading indicator when debts are issued with different contractual forms. In this paper we construct a new measure of the stock of external sovereign debt for 100 developing countries from 1979 to 2006 that is invariant to contractual form, and illustrate five problems with debt stocks measured at face value. First, we show that correcting for differences in the contractual form of debt paints a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external sovereign debt. Second, rankings of indebtedness across countries, which were historically used to define eligibility for debt forgiveness, are sometimes inverted once we correct for differences in contractual form. Third, the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by between 40 to 70 percent once model-consistent measures of debt are used. Fourth, we show how the spread of aggregation clauses in debt contracts which award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts. Fifth, we show how the use of contractual face values gives issuing countries the ability to manipulate their debt stock data, and illustrate the use of these techniques in practice. |
| JEL: | E01 F30 F34 H63 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17551&r=mac |
| By: | Viral V. Acharya; Raghuram G. Rajan |
| Abstract: | What determines the sustainability of sovereign debt? In this paper, we develop a model where myopic governments seek electoral popularity but can nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector. Interestingly, the more myopic a government, the greater the advantage it sees in borrowing, and therefore the less likely it will be to default (in contrast to models where sovereigns repay because they are concerned about their long term reputation). More myopic governments are also likely to tax in a more distortionary way, and create more dependencies between the domestic financial sector and government debt that raise the costs of default. We use the model to explain recent experiences in sovereign debt markets. |
| JEL: | E62 G2 H63 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17542&r=mac |
| By: | Rojas Breu, Mariana |
| Abstract: | I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit a§ects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption-risk sharing more ine¢ cient. I calibrate the model using U.S. data on credit-card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare. |
| Keywords: | Money; credit; risk sharing; limited participation; |
| JEL: | E51 E41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/7353&r=mac |
| By: | Elias Albagli; Christian Hellwig; Aleh Tsyvinski |
| Abstract: | We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different realization of the underlying shocks to satisfy the market-clearing condition. This identity shift amplifies the impact of price on the marginal trader's expectations. We derive tight characterization for both the conditional and the unconditional expected wedges. Our first main theorem shows how the sign of the expected wedge (that is, the difference between the expected price and the dividends) depends on the shape of the dividend payoff function and on the degree of informational frictions. Our second main theorem provides conditions under which the variability of prices exceeds the variability for realized dividends. We conclude with two applications of our theory. First, we highlight how heterogeneous information can lead to systematic departures from the Modigliani-Miller theorem. Second, in a dynamic extension of our model we provide conditions under which bubbles arise. |
| JEL: | E44 G12 G14 G30 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17548&r=mac |
| By: | Jakub Growiec (National Bank of Poland, Economic Institute) |
| Abstract: | We derive the aggregate normalized CES production function from idea-based microfoundations where firms are allowed to choose their capital- and labor-augmenting technology optimally from a menu of available technologies. This menu is in turn augmented through factor-specific R&D. The considered model yields a number of interesting results. First, normalization of the production function can be maintained simultaneously at the local and at the aggregate level, greatly facilitating interpretation of the aggregate production function’s parameters in terms of the underlying idea distributions. Second, in line with earlier findings, if capital- and labor-augmenting ideas are independently Weibull-distributed then the aggregate production function is CES; if they are independently Pareto-distributed, then it is Cobb–Douglas. Third, by disentangling technology choice by firms from R&D output, one can draw a clearcut distinction between the direction of R&D and the direction of technical change actually observed in the economy, which are distinct concepts. Fourth, it is argued that the Weibull distribution should be a good approximation of the true unit factor productivity distribution (and thus the CES should be a good approximation of the true aggregate production function) if a “technology” is in fact an assembly of a large number of complementary components. This argument is illustrated with a novel, tractable model of directed (factor-specific) R&D. Finally, it is shown that all our results carry forward to the general case of n-input production functions. |
| Keywords: | CES production function, normalization, Weibull distribution, direction of technical change, directed R&D, optimal technology choice |
| JEL: | E23 E25 O47 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:98&r=mac |
| By: | Parmendra Sharma; Neelesh Gounder |
| Keywords: | Fiji, South Pacific, bank, net interest margin |
| JEL: | E40 G21 L11 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:gri:fpaper:finance:201112&r=mac |
| By: | Juan A. Montecino |
| Abstract: | This paper addresses the claim that the governments of Argentina, Bolivia, Ecuador and Venezuela, Latin America’s so-called “left-populist” governments, have failed to effectively reduce inequality in the 2000s and have only benefitted from high commodity prices and other benign external conditions. In particular, it examines the econometric evidence presented by McLeod and Lustig (2011) that the “social democratic” governments of Brazil, Chile and Uruguay were more successful and finds that their original results are highly sensitive to the use of data from the Socioeconomic Database for Latin America and the Caribbean (SEDLAC). |
| Keywords: | inequality, latin america |
| JEL: | E6 F2 O54 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2011-22&r=mac |
| By: | Ahmad, Usman |
| Abstract: | This paper attempts to analyze the performance of the banking sector of Pakistan in the light of second generation reforms on the domestic scheduled banks by using data from 1990 to 2008. For this purpose I used Non Parametric Data Envelopment Analysis (DEA). The analysis revealed an overall improvement in the efficiency of commercial banks. It implies that financial sector reforms, particularly the second phase of reforms, improved the efficiency of the commercial bank in Pakistan. After the reforms, pure technical efficiency increased as compared to scale efficiency and it was found that the overall efficiency of the industry has increased due to pure technical efficiency. The study concludes that the reforms were successful in improving the efficiency of the domestic commercial banks in Pakistan. |
| Keywords: | Efficiency; Banks; DEA; Pakistan |
| JEL: | E58 G21 |
| Date: | 2011–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34220&r=mac |