nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒11‒14
fifty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Business Cycle and Bank Capital Regulation: Basel II Procyclicality By Guangling (Dave) Liu; Nkhahle Seeiso
  2. Housing and Banking in a Small Open Economy DSGE Model By Viktors Ajevskis; Kristine Vitola
  3. Monetary policy in disarray By Tatom, John
  4. An estimated small open economy model with frictional unemployment By Julien Albertini; Günes Kamber; Michael Kirker
  5. Supply-Side Policies and the Zero Lower Bound By Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramírez, Juan Francisco
  6. Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy By Wang , Gaowang; Zou, Heng-fu
  7. The role of labour markets in fiscal policy transmission By Obstbaum, Meri
  8. Unemployment, Skills, and the Business Cycle Since 2000 By Sparber, Chad
  9. Optimal Monetary Policy with Informational Frictions By George-Marios Angeletos; Jennifer La'O
  10. Inflation and asset prices By Tatom, John
  11. Les « hélicoptères » des banques centrales By Dai, Meixing
  12. Loose monetary policy and excessive credit and liquidity risk-taking by banks. By Ongena, S.; Peydro, J.L.
  13. Cycles inside cycles: Spanish regional aggregation By Ana Gomez Loscos; M. Dolores Gadea; Antonio Montañes
  14. Discordant City Employment Cycles By Michael Owyang; Jeremy Piger; Howard Wall
  15. Real time analysis of euro area fiscal policies: adjustment to the crisis By Paloviita, Maritta; Kinnunen, Helvi
  16. Fiscal Policy and Unemployment By Marco Battaglini; Stephen Coate
  17. Aggregate Real Wages: Macro Fluctuations and Micro Drivers By Mary C. Daly; Bart Hobijn; Theodore S. Wiles
  18. Persistent Liquidity Effects and Long Run Money Demand By Fernando E. Alvarez; Francesco Lippi
  19. The Macroeconomics Shocks and the Brazilian Agricultural Price Evolution – A VAR Analysis Approach By Humberto Spolador; Geraldo Barros; Mirian Bacchi
  20. Poverty and the business cycle: The role of the intra-household distribution of unemployment By Luis Ayala; Olga Cantó; Juan G. Rodríguez
  21. Tableaux économiques et analyse des business cycles chez Marschak, Frisch et Leontief By Akhabbar, Amanar
  22. Technology choice and endogenous productivity dispersion over the business cycles By Tian, Can
  23. Redistribution and the Multiplier By Monacelli, Tommaso; Perotti, Roberto
  24. Macroprudential Regulation and the Monetary Transmission Mechanism By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  25. Financial liberalization and macroeconomic performance, empirical evidence from selected Asian countries By Raza, Muhammad Wajid; Mohsin, Hasan M
  26. Austria: Public Sector Inefficiencies Have Become Less Affordable By Karin Fischer; Rauf Gönenç; Robert Price
  27. The redistributive effects of monetary policy By Olivier Ledoit
  28. The Global Economic Crisis: Long-Term Unemployment in the OECD By Junankar, Pramod N. (Raja)
  29. Can the exchange rate regime influence corruption? By Katherina Popkova
  30. The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy By Arvind Krishnamurthy; Annette Vissing-Jorgensen
  31. Leaders and outliers in the race of regions - EU Cohesion Policy in Poland in the light of macroeconomic modelling By Zbigniew Mogila; Janusz Zaleski; Joanna Kudełko
  32. Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis By R. Anton Braun; Tomoyuki Nakajima
  33. Unemployment, Vacancies, Wages By Diamond, Peter A.
  34. The "Austerity Myth": Gain Without Pain? By Roberto Perotti
  35. Motivations and strategies for a real revaluation of the Yuan. By Meixing Dai
  36. Words to the Wise: Stock Flow Consistent Modeling of Financial Instability By Stephen Kinsella
  37. Markets with Search Frictions and the DMP Model By Mortensen, Dale T.
  38. Welfare Costs of Long-Run Temperature Shifts By Ravi Bansal; Marcelo Ochoa
  39. Equilibrium in the Labour Market with Search Frictions By Pissarides, Christopher A.
  40. The financial trilemma in China and a comparative analysis with India By Aizenman, Joshua; Sengupta, Rajeswari
  41. Causality and contagion in peripheral EMU public debt markets: a dynamic approach By Marta Gómez-Puig; Simón Sosvilla-Rivero
  42. Exchange Rate Pass-Through to Prices: Evidence from Mexico By Carlos Capistrán; Raúl Ibarra-Ramírez; Manuel Ramos Francia
  43. Innovation and Growth with Financial, and Other, Frictions By Jonathan Chiu; Césaire Meh; Randall Wright
  44. Temperature, Aggregate Risk, and Expected Returns By Ravi Bansal; Marcelo Ochoa
  45. Forecasting GDP growth in times of crisis: private sector forecasts versus statistical models By Jasper de Winter
  46. Unemployment Dynamics in the OECD By Michael W.L. Elsby; Bart Hobijn; Aysegul Sahin
  47. How do banks’ funding costs affect interest margins? By Arvid Raknerud; Bjørn Helge Vatne; Ketil Rakkestad
  48. Wage rigidity and disinflation in emerging countries By Messina, Julian; Sanz-de-Galdeano, Anna
  49. Episodes of Large Capital Inflows and the Likelihood of Banking and Currency Crises and Sudden Stops By Davide Furceri; Stéphanie Guichard; Elena Rusticelli
  50. Medium-Term Determinants of International Investment Positions: The Role of Structural Policies By Davide Furceri; Stéphanie Guichard; Elena Rusticelli

  1. By: Guangling (Dave) Liu (Department of Economics, University of Stellenbosch); Nkhahle Seeiso (Department of Economics, University of Stellenbosch)
    Abstract: This paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) ``financial accelerator" model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further amplifies the financial accelerator effect through the external finance premium channel, which, in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which, in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable.
    Keywords: Business cycle fluctuations, financial accelerator, bank capital requirement, monetary policy
    JEL: E32 E44 G28 E50
    Date: 2011
  2. By: Viktors Ajevskis; Kristine Vitola
    Abstract: The severe repercussions of the latest financial crisis highlighted the crucial role of the financial sector in the propagation of economic and financial shocks. In this paper we analyse the role of financial market frictions in business cycle fluctuations and in the transmission of monetary policy in a small open economy pursuing fixed exchange rate strategy. To this end, we develop and estimate a DSGE model for Latvia with financially constrained households and firms, embedding monopolistically competitive banking sector facing capital constraints. This general equilibrium framework is useful to study the potential of macro-prudential tools and their interaction with other macroeconomic and monetary policy instruments. Our findings suggest that the banking sector mutes the response of bank retail rates to an increase in the foreign policy rate and thus attenuates the drop in real aggregates. A permanent bank capital contraction subdues output, consumption, investment, domestic lending and foreign borrowing in the long run. Under a temporary shock to bank capital, asset prices and housing investment are first to recover, for loans it takes several years, while output, consumption and capital investment rebound at a slower pace. In the long run, a tighter capital requirement leads to higher output, capital investment and domestic lending while reducing household deposits and foreign liabilities of banks.
    Keywords: DSGE, DSGE models, Bayesian estimation, banks, financial frictions, macro-financial linkages, small open economy
    JEL: C11 E32 E43 E44 F41 R21
    Date: 2011–11–03
  3. By: Tatom, John
    Abstract: Monetary policy has become difficult to characterize or follow since 2007. A debate as to whether interest rate targets or monetary aggregate targets are better indicators of policy and prospective outcomes has given way to a new credit policy built on inflating the Federal Reserve (Fed) balance sheet to provide private sector credit. This policy grew out of the Great Depression and has led the Fed to ignore monetary growth and render a federal funds rate target impotent by pushing it to zero. To implement the more than doubling of the Fed’s assets, the Fed took up commercial banking policies. Three examples are: selling Treasury assets to fund private assets, paying subsidies to banks for holding reserves and attracting a new class of Treasury debt sterilized in Fed deposits. These actions insulated monetary aggregates and the effective monetary base from the explosion in the Fed’s balance sheet. The new credit policy severed the tight link that had existed for over 70 years between Fed credit and its effective monetary base. Fortunately, it also insulated the economy from a more than doubling of the general price level. But these actions have turned the balance sheet of the Fed into a collection of illiquid and risky private assets. A similar portfolio of government securities that has the longest duration in history and therefore the greatest interest rate risk limits the Fed’s ability to reduce its assets or the excess reserve position of banks, exceeding $1.5 trillion and costing the taxpayer over $3.3 billion, from 2009 to mid-2011. The subsidy and excess reserve levels of the first half of 2011 will cost $2.3 billion per year going forward. Finally, the paper rebuts claims by Fed officials that the Fed has successfully followed the framework of monetary policy developed by Milton Friedman. The paper concludes with recommendations for Congressional restrictions on the Fed and Treasury to ensure that the Fed focus on responsible monetary policy and not its failed credit policy.
    Keywords: monetary policy; credit policy; central banking; Milton Friedman; business cycles
    JEL: E5 E3
    Date: 2011–08–27
  4. By: Julien Albertini; Günes Kamber; Michael Kirker (Reserve Bank of New Zealand)
    Abstract: This paper investigates labour market dynamics in New Zealand by estimating a structural small open economy model enriched with standard search and matching frictions in the labour market. We show that the model its the business cycle features of key macroeconomic variables reasonably well and provides an appealing monetary transmission mechanism. We then extend our analysis to understand the driving forces behind labour market variables. Our findings suggest that the bulk of variation in labour market variables is solely explained by disturbances pertaining to the labour market.
    JEL: E32 J6
    Date: 2011–08
  5. By: Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramírez, Juan Francisco
    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.
    Keywords: New Keynesian models; supply-side policies; zero lower bound
    JEL: E30 E50 E60
    Date: 2011–11
  6. By: Wang , Gaowang; Zou, Heng-fu
    Abstract: This paper develops a simple mercantilism model for a small open economy and examines the real effects of macroeconomic policies. In this setting, the saddle-point stability of the model with wealth effects hinges on an interesting "relative smoothness condition" for foreign asset accumulation. And comparative static analysis shows that an increase of monetary growth rate and a central-bank purchase of foreign exchange have positive real effects on the economy. In contrast, an increase of government expenditure always has negative effects on the economy. Moreover, the stronger of the mercantilist sentiments, the more consumption, real money balance holdings and foreign asset accumulation in the long run. These conclusions are very different from those ridiculous ones of Obstfeld's paper (1981).
    Keywords: Mercantilism; Foreign Asset Accumulation; Relative Smoothness Condition
    JEL: E58 E52 F41 E63
    Date: 2011–10–30
  7. By: Obstbaum, Meri (Aalto University School of Economics and Ministry of Finance)
    Abstract: This paper shows how frictions in the labour market shape the responses of the economy to government spending shocks. The open economy New Keynesian DSGE model is extended by labour market frictions of the Mortensen-Pissarides type and a detailed description of fiscal policy. The nature of offsetting fiscal measures is found to be critical for the effects of fiscal stimulus, due to the different effects of different tax instruments on the labour market. Specifically, shifting the debt-stabilizing burden towards distortionary labour taxes has detrimental effects on the labour market outcome and on overall economic performance in a flexible wage regime. The results show that wage rigidity increases the effectiveness of fiscal policy in the short term but leads to a worse longer term result including unemployment exceeding steady state levels. The analysis suggests that a closer look at the functioning of labour markets may help to identify fiscal policy transmission channels not captured by the standard New Keynesian model.
    Keywords: search frictions; wage bargaining; wage and price rigidity; fiscal rules; debt stabilization
    JEL: E62 J41
    Date: 2011–08–05
  8. By: Sparber, Chad (Department of Economics, Colgate University)
    Abstract: This paper employs reduced-form microeconometric analysis to examine how yearly changes in aggregate income and GDP growth affect the unemployment probability of individuals with varied skills in the United States. The paper goes beyond traditional education-based measures and assesses how manual, communication, and quantitative skills affect the relationship between macroeconomic shocks and unemployment. Workers specialized in communication skills exhibit lower unemployment rates, reduced unemployment volatility, and less sensitivity to macroeconomic fluctuations.
    Keywords: Unemployment, Skills, Business Cycle, Macroeconomic Shocks, GDP
    JEL: E24 E32 J21 J24 J64
    Date: 2011–11–03
  9. By: George-Marios Angeletos; Jennifer La'O
    Abstract: We study optimal monetary policy in an environment in which firms’ pricing and production decisions are subject to informational frictions. Our framework accommodates multiple formalizations of these frictions, including dispersed private information, sticky information, and certain forms of inattention. An appropriate notion of constrained efficiency is analyzed alongside the Ramsey policy problem. Similarly to the New-Keynesian paradigm, efficiency obtains with a subsidy that removes the monopoly distortion and a monetary policy that replicates flexible-price allocations. Nevertheless, “divine coincidence” breaks down and full price stability is no more optimal. Rather, the optimal policy is to “lean against the wind”, that is, to target a negative correlation between the price level and real economic activity.
    JEL: D61 D83 E32 E52
    Date: 2011–11
  10. By: Tatom, John
    Abstract: Changes in the general level of prices and inflation have profound effects on asset prices. There are several reasons for these effects and the influence differs depending on the source of the inflation and whether it is expected or not. To understand these effects it is important to clarify what is meant by inflation, the pure theory of the sources of inflation, how inflation affects goods and services prices and how it affects the assets that are used to finance production, both equity prices and fixed income assets. This article reviews the theory of inflation, its sources and effects on asset prices, especially equity, bond and real asset prices. The simplest and broadest economic model suggests that money is a veil and that changes in its value (the price level and its rate of depreciation (inflation) have no real effect s on the economy, especially asset prices and real rates of return on assets. There are a variety of reasons to expect that inflation is not “neutral,” however. This article focuses on several factors that give rise to real adverse effects of inflation on asset prices, including supply shocks that reduce wealth and raise prices, and tax effects of inflation that arise from a lack of full indexation of the tax system. Inflation has had large effects on asset prices in the United States, especially during the Great Inflation from 1965 to 1984. The evidence here supports these sources of real effects of inflation.
    Keywords: Inflation; asset prices; supply shocks; real rate of interest; real rate of return on equity
    JEL: E31 E44 G0
    Date: 2011–11
  11. By: Dai, Meixing
    Abstract: The effects of quantitative easing policy, which looks like a “helicopter dropping” of money, are quite complex. Implemented following a major crisis induced by the deflation of bubbles on asset prices, this policy creates redistributive effects in favour of financial and banking institutions without effectively stimulating the growth due to its character of restricted currency distribution. Banking and sovereign debt crises in the euro area implies that the European Central Bank must reform the way it “drops” the money to effectively reduce the financing costs of financially constrained agents, including the governments of the member States of EMU.
    Keywords: Quantitative easing; liquidity trap; monetary policy reform; sovereign debt and banking crisis; deflation
    JEL: E58 E52 E44
    Date: 2011–06–09
  12. By: Ongena, S. (Universiteit van Tilburg); Peydro, J.L.
    Date: 2011
  13. By: Ana Gomez Loscos; M. Dolores Gadea; Antonio Montañes
    Abstract: This paper sets out a comprehensive framework to identify regional business cycles within Spain and analyses their stylised features and the degree of synchronization present among them and the Spanish economy. We show that the regional cycles are quite heterogeneous although they display some degree of synchronization that can be partially explained using macroeconomic variables. We also propose a dynamic factor model to cluster the regional comovements and Önd out if the country cycle is simply the aggregation of the regional ones. We Önd that the Spanish business cycle is not shared by the seventeen regions, but is the sum of the di§erent regional behaviours. The implications derived from our results are useful both for policy makers and analysts.
    Date: 2011–09
  14. By: Michael Owyang; Jeremy Piger; Howard Wall
    Abstract: The national economy is often described as having a business cycle over which aggregate output enters and exits distinct expansion and recession phases. Analogously, national employment cycles in and out of its own expansion and contraction phases, which are closely related to the business cycle. This paper estimates city-level employment cycles for 58 large U.S. cities and documents the substantial cross-city variation in the timing, lengths, and frequencies of their employment contractions. It also shows how the spread of city-level contractions associated with U.S. recessions has tended to follow recession-specific geographic patterns. In addition, cities within the same state or region have tended to have similar employment cycles. There is no evidence, however, that similarities in employment cycles are related to similarities in industry mix. This suggests that the U.S. employment and business cycles has a spatial dimension that is independent of broad industry-level fluctuations.
    Date: 2011–09
  15. By: Paloviita, Maritta (Bank of Finland Research); Kinnunen, Helvi (Bank of Finland)
    Abstract: Using real time data from the OECD and fiscal policy reaction functions, this study explores euro area fiscal policies since the late 1990s. Both discretionary plans for the budget year and policy changes during budget implementation stages are investigated. The main focus is on the fiscal adjustment to the recent financial and economic crisis. The results suggest that during the time of monetary union (EMU) euro area planned fiscal policies have been long-term oriented and counter-cyclical. In the implementation stages new policy decisions have been made in response to unexpected economics developments. We provide evidence that the crisis had a clear impact on discretionary policies. Due to the resultant increase in uncertainty, the crisis spotlighted the impact of cyclical developments on fiscal planning. In the implementation stages, huge forecast errors in connection with planned policy were observed. As a consequence, new decisions were made in order to alleviate the negative impacts of the crisis on euro area economies.
    Keywords: fiscal policy; real time data; planning stage; implementation stage; cyclical sensitivity; economic crisis
    JEL: E32 E62
    Date: 2011–10–14
  16. By: Marco Battaglini; Stephen Coate
    Abstract: This paper explores the interaction between fiscal policy and unemployment. It develops a dynamic economic model in which unemployment can arise but can be mitigated by tax cuts and public spending increases. Such policies are fiscally costly, but can be financed by issuing government debt. In the context of this model, the paper analyzes the simultaneous determination of fiscal policy and unemployment in long run equilibrium. Outcomes with both a benevolent government and political decision-making are studied. With political decision-making, the model yields a simple positive theory of fiscal policy and unemployment.
    JEL: E6 E62 H3 H63
    Date: 2011–11
  17. By: Mary C. Daly (Federal Reserve Bank of San Francisco); Bart Hobijn (Federal Reserve Bank of San Francisco, and VU University Amsterdam); Theodore S. Wiles (The Analysis Group)
    Abstract: Using data from the Current Population Survey from 1980 through 2010 we examine what drives variation and cyclicality in the growth rate of real wages over time. We employ a novel decomposition technique that allows us to divide the time series for median weekly earnings growth into the part associated with the wage growth of persons employed at the beginning and end of the period (the wage growth effect) and the part associated with changes in the composition of earners (the composition effect). The relative importance of these two effects varies widely over the business cycle. When the labor market is tight job switchers get high wage increases, making them account for half of the variation in median weekly earnings growth over our sample. Their wage growth, as well as that of job-stayers, is procyclical. During labor market downturns, this procyclicality is largely offset by the change in the composition of the workforce, leading aggregate real wages to be almost noncyclical. Most of this composition effect works through the part-time employment margin. Remarkably, the unemployment margin neither accounts for much of the variation nor for much of the cyclicality of median weekly earnings growth.
    Keywords: Business cycle; labor market dynamics; wages.
    JEL: E24 J3 J6
    Date: 2011–11–08
  18. By: Fernando E. Alvarez; Francesco Lippi
    Abstract: We present a monetary model in the presence of segmented asset markets that implies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. At the same time, the model has completely classical long-run predictions, featuring quantity theoretic and Fisherian properties. The model simultaneously explains the short-run “instability” of money demand estimates as-well-as the stability of long-run interest-elastic money demand.
    JEL: E31 E4 E41 E43 E5
    Date: 2011–11
  19. By: Humberto Spolador; Geraldo Barros; Mirian Bacchi
    Abstract: The findings presented in this paper come from our study of the effects of Brazilian macroeconomic policy on the Brazilian Farm [product] Price Index using an adapted version of Frankel’s (1986 & 2006) theoretical model. The study examined the connection between Brazilian farm prices and external variables (worldwide importation of agribusiness products, international commodity prices, and foreign real interest rates) and between Brazilian farm prices and domestic variables (GDP, the real exchange rate, and local interest rates).
    Date: 2011–09
  20. By: Luis Ayala (Universidad Rey Juan Carlos); Olga Cantó (Instituto de Estudios Fiscales); Juan G. Rodríguez (Universidad Complutense de Madrid)
    Abstract: Conventional wisdom predicts that changes in the aggregate unemployment rate may significantly affect a country’s income distribution and, as a consequence, have a relevant impact on the evolution of the poverty rate. However, the relationship between labour macroeconomic indicators and poverty seems to have become weaker in recent times. Using panel data on unemployment and poverty for Spanish regions we estimate a System GMM model in order to model this relationship taking into account that the intrahousehold distribution of unemployment can be more relevant than aggregate unemployment in order to explain poverty changes. We also test the hypothesis of asymmetric effects of the business cycle on the share of poor individuals in the population. Our results show that unemployment has a positive impact on severe poverty, while inflation has a negative effect. Among the three unemployment measures considered in order to predict poverty, the percentage of households where all active members are unemployed registers the highest explanatory power. We also find that a change in unemployment has a larger effect on poverty during a period of economic recession than during a period of expansion.
    Keywords: poverty forecasting, unemployment, system GMM model
    JEL: E3 I3
    Date: 2011
  21. By: Akhabbar, Amanar
    Abstract: Ragnar Frisch wrote in 1933 that "The complete macrodynamic problem, as I conceive of it, consists in describing as realistically as possible the kind of relations that exist between the various magnitudes in the Tableau Economique ..., and from the nature of these relations to explain the movements, cyclical or otherwise, of the system." My paper examines how the so-called Tableau Economique was employed by three major economists of the 20th century to make mathematical models in order to analyze business cycles, i.e. Jacob Marschak, Ragnar Frisch and Wassily Leontief. We show that the three of them used intersectorial tables to build mathematical models of business cycles. Theoretical mechanisms behind the model are very different between the three models and were inspired by Marxian, Austrian and Walrasian economics. Hence, the same interindustrial Tableau Economique supported very different analyses of business cycles. These works of Marschak, Frisch and Leontief implemented original concepts and tools like dynamic modeling, expectation theory, collective welfare functions, national accounting, and matrix algebra.
    Keywords: Tableau; economique; sectors; business cycle; Marschak; Frisch; Leontief; matrix; welfare; structural change;
    JEL: B21 B23 B22
    Date: 2011–09–01
  22. By: Tian, Can
    Abstract: Various empirical works have shown that dispersion of firm-level profitability is significantly countercyclical. I incorporate firms' technology adoption decision into firm dynamics model with business cycle features to explain these empirical findings both qualitatively and quantitatively. The option of endogenous exiting and credit constraint jointly play an important role in motivating firms' risk taking behavior. The model predicts that relatively small sized firms are more likely to take risk, and that the dispersion measured as the variance/standard deviation of firm-level profitability is larger in recessions, which are consistent to the data.
    Keywords: Firm Dynamics; Business Cycles; Countercyclical Dispersion
    JEL: L25 L11 E32
    Date: 2011–05–31
  23. By: Monacelli, Tommaso; Perotti, Roberto
    Abstract: Does it matter, for the size of the government spending multiplier, which category of agents bears the brunt of the necessary adjustment in taxes? In an economy with heterogeneous agents and imperfect financial markets, the answer depends on whether or not New Keynesian features, such are price rigidity, are present. If prices are flexible, the tax-financing rule is either neutral or leads to a larger multiplier when taxes are levied on the borrowing constrained agents. If prices are sticky, the multiplier is larger when taxes are levied on the unconstrained agents. We discuss the conditions under which these results hold. Furthermore, we study the real effects of fiscal expansions via pure, revenue-neutral, tax redistributions.
    JEL: E62
    Date: 2011–11
  24. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: This paper presents a simple dynamic macroeconomic model of a bank-dominated financial system that captures some of the key credit market imperfections commonly found in middle-income countries. The model is used to analyze the interactions between monetary and macroprudential policies, involving, in the latter case, changes in reserve requirements and the imposition of an upper limit on banks’ leverage ratio. Policy implications are also discussed, in the context of the post-crisis debate on the use of macroprudential tools. The analysis shows that understanding how these tools operate is essential because they may alter, possibly in substantial ways, the monetary transmission mechanism.
    Date: 2011–11
  25. By: Raza, Muhammad Wajid; Mohsin, Hasan M
    Abstract: Financially repressed economy cannot grow with an increasing growth rate. That’s why most of the developing countries move toward liberalized financial system. The basic objective of this paper is to provide a comparative analysis of Pakistan, China, and India financial sector liberalization and its impact on macroeconomic performance. This study uses Johansen co integration to provide cross country evidence of long run relationship between macroeconomic variables and financial openness. Results show that there is long run relation among financial openness and macro economic performance in all three countries. Financial liberalization has positive and significant effect on Pakistan macroeconomic performance while negative and significant effect on china economy. The relationship in India is positive but not significant
    Keywords: Financial liberalization; financial depth. Economic growth
    JEL: E0 N20 F43
    Date: 2011–05–15
  26. By: Karin Fischer; Rauf Gönenç; Robert Price
    Abstract: Performance of fiscal policy, while good in international comparison, is not sufficient to prepare for future ageing-related spending increases. Subject to macroeconomic developments, the pace of consolidation could be more ambitious than currently planned, with a view to reducing the debt burden below 60% of GDP by 2020. Austrian fiscal policies have tended to be pro-cyclical in upturns, mainly because spending was not adequately kept in check. Stronger fiscal rules and a reform of inter-governmental fiscal relations could help contain expenditure dynamics. Efficiency-raising reforms in key spending areas such as pensions and other social expenditures, health, and education are also highly needed to reduce spending and ensure the provision of high-quality public services at lower cost. In this regard, Austria should make full use of the performance budgeting framework it plans to introduce from 2013. Higher potential growth could also take off some of the pressure on public finances. There remains significant room to rebalance the tax structure towards less distortive sources of revenue, thus supporting employment and growth.<P>Autriche : Les carences du secteur public sont de moins en moins supportables<BR>Les résultats de la politique budgétaire menée par les autorités autrichiennes sont bons par rapport à d’autres pays, mais insuffisants pour faire face aux augmentations des dépenses qui seront induites par le vieillissement de la population dans les années à venir. En tenant compte des développements macroéconomiques, le rythme d’assainissement pourrait être plus rapide que ce n’est actuellement le cas, de façon à ramener la dette au-dessous de 60 % du PIB d’ici 2020. Traditionnellement, la politique budgétaire en Autriche a toujours été procyclique au cours des phases ascendantes en raison d’une maîtrise insuffisante des dépenses. Le renforcement des règles budgétaires et la réforme des relations budgétaires entre administrations pourraient contribuer à endiguer la hausse des dépenses. De même, des réformes visant à accroître l’efficience des principales catégories de dépenses, comme les retraites et autres dépenses sociales, la santé et l’éducation sont indispensables pour freiner les dépenses et garantir des services publics de qualité à moindre coût. À cet égard, l’Autriche devrait recourir systématiquement au cadre de budgétisation dans l’optique des résultats qu’elle envisage de déployer en 2013. L’accélération de la croissance potentielle pourrait également soulager les tensions qui s’exercent sur les finances publiques. Il reste encore beaucoup à faire pour rééquilibrer la structure de la fiscalité au profit des sources de recettes provoquant le moins de distorsions, afin de soutenir l’emploi et la croissance.
    Keywords: budgets, Austria, deficit, debt, regional, consolidation, federal, fiscal, budget, Autriche, déficit, dette, consolidation, fédéral, fiscal, régional
    JEL: E62 H68 H77
    Date: 2011–10–17
  27. By: Olivier Ledoit
    Abstract: We introduce a model of the economy as a social network. Two agents are linked to the extent that they transact with each other. This generates well-defined topological notions of location, neighborhood and closeness. We investigate the implications of our model for monetary economics. When a central bank increases the money supply, it must inject the money somewhere in the economy. We demonstrate that the agent closest to the location where money is injected is better off, and the one furthest is worse off. This redistribution channel is independent from the ones previously noted in the literature. Symmetrically, any decrease in the money supply redistributes purchasing power in the other direction. We also outline the testable implications of our model.
    Keywords: Money, redistribution, policy, central bank, social network, topology
    JEL: E40 E50
    Date: 2011–10
  28. By: Junankar, Pramod N. (Raja) (University of New South Wales)
    Abstract: This paper analyses the impact of the global economic crisis on unemployment and long term unemployment in the OECD. It uses simple econometric models using panel data (quarterly) and time series data. In general, we find that long term unemployment increases with the unemployment rate, there is persistence in long term unemployment, and that the employment protection variable and the replacement rate are statistically insignificant. Overall, the findings of our research are that there are many differences between the impact of the Great Recession on different countries. Countries that faced a significant financial crisis and a collapse of the housing market bubble have had large increases in unemployment and long term unemployment. There was a big fall in employment in the (especially) construction and manufacturing industries. The financial collapse led to an increase in unemployment in the financial and business sector. As a result of these twin shocks labour mobility of the unemployed is likely to be affected: with negative equity in housing, unemployed workers are unlikely to move regionally. With a loss of wealth (in housing and financial assets, including superannuation) there will be a fall in consumer spending which will slow down the recovery of economies. This means that, especially for some countries, there will be a long period of high unemployment and long term unemployment.
    Keywords: long-term unemployment, global crisis, labour market policies, OECD
    JEL: E24 J60 J68 J69
    Date: 2011–10
  29. By: Katherina Popkova
    Abstract: This paper analyses the influence of the exchange rate regime of a country on the level of tolerated corruption with a special focus on the interdependency of monetary and fiscal policies. Using a simple theoretical framework based on Barro-Gordon-Model I compare independent monetary policy with a tight peg arrangement in order to find out which regime is more likely to induce governments to intensify the fight against corruption. It is shown that if corruption has a considerable positive impact on output, a tight peg regime can increase tolerated corruption. However, if corruption has a negative effect on output, a pegged exchange rate regime will lead to a lower level of tolerated corruption. The issue of particular interest appears to be the finding that a strong positive impact of corruption on output can induce governments to choose a pegging regime while a weak positive impact of corruption (and a negative influence of corruption even more) provides an incentive to keep monetary independence.
    Keywords: Exchange Rate Regime, Monetary Policy, Fiscal Policy, Corruption
    JEL: E52 E58 E61 E63 F33
    Date: 2011
  30. By: Arvind Krishnamurthy; Annette Vissing-Jorgensen
    Abstract: We evaluate the effect of the Federal Reserve’s purchase of long-term Treasuries and other long-term bonds ("QE1" in 2008-2009 and "QE2" in 2010-2011) on interest rates. Using an event-study methodology we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target because QE works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and an MBS pre-payment channel and a corporate bond default risk channel for QE1. Second, effects on particular assets depend critically on which assets are purchased. The event-study suggests that (a) mortgage-backed securities purchases in QE1 were crucial for lowering mortgage-backed security yields as well as corporate credit risk and thus corporate yields for QE1, and (b) Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and Agencies relative to mortgage-backed securities and corporates, with yields on the latter falling primarily through the market’s anticipation of lower future federal funds rates.
    JEL: E4 E5 G14 G18
    Date: 2011–10
  31. By: Zbigniew Mogila; Janusz Zaleski; Joanna Kudełko
    Abstract: Since Poland has benefited from cohesion policy since accession to the EU in 2004, and is currently the largest national beneficiary of EU cohesion policy expenditure in the financial perspective 2007-2013, analysis of the impact of the EU funds in this country seems to be an important part of the overall evaluation of this policy. The outcome is especially interesting at the beginning of the debate on the future of EU cohesion policy the results of which will certainly have an effect on the development of many regions in the EU. In our analysis we concentrate on the three Polish NUTS-2 regions: Mazowieckie- capital region with the overwhelming economic supremacy, Dolnośląskie- one of the leading Polish regions, Świętokrzyskie – representative of the regions lagging behind the Poland’s average in terms of socio-economic development. The main aim of this paper is not simply to compare and contrast the impacts of EU cohesion policy on the above mentioned regions, but also to confront them with the theoretical expectations. The analysis is carried out using such macroeconomic indicators as GDP per capita, employment, labour productivity and it focuses on the period 2004-2020 in order to capture both short- and long-term effects of the EU intervention. Our research draws on the regional HERMIN macroeconomic models of Mazowieckie (HPL5MZ), Dolnośląskie (HPL5DL) and Świętokrzyskie (HPL5SW) which are regionalised versions of the Polish national HERMIN macroeconomic model (HPL5)- part of the Cohesion System of HERMIN Models (CSHM) used by the European Commission. The results of our analysis point to the role of EU cohesion policy in the process of socio-economic convergence both at the national and European level. However, they are presented from a perspective of the three Polish regions characterized by the different levels of socio-economic development in order to show how EU funds affect economic leaders and outliers of the country. On the basis of the conducted analysis several conclusions are drawn with regard to macroeconomic modelling at the regional level which might be used to improve robustness and credibility of the evaluation of EU cohesion policy.
    Date: 2011–09
  32. By: R. Anton Braun (Federal Reserve Bank of Atlanta); Tomoyuki Nakajima (Kyoto University)
    Abstract: We compare the dynamics of in flation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial fric- tions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted some agents can't act on their beliefs and prices don't respond to the news. Instead prices only move in periods immediately prior the crisis.
    Keywords: sovereign debt crisis; defl ation; fiscal risk; leverage; borrowing constraint
    JEL: E31 E62 H60
    Date: 2011–11
  33. By: Diamond, Peter A. (Massachusetts Institute of Technology)
    Abstract: Peter A. Diamond delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–12–08
  34. By: Roberto Perotti
    Abstract: As governments around the world contemplate slashing budget deficits, the “expansionary fiscal consolidation hypothesis” is back in vogue. I argue that, as a statement about the short run, it should be taken with caution. I present four detailed case studies, two – Denmark and Ireland – undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two – Finland and Sweden - after floating the currency. All four episodes were associated with an expansion; but only in Denmark the driver of growth was internal demand. However, after three years a long slump set in as the economy lost competitiveness. In all the others for a long time the main driver of growth was exports. In Ireland this occurred because the sterling coincidentally appreciated. In Finland and Sweden the currency experienced an extremely large depreciation after floating. In all consolidations interest rate fell fast, and wage moderation played a key role in generating a gain competitiveness and a decline in interest rates. These results cast doubt on at least some versions of the “expansionary fiscal consolidations” hypothesis.
    JEL: E62 E65 F32
    Date: 2011–11
  35. By: Meixing Dai
    Abstract: Most Western economists and policymakers agree that the Yuan is significantly undervalued and push for its quick nominal revaluation. This paper defends that many domestic and foreign factors could be responsible for the Yuan’s undervaluation, and the People’s bank of China (PBC) cannot optimally invest growing foreign exchange reserves. It provides a theoretical framework to discuss the optimal strategy associating a gradual nominal revaluation of the Yuan with higher inflation, and structural and macroeconomic policies to bring the real exchange rate to its equilibrium level. This strategy allows absorbing external imbalances while laying down the foundation for China’s long-term growth.
    Keywords: Real revaluation; Yuan; Renminbi (RMB); foreign exchange reserves; external imbalance; macroeconomic adjustment measures.
    JEL: E2 E5 E6 F3
    Date: 2011
  36. By: Stephen Kinsella (Department of Economics, University of Limerick)
    Abstract: The crisis has exposed the failure of economic models to deal sensibly with endogenously generated crises propagating from the financial sectors to the real economy, and back again. The goal of this paper is to review the method of stock flow consistent modeling to highlight areas in which it is deficient. I argue there is a fruitful research agenda in shoring up these deficiencies. The objective of stock flow modeling should be the ability to practically model unstable macroeconomies, and in particular their interactions with the financial sector. These models should provide 'Words to the Wise', and until they do, they are just thought experiments.
    Keywords: Instability, finance, stock flow consistent models
    JEL: E32 E37 E51 G33
    Date: 2011–11–07
  37. By: Mortensen, Dale T. (Northwestern University)
    Abstract: Dale T. Mortensen delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–12–08
  38. By: Ravi Bansal; Marcelo Ochoa
    Abstract: This article makes a contribution towards understanding the impact of temperature fluctuations on the economy and financial markets. We present a long-run risks model with temperature related natural disasters. The model simultaneously matches observed temperature and consumption growth dynamics, and key features of financial markets data. We use this model to evaluate the role of temperature in determining asset prices, and to compute utility-based welfare costs as well as dollar costs of insuring against temperature fluctuations. We find that the temperature related utility-costs are about 0.78% of consumption, and the total dollar costs of completely insuring against temperature variation are 2.46% of world GDP. If we allow for temperature-triggered natural disasters to impact growth, insuring against temperature variation raise to 5.47% of world GDP. We show that the same features, long-run risks and recursive-preferences, that account for the risk-free rate and the equity premium puzzles also imply that temperature-related economic costs are important. Our model implies that a rise in global temperature lowers equity valuations and raises risk premiums.
    JEL: E0 G0 Q0
    Date: 2011–11
  39. By: Pissarides, Christopher A. (London School of Economics)
    Abstract: Christopher A. Pissarides delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.
    Keywords: Search frictions;
    JEL: E24 J64
    Date: 2010–12–08
  40. By: Aizenman, Joshua; Sengupta, Rajeswari
    Abstract: A key challenge facing most emerging market economies today is how to simultaneously maintain monetary independence, exchange rate stability and financial integration subject to the constraints imposed by the Trilemma, in the era of deepening globalization. In this paper we study the Trilemma choices of the two key drivers of global growth, China and India. We overview and contrast the policy choices of the two, and test their Trilemma choices and tradeoffs. China’s Trilemma configurations are unique relative to the one characterizing other emerging markets in the predominance of exchange rate stability, and in the failure of the Trilemma regression to capture any significant role for financial integration. One possible interpretation is that the segmentation of the domestic capital market in China, its array of capital controls and the large hoarding of international reserves imply that the “policy interest rate” does not reflect the stance of monetary policy. In contrast, the Trilemma configurations of India are in line with the regression results of other emerging countries, and are consistent with the predictions of the Trilemma tradeoffs. India like other emerging economies has overtime converged towards a middle ground between the three policy objectives, and has achieved comparable levels of exchange rate stability and financial integration buffered by sizeable international reserves.
    Keywords: Financial trilemma; International reserves; Foreign exchange intervention; Monetary policy; Capital account openness
    JEL: E58 F3 E52 F41
    Date: 2011–11–01
  41. By: Marta Gómez-Puig (Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales); Simón Sosvilla-Rivero (Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales)
    Abstract: Our research aims to analyze the causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of contagion between yields on bonds issued by different countries. In the second step, we study the determinants of these contagion episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.
    Abstract: Nuestra investigación tiene como objetivo analizar las relaciones causales en el comportamiento de la deuda pública emitida por países miembros periféricos de la Unión Económica y Monetaria (UEM), con especial énfasis en los recientes episodios de crisis desatados en los mercados de deuda soberana de la zona euro desde 2009. Con este objetivo, empleamos una base de datos de la frecuencia diaria de los rendimientos de los bonos gubernamentales a 10 años emitidos por cinco países de la UEM (Grecia, Irlanda, Italia, Portugal y España), que abarca toda la historia de la UEM desde su inicio el 1 de enero de 1999 al 31 diciembre de 2010. En la primera etapa, se explora la relación causal por pares entre los rendimientos, tanto para la muestra completa y para submuestras cambiantes de los datos, con el fin de capturar posible relación causal en función del tiempo. Este enfoque nos permite detectar episodios de contagio entre los rendimientos de los bonos emitidos por países distintos. En el segundo paso, se estudian los factores determinantes de estos episodios de contagio, el análisis del papel desempeñado por diferentes factores, prestando especial atención a los instrumentos que capturan la deuda nacional total (doméstica y extranjera) en cada país.
    Keywords: Sovereign bond yields, Causality, Time-varying contagion, Euro area, Peripheral EMU countries, Rendimientos bonos soberanos, Causalidad, Contagio variable en el tiempo, Eurozona, Países periféricos UEM.
    Date: 2011
  42. By: Carlos Capistrán; Raúl Ibarra-Ramírez; Manuel Ramos Francia
    Abstract: This paper analyzes the pass-through of exchange rate to different price indexes in Mexico. The analysis is based on a vector autoregressive model (VAR) using monthly data from January 1997 to December 2010. The pass-through effects are calculated by means of accumulated impulse response functions to a recursively identified exchange rate shock. The results show that the exchange rate pass-through to import prices is complete, but it declines along the distribution chain in such a way that the impact on consumer prices is below 20 percent. Moreover, we find that the exchange rate pass-through seems to have decreased substantially from 2001 onwards, which coincides with the adoption of an inflation targeting regime by Banco de Mexico.
    Keywords: Exchange rate pass-through, import price, consumer price, distribution chain, inflation.
    JEL: E31 F31 F41
    Date: 2011–11
  43. By: Jonathan Chiu; Césaire Meh; Randall Wright
    Abstract: The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.
    Keywords: Economic models; Potential output; Productivity
    JEL: E4 G2 O3 O4
    Date: 2011
  44. By: Ravi Bansal; Marcelo Ochoa
    Abstract: In this paper we show that temperature is an aggregate risk factor that adversely affects economic growth. Our argument is based on evidence from global capital markets which shows that the covariance between country equity returns and temperature (i.e., temperature betas) contains sharp information about the cross-country risk premium; countries closer to the Equator carry a positive temperature risk premium which decreases as one moves farther away from the Equator. The differences in temperature betas mirror exposures to aggregate growth rate risk, which we show is negatively impacted by temperature shocks. That is, portfolios with larger exposure to risk from aggregate growth also have larger temperature betas; hence, a larger risk premium. We further show that increases in global temperature have a negative impact on economic growth in countries closer to the Equator, while its impact is negligible in countries at high latitudes. Consistent with this evidence, we show that there is a parallel between a country's distance to the Equator and the economy's dependence on climate sensitive sectors; in countries closer to the Equator industries with a high exposure to temperature are more prevalent. We provide a Long-Run Risks based model that quantitatively accounts for cross-sectional differences in temperature betas, its link to expected returns, and the connection between aggregate growth and temperature risks.
    JEL: E0 G12 Q0
    Date: 2011–11
  45. By: Jasper de Winter
    Abstract: This paper examines the accuracy of short run forecasts of Dutch GDP growth by several linear statistical models and private sector analysts. We focus on the financial crisis of 2008-2009 and the dot-com recession of 2001-2002. The dynamic factor model turns out to be the best model. Its forecast accuracy during the crisis deteriorates much less than that of the other linear models and hardly at all when backcasting and nowcasting. Moreover, the dynamic factor model beats the private sector forecasters at nowcasting. This finding suggests that adding judgement to a mechanical model may not improve short-term forecasting performance.
    Keywords: Nowcasting; Professional Forecasters; Factor Model; Forecasting
    JEL: E52 C53 C33
    Date: 2011–11
  46. By: Michael W.L. Elsby (University of Edinburgh, and NBER); Bart Hobijn (FRB San Francisco, and VU University Amsterdam); Aysegul Sahin (FRB New York)
    Abstract: We provide a set of comparable estimates for the rates of inflow to and outflow from unemployment using publicly available data for fourteen OECD economies. We then devise a method to decompose changes in unemployment into contributions accounted for by changes in inflow and outflow rates for cases where unemployment deviates from its flow steady state, as it does in many countries. Our decomposition reveals that fluctuations in both inflow and outflow rates contribute substantially to unemployment variation within countries. For Anglo-Saxon economies we find approximately a 15:85 inflow/outflow split to unemployment variation, while for Continental European and Nordic countries, we observe much closer to a 45:55 split. Using the estimated flow rates we compute gross worker flows into and out of unemployment. In all economies we observe that increases in inflows lead increases in unemployment, whereas outflows lag a ramp up in unemployment.
    Keywords: Unemployment; Worker flows; Job Finding Rate; Separation Rate
    JEL: E24 J6
    Date: 2011–11–08
  47. By: Arvid Raknerud (Statistisk sentralbyrå (Statistics Norway)); Bjørn Helge Vatne (Norges Bank (Central Bank of Norway)); Ketil Rakkestad (Norges Bank (Central Bank of Norway))
    Abstract: We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks’ funding costs on their retail rates. Banks’ funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks’ loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits.
    Keywords: Interest rates, NIBOR, Pass-through, Funding costs, Bank panel data, Dynamic factor model
    JEL: E43 E27 C33
    Date: 2011–07–06
  48. By: Messina, Julian; Sanz-de-Galdeano, Anna
    Abstract: This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay, relying on high quality matched employer-employee administrative data. Downward nominal wage rigidities are more important in Uruguay, while wage indexation is dominant in Brazil. Two regime changes are observed during the sample period, 1995-2004: (i) in Uruguay wage indexation declines, while workers'resistance to nominal wage cuts becomes more pronounced; and (ii) in Brazil, the introduction of inflation targeting by the Central Bank in 1999 shifts the focal point of wage negotiations from changes in the minimum wage to expected inflation. These regime changes cast doubts on the notion that wage rigidity is structural in the sense of Lucas (1976).
    Keywords: Labor Markets,Income,Economic Theory&Research,Environmental Economics&Policies,Labor Policies
    Date: 2011–10–01
  49. By: Davide Furceri; Stéphanie Guichard; Elena Rusticelli
    Abstract: This paper provides an empirical investigation of the relationship between surges in capital inflows and the probability of subsequent banking, currency and balance-of-payment crises. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that a large capital inflow episode increases substantially the probability of having a banking or a currency crisis in the two following years. The effect is especially large for the case of balance-of-payment crises. The paper also finds that the effect of large capital inflows is different depending on the type of flows characterising the episode. In particular, large capital inflows that are debt-driven significantly increase the probability of banking, currency and balance of payment crises, whereas if inflows are driven by equity portfolio investment or FDI there is a negligible effect. This means that structural reforms that modify the composition of capital flows towards a lower share of debt are likely to reduce the financial vulnerabilities to large capital inflows. At the same time, however, structural reforms may also increase the overall size of capital flows.<P>Épisodes d'entrées massive de capitaux et risqué de crises bancaires et de changes et d'arrêt brutal du financement extérieur<BR>Ce document presente une etude empirique de la relation entre les fortes entrees de capitaux et la probabilite de crises bancaires, financiere ou de balance des paiements ulterieures. Les resultats obtenus sur un panel d'economies developpees et emergentes de 1970 a 2007 suggerent que les episodes de fortes entrees de capitaux ou ¡ìmannes¡í augmentent fortement la probabilite d'avoir une crise bancaire ou une crise de change dans les deux annees suivantes. L'effet est particulierement grand pour les crises de balance des paiements. Le document montre egalement que l'effet des mannes de capitaux est different selon le type de flux de capitaux qui les caracterisent. En particulier les mannes de dette augmentent de maniere tres significative la probabilite de crise bancaire, de change et de balance des paiements, alors que les mannes d.investissements de portefeuille en actions et de l'IDE ont un effet negligeable. Cela signifie que les reformes structurelles qui modifient la composition des flux de capitaux vers une plus faible part de la dette sont susceptibles de reduire la vulnerabilite financiere associee aux larges entrees de capitaux. Toutefois, les reformes structurelles risquent aussi d.augmenter le montant total the flux de capitaux.
    Keywords: capital flows, financial crisis, banking crisis, sudden stops, flux de capitaux, crise financière, crise bancaire, arrêt brutal des entrées de capitaux
    JEL: E44 E51 F1 F34
    Date: 2011–05–18
  50. By: Davide Furceri; Stéphanie Guichard; Elena Rusticelli
    Abstract: This paper provides an empirical investigation of the medium-term determinants of international investment positions for a large sample of advanced and emerging economies. In addition to the usually considered drivers of foreign assets and liabilities, the analysis focuses on the role of structural policy indicators. Using cross-section and panel regression techniques the results suggest that structural policy settings are important long-term drivers of capital flows, having a relatively large impact on gross and net foreign capital positions and on their composition. In particular, the results suggest that certain kinds of structural policy reform could help to narrow global imbalances, and to modify the composition of international capital flows towards more stable and productive sources.<P>Déterminants à moyen terme des positions étrangères extérieures : le rôle des politiques structurelles<BR>Cet article présente une étude empirique des déterminants à moyen terme de positions de l'investissement international pour un large échantillon des économies avancées et émergentes. En plus des déterminants usuels des engagements et actifs internationaux, l'analyse met l'accent sur le rôle des indicateurs structurels. Les résultats des régressions en coupe transversale et en panel suggèrent que les politiques structurelles en place sont d'importants moteurs à long terme des flux de capitaux, ayant un impact relativement important sur les positions extérieures brutes et nettes et sur leur composition. En particulier, les résultats suggèrent que certains types de réforme des politiques structurelles pourraient aider à réduire les déséquilibres mondiaux et á modifier la composition des flux de capitaux vers des sources plus stables et plus productives.
    Keywords: capital flows, structural policy, global imbalances, politique structurelle, déséquilibres mondiaux, flux des capitaux
    JEL: E6 F21
    Date: 2011–05–17

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