nep-mac New Economics Papers
on Macroeconomics
Issue of 2011‒11‒21
33 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Right on Target: Exploring the Determinants of Inflation Targeting Adoption By Hanna Samaryna; Jakob de Haan
  2. Inflation versus price-level targeting and the zero lower bound: Stochastic simulations from the Smets-Wouters US model By Hatcher, Michael C.
  3. Optimal monetary policy with state-dependent pricing By Anton Nakov; Carlos Thomas
  4. Optimal monetary policy with state-dependent pricing By Anton Nakov; Carlos Thomas
  5. From many series, one cycle: improved estimates of the business cycle from a multivariate unobserved components model By Charles A. Fleischman; John M. Roberts
  6. News driven business cycles and data on asset prices in estimated DSGE models By Stefan Avdjiev
  7. Gold Sterilization and the Recession of 1937-38 By Douglas A. Irwin
  8. Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications By Dixon, Huw; Bihan, Hervé Le
  9. The South Asian Phillips Curve: Assessing the Gordon Triangle By Subhani, Dr. Muhammad Imtiaz; Osman, Amber
  10. Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment By Sandra Gomes; Pascal Jacquinot; Matthias Mohr; Massimiliano Pisani
  11. Dissent voting behavior of central bankers: what do we really know? By Horvath, Roman; Rusnak, Marek; Smidkova, Katerina; Zapal, Jan
  12. Professor Fisher and the Quantity Theory - A Significant Encounter By David Laidler
  13. Monetary Shocks or Real Shocks, Which matters the most for Share Prices By Subhani, Dr. Muhammad Imtiaz; Osman, Ms. Amber
  14. Sustainable Credit And Interest Rates By Andreas Hula
  15. The Behaviour of Consumer Prices Across Provinces By Gordon Wilkinson
  16. International transmission of medium-term technology cycles. Evidence from Spain as a recipient country By Monica Correa Lopez
  17. Turkiye'de Endeksli Bonolar Kullanilarak Enflasyon Telafisi Olculmesi By Murat Duran; Eda Gulsen; Refet Gurkaynak
  18. Credit Crises, Precautionary Savings, and the Liquidity Trap By Veronica Guerrieri; Guido Lorenzoni
  19. Rising Labor Productivity during the 2008-9 Recession By Casey Mulligan
  20. New estimates of U.S. currency abroad, the domestic money supply and the unreported Economy By Feige, Edgar L.
  21. The Impact of the International Financial Crisis on Asia and the Pacific: Highlighting Monetary Policy Challenges from a Negative Asset Price Bubble Perspective By Andrew Filardo
  22. Studying the NAIRU and its Implications By Bozani, Vasiliki; Drydakis, Nick
  23. Analyzing Economic Effects of Extreme Events using Debit and Payments System Data By John Galbraith; Greg Tkacz
  24. Trade Prices and the Global Trade Collapse of 2008-2009 By Gita Gopinath; Oleg Itskhoki; Brent Neiman
  25. Gender Gaps Across Countries and Skills: Supply, Demand and the Industry Structure By Claudia Olivetti; Barbara Petrongolo
  26. The interbank market after the financial turmoil: squeezing liquidity in a "lemons market" or asking liquidity "on tap" By Antonio De Socio
  27. The Macroeconomics of TANSTAAFL By Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
  28. Interoperability between central counterparties By Jürg Mägerle; Thomas Nellen
  29. Impact of food inflation on poverty in the Philippines By Tomoki Fujii
  30. Pensions in a shrinking economy: a comment on Kuné By Sergio Cesaratto
  31. Political Leaders’ Socioeconomic Background and Fiscal Performance in Germany By Bernd Hayo; Florian Neumeier
  32. Le radici distributive della crisi infinita - Income distribution: the roots of the neverending crisis By Massimo Florio
  33. Entrepreneurship and Innovation: Public Policy Frameworks By Audretsch, David B.; Link, Albert N.

  1. By: Hanna Samaryna; Jakob de Haan
    Abstract: This paper examines which economic, fiscal, external, financial, and institutional characteristics of countries affect the likelihood that they adopt inflation targeting as their monetary policy strategy. We estimate a panel binary response transition model for 60 countries and two subsamples consisting of OECD and non-OECD countries over the period 1985-2008. The findings suggest that past macroeconomic performance of a country, its fiscal discipline, exchange rate arrangements, as well as the structure and development of its financial system have a significant impact on the likelihood to adopt inflation targeting. However, the determinants of inflation targeting differ between OECD and non-OECD countries.
    Keywords: inflation targeting; monetary policy strategy
    JEL: E42 E52
    Date: 2011–11
  2. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: Using a version of the Smets-Wouters model of the US economy augmented to include both New Keynesian and New Classical sectors, this paper investigates the performance of inflation targeting and price-level targeting when the zero lower bound on nominal interest rates is occasionally-binding. Several notable results emerge. First, the unconditional probability of hitting the lower bound is lower under price-level targeting than inflation targeting, with 'lower bound episodes' being less frequent and lasting for shorter periods of time. Second, the volatilities of key macroeconomic variables are lower under price-level targeting than inflation targeting. Third, the lower frequency and severity of lower bound episodes under price-level targeting appears to have a first-order impact on consumption, investment and output, raising their mean values. Intuitively, price-level targeting performs well because inflation expectations act as automatic stabilisers, reducing the chance of hitting or remaining at the lower bound whilst also providing stability when the economy is away from the lower bound.
    Keywords: Zero lower bound; occasionally-binding constraint; price-level targeting; inflation targeting
    JEL: E52 E58
    Date: 2011–10
  3. By: Anton Nakov (Banco de España and ECB); Carlos Thomas (Banco de España)
    Abstract: We study optimal monetary policy from the timeless perspective in a general state-dependent pricing framework. Firms are monopolistic competitors and are subject to idiosyncratic menu cost shocks. We find that, under isoelastic preferences and no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an “envelope” property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms’ profits and therefore has no effect on the rate of price adjustment. We offer an analytic solution which does not rely on local approximation or efficiency of the steady-state.
    Keywords: monetary policy, state-dependent pricing, monopolistic competition
    JEL: E31
    Date: 2011–11
  4. By: Anton Nakov; Carlos Thomas
    Abstract: In an abstract economic model, we study optimal monetary policy from the timeless perspective under a general state-dependent pricing framework. We find that when firms are monopolistic competitors subject to idiosyncratic menu cost shocks, households have isoelastic preferences, and there is no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an "envelope" property: At zero inflation, a marginal increase in the rate of inflation has no effect on firms' profits and therefore it has no effect on the probability of price adjustment. Our results lend support to more informal statements about the suitability of the Calvo model for studying optimal monetary policy despite its apparent conflict with the Lucas critique. We offer an analytic solution that does not require local approximation or efficiency of the steady state.
    Date: 2011
  5. By: Charles A. Fleischman; John M. Roberts
    Abstract: We construct new estimates of potential output and the output gap using a multivariate approach that allows for an explicit role for measurement errors in the decomposition of real output. Because we include data on hours, output, employment, and the labor force, we are able to decompose our estimate of potential output into separate trends in labor productivity, labor-force participation, weekly hours, and the NAIRU. We find that labor-market variables—especially the unemployment rate—are the most informative individual indicators of the state of the business cycle. Conditional on including these measures, inflation is also very informative. Among measures of output, we find that although they add little to the identification for the cycle, the income-side measures of output are about as informative as the traditional product-side measures about the level of structural productivity and potential output. We also find that the output gap resulting from the recent financial crisis was very large, reaching -7 percent of output in the second half of 2009.
    Date: 2011
  6. By: Stefan Avdjiev
    Abstract: The existing literature on estimated structural News Driven Business Cycle (NDBC) models has focused almost exclusively on macroeconomic data and has largely ignored asset prices. In this paper, we present evidence that including data on asset prices in the estimation of a structural NDBC model dramatically affects inference about the main sources of business cycle fluctuations. Combined with the large body of evidence that asset price movements reflect changes in expectations of future developments in the economy, our results imply that data on asset prices should always be used in the estimation of structural NDBC models because they contain information that cannot be obtained by using solely macroeconomic data.
    Keywords: News Driven Business Cycles, Asset Prices, Estimated DSGE Models, Bayesian MCMC Methods
    Date: 2011–11
  7. By: Douglas A. Irwin
    Abstract: The Recession of 1937-38 is often cited as illustrating the dangers of withdrawing fiscal and monetary stimulus too early in a weak recovery. Yet our understanding of this severe downturn is incomplete: existing studies find that changes in fiscal policy were small in comparison to the magnitude of the downturn and that higher reserve requirements were not binding on banks. This paper focuses on a neglected change in monetary policy, the sterilization of gold inflows during 1937, and finds that it exerted a powerful contractionary force during this period. The transmission of this monetary shock to the real economy appears to have worked through lower asset (equity) prices and higher interest rates.
    JEL: E5 N12
    Date: 2011–11
  8. By: Dixon, Huw (Cardiff Business School); Bihan, Hervé Le
    Abstract: The Generalized Calvo and the Generalized Taylor models of price and wage-setting are, unlike the standard Calvo and Taylor counterparts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro-area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard DSGE model. The Generalized Taylor model is found to help rationalizing the humpshaped and persistent response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.
    Keywords: Contract length; steady state; hazard rate; Calvo; Taylor; wage-setting; price-setting
    JEL: E31 E32 E52 J30
    Date: 2011–10
  9. By: Subhani, Dr. Muhammad Imtiaz; Osman, Amber
    Abstract: One of the key drivers for the policy makers is the tie-up between price inflation and unemployment. In relevance to the economic theories in yester years, Phillips Curve has witnessed negative relationship between inflation and unemployment in many economies. This has an implication that if government seeks to reduce the unemployment then the inflation goes up means if it wants to relish the lower unemployment then it has to bear the burden and consequences of inflation. This paper in distinction investigates the Phillips Curve in connection with the Gordon Triangle for the South Asian Countries i.e. Pakistan, India, Bangladesh and Sri Lanka. The systematic investigation is based on historical thirty years of the rates of inflation and unemployment for the countries outlined. The split analysis of each country highlights the relationship between inflation and unemployment, which is positive for Pakistan and negative for Bangladesh, while no relationship has been observed between the two variables (no Phillips curve) for India and Sri Lanka. The negative impact of unemployment on inflation is actually the confirmation of Phillips Curve, which is indentified for Bangladesh while the positive association between the unemployment and inflation (Stagflation) is also observed, which is the confirmation of Gordon triangle empirically observed and identified for Pakistan.
    Keywords: Inflation; Unemployment; Phillips Curve; Gordon Triangle
    JEL: E31 A1
    Date: 2011
  10. By: Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Matthias Mohr (European Central Bank); Massimiliano Pisani (Bank of Italy)
    Abstract: We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, a unilateral markup reduction by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. Second, cross-country coordination of reforms would add extra benefits to each region, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. In the long run German (Portuguese) output would increase by 9.2 (8.6) percent. Third, cross-country coordination would make the macroeconomic performance of the different regions more homogeneous, in terms of price competitiveness and real activity. Overall, our results suggest that while reforms implemented individually by each country in the euro area will produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.
    Keywords: economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups.
    JEL: C53 E52 F47
    Date: 2011–10
  11. By: Horvath, Roman; Rusnak, Marek; Smidkova, Katerina; Zapal, Jan
    Abstract: Abstract We examine the determinants of the dissent in central bank boards’ voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the U.K. and the U.S. In contrast to previous studies, we consider about 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and deal formally with the attendant model uncertainty using Bayesian model averaging. We find that the rate of dissent is between 5% and 20% in these central banks. Our results suggest that most regressors, including those capturing the effect of inflation and output, are not robust determinants of voting dissent. The difference in central bankers’ preferences is likely to drive the dissent in the U.S. Fed and the Bank of England. For the Czech and Hungarian central banks, average dissent tends to be larger when policy rates are changed. Some evidence is also found that food price volatility tends to increase the voting dissent in the U.S. Fed and in Riksbank.
    Keywords: monetary policy; voting record; dissent
    JEL: E58 E52
    Date: 2011–11–11
  12. By: David Laidler (University of Western Ontario)
    Abstract: Irving Fisher's encounter with the Quantity theory of Money began in the 1890s, during the debate about bimetallism, and reached its high point in 1911 with the publication of The Purchasing Power of Money. His most important refinement of the theory, derived from his recognition of bank deposits as means of exchange, was to treat their out of equilibrium recursive interaction with inflation as integral to it. This treatment underlay both his 1920s work on the business cycle as a "dance of the dollar" and his advocacy of subjecting monetary policy to a legislated price stability rule, initially to be based on his "compensated dollar" scheme. Fisher's failure to recognize the onset of the Great Depression even as it was happening was directly related to his faith in the quantity theory's seeming implication that price level stability in and of itself guaranteed the continuation of prosperity, while his subsequent work on the debt deflation theory of great depressions initially failed to repair the damage that this failure did to his reputation, and to that of the quantity theory. In the 1930s Fisher nevertheless remained an active supporter of various schemes to reflate and then stabilize the price level. His subsequent influence on the quantity theory based Monetarist counter-revolution that began in the 1950s lay, directly, in its deployment of his analysis of expected inflation on nominal interest rates, and, indirectly, in its espousal of the case for subjecting monetary policy to a legislated rule.
    Keywords: Quantity theory; Price level; Inflation; Deflation; Business cycle; Depression; Money; Interest; Fisher effect
    JEL: B1 B2 B3 E3 E4 E5
    Date: 2011
  13. By: Subhani, Dr. Muhammad Imtiaz; Osman, Ms. Amber
    Abstract: This study examines that out of monetary shocks (ΔM2) and real shocks in share prices (ΔYt-k), which one or both really explain share prices of Karachi stock exchange 100 index. The time series econometrics is used to investigate the data for the monthly period of January 1991 to January 2011 for money supply (M2) and share prices of KSE 100 index. The results of unit root test reveal that there is a real shock in share prices and it explains the share price of KSE 100 index temporarily, while Vector auto regression revealed that Share prices of KSE 100 index is meagerly explained by the monetary shocks.
    Keywords: Share Prices; Real Shocks; Monetary Shocks; Unit Root Test; Granger Causality Test
    JEL: O16 A11
    Date: 2011
  14. By: Andreas Hula
    Abstract: With negative growth in real production in many countries and debt levels which become an increasing burden on developed societies, the calls for a change in economic policy and even the monetary system become louder and increasingly impatient. We research the consequences of a system of credit and debt, that still allows for the expansion of credit and fundamentally retains many features of the present monetary system, without the instability inherent in the present system.
    Date: 2011–11
  15. By: Gordon Wilkinson
    Abstract: Measures of core inflation enable a central bank to distinguish price movements that are transitory and generated by non-monetary events from those that are more permanent and related to prior monetary policy decisions. The author uses standard statistical measures to assess the behaviour of consumer prices across provinces and identify price components with more divergent price patterns. The results indicate that energy, shelter and tobacco prices are the most volatile across provinces. Very large price movements restricted to one or a few provinces suggest that the forces or events triggering those movements may be province specific and unrelated to national demand pressures. Such results suggest that constructing a type of core inflation measure called the “trimmed mean” that excludes components with exceptionally large price changes at the provincial level may offer an alternative means of assessing underlying inflationary pressures.
    Keywords: Inflation and prices
    JEL: E31
    Date: 2011
  16. By: Monica Correa Lopez
    Abstract: This paper documents stylized facts of international medium-term business cycles by exploring the pattern of comovement between a catching-up economy, Spain, and each of the obvious candidate countries to technological leadership of the 1950-2007 period, the U.S., France, Germany, Italy and the U.K. A remarkable feature of the international medium-term business cycle is the strong, positive lead displayed by the U.S. technology and terms of trade cycles over Spain's macroeconomic aggregates. The corresponding evidence when the counterpart to Spain is a large European economy is weaker, particularly in the case of Europe's medium-term technology cycles. Nonparametric tests results suggest that, over the medium-term cycle, a shift towards more economic integration may not necessarily be associated with increased international comovement.
    Keywords: Medium-term business cycles; Stylized facts; International comovement; Technology diffusion
    JEL: E32 F41 O3
    Date: 2011–11
  17. By: Murat Duran; Eda Gulsen; Refet Gurkaynak
    Abstract: [TR] Enflasyon beklentilerine iliskin dogru bilgi elde etmek tüm iktisadi birimler icin daha saglikli ekonomik kararlarin alinabilmesi acisindan onem tasimaktadir. Uygulamada, enflasyon beklentilerini olcmek amaciyla kullanilan kaynaklar beklenti anketleri ve finansal piyasa verileridir. Bu notta, enflasyon telafisinin anket verilerine alternatif bir enflasyon beklentisi gostergesi olarak kullanimi ustunlukleri ve sakincalarindan bahsedilerek tartisilmaktadir. Buna ek olarak, nominal ve enflasyona endeksli tahvil verileri kullanilarak hesaplanan enflasyon telafilerinin para politikasina iliskin cesitli analizlerde kullanilabilecegi gosterilmistir. [EN] For all economic actors, obtaining accurate information about inflation expectations is crucial in decision making process. In practice, two main sources in the measurement of inflation expectations are expectation surveys and financial market data. In this note, we discuss inflation compensation as an alternative indicator of inflation expectations to expectation surveys along with the advantages and disadvantages of its usage. In addition, we show that inflation compensation, calculated by using nominal and inflation-linked bond data, can be used as a tool in various monetary policy analyses.
    Date: 2011
  18. By: Veronica Guerrieri; Guido Lorenzoni
    Abstract: We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.
    JEL: E2 E4
    Date: 2011–11
  19. By: Casey Mulligan
    Abstract: During the recession of 2008-9, labor hours fell sharply, while wages and output per hour rose. Some, but not all, of the productivity and wage increase can be attributed to changing quality of the workforce. The rest of the increase appears to be due to increases in production inputs other than labor hours. All of these findings, plus the drop in consumer expenditure, are consistent with the hypothesis that labor market “distortions” were increasing during the recession and have remained in place during the slow “recovery.” Producers appear to be trying to continue production with less labor, rather than cutting labor hours as a means of cutting output.
    JEL: E24 E32 J22
    Date: 2011–11
  20. By: Feige, Edgar L.
    Abstract: New Estimates of U.S. Currency Abroad, the Domestic Money Supply and the Unreported Economy Edgar L. Feige * Abstract Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400- $550 billion. Currently, we estimate that 18-23 percent of total reportable income is not properly reported to the IRS.
    Keywords: Overseas currency; currency abroad; underground economy; unreported economy; domestic money supply; tax gap; tax evasion; cash payments; monetary aggregates
    JEL: E51 O17 E52 E26 H26 E41
    Date: 2011–09
  21. By: Andrew Filardo
    Abstract: The international financial crisis of the late 2000s has revived interest in asset price bubble research. For some, the event confirmed the enduring relevance of studying asset price bubbles in our economies. For others, it was a realisation that asset price bubbles are of much greater significance than previously thought. The financial and policy preconditions that foster "frothy" asset prices which characterise bubbles have been the focus of considerable attention. While doubtless important, it is not the only aspect that requires greater understanding. We also need to develop a better understanding of the whole life-cycle of asset price bubbles, from their origins, to their expansion and spread, the inevitable collapse, and the aftermath that has to be cleaned up. It is increasingly recognised that researchers must not treat bubbles as one-off, exogenous events. The challenge is to develop a more holistic approach, and then build into our policy models endogenous bubble behavior. Such behavior may indeed be rare but nonetheless has its origins in a number of avoidable factors, not least being some combination of financial fragility, flawed policy frameworks, and poor risk management decisions. This paper contributes to our understanding of asset price bubbles by looking at assets when they are severely underpriced, i.e., when there are negative asset price bubbles. Generally, negative asset price bubbles are an underrepresented protagonist in most crisis stories, and this has certainly been the case in the recent international financial crisis. The particular illustration for this paper comes from an examination of the financial market spillovers from the West to Asia and the Pacific. Where did the spillovers come from and how will the crisis end? While there are many different ways to conceptualise the spillovers, this paper will show how cross-border spillovers led to the severe underpricing of various types of assets in Asia and the Pacific. And, just as the policy response to the bursting of the dot-com bubble in the United States may have contributed to the housing problems in the 2000s, there are concerns that accommodative monetary policy in response to the negative asset price bubble and associated macroeconomic fallout may be laying the foundation for a round of positive asset price bubbles. The paper begins with a brief discussion of a negative asset price bubble and a narrative of the international financial crisis in Asia and the Pacific. Prior to September 2008, the international financial crisis had had a limited impact on Asia-Pacific markets. To be sure there were periods of unusual stress but, by and large, the region was more focused on macroeconomic policy issues throughout much of the year. That all changed in late 2008 as the region, despite its strong economic and financial fundamentals, entered what was to become a sharp V-shaped business cycle. Through the lens of a negative asset price bubble perspective, this paper helps to shed new light on the unusual dynamics as well as the policy trade-offs faced during the crisis and afterward. Asia and the Pacific economies are particularly useful "laboratories" to examine these phenomena because of the diverse economic, financial, and policy frameworks in place. The paper also presents a simple model of endogenous asset price bubbles to clarify some of the policy issues. The model assumes there are two regions of the world that are susceptible to domestic asset price bubbles. This type of model emphasises the highly persistent nature of financial shocks associated with boom-bust dynamics and the potential spillovers across geographic borders. An asset price bubble in one economy can influence the likelihood of an asset price bubble in the other economy. Possibly most important, the actions of the policymaker in one region can affect not only the occurrence of a bubble in its domestic market but also the occurrence of a bubble in the other region. This type of model also elevates the importance of tail risk considerations for policymakers, opening up consideration of more complex monetary policy trade-offs than in conventional macroeconomic models. The paper then explores the implications, combining both the narrative from the crisis and the implications of the theoretical model to understand better the regional policy trade-offs that occurred during the international financial crisis. In addition to emphasising the critical importance of having strong economic and financial fundamentals going into a crisis period, it also highlights the value of monetary policymakers adopting state-dependent policy frameworks. During normal times, monetary policy focused on price stability makes sense. During crisis times, the priorities of a central bank may need to be adjusted by putting more weight on financial stability than on short-term inflation stability. This comes down to placing more weight on tail risks when making policy decisions. Practically, this means that short-term deviations from (implicit and explicit) inflation targets may be appropriate, if not optimal, when coming out of a crisis. The paper proceeds as follows. Section 2 lays out the basic intuition of a negative asset price bubble. Section 3 reviews the Asia-Pacific experience during the recent international financial crisis, highlighting aspects of this new bubble perspective. Section 4 then presents a simple international monetary policy model with negative asset price bubbles to explore the theoretical channels of spillovers and the policy trade-offs. Section 5 describes results. Section 6 draws on historical narrative and theoretical findings to evaluate the policy implications. Section 7 offers some conclusions.
    Keywords: Financial crisis, monetary policy, asset price bubble, central banking
    Date: 2011–11
  22. By: Bozani, Vasiliki (University of Crete); Drydakis, Nick (University of Patras)
    Abstract: The current paper is a means of demonstrating our knowledge about macroeconomic theories, and its key variables, phenomena, and history. Given the key role that the Non-Accelerating Inflation Rate of Unemployment (NAIRU) has in the macroeconomic theory as well as its role in determining employment theories, it is raised the need for a thorough evaluation of its origins and a brief explanation of some of the claims surrounding it. In these grounds, this study aims at integrating and generalizing findings and presenting the changes within the macroeconomic field over the years by investigating theories, identifying methodological strengths and the weaknesses in the body of the macroeconomic research about the concept of NAIRU. In order to help the reader to avoid misunderstandings we define the best descriptors and identify the best sources to use in the review literature related to our topic, we rely on primary sources in reviewing the literature, we examine critically all aspects of the research design and analysis, and we consider contrary findings and alternative interpretations in synthesizing quantitative literature.
    Keywords: NAIRU, macroeconomic policies
    JEL: E24 E61
    Date: 2011–10
  23. By: John Galbraith; Greg Tkacz
    Abstract: This paper uses payments system data to study the impact on personal consumption expenditure, and therefore on economic activity, of occasional extreme events. The usual quarterly data supplied by central statistical agencies are of little use to policy makers for monitoring effects of transitory events, as the impacts of events lasting a few days or weeks may be obscured in time-aggregated data. However, technological advances of the past several years have resulted in new high-frequency data sources that could potentially provide more accurate and timely information on economic activity. Here we use daily Canadian debit transaction volume data, and business-day (five times per week) debit and check transaction volume and value data, to investigate the impact on consumer expenditure of several extreme events: the September 11 2001 terrorist attacks, the SARS epidemic in the spring of 2003, and the August 2003 electrical blackout. Contrary to initial perceptions of these events, we find only small and transitory effects. <P>
    Keywords: debit card transactions, macroeconomic monitoring, real-time data,
    JEL: E21 G21
    Date: 2011–11–01
  24. By: Gita Gopinath; Oleg Itskhoki; Brent Neiman
    Abstract: We document the behavior of trade prices during the Great Trade Collapse of 2008-2009 using transaction-level data from the U.S. Bureau of Labor Statistics. First, we find that differentiated manufactures exhibited marked stability in their trade prices during the large decline in their trade volumes. Prices of non-differentiated manufactures, by contrast, declined sharply. Second, while the trade collapse was much steeper among differentiated durable manufacturers than among non-durables, prices in both categories barely changed. Third, despite this lack of movement in average price levels, the frequency and magnitude of price adjustments at the product level noticeably changed with the onset of the crisis.
    JEL: E3 F1 F4
    Date: 2011–11
  25. By: Claudia Olivetti; Barbara Petrongolo
    Abstract: The gender wage gap varies widely across countries and across skill groups within countries. Interestingly, there is a positive cross-country correlation between the unskilled- to-skilled gender wage gap and the corresponding gap in hours worked. Based on a canonical supply and demand framework, this positive correlation would reveal the presence of net demand forces shaping gender differences in labor market outcomes across skills and countries. We use a simple multi-sector framework to illustrate how differences in labor demand for different inputs can be driven by both within-industry and between-industry factors. The main idea is that, if the service sector is more developed in the US than in continental Europe, and unskilled women tend to be over-represented in this sector, we expect unskilled women to suffer a relatively large wage and/or employment penalty in the latter than in the former. We find that, overall, the between-industry component of labor demand explains more than half of the total variation in labor demand between the US and the majority of countries in our sample, as well as one-third of the correlation between wage and hours gaps. The between-industry component is relatively more important in countries where the relative demand for unskilled females is lowest.
    Keywords: gender gaps, education, demand and supply, industry structure
    JEL: E24 J16 J31
    Date: 2011–11
  26. By: Antonio De Socio (Bank of Italy)
    Abstract: After August 2007 the plumbing system that supplied banks with wholesale funding, the interbank market, failed because toxic assets obstructed the pipes. Banks were forced to squeeze liquidity in a &#x201C;lemons market&#x201D; or to ask for liquidity &#x201C;on tap&#x201D; from central banks. This paper disentangles the two components of the three-month Euribor-Eonia swap spread, credit and liquidity risk and then evaluates the decomposition. The main finding is that credit risk increased before the key events of the crisis, while liquidity risk was mainly responsible for the subsequent increases in the Euribor spread and then reacted to the systemic responses of the central banks, especially in October 2008. Moreover, the level of the spread between May 2009 and February 2010 was influenced mainly by credit risk, suggesting that European banks were still in a &#x201C;lemons market&#x201D; and relied on liquidity &#x201C;on tap&#x201D;.
    Keywords: interbank markets, credit risk, liquidity risk, financial crisis, Euribor spread.
    JEL: E43 E44 E58 G21
    Date: 2011–09
  27. By: Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
    Abstract: This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a pos- sibility and illustrate it in a standard R\&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R\&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedman’s conjecture There ain’t no such thing as a free lunch (TANSTAAFL) may not apply.
    Keywords: Intertemporal free lunch; Dynamic inefficiency; R\&D-based growth; Transitional dynamics.
    JEL: E20 H20 O41
    Date: 2011–11
  28. By: Jürg Mägerle; Thomas Nellen
    Abstract: In reaction to recent requests for interoperability between central counterparties of European stock markets, regulators have issued new guidelines to contain systemic risk. Our analysis confirms that the currently applied cross-CCP risk management model can be a source of contagion, particularly if applied in multilateral frameworks. While regulators' new guidelines eliminate systemic risk, this comes at the cost of an inefficiently overcollateralised clearing system. We discuss further approaches that contain systemic risk while reducing or eliminating overcollateralisation. Interoperability is of economic importance as it may contribute to the efficiency and safety of a worldwide fragmented clearing infrastructure.
    Keywords: interoperability between central counterparties, financial network, systemic risk, netting efficiency
    JEL: E42 E58 G28
    Date: 2011
  29. By: Tomoki Fujii (School of Economics, Singapore Management Unversity)
    Abstract: We simulate the impact of actual food price increase between June 2006 and June 2008 on poverty across different areas and whether the household’s main income source is agricultural activities. We explicitly treat heterogeneity in food price changes and the patterns of consumption and production by merging a expenditure survey dataset and a price dataset at the provincial level or lower. While the increase of head count index is larger for non-agricultural households than agricultural households, the opposite is true for the poverty gap and poverty severity measures, because poor agricultural households are particularly vulnerable to food inflation.
    Keywords: non-parametric regression, net consumption ratio, global food crisis, vulnerability
    JEL: E31 I32 O1
    Date: 2011–11
  30. By: Sergio Cesaratto
    Abstract: In a contribution to Pensions: An International Journal, Prof. Jan Kuné discusses whether a fully funded (FF) pension scheme can cope with a demographic shock better than a payas- you-go (PAYG) system. He makes ample use of my own contributions on this issue but ignores my criticism of the neoclassical interpretation of FF pension schemes and especially of the claim that an FF scheme is superior to PAYG in this and other respects. The purpose of this note is to stimulate some response, from Prof. Kuné or others, to my critique of the neoclassical interpretation. The policy implications of this discussion for pension reforms are evident.
    JEL: E11 G23 H55
    Date: 2011–10
  31. By: Bernd Hayo (University of Marburg); Florian Neumeier (University of Marburg)
    Abstract: This paper investigates whether the socioeconomic status of the head of government helps explain fiscal performance. Applying sociological research that attributes differences in people’s ways of thinking and acting to their relative standing within society, we test whether the social status of German prime ministers can help explain differences in fiscal performance among the German Laender. Our empirical findings show that the tenures of prime ministers from a poorer socioeconomic background are associated with higher levels of public spending and debt financing.
    Keywords: Leadership, socioeconomic status, fiscal policy, public spending, public deficit
    JEL: E61 E62 H11 H72
    Date: 2011
  32. By: Massimo Florio (DEAS, Universita' di Milano)
    Abstract: This paper supports the view that the deep roots of the current global crisis, which has taken the form of a mainly financial crisis, are related to a global fundamental unbalance in income distribution. There are two dimensions of the unbalance. The first one is between capital and labour income, particularly in advanced economies. The second one is between incomes of advanced economies and of developing countries. Without addressing these two broad real unbalances the outcome is going to be a long-term economic disease
    Keywords: income distribution, global crisis, financial crisis
    JEL: E25 E64 E
    Date: 2011–11–09
  33. By: Audretsch, David B. (Indiana University); Link, Albert N. (University of North Carolina at Greensboro, Department of Economics)
    Abstract: The purpose of this paper is to identify and unravel the disparate views toward innovation prevalent within the economic community and to link them to the various public policy approaches. These various schools of thought, or ways of thinking about the economy in general and the role of entrepreneurship and innovation in particular, not only shape how innovation and entrepreneurial activity are valued, but also the overall policy debate concerning innovation and entrepreneurship. Unraveling of these views sets highlights the disparate way in which entrepreneurial activity leading to innovation is valued.
    Keywords: Entrepreneurship; Innovation; Economic Theory
    JEL: E10 L26 O31
    Date: 2011–11–08

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